The Wake-Up Call Europe Toughens Stance against Putin

It took the shooting down of a Boeing jet carrying almost 300 people before the EU agreed on the first true economic sanctions against Russia. The Americans want further action, but it is impossible to know if punitive measures can sway Vladimir Putin.
A column of hearses leaves an airbase in Eindhoven, The Netherlands, carrying the bodies of victims of the Malaysia Airlines crash.

A column of hearses leaves an airbase in Eindhoven, The Netherlands, carrying the bodies of victims of the Malaysia Airlines crash.

Foto: Remko De Waal/ dpa

It was the images. Absurdly tattooed pro-Russian fighters, cigarettes dangling from their lips and Kalashnikovs tucked under their arms, stomping around in the field of bodies and wreckage at the crash site, as if the dead children from the downed Boeing had nothing to do with them. Experts holding their noses as they opened a railroad car full of dead bodies. A seemingly endless convoy of hearses leaving Eindhoven Airport in the Netherlands. And Russian President Vladimir Putin took it all in without losing his composure.

It's usually the images.

It's part of the occasionally cynical business of political experts to refer to a tragedy of this magnitude, and to the endlessly repeated TV images of the suffering of innocent people, as a "game changer." It's the moment that divides the course of a crisis into "before" and "after" -- a time when the public and politicians hold their breaths and take a new look at the situation. But one of the unique features of the European Union is that in the "after" period, it often continues for a time to behave the way it did in the "before" period. Supporting evidence was provided by an exchange from last Tuesday, almost a week after Malaysian Airlines flight MH 17 was shot down:

Let's at least do an arms embargo, argued British Foreign Secretary Philip Hammond.

No, you can't even do financial sanctions, responded his French counterpart Laurent Fabius in the hearing room of the European Council building in Brussels.

Prior to the meeting, EU foreign ministers had seemed deeply disconcerted. But behind closed doors, the overriding objective was apparently not to determine how best to force Putin to back down, but how best to protect their own domestic economies.

'Simply Ridiculous"

In the days following, senior representatives of Eastern European member states voiced doubts about their smug cousins from the EU's western member states. It is "simply ridiculous," one representative said.

But by the end of the week, Europe had finally arrived in the "after" phase. The "game changer" had had its effect. It is now all but certain that flight MH 17 was shot down by a surface-to-air missile system from Russian inventories, a system that hardly would have reached Ukraine without Putin's approval. The 28 EU ambassadors agreed in principle on initial tough economic sanctions against Russia, which they plan to wrap up on Tuesday. In a letter to European leaders, European Council President Herman Van Rompuy wrote: ""I would like to ask you that you instruct your ambassador to complete an agreement by Tuesday." Unless the EU abandons its resolve once again, "we can now pull the plug on Russia and Putin in a very controlled manner," say officials in Berlin.

Russian President Vladimir Putin has so far resisted Western attempts to force him to abandon support of pro-Russian separatists in eastern Ukraine.

Russian President Vladimir Putin has so far resisted Western attempts to force him to abandon support of pro-Russian separatists in eastern Ukraine.


European leaders are expected to officially approve the new sanctions against Russian banks, companies and private citizens by the end of this week. Despite the summer break, the German government is hoping for a special summit in Brussels. The EU message to Putin, after all, must also be accompanied by images -- symbolism strong enough to be worthy of the pictures from the MH 17 crash site.

In practical terms, the sanctions revolve around oil, natural gas, weapons, high tech and a lot of money. If it weren't for the reality of the war in eastern Ukraine, where people are dying every day, the latest European offensive would be dubbed an "economic war."

Is this the way to stop Putin? And how will he respond?

The EU wants the Russian president to promptly close the border with Ukraine and cut off supplies to the separatists. It also wants Putin to disarm the separatists, recognize the Ukrainian government and guarantee freedom of movement for OSCE observers. The German Foreign Ministry wants even more: a UN police mission with a clearly defined mandate and time frame, to investigate the crash of flight MH 17. "Talks to that effect are already underway with our Dutch and Australian partners," say German Foreign Ministry officials. This would require a resolution in the UN Security Council, to which Putin would have to agree.

Staying the Course

It would be a first test to see if the Europeans' newfound courage has made an impression on the Russian president.

As Western agencies did during the Cold War, the Bundesnachrichtendienst (BND), Germany's foreign intelligence agency, is now trying to figure out what Putin's advisors are telling him. There are signs that Kremlin hardliners and business leaders are locked in a fierce battle for the upper hand. In contrast to what Western intelligence services believed at the beginning of the Ukraine crisis, cracks now appear to be forming in Putin's power structure. This, at least, was reported by the head of the BND, Gerhard Schindler, in a recent meeting of the Foreign Affairs Committee in German parliament, the Bundestag. He delivered a similar report in the Chancellery a short time later, during the weekly intelligence briefing, sources say. BND officials believe that it is quite possible that some Russian oligarchs will soon place economic interests above the political and try to get Putin to change course.

