What further sanctions will Russia face – and are they likely to work?

Q&A: Natural gas is Russia’s trump card as the EU, US and others weigh their next move

Since Russia began amassing its army on Ukraine's borders, the European Union, the UK and the United States have been warning that an invasion would be met with severe economic sanctions.

On Tuesday, the first round of those sanctions was unveiled. What might trigger more, and what would be the economic fallout?

What constitutes an invasion?

EU ambassadors meeting in Brussels on Tuesday agreed an initial response to Russian president Vladimir Putin's recognition of the breakaway self-declared republics of Donetsk and Luhansk in eastern Ukraine.

They agreed to freeze the assets of, and impose travel bans on, 351 members of Russia's State Duma, which voted to recognise the breakaway regions.

The sanctions also bar the Russian central bank from raising money on European financial markets, and target 27 individuals involved in the sending of the Russian military into Ukraine, including financial backers, military leaders, and distributors of disinformation.

But how tough sanctions should be and when to employ them has been a matter of debate due to differing views on whether Moscow’s actions constitute an invasion.

Russian-backed separatists seized part of the Donetsk and Luhansk regions in 2014 at the time of the Russian annexation of Crimea, the start of a conflict that has killed 14,000 people so far.

The regions, which border Russia and have a large percentage of Russian speakers, are only partly under control of the separatists. But these forces claim sovereignty of all of the Donetsk and Luhansk territories, including the parts currently held by the Ukrainian army.

Will Russian forces now try to push forward the so-called “line of contact” with Kyiv’s defending army farther into Ukraine? Or will Moscow seek to bolster control only of the areas already in the hands of pro-Russian rebels?

These are among the questions in play as the EU 27 try to determine what constitutes an invasion and what would trigger the maximum sanctions in response.

For some, action limited to the regions that were already in the hands of Russian-backed separatists does not constitute a full escalation of the situation. When speaking of an invasion, they imagine a full incursion into Ukrainian-held territory. This is something western governments have warned is very much still on the cards – up to and including an assault on the capital, Kyiv.

But for others, the Russian attack has already begun. Even before Moscow’s recognition of the breakaway enclaves, the mass military build-up on Ukraine’s borders was already terrorising the country and crushing it economically. For them this further step, seizing areas that are Ukraine’s sovereign territory, is unambiguously an invasion.

How do sanctions work?

Economic sanctions are one of the principal ways that the EU exerts its foreign policy, and are used to respond to crises and to try to prevent conflicts, along with diplomatic outreach.

They can target governments, individuals and non-state entities such as companies. Usually, sanctions involve the freezing of assets and travel bans. The EU can also adopt sanctions that affect an entire economic sector, such as an exclusion from the banking system, import or export bans, or arms embargoes.

The details of proposed sanctions are kept under wraps until the last minute to ensure their maximum effectiveness. In recent weeks European Commission foreign affairs officials have been tick-tacking with national governments, teasing out potential objections ahead of time so that sanctions can be deployed quickly when needed. There has also been close co-ordination with the UK and the US in efforts to ensure a unified response.

The EU can impose sanctions determined by the United Nations or act on its own. They require the agreement of all 27 member states, before the details are finalised by sanctions experts, who ensure they are legally sound.

Sanctions must be targeted towards specific policies or activities, and cannot be imposed on a whole country or population. The evidence to support the sanctions must show, for example, proof that particular individuals are responsible for the offending act.

Dossiers of such evidence have been compiled as part of the EU’s preparations in recent days and weeks. The targets of EU sanctions have been able to legally challenge them in the past, and there is a determination that the legal basis for them this time should be airtight.

What could the EU impose on Russia?

The EU already has sanctions on Russia dating from the annexation of Crimea in 2014.

New sanctions in response to Russia’s “recognition” of the self-declared Donetsk and Luhansk republics are expected to extend trade bans in place for Crimea to the breakaway regions, and to target individuals and entities involved in the military advance.

The EU’s existing sanctions – that is, those in place prior to the current crisis – on Russia affect 48 entities and 193 people, who are subject to an asset freeze and a travel ban preventing them from entering the EU. Those on the list have been targeted for actions that “undermined Ukraine’s territorial integrity, sovereignty and independence”.

