Sanctions by the West may have little bite

European Union heads of state and governments are gathering on Thursday for an unprecedented summit to deal with the crisis in Ukraine.

In public, Europe and the United States are united in demanding that Russia halt its military intervention, and in warning that Russia's takeover of Ukraine's strategic Crimea region will not go unpunished.

But, with all military options ruled out, the current diplomatic and economic sanctions contemplated by the EU and the US will have little impact on Russia's immediate behaviour.

The measures which can genuinely hurt Moscow remain firmly off the table due to Europe's high dependence on Russian oil and gas.

Western governments are also very reluctant to impose financial sanctions against Moscow for fear of hurting their own capital markets.

What will most likely be imposed on Russia by the US and the EU instead is a set of so-called "targeted" sanctions: travel bans on key

Russian politicians, a freeze on the bank accounts of Russia's billionaire oligarchs, and the potential exclusion of Russia from the Group of Eight (G-8) club of top industrialised nations.

But, imposing even this limited array of sanctions will not be easy, and their impact is largely symbolic.

A "blacklist" of Russian officials not allowed to travel to the US already exists, with the Europeans likely to draw on the same list for their own travel ban. But putting senior Russian ministers on this list may be counter-productive for future diplomatic initiatives.

Freezing the oligarchs' funds deposited in Europe and the US is also easier said than done. Western intelligence agencies are loath to disclose what they know about such accounts, since following the financial transactions conducted through them yields important bits of information about the inner workings of the Russian government.

Besides, any order to freeze money is likely to be challenged through the courts either by the account holders or the numerous "shell" companies Russian oligarchs use for this purpose.

And kicking Russia out of the G-8 is no big deal. The G-8 is an informal club which makes no binding decisions and offers no financial advantages. Russian President Vladimir Putin can easily brush it off as a relic of a Western-dominated past, and instead lavish attention on the Brics group of the major developing nations - Brazil, Russia, India, China and South Africa - to which Moscow also belongs.

Still, the West has huge leverage on Russia, if it chooses to use it. The EU is Russia's largest trading and investment partner, generating around ยค300 billion (S$524 billion) in annual turnover.

While much of the trade is protected from politically motivated sanctions due to Russia's membership in the World Trade Organisation, foreign direct investment is not, and drying out the sources of capital for the Russian economy will be a big blow for Moscow.

The rouble, Russia's currency, is already in free fall on world financial markets precisely because of this danger. Restricting the freedom of Russia's banks and corporations to conduct business will also hit Moscow's economy badly.

And Nato, the US-led military alliance in Europe, could start planning for the pre-positioning of Western military bases on Russia's borders, a move which will seriously affect Russian security and one which Mr Putin was always anxious to avoid.

But, there is no consensus on taking any of these measures. About a quarter of all the natural gas and a third of all the oil consumed in Europe come from Russia, with Germany dependent for two-thirds of its national needs on these Russian energy resources.

Meanwhile, an embarrassing leak from Britain, where a top official accidentally allowed his briefing papers to be photographed by the media earlier this week, revealed that Prime Minister David Cameron's government opposes financial sanctions on Russia, fearing that these would hurt London, Europe's top capital hub.

The British are also against any discussion about moving Nato military bases closer to Russia, largely because neither they nor the other Europeans can afford the expense.

Germany's Foreign Minister Frank-Walter Steinmeier indignantly rejects accusations that the EU's muted response to the Ukraine crisis is an indication of weakness. Instead, he claims that Europeans are deliberately cautious because they want to manage the crisis, and "crisis diplomacy is not weakness".

Perhaps. But President Putin is bound to see it for what it is: impotence from a risk-averse European continent.


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