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EU drive to sanction Russia bogs down where Soviet tanks rumbled

By Peter Laca and Radoslav Tomek

Vladimir Putin once said “one could simply die” listening to the fractious debates of the European Union. He’ll like the current sound of discord, as three ex- Soviet satellites try to temper the push for tougher sanctions.

With the European Commission preparing another round of penalties to punish Russia for backing rebels in eastern Ukraine, the showdown is testing the allegiances of Hungary, Slovakia and the Czech Republic. As France on Wednesday suspended the delivery of the first of two Mistral warships to Russia, part of a 1.2 billion-euro ($1.6 billion) contract, the Czech government said it wants to amend sanctions whose impact it estimates at $133 million.

The economic calculus is sidelining memories of Soviet tanks that crushed uprisings in 1956 and 1968 in Hungary and the two former members of Czechoslovakia. Unlike fellow EU states with experience in the Soviet bloc such as Poland and the three Baltic states, economic concerns take precedence for the governments in Budapest, Prague and Bratislava as Putin holds out the threat of a reprisal that may target cars and other industrial imports.

“For the Baltics and Poland, security trumps the economy,” said Tsveta Petrova, an analyst at Eurasia Group. “The rest of central and eastern European countries put their business interests above political goals. They’re trying to change the definition of what the sanctions might look like to avoid their economies being hurt.”

Diplomatic efforts

The European Commission, the bloc’s executive, is continuing preparations on a further tightening of sanctions. They may involve “access to capital markets, defense, dual-use goods, and sensitive technologies,” the commission said in an e-mailed statement.

“It is now for member states to discuss and assess the commission’s proposals,” it said.

Bound by the rule of unanimity, the 28-member EU will probably face diplomatic efforts by the three central European nations to snarl the process and soften any restrictions, Petrova said.

That puts the countries, which account for about 2 percent of the EU’s economic output, on a collision course with Germany and other EU powers clamoring to inflict greater cost on Russia.

Chancellor Angela Merkel signaled this week that Germany is ready for any economic fallout from measures taken against Russia, comments echoed by Austrian Chancellor Werner Faymann.

Cease-fire agreement?

The leaders of Ukraine and Russia agreed on Wednesday to work on a “cease-fire regime” and take other steps to end the conflict. Further sanctions could be put on hold if a truce takes effect, a German government official said. The government in Kiev blames its neighbor for stoking the insurgency with manpower and weapons, an allegation Russia denies.

The grumbling over tit-for-tat sanctions isn’t confined to Hungary, Slovakia and the Czech Republic.

After Russia retaliated last month by banning some food imports from the EU and other countries, Greece complained about the impact on its industries ranging from tourism to agriculture. Nations from Finland and Poland may push the EU for compensation over lost sales.

When EU leaders negotiated a round of sanctions in July, the Slovak, Czech and Hungarian governments focused on shielding their economies from the impact of trade restrictions.

Slovak demurral

“If more sanctions are proposed, I reserve the right in the name of the Slovak government to reject certain sanctions that would hurt national interests,” Slovak Prime Minister Robert Fico said at the EU summit, the Bratislava-based newspaper SME reported Aug. 31.

The measures against Russian haven’t worked and it’s “self-delusion” to think they’ll help resolve the crisis in Ukraine, Hungarian Prime Minister Viktor Orban said Aug. 30 in Brussels, according to the country’s state-run MTI news service.

Fico said he helped lobby for local branches of Sberbank, Russia’s biggest lender, to be excluded from the EU’s sanction list.

While the Czech government wants the EU to present a “united front” in response to Russia, it worries a preliminary proposal for further measures would hurt the Czech engineering industry, Prime Minister Bohuslav Sobotka said on Wednesday. The government estimates such impact at 2.8 billion koruna ($133 million), or about 0.1 percent of economic output.

“We would like to achieve a change in the conditions of the currently prepared sanctions so that they affect Czech machinery exports as little as possible,” Sobotka said.

‘Shooting oneself’

Hungary, which obtained a 10 billion-euro ($13.2 billion) Russian loan this year to finance a nuclear power plant expansion, shares similar sentiments. Orban sees the sanctions causing “greater harm to us than to the Russians,” saying they amounted to “shooting oneself in the foot.”

The standoff is adding to central Europe’s thorny relationship with its former master. Millions of Red Army soldiers died pushing the Nazis out of the region during World War II, which was followed by four decades of Soviet political and economic dominance.

In 1956, Soviet tanks crushed an anti-communist uprising in Hungary and restored a hard-line regime. Twelve years later, Warsaw Pact forces invaded then-Czechoslovakia to overturn a movement for greater civil rights.

Volkswagen, Samsung

While the Slovak, Hungarian and Czech economies doubled in size during their decade in the EU, with fellow bloc members buying most of production of local factories owned by companies including Volkswagen AG and Samsung Electronics Co., their governments worry about losing access to Russia’s market of about 140 million people.

The Czech Republic exported $5 billion of goods to Russia last year, compared with $47.5 billion to Germany, its largest market. Hungary’s exports to Russia totaled $3 billion, or 3 percent of all sales abroad, while Slovakia’s exports stood at $3.5 billion, or about 4 percent of the total, according to International Monetary Fund data compiled by Bloomberg.

“It is hardly by coincidence that the Kremlin has recently suggested that the next measure they would consider would be to ban imports of cars,” said Otilia Dhand, an analyst at Teneo Intelligence in London who specializes in eastern Europe. “Automotive exports to Russia are crucial especially for Hungary and Slovakia.”

The maneuvering is casting a shadow over the EU’s latest effort to deter Russia from further intervention in a conflict that the United Nations estimates has claimed 2,600 lives. The split bodes well for Putin as he “tries to play off one set of EU states against others,” according to Eurasia Group’s Petrova.

Even with their differences, central Europe values EU benefits more than links with Russia, Dhand said.

“Should there be a question of further expansion of sanctions against Russia on the table again, they would probably do the same as they did in the last round: support the sanctions in Brussels and criticize them on the home turf,” Dhand said. [Bloomberg]

 

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