Symbolism Over Substance: In the Ukraine Crisis, the EU Steps Up

Russia’s invasion of Ukraine is yet another clash of political and economic interests in Europe. The protagonists in this crisis include a multitude of other governments and international organizations beyond the two warring nations: the United States, the members of the North Atlantic Treaty Organization (NATO) military alliance with France, Germany, Turkey and the UK taking leading diplomatic roles, and the European Union (EU). China too has emerged as an important player, given its status as a global power and its strong ties to both Russia and Ukraine. 

The unfolding tragedy should be viewed through the frame of the shifting relationships since the end of the Cold War, the collapse of the Soviet Union, previous military clashes in Eastern Europe and the regional security dynamics in East Asia. The conflict has become a major test of the EU’s mettle to preserve peace and stability in Europe in what is the biggest security catastrophe in the continent since the war in Yugoslavia (1991-95). 

Germany, in particular, as the continent’s biggest and arguably most influential economy and the incumbent G7 chair, has stepped up. The new chancellor, Olaf Scholz, has taken a leading role on the diplomatic stage, prompted not just by Berlin’s abiding influence with Moscow (dating back to Scholz’s predecessors Gerhard Schröder, who has strong ties with Russian energy companies, and Russian-speaker Angela Merkel, who was known for her rapport with Russian President Vladimir Putin) but also by questions about China’s approach to the war. 

Yet, despite the more active role of the German government, most of its actions so far have been symbolic, with little economic impact and minimal chance of turning Putin around. The question is how big – and effective – is the bandwagon to counter Russia. Despite what appears to be a broad coalition of countries and international organizations (including sports federations) imposing a raft of restrictions and exclusions on Moscow, Putin can rely on China and other countries including key Asian partners such as India and Vietnam, as well as “neutral” friends such as Israel, Saudi Arabia and the United Arab Emirates, to carry it through the tightening trade and financial sanctions squeeze.

For Putin, as with previous Russian governments that regarded the country as a great power or superpower disinterested in joining any democratic European bloc, Ukraine is a very important geostrategic asset and highly desirable satellite. It was not a surprise when, after the revolution that toppled a pro-Moscow government in Kyiv in 2014, Russia invaded Ukraine and annexed Crimea, guaranteeing its control of the Black Sea naval bases. 

In setting its strategy to counter Moscow, Germany and the EU have now down been influenced by their assessment of not just the resolve of Western nations to take punitive action but also the approach that China has so far taken in reaction to the Russian invasion. Beijing has not expressed disapproval of Russia. The chairman of the China Banking and Insurance Regulatory Commission (CBIRC) declared March that Beijing would not join in imposing financial sanctions on Russia. 

This was important for several reasons. First, the largest amount of Russian foreign exchange reserves, an estimated 13-15 percent (US$77 billion to US$90 billion), is held in China and can be used freely, without the threat of freezing. The large sum is evidence of the booming Russia-China trade and also of Moscow’s intention to decouple its economy partially from the US dollar. While Chinese commercial banks will not violate US sanctions against Russia, Chinese-Russian trade, which last year reached US$146.9 billion, will continue largely uninterrupted. This means that Russian companies will be able to export oil, natural gas, coal and agricultural products and gain more foreign exchange. 

After sanctions were imposed on Moscow in 2014 in the aftermath of the annexation of Crimea, Russia created SPFS (System for Transfer of Financial Messages), its equivalent to international financial payment messaging system SWIFT (Society for Worldwide Interbank Financial Telecommunications), from which several Russian banks were removed as part of US and European sanctions measured issued in late February. The Chinese currency is not freely convertible into US dollars and the US, Canada, the EU and the UK banned transactions with the Russian central bank, but Chinese renminbi reserves enable Russian companies and institutions to operate with those countries that utilize CIPS (Cross-Border Interbank Payment System), the Chinese equivalent of SWIFT. 

In China, newspapers, media outlets and “online nationalists” are casting Putin and the Russian forces in a positive light, a strong contrast to the predominant narrative in the Western media. While not perhaps full-throated endorsement of the invasion, China’s approach must be a source of relief to Moscow, which is now bearing the brunt of the barrage of criticism and punishment from the Western camp. It was highly unlikely Beijing would have jumped on the sanctions bandwagon, despite being one of the most important purchasers of Ukrainian agricultural products and weapons. If it had, that would have been a serious blow to Putin’s plans. China’s position will have a bearing on the effectiveness of the EU and US sanctions on Russia.

Awareness of these limits were a factor in what the EU decided to do and what Germany was willing to support. While the measures put economic pressure on Russia, none of the actions will likely deter Russia from pursuing its military campaign in Ukraine. The exclusion of several banks from SWIFT will inconvenience the affected Russian financial institutions and mean much higher costs for them, but would not prevent actual money transfers by the banks, which could message each other through alternative platforms such as Telegram, WhatsApp or China’s CIPS. It is notable that neither Sberbank, Russia’s largest bank which handles many energy-related financial transactions, nor Gazprom Bank, which settles German and other oil and gas purchases from the state-controlled Russian energy company Gazprom, have been cut off, with Berlin stymieing EU efforts to include them.

