Exploring the Visegrád-Russia Connection

Eric S. Peters

EXPLORING THE VISEGRÁD-RUSSIA CONNECTION Understanding the Political and Economic Ramifications of Sanction Policies Four Years Later

ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS

CONTENT Introduction 1 Preface

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Econometric Analyses 1. Introduction 18 2. Literature Review 19 1. European Union Specific 19 2. Regional & National Specific 21 Institutional Background 22 1. V4-Russia Trade Overview 22 2. Structural Design of Sanctions 26 Methodology 29 1. Data Description 29 2. Explanatory Variables Overview 30 3. Formal Econometric Model 30 4. Hypothesis Testing & Research Question Restatement 31 Empirical Results 32 Discussion of Results and Further Considerations 41 1. Implications of Findings 41 2. Irregular Trade Diversion Possibilities 44 3. Further Methodological Considerations 50 Conclusion 51 Works Cited 53 Summary Statistics 55 Visualizations of V4-Russia Trade 60 Energy Review of Energy-Related Sanctions 1. Overview of Western Sanction Policy & Significant Actors Targeted 2. EU & United States Energy Sanction Policy Differences Introduction to V4 Energy Market Structures 1. Overview 2. Energy Mix by Country 3. Consumption & Efficiency Measures by Country

71 71 72 73 73 74 77

The V4-Russia Petroleum Relationship 79 1. Respective Market Shares of Russian Petroleum Companies 79 2. V4-Russia Crude Oil Supply Dependencies 80 3. Structural Nature 82 4. Nature of Prices 84 5. Conclusions 85 The V4-Russia Natural Gas Relationship 86 1. Respective Market Shares of Russian Natural Gas Companies 86 2. V4-Russia Natural Gas Supply Dependencies 87 3. Structural Nature 90 4. Nature of Prices 92 5. Conclusions 92 Future Geopolitical Considerations 93 1. Changing Energy Dynamics 93 2. Russian-led Initiatives 93 a. South Stream & Turk Stream 93 b. Nord Stream II 95 3. EU-led & V4-led Counter-Initiatives 97 a. The Three Seas Initiative & North-South Corridor 97 b. Liquefied Natural Gas Growth 97 c. V4 Dual-flow Infrastructure Potential 99 d. Southern Supplier Development 99 Conclusion 100 Works Cited 102 Index 107 Financial Services & Governance Introduction 109 Review of Capital Markets-Related Sanctions 109 1. Overview of Western Sanction Policy and Significant Actors Targeted 109 2. Significant EU Sanction Policy Details 111 The Russian Banking Sector 111 1. Introduction to Banking in Russia 111 2. Market Structure 112 3. Avoidance Efforts 113 a. Motivations for Avoidance 113 b. Bank Rossiya 114

c. Gennady Timchenko 115 4. Conclusions 115 The V4 Banking Sector 116 1. Introduction to Banking in the V4 116 2. Market Structure 116 3. The Russian Risk 119 4. Conclusions 121 Comparable Metrics 122 1. Introduction 122 2. Currency Forecasts 122 a. Understanding Forecasting 122 b. ARIMA Foreign Exchange Forecasts 123 c. Correlation ≠ Causation 125 3. Credit Rating Changes 127 4. Conclusions 128 Governance Considerations 129 1. Significant Russian Governance – A Political Worry 129 2. Foreign Direct Investment Trends 129 3. The Russian Place in V4 FDI 131 4. Governance in Hungary – A Brief Case Study 132 a. Historical Russian Activity 132 i. Surgutneftegaz 132 ii. Gazprom 133 iii. Lukoil 133 iv. Sberbank 134 b. Present Day Russian Activity 134 Paks II Nuclear Power Plant 134 Conclusion 135 Works Cited 137 Index 143 Defence & Dual Use Introduction 145 Review of Defense-Related Sanctions 146 1. Overview of Western Sanction Policy & Significant Actors Targeted 146 2. Defining Dual-Use Goods 148 The Russian Defense Sector 149

1. Introduction to the Defense Industry in Russia 149 2. Market Structure 150 3. Significant Actors 151 a. Rostec 151 b. Almaz-Antey 152 c. Kalashnikov Concern 153 4. The Turn to the East 153 5. Conclusions 154 The V4 Defense Sector 155 1. Introduction to the Defense Industry in the V4 155 2. Western Defense Industry Overview 155 3. The Economics of Defense in the V4 157 4. Historical V4 Defense Industry Case Studies 160 a. Czechia 160 b. Hungary 160 c. Poland 161 d. Slovakia 162 5. Conclusions 162 Additional Considerations & Recent Updates 163 1. Dual-Use Sanctions in Action 163 2. Weaknesses in Dual-Use Trade Controls 164 Conclusion 166 Works Cited 167 Agriculture Introduction 173 Review of Agricultural Counter-Sanctions 174 1. Overview of Russian Counter-Sanction Policy 174 2. Specifics of Agro-food Restrictions 175 The Economic Importance of Agriculture in V4 & Russian Economies 176 Russian Agricultural Markets 178 1. Introduction to Agriculture in Russia 178 2. Global Position & Market Structure 178 3. Output Mix 179 4. Conclusions 180 V4 Agricultural Markets 181 1. Introduction to Agriculture in the V4 181

2. Initial V4 Reactions to Counter-Sanctions 181 3. Overview of EU Agriculture 182 4. Framing V4 Agriculture 184 5. Conclusions 186 V4-Russian Agricultural Trade 186 1. Primer on Direct Trade 186 2. Relevant Literature 187 a. United Nations 187 b. European Commission 188 c. Other 189 3. Analysis of Historical V4-Russia Export Data 189 a. Data Description 189 b. Export Visualizations 190 c. Discussion of Findings 194 Putting It All Together – Developments Since 2014 194 1. Introduction & Important Questions Raised 194 2. Russia Agriculture Today 195 a. The Good 195 b. The Bad 196 3. EU and V4 Agriculture Today 197 a. The Bad 197 b. The Good 198 4. Summarized Findings 201 Conclusion 202 Works Cited 204 Index 209 Policy Recommendations Introduction 215 Summary of Previous Research 216 Introduction 216 Essay 1: Econometric Analyses 217 Essay 2: Energy 218 Essay 3: Financial Services & Governance 219 Essay 4: Defense & Dual-Use 221 Essay 5: Agriculture 221 Current Updates 222 1. Introduction 222

