Russia sanctions may undermine EU's recovery

(BRUSSELS) - The EU is expected to take the plunge Tuesday and impose tougher sanctions on Russia over Ukraine, but the measures could hit its own struggling economy -- especially should Moscow reply in kind.

"It is clear that there is a risk of Russian reprisals," one EU diplomat said, noting that Moscow has repeatedly used trade embargoes to put pressure on former communist states such as Moldova or Georgia seeking closer ties with the European Union.

As if on cue, Moscow announced Monday a ban on the import of processed fruit and vegetables from Ukraine, and warned of similar steps against the European Union.

The International Monetary Fund last week cut its 2014 global growth forecast to 3.4 percent from 3.7 percent, in part because of the Ukraine crisis, and warned that sanctions against Russia would hurt Europe.

Those economies "that have very active and direct trade links with Russia, particularly in eastern and central Europe and central Asia," would be worst affected, it said.

In 2013, EU-Russia trade was worth 336 billion euros ($451 billion), with Moscow running a trade surplus of nearly 87 billion euros.

Some of the bloc's 28 member states, such as Italy or Germany, have major economic ties with Moscow while the former Soviet-era satellites still rely heavily on Russian gas.

The EU as a whole is dependent on Russia for a third of its supplies.

- Sanctions to squeeze Russia -

Up to now, the EU has been reluctant to risk damaging such important links. But the loss of nearly 300 lives in the alleged shooting down of Malaysia Airlines flight MH17 by pro-Moscow rebels using a Russian-made missile has radically changed matters.

"The EU is resorting to sanctions because it has no other instrument to force the Russians to stop fanning the conflict," an EU diplomat said on condition of anonymity.

On Saturday, Brussels hit another 15 individuals and 18 entities -- including Russia's intelligence chiefs -- with 'Phase 2' asset freezes and travel bans for their role in the Ukraine crisis.

On Tuesday, member states are expected to take the next step, approving sanctions in four key areas: access to capital markets, defence, dual-use goods and sensitive technologies, including in the energy sector.

The tougher sanctions are intended to be particularly painful for Russia, which is already flirting with recession as tensions over the crisis have hurt growth and sent investors fleeing.

Curbing access to the EU financial markets, principally London, will make it more difficult for Russian state-owned banks to raise fresh funds and put the economy under even more pressure.

Future arms sales are expected to be banned. In the energy sector sanctions will apply to oil but not gas, so as to help protect the bloc's energy security.

Sales of technology with both civilian and defence applications, a market thought to be worth 20 billion euros annually, will also be tightened up to ram home the message.

- Striking a balance -

"My assessment is that this package strikes the right balance," said Herman Van Rompuy, who heads the European Council of EU leaders.

"It should have a strong impact on Russia's economy while keeping a moderate effect on EU economies."

This year these sanctions could shave some 40 billion euros from the bloc's annual economic output, equivalent to around 0.3 percent, the EU Observer estimated. That could rise to 50 billion euros, or 0.4 percent, in 2015.

For Russia, the impact is expected to be much greater, enough to drive it deep in recession with losses of 1.5 percent and 4.8 percent of gross domestic product (GDP), the website said.

But another EU diplomat cautioned the Russia figures should be treated cautiously as much would depend on how its key energy export sector is affected by the sanctions.

And if the EU numbers are smaller they could still be serious enough to hit the bloc's already shaky recovery from the eurozone debt crisis.

The eurozone economy grew only 0.3 percent in the first quarter, with the recovery now showing signs of faltering as the Ukraine crisis takes its toll.

"Many member states are not in the best of shape," said an EU diplomat, who asked not to be named.

"All the member states are aware their economies could be affected," said another, adding "that is why they are all fighting it out to make sure the pain is spread around."