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Suddenly, Europe Is Taking a Harder Line on Russia Sanctions

German Chancellor Angela Merkel speaks to members of the media during a press conference on April 11 in Athens

Photograph by Kostas Tsironis/Getty Images

German Chancellor Angela Merkel speaks to members of the media during a press conference on April 11 in Athens

(Corrects to remove quotation marks in the second and seventh paragraphs around statements made by a German government official. The statements are paraphrase and not direct quotation.)

As violence escalates in eastern Ukraine, Europe is moving toward an action some thought it might never take: the imposition of stringent economic sanctions on Russia. Angela Merkel, the Russian-speaking German chancellor whose country has more at stake financially than any other, is leading the charge.

Until recently, much of the toughest talk of sanctions was coming from Washington, while the Europeans were regarded as—well, wimps. But now, Berlin is already busy coordinating the next phase of sanctions behind the scenes, a high-ranking German government official tells Bloomberg News. These sanctions will be wider-ranging and more-hurtful to business interests than the limited measures now in place, this official says.

Merkel has fired two warning shots at Moscow in recent days. Berlin announced today that Germany had suspended granting licenses for arms exports to Russia, after saying on April 11 that a planned $973 million satellite-technology deal between Russia and Airbus Group (AIR:FP) had been put on hold.

Before that, sanctions imposed by Europe and the U.S. mainly involved visa bans and asset freezes on individuals, as well as a few Russian banks with mainly domestic customers. Now, Merkel is making clear that “Berlin’s loyalty to the Western alliance [will] take precedence over business calculations,” Otilia Dhand, vice president of Teneo Intelligence in London, says in a note to clients today.

France, Europe’s No. 2 economy, also has a big stake in the debate about sanctions, including a $1.7 billion contract to sell two Mistral helicopter carrier ships to the Russian navy. But the French, while castigating Moscow for its actions in Ukraine, have been more circumspect on the issue of economic punishment. Foreign Minister Laurent Fabius said last month that France might “envision” blocking the Mistral sale, but that no decision would be made until October—presumably after the current crisis abates.

How far are Merkel and other European Union leaders prepared to go? And just how much will Europe Inc., particularly Germany’s powerful business lobby, be willing to stomach?

The German government official says dissent is growing about how and when sanctions should be applied. Scenarios under consideration range from broad-based measures, similar to those placed on Iran, to more narrowly focused ones targeting specific industries or sectors of the economy. There are also discussions about excluding Russia from the Swift international money-transfer system, this official says.

Russian retaliation to such measures could hit Germany hard. It’s Russia’s biggest European trading and investment partner. (The European Union provides about two-thirds of inward foreign investment to Russia; the U.S. provides about one-fourth.)

Big German companies with interests in Russia include Daimler (DAI:GR), which has a truck-making venture and said recently it might build Mercedes-Benz cars there; Volkswagen (VOW:GR), which is building cars and engines at two Russian facilities; and Siemens (SI), which has an order worth more than $3 billion to supply equipment to Russian Railways. All told, some 6,000 German companies, most of them small to midsize mittelstand operations, do business in Russia.

Another risk is that Russia could scale back natural gas supplies to Europe, which gets one-third of its gas from the Russians. Sanctions also could ruin chances for foreign companies to win lucrative Russian contracts. Consider Russian Railways, the state railroad monopoly, which is embarking on a $157 billion program to install high-speed rail service. Such European giants as Germany’s Siemens and Deutsche Bahn, and French engineering group Alstom (ALO:FP), have expressed interest in contracts.

Russian Railways Chief Executive Vladimir Yakunin was one of several members of President Vladimir Putin’s inner circle slapped with U.S. sanctions that forbid him from traveling to the U.S. The sanctions don’t prevent him from going to Europe, however—and this week he’s in Paris at a rail industry conference, where he’s hobnobbing with leaders of global companies, such as Germany’s Deutsche Bahn, that are eyeing contracts for the high-speed project. A Deutsche Bahn spokesman tells Bloomberg Businessweek that the company’s chief executive, Ruediger Grube, is attending the Paris conference and is expected to talk with Yakunin but declines to say exactly what they will discuss.

For now, most German business leaders aren’t openly challenging Merkel on the question of sanctions. But that could change, especially if it appears Moscow might retaliate against them—for example, by seizing their assets or restricting their activity in Russia.

Matlack is a Paris correspondent for Bloomberg Businessweek.
Delfs is a reporter for Bloomberg News in Berlin.

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