Why the EU should avoid sanctioning Russia

Alex Korbel Research Fellow, Molinari Economic Institute
Font Size:

A standoff is building over Crimea following what the Kremlin sees as the ouster of a legally elected president by a mob and what Western governments sees as a violation of Ukraine’s territorial integrity. As calls for EU sanctions on Russia rapidly gain ground, many say imposing substantial economic sanctions on Russia would prove to be impossible, would hurt both sides, and wouldn’t solve the problem.

Imposing substantial sanctions on Russia would require unanimity of all the EU 28 member states. This is unlikely, considering that the further the distance from Ukraine, the less the enthusiasm for confronting Russia. The members states’ political leaders are all against punitive actions against Russia and will ensure that sanctions remain symbolic. For example, the UK’s financial markets are dependent on Russian investments and Germany’s manufacturing industries are dependent on Russian clients.

These leaders know that any trade and financial sanctions would hurt both sides. Russia and the EU have close economic ties. The EU is Russia’s number-one trading partner (machinery, chemicals and agrarian products) and Russia is the EU’s number three trading partner (raw materials, natural gas and oil). Voluntary exchanges are beneficial to all the parties involved – limiting trade hurts western and Russian companies and individuals alike.

Moreover, a close look at history shows that economic sanctions have little apparent success beyond signaling.

Indeed, global financial markets are already far more effectively punishing Russia than any European meddling. The two main Moscow stock markets, RTS Index and Micex Index, have fallen off sharply since the rise of tensions, weakening the Russian economy and undermining the ruble to the point that Russia’s central bank raised interest rates last week.

These moves are not the result of a secret western plot or a coordinated arbitrament, but the natural result of a huge number of investors fleeing from an unstable situation. It is also a reminder of the challenges free trade presents to statist power in a command-and-control economy.

The ultimate priority should be to prevent a war which would be a human, economic, political, and cultural disaster for Ukraine, Russia, the EU and NATO. Armed conflict would only benefit China, whose government is a competitor of Russia and the USA in the eyes of our political leaders.

The next priority should be keeping Ukraine together. It is in the interest of both Russia and the EU. A united Ukraine will inevitably ask for one or several bailouts in the coming years. Since the EU and international financial institutions always come a day too late and a euro too short, Kiev will probably have no choice but to ask Moscow for a line of credit, making the entire country a client state of Russia.

In order to preserve the unity of Ukraine and to save its economic institutions, introducing a new federal constitution that will get rid of the hyper-centralized, corrupt, and inefficient bureaucracy, with greater power to the local level and the free development of private solutions seems like a good place to start.

Last but not least, one important lesson should be drawn from this crisis:

What has saved Ukraine until recently has been that the West and Russia generally refrained from forcing Ukrainian governments to make a clear choice between an economic or political integration with a European or with a Russian-led area.

Over the past year, both Russia and the EU tried to force Ukraine to make a clear choice between them – never considering that Ukraine’s interest is to avoid having to choose sides – and the entirely predictable result has been to tear the country apart.

So the lesson is this: foreign powers must learn to mind their own business and avoid meddling with the choices of third countries like Ukraine.

Alex Korbel is a Young Voices Advocate who provides political and macroeconomic analysis and forecasting for Europe. He is a research fellow at the Molinari Economic Institute (Brussels, Paris, Montreal), a political analyst for the French news website Contrepoints and a columnist for the worldwide financial website 24hgold.com