Thursday, March 13, 2014

Merkel’s tough stance toward Russia threatens trade war

Reversing a longtime policy of caution toward Russia, Germany enters new territory with unknown consequences.
Jason Overdorf
GlobalPost - March 13, 2014

BERLIN, Germany — Chancellor Angela Merkel has issued an ultimatum to Russia over what she called its annexation of Crimea: Back down or face strong measures from the European Union.

Accusing Moscow of acting by the “law of the jungle” in an address to parliament on Thursday, Merkel said Russian President Vladimir Putin’s actions are a clear breach of international law and threatened full-fledged economic sanctions.

“If Russia continues on its course of the past weeks, it will not only be a catastrophe for Ukraine, but also we, the neighboring states, would understand this as a threat to us,” she said in her strongest-ever words toward Russia. “It would not only change the European Union's relationship with Russia, but… would also cause massive damage to Russia, economically and politically.”

Although Merkel continued to call for a diplomatic resolution to the Crimea crisis and emphasized that the standoff can’t be solved militarily, her tough talk is the clearest evidence so far of what appears to be a reversal in German policy away from arguing for engaging rather than challenging Russia that pre-dates the end of the Cold War.

The new stance from the EU’s political and economic leader comes despite deep concerns about Germany’s heavy dependence on Russian natural gas as well as dogged resistance from business leaders, and indicates the chancellor may make good on promises made at the beginning of her first term in 2005 to end her country’s reluctance to take a leadership role in foreign affairs.

Calling Putin’s actions “annexation” clearly evokes Adolph Hitler's 1938 “Anschluss” of Austria, says Nina Schick of Open Europe, an EU-focused think tank.

“The stance in Berlin has definitely hardened over the past few days,” she says.

Merkel reiterated a threat she made at a meeting with Poland's Prime Minister Donald Tusk on Wednesday that Putin has until Monday to enter into substantial negotiations in order to avert European Union visa bans and asset freezes for Russians deemed responsible for the country’s actions in Crimea. She also made first mention of a potential “third round” of sanctions.

Few believe Putin will back down over a Crimean referendum planned for Sunday about joining Russia. US and European officials argue that the poll’s suddenness and presence of Russian troops on the Black Sea peninsula make the exercise a farce.

Moscow has threatened to respond in kind to EU sanctions.

Claudia Kemfert, an energy policy expert at the German Institute for Economic Research, says Merkel doesn't plan on being first to blink, despite being “very dependent on Russia's energy imports.”

The German leader may be gambling that Russia will balk at retaliating by cutting off gas supplies to Germany because it needs the EU’s money as badly as the European bloc needs the fuel.

However, the depth of Merkel's change of heart and just how far other EU members are willing to venture remains to be seen.

The EU has so far suspended talks with Russia on a wide-ranging economic pact and granting Russian citizens visa-free travel within the EU. Shick believes a tougher, second round of targeted measures promised for next week will stop short of “meaningful” economic sanctions, and be highly unlikely that to freeze Putin's personal assets.

“It's still largely symbolic,” she says. “If they wanted to hit Russia hard, they would take broader economic sanctions.”

In her speech on Thursday, Merkel also made first mention of a potential “third round” of sanctions.

However, business lobbies that have heavily influenced German policy toward Russia in the past have tried to steer Merkel away from any meaningful sanctions.

On Wednesday, the trade group BGA warned that economic sanctions against Russia would hurt German businesses more than companies from other European countries. It pointed to the 6,200 German firms with investments in Russia and Germany's $100 billion in bilateral trade with Moscow.

Public opinion polls suggest sanctions would also be unpopular among the population, which fears a rise in what are already Europe's highest electricity charges. A survey conducted last week by the polling firm infratest dimap found that Germans oppose economic sanctions by a ratio of 57 percent to 38 percent.

In the lead-up to Merkel’s speech on Thursday, politicians and spin-doctors in Germany and the US have endeavored to chip away at such opposition. Advocates of fracking — the extraction of gas by fracturing rock — suggest shale gas supplies around the world can make up for a potential loss of Russian supplies.

American officials have promised to speed up exports of liquified natural gas from America. And Merkel's Finance Minister Wolfgang Schäuble, among others, has downplayed the impact sanctions against Russia would have on the German economy, pointing out that they would be far more devastating to Russia — and therefore likely to work.

“We believe the fallout for the economy and for financial policy is — and will remain — manageable, for both Germany and Europe as a whole," he said on Wednesday.

Manageable perhaps, but certainly not pleasant, energy experts say.

Germany currently relies on Russia for around 40 percent of its gas.

However, US production of its own gas through fracking had created a glut in international markets that may enable Germany to replace that supply with imports from Norway, the Netherlands, Algeria or Qatar, Kemfert says.

More from GlobalPost: In Kyiv, fear of war mixes with frustration over lack of action

The stakes are far higher for other countries in Central and Eastern Europe that depend on Russia for up to 100 percent of their gas supplies and have recently asked Washington to make it easier for them to import American gas.

Analysts say it’s wrong to believe that supply can be replaced without a significant increase in prices, or that US gas producers can wave a magic wand to make the problem go away.

“It would take a decade for gas supplies from the US to have any impact on the European situation,” says Andrew McKillop, former in-house policy analyst at the European Commission's energy directorate.

A decision by Moscow to cut off gas to Europe may prompt panic in the energy sector and power rationing in some countries, he adds.

Even Germany lacks the infrastructure needed to replace piped Russian gas with liquified natural gas from the US — which means that despite Merkel’s new resolve to confront Putin, the consequences of an EU trade war with Russia can’t be predicted.