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The Effect of the New US Sanctions on European Companies

The Effect of The New US sanctions on European Companies
How exactly will the new US sanctions affect EU companies working on Russia-related energy projects? Could this be the straw that finally breaks the back of close US-EU business and political ties?

Art Franczek, the President of the American Institute of Business and Economics in Moscow and Dr. Richard Wellings, the Deputy Research Director of The Institute of Economic Affairs in London join the program.

To the first question as to what direct impact the new sanctions will have on European companies working on Russian energy projects, Richard points out that the sanctions have been badly drafted; there are some which are obligatory and some which are optional, which will create a huge amount of political uncertainty in the long term. “It does introduce huge political risk because some of the investments into the energy industry are very long term.” Art added that we have extra-territorial and secondary sanctions, “this is what has got the Europeans quite worried, this means that the United States can sanction companies that are simply doing business in Russia, at the discretion of the [American] President. They can sanction European companies, for example, oil companies, Italian oil companies; these are the companies that have put $4.75 billion into the Nord Stream 2 pipeline. And this is specifically directed in the sanctions.

Art describes the mechanism of the sanctions: “They can sanction them by limiting their access to the US financial system — to their corresponding dollar accounts. They are oil companies, their revenues are in dollars, because oil is denominated in dollars, and they can basically sanction their dollars and stop the flow of dollars. It is a very severe penalty. And this is a political thing, at the discretion of the President.”

Richard says that what is worse is that it is going to be very difficult for the companies affected by these sanctions to do anything about it. They can lobby their own governments but, there is unlikely to be any result… “The EU institutions have already been lobbying quite hard against this package.”

The effect of widening the gap between European politicians and the US administration is discussed. Angela Merkel has to win an election soon and the Italian elections are coming up. Art comments: “If I was Shulz, I would hit Merkel over the head with this, because she is so close to the Americans. …It hasn’t started yet, just wait.” Richard adds that the US intention to withdraw from the Climate Paris Agreement has upset the Europeans.” Art dismisses that as being symbolic because the Americans can go back in, but the sanctions “have teeth and meaning.” Art points out that in the first draft of the Senate Bill, it was written that part of the purpose of these sanctions is to promote US energy and US jobs. As for retaliatory measures which the Germans have threatened against the US, Art clarifies that these could mean taking this to the WTO, which will take three years, …furthermore, Junker got an agreement from Obama that he would not enforce sanctions which were detrimental to Europe.”

The vote will be taken in January by the EU when it will decide whether to continue EU sanctions against Russia. Richard says that it is very difficult to predict if all countries will vote in favor of retaining the sanctions against Russia. All EU countries have to vote unanimously. A debate takes place in the second half of this program regarding the future of the European sanctions now that Britain is leaving the EU, and Joe Biden is not around anymore.

The sanctions are full of conditionals, — the sanctions ‘may’ and ‘could’ be applied. There is a lot of ‘wiggle’ room. Art explains. “The obligatory part of the sanctions are codying Obama’s decrees. They are going to stay forever. Some are at the discretion of the President, such as the financing of Russian pipelines, and the others are at the discretion of the President.” Richard points out: “the fact that there will be presidential discretion is nevertheless terrible news for companies because it creates such a huge amount of uncertainty whether they should invest or not, and particularly if there is a possibility, and I consider it to be a small chance, of a more hardline President in Pence in a  few months time, then clearly investments will be delayed. …This is very bad news for business, and will have knock on effect for the wider economy in Europe.”

The last few moments of this program are taken up with discussing the possibility that Europeans will now start to turn away for the US. 

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