Russia Sanctions: Why The U.S. And Europe Are Not Quite In Step

By: Irene Chapple and Ivana Kottasova
By: Irene Chapple and Ivana Kottasova
The United States and Europe have reacted against Russia

This map shows the gas pipelines that go through Ukraine, and the EU's dependence on Russia for energy. 30% of the EU's gas comes from Russia.

(CNN) -- The United States and Europe have reacted against Russia's military intervention in the Crimean peninsula last week with threats of economic punishments. But their positions are slightly different. Here's why.

How important is Russia's economy?

Russia is the eight biggest economy in the world, with GDP of more than $2 trillion. Its economy -- which is heavily reliant and commodities, particularly oil and gas -- is expected to grow only slightly in 2014 to around $2.4 trillion. Hopes it would be one of the decade's powerhouse economies have faded, with its GDP growing just 1.3% last year compared to 2012, one of the sharpest slowdowns in the emerging markets.

Russia boomed in the late 1990s and early 2000s as energy prices rose, then stumbled as demand for commodities contracted. But its energy supplies remain vitally important for the European Union, to which it supplies a third of its natural gas. Germany, the eurozone's biggest economy, imports around 40% of its gas from Russia.

But Russia's relationship with the West has fractured over the Ukraine crisis, and it now risks being economically isolated by the U.S. and the European Union. Visa bans have been introduced, and harsher sanctions threatened.

What is Russia's economic relationship with the U.S?

The economic relationship between Russia and the U.S. is unbalanced. Russia is the 20th largest trading partner for the U.S., with $27 billion worth of trade exported across the Atlantic. On the flip-side, the U.S. is Russia's fifth largest partner, with just $11 billion worth of trade.

According to Russian Foundation chair David Clark, trade is a "relatively unimportant" component of relations. Energy links are also weakening as the U.S. looks to shale gas for its energy supplies and heads towards self-sufficiency.

However, on Thursday the U.S. State Department imposed a visa ban on Russian and Ukrainian officials and individuals "responsible for, or complicit in threatening the sovereignty and territorial integrity of Ukraine." President Barack Obama also signed an Executive Order laying the groundwork to impose sanctions against individuals and entities responsible for the crisis.

In a statement the White House said the move was a response to "Russia's ongoing violation of Ukraine's sovereignty and territorial integrity -- actions that constitute a threat to peace and security and a breach of international law."

Clark said the U.S. could get greater leverage over Russia from financial sanctions aimed at the country's banking system and stability of the ruble. Measures targeted at named individuals, similar to those contained in the Magnitsky Act, could also be effective. "Russia's angry response to the act shows that it works," Clark said.

Russia has threatened to retaliate against sanctions but, according to Clark, it "has a great deal to lose by escalating too far. Seizing western property would make Russia a no-go zone for foreign investors who Russia desperately needs to modernize its economy and maintain energy production."

Is Europe going to do the same?

The EU is Russia's largest trading partner, and there are deep economic links between the two. Almost half of Russia's exports -- $292 billion worth -- end up in EU countries. Russia, in turn, is the third biggest trading partner for the EU, with $169 billion in imports.

The EU has stepped more cautiously than the U.S. on sanctions. On Thursday, the EU threatened to impose sanctions on Russia if the negotiations between Moscow and Kiev did not prove effective in dealing with the Ukraine crisis.

European Council President Herman Van Rompuy said negotiations needed to start in the next few days and "produce results." Without that, he said, the EU would look to additional measures such as travel bans, asset freezes, and cancellation of the EU and Russia summit.

Earlier, a document leaked from British government suggested the UK was happy to impose sanctions -- but only those that would not cause harm to the country's financial sector.

And while G8 members -- excluding Russia -- are threatening to abandon a Sochi summit planned for later this year, Germany has also pushed for more diplomacy.

Clark believes Russia could retaliate against any European sanctions, saying it would probably try and "pick-off some of the countries that have been most forceful in advocating tough measures against it -- especially Poland and the Baltic States." However, "it probably wouldn't retaliate against the EU as a whole or against Germany."

Meanwhile, the West has offered $16 billion in aid for Ukraine, helping the country prop up its flailing finances. Ukrainian leaders have said they will be $30 billion in the hole by the end of 2015. About half of that debt comes due in 2014.

Why the different approaches?

The eurozone has only just emerged from its own crisis, and would be wary of cutting ties with such a powerful economic partner. Its reliance on gas out of Russia would also feed caution. In contrast, the U.S. is weaning itself off Russia's energy supplies and its trade relationship is much less intertwined.

But Louise Cooper, of financial blog CooperCity, said the West risks looking weak if it doesn't follow tough talk with action. The EU has so far "only come up with a threat of symbolic sanctions, even after Crimea has effectively been taken over by Russia with a new pro-Russian government," she noted. Even the U.S. visa ban "will have no impact on either the Russian economy or the American one," she said.

Meanwhile Russia risks isolating itself, Clark said. "It can maintain de facto control over Crimea indefinitely, but it will come at a very considerable long-term cost to Europe's willingness to consider Russia as anything other than a source of trouble and insecurity."

Posted by Greg Palmer


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