Sanctions against Moscow, a Boomerang

An Article by Mario Lettieri and Paolo Raimondi published at ItaliaOggi on August 20, 2014

Washington sanctions against Russia have above all a geopolitical relevance. It is the return of the Cold War between the two superpowers. For the European Union, on the contrary, they risk provoking immense economic and political disaster for the Euro-Asian region as a whole.

Europe’s lack of “international personality” is unfortunately well known. With its economic weakening, Europe also runs the risk of submitting itself to a new atlanticism. This would please Washington. Indeed, the sanctions undermine the EU’s independent role and all its autonomous strategic vision of future geopolitical agreements.

The sanctions’ negative effects in Europe, and particularly in Germany, are fortunately provoking a profound debate on the role and future development of the EU. As it is known, the EU decided to expand the sanctions also against Russian corporations, just as the US had done earlier. On Washington’s “black list” are companies like the oil giant Rosneft, the gas corporation Novatek, Gasprombank and the weapons producer Kalashnikov. These companies can no longer ask American banks for credit and cannot sell middle and long term bonds to investors with American links.

In other words, the intention is to financially strangulate Russian enterprises and banks whose access to international financial markets will be progressively reduced. But the risk is a boomerang. The negative effects will be felt in all Europe, including in Germany. In Italy the exports of agriculture products and wine have already been affected.

The German industrial association speaks of a loss of 25,000 jobs. Deutsche Bank estimates a loss of 0.5% in the German GDP caused by the combined sanctions

The authoritative Russian-German Chamber of Commerce expects sanctions to affect at least a quarter of all the companies doing business abroad. For example a pipelines sealing firm in Bavaria working with Novatek has suffered a reduction of 30% for orders cancelled or postponed. Siemens itself would have to stop a contract worth 90 million euro for turbines and generators ordered by Rosneft. Also the German car producers foresee reduced sales in Russia for 2014: Volkswagen will lose 10% while Opel has already lost 12% in the first 5 months of the year. Moscow de facto is pushed to look for alternative suppliers.

As a result, an objectively difficult investment situation has been created in Europe, placing in jeopardy even the life of several European firms which may be penalized.

At the same time Berlin is considering a new European economic policy. The DIW (German Institute of Economic Research) has put at the center of its proposals long term investments in new technologies and infrastructure which are considered essential for economic recovery. From the beginning of the financial crisis, capital creation in the Euro zone fell by about 15%. There is a big gap between planned investments and those actually carried out.

In 2010-12 in Germany it was a 3.7% gap. To compensate, about 80 billion euro investments would be needed every year, and for the entire EU about 200 billion euro.

Therefore Berlin is considering the creation of a European fund of 100 billion euro which should be managed by the European Investments Bank. The national development banks, like the Cassa Depositi e Prestiti in Italy and the Kreditanstalt fuer Wiederaufbau in Germany, would be involved in providing credit for development. Such an approach should be outside the parameters of the Stability Pact.

The fund should have also the capacity to issue bonds, which will be guaranteed by the countries involved. They should have a very advantageous rating, keeping interest rates low as well. We do not believe that there should by any problem in finding bond investors because, as is well known, Europe saves about 300 billion euro every year, equal to 2.5% of its GDP.

The fund is a good proposal. But we believe that the right path for the EU to follow is one of cooperation and development inside Europe and with neighboring countries to provide stability and a solid recovery perspective.

Mario Lettieri was Economics undersecretary in Prodi’s government
Paolo Raimondi is Economist and Editorialist of the Italian Economic Daily ItaliaOggi

Click here to read the original version in Italian