Europe headed for East-West showdown

A man holding a Russian flag on the roof of the naval headquarters in Sevastopol yesterday. Three Russian flags were flying at one of the entrances to Ukraine's naval headquarters in the Crimean port of Sevastopol yesterday, suggesting that at least part of the base was under the control of pro-Russian forces.

RUSSIA is facing a fresh round of economic sanctions as European Union heads of states and governments gather today in Brussels for an unprecedented second summit in as many weeks devoted to the crisis in Ukraine.

"This must be the occasion for a strong and coordinated European response to the new stage that has now been reached," said French President Francois Hollande, referring to the Russian decision to annex Ukraine's Crimea province.

But far from being alarmed by the prospect of sanctions, officials close to Russian President Vladimir Putin are threatening their own retaliation against Europe. The continent is heading for an East-West showdown which, as British Foreign Secretary William Hague warned legislators in London, could last "for years".

The first round of sanctions unveiled by the EU at the start of this week concerned the freezing of assets and travel bans on 21 Russian businessmen and officials. The intention was to hit at Mr Putin's friends and financial backers who supported the forceful seizure of Crimea from Ukraine.

But the exercise backfired when it became clear that, far from including the big oligarchs and other famous Russian decision-makers, the EU's "black list" was largely composed of nobodies, little-known individuals whose isolation would make not the slightest bit of difference to Moscow's behaviour.

One option scheduled to be discussed at the EU summit today is to heap additional pressure on the Putin government by issuing a further EU list of Russian officials banned from travelling to the West. The list could include, for instance, some ministers or the heads of Russia's energy utilities, who are Moscow's chief paymasters.

Yet getting a consensus on this will not come easy, especially since the Germans remain adamantly opposed to blacklisting energy officials due to Germany's dependency on Russia's oil and gas.

Nor are discussions about other potential sanctions faring any better. Britain has announced that it is halting military exports to Russia and has called on France and other EU member-states to do the same.

But British military-related trade with Russia amounted to only €102 million (S$179 million) last year, while France stands to lose €1.2 billion - 10 times that amount - should it cancel a contract to deliver two military ships to Russia.

Unsurprisingly, therefore, French Foreign Minister Laurent Fabius has indicated that he may be willing to cancel the naval contract only if the British stop shielding London's financial centres from the application of any commercial sanctions against Russia. The chances are that neither of these proposals will come about.

The mere talk of adopting further measures against Russia has already attracted a sharp rebuke from Moscow, which warned that they "will not remain without consequences".

Europe has the capacity to inflict serious damage on the Russian economy. Russian companies took US$58 billion (S$73 billion) in Western loans last year. Overall, these companies - all state-owned - owe a total of $653 billion. Just a tiny rise in the interest rates charged for such loans could render Russia's economic life difficult.

Growth in Russia is also sluggish. The country's economy is scheduled to post only a 0.7 per cent rise this year, at a time when oil prices are high and Russia should be booming. Any commercial disruption could plunge the country into negative territory.

But more ominous from Moscow's perspective are clear indications that the United States is beginning to put together a military response to Russia's incursion into Ukraine.

US Vice-President Joe Biden toured Europe this week with the aim of reassuring Ukraine's neighbours of the US commitment to their defence.

"You have an ally whose bud-get is larger than the next 10 nations in the world combined," Mr Biden reminded leaders in Poland.

There are also indications that US President Barack Obama, who has called for a special meeting of the G-7 nations next week, will be proposing to move US military equipment to more permanent military bases on the territory of the former communist countries which are currently members of Nato, the US-led military alliance in Europe.

The key determinant in all these Western measures will be Russia's actions in Ukraine. If President Putin's vow that he "does not need" a further partition of Ukraine is correct, the pace of sanctions imposed on Russia may slow down.

Either way, Ukraine represents a watershed for the continent. "Before our eyes, the history of this region is changing," said Polish Prime Minister Donald Tusk.

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Ukraine crisis