Russia’s move on Ukraine triggers western sanctions

This is an audio transcript of the FT News Briefing podcast episode: Russia’s move on Ukraine triggers western sanctions

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, February 23rd, and this is your FT News Briefing.

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Russia is edging closer to war. President Vladimir Putin is endorsing Russian-backed separatists who claim the entire Donbas region of eastern Ukraine. Meanwhile, western powers are pushing back both with sanctions and by suspending the Nord Stream 2 pipeline project. But can Germany kick its Russian gas habit?

Guy Chazan
Its industry has really become addicted to relatively cheap Russian gas so it’s in a bit of a bind, really.

Marc Filippino
Plus, how are Russian markets holding up through all this? Unsurprisingly, not so great. We’ll tell you more. I’m Marc Filippino, and here’s the news you need to start your day.

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Very late on Monday night, Russian president Vladimir Putin decided to send what he called peacekeeping troops into eastern Ukraine. They’ll support two Russian-backed separatist states that he’s recognised as independent. This crossed a line for western powers, and they retaliated with a salvo of sanctions against Moscow on Tuesday. The US is targeting two of Russia’s largest financial institutions, as well as Russian elites and their family members. The FT’s Henry Foy has more on Europe’s sanctions towards Russia.

Henry Foy
So the European Union has decided to sanction a lot of individuals and entities. They’ve gone after 351 members of the Russian parliament. These are elected MPs, elected representatives who voted for the independence of these statelets, these separatists to be recognised for troops to be sent in, and also 27 individuals and entities who are linked to actions that have undermined Ukraine’s sovereignty. The key thing here, though, is the EU, just like the US and the UK who also announced their own sanction packages, are saying this is not it. This is just the first wave. And if you continue aggression against Ukraine and if there is a full invasion of the rest of Ukraine not held by these pro-Russian separatists, then there will be more — much, much more. This first wave is targeted. It’s not particularly economically damaging, but it’s a sign that there is unity across the west in standing up to this.

Marc Filippino
Henry, is all this enough to push Russia from further escalation?

Henry Foy
Well Marc, officials I speak to here in Brussels, in the EU, inside of Nato, tell me basically, no. That effectively, Putin has made a decision that he is going to go the whole way and invade Ukraine. That’s a decision that he’s built up over years. It’s an emotional decision. It’s an irrational one. And there’s really little that the west can do about it, given that Putin has thrown away and torn up all the diplomatic efforts. And he will take these sanctions and the sanctions will slow him down. They will affect the Russian economy. They will make an invasion more painful than perhaps it would have been before. However, they’re not going to stop him if that is what he intends to do, and most people, the Nato intelligence community, the defence community, believes that that is his decision.

Marc Filippino
Now, how is Nato’s approaching all this? You know, a crucial issue for Russia is that it wants to keep Ukraine and other former Soviet countries out of Nato. What’s its role right now?

Henry Foy
So Nato’s role, they’ve been very clear about this, is to protect itself, to protect alliance members, to protect Nato members in Europe. So what they’ve done in recent months and weeks is to deploy more troops in eastern European countries that border Ukraine and Russia effectively as deterrents to Russia to say, look, if you are going to invade Ukraine, you’re not going to come anywhere near us because we are going to defend our own, our own members, but also to help with any cross-border fallout from an invasion of Ukraine, which is likely to be in the form of refugees, potentially spillover events such as terrorism.

Marc Filippino
Henry Foy is the FT’s European diplomatic correspondent.

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The news of Russia sending troops to Ukraine sent the price of oil up to nearly 100 bucks a barrel yesterday, and there was other energy news too. Germany has frozen the approval process on the controversial Nord Stream 2 gas pipeline. Chancellor Olaf Scholz says Berlin would not approve the Kremlin-backed project. The pipeline is owned by the Russian-backed company Gazprom and would have increased a Russian gas supplies to Germany and the rest of Europe. The pipeline project has been in the works for years, and there has been a lot of pressure on Germany to stop it. But now that it’s been stopped, what’s next for Germany’s energy sector? Our Berlin bureau chief Guy Chazan joins me now to talk about this. Welcome to the show, Guy.

Guy Chazan
Hi.

Marc Filippino
So Guy, one of our Lex columnists wrote that Germany has been like a junkie in its addiction to Russian gas. How dependent is Germany on Russian energy?

