March 19 (Bloomberg) -- European Union governments struggled to find ways of punishing Russia for annexing Crimea, reflecting east-west divisions within the EU and concerns that trade curbs would do self-inflicted damage to Europe’s economy.
It is unclear whether EU leaders will agree on a road map for economic sanctions at a two-day summit starting tomorrow in Brussels, six EU officials told reporters today. A less controversial option would be to expand an existing blacklist of 21 Russian and Crimean officials, they said.
“There is the need to keep a line of dialogue open,” Italian Prime Minister Matteo Renzi told parliament in Rome today. Italy wants “a solution that doesn’t take us back to an Iron Curtain situation.”
Special trading relationships that several countries have with Russia, coupled with the economic fallout from Europe’s debt crisis, are frustrating efforts to forge a united response to the most serious threat to the European order since the Cold War.
Sanctions require the agreement of all 28 EU countries, a consensus-building process that cannot match Russian President Vladimir Putin’s speed in mobilizing troops in Crimea, staging the secession referendum and moving to annexation.
“Among the 28 there are very wide gaps, there are countries that have very different positions,” Luxembourg Prime Minister Xavier Bettel told reporters in Luxembourg. He said Russia hasn’t yet crossed a red line that would trigger harsher penalties.
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 ($14 billion) bailout that ravaged the island’s economy.
Cyprus remains a haven 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 yesterday 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 the leaders assemble in Brussels tomorrow afternoon.
An agreement on economic sanctions “can’t realistically be expected,” Czech Prime Minister Bohuslav Sobotka said at a parliamentary committee meeting in Prague today, according to the CTK news service.
At an emergency 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 told Russia there would be “additional and far-reaching consequences for relations in a broad range of economic areas” unless it backed down. EU officials were not sure whether the leaders will view Putin’s takeover of Crimea as the trigger for more measures.
One option is to widen the blacklist to include figures in Putin’s inner circle, the officials said. 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.
Debate over economic 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.
“An escalation risks higher commodity prices, higher inflation and lower growth,” U.K. Chancellor of the Exchequer George Osborne told parliament in London today.
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.
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.
“The heterogeneity of EU member states’ interests raises doubts within the Kremlin about how determined the EU will actually be,” Georg Zachmann, a fellow at the Brussels-based Bruegel research group, said in a blog post.
EU economic retaliation must be carefully calibrated, Austrian Chancellor Werner Faymann said yesterday. 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.
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, today proposed adding 1 billion euros 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.
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