Robert Fico, Slovakia’s prime minister, vetoed the 18th package of sanctions against Russia on June 26. The decision was not based on his established sympathy for the Russian president, Vladimir Putin, but rather a desire to wring more money from an already stretched European budget.
The sanctions, as a foreign policy matter, require unanimous approval. So Fico was able to block them based on his objections to the EU’s roadmap to phasing out Russian gas in Europe.
The so-called REPowerEU plan envisions a phase-out of all imports of Russian fossil fuels, including pipeline gas and liquefied natural gas, by the end of 2027. Slovakia, a landlocked country, is heavily dependent on Russian gas, both as a source of energy and a source of transit payments. A similarly dependent (and similarly Kremlin-friendly) Hungary joined its neighbor in objecting.
To outsmart them, the European Commission classified the roadmap not as a sanctions measure, but as a matter of trade and energy, which only needs a qualified majority to pass.
Fico and the Hungarians retaliated by blocking the bloc’s sanctions package, even though it was unrelated to the gas issue. After an apparent failure to resolve the problem at a bilateral meeting with Ursula von der Leyen, the Commission President, Fico turned to his Facebook account and recorded a message, outlining Slovakia’s grievances and concerns.
He said that if Slovakia agreed to eliminate Russian gas, it would face higher transit fees, as it would need to purchase gas from western, southern, and northern ports, where liquefied natural gas (LNG) arrives from overseas before being gasified and pumped into the pipelines.
He also cited his government’s calculations that substituting Russian gas would raise energy prices for businesses and households by up to 50%. So, he wants the European Commission to lock in the current low transit costs that Slovakia is paying, to provide compensation to businesses and households, and to protect them from future spikes in gas prices, since LNG prices are much more volatile compared to those attached to Gazprom’s long-term contracts.
Moreover, Slovakia might face lawsuits from Gazprom if it breaches these long-term take-or-pay agreements with, and Fico also wants financial assistance to address this issue.
“It’s unfortunate that we are heading down this road, as this is clearly an ideological proposal,” he said in his video message. “This will harm us, unless an agreement is reached with the European Commission that would compensate us for all the damage this proposal might cause.”
Slovakia’s demands could cost tens of billions of euros, a substantial sum for a constantly overstrained European budget.
Most likely, Brussels will find a compromise with Bratislava, but the standoff will delay the sanctions package and signal more problems for future packages.
The plays into Russian hands. If the European Commission buys off Slovakia this time, it would allow Moscow to encourage current and future anti-EU and anti-sanctions leaders in the hope they will continue to blackmail Brussels.
If the European Commission strongarms Slovakia or any other opponent of the sanctions, that could strengthen populist Eurosceptics and tentative Russophiles in other countries. A possible decision to move sanctions from political to trade issues, and thus replacing the need for unanimity with a qualified majority, would assist Moscow’s (admittedly shameless) claims that the EU is dictatorship and neo-colonialist.
Russia has largely adapted to the current sanctions regime. Russian business is less and less worried about sanctions and more concerned about domestic factors, according to the CEO Barometer study from Yakov & Partners (McKinsey’s former Russian office), which surveyed 150 leaders in a variety of industries.
As the economy enters a recession, they are more worried about the shortage of labor, the high cost of capital, and state regulations.
And yet now is the time that sanctions really do matter, more so than during the past two years of government spending-fueled growth. Trade restrictions erode labor productivity, energy sanctions hinder oil producers’ ability to develop new fields and reduce their profits, and financial sanctions deprive Russian companies of cheaper funding.
Now that Russia is on a deteriorating economic path, these hurdles may be more damaging than during the years of growth. To achieve this, Europe needs to constantly adjust its sanctions policy so that Russian businesses need to spend to adapt to every new turn of the screw.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA) specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
More on this and other aspects of the Russian economy in a weekly summary produced by the independent publication, The Bell.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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