2. V4 3. Ukraine 4. Russia 5. Trans-Atlantic 6. Conclusions Foreign Policy 1) Maintain Original Sanctions Policies Against Russia 2) Encourage Honest and Continuous Dialogue with Russia & Redevelop Minsk Agreements 3) Pursue the Further European Alignment of Serbia Energy Policy 1) Institutionalize Three Seas Initiative & Invite Germany 2) Invest in LNG Infrastructure 3) Complete V4 Dual-Flow Capabilities 4) Fund Additional Pipeline Developments 5) Promote Alternative Energy Options Governance Policy 1) Continue Strengthening EU Ownership Transparency Policies Agricultural Policy 1) Communicate Recent Successes of EU Agricultural 2) Consider Continuing Aid Packages for

Disadvantaged EU Produces As Needed Concluding Remarks Works Cited

223 224 225 226 228 229 229 231 233 235 235 237 239 239 240 241 241 243 243 245 246 248

Antall Jรณzsef Knowledge Centre Budapest, Hungary Eric S. Peters

Exploring the Visegrรกd-Russia Connection: Understanding the Political and Economic Ramifications of Sanction Policies Four Years Later 2018

Preface Introduction From March 2014 to September 2014, the European Union (EU), in concert with the United States (U.S.) and a number of other nations, enacted three rounds of sanctions against the Russian Federation (Russia). These sanctions were implemented due to the perceived role of the Russian Federation in the Ukrainian Euro Maiden Revolution of February 2014, and the subsequent annexation of the Crimean region. Sanctions, defined, are the “withdrawal of customary trade and financial relations for foreign and security policy purposes.” (1) For the sake of this project, EU sanctions will be the focus. The EU defines their sanctions by five broad categories (2): 1) Diplomatic measures. This includes the suspension of Russia’s G8 member status.

2) Individual restrictive measures (asset freezes and travel restrictions) on 150 people and 38 entities.

3) Restrictions on economic relations with Crimea and Sevastopol including a complete ban on imports, investment, trade, and tourism services, as well as a partial ban on exports.

4) Economic sanctions. This has limited access to Western capital markets and Russian access to sensitive military technology. Additionally included are complete bans on the trade of arms and military dual-use goods, among other goods.

5) Restrictions on economic cooperation. This includes the suspension of access to European development funds.

The second point of EU sanctions, sanctioning individuals and entities, and the fourth point, the economic sanctions are of particular interest.

In line with “smart sanctions” theory, by designing sanctions that target specific individuals and entities, the EU has aimed to minimize harmful economic effects for the general population, while targeting Russian citizens either allegedly involved with the decision to annex/invade Crimea 1 Council on Foreign Relations: What are Economic Sanctions?

2 European Council: www.consilium.europa.eu/en/policies/sanctions/ukraine-crisis/#

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or entities who simply possess significant political or economic power (3).

A more comprehensive list of notable individuals and entities sanctioned can be found in the index.

Furthermore, the fourth point of EU sanctions are designed in a similar style to the second, but with a wider, more sectoral lens. Three sectors deemed strategically important to the Russian economy – the energy, financial services, and defense industries – were targeted by the EU. In addition to the brief description found above, a detailed list of sanctioned products within each sector will be discussed in Essay 1: Econometric Analyses.

In a retaliatory move, August 2014 marked the Russian response to the implementation of Western sanctions with a set of their own individual and economic counter-sanctions. These economic counter-sanctions differ from EU and Western sanctions by targeting an even wider set still of individuals, entities, and products.

Personal Motivation Over three years have passed since the implementation of sanctions and counter-sanctions now. No change in the use of these policies seems in sight. Despite this, there has been only a small body of economic research focusing on these sanctions and counter-sanctions. This research has tended to focus on the value of loss trade for EU nations as a result of maintaining this foreign policy stance. Also, the research conducted tends to have an EU-specific focus not particular to any particular region or set of countries within the EU. However this has begun to change. In October 2017 the Prague Security Studies Institute (PSSI) published Harsh Expectations Versus a Modest Reality – Economic Relations between the Visegrad Countries and Russia Surrounding the Ukrainian Crisis. To date, this paper is the only significant published research designed to specifically examine the potential loss trade costs for Visegrád 4 (V4) nations, defined as Czechia, Hungary, Poland, and Slovakia. Due to relatively substantial economic growth enjoyed by this region, and my own personal interest, I aim to expand upon the PSSI’s work, and further explore the ramifications of 2014 sanction and counter-sanction policies so as to deepen the knowledge of this topic for V4 policymakers.

3 European Council: www.consilium.europa.eu/en/policies/sanctions/ukraine-crisis/#

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For each V4 nation, Russia ranks as a top non-European trading partner, due to historical connections and geographic proximity (4). As the 21st century geopolitical landscape continues to evolve, one thing is guaranteed – Russia will continue to be a major force in Europe and Eurasia.

Therefore, for V4 leaders, it is of paramount importance to understand the economic and political repercussions of the V4’s most substantial foreign policy stance towards Russia. Based upon the rhetoric of the day, and the conflicting voices that can be heard between the capitals of Central Europe and in the halls of Brussels, it is clear that the 2014 sanctions are not clearly understood. I feel that due to the dearth of V4-specific research on this topic, and the continued relevance of this topic, there is no better time that the present to undertake this task.

Through a set of six essays, I aim to provide a substantial economic and political overview of V4-Russia affairs over the last seven years, with a particular focus on the 2014 sanctions and counter-sanctions.

The first essay will provide an econometric analysis of V4-Russia trade by affected product. The second, third, fourth, and fifth essays will be case studies exploring the interactions between sanctions and counter-sanctions and targeted sectors (energy, financial services, defense, and agriculture).

The sixth and final essay will clearly summarize the main takeaways of the previous five essays before offering a multi-pronged policy recommendation for V4 and EU leaders.

Structural Overview Essay 1: Econometric Analyses – will provide an econometric analysis of trade between V4 countries and Russia in order to identify trends before and after the implementation of sanctions. To accomplish this, monthly trade data has been collected for each V4 country by sanctioned and countersanctioned products via Harmonized System (HS) trade code. Using an OLS linear regression model, the general trend of trade will be mapped for each sanctioned HS code before and after July 2014. The differences found for each HS code will then be evaluated for statistical significance.

