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The Russian connections of European companies could lead to tough sanctions

Europe may consider sanctions against Russia in the event of an invasion by Ukraine. The task is not easy.

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The Russian connections of European companies could lead to tough sanctions

Sanctions are intended to minimize the damage to the Kremlin's key banks and energy companies, but not to jeopardize the continent’s Russian-dependent energy supplies. They also aim to avoid inflicting too many damages on European companies that have strong ties with Russia such as Pirelli, Pirelli, and German industrial manufacturer Siemens AG.

Russia is linked to the world's financial and energy markets , and Russia has major foreign partnerships and investments. Therefore, any actions taken in Russia will have an impact on other countries. It is not clear how much.

To keep the Kremlin guessing, the European Union's executive committee isn't disclosing the sanctions it is discussing. Officials claim that the measures proposed would be more severe and sweeping than those in place after Russia annexed Ukraine’s Crimea peninsula in 2014.

These are the places where sanctions could have an impact on Europe's economy

WAITING FOR WORDS

European corporations are keeping an eye on developments, but it is not clear what the measures will be. They hope for a diplomatic solution and limit their comments.

BMW stated that politics sets the rules for how we work as a company and that "if they change, we will evaluate them" and determine the best way to handle them.

Siemens AG, which receives about 1% of its revenues from Russia, is currently developing a new generation high-speed trains together with Russian partners. These trains will be built at a Russian plant. Siemens Energy, which is a separate company partially owned by Siemens AG, builds power plants and equipment to support 57 Russian wind farms.

European automakers are well represented in Russia. Several Russian automakers have Russian factories, including Mercedes-Benz, Stellantis and Renault. BMW also has a Russian partner, Avtotor, which makes cars in Russia. France's Renault is Russia's largest carmaker, Avtovaz with its sprawling Tolyatti plant. Stellantis plans import vans commercial under the Opel, Citroen and Peugeot brands from Kaluga in order to meet Europe's growing demand for delivery services.

Pirelli, an Italian tire manufacturer, is owned by China. It has two Russian factories that employ around 2,500 people. They produce tires mainly for Russia's domestic market, but also for export.

"We continue to invest, and we believe in the development of the Russian market and internationalization," CEO Marco Tronchetti Provera told reporters last month. "We believe that even during crises, there must be a meeting point. We believe that equilibrium will be found at the end."

Last month, he and other CEOs met Russian President Vladimir Putin to discuss business prospects.

Italy's agribusinesses suffered huge losses when Russia placed retaliatory import restrictions on produce, cheese, and meat in 2014. The Confartigianato association, which represents craftsmen from Italy's northeastern Vicenza region, is pushing ahead with a virtual product show in Moscow next month, despite the tensions. Participants include producers of Colombo Easter bread, Panettone Christmas bread and winemakers. These products are not subject to the embargo.

Intesa SanPaolo in Italy, which supports Italian companies in Russia, also said that its mission has not changed.

CEO Carlo Messina stated that "Frankly, geopolitics is not something we do." We respect the rules but we serve Italian customers and do so in all countries, even Russia. We will not hesitate to take necessary measures if the rules change or become an obstacle.

WHAT SANCTIONS WOULD HIT

The discussion has been dominated by large Russian banks. These banks could be subject to various measures, including restrictions on dollar transactions and limits on borrowing.

Rosneft, a state-owned energy company, and Gazprom could also be targeted. They could face sanctions from Western creditors and investors if they borrow money. This would restrict their ability to invest but not immediately cut off electricity supplies to Europe. Russia receives 40% of its natural gasoline and Europe is currently facing high prices and low reserves .

AVOID BLOWBACK

Avoiding large-scale economic or business losses in Europe is a key element. It may prove difficult to gather support from the 27 EU member countries, as they would need to agree unanimously to sanctions.

Novatek, a Russian natural gas producer, could be one of the targets for sanctions. However, 19.4% of the company is held by TotalEnergies in France. This means that harsh sanctions would need some "diplomatic finesse" due to the fact that the company is connected to NATO allies, according to Dan Fried, a former U.S diplomat who created the 2014 sanctions against Russia.

Also, sanctions could allow competitors from China or other countries that don't want to punish Russia. Some smaller German machinery firms gave up after the 2014 sanctions were lifted. They didn't want to deal with bureaucracy or risk of violating complicated rules unintentionally.

In 2016, Russian machinery manufacturers were surpassed by Chinese ones. The number of German companies doing business with Russia has declined from 6,000 in 2010, to 3,500 by 2021.

Conflict Armament Research, an organization that studies supply chains for weapons, discovered that Russian entities had still obtained British, Czech and French components for spy drones of military grade.

CAR reported in November that the parts were found in crashed or downed drones in Ukraine, and Lithuania. Damien Spleeters, the lead author, stated that electronics companies that make electronic products that can be used both for civilian and military purposes don't usually have to verify on end uses before they sell.

RUSSIA WALLED-OFF

The Kremlin took steps to decrease its dependence on foreign countries and other sources of financing. It has low government debt, $630 billion of gold and foreign currency reserves. Russian companies have been pushing to source parts locally even though they work with European partners.

In a recent analysis, Harley Balzer, a Georgetown University expert on Russian-Chinese relations, stated that "localization is highly susceptible to additional sanctions."

He believes that Russia could be prevented from obtaining U.S. electronics components. Russia's defense industries import about 20-30% of its electronics, and China doesn’t produce the advanced chips and processors Russia requires.

MODEST IMPACT

Russia is a major energy supplier but it does not send many other goods to Europe.

Holger Schmieding (chief economist at Berenberg bank) stated that "despite its potential and size, Russia's poorly managed economy isn't a major market in Europe."

Germany is Europe's largest economy and exports 1.9% to Russia. Poland, which is a neighbor, has 5.6%.

Schmieding stated that Europe is nearly through winter and can probably handle any temporary reduction in natural gas imports from Russia. Russia doesn't want to see a long-term decrease in natural gas.

He stated that "some losses in non-energy commerce with Russia due to sanctions and countersanctions will likely have an almost negligible effect on Europe's future growth outlook beyond the next 1 or 2 months."


 

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