The Sanctions Debate

BERLIN/MOSCOW (Own report) - In the prelude to Chancellor Merkel's visit to Russia, German business associations and foreign policy experts are urging that the policy of sanctions be ended. They argue that sanctions practically have become ineffective, since Russia's economy has withstood these trade restrictions and is now even recovering. The boycott has also damaged the EU's image and that of the USA in Russia and, even though intended to weaken, it has helped to stabilize the Russian government. Moreover, Russian orders, that German businesses had once expected, were increasingly going to competitors, for example in China - and are ultimately lost. However, German economists still see Russia as a lucrative market. According to an analysis by the Bertelsmann Foundation and Munich's ifo Institute, a free-trade agreement between the EU and the Eurasian Economic Union (EAEU), congregated around Russia, would generate a growth of 45 billion euros. Government advisors recommend that the sanctions policy be gradually ended. This would not eliminate the prospect that Moscow, at any time, could be forced to its knees with an arms race.

Russia on the Rise

In the run-up to Chancellor Angela Merkel's talks with Russian President Putin in Sochi today, business representatives have indicated that the EU sanctions against Russia are no longer achieving the desired results. The German Chambers of Industry and Commerce (DIHK) have noted that, following the imposition of the sanctions in 2015, the Russian economy had slumped by 3.7 percent.[1] However, this decline was only due in part to sanctions. It was mainly due to the fact that the oil price - on which the Russian economy is heavily dependent - was simultaneously cut in half. According to the World Bank, the sanctions accounted for only 0.5 percent of the losses to Russia's GDP. In the meantime, the Russian economy has recovered, notes the DIHK. The International Monetary Fund (IMF) expects a 1.5 percent growth in 2017. With its counter-sanctions - banning EU agricultural imports - Moscow has even succeeded in initiating a diversification of its economy. Already in 2015, the share of the agricultural sector in Russia's economic output rose to 3.9 percent. Today, Russia earns more with its agricultural exports than with arms exports.

Permanent Losses

The sanctions, however, have a negative effect on the economies of various EU countries and the USA, observers have noted. Germany's export to Russia has declined by 50 percent - from 38 billion euros in 2012 to 21.5 billion in 2016. This trend seems to have reversed. In the first two months of 2017, German exports to Russia grew by 38 percent in comparison to the same period a year ago, reaching four billion euros. German direct investments in Russia have also increased and could reach 2.5 billion euros in 2017 - from a volume of 1.95 billion in 2016, according to the DIHK. However, due to the substitution of imports in the last three years, the shares of German enterprises in Russia's agricultural sector have "more than likely, been sustainably lost."[2] German mechanical engineering may have permanently lost its top position in Russia. Last year, German exports of machines and installations to Russia, totaling 4.4 billion euros, fell behind Chinese exports worth 4.9 billion. This trend can hardly be reversed.[3] Moscow has even succeeded to begin with the strategically significant oil drilling in Russia's Arctic, on its own - which is what Berlin and Washington had sought to prevent by banning the export of state-of-the art oil extraction technology.[4] In the meantime, Exxon Mobil, which originally wanted to have its share in this highly lucrative business, is up in arms against Washington's sanctions.

Adverse Effect

As the German Committee on Eastern European Economic Relations (OA) indicates Russia has, in the meantime, become economically accustomed to the sanctions. Therefore the sanctions are "no longer really relevant as a political factor"[5] and from the perspective of German strategists, they are counter-productive. Even though the sanctions-induced export losses affected EU exporters less severely than the absence of deliveries to Russia's industries relying on them, "in light of the already tense economic situation," the EU's losses cannot be consistently "overlooked," explains the German Institute for International and Security Affairs (SWP).[6] In addition, the "coincidence between the sanctions with the drop in the oil prices and the economic crisis in 2014 - 2015 (...) has strengthened the impression within the Russian population, that "the sanctions are aimed at worsening their socio-economic situation." In fact, the transatlantic powers' aggressive posture toward Moscow, is not only recognized as such in Russia, it has also helped close ranks in support of the current government. The latest estimation of popular support for President Vladimir Putin was at more than 80 percent. Ultimately, sanctions have contributed to the "consolidation" of the Russian government, admits SWP in a recent analysis.[7]