4 Observatory of Economic Complexity: atlas.media.mit.edu/en/

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Essay 2: Energy – Russia’s largest export, and Europe’s largest imported product from Russia, energy is an industry with deep geopolitical roots.

V4 nations are especially reliant upon Russian natural gas and oil imports.

Taking into account these products and their respective markets and value chains, we will explore how sanctions interact with this critical sector and what the future may hold V4 energy supply security.

Essay 3: Financial Services & Governance – A key facet of Western sanctions was the withdrawal of access to capital markets for Russian companies. How have foreign exchange and sovereign credit ratings moved since the implementation of sanctions? How has the V4 been affected by changes of Russian macroeconomic and financial indicators? Here, the V4Russian financial and governance relationship will be explored at a high-level.

Essay 4: Defense & Dual-Use – With names like Kalashnikov, Russian defense products are known world-wide. Many additionally suspect that the goods of sanctioned Russian defense and dual-use firms helped support unrest in Eastern Ukraine in early 2014. No other industry is linked to national security like the defense sector. How connected are V4 defense industries to the Russian defense sector? The size of the V4 and Russian defense sectors, the relationships between the two, and the impacts of dual-use regulation will be discussed in this essay.

Essay 5: Agriculture – The V4 nations are some of Europe’s most reliable producers of agricultural products. As Russia is one of the largest purchasers of V4 agricultural products, how have their counter-sanctions affected the farmers of Czechia, Hungary, Poland, and Slovakia? To discover the true effects and costs for V4 farmers, a thoughtful and careful exploration of this topic will be undertaken to better understand how agricultural markets have responded to this demand shock.

Essay 6: Policy Recommendations – Taking into account the previous five essays, policy recommendations will be provided for EU and V4 leaders.

This final, and most important piece, will succinctly summarize the findings of previous papers, provide updates on the current EU-Russia relationship, and deliver an 11-point policy recommendation for V4 leadership to consider in the coming months and years.

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To you, the reader, I hope you find these essays informative and helpful. Whether a policymaker or concerned citizen, I hope the following works clearly communicate the complexities of the 2014 sanction and counter-sanction policies for the Visegrád 4. Additionally, while the policy suggestions are just that, suggestions, I hope the underlying message shines through – that creative solutions do exist that can benefit V4 nations while satisfying foreign policy objectives.

Best, Eric S. Peters Fulbright Fellow Antall József Knowledge Center Budapest, Hungary

Works Cited “EU Restrictive Measures in Response to the Crisis in Ukraine.” European Council, European Union, 23 Oct. 2017, www.consilium.europa. eu/en/policies/sanctions/ukraine-crisis/#.

European Union, European Council Decision, 512, vol. 2014, 2014. CFSP. European Union, European Council Decision, 659, vol. 2014, 2014. CFSP. Observatory of Economic Complexity, The MIT Media Lab Macro Connections Group, 2018, atlas.media.mit.edu/en/.

United States, Executive Order. No. 13662, 2014. OFAC sanction list.

“What Are Economic Sanctions?” Council on Foreign Relations, Council on Foreign Relations, 7 Aug. 2017, www.cfr.org/backgrounder/ what-are-economic-sanctions.

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Index Table 1. Significant Individuals Named by United States and EU Sanctions Sanctioning Reason Targeted Government(s) Funded Putinrelated projects.

Funds Gazprom, EU, US and helped with Russian Olympic bid.

Personal Banker for Senior Kremlin EU, US officials. (38% owner of Rossiya) Personal Banker for Senior Kremlin EU, US officials. (10% owner of Rossiya) Firm helped arm rebels.

EU, US Technopromexport to build energy plants in Crimea.

Thought to have played a key role in annexing Crimea.

EU, US Led political integration of Crimea.

Close Putin advisor.

Assassinated.

EU, US Managed Military Intelligence.

Individual

Employer

Role

Sector

Arkady Rotenburg

SMP Bank

Owner

Banking

Yuri Kovalchuk

Bank Rossiya

Investor

Banking

Nikolai Shamalov

Bank Rossiya

Investor

Banking

Sergei Chemezov

Rostec, Rosoboronexport, CEO Technopromexport

Vyachelsav Volodin

Russian Federation

First Deputy Chief

Government

Igor Sergun

Russian Federation

Director of GRU

Government

Sergei Naryshkin

Speaker of Russian Federation Duma Lower House

Government

Vladislav Surkov

Presidential Russian Federation Aide

Government

EU, US

Dmitry Rogozin

Russian Federation

Deputy Prime Government Minister

EU, US

Sergei Glazyev Russian Federation Advisor

Defense

Government

EU, US EU, US

Oleg Belaventsev

Russian Federation

Representative Government of Crimea

Dmitry Kiselyov

Russia Today

TV Anchor

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EU, US

Communication EU

Leading MP. Election mastermind and creator of „managed democracy.�

Former Russian ambassador to NATO. Talked openly about intervening in Ukraine.

Anti-west, hostile to Kiev protests that ousted Yanukovych.

Chief of General Staff of the Armed Forces

Valery Gerasimov

Russian Federation

Vladimir Zhirinovsky

Russian Federation MP

Mikhail Fradkov Alexander Bortnikov Nikolai Patrushev Ramzan Kadyrov

Government

EU

High ranking military leader.

Government

EU

Ultra-nationalist.

EU

Influential in crafting Anti-Ukrainian policy.

EU

Head of Internal Security.

EU

Former FSB head.

Director of Foreign Russian Federation Government Intelligence Service Director of the Russian Federation Government FSB Secretary of Russian Federation the Security Government Council Chechen Republic President

Government*

EU

Alexander Donetsk Peoples’ Zakharchenko Republic

Prime Minister Government*

EU

Boris Rotenburg

SMP Bank

Owner

Banking

US

Gennady Timchenko

Novatek, Volga Group, (Gunvor)

Owner, (Investor)

Commodities, Energy

US

Igor Sechin

Rosneft

CEO

Energy

US

Government

US

Sergei Ivanov Russian Federation Chief of Staff Vladimir Kozhin

Head of Russian Federation Government Administration Director of Federal Viktor Ivanov Russian Federation Government Drug Control Service Sergei Russian Federation MP Government Mironov Deputy Prime Dmitry Kozak Russian Federation Government Minister Vladimir Yakunin

Russian Railways

Chairman

US US US US

Transportation US

Supported rebels and rumored that his military committed human rights abuses.

