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Merkel, Hollande Warn on Russia Sanctions Revealing EU Split

March 20 (Bloomberg) -- Bloomberg’s Ryan Chilcote updates the latest news from the Ukraine crisis on Bloomberg Television's “In The Loop.” (Source: Bloomberg)

Germany and France said the European Union won’t rush to impose economic sanctions on Russia for the annexation of Crimea, as the U.S. stepped up its measures against the Kremlin and its allies.

Germany, which is Russia’s biggest EU trading partner, expects the 28-country bloc to expand “stage two” measures in place including travel bans and asset freezes, Chancellor Angela Merkel said before an EU summit in Brussels. It is too early to move to economic retaliation, she said.

“There will be an expansion of what we call stage two,” Merkel said. “We will make very clear that in the case of further escalation we will be ready to introduce economic sanctions.”

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Special trading relationships that several countries have with Russia, coupled with the fallout from Europe’s debt crisis, are frustrating a united response to the most serious threat to the European order since the Cold War. One less controversial option would be to expand an existing blacklist of 21 Russian and Crimean political and military figures, EU officials said yesterday.

President Barack Obama today announced sanctions that go further than current EU measures and will target other senior Russian officials and a bank. He also signed an order authorizing, though not implementing, sanctions affecting parts of the Russian economy, which he didn’t specify.

Photographer: Krisztian Bocsi/Bloomberg

Chancellor Angela Merkel said, leaders will "make it clear that we’re always ready to enact stage-three measures if the situation worsens,." Close

Chancellor Angela Merkel said, leaders will "make it clear that we’re always ready to... Read More

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Photographer: Krisztian Bocsi/Bloomberg

Chancellor Angela Merkel said, leaders will "make it clear that we’re always ready to enact stage-three measures if the situation worsens,."

Putin’s Speed

Sanctions require the agreement of all EU governments, a consensus-building process that can’t match Russian President Vladimir Putin’s speed in mobilizing troops in Crimea, staging the secession referendum and moving toward annexation.

“We have to also think about other sanctions if there is an escalation,” French President Francois Hollande said before the summit. “If there are illegitimate claims, if there are troop operations, if there are threats, then there will be other sanctions.”

Graphic: What Crimea Is Costing Putin

EU leaders normally set broad strategy, lessening the likelihood that the summit will decide legally binding steps. While sanctions have made the most headlines, the EU will also sign the political provisions of a trade agreement with Ukraine and consider speeding up its economic assistance.

The European Commission, the EU’s executive arm, yesterday proposed adding 1 billion euros ($1.4 billion) to a previously approved 610 million euros in budget support for Ukraine. The European aid would accompany an International Monetary Fund package that is being negotiated.

‘Prosperous Ukraine’

“The most urgent thing to do is to make all our efforts to sustain a credible, stable, viable, democratic, prosperous Ukraine,” the commission’s president, Jose Barroso, said today. EU leaders will also sign the political provisions of a trade accord with Ukraine tomorrow.

At a summit on March 6, the EU suspended trade and travel talks with Russia and paved the way to the imposition on March 17 of asset freezes and visa bans on 13 Russian and eight Crimean officials. The bloc also warned Russia that “any further steps” to “destabilize the situation in Ukraine” would trigger a host of economic restrictions.

A Snapshot of Ukraine's Past and Future

Leaders will spar over whether Russia crossed that red line by taking control of Crimea. The need for EU unanimity gives leverage to countries like Cyprus, which is chafing at the terms imposed by European governments in exchange for a 10 billion-euro bailout that ravaged the island’s economy.

Russia, Cyprus

Cyprus remains a beacon for Russian investment as it tries to fix an economy that shrank 6 percent last year. Foreign Minister Ioannis Kasoulides told state-run RIK radio on March 18 that Cyprus opposes further sanctions.

Whether fellow skeptics including Hungary and Bulgaria would endorse a ratcheting up of sanctions in exchange for financial compensation won’t become clear until after today’s talks. Ukraine is on the agenda for the dinner session, which may run until midnight.

In the absence of tougher sanctions, EU leaders who fought market forces during the debt crisis are now counting on them to bring Russia to heel. Russia’s Micex stock index has dropped 12 percent since the start of the year and the ruble has lost 9 percent against the dollar.

“Market forces show the biggest impact on Russia,” Finnish Prime Minister Jyrki Katainen said. “The stock exchange has come down in Russia because of their own behavior and also their economy seems to be coming down.”

Putin’s Damage

Swedish Prime Minister Fredrik Reinfeldt said Putin is making Russia weaker. “The Russian economy is already hurt by what Putin is doing,” he said.

Several leaders urged widening the EU blacklist to include figures in Putin’s inner circle. The first list left the president’s office untouched, while the U.S. targeted Putin confidantes including Deputy Prime Minister Dmitry Rogozin, who was the Kremlin’s envoy to NATO when Russia invaded Georgia in 2008.

“The list will be longer and also I think higher up in the hierarchy of who has been responsible for what has happened in Crimea,” Reinfeldt said.

Debate over European sanctions has gone hand in hand with the question of how to share the costs of snubbing Russia. Banking curbs would hurt Britain, an arms embargo would bar France from selling Mistral-class helicopter carriers to the Kremlin, and cutbacks in purchases of Russian gas would harm a swathe of EU countries.

Firmer Response

Germany, which dominated the debt crisis response, is tugged between trade and energy links with Russia and calls by neighbors such as Poland and the Baltic states for a firmer response to aggression on the EU’s doorstep.

“We have to make some serious steps including asset freezes, economic sanctions,” Estonian Prime Minister Andrus Ansip, whose country shares a border with Russia, told reporters today. “We have to stop Russia.”

Germany relies on Russia for 35 percent of its oil and natural gas imports. About 6,200 German companies generate exports of 36 billion euros and imports of 40.4 billion euros in trade with Russia, according to the BGA exporters’ lobby.

EU economic retaliation must be carefully sculpted, Austrian Chancellor Werner Faymann said March 18. Austria buys about 55 percent of its gas from Russia, and Austrian banks Raiffeisen Bank International and UniCredit Bank Austria are among the biggest in Russia.

Business ties are good for “promoting peaceful development on both sides,” Faymann said.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Ian Wishart in Brussels at iwishart@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Leon Mangasarian

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