Sergey Glazyev, 53, is one of the most influential hardliners who want Putin to stay the course. Glazyev is responsible for relations with Ukraine and the Eurasian Economic Community in the Kremlin.

Glazyev calls Ukrainian President Petro Poroshenko a "Nazi" and is also calling for airstrikes against Ukrainian troops. He views Europe as degenerate, and the United States as an enemy that is secretly printing enough money to enable it to buy up or ruin Russia. As a consequence, Glazyev wants to seal off his country and make it self-sufficient in key areas. For Putin confidants like Glazyev, EU sanctions are the perfect trigger for such a renunciation of the Western world. If Glazyev had his way, Moscow would cease holding its $472 billion (€351 billion) in foreign currency reserves in US dollars or euros, would replace Visa and MasterCard with "Eurasian credit cards," and would replace Europe with China as Russia's most important partner.

Already, Russian civil servants and politicians are no longer permitted to have bank accounts and own companies or houses abroad, and 4 million police officers, military officials and intelligence agents are not allowed to vacation in the West. In the future, all Russian government employees will be required to drive official cars made in Russia.

A world is taking shape that mirrors Putin's weltanschauung. It is a world in which Russia, supposedly humiliated by the West, regains its old glory.

Pushing Putin into a Corner

Moscow political scientist Stanislav Belkovsky is reminded of Putin's interview-based biography "First Person," published in 2000. In it, the president says: "You should never drive a rat into a corner." And because one shouldn't apply pressure to Putin, who is not a flexible person, says Belkovsky, "we can expect all kinds of aggressive decisions from him now."

So far, Putin has avoided direct military intervention in Ukraine. But according to Western intelligence information, Russia moved heavy military equipment across the three border crossings rebels captured during the recent ceasefire declared by the Ukrainian government in Kiev. And by acquiring anti-aircraft missiles, the separatists have offset the Ukrainian army's biggest military advantage, its air superiority. More than a dozen aircraft have already been shot down.

Since the shooting down of MH 17, Putin has lost any political capital he still had in Europe and the US. And with nothing left to lose, it seems likely that he is approaching tougher sanctions with sanguinity.

Eckhard Cordes, the chairman of the Committee on Eastern European Economic Relations, an organization representing German business interests in Russia, agrees. "In the current situation, too much external pressure can achieve the opposite of what is intended. It does no one any good if we completely force Putin into a corner." Indeed, such a prospect alarms quite a few people in the Russian economy. Oligarchs may be concerned about their billions and their villas in Cyprus, on the Côte d'Azur and in London. But they also know that without machinery and know-how from the West, the Russian economy is doomed.

Of the very few people who have dared to say this openly, one is former Finance Minister Alexei Kudrin, a liberal. According to his calculations, rearmament, military intervention in eastern Ukraine and sanctions could cost Russia up to 20 percent of its economic strength within a few years. Former Russian Prime Minister Mikhail Kasyanov was even blunter: "If sanctions were imposed against the entire Russian financial sector, our economy would collapse in six weeks."

America Loses Patience with Europe

The European Union won't go quite that far this week. German Chancellor Angela Merkel and Foreign Minister Frank-Walter Steinmeier are determined not to jeopardize solidarity among the 28 EU countries. They also want to maintain Germany's direct ties to Moscow. Of course Germany also continues to apply a caveat that a source within the Berlin government puts this way: "It should hurt them, but not us."

That's why the only step that is clear at this point is Monday's addition of 15 new names to the current blacklist, which already includes 72 people. The new names include the heads of the Federal Security Service (FSB) and foreign intelligence, as well as the president of Chechnya.

EU-based assets belonging to these individuals will be frozen and those on the list also face travel restrictions. In addition, sanctions have been imposed on almost 20 companies and organizations, mostly based in eastern Ukraine. None of this will be particularly alarming to the Kremlin. One of the companies is a wine and sparkling wine producer from Crimea.

Will the Oligarchs Be Next?

However, the list does not include some of Putin's important supporters. Roman Abramovich, who owes his wealth to his strong ties to Putin, will continue to hold court at London football club FC Chelsea. Alexey Miller, the head of energy giant Gazprom, has also been spared. His company supplies natural gas to much of Europe. "You have to understand," says a government official contacted by phone, "that all of this isn't very easy."

There are still many, many questions or restrictions that essentially constitute footnotes to the agreement that reflect national interests. For instance, the arms embargo only applies to future deals because of the pending sale of two French helicopter carriers to Russia. The extent of restrictions on high-tech sales to the oil industry, which is extremely important for Russia, remains unclear. The same applies to what appears on the list of prohibited products for dual civilian and military use, an area of interest to the German economy. At issue are special materials, certain tool-making machines and high-performance computers. The European Commission estimates that a total of €4-5 billion in trade volume is on the line.

"It's most imperative that we strike the oligarchs," says German Economics Minister Sigmar Gabriel of the center-left Social Democratic Party. "And we need to succeed in that regard in the next week." Russian policy rests on the oligarchs' shoulders, Gabriel explains. "We have to freeze their accounts in European capitals and revoke their entry visas." He concedes the German and European economy will feel the consequences of sanctions. "But what would be the consequences if Europe, fearing economic losses, stood back and watched a civil war unfold and innocent people die?"

