EU expands Russian oligarch sanctions blacklist in wake of MH17 crash

The European Union has expanded its blacklist of Russians subject to sanctions and broad economic measures against Moscow are looking increasingly likely following the shooting down of Malaysia Airlines flight MH17 despite deep divisions among the 28 EU member states.

Such measures would represent a rift between Russia and the rest of Europe of a depth not seen for over 20 years. While analysts balk at describing the looming standoff as a new cold war, pointing out Russia is a much less formidable power than the Soviet Union, they say the new east-west tensions could intensify and prove very hard to reverse.

So far, with no sign of an end to Russian military support for separatists in eastern Ukraine and reports of direct artillery fire from inside Russia against Ukrainian positions, Vladimir Putin appears to be responding to the threat of more sanctions by raising the stakes on the battlefield.

"Putin has dug himself into a hole," said John Lough, an associate fellow at the Chatham House thinktank's Russia and Eurasia programme. "He has revved up public opinion with grotesque use of propaganda, and it is not clear what he can do with the national mood he has released. What is it going to focus on? This could transform the relationship extremely negatively to one of long-term mutual alienation."

However, Lough added: "We are a long way off from a new cold war. Russia is a very different country from the Soviet Union, with no unifying ideology. This is a collision of interests rather than of ideologies. Inadvertently the EU finds itself in competition with Russia on its periphery."

The European Council on Foreign Relations (ECFR) said the direct challenge posed by Putin could unravel the post-cold war order in which the eastward spread of liberal European ideas once seemed inevitable.

"By annexing Crimea and intervening in Ukraine, Russia has raised fundamental questions about the principles of the European order," the ECFR said in an assessment of 10 global consequences of the Ukraine crisis. "Russia wants to both restore and re-legitimise spheres of influence as an organising principle of European order. This is a direct challenge to Europe and the west as a whole: although some countries might be willing to accept implicitly Russia's view of European order, none can afford to do so explicitly."

The EU has found it hard to find a cohesive position towards Russia but the downing of the Malaysian airliner, killing 298 people, of whom more than 200 were EU nationals, has made an escalation in European sanctions all but certain.

The new EU sanctions list adds 15 individuals and 18 entities, bringing the totals of those affected to 87 people and 20 organisations, all deemed to be directly linked to the destabilisation of eastern Ukraine. Among the new names were the chief of Russia's FSB security service, Alexander Bortnikov, and Mikhail Fradkov, a former prime minister who now heads the foreign intelligence service.

European ambassadors meeting in Brussels on Thursday also agreed to widen targeted sanctions to include Putin's close circle of supporters, but the final decision on a list of affected "cronies" will not be discussed until Monday.

The EU is also due to decide next week on the first significant financial sanctions to be imposed if Russian-backed separatists continue to obstruct an investigation into the airliner crash and Russia fails to stop the flow of arms to the rebels. Those conditions appear unlikely to be met.

European commission officials have drawn up options including banning Russian banks with more than 50% state ownership from raising capital on European markets, a potentially powerful blow. Last year, almost half the bonds issued by Russian public financial institutions, worth €7.5bn (£6bn), were sold on European markets.

Such measures have long been portrayed as particularly damaging to London, but research by the Open Europe thinktank suggests the impact has been exaggerated, partly because of the high profile of some London-based oligarchs. In 2012, the latest year for which full statistics are available, the stock of Russian assets in the UK was worth £27bn, only half of one per cent of total European assets invested in the UK.

"While the Londongrad narrative is attractive, the data suggests it doesn't quite hold," said Raoul Ruparel, the head of economic research at Open Europe. "Given that London is a global financial centre, Russian business is only a small slice of a very large pie. The stage three sanctions being considered should therefore be manageable from the City's perspective."

The limited stakes involved help explain the UK's vocal backing of tough measures in Brussels, but progress in agreeing a package of EU measures has been slowed by the principle of burden sharing, in which all member states with an economic stake in the outcome have to be seen to be making equal sacrifices.

In that respect, European officials have drawn up a draft arms embargo covering the entire defence sector, but left it to the politicians to hammer out whether and how it should affect contracts already signed. France has sold two Mistral helicopter carrier vessels to Russia worth a combined €1.2bn, but President François Hollande has hinted at a compromise, by which one ship would be delivered and another held back, even at the cost of penalties and forgone income.

"This is a huge problem for Hollande," said Bruno Tertrais, a senior research fellow at the Fondation pour la Recherche Stratégique in Paris. "The question of reputation as a supplier is as important at least as the money. If it was just about a billion euros, it would be different story."

The choices facing Europe are complicated by different degrees of dependence on Russian gas for energy supplies. However, the correlation between gas pipelines and political positions is not linear. Bulgaria is completely dependent and is the European state most opposed to sanctions. But Lithuania, Latvia and Estonia also receive all their gas from Russia but are fervent advocates of punitive measures.

The most decisive split over sanctions in Europe may not be between governments but inside the most powerful government on the continent, in Berlin. Chancellor Angela Merkel has been a much tougher advocate of sanctions than the foreign ministry under Frank-Walter Steinmeier. How those differences are resolved could determine which way Europe jumps next week.

There is no doubt that the sanctions on the table in Brussels could inflict serious economic damage on Russia. Whether that can influence Putin's actions, however, is another question.

"A lot depends on how much the elite that matters, the elite behind Putin, are up for a confrontation," said Sophia Pugsley, an ECFR analyst. "Which way they will go is anyone's guess."