Sanctions no big damage to EU

Photo: Küllike Rooväli

European Commission Deputy Secretary-General Henrik Hololei says repercussions from Russian sanctions do show most in EU agriculture, but financial indicators reveal technology to be worst affected.

Am I getting it right, that sanctions have but a small impact on EU?

Yes, it broadly falls within the assessment we had before we imposed the economic sanctions. Truth be told, the impact falls in the conservative part of the assessment i.e. the impact is smaller than expected. It’s about 0.2–0.3 of the entire GDP increase of EU for 2014–2015.

The heaviest blow landed on agriculture?

Not quite, actually. These were the sanctions imposed on agricultural products and by that Russia hit herself the most. The market share of Western agricultural products was very large and therefore Russia is unable on her own to fill the gap. They thought they’d be able to import from third countries, but the plan has failed to fully realise either.

From the EU point of view, what shows most is the hit suffered by the states agriculturally more linked to Russian market. For the EU agricultural market, Russia has been the second largest market with volume of about €12bn last year i.e. ten percent of entire EU export of agricultural products.

The current restriction applies to over a third of that i.e. five billion euros. Naturally, in some segment like the fast spoiling foods, Estonia, other Baltics, Poland and Finland are more deeply touched. Regarding fruit, the rest of Europe as well – a bit.

Even so, financial data says the overall numbers are relatively small. Looking at oil drilling and the entire oil industry cooperation, machines and equipment are not being sold for billions of euros because of to the sanctions. Money-wise, that’s more – but it’s less visible. 

The income loss is most felt in the areas of intense export – and that’s technology first of all.

When assessing impact of sanctions on Russia, how can we say what is the part played by sanctions, what has been the impact of oil price drop, and what the role of slowdown in Europe as a vital trade partner to Russia?

That’s one excellent question and as I presented the question of sanctions-package impact on member states, I repeatedly underlined it was actually impossible to precisely pinpoint the part of the sanctions.

One is certain: the sanctions have substantially speeded up the negative processes in Russian economy. There’s actually three aspects to this. The first being: even before the economic sanctions were imposed, there were clear signs of Russian economic growth stalling and nearing zero. Largely, that’s because Russia has basically neglected structural reforms; they have not advanced with modernisation of the economy; the various trade barriers have not been removed; and the entire structure of the economy is not corresponding to what this century would require. 

On the back side of this comes the serious drop of oil prices. While in July Brent crude cost $114 a barrel, by today (Friday – edit) it has dropped to $82–83. No doubt, this has a huge impact on Russia.

Russia exports oil and oil products for an average of $70bn a quarter, wherefore the damages are reaching into billions already. To keep the Russian budget balanced, oil ought to be at least $95 a barrel.

Between these two aspects come the sanctions which have served as a catalyst of said processes.

Which sanctions have hit the Russian economy the hardest?

Of all sanctions, the most effective have been those imposed on financial sector, serving to bring the rouble down to record lows. Capital flight has exceeded all earlier forecasts – by the end of the year, it is predicted at $120bn and it seems to be very clearly headed towards that.

Capital fleeing the country has pushed the interest rates up sharply, affecting economic activity. It is especially hard for small and medium business. There are now almost no foreign investments into Russia, any more. 

Talking about the energy sector, restrictions have already been effective for the very reason of all Arctic partnership projects being linked to European and US oil majors. Exxon Mobil, for instance, has frozen nine of the ten projects launched before the sanctions with Rosneft.

How great the likelihood of a next round of sanctions?

At the moment we may say anything may happen. The whole time we’ve been saying the sanctions may be levelled out or reduced, as well as new ones added.

In the second half of December, heads of European governments are convening again; if by that time there are clear signs of escalation in Eastern Ukraine, no doubt the talks will be on the table.