German Public Supports Tough Action

Meanwhile, other members of the SPD are also losing patience, even with Gerhard Schröder. In light of the latest developments, the former chancellor would be well advised to reconsider his appearances and involvement with Gazprom, says Rolf Mützenich, the SPD's deputy whip in parliament. Even Schröder should know how sensitive the Poles and citizens of the Baltic countries are about the Putin-Schröder alliance. Foreign policy expert Dietmar Nietan puts it even more bluntly: "I have no advice to give the former chancellor. But I would be pleased if he would speak clearly in Moscow and state that a red line has been crossed."

Germans tend to agree. In a poll conducted for SPIEGEL, 52 percent of Germans said they would favor tougher sanctions, even they would lead to the loss of "many jobs" in Germany, while 39 percent are opposed. Some 40 percent of respondents support the German government going it alone, while 59 percent are opposed.

The business community has also gotten the message.

Although the initial sanctions had few direct consequences for them, many business leaders had warned against sanctions -- drawing the ire of the chancellor and other politicians. Now they are changing their position, and Committee on Eastern European Economic Relations Chairman Cordes says: "The EU's current sanctions policy is responsible. The German business community recognizes the primacy of politics. If economic sanctions are approved, we will support them." Small and mid-sized business owners, which form the backbone of the German economy, tend to agree. "It's terrible for me, but the political world has to take action," says the owner of a family owned company that does considerable business in Russia.

Exports to Russia in Decline

A look at their own circumstances has presumably helped businesses rethink their position on sanctions. "The main reason German companies are exporting less and less to Russia is that the Russian economy is sliding into recession," says Klaus Mangold, the chairman of the German arm of Rothschild Bank and also a former head of the Committee on Eastern European Economic Relations.

Because of the uncertain outlook, Russian companies are hesitant to order German machinery, equipment and building materials. German exports to Russia declined by about 15 percent in the first five months of 2014, and the situation continue to deteriorate in June. However, business with Russia only accounts for about 4 percent of German foreign trade. And the European economy as a whole has also seen few adverse effects of EU sanctions to date. Only a few banks have lost the occasional Russian client who had parked his or her money in foreign bank accounts.

Of course, this would change if the West aimed to strike Russia in its funding of the government and industry. "Money is the nerve of war," said Julius Caesar, a very early European.

"The restriction on arms exports will have little effect on the Russians. They'll simply shrug it off," says banker Mangold. But American sanctions against Gazprombank and the VEB development bank "will really hurt Russia," Mangold believes. Gazprombank is Russia's third-largest financial institution and is 36-percent owned by the eponymous energy group. VEB's role in Russia is similarly important to that of KfW, the German development bank. A total of four banks are now cut off from the flow of money coming from American investors. This is dramatic for the Russian economy. In the next 30 months, Russian companies are expected to have to raise up to $150 billion on financial markets to meet their commitments, and four Russian banks affected by US sanctions account for about one-third of that money. European banks would have even greater leverage, but of course would also incur greater risk. Russian borrowers owe European banks about $155 billion. French banks alone have lent $47 billion to Russian customers, while German lenders have roughly $17 billion in outstanding loans in Russia. "If EU countries follow the United States with similar sanctions, things will be very tight for many Russian companies," says Mangold.

That is, if they do it.

EU Faces Pressure from US

After imposing initial restrictions on lending by the European Investment Bank and the European Bank for Reconstruction and Development, the EU ambassadors only reached the basic agreement to bar Russian companies with majority government ownership access to the European capital market. Of course, the EU could face pressure from US President Barack Obama to take further action. He's increasingly losing patience, both with Putin and Europe.

Heather Conley, director of the Europe Program at the influential Center for Strategic & International Studies (CSIS) in Washington, says: "If the Europeans don't keep up with sanctions, they could be forced in through the back door, because otherwise US authorities could impose punitive measures on EU companies that continue to cooperation with proscribed Russian financial institutions. That would guarantee new tensions between the United States and Europe."

US pressure, which was increased in July, is already affecting European banks. They are reducing their loans to Russia out of fear of being penalized in the United States for not abiding by American sanctions. "Business with Russian banks on the US list has virtually ground to a halt," says a German bank executive.

This comes as no surprise. US authorities recently slapped a $9 billion fine on major French bank BNP Paribas, which had violated US sanctions against Iran, Cuba and Sudan.

The United States is now using this form of "soft power" more frequently, says a prominent German bank CEO. In doing so, it is replacing military intervention, or "hard power," which the war-weary superpower is no longer capable of applying. In other words, the Americans have learned from the Europeans. Now the Europeans simply have to emulate the Americans.

By Benjamin Bidder, Nikolaus Blome, Martin Hesse, Horand Knaup, Christian Neef, Christoph Pauly, Michael Sauga, Jörg Schindler and Gregor Peter Schmitz

Translated from the German by Christopher Sultan