Strong Ties Mean Europeans Must Sacrifice For Sanctions

Gary Hufbauer, senior researcher from the Peterson Institute for International Economics, discusses how Russia's trade relationships with Europe may complicate a sanctions regime.

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As Western leaders mull over possible sanctions against Russia, it's commonly observed that Europe is more economically connected to Russia than we are. What are those connections and how big are they? Well, we're going to ask Gary Hufbauer, who's a senior fellow at the Peterson Institute for International Economics. Welcome to the program once again.

GARY HUFBAUER: Thanks very much.

SIEGEL: When we hear of Russian economic ties to Europe, the first thing we usually hear about is Russian oil and gas. Is that most of what Russia sells to Europe?

HUFBAUER: Yeah, that's mostly what Russian sells. Russia sells about $300 billion of oil and gas a year. And the gas certainly goes to Europe. The oil goes to world markets, but a lot of it goes to Europe. That's their big export.

SIEGEL: It is remarkable that even today - and we're now 20 years since the collapse, or more than 20 years since the collapse of the Soviet Union - Russia is largely an extractive economy. It's about minerals and the things that are pumped and mined out of the ground as opposed to things that are manufactured.

HUFBAUER: Yes. Russia is basically Saudi Arabia of north. A little more diversification than Saudi Arabia but surprisingly not very diversified.

SIEGEL: How big a market is Europe to the Russians? I mean, is that their main customer for gas?

HUFBAUER: Oh, yes. But two other destinations which are worth noting are China and countries that borders Russia, such as Turkey. But China's trade with Russia amounts to 50 billion a year. That's much less than Europe.

SIEGEL: And among EU members, would Germany be the biggest customer of the Russians and biggest vendor to the Russians?

HUFBAUER: Oh, yes. Germany is foremost, directly and then indirectly through eastern Europeans countries.

SIEGEL: And also a big investor in Russia as well.

HUFBAUER: Oh, yes. All the big German firms have interests in Russia, I'm going from the banks like Deutsche Bank to the engineering companies like Siemens. So you take those considerations and I think President Obama is having a hard time persuading Chancellor Merkel to draw the line in the sand on east Ukraine.

SIEGEL: On the other hand, it would sound that whatever Chancellor Angela Merkel would agree to would be something that the rest of Europe would have a hard time saying no to if (unintelligible), yeah.

HUFBAUER: Oh, absolutely. Right. She's the pivot person.

SIEGEL: While Germany, say, does a lot more business with Russia than Italy does, Germany's economy is also a lot stronger than Italy. Imagine that there are some countries in the EU that just because of where they are in terms of recovering from the disaster of recent years would be more vulnerable to any kind of economic sanction that they were taking part in.

HUFBAUER: Well, that's a fair statement. And if sanctions are serious, by our definition of seriousness, probably the fallout will be a recession in Western Europe. And as you know, the southern part of Western Europe is just now kind of stumbling back into somewhat better times. So their enthusiasm for this might be limited. On the other hand - on the other hand, they all remember much better probably than we do in this country the piecemeal expansion that Hitler engaged in prior to his invasion of Poland. And that memory is quite strong with respect to what Russia is doing today to the Ukraine.

SIEGEL: Gary Hufbauer, thank you very much for talking with us.

HUFBAUER: Hey, thanks a lot. Take care.

SIEGEL: Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, D.C.

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