European companies’ ties with Russia could tighten sanctions

FRANKFURT, Germany (AP) – Europe is considering sanctions against Russia if it invades Ukraine – and the job is far from easy.

The sanctions will be aimed at maximizing pain for the Kremlin, its key banks and energy companies, but will also avoid threatening Russia’s continent-dependent energy supplies or causing too much damage to European companies with strong ties to Russia, including a German industrial producer. Siemens AG, Italian tire manufacturer Pirelli and automakers such as Volkswagen and Mercedes-Benz.

Russia has ties to global energy and financial markets and is home to major foreign partnerships and investments, so any measures will have implications outside the country. The question is how much.

The EU’s executive committee is not disclosing sanctions, which are being discussed so that the Kremlin does not guess. Officials say the measures will be broader and tougher than those imposed in 2014 after Russia annexed the Ukrainian peninsula of Crimea.

Here are the places where sanctions could affect Europe’s economy:

WE ARE WAITING FOR THE WORD

Given that it is not known what measures will be taken, European corporations are vigilantly monitoring developments and limiting their comments to hopes for a diplomatic solution.

BMW said that “the policy defines the rules under which we operate as a company” and that “if the framework conditions change, we will evaluate them and decide how to deal with them.”

Siemens AG, which receives about 1% of its revenue from Russia, is developing a new generation of high-speed trains with Russian partners to be built at the plant. Siemens Energy, of which Siemens AG is a part, is building power plants and equipment for 57 wind farms in Russia.

European automakers have a wide presence. Volkswagen, Stellantis, Renault and Mercedes-Benz have plants in Russia, and BMW manufactures cars there through Russian partner Avtator. French Renault owns the largest Russian automaker AvtoVAZ with a large plant in Togliatti. Stellantis plans to import commercial vans under its Peugeot, Opel and Citroen brands from its Kaluga plant to meet Europe’s increased demand for delivery services.

The Italian tire manufacturer Pirelli, owned by China, operates two factories employing about 2,500 people in Russia, producing tires mainly for the domestic market but also for export.

“We continue to invest and believe in the development of the Russian market and internationalization,” CEO Marco Tronchetti Provera told reporters last month. “We believe that even in crises we need to find a meeting place, and we believe that in the end an equilibrium will be found.”

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

Italy’s agribusiness lost heavily when Russia imposed a retaliatory ban on imports of food, cheese and meat in 2014. Despite new tensions, the Confartigianato Masters Association of the northeastern Italian province of Vicenza continues to hold a virtual food fair in Moscow next month. Among those wishing to take part are producers of Panettone Christmas bread, Colombo Easter bread and winemakers, products that do not fall under the embargo.

Also, the Italian bank Intesa SanPaolo, which supports Italian business in Russia, says its mission has not changed.

“Honestly, we are not involved in geopolitics,” said CEO Carlo Messina. “We respect the rules, but we serve Italian customers, and we do it in all countries, including Russia. If the rules change and become an obstacle, we will take the necessary measures. “

WHAT SANCTIONS WILL BE GIVEN

Much of the discussion has focused on major Russian banks, which may face measures ranging from restrictions on borrowing to restrictions on dollar transactions.

Another target could be energy companies such as Rosneft and state-owned Gazprom, which could face bans on borrowing from Western investors and creditors. This would limit their ability to invest in new projects, but would not immediately stop energy supplies to Europe, which receives about 40% of its natural gas from Russia and faces low reserves and high prices this winter.

Avoiding a backlash

A key aspect will be to avoid disproportionate losses for Europe’s economy or companies. Otherwise, it may be difficult to rally support among the governments of the 27 EU member states, which would have to agree unanimously on sanctions.

For example, Russian natural gas producer Novatek may be a possible target for sanctions, but 19.4% of the company is owned by France’s TotalEnergies, which means tough sanctions will require some “diplomatic subtlety” given its ties to a NATO ally, the former diplomat said. . Dan Fried, who developed sanctions against Russia in 2014.

Sanctions could also open the door to competitors from China and other countries that will not punish Russia. After the 2014 sanctions banned the export of potential military equipment to Russia, some small German engineering companies refused to fight bureaucracy and the risk of unintentionally breaking complex rules.

As a result, Chinese engineering manufacturers outperformed German ones as suppliers to Russia in 2016. In total, the number of German companies doing business in Russia has shrunk from 6,000 in 2010 to 3,500 in 2021.

However, a study by Conflict Armament Research, which examines military supply chains, found that Russian organizations continued to purchase British, Czech, French, German, Spanish, and American components for military spy drones.

In November, CAR reported that details had been found in downed or crashed drones in Ukraine and Lithuania. Lead author Damien Splitters said companies that make electronics that can be used for both civilian and military purposes are usually not required to check the final way of using their sales in advance.

ABOVE RUSSIA

The Kremlin has taken steps to reduce economic dependence on other countries and external sources of funding. It has low public debt and $ 630 billion in foreign exchange and gold reserves. Russian companies insist on purchasing spare parts locally, even when working with European partners.

But Harley Balzer, an expert on Russian-Chinese relations and an honored professor at Georgetown University, wrote in a recent analysis that despite these efforts, “localization is very vulnerable to additional sanctions.”

According to him, Russia’s defense in the production of American electronic components may be a key factor in the pressure, because the Russian defense industry imports about 20-30% of electronics, and China does not produce sophisticated chips and processors that Russia needs.

EARRINGS?

Although Russia is a major supplier of energy, it sends several other goods to Europe.

“Despite its size and potential, Russia’s poorly managed economy is not a major market for Europe,” said Holger Schmiding, chief economist at Berenberg Bank.

Germany, Europe’s largest economy, sends only 1.9% of its exports to Russia, compared with 5.6% to neighboring and neighboring Poland.

Schmiding said Europe is almost winter and it can probably cope with any temporary drop in natural gas from Russia. Long-term cuts are not in Russia’s interests.

“Some losses in non-energy trade with Russia as a result of sanctions and counter-sanctions are likely to have almost little impact on Europe’s growth prospects in the next one or two months,” he said.

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