THE NEGATIVE SUM GAME OF SANCTIONS

Sanctions and retaliation are obviously a negative sum game. If countries stop their cooperation in certain areas, both sides lose. Sanctions are part of a political game of escalation in which both sides signal how much value they put on an issue.

The EU has found it hard to find a cohesive position towards Russia. Nevertheless, the EU sanctions list now affect 87 people and 20 organisations, all deemed to be directly linked to the destabilisation of eastern Ukraine. The EU is also due to decide next week on the first significant financial sanctions to be imposed

European Commission officials have drawn up options that include:

• Russian banks with state ownership over 50 percent would not be able to raise capital through new share or debt issues on European Union's capital markets.
• The ban would apply to debt, equity and other financial instruments with maturity longer than 90 days issued by state-run financial institutions after the ban enters into force.
• The ban would include both primary and secondary markets.
• A possible next step could be tied to other sanctions in the package, prohibiting the purchase of bonds and equities from companies operating in sectors that are subject to sanctions (energy, defense). 
• Newly issued Russian securities from the targeted entities would be prohibited from listing on EU stock exchanges. 
• The proposal envisages an embargo on trade in arms on the entire defense sector. The embargo would be reversible.
• It is still open how to deal with prior contracts (such as France's 2011 deal to build Mistral helicopter carriers).T
• The proposal is to impose an export embargo for all dual goods for military use, military end users or mixed end-users.  Examples of the targeted goods include special materials, some machine tools, high performance computers and electronics.
• There would be a system of prior authorization for the sale, supply, transfer or export, directly or indirectly, of the European technologies to Russia. 
• Public authorities would deny export authorization of pre-identified technologies destined for projects in deep sea drilling, arctic exploration and shale oil.

The choices facing Europe are complicated by different degrees of dependence on Russian gas for energy supplies (Lithuania 100%, Estonia 100%, Finland 100%, Latvia 100%, Bulgaria 89%, Slovakia 83%, Slovenia 60%, Austria 60%, Poland 59%, Czech Republic 57%, Greece 56%, Germany 37%, Italy 29%, Luxembourg 24%, France 16%, Netherlands 5%, Belgium 0.3%).

Europe is still heavily reliant on Russian gas. Germany, arguably the most powerful player in the European Union, got 37 percent of its gas in 2012 from Russia. The European Union as a whole used Russian exports for 24 percent of its gas.

Germany's reliance on Russian gas is one of the reasons why Europe is having a tough time agreeing to new sanctions. The UK, which doesn't import Russian gas, wants to sanction Russia's gas exports. Germany disagrees, preferring a ban on military exports from Europe. France, which takes in Russian gas (but less than Germany) and plans to sell naval ships to Russia, would rather the UK seize Russian assets stored in London. All of that disagreement between major European powers has led to slow, messy negotiations.

Ironically, countries in eastern Europe that are the most reliant on Russian gas exports — such as Poland and the Baltic states of Estonia, Latvia, and Lithuania — tend to be more bullish on sanctioning Russia because they see it as a more direct threat.  Bulgaria is the European state most opposed to sanctions.

Russian Retaliatory Measures

Any sanctions on Russia will have a "boomerang effect" that will harm the EU. Reciprocal measures against foreign companies and individuals could be introduced. And sanctions will be met with reprisals on  European businesses.

Confiscation of property: Russian ministers are currently working on a bill that would allow the state to confiscate the property of US and European companies. Legal experts suggest that asset confiscation is unlikely because it violates Russian and international laws.

Cyber warfare:  Russia may retaliate against EU sanctions with cyber warfare and cyber spies could disable IT operations and cripple government functions.

Political disruption: Experts warn that increased sanctions may result in Russia becoming increasingly obstructive on the world stage, particularly in relation to international efforts on Iran, Syria and North Korea. Russia could potentially use its veto power in the UN Security Council to block international initiatives.

Withholding gas: Russia may cut off its gas supplies to the continent. There would be a problem for European industry in several countries if Russia were to retaliate with energy sanctions.