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Germany Is Right to Flout Russia Sanctions

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Germany has rallied Europe in support of Ukraine-related sanctions against Russia, but has been less diligent in their implementation. German leaders back these ineffectual measures primarily to humor the U.S. and are rightly unwilling to suffer too much for them.

In a recent speech to her CDU party, which ended with a nine-minute standing ovation, Chancellor Angela Merkel said of the sanctions:

It was the right reaction, no matter how much we'd like to keep a good relationship with Russia. We must adhere to our principles.

How, then, to explain the Deutsche Bank internal review that found $10 billion worth of suspicious transactions in its Russian operation? These appear to have been meant to help Russian business people move their money overseas. President Vladimir Putin's friends, Arkady and Boris Rotenberg, who are under sanctions and should therefore be off limits to banks that operate in the U.S. and Europe, are said to be among the clients. Up to $1 billion of the deals -- including "mirror trades," where securities are bought in one market and sold in another to move money to a different jurisdiction -- took place in 2014 and 2015, when sanctions were in effect.

Yet Germany's regulators appear even less interested in this apparent transgression than Russia's. The Russian central bank has fined Deutsche about $5,000 for the trades, while the German authorities have so far ignored them. It's the U.S. Department of Justice that has been investigating the issue and is pressuring the German bank to do more digging around internally.

Similarly, there has been no German government response to reports that a Russian company 65 percent owned by the German engineering giant Siemens has been contracted to produce gas turbines for power plants in Crimea. These plants would overcome the annexed peninsula's energy dependence on Ukraine, but EU companies aren't supposed to supply energy equipment to Crimea. Technically, the contract is in compliance with sanctions, because the turbines would be supplied to Taman, a Russian town on the Sea of Azov. Russia would then move them to Crimea. Plus, Siemens Tekhnologii Gazovykh Turbin is a Russian-registered company, not a German one -- despite the Siemens-heavy ownership split.

These are transparent ruses. For a German company to supply Crimea with equipment is not in line with the spirit of the sanctions.

Then there's the contract between state-controlled Russian natural gas supplier, Gazprom, and European companies, such as the German-based E.ON and BASF, to expand the Nord Stream pipeline into Germany. The deal was signed in September and, if implemented, will allow Russia to bypass Ukraine for most of its gas supplies to Europe. 

Late last year, Russia was forced to cancel another pipeline project, South Stream, which would have carried Russian gas directly to Southern Europe across the Black Sea. Countries such as Bulgaria, Italy and Austria strongly advocated the project, hoping it would bring them cheaper energy and transit fees. Yet the  European Commission, whose energy department was at the time headed by a German national, found the project in violation of EU rules that don't allow a gas supplier to own pipelines or have the monopoly right to fill them -- both conditions of the Gazprom project. The Commission began an infringement procedure against Bulgaria to force a halt to construction.

Nord Stream 2 is similarly suspect. Gazprom originally was supposed to hold a 51 percent stake in the project's Swiss-registered operating company and was meant to be the sole supplier of the gas that would run through it. Now, mindful of possible problems with the EU, Gazprom intends to sell 1 percent of the project to one of its fellow shareholders, the French company Engie. In theory, it could let other Russian natural gas producers into the pipeline if required. Even so, the project runs counter to the spirit of the EU energy rules that seek to diversify the bloc's fuel sources. Gazprom already delivers 38 percent of the natural gas used in Germany. "There is a strong indication that Nord Stream 2 contradicts the aims of the agreed European policy," European Council President Donald Tusk recently said.

Southern European nations, denied their own Russian pipeline, are up in arms. Because of Nord Stream 2, Italy demanded a discussion before it could support an extension of Russian sanctions into next year. Italian Prime Minister Matteo Renzi repeated to the Financial Times what he told Merkel during that discussion:

So we say no to South Stream and then all of a sudden, quietly, we discover that there’s Nord Stream. Who decided? Is that an EU energy policy choice? At the table, when I raised it, only Germany and Holland defended it. I understand this is important business, fine, I’m not scandalized — but I want to say either the rules apply to everyone, or no one.

Merkel's response was that private companies were involved in the pipeline and she didn't want to interfere. Her coalition partner and Economy Minister Sigmar Gabriel is a proponent of Nord Stream 2, and the chancellor, understandably, wants to avoid a conflict with him. Besides, Germany needs more natural gas if it is to phase out coal-burning power plants and meet its clean energy goals. 

Some might call the German leniency toward borderline sanction-busting hypocritical, as Renzi does. Yet the sanctions are a political statement more than anything else. In purely economic terms, they have contributed no more than 10 percent of Russia's economic decline this year, or about 0.3 percent of gross domestic product. They have curtailed the ability of Russian banks and companies to borrow in Western markets, and that has hindered their expansion, but they ended up paying down their dollar- and euro-denominated debts, which, given the ruble's shakiness, has only improved their financial health. There has been no other noticeable effect.

The sanctions were a U.S. idea, and the administration loved having Merkel's support. Together, U.S. allies have presented a united Western front against Russia's aggression. These benefits have been reaped, but it's impractical to force German companies to pay for them. Sanctions activism on the government's part would have been excessive and counterproductive.

Merkel may be forced to move against Nord Stream next year to prevent a new conflict with southern European countries, where anti-German sentiment is already high. She is more likely, however, to make sure the gas project fully complies with European rules. Italy and its neighbors should have tried harder with South Stream instead of taking the EU's outwardly anti-Russian policy at face value.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Marc Champion at mchampion7@bloomberg.net