Russian ties to European companies may make sanctions harsh

FRANKFURT, Germany (Associated Press) – Europe is considering sanctions against Russia if it invades Ukraine The work is far from simple.

Sanctions will seek to maximize the suffering inflicted on the Kremlin and its major banks and energy companies, but also avoid endangering Russia’s dependent energy supplies on the continent. Or doing a lot of damage to European companies with strong ties to Russia, including German manufacturer Siemens AG, Italian tire maker Pirelli and automakers such as Volkswagen and Mercedes-Benz.

Russia has relations with world energy And the financial markets are home to major foreign partnerships and investments, so any measures will have repercussions outside the country. The question is how much.

The European Union’s executive committee does not reveal what sanctions it is discussing in order to leave the Kremlin guesswork. Officials say the measures will be more comprehensive and strict than those imposed in 2014 after Russia annexed Ukraine’s Crimea peninsula.

Here are the places where sanctions could affect Europe’s economy:

waiting for word

Since it is not known what the measures will be, European companies are watching developments with caution and limiting their comments to hopes of a diplomatic solution.

“Policy sets the rules by which we operate as a company” and that “if the terms of the framework change, we will evaluate them and decide how to deal with them,” BMW said.

Siemens AG, which gets about 1% of its revenue from Russia, is developing a new generation of high-speed trains with Russian partners to be built at a plant there. Siemens Energy, partly owned by Siemens AG, is building power plants and equipment for 57 wind farms in Russia.

European automakers have a wide presence. Volkswagen, Stellants, Renault and Mercedes-Benz have plants in Russia, while BMW makes cars there through Russian partner Avtotor. France’s Renault owns Russia’s largest automaker, AvtoVAZ, with its sprawling plant in Togliatti. Stellantis plans to import commercial trucks under its Peugeot, Opel and Citroen brands from its Kaluga plant to meet the growing demand in Europe for delivery services.

Italian tire maker Pirelli, owned by the Chinese, operates two factories employing about 2,500 people in Russia, producing tires mostly for the domestic market but also for export.

“We continue to invest, we believe in the development of the Russian market and internationalization,” Chief Executive Officer Marco Tronchetti Provera told reporters last month. “We believe that even in crises, we must find a meeting point, and we believe that balance will be found in the end.”

He and other CEOs met with Russian President Vladimir Putin last month to discuss business prospects.

Italian agribusiness lost big when Russia imposed a retaliatory ban on imports of produce, cheese and meat in 2014. Despite the new tensions, the Confartigianato Association of Artisans in the northeastern Italian province of Vicenza is pressing ahead with a virtual produce fair in Moscow next month. Among those seeking to participate are panettone makers of Christmas bread, Colombo and Easter bread and winemakers, products not subject to embargo.

Similarly, the Italian bank Intesa SanPaolo, which supports Italian companies in Russia, says its mission has not changed.

“Frankly, we don’t follow geopolitics,” said CEO Carlo Messina. “We respect the rules, but we serve Italian customers, and we do it in all countries, including Russia. If the rules change and create an obstacle, we will take the necessary steps.”

What penalties will be imposed?

Much of the discussion has focused on the big Russian bankswhich may face measures from restrictions on borrowing to restrictions on transactions involving dollars.

Another target could be energy companies such as state-owned Rosneft and Gazprom, which could face a ban on borrowing from Western investors and creditors. This would limit their ability to invest in new projects, but would not immediately cut off energy supplies to Europewhich gets about 40% of its natural gas from Russia It faces declining reserves and rising prices This winter.

Avoid falling

A key aspect is to avoid disproportionate losses to the European economy or companies. Otherwise, it could be difficult to garner support among the 27 EU member states, which would have to unanimously agree to the sanctions.

For example, Russian natural gas producer Novatek may be a potential target for sanctions, but 19.4% of the company is owned by France’s TotalEnergies, meaning harsh sanctions require some “diplomatic ingenuity” given its association with a NATO ally, a former US diplomat said. Dan Freed, who drafted the 2014 sanctions against Russia.

Sanctions could also open the door to competitors from China And other countries that will not punish Russia. After 2014 sanctions banned the export of equipment with potential military use to Russia, some smaller German machine companies gave up rather than deal with the bureaucracy and risk of inadvertently violating complex rules.

As a result, Chinese machine makers overtook German companies as suppliers to Russia in 2016. Overall, the number of German companies operating in Russia dwindled from 6,000 in 2010 to 3,500 in 2021.

However, Conflict Armament Research, which investigates supply chains for weapons of war, has found that Russian entities are still acquiring British, Czech, French, German, Spanish and American components of military-grade spy drones.

In a November report, CAR said the parts were discovered in drones that went down or crashed in Ukraine and Lithuania. Lead author Damien Splitters said that companies that make electronic devices that can be used for both civilian and military purposes are generally not required to verify the end-use of their sales ahead of time.

Walid of Russia

The Kremlin has taken steps to reduce its economic dependence on other countries and external sources of funding. It has low government debt and $630 billion in foreign currency and gold reserves. Russian companies have paid to source parts locally, even when working with European partners.

But Harley Balzer, an expert on Russia-China relations and professor emeritus at Georgetown University, wrote in a recent analysis that despite these efforts, localization is highly vulnerable to additional sanctions.

He says that preventing Russia from acquiring American electronic components could be a major pressure point, because Russia’s defense industries import about 20-30% of its electronics and China does not produce the advanced chips and processors that Russia needs.

modest effect?

While Russia is a major energy supplier, it sends few other goods to Europe.

“Despite its size and potential, the poorly managed Russian economy is not a key market for Europe,” said Holger Schmieding, chief economist at Berenberg Bank.

Germany, Europe’s largest economy, sends only 1.9% of its exported goods to Russia, compared to 5.6% to its neighbor and fellow EU member.

Schmieding said Europe is approaching winter and can likely manage any temporary decline in natural gas from Russia. A long-term reduction is not in Russia’s interest.

“Some losses in non-energy trade with Russia as a result of sanctions and counter-sanctions will likely have almost little impact on growth prospects in Europe beyond the next month or two,” he said.