Admitted Russians citizens fought along with soldiers.

Rebel Leader.

Funded Putinrelated projects.

Funds Gazprom, and helped with Russian Olympic bid.

Putin possessed investments in his commodity trading firm.

Shares interests with Putin. Rosneft is a leading Russian company.

Governmental Advisor.

Governmental Advisor.

Former FSB head.

Served in various advisory roles.

Leading MP. Trusted Advisor to Putin.

St. Petersburg network friend of Putin. Advisor.

Bold indicates an individual sanctioned by the EU. ‘*’ indicates a targeted individual associated with government other than that of the Russian Federation.

Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/CFSP

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Table 2. Significant Entities Named by United States and EU Sanctions

Bold indicates an entity sanctioned by the EU. Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/ CFSP

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I ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS

1. Introduction The geographical proximity of Russia to the EU affords the EU many logistical benefits. This is especially relevant for the V4 nations of Czech Republic, Hungary, Poland, and Slovakia. Due to its economically advantageous location, Central Eastern Europe (CEE) has historically looked east as much as it has looked west. With the advent of the 2014 economic sanctions though, this dynamic is changing. For V4 businesses and governments alike, a robust understanding of the changing V4-Russia economic relationship will grow in importance the longer sanction policies are pursued by the EU and Russia. In this essay, the first of six, I aim to examine the general trend of trade between each V4 nation and Russia from January 2010 through July 2017 through a statistical and econometric lens.

The goal of this essay will be to answer this question for each V4 nation: Do 50% or more of export restricted product groups experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions?

Therefore, my research hypothesis for each V4 nation reads: 50% or more of export restricted product groups experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

In response, my null hypothesis for each V4 nation follows: 50% or more of export restricted product groups experience do not experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

The significance of shifts in the US$ value of products specifically targeted by the 2014 EU sanctions and Russian counter-sanctions was determined via the use of an OLS linear regression model with Newey-West estimators on 64 panel data samples, 16 per country. My results allowed me to reject H0 for Poland and Slovakia. For Poland and Slovakia, 50% or more of export restricted products experienced significant changes in the US$ value of trade after the implementation of the 2014 sanctions. However, I was not able reject H0 for Czechia or Hungary. With mixed results, further qualitative factors had to be evaluated to determine how EU sanctions

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and Russian counter-sanctions have affected V4 export economies. In conjunction with the literature reviewed, the nature of products sanctioned, and the establishment of new export markets, I believe my results provide evidence that not only are EU sanctions not significantly harmful for the V4’s own economies, but neither are Russian counter-sanctions.

2. Literature Review 1. European Union Specific This research aims to build on the small, but growing amount of research on the repercussions of sanctions and counter-sanctions. Most literature focusing on this topic has looked at the EU-level impact of sanction policies. There are a few notable exceptions to this though, which aim at understanding the cost of sanction policies on the regional and country-specific level.

Dr. Elisabeth Christen, Dr. Oliver Fritz, and Dr. Gerhard Streicher of the Austrian Institute of Economic Research (WIFO) were among the first to publish research on this topic in June 2015. By using a multi-country input-output model, they found a decline in commodity exports and tourism demand which stemmed not only from export restrictions to Russia (sanctions), but also from weak growth within Russia itself. Furthermore, difficulty was found in distinguishing between the short-term and long-term effects of sanctions and the related direct and indirect costs. Simulations performed highlight higher likely repercussions for Baltic and Eastern European nations with higher export dependencies. Using their model, the researchers found large macro-economic direct and indirect costs related to EU sanction policy, ultimately amounting to a €34 billion loss in the short run and a €92 billion loss in the long run (1).

Similarly, the Chinese University of Hong Kong’s Dr. Matthieu Crozet and the Kiel Institute of World Economy’s Julian Hinz found the heaviest cost of sanctions resulted not from Russian counter-sanctions, but from the 1 Christen, Elisabeth, et al.: Effects of the EU-Russia Economic Sanctions on Value Added and Employment in the European Union and Switzerland

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EU’s own financial sanctions affecting trade finance markets. A two-part analysis, Crozet and Hinz first used a general equilibrium counterfactual analysis with United Nations International Trade Statistics Database (UN Comtrade) data. Through this they identified a global lost trade value of US$ 4.7 billion per month, with US$ 1.8 billion being borne by sanctioning Western nations. Among sanctioning Western nations, EU member states accounted for 90% of this cost. Also, 91% of loss trade was within nonembargoed products, meaning indirect costs of sanction policy massively outweighed the direct costs. Secondly, monthly French export data was utilized to determine the firm-level impacts of sanctions. They found that oftentimes French exporters that were directly impacted by sanctions (i.e. agriculture) struggled to reorient their value chains to new markets to avert significant sales losses (2),(3).

Next, the European Parliament commissioned a collaborative piece between researchers of the two previously mentioned organizations – WIFO (Dr. Oliver Fritz, Dr. Elisabeth Christen, and Dr. Franz Sinabell) and the Kiel Institute of World Economy (Dr. Julian Hinz). Similar in methods and findings to the researchers preceding work, trade volumes were found to have fallen as a result of not just economic sanctions, but also due to the recession of the Russian economy in general. Many European and Russian companies were able to divert trade to new markets and avoid the worsening EU-Russian economic relationship. However, these diversions were not nearly sufficient to account for the size of the reduction in exports. Quantitative evaluations of loss trade costs relating from sanctions mirror costs found in the previous papers of the various authors, (Christen, E. et al. 2015) and (Crozet and Hinz 2016, 2017). These export reductions and the related costs remain significant today. Interestingly, (European Parliament 2017) proposes evidence of some level of trade diversion through non-sanctioning European nations and non-Russian countries in the Eurasian Economic Union (EEU) as a means to legally pass-through sanctioned products to Russia and maintain pre-sanctions trade relationships (4).

