Europe News

Merkel talks tough, but can Europe back it up?


German Chancellor Angela Merkel has become increasingly forceful in speaking out against Russian President Vladimir Putin since an airliner carrying almost 300 people was shot down on Thursday over Ukraine—presumably by forces linked to Moscow.

German Chancellor Angela Merkel addresses a news conference in Berlin, July 18, 2014.
Axel Schmidt | Reuters

But it's not clear that Merkel, arguably not just the leader of Germany but also the most important politician in the euro zone, is in a position to actually hit Russia where it would hurt: Its pocketbook. Germany is a major customer for Russian natural gas exports, and so a cutoff of those purchases would hurt Russia economically. But the flip side of that situation is that Germany is reliant on Russia for more than a third of the natural gas it consumes and doesn't have a ready supply alternative.

Speaking at a press conference on Friday, Merkel said that Russia bears responsibility for what is happening in Ukraine, where pro-Russian militants have been battling government troops for about four months.

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"It is indeed the case that the separatists are heavily armed, and there are many indications that some of these weapons have come across the border from Russia," she said.

We are talking about a $12 trillion, globally integrated economy versus a $2 trillion gas station with only one customer. It's time for Europe to stand up.
Ian Brzezinski
Senior fellow, the Atlantic Council

Robert Bensh, an energy executive who owns significant energy assets in Ukraine, told CNBC that Germany has some leverage, but only in the near term. Europe has come out of an unusually mild winter that left it with more natural gas remaining in storage than is usual.

"Gas storage levels are high at present, and will be enough to get Europe through the winter; however, Ukraine is bankrupted by losing the East and Crimea, along with the offshore resources of the Black Sea," he said.

Bensh said that leaves Europe without many choices when it comes to gas supplies in the long term.

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"So unless full pressure is put on Russia now, a near-term advantage rotates to a longer-term loss," he said.

Kennan Institute Director Matthew Rojansky told CNBC that there is plenty of leverage, but that both sides will feel the pain in the short term and until Europe can find new sources of energy.

"I do suspect that the large number of EU citizens killed in this attack will change the thinking about this conflict in Western Europe, because it brings it much closer to home," he said. The Malaysia Airlines flight shot down on Thursday was en route from Amsterdam, Holland, to Kuala Lumpur, Malaysia. More than a third of its passengers were Dutch.

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Adrian Karatnycky, senior fellow at the Atlantic Council, told CNBC that although Germany and Europe have a significant dependence on Russian gas, Russia also needs those markets for its own cash flow and economic stability.

"Moreover, the U.S. can unilaterally impose sanctions against all financial transactions in U.S. dollars involving Russian financial institutions and businesses," Karatnycky said. "Such a unilateral sanction would compel all European banks to go along and impede much financial activity with Russia."

Merkel: Russia responsible for Ukraine

Ian Brzezinski, a senior fellow at the Atlantic Council who focuses on trans-Atlantic security, said that Europe does have leverage over Russia, and should use it.

"We are talking about a $12 trillion, globally integrated economy versus a $2 trillion gas station with only one customer," he said. "It's time for Europe to stand up."

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In his press conference on Friday discussing the situation in Ukraine, President Barack Obama echoed those sentiments by underscoring that Russia is a large economy that's heavily integrated in global transactions.

"The stakes are high for Europe," Obama said.

—By CNBC's Dina Gusovsky.