Leaked paper: EU options on 'stage three' Russia sanctions

BRUSSELS - Even before the MH17 disaster, EU countries were discussing a potential ban on Russian oil and gas imports if worst comes to worst.

A text, drafted by the European Commission in late April, outlines what the EU is calling its “stage three” sanctions.

It is entitled: “Assessment of the potential impact of restrictive measures towards Russia on the economy of the EU and its member states”.

A two-page segment of the paper, seen by EUobserver, outlines three options.

Low-intensity

The first, a “low-intensity” scenario, names seven steps.

They include “restrictions” on imports of Russian “luxury goods (diamonds, precious metals, furs, vodka and caviar) and of food products”; restrictions on “selected … intermediate and processed goods (fertilisers, chemcials, tyres, vessels”, but not “steel or nuclear components”; restrictions on “imports and exports of arms”; and restrictions to “export financing” for the listed industries.

They also include: blacklisting more Russian individuals and some companies; suspending EU grants for Russia projects; stopping loans from the European Investment Bank.

The latter three measures were already agreed by EU countries last week before the MH17 crash, in what some diplomats at the time called “stage 2.9 sanctions”.

The additional names to go on the blacklist are due to be published by the end of the month.

Medium-intensity

The “medium-intensity” scenario proposes eight more steps.

These are: a ban on imports of all intermediate and processed goods; a ban on imports/exports of “all sensitive technologies and dual use and arms”; blacklisting still more people; “restrictions” on “trade and investment and related financial services”; restrictions on “free movement of capital”; restrictions on “maritime and road transport (not air transport)”; “holding up Russian investment/acquisition in the energy sector”; an “import ban on coal (no ban on electricity)”; and “cancellation of all co-operation activities”.

While France’s plan to deliver a “Mistral” warship to Russia in October has attracted much attention, the ban on “dual use” items would hurt more.

According to Igor Sutyagin, a Russia expert at the Rusi think tank in London, France currently makes gunsights for Russia’s best tank, the T90, while European firms Thales and Eads make important components for Russian spy satellites.

According to IHS Jane’s Defence Weekly, a British consulting firm, France also sells avionics for Russian MiG jets and “electro-optic infrared” technology, used in surveillance and targetting, for Russian tanks and military helicopters.

Even before MH17, the commission already targeted Russian energy sector investments by forcing Bulgaria to halt construction of Russia’s South Stream gas pipeline.

Following MH17, EU foreign ministers on Tuesday (22 July) threatened to impose sanctions on “capital markets, defence, dual use goods and sensitive technology including in the energy sector” unless Russia stops destabilising Ukraine and lets international air crash investigators do their work.

High-intensity

The EU commission’s “high-intensity” option names five steps.

It calls for: “capital market restrictions”; “prohibition of new investment in Russia”; “strict application of EU regulatory rules to Russian assets in EU companies”; an “import ban on gas”; and “an import ban on oil”.

Putting the oil and gas ban in perspective, according to US figures the EU buys 84 percent of Russian oil exports and 76 percent of its gas exports.

A back of the envelope calculation, assuming end-of-year 2013 prices for both commodities, indicates the EU ban would blow a $300 billion hole in Russia’s $420 billion annual budget.

With several large EU countries - Germany; Italy; and Poland - dependent on Russian gas for at least one third of their needs, it would also be a shock for the European economy.

The commission paper notes that EU officials carried out macro-economic impact assessments for each member state - circulated in a “country fiche” to each capital.

Much is likely to have changed since April.

The commission paper adds that the sanctions proposals are being “tested” based on member states’ feedback, so that the options paper is, at any given time, a “work in progress”.

There is also likely to be plenty of devil in the detail.

When the US imposed its first economic sanctions on Russia last week, it imposed a trade ban and asset freeze on eight Russian arms firms.

But its ban on four Russian energy firms and banks was a ban-lite which forbade only the issuing of long-term debt (90-day or longer bonds) to the companies concerned.

Meanwhile, one EU official told EUobserver that some versions of a potential EU arms embargo on Russia would target new export licences only, leaving France free to deliver its Mistrals.

But one indication the EU is serious about its threats came at last week’s summit.

From bark to bite

In a little-noticed aside, commission chief Jose Manuel Barroso told press that his energy department is carrying out “stress-tests” on how EU states could cope with a cut-off of Russian gas, with results due in October.

A US source who helped prepare the American sanctions, told EUobserver that Washington is also ready to go further.

"These [the economic sanctions so far] seem more designed to quiet critics than inflict real damage. Even so, we're firmly on the pressure track and will see further escalation. August looms and Russia will be about the business of establishing facts on the ground before we take another whack", the source said.

The mix of prohibitions on Russian financial and energy sectors, if imposed, would see Russian leader Vladimir Putin take his country to a place somewhere between North Korea and Iran in terms of pariah status.

He is currently trying to build better ties with non-aligned UN countries to hedge his bets.

But with dozens of victims on MH17 coming from Indonesia, Malaysia, and the Philippines, it remains to be seen if Asia is still willing to roll out the red carpet.

For his part, the Ukrainian ambassador to the EU, in a letter circulated to the EU foreign service on Monday and seen by this website, added some extra ideas on how to hurt Moscow in political terms.

He said Italy should uninvite Putin to a summit of Asian and European countries in Milan in October.

He noted the EU should encourage Australia, which also lost people in the air crash, to uninvite him from a G20 summit in November.

He said the “Donetsk People’s Republic” and “Luhasnk People’s Republic” - the Russia-controlled breakaway entities in east Ukraine - should be listed by the EU as “terrorist organistaions” and he recommended EU countries to undertake a “reconsideration of Russia’s right to hold the next Fifa world cup in 2018”.