Why do EU sanctions against Russia stop short of a total trade ban?

Question

With the Russian invasion of Ukraine now officially around the corner (or even underway), I am surprised how minimalistic and non-committal the proposed sanctions are. Even the US "mother of all sanctions" consists of mainly targeted surgical measures like cutting Russia off SWIFT and banning the export of semiconductors and the like. I understand that US doesn't have to show much of an effort since it's a long way from Ukraine to Washington, but I would expect much more resolve from the EU with a war on its doorstep.

EU sanctions against Russia have been ongoing since 2014. However, given their limited nature, Russia doesn't seem to have responded much to them (apart from learning to buy Russian apples instead of Polish ones).

Given that the EU-Russia trade comprises just 5% of all international trade of the EU but almost 40% of all Russian trade, I would naively expect that a total ban on trade and financial transactions would hurt the EU a little but bring Russia swiftly to its knees and Putin to the negotiating table. Of course, losing a third of the gas supply would mean everyone in Europe would have to put on an extra sweater or two and China would also likely step in and pick up part of the slack, but I cannot imagine Russia being able to retarget half of its foreign trade overnight.

(To illustrate my line of thought, consider how we treat bacterial infections with antibiotics. You don't slowly ramp up the dose because that would let the bacteria develop resistance, you hit them with a big hammer right away so they don't get a chance.)

I assume that if the above made a lot of sense economically, politicians would figure out a way to sell it to the general public (after all, they managed to sell things that didn't make any economical sense at all). Is there a serious economic analysis showing that targeted sanctions are more efficient than a total trade ban?

Answer 1

I think there are at least two obvious reasons,

• The EU profits from trade with Russia. Russia buys a lot of stuff, sells a lot of stuff the EU needs, and also uses the European market for its transactions with other parties, increasing its size and importance. A lot of European companies operate extensive local branches in Russia, such as banks, retailers, consumer goods makers, etc - whose bottom line will not be happy.

• EU countries can't afford to fire all of their weapons and come empty-handed. Let's assume the EU introduces a full ban on trade with Russia. Let's assume Russia takes over Belarus and Ukraine the next morning and imposes a blockade on the Baltic states. The EU then can't do anything short of a military intervention since it has exhausted its "soft" options.

There are subtle reasons, such as, some EU countries may not be happy about US and/or EU policies, so they would give the necessary lip service and then block the harsh measures because they feel that Russia balances out these parties.

Update: Losing half of Russia's international trade is not a deterrent to stop Putin from trying to rebuild the Russian sphere of influence. The threats of loss of half of the international trade are the deterrent. Once you actually trigger it, the damage is done but it's not a deterrent anymore since there's no downside for Putin to invade whoever he pleases after already suffering the "pre-consequences".

Answer 2

The deployment of Russian troops in those regions is not such a big change in the actual situation on the ground. Before they were called volunteers, now they are officially recognised. So, we can't really say that the invasion of Ukraine is around the corner or underway. Tougher sanctions would mean an escalation with unknown consequences.

Answer 3

1. S&P500 (and other stock indices) is down a few per cents because of the fears of a possible escalation in Ukraine which may or may not lead to serious sanctions on Russian economy. Imagine what nightmare happens if such sanctions are implemented. Also, please consider, how much are regular Europeans ready to pay to save a third world country? Do they really care for Ukraine so much to be willing to pay several times more for gas and lose a considerable share of their life savings because of a fall of the market?
2. Although Russia doesn't have much leverage, it has some "dirty" "last resort" cards in hand, such as helping Iran with its nuclear program or sparking a conflict in Middle East that will lead to a refuges crisis. Hard to tell what happens in Putin's mind, but given that Russians will consider such sanctions as unfair, you can't leave out a possibility of such response to the sanctions.

Answer 4

Speaking as a moderate European:

consider how we treat bacterial infections with antibiotics. You don't slowly ramp up the dose because that would let the bacteria develop resistance, you hit them with a big hammer right away so they don't get a chance.

The main point here is that we don't really want to kill Russia.

Well, most of us. At least, for now. Sort of.

The main purpose of sanctions is to make things unpleasant for the decision-makers (e.g. by targeting particular people and businesses) and/or make the wrong decisions hard to fulfill (e.g. by depleting the military industry of important supplies).

On the other hand, sanctions can easily become counter-productive. E.g. an economy collapse may consolidate people around the current leader (this works even in more or less working democracies) or make it cheaper for the government to recruit soldiers.

The third consideration is called China.

From the European viewpoint, China is something like Russia squared. We may not like what Russia is right now, but making it more aligned with China is something considered much worse.

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p.s.1 : The above is written at 2022-02-23, few hours before the massive Russian attack.

p.s.2 : In regard to the decision-makers, the thinking goes as:

• Russia is not a democracy (*)
• The ordinary citizen does not influence the government actions much
• Then, it is pointless and even somewhat cruel to impose unnecessary burden to the ordinary citizen

If it was a more or less democratic, the much simpler fiddling with international trade regulations and tariffs will do the trick. We see this rather frequently.

