After much wrangling, the European Union finally agreed a sixth package of sanctions against Russia. It will: phase out Russian oil imported by sea by the end of the year, albeit with a carve-out for Hungary, Slovakia, and the Czech Republic to receive oil transported by pipeline; ban three banks from the SWIFT financial messaging system, including Russia’s largest consumer bank, Sberbank; and target three Kremlin-controlled broadcasters.
Despite the compromise nature of the final deal, Europeans might feel that they are closer than ever before to their objectives of punishing Russia for its aggression in Ukraine – and acting as the truly “geopolitical” player the European Commission wishes the EU to be.
However, the package’s effects may not be felt immediately, or even have the desired impact in some respects.
Firstly, the EU’s oil ‘embargo’ looks to phase out Russian oil; but revenue from its sale is still set to flow to Russian coffers for the next couple of months, and potentially years given the exemptions agreed. With a cut-off date now determined, these measures might even spur yet-greater Russian aggression in Ukraine, while rising oil prices may theoretically make it possible for Russia to sell its crude at higher rates, offsetting some of its potential losses. Russian crude is now trading at a price comfortably beyond what the Kremlin needs to achieve its budget requirements, even if it is still well below that of a comparable barrel of the Brent benchmark. And the sanctions the EU has imposed on maritime insurance will make things much more difficult for exporters in the future, but not impossible.
There is also a risk that the EU’s measures could push global oil prices even higher; the United States in particular has warned against the global fallout of a European oil embargo as it experiences high inflation (crucially, before November’s midterm elections). Europeans might have to accept that others will not forgo cheaper Russian energy, and also accept the far-reaching consequences of their decisions, which complicate the calculations for others, even allies. Part of addressing these secondary effects may be to seek to increase seaborne exports by working with other oil-producing nations on raising their output, effectively reducing international prices for non-sanctioned oil.
Secondly, sanctioning Sberbank will probably have only a modest impact, as the bank itself has had to refocus in the wake of US sanctions and is now serving domestic clients. This state of affairs solidifies the division between the Western banking and financial sector and Russia’s, making trans-border payments very costly (as alternatives to SWIFT have to be used). Dealings with Russian entities will generally become much more difficult as banks shy away from them for fear of being caught by European and US sanctions. On the other hand, Gazprombank is exempt from sanctions and will likely consolidate this position as competition for major cross-border payments falls. Ruble assets held with Russian banks will also continue to solidify, with a rising exchange rate amid huge current account surpluses. That being said, Chinese firm UnionPay has backed off from a deal to expand its presence in Russia over fear of being sanctioned – dashing Russian banks’ hopes.
Finally, a global food crisis has developed since Russia’s invasion and blockade of Ukrainian ports, with secondary effects that are now having consequences further down the supply chain, such as India’s decision to ban wheat exports and Argentina’s export quotas. Diplomatic interventions have led to countries already turning away Russian ships carrying grain from Russia or occupied Ukraine. Importing nations are concerned that sanctions severely complicate payment for non-sanctioned produce and will be looking for alternative producers. But, as prices rise further, stocks decline, and governments’ core domestic interests come under pressure, they too might decide they have few alternatives but to buy from Russia. Whether Europeans like it or not, the collective impact of their external policy on Russia has drawn the EU into a battle of narratives.
To offset this and maintain the potential of its external action, including the use of sanctions, Europeans should look for ways to help affected countries, including offering direct support through financial assistance in order to help with rising food prices. In the medium term, they can also pursue measures to increase domestic production. Furthermore, Europeans should work to ensure that partner countries see this effort in action, to combat the Russian narrative of the West being a block on tackling rising prices rather than being part of the solution. But they need to start providing help at wider scale now, and not in several months’ time. Many states do not care about who is to blame for the crisis – as Senegal’s president and African Union chair Macky Sall recently demonstrated when he met with Vladimir Putin and repeated Russia’s words over lifting Western sanctions. The West must help, and be seen to help. Europeans should also avoid imposing export restrictions, which would solidify the narrative of an uncaring West, unless they can provide relief by unblocking trapped Ukrainian exports at the same time.
The EU’s sixth sanctions package tightens the economic squeeze on Russia. It tackles oil imports for the first time and excludes one of the last big Russian banks from the SWIFT system. The economic consequences of the measures are still to fully unfold but they will structurally weaken the Russian economy by further severing its ties with Europe and the Western world. They will also make it more difficult for Russia to do business with other parts of the world. Whether this will change the calculus for the Kremlin and the military decisions it takes is another question. For Russia’s economy, the future looks grim with regards to its international exposure, but on the domestic front it is showing more resilience for the time being. Economic consequences weigh differently in the Russian strategy than if the same were to happen to a European country. The EU’s sixth sanctions package and its predecessors alone will not transform the situation on the ground – and the bloc must take care over how the narratives growing up around its punitive measures influence opinion around the world.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.