2 Gros, Daniel, and Federica Mustilli: The Economic Impact of Sanctions Against Russia: Much Ado About Very Little 3 Gros, Daniel, and Federica Mustilli: The Effects of Sanctions and Counter-Sanctions on EU-Russian Trade Flows 4 Günther, Jutta, et al: Consequences of EU-Russia Sanctions for the German Economy

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However, Dr. Daniel Gros and Federica Mustilli of the Center for European Policy Studies (CEPS) disagree with the findings of these previous studies, particularly WIFO’s conclusions. Gros and Mustilli disentangled the effects of EU sanctions from the worsening Russian economy by analyzing changes in the EU share of Russian imports. As all importers of Russian goods should be affected equally by the worsening of the Russian economy, any significant change in trade relations should be demonstrated in a changed percentage share. Gros and Mustilli found no significant change for the EU at large. In contrast again to WIFO’s discussion of a reduction in Russian tourism, CEPS discovered no significant negative changes in the annual Russian imports of services for not only the EU, but also other sanctioning countries, like the United States and Japan. The more indirect effects of sanctions, like value added and employment, are not substantially explored though (5),(6).

2. Regional & National Specific Taking a more country-centric approach, the University of Bremen’s Dr. Jutta Günther and Maria Kristalova and the University of Leipzig’s Dr. Udo Ludwig found the German economy suffered significant loss trade costs from the introduction of sanctions. Using an open static Leontief model, or input-output model, for their analysis, the indirect costs of sanctions proved to be much greater than the direct costs. Among export-oriented sectors, the automotive, mechanical engineering, and electronics industry were found to incur the highest costs. For 2014, a year where exports declined, 8.7% of these output losses resulted from sanctions. For 2015, this number climbed from 8.7% to 56%, and was likely to remain similarly high for 2016 and beyond. Finally, they found that the burden of sanctions increases over time for the German economy as the EU’s sanction policy is continued. This paper has yet to be finalized during the writing of this work, but (Günther, J. et al. 2016) expect to publish their work in the coming months (7).

Lastly, in 2017, the Prague Security Studies Institute (PSSI), in collaboration 5 Gros, Daniel, and Federica Mustilli: The Economic Impact of Sanctions Against Russia: Much Ado About Very Little 6 Gros, Daniel, and Federica Mustilli: The Effects of Sanctions and Counter-Sanctions on EU-Russian Trade Flows 7 Günther, Jutta, et al: Consequences of EU-Russia Sanctions for the German Economy

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with the Slovak Foreign Policy Association, the Center for Polish-Russian Dialogue and Understanding, and the Hungarian Academy of Sciences, published the most in-depth analysis of the effects of sanctions on the V4 context that is available today. Through a non-statistical analysis of changes in V4 import and export trends, PSSI found only a slight negative economic effect for V4 macro-economies, which was much less than expected. While certain non-diversified agricultural products were affected, it is explained that most industries have successfully reacted to the constraints of sanctions and shifted trade flows to alternative markets. The difficulty of disentangling the effects of sanctions from the general downturn of Russian economic health is noted (8).

Institutional Background 1. V4-Russia Trade Overview The V4-Russia economic relationship is extremely robust, due to geographical advantages and historical connections rooted in the Communist era. From the beginning of the new millennium to the implementation of sanctions, Russia has on average ranked as a top-15 export destination country and top-5 import origination country (9). Trade between V4 countries and Russia has grown steadily as well, even accounting for the global financial crisis of 2008. Figures 1 and 2, which show the USD value of V4-Russia exports and imports, display a continually strengthening trade relationship until 2014. Figures 3 and 4, which detail the year-to-year percentage changes for V4-Russia exports and imports, have also skewed positive until recently.

At first glance, it is easy to assume the implementation of 2014 sanctions and counter-sanctions has caused a significant decrease in trade. However, this is not a safe assumption based upon standard practice.

8 TomĂĄĹĄek, J. et al.: HARSH EXPECTATIONS VERSUS A MODEST REALITY: ECONOMIC RELATIONS BETWEEN THE VISEGRAD COUNTRIES AND RUSSIA SURROUNDING THE UKRAINIAN CRISIS 9 Observatory of Economic Complexity: atlas.media.mit.edu/en/

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While shifts in V4-Russian trade could be affected by the introduction of economic sanctions and counter-sanctions, many other factors, or some combination of these other factors, could possibly be influencing trade as well.

Therefore, the focus of this work will be to only analyze the trade of products explicitly identified by sanctions within the context of V4-Russia trade.

Figure 1. Historical Value of V4-Russia Exports (US$)

Source: World Bank, AJTK Calculations

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Figure 2. Historical Value of V4-Russia Imports (US$)

Source: World Bank, AJTK Calculations

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Figure 3. V4-Russia Year over Year Export Value Percentage Change (2001-2016)

Source: World Bank, AJTK Calculations

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Figure 4. V4-Russia Year over Year Import Value Percentage Change (2001-2016)

Source: World Bank, AJTK Calculations

2. Structural Design of Sanctions As briefly touched on in the introductory Preface, the EU has included economic sanctions as a key part of their response to perceived Russian aggression in Crimea. These sanctions are strict in scope and designed to limit access to Western capital markets and to sensitive military technology.

Also included are complete bans on the trade of arms, military dual-use goods, and a variety of other strategic goods (10). Other strategic goods include mostly energy industry related products, such as pipeline materials. Russian counter-sanctions are wider than their EU counterparts, and include almost total import bans on vegetables, fruits, meats, and other similar agro-food products. Both the EU’s and Russia’s sanctioned product lists are organized via 10 European Council: EU Restrictive Measures in Response to the Crisis in Ukraine

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the United Nations’ Harmonized Commodity Description and Coding System, or Harmonized System for short. Harmonized System (HS) was designed as a common nomenclature which would allow for the easy classification of products for customs purposes (11). Products within HS Code can be identified at the 2-digit level, the 4-digit level, which is a subgroup of the 2-digit, and the 6-digit level, which is a further subgroup of the aforementioned groups. There are 99 2-digit groups, with each group possessing several 4-digit subgroups and beyond. A simple example to illustrate this is HS Code 920120, which identifies grand pianos. For an internationally traded grand piano, the HS 2-digit code is 92, the 4-digit is 9201, and the 6-digit is 920120. Specificity increases with the digit level. Now, EU sanctions tend to be written at the 4-digit and 6-digit level, holding with the spirit of “smart sanctions.” Russian sanctions showcase an opposing mentality and tend to be written at the 2-digit and 4-digit level. Due to the limits of this study, a certain level of data aggregation will be performed for brevity, clarity, and data availability.

The list of HS codes used for analysis was initially constructed from the converted list provided by (Crozet and Hinz 2016, 2017). Table 1 lists sanctioned products (i.e. facing EU export restrictions), via their HS code and with a brief description. The aggregation of EU sanctions has been set to the 4-digit level.

