Business leaders worry sanctions on Russia over Ukraine could disrupt world economy

 

McClatchy Foreign Staff

With diplomatic efforts having failed to defuse the crisis in Ukraine, political and business leaders are worried that plans to place sanctions on the Kremlin will create an economic meltdown in the economies of the European Union and Ukraine, both of which have important trade relations with Russia and depend on it for their energy supplies.

In 2013, the EU accounted for 45 percent of Russia’s $523 billion in exports, two-thirds of which were natural gas and oil, according to World Trade Organization statistics. Last year, Russia imported $344 billion worth of products, with machinery ($53 billion) and vehicles ($38 billion) among the biggest import items. The EU share of those imports are about one-third of the total.

Ukraine last year sold about $15.75 billion worth of products to Russia -- its largest market -- with iron and steel and cereals its principal export items. Russia is also major source of Ukraine’s imports, accounting for $25.6 billion of Ukraine purchases, or just under a third of the country's $77 billion total; the EU accounted for just slightly less.

By comparison, U.S. trade with Ukraine is negligible, just $2.9 billion in both directions last year.

Jean-Guy Carrier, secretary general of the International Chamber of Commerce, warned that an escalation in sanctions will be very damaging to world trade.

“An escalation would be economic madness,” he said in an interview.

Just what sanctions the United States and Europe will agree to is unclear. To date, the two sides have limited the specifics to travel restrictions and possible actions against specific individuals. They’ev avoided discussion of such crippling sanctions such as limitations of Russian oil and natural gas purchases.

“We don’t like sanctions on principle. They are a very disruptive instrument in dealing with political subjects, but if they come about, the type of sanctions should be as targeted as possible,” Carrier said. “If used, they should be on individuals. Across the board sanctions are quite disruptive to economies,”

President Barack Obama, in comments on Thursday said that the United States prefers not to impose broad sanctions. But with Russia vetoing a U.N. Security Council resolution calling for a halt in a referendum in Crimea on Sunday that’s expected to clear the way for Russia to annex the region, that position may change.

A senior Russian official who spoke on the condition of anonymity because of the sensitivity of the topic said he was not yet concerned that sanctions would be broad. “We have had no signs sanctions will cover trade,” he said.

“We are for sure in contact with most of our trading partners,” the Russian official added, noting, however, that “it’s not trade officials who take decisions in this case.”

A former senior U.S. official, who spoke on the condition of anonymity also because of the sensitivty of the issue, said he expected Congress to demand tougher sanctions, especially if Russian forces move into other parts of Ukraine.

“You can clearly see from the U.S. side that they want to put the screws on Russia,” he said. “If they(Russians) make further moves in the east, I can see significant trade restrictions.”

If the Russian forces stay out of the east, however, a bigger concern for the world economy will be China’s economic slowdown. But that assumes that the Ukraine crisis is “contained to the Crimea and does not spread to the eastern parts” of the country, he said.

Europe also would like to see sanctions not disrupt trade in a major way. A Western European ambassador here said that to date, contemplated sanctions are very specific, “the aim being not disrupt commercial flows.”

WTO rules would permit the United States and Europe to impose restrictions on Russia. Experts note that an EU effort to challenge the 1996 so-called Helms-Burton act that restricts trade with Cuba failed because the WTO treaty includes a security exceptions clause that allows any of the WTO’s 159 members to restrict trade if they consider the step necessary to protect essential security interests.

The fact that Cuba has not challenged the U.S. embargo, in the WTO “tells us Havana accepts it’s not a winning proposition,” said one WTO expert who asked to remain anonymous because of the sensitivity of the subject.

A dispute panel was established in November 1996 to consider an EU challenge to the U.S. law, but its work was suspended in April 1997.

Zarocostas is a McClatchy special correspondent.

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