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Financial sanctions against Russia ‘are quite potent’

Published time: July 30, 2014 15:13
EU Flags fly at half mast in front of the Berlaymont European Commision Bulding in Brussels (AFP Photo)

​The immediate impact on the Russian economy is not going to be crippling, but sanctions will work in the long run starving Russian banks and companies of funding over the next few years, Wolfgang Munchau, director Eurointelligence news blog, told RT.

Both the European Union and the United States announced a new round of sanctions against Moscow on Tuesday. The so-called "sectorial" sanctions imposed by the EU became the most serious step against Russia the member states have agreed. The EU believes the sanctions will “limit access to EU capital markets for Russian State-owned financial institutions, impose an embargo on trade in arms, establish an export ban for dual use goods for military end users, and curtail Russian access to sensitive technologies particularly in the field of the oil sector.”

There is a new thinking in the US and the EU that the financial sanctions are more potent than trade sanctions, Munchau said.

RT: What's your prediction, how will this effect Russia's economy?

Wolfgang Munchau: Russia's economy will be affected. The immediate effect won't be very strong or devastating, although certain people will be targeted and certain companies and banks will feel the strain. The immediate impact on the Russian economy is not going to be crippling, it will almost certainly cause a recession, definitely more pessimistic than the official forecasts, but the sanctions themselves will work in the long run. That's the real effect. Financial sanctions are quite potent; they will starve Russian banks and companies from funding over the next years. They have a lot of debt to roll over in the next twelve months that is where the sanctions will hit them.

US President Barack Obama makes a statement on the situation in Ukraine on the South Lawn of the White House in Washington on July 29, 2014 (AFP Photo)

RT: Has the West chosen the most effective way to apply pressure on Moscow?

WM: You can always try all-out sanctions, but that would have been far too much, it would have been a financial war. And it is not clear at all whether the West and the EU in particular would have had a stomach for that, because it would have also meant a very significant economic damage to the EU as well. That shows the type of sanctions that cause the least damage to the EU and the most damage to Russia, and there is a new thinking in sanctions philosophy both in the US and recently in the EU that the financial sanctions are more potent than trade sanctions.

RT: Obama said this round of sanctions is the toughest so far. If these aren't effective, what's next?

WM: The next [step] would be to widen the financial sanctions. I do not think we are going to have a gas import or oil import ban or anything like that. I would assume that the next round of sanctions will target more people, that thing they can always step up. What we will be able to see is [also] sanctioning banks in the EU to prevent them from extending credit to Russian companies. That has not happened yet, we could really curtail credit flows to Russia. That would certainly be one of the next sanctions on the agenda, and that would have a very serious impact indeed.

RT: Europe was in no rush to follow America's move to impose these sanctions. Why has it now come on board?

WM: Undoubtedly, that was the Malaysia Airlines MH17 tragedy; it has brought an enormous sense of solidarity to the EU. Before that the story almost disappeared from the radars screens in many EU countries. Different countries have different relations with Russia - both Italy and Germany were much closer to Russia and to Putin than several Eastern European countries and the UK. Until the disaster they were very cautious. Not blocking things, but they were more cautious on sanctions, but after MH17 the German government changed its position. Merkel realized that Putin has not been telling the truth and hasn't kept his promises to her in the way she sees it, and she felt that she cannot rely on what Putin promises and says, and that the EU needs to act jointly or be completely discredited.

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