European companies’ Russian ties could make sanctions harsher | Economic news

By DAVID McHUGH and COLLEEN BARRY, Associated Press

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

The sanctions would seek to maximize the pain of the Kremlin, its major banks and energy companies, but also to avoid jeopardizing the energy supplies of the continent dependent on Russia or inflicting too much damage on European companies closely linked to Russia. , including German industrial maker Siemens AG, Italian tire maker Pirelli, and automakers like Volkswagen and Mercedes-Benz.

Russia has ties to global energy and financial markets and is home to significant foreign partnerships and investment, so any action will have repercussions outside the country. The question is how much.

The European Union’s executive board is not revealing the sanctions it is discussing to keep the Kremlin guessing. Officials say the measures would be more sweeping and tougher than those imposed in 2014 after Russia’s annexation of Ukraine’s Crimean peninsula.

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Here are the places where the sanctions could affect the European economy:

Given that it is unclear what the measures would be, European companies are cautiously monitoring developments and limiting their comments to the hope of a diplomatic solution.

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

Siemens AG, which derives around 1% of its revenue from Russia, is developing a new generation of high-speed trains with Russian partners to be built in a factory there. Siemens Energy, partly owned by Siemens AG, builds power plants and equipment for 57 wind farms in Russia.

European car manufacturers are very present. Volkswagen, Stellantis, Renault and Mercedes-Benz have factories in Russia, while BMW manufactures cars there through its Russian partner Avtotor. French Renault owns Russia’s biggest automaker, Avtovaz, with its sprawling factory in Togliatti. Stellantis plans to import commercial vans under its Peugeot, Opel and Citroën brands from its Kaluga plant to meet increased demand for delivery services in Europe.

Chinese-owned Italian tire maker Pirelli operates two factories employing some 2,500 people in Russia, producing tires mainly for the domestic market but also for export.

“We continue to invest and we believe in the development of the Russian market and internationalization,” CEO Marco Tronchetti Provera told reporters last month. “We believe that even in a crisis we have to find a meeting point, and we believe that the balance must be found in the end.

He and other CEOs met with Russian President Vladimir Putin last month to discuss business prospects.

Italy’s agribusiness lost big when Russia imposed retaliatory import bans on produce, cheese and meat in 2014. Despite the new tensions, the artisans’ association Confartigianato from the Italian province of Vicenza , in northeast Italy, is hosting a virtual product fair in Moscow next month. Those seeking to participate include makers of Panettone Christmas bread, Colombo Easter bread and winemakers, products that do not fall under embargo.

Similarly, Italian bank Intesa SanPaolo, which supports Italian businesses in Russia, says its mission has not changed.

“Frankly, we don’t do geopolitics,” CEO Carlo Messina said. “We follow the rules, but we serve Italian customers, and we do so in all countries, including Russia. If the rules should change and present an obstacle, we will take the necessary measures.

Much of the discussion focused on Russia’s big banks, which could face measures ranging from borrowing limits to restrictions on transactions involving dollars.

Another target could be energy companies such as Rosneft and state-owned Gazprom, which could be barred from borrowing from Western investors and creditors. This would limit their ability to invest in new projects but would not immediately cut off energy supplies to Europe, which gets around 40% of its natural gas from Russia and faces low reserves and low prices this winter. students.

A key aspect will be to avoid disproportionate losses for the European economy or businesses. Otherwise, it could be difficult to rally the support of the 27 member governments of the EU, which would have to unanimously agree on the sanctions.

For example, Russian natural gas producer Novatek could be a possible target for sanctions, but 19.4% of the company is owned by France’s TotalEnergies, meaning harsh sanctions would require some “diplomatic finesse” given the link with a NATO ally, said the former American diplomat. Dan Fried, who crafted the 2014 sanctions against Russia.

Sanctions could also open the door to competitors from China and other countries that do not punish Russia. After the 2014 sanctions banned the export of equipment for potential military use to Russia, some smaller German machinery companies gave up rather than face bureaucracy and the risk of unwittingly violating complex rules.

As a result, Chinese machinery manufacturers overtook German manufacturers as suppliers to Russia in 2016. Overall, the number of German companies doing business in Russia increased from 6,000 in 2010 to 3,500 in 2021.

However, Conflict Armament Research, which investigates war weapons supply chains, found that Russian entities were still acquiring British, Czech, French, German, Spanish and American components for military-grade spy drones.

In a November report, CAR said the parts were found in downed or crashed drones in Ukraine and Lithuania. Lead author Damien Spleeters said companies making electronics that can be used for both civilian and military purposes are generally not required to verify the end use of their sales in advance.

The Kremlin has taken steps to reduce its economic dependence on other countries and external sources of funding. It has a low public debt and $630 billion in foreign currency and gold reserves. Russian companies have pushed to source locally, even when working with European partners.

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

Preventing Russia from obtaining American electronics could be a key pressure point, he says, because Russian defense industries import about 20-30% of their electronics and China does not produce the sophisticated chips and processors whose Russia needs.

While Russia is a major energy supplier, it sends few other goods to Europe.

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

Germany, Europe’s largest economy, sends just 1.9% of exported goods to Russia, compared to 5.6% to neighboring EU-member Poland.

Schmieding said Europe is nearly through winter and could likely handle any temporary drop in natural gas from Russia. A long-term reduction is not in Russia’s interest.

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

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