Conversely, Table 2 lists products counter-sanctioned, also via their HS code and with a brief description. The aggregation of Russian counter-sanctions has been set at the 2-digit level.

11 United Nations International Trade Statistics Knowledgebase (UN Comtrade): unstats. un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-Commodity-Description-andCoding-Systems-HS

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Table 1. EU Sanctioned Products by HS Code HS Code

Description

7304

Tubes, pipes, and hollow profiles, seamless, of iron (other than cast iron) or steel

7305

Tubes and pipes (e.g. welded, riveted, or similarly closed), internal and external circular cross-sections, external diameter of which exceeds 406.4mm, of iron or steel

7306

Tubes, pipes, and hollow profiles (e.g. open seam or welded, riveted, or similarly closed), of iron or steel

8207

Tools, interchangeable; for hand tools, whether or not power-operated, or for machine tools (pressing, stamping, punching, drilling etc.) including dies for drawing or extruding metal, and rock drilling or earth boring tools

8413

Pumps, for liquids, whether or not fitted with measuring device, liquid elevators

8430

Other moving, grading, levelling, scrapping excavating, tamping, compacting, extracting or boring machinery, for earth, minerals or ores, Pile drivers and pile extractors, Snow ploughs and snow blowers

8705

Special purpose motor vehicles; not those for the transport of persons or goods (e.g. breakdown lorries, road sweeper lorries, spraying lorries, mobile workshops, mobile radiological units etc.)

8905

Light-vessels, fire-floats, dredgers, floating cranes, other vessels; the navigability of which is subsidiary to main function; floating docks, floating, submersible drilling, production platforms Source: Crozet and Hinz (2017)

28

ECONOMETRIC ANALYSES

Table 2. Russian Federation Counter-Sanctioned Products by HS Code HS Code

Description

2

Meat and edible meat offal

3

Fish and crustaceans, mollusks and other aquatic invertebrates

4

Dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified or included

7

Vegetables and certain roots and tubers; edible

8

Fruit and nuts, edible; peel of citrus fruit or melons

16

Meat, fish or crustaceans, mollusks or other aquatic invertebrates preparations thereof

19

Preparations of cereals, flour, starch or milk; pastrycooks’ products

21

Miscellaneous edible preparations

Methodology 1. Data Description Now with an appropriate understanding of the V4-Russia trade dynamic and the specifics of product-level economic sanctions, we turn to our model. To determine the effect of export restrictions on sanctioned product groups, I will utilize an OLS linear regression model with panel data. For each of the eight EU sanctioned HS codes (7304, 7305, 7306, 8207, 8413, 8430, 8705, 8905) and the eight Russia restricted HS codes (2, 3, 4, 7, 8, 16, 19, 21) described in Table 1 and Table 2, historical trade data has been collected from January 2010 through July 2017, on a monthly basis.

This data was sourced exclusively from the UN Comtrade Database; it is denominated in US$. Across four countries, with a set of historical trade data for each sanctioned HS code (16 in total per country), we have 64 unique samples to test.

29

ECONOMETRIC ANALYSES

2. Explanatory Variables Overview Two explanatory variables are included in our model. The first is a time dummy variable, to distinguish between time periods where economic sanctions are in effect, and time periods where they are not in effect. For these time periods, there is one important difference between EU sanctions and Russian counter-sanctions. While there are three rounds of EU sanctions enacted over the course of 2014, it is in July 2014 when product-level sanctions are first introduced and implemented. (12).

Russia responded one month later, in August 2014, with their own countersanctions (13). Therefore, the time dummy variable will be recorded as ‘0’ before July 2014 for EU sanctioned HS code data sets for all countries and ‘1’ for July 2014 and all time periods afterwards. Similarly, for the Russian sanctioned HS code data sets, a ‘0’ will be recorded for all time periods before August 2014, and a ‘1’ for August 2014 and all time periods afterwards.

Our second explanatory variable is the German equivalent of our dependent variable, V4-Russia exports. For each of the 16 sanctioned HS codes per country, the equivalent V4-Germany historical export data has been collected over the same time period of January 2010 – July 2017. V4Germany export data was chosen to act as a proxy to control for general shifts in trade for V4 nations. Furthermore, the selection of Germany is intentional. Germany is recorded as the largest import and export trade partner for each V4 country, Czechia, Hungary, Poland, and Slovakia, for each year within our almost eight-year sample (14).

3. Formal Econometric Model

This econometric model aims to explain changes in the US$ value of Y, Russian exports for i, each V4 country, during t, January 2010 – July 2017, 12 European Parliament, Committee on International Trade, et al: Russia’s and the EU’s Sanctions: Economic and Trade Effects, Compliance and the Way Forward 13 Government of the Russian Federation: On the Introduction of Changes in the Resolution of the Government of the Russian Federation of 7 August 2014, No. 778, Vol. 830 14 Observatory of Economic Complexity: atlas.media.mit.edu/en/

30

ECONOMETRIC ANALYSES

for h, each sanctioned HS code. I plan to explain these changes via β0, a constant; β1, the US$ value of German exports for the equivalent V4 country, time period, and HS code; β2, a time dummy variable for time periods where either EU sanctions or Russian counter-sanctions are in effect; and ∈, an error term. Formal analysis will be conducted via R programming language within the RStudio platform.

4. Hypothesis Testing & Research Question Restatement To review, the goal of this essay is to answer the following question for each V4 nation: Do 50% or more of export restricted product groups experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions? Restated, each for Czechia, Hungary, Poland, and Slovakia, does half or more than half of the 16 sanctioned HS code data samples showcase a statistically significant difference after the implementation of sanctions? Therefore, for each V4 nation, the following hypotheses will be tested: H1: 50% or more of export restricted product groups experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

H0: 50% or more of export restricted product groups do not experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

31

ECONOMETRIC ANALYSES

Empirical Results 1. Statistical Output a. Czechia Table 3. Regression Results for EU Sanctioned Czech Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period

HS 7304 (GER)

HS 7304 (RUS)

HS 7305 (RUS)

HS 7306 (RUS)

HS 8207 (RUS)

HS 8413 (RUS)

HS 8430 (RUS)

HS 8705 (RUS)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

15,286.8**

2,061.4

-4,025.3**

26,801.1***

1,420.4

9,806.5*

922.2

(6,425.8)

(6,457.1)

(1,793.9)

(9,157.7)

