German companies and possibly consumers could also be affected by an escalation of the conflict over eastern Ukraine and possible sanctions against Russia. Eastern Europe expert Janis Kluge from the Berlin think tank Foundation Science and Politics explains in an interview with Capitalwhat steps he expects from the conflicting parties.
The US is considering excluding Russia from the Swift community if the Ukraine conflict escalates. How badly would this move hit Russia?
Janis Kluge: An exclusion of Russia would actually be a very harsh sanction. That’s why I also think that this step is not necessarily the first and most realistic option. Because there are a variety of measures that would be less destructive and still hit the Russian economy.
Has the exclusion from the Swift community been used before?
So far, this step has already been used against Iran, but that was a completely different case. Because Iran was economically less intertwined than Russia is – especially with regard to the European countries, where there are very large trade flows.
What would that mean for these trade flows if a Swift bailout became a reality?
It would bring trade in its current form to a standstill for the time being. There are alternatives to bypass this step. But I have my doubts that German or other European companies would try to evade the sanctions because that could have other consequences as well. Also with regard to the energy dependence on Russia, this scenario is actually inconceivable.
What would that mean specifically for Germany?
Germany has particularly close trade ties with Russia. If Swift were to be excluded, then payment for imports and exports would have to take place in a different way, for example via couriers, who then transport cash back and forth. Another idea would be cryptocurrencies, for example. However, such projects would probably fail because the German companies tried to end their trade relations as far as possible. The only exception would be areas such as natural gas, where there is some dependency. So the move would actually be extremely disruptive.
In what way?
There was already a milder variant in 2018, when the USA blacklisted the Russian company Rusal. Ultimately, the step was not carried out. But even the announcement caused a lot of stress in Europe and Germany, because Rusal has supplied many European companies with aluminum. If you now think of this for the whole economy, then it is clear that the Swift exclusion is not called “the nuclear option” for nothing.
How would Russia react to that? Some voices are already expecting closer rapprochement with China.
I don’t really see an immediate way out of such an extreme sanction scenario for Moscow. Because the trade flows that are important for Russia cannot simply be diverted to China, for example. There are fixed pipelines for natural gas. And so far there is no connection from the large West Siberian gas fields to China. Much of the gas there is produced for the European market. There is also another important factor to keep in mind.
And which would be?
China has not been loyal to Moscow in sanctions against Russia in the past. Because for Beijing, access to the US market and the European market and the associated investments are much more important than to Russia. Compared to the West, that is a completely different order of magnitude. That is why Chinese companies have adhered to Western sanctions against Russia in the past. So China would not be an alternative that would help Russia out of trouble.
The US is also considering operating Nord Stream 2 as a leverage. What are the consequences of a pipeline stoppage?
Sanctions against Nord Stream 2 are realistic in the event of a major escalation in Ukraine. But they would not mean that Russia can no longer transport gas to Europe. Because Belarus and Poland, in part also through Turkey and above all through Ukraine, offer other ways of transporting gas – even if the question arises here, of course, to what extent that would still be possible with Ukraine. Ultimately, however, the pipeline capacities are more than sufficient even without Nord Stream 2.
How would the move affect the German-Russian relationship?
That depends very much on the way in which these sanctions are decided and whether Berlin explicitly supports them or even initiates them. In this case, the politically already very strained German-Russian relationship would once again cool down significantly. But my assessment would be that the new federal government would rather decide to stop Nord Stream 2 in the event of an escalation in Ukraine.
What consequences could an escalation of the conflict have with regard to the energy supply in Europe? Russia played a major role in this.
We saw this fall that there is an actual and critical dependence on Russian natural gas supplies. However, the question is always whether Russia would be ready to use this dependency to exert political pressure. Some observers say that this is currently happening because there have been very few deliveries from Russia recently and prices in the EU are extremely high at the same time. For Russia, however, this is counterproductive in the long term. Because that would fuel the ambitions to look for other energy sources. At this point in time, I therefore think it is not realistic that Russia will actually stop its gas supplies to the EU. But if it did, it would actually have very big consequences – also for European consumers.
How effective are the threatened sanctions?
In general, economic sanctions are already an effective tool. The problem, however, is that this effectiveness is not that easy to prove. Because sanctions are always most effective when they don’t even need to be introduced. That is, when a threat is enough to prevent certain behavior. If the western states do not want to intervene militarily in the conflict to stop Russia, sanctions are almost the only means. Theoretically, the possibilities are almost unlimited, because Russia is – to a much greater extent than it would like to admit – dependent on international economic relations.
Even so, as you said, Swift’s exclusion would be a very extreme scenario. What alternative sanctions do you think are possible?
Sanctions in the financial sector in particular could create just as big problems for Russia without reaching the level of destruction as the Swift exclusion. Sanctions could be directed against Russian government bonds, for example, or limit access to western capital markets for other companies. Another option is blacklists for Russian oligarchs and elites. These are all measures that would have a great economic effect in Russia, because they cost the capital that the economy needs. The question of political effectiveness remains a matter of interpretation – and from my point of view these steps are already included in the Kremlin’s calculations.
Does that mean that Russia might invade Ukraine after all?
If Russia were to take military action now, I would not expect an open invasion of Ukraine to begin, simply because the risks are far too great, also because of the sanctions. Even in the past few years, military operations abroad have always been careful not to cross a certain threshold of international confrontation. Nevertheless, it becomes clear that Russia is not satisfied with the current situation in Donbass. Because despite the losses caused by the conflict, Ukraine has made itself somewhat independent. That is why Russia is now increasing the pressure and would like to see the Minsk agreements implemented according to the Russian interpretation. Then you would have more influence on politics in Kiev again.
So how will the conflict continue in the medium term?
I expect that we will have escalations of various kinds between Ukraine and Russia – and thus, figuratively, between the western states and Russia – again and again. That is why I also expect that there will be new sanctions in this context. These sanctions are likely to be directed primarily against Russian people, such as oligarchs and government bonds, as well as against financing options for Russian companies. And finally, they will also be directed against Nord Stream 2 if there actually were a major escalation. This does not necessarily mean an invasion, but there are other potential scenarios, such as a renewed flare-up of fighting on the line of contact in Ukraine, where such sanctions are conceivable.
With Janis Kluge said Christiane Kreder
This interview first appeared on capital.de.