US And Europe Could Bring Down The Hammer On Russia, But At What Cost?

Updated on

Now that Russia has essentially annexed Crimea, the US and Europe are weighing their options for dissuading an escalation (and an invasion of eastern Ukraine specifically). The first two rounds of targeted sanctions have had an impact on the already fragile Russian economy, but President Obama’s attempt to increase the pressure with far-reaching, coordinated sanctions is meeting resistance from Europe for good reason – halting trade cuts both ways.

“The primary reason sanctions have not been escalated is Europe’s strong reliance on Russia as a trade partner and energy supplier,” writes Sterne Agee chief economist Lindsey Piegza in a March 28 report. “Economic sanctions can hurt Russia’s delicate economy, but not without causing the EU significant pain as well.”

European sanctions could seriously damage the Russian economy

The first round of sanctions, with a few targeted sanctions and travel restrictions, was basically laughed off by the Russian elites, and Putin doesn’t seem to care about being excluded from the G8, but when the second round of sanctions undercut Russia’s ability to process dollar payments, its stock market fell sharply, so sanctions could be a viable tactic.

But with just tens of billions of euros in trade between the US and Russia, even harsh unilateral sanctions would have a limited effect. Trade between the EU and Russia, on the other hand, is measured in the hundreds of billions of euros. As Russia’s number one trading partner (41% of trade), if Europe decides to follow America’s lead and imposes widespread sanctions, it could likely send Russia into a recession.

russian stock market 0314


Ending trade with Russia threatens the EU recovery

The problem is that Europe would be risking the same fate for itself. Even if the US recovery has been surprisingly weak by some measures, EU GDP growth hasn’t even pushed past 0.5% at this point, and some nations are still in recession. Not only does the US engage in much less trade with Russia than Europe, it’s also much less reliant on exports in general.

Bilateral trade between Germany and Russia is more than €75 billion, and Germany has another €20 billion invested in Russia. Overall, Russia accounts for more than 11% of the EU’s external trade. The EU can’t expect to cut off that much economic activity and still pull out of the recession unaffected.

EU GDP post crisis 0314 exports as percnt GDP 0314

No doubt America’s European allies realize they would have to do most of the heavy lifting in the event of widespread sanctions, but that doesn’t mean the US would be unaffected. If sanctions against Russia push Europe back into a recession, it will weigh heavily on the somewhat anemic US recovery as well. If sanctions go far enough they could cripple the Russian economy, but if Putin still doesn’t back down there will be plenty of pain to go around.

Leave a Comment