To be sure, the decision by the Scholz government (made after Russia recognized the two secessionist regions in Ukraine) to interrupt construction of the Nord Stream 2 gas pipeline connecting Russia and Germany through the Baltic Sea will have economic impact on Russia, particularly Gazprom. It has already affected Germany, having contributed to crashes in the share prices of chemical company BASF (which, through subsidiary Wintershall, is one of the pipeline financiers) and other future users. But the move will not lead to the halt of the invasion of Ukraine. Moreover, the stoppage does not mean that the parts of the pipeline that have already been installed will be dismantled, meaning that construction could be finished later. 

Scholz did announce Germany’s intention to sharply to reduce dependence on natural gas imports. While Russia may well be the target of this policy, Scholz did not mention it explicitly. Instead, he talked generally about any “individual energy supplier”. In the context of Germany’s clean-energy goals, this commitment was not a bold step. Germany already has the highest electricity costs in the world and natural gas is an important energy source for power generation. Being able to justify future cost increases due to a green transition from fossil fuels by attributing them to the price for taking punitive action against Russian aggression offers political benefits for Scholz’s Social Democratic Party (SDP) and its coalition partners. Germany is moving to achieve net zero carbon emissions in 2045 by moving to reduce but likely not eliminate coal, oil and finally natural gas deliveries from Russia. If momentum builds for other countries in the EU and Japan to join the US ban of Russian oil imports, Germany may yet be compelled to eliminate its gas imports from Russia far sooner than planned, as unrealistic as that may be. This would lead to an explosion in German energy costs and drive inflation up further.

Scholz’s military-related announcements in his speech, including a one-off 100 billion-euro increase in the German military budget, seem equally driven by a realistic view that Ukraine cannot win the war against Russian forces and that the current level of international sanctions will not stop Russia’s aggression as long as China and other countries do not support the measures. Moreover, increasing a very small budget still results in a low sum, even though it addresses, however modestly, the longstanding criticism by the US of Europe’s less-than-robust defense spending. 

Scholz’s announcement of arms deliveries to Ukraine in the midst of the conflict was also more symbolic than substantive. The equipment includes 1,000 anti-tank weapons and 500 surface-to-air missiles – the numbers remarkable in their lack of zeros. More missiles may be included in the package, including Soviet-produced leftovers from the former East German military stock. 

On March 4, the Ukrainian ambassador asked the German government for tanks, artillery, helicopters, reconnaissance and combat drones, and navy vessels. Even if the request were granted, the deliveries would have limited utility, coming after the conflict had already started, making it practically impossible for the Ukrainian military to gain the necessary experience needed to deploy them. The supplies Germany and other EU members have promised so far, even if expeditiously delivered, would do no more than help the Ukrainians delay the advance of the Russian military, prolonging the conflict or at best achieving some kind of a stalemate. Indeed, Scholz and other NATO leaders have spoken out strongly against any direct NATO involvement in the conflict. The chancellor understands that, absent a much more robust groundswell of support for arms sales to Ukraine, there is no real incentive to ramp up Berlin’s offer.

And with all the focus on Russia, what may not be appreciated is how this struggle to confront Putin effectively could well be a preview of the challenges involved should the US, the EU and other so-called like-minded are confronted by Chinese action they too want to counter. China, after all, has been identified by the US and, more obliquely, by its allies and partners as the primary threat to global security. In the emerging narrative of intensifying multipolarity and a new Cold War, it is not unimaginable that China and the US could come into sharp conflict. An attempt by the mainland to take control of Taiwan is one scenario.

In recent years, the EU has implemented sanctions on China in connection to its actions against the Uyghurs in Xinjiang, to which Beijing has responded with counter-sanctions and an anti-sanctions law. The current EU sanctions against Russia, most of which were implemented after the outbreak of war, communicate not only to the Russians but also to the Chinese government that the use of violence and military force would result in noticeable economic costs, thereby raising the stakes. This could prompt China to pursue an economic decoupling strategy as a way to cushion the blow should it face penalties. Russia pursued such a strategy after it was hit with sanctions by Western sanctions after it annexed Crimea in 2014. But in the process, Russia lost its edge in shaping economic policy as it lost bargaining power and was therefore much more desperate to attract business and investment. The Russian economy, as a result, has not been able to diversify and has remained miniscule compared to that of China, with income largely derived from non-sustainable rents from the export of raw materials.

China is of a wholly different economic class and weight than Russia. In a scenario such as a conflict in the Taiwan Strait initiated by Beijing, it may be that such a transgression would stir much more negative reactions among key Asia-Pacific states, particularly China’s neighbors Japan, South Korea, Vietnam and India, that a significant international bandwagon, drawn together by the US, would materialize quickly and with greater intensity than even what has been the case with the Ukraine war. 

This time, German and EU dependence on oil and gas imports from the very target of the sanctions would not be a factor, though of course, China’s economic and trade relationships may provide it a great deal of leverage with certain countries. How this all would play out is impossible to predict. But in the Ukraine drama, the current sanctions, however symbolic and lacking in persuasive teeth, may keep piling on a determined and daring Russia, whose volatile leader (and successors) will not be able to repair relations with the EU for decades. The power plays will prepare the US, the EU and others in their like-minded camp to a bigger, much tougher fight that may emerge in the future. The concerted action to rein in Putin, however, may yet turn out to be an effective incentive for Beijing to avoid risking a major conflict.