Europe Economy

European firms seek to minimize Russia sanctions

Alison Smale and Danny Hakim
Andrey Rudakov | Bloomberg | Getty Images
Key Points

With the showdown over Ukraine escalating and President Obama warning Moscow of a tough new round of sanctions, Russia and its allies in the European private sector are conducting a separate campaign to ensure that they can maintain their deep and longstanding economic ties even if the Kremlin orders further military action.

European banks and businesses are far more exposed to the Russian economy than are their American counterparts. Trade between the European Union and Russia amounted to almost $370 billion in 2012, while United States trade with Russia was about $26 billion that year.

Read MoreSwift, new sanctions to be imposed on Russia

As a result, they have lobbied energetically to head off or at least dilute any sanctions, making it hard for American and European political leaders to come up with a package of measures with enough bite to influence Moscow's behavior in Ukraine.

Since Russia's annexation of Crimea, energy companies, exporters, big users of Russian natural gas and investors with stakes in Russia have counseled caution. "Neither in energy terms, nor politically, should we turn away from Russia," said Rainer Seele, the chairman of Wintershall, a subsidiary of the large German-based chemical company BASF that is deeply entwined in Russia's oil and natural gas trade.

Russia is already paying a price for its foreign policy, experts say, with capital leaving the country and the ruble falling steadily, causing the government to raise interest rates. Its government bonds were downgraded on Friday to near junk status by Standard & Poor's in the latest indication that its economy is already under growing pressure.

Read MoreS&P downgrades Russia to BBB- amid capital outflows

In a statement on Friday, the White House said Mr. Obama had discussed Ukraine with Chancellor Angela Merkel of Germany, Prime Minister David Cameron of Britain, President François Hollande of France and Prime Minister Matteo Renzi of Italy. Mr. Obama said only that the leaders had "agreed to work closely together, and through the G-7 and European Union, to coordinate additional steps to impose costs on Russia," and European governments, without being specific, signaled that they were ready to take some kind of action.

On Friday evening, a senior Obama administration official said sanctions against more Russian individuals could be announced as early as Monday. Two Western officials said that the European Union would impose sanctions against 15 Russians.

And late Friday night, the White House released a statement from the Group of 7, which said: "We have now agreed that we will move swiftly to impose additional sanctions on Russia.

"Given the urgency of securing the opportunity for a successful and peaceful democratic vote next month in Ukraine's presidential elections," the statement added, "we have committed to act urgently to intensify targeted sanctions and measures to increase the costs of Russia's actions."

The phone discussion among the leaders came at the end of a week in which executives of the giant Russian gas company, Gazprom, stumped across the European capitals, rallying support from customers and suppliers against increased tensions and making the case that Russia and Europe were long-term economic partners who should not let temporary crises cut their ties. Gazprom is 50 percent owned by the Russian government.

"Sanctions will not help anybody, they would not just hurt Russia, but also Germany and Europe as a whole," Mr. Seele of Wintershall has said.

Alexander Medvedev, the No. 2 at Gazprom, said that his company had done everything possible to keep gas flowing to both Ukraine and Europe, but that the time of a financial reckoning was near, alluding to the $18.5 billion that he said Ukraine owed. How, he asked, can a publicly traded company like Gazprom keep contractual promises and make needed investments with such a cash shortfall from a slippery customer? Perhaps, he suggested, Ukraine's Western friends would like to help meet these bills.

About a quarter of the European Union's gas supplies originate in Russia. More than half of Russia's exports go to the European Union, and 45 percent of its imports come from the European Union, according to European statistics.

Read More Some Western firms could face Russian retaliation

The pace at which the Ukraine crisis is changing the economics and geopolitics of Europe became clear again on Friday when Ms. Merkel endorsed a suggestion from Prime Minister Donald Tusk of Poland for a common energy policy for the 28-nation European Union. But even the general embrace of the idea by Germany suggests that European Union countries might be prepared to pull together with the kind of unified response that Russia and Russian businesses fear could lead to Moscow's isolation.