(13,080.5)

(5,069.2)

(5,025.9)

0.02 (0.1)

HS 7305 (GER)

-0.1 (0.4)

HS 7306 (GER)

0.01 (0.02)

HS 8207 (GER)

-0.2** (0.1)

HS 8413 (GER)

-0.01 (0.02)

HS 8430 (GER)

0.1 (0.1)

HS 8705 (GER)

-0.3 (0.2)

Sanctions

Constant

32

56,914.0

56,484.6

(311,578.5)

(361,200.4)

(89,961.9)

(498,516.0)

-111,301.7

5,321.8

424,865.7

1,340,915.0

(596,507.1)

(264,540.8)

-785,474.8

**

***

(115,741.6)

ECONOMETRIC ANALYSES

-1,460,166.0

***

**

(664,718.8)

-759,064.8 (632,930.4) 2,910,302.0

***

(845,661.8)

-322,405.5

-333,643.7

(258,162.2)

(281,853.1)

-100,805.9

594,951.4***

(217,189.5)

(152,862.9)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. EU sanctions are implemented in July 2014 and are effective from this month onwards. HS 8905 is omitted due to significant missingness.

Table 4. Regression Results for Russian Counter-Sanctioned Czech Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period HS 2 (GER)

HS 2 (RUS)

HS 4 (RUS)

HS 7 (RUS)

HS 8 (RUS)

HS 16 (RUS)

HS 19 (RUS)

HS 21 (RUS)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

-1,536.1**

35,704.8***

-174.0

-1,389.2***

3,477.3***

-1,672.2

1,753.2

(581.4)

(6,438.7)

(318.0)

(473.9)

(954.7)

(3,018.4)

(2,208.0)

0.01 (0.02)

HS 4 (GER)

0.1** (0.03)

HS 7 (GER)

-0.01 (0.01)

HS 8 (GER)

-0.01*** (0.004)

HS 16 (GER) HS 19 (GER)

-0.2*** (0.1) 0.1 (0.03)

HS 21 (GER)

-0.05* (0.03)

Sanctions

Constant

44,212.8

-1,514,294.0***

-11,350.8

9,849.1

-25,753.4

-60,079.0

-121,222.7

(31,833.9)

(321,304.6)

(17,988.2)

(27,715.6)

(81,759.8)

(106,697.8)

(87,261.6)

136,313.0**

-773,108.6

58,467.6***

113,436.7***

191,633.5***

237,137.1

701,147.9***

(52,875.2)

(611,853.4)

(13,903.6)

(19,722.1)

(66,947.6)

(147,651.6)

(123,252.5)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. EU sanctions are implemented in July 2014 and are effective from this month onwards. HS 8905 is omitted due to significant missingness.

33

ECONOMETRIC ANALYSES

b. Hungary Table 5. Regression Results for EU Sanctioned Hungarian Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period

HS 7304 (GER)

HS 7304 (RUS)

HS 7306 (RUS)

HS 8207 (RUS)

HS 8413 (RUS)

HS 8430 (RUS)

HS 8705 (RUS)

(1)

(2)

(3)

(4)

(5)

(6)

-6,154.4

-598.2*

-1,079.1

23,377.8

-2,169.3

23,614.8

(4,206.1)

(354.5)

(702.0)

(14,100.0)

(6,010.2)

(12,795.4)

0.1 (0.2)

HS 7306 (GER)

-0.002 (0.004)

HS 8207 (GER)

0.01 (0.03)

HS 8413 (GER)

0.1** (0.1)

HS 8430 (GER)

0.1 (0.2)

HS 8705 (GER)

-0.3 (0.7)

Sanctions

Constant

199,449.8

8,744.7

-14,595.7

-1,108,769.0

-141,897.4

-375,626.3

(238,509.8)

(16,951.5)

(35,178.8)

(729,044.8)

(301,460.2)

(687,336.9)

260,570.1*

48,210.3**

98,392.5**

705,160.6

452,480.8**

-423,461.4

(146,120.2)

(21,943.4)

(44,545.5)

(678,837.0)

(209,803.7)

(504,799.6)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. EU sanctions are implemented in July 2014 and are effective from this month onwards. HS 8905 is omitted due to significant missingness.

34

ECONOMETRIC ANALYSES

Table 6. Regression Results for Russian Counter-Sanctioned Hungarian Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period HS 2 (GER)

HS 2 (RUS)

HS 4 (RUS)

HS 7 (RUS)

HS 8 (RUS)

HS 16 (RUS)

(1)

(2)

(3)

(4)

(5)

79,663.4**

2,143.4

4,963.1

-7,216.1

12,406.5

(30,846.5)

(10,338.7)

(3,730.1)

(13,829.3)

(7,388.3)

*

HS 19 (RUS) HS 21 (RUS) (6)

(7)

6,706.1

4,073.9

(6,404.6)

(2,522.4)

0.2* (0.1)

HS 4 (GER)

0.002 (0.03)

HS 7 (GER)

-0.1*** (0.02)

HS 8 (GER)

0.3*** (0.1)

HS 16 (GER)

0.1 (0.04)

HS 19 (GER)

-0.2* (0.1)

HS 21 (GER)

0.01 (0.02) 177,075.3

-499,963.2

-348,915.6

-270,776.3

38,519.9

(1,968,902.0)

(497,935.5)

(217,770.5)

(707,126.6)

(463,885.9)

(217,153.4)

(104,741.6)

515,435.3

823,146.3**

681,090.9***

-67,260.2

577,501.4**

670,374.0**

424,130.0***

(939,989.2)

(343,066.3)

(130,208.1)

(391,301.0)

(282,236.3)

(269,464.5)

(67,728.7)

Sanctions -7,807,439.0

Constant

***

**

-1,349,185.0

***

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. Russian counter-sanctions are implemented in August 2014 and are effective from this month onwards. HS 3 is omitted due to significant missingness.

