Tough Talk From Germany On Russian Energy Sanctions

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Tough Talk From Germany On Russian Energy Sanctions

Yesterday’s Crimean ballot was decisive, nobody expected different. Today we await the reactions from both the European Union (EU) and the US. Both powers promised sanctions against Moscow in response to the ‘illegal’ referendum on the future of this Ukrainian peninsula.

Three forms of sanctions are being debated by the western powers.

Visa restrictions are the first and most likely to be implemented initially. These are not aimed at everyday Russians, rather they are designed to get at the billionaire oligarch friends of Russian President Putin. The though process being that by making life uncomfortable for this group they will in turn put pressure on Putin to make concessions in the Ukraine.

Secondly, the EU, US and others are expected to impose restrictions and even freezes on Russian held assets abroad. The effect of this sanction route may however be limited simply by the fact that it has already been pre-empted. Last week saw a sell off in the likes of US Treasuries, this is a good indicator that Russia has been reducing assets that it deemed vulnerable to a freeze.

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Finally, to have any meaningful effect the ‘west’ must look to trade related sanctions in order to get the attention of the Russian authorities. The obvious trade sanction to impose is on the purchase of Russian energy.

The energy restriction option will hit the Russian economy hard. The problem is that it will also hit the EU hard. Last year the EU spent almost $160bn on the importation of Oil and Natural Gas from Russia. The US on the other hand spent less than $4bn on Russian energy.

Germany is one of the largest consumers of Russia’s energy commodities, in fact two of Russia’s five westward Natural Gas pipelines flow directly into Germany. In a posturing move, Germany’s Chancellor Angel Merkel has already stated that her country is willing to bear the economic pain that would result from imposing sanctions on Russia.

Despite Germany’s apparent willingness to take one for the team, markets do not believe that the EU’s fragile recovery could withstand such an energy shock. Oil and Natural Gas prices remain calm in full anticipation of the EU/US stopping short of commodity based trade sanctions on Russia.

To contact the reporter of this story: James Brennan at james@forexminute.com