Eurasian Free Trade

Incentives to renew business with Russia are becoming stronger. Not only associations such as the German Committee on Eastern European Economic Relations and the German Chambers of Industry and Commerce are lobbying in this sense. Recently, the influential Bertelsmann Foundation and the Munich-based Institute for Economic Research (ifo) compiled a study dealing with the possibility of a free trade agreement between the EU and the Eurasian Economic Union (EAEU) congregated around Russia.[8] An EU-EAEU free trade agreement could generate overall "growth impulses of up to 45 billion euros" for the EU, they predict. Not only eastern EU nations, such as Slovakia or the Baltic countries would benefit. Germany would also benefit "considerably."[9] One could begin with the "harmonization of technical standards." A free trade agreement ultimately presupposes an end to sanctions.

Gradually Lift

The SWP is now beginning to concentrate on an - intermediate to long-term - lifting of the sanctions. Politically, the sanctions no longer have any effect, says the think tank. Moreover, since they have been made tangent upon the full implementation of the Minsk Agreements, they are largely dependent on Ukraine. Kiev can practically force the indefinite continuation of sanctions, simply by unilaterally boycotting the agreement. Therefore, a "gradual lifting of the sanctions" should be recommended, namely, subsequent to each time the East Ukrainian "People's Republics" as well as Moscow fulfill stipulations of the Minsk Agreements.[10] Government politicians in Berlin have made similar proposals. It is unclear whether this had been one of the topics discussed during EU head foreign policy representative, Federica Mogherini's visit to Moscow April 24, or whether this will be discussed in German Chancellor Merkel's talks with President Putin, today.

Arms Race

Because of global rivalry that has intensified due to Russia's partial resurgence, a renunciation of the sanctions policy would by no means signify the beginning of a new partnership with Russia. ( reported.[11]). Strategic tensions between NATO countries and Russia have recently found expression in the deployment of NATO armed forces at Russia's western border. From Moscow's perspective, in the long run, this deployment could have more serious consequences than the current economic sanctions, as was recently pointed out by the DGAP. In the latest edition of its magazine, "Internationale Politik", Washington is already spending "eight times more on its military and arms than Moscow." Just like during the Cold War Russia could not "meet the challenge" of an "arms race with the USA."[12] The deployment of NATO's armed forces at Russia's western border - encouraged by Berlin - could serve as an important lever to relaunch the arms race.[13]

[1], [2] Russland: Licht am Ende des Tunnels? International Aktuell 02/2017, 27.04.2017.
[3] China überflügelt deutsche Maschinenbauer. 11.04.2017.
[4] Benjamin Triebe: Heisses Erdöl aus Russlands Kälte. 12.04.2017.
[5] "Hoffnung auf Bewegung in den EU-Russland-Beziehungen". 28.04.2017.
[6], [7] Sabine Fischer: Sanktionen als Dauerzustand? SWP-Aktuell 24, April 2017.
[8] Der Eurasischen Wirtschaftsunion (EAWU) gehören Armenien, Belarus, Kasachstan, Kirgistan und Russland an.
[9] "Vertrauensraum Lissabon bis Wladiwostok". 07.04.2017.
[10] Sabine Fischer: Sanktionen als Dauerzustand? SWP-Aktuell 24, April 2017.
[11] See Vom Krisenstaat zum Gestalter and Die langen Linien der Weltpolitik.
[12] Stefan Meister: Gefährlicher Scheinriese. Russlands vermeintliche Stärke hat viel mit der Schwäche des Westens zu tun. Internationale Politik Nr. 3, Mai/Juni 2017. S. 8-13.
[13] See Vom Frontstaat zur Transitzone and Vormarsch nach Osten.