Some Russian banks and companies are restricted from the EU financial system; there is a ban on the import and export of arms; and Russian access to sensitive technologies to do with oil extraction is restricted.

Most recently, five people were added to the sanctions list: they were members of the Russian State Duma elected to represent annexed Crimea, and the head and deputy head of the Sevastopol electoral commission.

The EU has also imposed an import ban on goods from annexed Crimea and Sevastopol, restrictions on trade and investment, a tourism ban and a ban on exports of some goods and technologies.

In response to Moscow’s latest move, those restrictions on Crimea are now expected to be extended to the breakaway Donetsk and Luhansk regions. Other measures are to target how Russian funds its military advance, as many as 351 politicians who supported it, and individuals involved in carrying it out.

How far could the EU go?

The EU, along with the US and UK, have prepared much more far-reaching sanctions that for now they are expected to keep in reserve and have ready in case of a further escalation.

The toughest sanctions the EU could inflict could involve freezing Russia out of the financial system – preventing trade in euro and dollars, for example – while cracking down on Russian oligarchs.

Sweeping sectoral sanctions could ban Russia from buying microchips – essential components in electrical goods that Russia needs to import – while hitting its wider banking and energy industries.

Such ideas are still in development in the European Commission, and have not yet been proposed to EU member states. They are being kept in the back pocket as a threat to dissuade Moscow from launching a full invasion of Ukraine.

There are differing points of view among EU member states about these sweeping sanctions. Such steps cause mutual damage, and some countries are more exposed to blowback than others.

The hawkish camp calling for the toughest response is led by the Baltic and eastern European member states. Despite being heavily exposed to economic damage themselves due to their geographical proximity to Russia, they feel their fundamental security is at risk if Moscow is not deterred.

More dovish are Austria, Germany and Italy, which favour taking incremental steps. Hungary, whose authoritarian leader, Viktor Orban, maintains close ties with Putin, has also objected and hesitated, at times delaying the EU's ability to agree on punitive measures.

Perhaps most controversial of all are the proposals to hit energy. This is because the EU is highly dependent on Russian gas, which accounts for an estimated 40 per cent of its imports. Any supply shock could further drive up prices at a time when energy costs are already threatening political instability. Some factories may have to suspend manufacturing if gas is too scarce, and electricity could ultimately be rationed.

Italian prime minister Mario Draghi last week said outright that the energy trade in general should be left out of any sanctions package.

However, Lithuania, despite being among the EU's most vulnerable countries to a Russian gas shock, has said nothing should be off the table, including a full import ban on Russian oil and gas.

Could Russia retaliate?

Russia typically retaliates to western sanctions, such as by expelling diplomats or banning officials from entering its territory.

But the potential to cut off gas supplies is its trump card. In the past, Moscow has repeatedly wielded the gas flow as leverage in disputes with countries in its vicinity.

It has repeatedly cut supplies to Ukraine during times of tension. Most recently, Gazprom threatened to cut off gas supplies to Moldova, Europe's poorest state, which is entirely reliant on Russian gas. The EU accused Moscow of taking the step to punish the country for electing a pro-European government that wanted closer ties with the EU.

Actions already taken by the state-owned energy giant Gazprom, including a reduction in gas flows to the EU despite supplies being available and slowness in refilling storage facilities, have been blamed for contributing to the existing energy cost crisis that has sent household bills soaring and forced some European factories to halt manufacturing.

A network of pipelines criss-crosses Europe, and some countries are connected with alternative supply sources, including from Denmark and the Netherlands. Ireland receives the bulk of its imports from the North Sea and Norway, via Britain. Southern European countries can receive gas from Azerbaijan via a pipeline to Italy and through Turkey.

The EU and the US have asked Qatar and Japan if they can supply additional shipments of liquefied natural gas to help make up for any shortfall. But these stopgaps would only go so far.

Countries including Ireland have argued that the situation demonstrates the need to accelerate the transition to renewable energy. France maintains that it all vindicates its pro-nuclear energy policy. As it stands, however, nothing can yet make up sufficiently for shortfalls in Russian gas supplies.

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