World Economy

Sanctions on Russia Raises EU’s Economic Costs

Sanctions on Russia  Raises EU’s Economic CostsSanctions on Russia  Raises EU’s Economic Costs

At a technology fair in Moscow last month, European executives faced the new reality of doing business in Russia since the West imposed sanctions: the number of companies at the international showcase had shrunk by half from a year ago.

“The impact on business couldn’t be clearer. Fewer stands, fewer companies,” says Mark Bultinck, a sales executive for Belgian digital screen maker Barco, which had a booth at the annual expo for the audiovisual industry, BDLive reported Friday.

The impact of the sanctions was already clear to Barco.

The company lost Russia’s biggest shipbuilder as a client when the US and the European Union (EU) blacklisted United Shipbuilding in July, meaning Barco could no longer sell screens to the company for its vessel training simulators.

Barco’s experience shows how sanctions are having a broad impact not just on Russian companies but on European ones too, and at a time when Europe’s weak economy can ill afford it.

The EU and the US imposed economic sanctions on Russia in late July, targeting the Russian energy, banking and defense sectors to punish Moscow’s support for rebels in eastern Ukraine, the West’s toughest steps yet.

  Economic Costs Severe

As EU governments consider blacklisting more Ukrainian separatists and potentially more Russians and companies over the crisis in Ukraine, anecdotal evidence and new EU data show the economic costs for Europe of pressuring the Kremlin.

In August, the month after sanctions were imposed, EU exports to Russia fell 19% to €7.9b compared to July, a loss of almost €2b, according to the EU’s statistics office, Eurostat.

Exports were also down 18% compared with August 2013, at a time of year that is traditionally busy for exporters. The drop partly reflects the food ban Moscow imposed on the EU in response to western sanctions. But it goes well beyond that. Total EU exports fell 12% in the first eight months of this year compared to a year ago.

In August, EU exports of machinery and transport equipment such as cars and tractors fell 23% compared to July.

Compared with a year ago, those exports fell 21%. Manufactured exports fell 16% across the 28-nation bloc in August. Germany, which accounts for one-third of sales to Russia, saw a sharp drop in sales of those goods, while Italy’s manufactured exports tumbled by almost half.

The sanctions are having such an impact because EU companies can no longer sell civilian goods that could also have a military use, no matter how small, without a license.

  Need Licenses

Tractors, cranes, excavators and mechanical parts that are needed to repair cars and trucks all fall under the so-called dual-use category and need a permit. Failure to obtain a license can bring a fine of up to 10% of the value of the exported goods.

But obtaining such licenses can delay exports by two to three months because so many more products need licenses and customs are suffering a big administrative burden.

“There are delays caused by the increased flow for individual licenses,” says Tristan Grimmer, a lawyer who helps companies navigate the process.

“With the oil and gas sector, much of what is being addressed previously did not require export licenses, so you have an entirely new sector that is asking for license authorizations to supply the Russian market.”

One official at the Strategic Goods Control service for Belgium’s Flanders region says the number of applications for licenses has jumped almost 40% since August and officials are flooded by e-mails from companies seeking advice.

“Everyone wants their file to be urgent. But it is not only in our hands. Sometimes we need certification by the Belgian embassy in Russia,” says the official.