No European industry has been as open in its support of Russia as the energy industry. Executives have publicly voiced skepticism about the effectiveness of sanctions, lobbied behind the scenes to head them off and traveled to Russia, on at least one occasion to pose with Russia's president, Vladimir V. Putin. And the Russians, while publicly playing down the effects of sanctions, have been trying to exert influence in Brussels and elsewhere, lobbyists said.

In an interview on Friday, Gerhard Roiss, the chief executive of the Austrian oil and gas supplier OMV, which has been working with Gazprom for five decades, said, "You cannot talk about sanctions if you don't know the outcome of sanctions."

"Europe has developed over the last 50 years into a region where we have a division of labor and a division of resources, and this means in concrete terms that energy is imported from Russia and products — automotive or machinery — are exported from European countries into Russia," he added.

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Mr. Roiss met with Gazprom's chief executive this week and reaffirmed their business ties. He pointed out that this was hardly the first political crisis the sides had faced. The year Russian gas first started flowing into Austria, 1968, was the same year the Soviets invaded the former Czechoslovakia. "We've had a crisis situation several times, but if you see it over the 50 years, natural gas was not used as a weapon, and we should not use gas as a weapon," he said.

Before the call between the European leaders and Mr. Obama, Ms. Merkel called Mr. Putin in what appeared to be a last warning to fulfill the accord reached in Geneva last week to reduce tensions in Ukraine. Minutes later, a Kremlin statement put a different spin on the call, saying that both Mr. Putin and Ms. Merkel had called for three-party talks on Russian gas supplies to Europe through Ukraine.

Whether that was an indication that Mr. Putin now feared that tough sanctions loom — sanctions that Western leaders argue would inflict more harm on Russia's heavily oil- and gas-dependent economy than on Europe — was not clear.

Mr. Medvedev's tour of Europe, and what he said was constant contact with the European Union's energy commissioner, Guenter Oettinger, suggested that Russian business was very worried about losing what it has carefully built.

Do not forget, Mr. Medvedev urged Europe, that Gazprom has for decades — right through the Cold War and multiple East-West crises — been a reliable supplier. It has no intention of leaving customers in the lurch now.

"We are not planning to cut gas to Ukraine," Mr. Medvedev said. "We just would like to receive payment for the gas that we are going to deliver."

In 2006 and especially 2009, when Ukraine and Russia were locked in disputes over natural gas prices, European customers experienced delivery shortfalls for which Gazprom blamed Ukraine's siphoning of supplies intended for Europe to meet its own domestic needs.

"There never were, are not and won't be plans to cut" delivery, Mr. Medvedev said of the current situation. For one thing, he added, "we are too much dependent on the cash flow from Europe."

Russian business — not to mention rich Russians who have eagerly bought property everywhere from London to France, Berlin and the Czech spa city of Karlovy Vary — is now not just embedded in the energy supply and financial markets of Europe. As any soccer fan could see in the Champions League matches this week, Gazprom is a main sponsor of the sport in Europe.

Whether that has bought much independence from the image of the Russian government is questionable. Pressure has risen markedly on German business since Joe Kaeser, the chief executive of Siemens, met Mr. Putin in late March. Mr. Kaeser was not admonished outright, but Ms. Merkel had a distinctly frosty face for him two days later when both attended a signing of new contracts with China.

BP has a 19.75 percent stake in Rosneft, the Russian oil giant. "We're monitoring the situation, and clearly we're committed to our investment in Russia," said Toby Odone, a BP spokesman. "People keep asking us to speculate what would happen if such and such a sanction were imposed, and we're not going to do that. As things stand, our interests in Russia have not been affected by the measures that have so far been imposed."

Mr. Roiss said he had spoken to officials "on the European level and on the national level."

"This is not an issue of lobbying, it's an issue of saying what you think," he said. "My feedback from talking to politicians, wherever they are, is that people see that this is quite a broad issue, that one should not really mix too much into politics."