Guy Chazan
Well, it relies on Russia for 55 per cent of its gas imports, and that’s more than many other countries in Europe. It’s a sort of, it’s an indictment in a way of the country’s kind of energy policies over the past few years because in 2011 it took this rather controversial decision to phase out all its nuclear power stations by 2022, and it’s now also phasing out its coal-fired power stations by 2030. So it has all these very ambitious goals to change its energy mix, but that has made it relatively more reliant on gas. And when you’re more reliant on gas, you’re more reliant on Gazprom because that’s Europe’s major supplier.

Marc Filippino
Yeah, and Russia, in response to Germany’s move, said, OK, well, you know, this is going to have an impact on already high energy prices. How hard will higher prices hit Germany’s economy?

Guy Chazan
Well, we’ve already been getting a taste of it because over the past few months, energy experts have said that Gazprom seems to be deliberately withholding supplies to the spot market in Europe, and that has driven up prices. But it’s basically destroyed the reputation of Gazprom as a reliable supplier in Germany. The green minister of the economy yesterday said that explicitly, and that’s really a big change because in the past, whenever you sort of ask German officials, you know, what about this relationship with Russia? They always say, well, you know, even in the worst times during the cold war, Russia was a reliable supplier. Those flows of gas were never affected. But that seems to have changed in recent months, and the perception of Gazprom has accordingly changed as well in Germany.

Marc Filippino
So given that this perception of Gazprom has changed, what alternatives does Germany have when it comes to energy sources?

Guy Chazan
Well, none at the moment. That’s the problem. It basically is building a terminal for the import of LNG, liquefied natural gas. But that is very expensive, much more expensive than Gazprom’s gas. So it’s in a bit of a bind, really. But the big difference, I suppose, really from the Merkel era, the governments of Angela Merkel, is that we now have this government with the Greens, and they are determined for Germany to go carbon neutral in the next 25 years. And if that ambition is achieved, then there will be much, much more renewables, much more wind and solar, and much less reliance on fossil fuels such as oil, coal and gas.

Marc Filippino
Less of a question on the economics of this whole thing and more about the safety of German people. I mean, it’s the middle of February. If people aren’t able to heat their homes, is there a potential issue with people being safe and warm in Germany?

Guy Chazan
Well, I don’t think so, because the consensus is that Gazprom and Russia would not do anything as suicidal as withhold gas supplies to Germany. I mean that literally would be destroying an energy relationship, which is mutually, very, very beneficial. It’s not just Germany that benefits from this. It’s Russia, too, which relies very, very heavily on the flow of foreign currency into its exchequer. I think actually, if it were to come to that, Germany is actually quite well placed at the moment because the winter is drawing to an end and it’s getting sort of LNG shipments via Rotterdam. So it has been able to diversify. And apparently ministers have been saying the energy security situation is OK at the moment.

Marc Filippino
Guy Chazan is the FT’s Berlin bureau chief. Thank you, Guy.

Guy Chazan
Thanks.

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Marc Filippino
Moscow’s main stock benchmark has collapsed by a third since October. Markets have been responding to the escalating crisis in Ukraine. Investors are mostly worried about two things — one, a full-blown invasion by Russia into Ukraine, and two, how sanctions, which you know, we talked about earlier, will affect assets. Our capital markets correspondent Tommy Stubbington has been following this and says there’s one area in particular investors are watching.

Tommy Stubbington
Possibly the most extreme form of sanctions in terms of their impact on the Russian stock market would be an outright ban on trading Russian stocks or Russian bonds on the secondary market, which would make it effectively impossible for western investors to hold those assets. Now we’re not there yet, but I mean, obviously any outside risks that investors see will lead to investors effectively dumping the Russian assets that they hold, and they do hold those assets largely because they are included in the indices, the investment benchmarks, the billions and billions of dollars of investments follow.

Marc Filippino
Now how insulated is the market overall? And is it likely that the Kremlin would react?

Tommy Stubbington
Share price declines, on their own, are probably something that I imagine the Kremlin wouldn’t be too worried about. They’d be more worried about the sanctions hurting at the level of the whole economy. And on that basis, the Russian economy is fairly well insulated from sanctions by the high level of dollar reserves that their central bank holds, which, you know, should be able to protect the rouble from any kind of run from overseas investors. And so the answer is the, you know, the Russian economy is certainly more sanctions-proof than possibly it was in the past.

Marc Filippino
Tommy Stubbington is the FT’s capital markets correspondent.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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