Russia | Full EU sanctions relief in January unlikely

Russia | Full EU sanctions relief in January unlikely

"Despite a more positive outlook for a lifting of sanctions linked to Russian involvement in Donbass, we assess that sanctions on entities and individuals linked to the annexation of Crimea are almost certain to remain in place."

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We previously forecast that a political settlement to the Ukraine conflict is now within reach. And that the timeline for Ukrainian reforms, which would fulfil key Russian demands, suggest this could happen by the end of the year. Clients have since asked us whether the EU will lift sanctions when they come up for renewal in January 2016. Based on current indications and our understanding of EU policy, we forecast only a partial lifting of sanctions in January - most probably sectoral sanctions rather than those targeting individuals and entities.

The EU Council has linked its decision on whether to extend sanctions into 2016 to the full implementation of the Minsk agreements by both sides. But, we think it is unlikely that all 13 points of Minsk will be implemented this year, mainly because Kiev is unlikely to be able implement all required political reforms even if it passes them in parliament.

Kiev must first pass constitutional changes through parliament to be able to comply with the Minsk accords. But strong opposition within parliament to such changes - particularly over the level of autonomy with the separatist Donbass region - has caused delays. We forecast with reasonable confidence that the government will be able to overcome this hurdle, but other less significant aspects that will enable it to fully comply with Minsk are unlikely to be resolved within the coming four months.

Russia had proven consistent in using force to pressure Kiev to implement reforms under its own terms. So we are sceptical that Russia would completely cut support for separatists and allow Ukrainian forces to recover control of its border with Russia in this time frame. This means fighting will probably continue in pockets until Moscow is certain that Kiev will comply with all its obligations as agreed in Minsk.

Nevertheless, progress is being made towards the implementation of the Minsk agreements. And we think such progress will probably create pressure among EU member states and business lobbies to call for at least partial sanctions relief, most probably sectoral sanctions. Sectoral sanctions have had a greater negative impact on both Russian and EU businesses than sanctions on individuals and entities. They have imposed restrictions on capital markets, oil exploration and production, and on trading in dual-use goods and technologies.

According to a recent survey of EU businesses in Russia led by the Association of European Businesses, a pro-Russian European business lobby, 70% of respondents said that the sanctions have had a negative effect on business. This impact has increasingly become a political issue in European states, where opposition parties in some EU countries are already pointing to the negative economic effects of sanctions to draw on popular support. French opposition MPs recently visited Crimea to call for an end to sanctions. Some Italian and German MPs have announced similar plans.

The agricultural sector in EU countries has particularly been affected by a Russian retaliatory ban on EU food products. According to the European Commission, agri-food exports to Russia between August 2014 and May 2015 decreased by 43%. French and British farmers claiming to be on the verge of bankruptcy protested this month against a fall in milk and meat prices, which is partly a result of Russian retaliatory sanctions banning the import of EU products, leading to a glut in supply.

It seems that the EU governments, including Germany and France, will find it difficult to deny an easing of sanctions due to domestic pressure if there is observable progress in the implementation of the Minsk agreements. And we think it is unlikely there will be a repeat of the unanimous backing of 28 member states we saw in June to extend the full range of sanctions, for the same reasons. At least seven EU governments (Greece, Italy, Austria, Hungary, Slovakia, Spain and Cyprus) have expressed their opposition to sanctions.

Despite a more positive outlook for a lifting of sanctions linked to Russian involvement in Donbass, we assess that sanctions on entities and individuals linked to the annexation of Crimea are almost certain to remain in place. The Minsk agreements do not plan for a return of Crimea to Ukraine. Western officials seem to avoid addressing the Crimean issue in an effort to bolster peace talks in Donbass. They will probably continue to do so until a settlement of the conflict in eastern Ukraine is reached.

Watch | Ukraine: Strategic and Security Outlook - 28 July 2015

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Image: Creative Commons - Press service of the President of Russia  

Author: Risk Advisory's Security Intelligence & Analysis Service
Published: 13th August 2015
Categories: Company News