By Don Quijones, Spain & Mexico, editor at WOLF STREET. 

In Europe, fears continue to grow over the potential consequences of the EU’s decision to double down on sanctions against Russia. Concerns have been brewing for some time, but it has finally dawned on some European leaders that completely alienating the EU’s largest neighbor and vital trading partner may not be in Europe’s long term interest. And these private fears are now being voiced in public.

During the run up to Christmas the Chancellor of Austria, Werner Faymann, cautioned against pushing the Russian economy towards collapse. “I cannot approve of the euphoria of many in the EU over the success of sanctions against Russia. I see absolutely no cause for celebration. I do not know why we should be pleased if the Russian economy collapses,” Faymann told the Oesterreich newspaper. “We would be sawing off the branch we are sitting on if we erected a new wall to Russia’s economy.”

With Austrian banks by far the most exposed among European financial institutions to Russian risk, Faymann has good reason to worry. But he is not alone. Faymann’s sentiments were echoed by the German Vice-Chancellor of Economic Affairs and Energy Minister, Sigmar Gabriel who warned that those who seek to destabilise Russia risk provoking “an even more dangerous situation for all of us in Europe.”

In an interview published on Sunday, he stated that the goal of sanctions against Russia was to return Moscow to the negotiating table to find ways for a peaceful resolution to the crisis in Ukraine. Additional sanctions may exclude Moscow from partnership in the resolution of conflicts which “would have very dangerous consequences for the entire world.“

It’s not just fears of geopolitical instability that are fueling German anxieties. As WOLF STREET reported in August, the heavyweights of German industry are feeling the pinch from the sanction spiral imposed by the U.S. and the EU on Russia, and are quietly but forcefully making their feelings felt. Indeed, with the first set of EU sanctions due to expire in March, Europe’s fragile coalition against Russia is looking shakier by the day. According to German officials, Italy, Hungary and Slovakia will be the most difficult to keep on board.

And among the heavy-weights to jump into the fray was French President François Hollande who, in a public-radio interview that was supposed to prop up his abysmal approval ratings, said that the sanctions “must stop now.” Or more precisely, “They must be lifted if there is progress. If there is no progress the sanctions will remain.”

Spain also publicly aired its grievances. With typical Spanish finesse, tact and diplomacy, the country’s Minister of Agriculture Isabel Garcia Tejerina said the following in a recent press conference:

Let’s not kid ourselves: Spaniards are not losing sleep over the conflict in Eastern Ukraine. However, sanctions against Russia are directly harming our economic interests. Other countries, especially those of the former Soviet bloc, have other interests and always position themselves behind anything that goes against Moscow’s interests. But Russia is a first-rate trading partner for Spain and although sanctions may seem inevitable, we will try to ensure that they end or are softened as soon as possible.

The Spanish government is worried for two reasons. First, Putin’s blanket ban on the purchase of agricultural products from Europe has bitten hard and deep into Spain’s food exports sector. Agricultural unions and organizations have heavily criticized the tit-for-tat sanction spiral which up to August last year had cost Spanish farmers 340 million euros in losses.

Second and even more worrisome for the Spanish government, the latest round of EU sanctions, announced during a meeting of the EU Council from December 18-19, specifically target Russian tourism – a vital source of funds for Spain’s barely recovering economy. The sanctions package includes amendments prohibiting the provision of “services directly related to tourism activities in Crimea or Sevastopol”. European cruise ships are prohibited from calling at Sevastopol, Kerch, Yalta, Theodosia, Evpatoria, Chernomorsk, and Kamysh-Burun, except in the case of an emergency. This applies to all ships owned and under the operational control of an EU shipowner or any ship flying the flag of an EU member state.

The Spanish government is worried about the potential fallout from any retaliatory actions from Putin – especially during an election year. In recent years, Spain has become one of the most popular tourist destinations among Russians, with more than one and a half million visiting the country in 2013. What’s more, they’re among the biggest spenders, with an average outlay of €1,480 per person – more than double the European average. In Barcelona, one of the most popular destinations, many luxury goods shops have even taken to employing Russian speakers to meet the demand.

However, that demand is now dwindling and luxury outlets are feeling the pain. As a friend of my wife who owns a high-end retail store in one of Barcelona’s most upmarket shopping districts recently told la Doña and me, not only are much fewer Russians coming into her shop, but those that do are now spending a whole lot less. This problem was highlighted by the Russian Federation’s Ambassador to Spain, Yuri P. Korchagin, who warned at a conference on emerging tourist markets that 2014 was the first in many years that Russian tourist numbers in Spain had declined:

According to the experts, the main causes behind this trend are the sharp devaluation of the ruble vis-à-vis the euro and the ongoing crisis in relations between Russia and the European Union as a result of the sanctions imposed by Europe.

Instead of vacationing in countries like Spain, Italy, Finland and the Czech Republic, more and more Russians are spending their rubles in non-European destinations such as Turkey and Egypt – countries that, in the words of Korchagin, “offer good prices” and “unlike the EU, do not require tourist visas”. A sharp decline in Russian travelers has also been reported in Austria, Germany, Cyprus, and the UK.

As the sanctions continue to bite, both in Russia and in the EU, one can expect Europe’s murmurings of disquiet and disapproval to grow. For the old continent, it is not so much the scale of forgone trade with its eastern neighbor that counts; it’s the fact that it is happening at a time when the economy is languishing and when Germany, its largest engine of growth, is sputtering on the verge of recession.

What’s more, with the global economy – in particular, emerging markets – now in the doldrums, the chances of finding alternative consumers of Europe’s goods and services are growing slimmer by the day. And this is a problem to which even the Grand Master of European Central Bank alchemy, Mario Draghi, will be hard pressed to conjure a solution. After all, the one thing central bankers can’t print out of thin air is international trade, which just so happens to be the lifeblood of all economies. By Don Quijones

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