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(*) Russia not being a democracy doesn't mean that it doesn't have some power process where the general population does influence the decisions of people in power. The process is slow and erratic, but it can still be said that Putin is whatever Russians are OK with (or at least, were OK a while back).

Answer 5

Several important reasons have been mentioned. Another one that seems to be missing in the discussion is that imposing sanctions is only the beginning. You also need to be able to sustain them or offer a path back to normality without entirely giving up on your demands. That in a context where most of the population and the politician class catering to it do not seem ready to make any great sacrifice.

A sanction package that is not sustainable can backfire badly. In a month or two from now, with Russia not budging, the EU might find itself under pressure from some member states to walk back on some of the sanctions, which would admittedly be even worse than not imposing them in the first place.

Answer 6

Total trade ban would hamper the humanitarian aid, which may be considered undesirable by some politicians and parts of the general population in the West. Think about the optics of a situation where the Russian efforts to vaccinate its population are thwarted due to total ban on the Western-manufactured enzymes and reagents needed for the production of the vaccine. Russian children would get sick and die, this will be shown on the Russian media, and rebroadcast in the Western media.

Total trade ban would be opposed by the countries in which the ruling elite has considerable ties with the Putin's regime. The larger countries include Germany and France, plus smaller players such as Hungary and Croatia. The list of mostly former politicians with ties to Putin's regime probably starts with Gerhard Schroeder, but includes many other prominent figures (Matthias Platzeck, Matthias Hoehn, Rolf Muetzenich, etc).

Answer 7

The percentages you cited are based on current prices of the goods and services being traded. But the price elasticity of these products varies quite a bit. European energy imports from Russia are hard to substitute. German manufacturers cannot just reduce their oil and gas usage by putting on sweaters. Banning Russian oil would cause European energy prices to skyrocket. Russian luxury goods imports from Europe are high in value right now, but they could more easily substitute these for (say) Chinese knockoffs.

The primary trade retaliation would have to come from the US, related to semiconductor technology. Note that for semiconductors, it was only meaningful to ban ASML (which is Dutch) exports to China, because China is trying to build leading edge fabs. So banning ASML exports to Russia wouldn't be meaningful.

Of course, this answer is a bit of a caricature. Europe (especially Germany) does export hard-to-substitute manufactured products to Russia. However, recall that before the fall of the USSR, it maintained a fairly independent industrial base. The rise of Chinese manufacturing after 2000 has allowed Russia to integrate with the Chinese industrial base. So Russia hasn't had a long period of time over which to develop supply chain dependencies on the West.

Answer 8

This question is much broader than EU vs Russia. When democracy and autocracy cross their ways, then democracy has to think on so many levels, while autocracy does what the leader says. In an autocracy, the leader is adored by the masses (up to the last point), in democracy leaders are criticized by the masses. So when in autocracy is some opposition, they are pretty silent. While in democracy leader has to count on so many interests to rule the country. Many of those interests have deep roots in this case in Russia. In the EU we have to multiply it all by 27. So until public opinion towards this question is still cool, politicians have to consider more with economic interests.

While the USA has a federal president who has the historical platform to demand from dictators, the EU has no real blunt mechanism to show our power at once. Or do you know who is now High Representative of the Union for Foreign Affairs and Security Policy? Does he speak for EU with Putin? Does Putin care about such a role at all? Do we ourselves?

From my point of view, the main reason the EU acts so toothless is tepid public opinion (compare Baltic states vs Portugal or Ireland) and huge dependence on the Russian market (mostly energy, but so many big EU companies have their branches braid into Russia). This last part is bound with the selfishness of politicians. I can't recall politicians risk for their own careers for the sake of punishing dictators. It seems to be impossible to have 27 countries having real statesmen same time in office...

Democracy needs so much time to act, that (I am afraid) it will cost too many lives.

Answer 9

It's all extremely simple. Here are spot gas prices.

This chart looks like that because there is no more stock, it's all been consumed, we're down to a few percent on stock capacity. And there is no way to transport enough gas from anywhere on time except through the Russian pipelines.

If Mr. Putin decides to stop exporting gas to Europe, there won't be enough of it no matter the price. This isn't just about wearing an extra sweater, it would cause industries to shut down, massive blackouts, etc. Due nuclear powerplants being shut down and the renewable craze, which requires backup natgas powerplants, EU grid has become quite dependent on natgas.

Basically, without Russian gas, it's over for the EU and most governments in Western Europe would blow very quickly.

However, it would be a breach of contract for Russia to do so, so I don't believe they will. They make it a point to honor their long-term gas contracts to the letter, but they don't sell us anything extra.

This means Europe has a severe gas shortage, which explains the huge increase in price... and Mr. Putin can tell them they can only blame themselves for not reserving higher quantities in the long-term contracts.

Russia built pipelines to sell gas to China, so they don't care about not selling to the Eurozone. Their gas revenues are fine. China also benefits, since that makes it less dependent on imports from US-controlled countries.

In addition, Russia is one of the biggest exporters of fertilizers, so if Mr. Putin says no fertilizer for you, then you're in trouble. Likewise for a few minerals and materials like titanium, palladium, etc.

So... yeah, Russia has the EU completely pinned. They can't do much of anything at all.