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German foreign minister visits Kyiv amid rising tensions over Ukraine

Amid the rising tensions on the Ukrainian border, enterprises with exposure to Russia’s markets and counterparties are being forced to reckon with the probability that Moscow’s invasion of Ukraine could lead to the implementation of high-level economic and trade sanctions on Russia. The issue is being actively discussed and debated on political forums and is the preferred response to any aggressive move Russia might employ in Ukraine. Attempting to sanction Russia to a level adequate to reverse the invasion of Ukraine will have a ripple effect across various industries. The situation at the Ukrainian border as well as negotiating table is highly fluid; currently, the probability, timeframe, and type of sanctions remain speculative.

On 18th January 2021, German Foreign Minister Annalena Baerbock visited Kyiv, Ukraine. Baerbock offered reassurance to Ukraine that Germany would not jeopardize Ukraine’s territorial integrity; moreover, she warned that any aggression against the state would come at a high price for the aggressor country, Russia, in this case. Following her trip to Kyiv, Baerbock flew to meet its Russian counterpart Sergey Lavrov; she stated that Russia’s troop build-up has “no understandable reason” and stressed the need to follow rules, even if they result in high economic cost. The US Secretary of State Anthony Blinked has also warned Russia of “massive consequences” in face of military action by Putin.

Punishing Moscow- what options are on the table? 

Although it is not USA’s first rodeo with a sanction on Moscow, the Biden’s government is being cautious over its moves. According to experts, potential targets are likely to include Russia’s bank, state-owned enterprises, Russian Direct Investment Fucks, and Kremlin-associated oligarchs. Other possible options include SWIFT shocks and expansion of sanction the trade of Moscow’s sovereign debt.  

  • The so-called nuclear option: switching off SWIFT

Amongst the harshest measures would be disconnecting Russia’s financial system from the international SWIFT messaging system, mainly utilized in global financial transactions. In 2019, the Russian PM referred to cutting Moscow off from SWIFT as equivalent to a “declaration of war.” Such a move could result in high-level chaos in the short run within Moscow and for global companies that have invested in the state since it could halt nearly all global transactions. Although Russia has been working on the development of its own system, it only accounts for 20% of the domestic transfers. Talks have emerged over whether or not to remove Russian banks from the SWIFT payment system that is responsible for 35 million transactions daily, rotating 5 trillion dollars around the globe. Such a move could have negative ramifications for the Russian economy; it will also make it onerous for Russian banks to make and acquire international payments. In turn, it could significantly weaken the Russian ruble and negatively impact energy giants. However, over the fear of destabilization of global financial markets, the EU and the USA have dropped the idea of removing Russia from SWIFT.

  • Economic sanctions against Russian banks

The first option was overruled since it could also lead to the development of an alternative payment infrastructure without western domination over it. Therefore, The US-EU talks were directed towards implementing sections against major banks in Russia. Berlin is insistent on the exclusion of this item in order to continue its payments for the import of oil and gas from Moscow. According to the White House National Security Council, as of now, no option is off the table, and the USA is closely working with its European counterparts to deal with the crises. 

The EU has not learned anything from its mistakes of 2014, especially in terms of diversification of energy resources. Western countries are reliant on Russia for another important natural resource apart from oil and gas, namely titanium; this could deter suppliers of these resources. Thus, interdependence could make it difficult for the West to pass wider sanctions against Moscow’s financial sector; sanctions on the banking system could only be effective if they halt their imports. Under the current situation, a channel for payment has to be left.

  • Pipeline politics 

Amid the frighting morass, one lowkey wild card is the energy infrastructure project- Nord Stream 2. It is an 11-billion-dollar Russian-owned pipeline that has put the USA and some of its European allies in a difficult position; it has also created divisions between European countries, and weekend Ukraine. The pipeline, running through the Baltic Sea from Russia to Germany, was completed in 2021; however, it awaits approval from German authorities for functioning. For the USA, a pipeline is a geopolitical tool utilized by Russia to underscore Europe’s energy needs and security. Once the pipeline is operational, Moscow will no longer have to pay a transit fee to transfer gas via Ukraine. According to Germany, the Nord Stream 2 is a “commercial project” is significant for its industry; therefore, the state wants to see it functioning. The project is viewed as a lever in negotiations over Ukraine, but there are divisions over how to use it. It has created discord amongst transatlantic allies, Europe, and America. While Berlin is under pressure to halt the project, Germany has not ruled out this option.

German stance on the issue

According to Rafael Loss, Germany has shown very little resolve in assisting Ukraine to deter Russian aggression. Baerbock has willingly drawn clear lines when it comes to dealing with Russia; for example, last month Germany expelled two employees of the Russian embassy. Moreover, her stance on Nord Stream 2 is clear; he asserted that it would not be allowed to operate if the Ukrainian crises persists. However, German Defense Minister stated that project must not be dragged on the issue. Moreover, Germany reiterated its refusal to supply defensive weapons to Ukraine as a part of its German peace policy that aims to foster peace through diplomacy.  

Written By: Olivium's Staff.


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