35

ECONOMETRIC ANALYSES

c. Poland Table 7. Regression Results for EU Sanctioned Polish Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period

HS 7304 (GER)

HS 7304 (RUS)

HS 7305 (RUS)

HS 7306 (RUS)

HS 8207 (RUS)

HS 8413 (RUS)

HS 8430 (RUS)

HS 8705 (RUS)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

4,036.0**

110.7

6,504.4**

5,366.8

23,869.9***

-14,273.1

8,260.4***

(1,959.1)

(1,546.5)

(2,996.4)

(3,508.8)

(8,742.9)

(11,928.4)

(3,018.8)

0.02 (0.02)

HS 7305 (GER)

0.01 (0.1)

HS 7306 (GER)

0.03 (0.03)

HS 8207 (GER)

0.01 (0.04)

HS 8413 (GER)

-0.1 (0.1)

HS 8430 (GER)

0.4 (0.2)

HS 8705 (GER)

0.02 (0.04)

Sanctions

Constant

36

76,291.6

23,885.1

(111,439.7)

(77,786.7)

-1,325.5

63,433.6

(98,900.4)

(57,584.2)

-711,818.2

***

-323,159.3

*

-1,586,221.0

***

799,833.5

-498,014.7***

(150,937.9)

(185,916.5)

(440,114.4)

(620,830.4)

(142,945.5)

591,100.0

509,078.9

2,122,712.0

1,246,070.0

34,299.0

(161,738.7)

(850,100.8)

(500,328.8)

(115,716.7)

***

(156,065.0)

ECONOMETRIC ANALYSES

***

**

**

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. Russian counter-sanctions are implemented in August 2014 and are effective from this month onwards. HS 3 is omitted due to significant missingness.

Table 8. Regression Results for Russian Counter-Sanctioned Polish Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period HS 2 (GER)

HS 2 (RUS) (1)

HS 4 (RUS) (2)

HS 7 (RUS) (3)

HS 8 (RUS) (4)

HS 16 (RUS) (5)

HS 19 (RUS) (6)

HS 21 (RUS) (7)

170,277.2*

199,022.9***

92,910.9**

335,364.0***

21,630.9

95,273.6***

83,485.9***

(88,237.5)

(67,585.1)

(38,461.6)

(110,619.7)

(15,496.7)

(32,059.3)

(27,114.0)

0.05 (0.03)

HS 4 (GER)

-0.1 (0.1)

HS 7 (GER)

0.3*** (0.1)

HS 8 (GER)

-0.6*** (0.2)

HS 16 (GER)

0.04 (0.03)

HS 19 (GER)

-0.03 (0.1)

HS 21 (GER) Sanctions Constant

-0.1 (0.1) -16,618,562.0*** -19,641,706.0*** -20,746,401.0*** -43,269,705.0***

-2,003,856.0**

-2,121,051.0

-5,643,339.0***

(4,610,665.0)

(3,849,070.0)

(1,549,460.0)

(6,222,337.0)

(829,599.4)

(1,589,935.0)

(1,309,555.0)

2,531,326.0

7,700,393.0***

7,750,870.0**

30,294,274.0***

-565,401.6

2,551,679.0

7,215,452.0***

(1,802,768.0)

(1,794,094.0)

(3,094,706.0)

(4,699,221.0)

(609,175.7)

(1,576,548.0)

(830,759.3)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. Russian counter-sanctions are implemented in August 2014 and are effective from this month onwards. HS 3 is omitted due to significant missingness.

37

ECONOMETRIC ANALYSES

d. Slovakia Table 9. Regression Results for EU Sanctioned Slovakian Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period

HS 7304 (GER)

HS 7304 (RUS)

HS 7306 (RUS)

HS 8207 (RUS)

HS 8413 (RUS)

HS 8705 (RUS)

(1)

(2)

(3)

(4)

(5)

-1,256.7**

454.8

403.9

2,134.5

-5,633.5

(629.0)

(1,410.1)

(260.7)

(1,305.3)

(41,846.7)

0.003 (0.02)

HS 7306 (GER)

0.1 (0.1)

HS 8207 (GER)

-0.003 (0.004)

HS 8413 (GER)

-0.01 (0.01)

HS 8705 (GER)

-0.5 (3.8)

Sanctions

26,701.1

-86,854.1

-33,625.3**

Constant

(34,302.0)

(68,352.8)

110,881.9**

124,218.6***

(49,691.2)

(39,663.0)

-152,477.8**

-920,369.6

(13,234.7)

(67,797.1)

(1,513,895.0)

29,678.5***

198,078.6***

1,303,736.0

(9,351.1)

(61,461.9)

(1,360,058.0)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. Russian counter-sanctions are implemented in August 2014 and are effective from this month onwards. HS 3 is omitted due to significant missingness.

38

ECONOMETRIC ANALYSES

Table 10. Regression Results for Russian Counter-Sanctioned Slovakian Exports (January 2010 - July 2017) Dependent variable:

Observation Time Period HS 4 (GER) HS 16 (GER)

HS 4 (RUS) (1)

HS 16 (RUS) (2)

HS 19 (RUS) (3)

9,356.2***

12,511.0**

-1,007.1*

2,171.6*

(2,205.7) 0.1* (0.1)

(5,542.0)

(526.6)

(1,256.1)

HS 19 (GER)

0.4 (0.5)

0.001 (0.03)

HS 21 (GER) Sanctions Constant

-315,994.9 (126,952.2) -70,164.0 (131,740.1) **

-813,573.7 (243,586.5) 59,108.2 (193,476.2) ***

128,245.7 (27,967.9) 89,859.5*** (19,242.2)

***

HS 21 (RUS) (4)

0.03** (0.02) -211,849.5*** (69,431.9) 71,090.4* (39,891.2)

Note: *p**p***p<0.01 All regressions utilize Newey-West estimators for the error term and are robust to heteroscedasticity and serial correlation. Results are denominated in USD. Russian counter-sanctions are implemented in August 2014 and are effective from this month onwards. HS 3 is omitted due to significant missingness.

2. Analysis of Results After conducting the above statistical analysis for the 16 data sets for each V4 nation, I received mixed responses to my research question. I define statistical significance as significance less than or equal to the 0.05 level, as designated by “**” or “***” ( for significance of 0.01 or less). For EU sanctioned Czech exports, two of seven testable datasets were found to be significantly statistically affected by the implementation of sanctions. For Russian counter-sanctioned Czech exports, one of seven testable datasets was found to be significantly statistically affected by the implementation of counter-sanctions. Overall, three of fourteen, or 21.4%, of testable datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions. Therefore, we cannot reject H0 for Czechia.

For EU sanctioned Hungarian exports, zero of seven testable datasets were found to be significantly statistically affected by the implementation of sanctions. For Russian counter-sanctioned Hungarian exports, three of

39

ECONOMETRIC ANALYSES

seven testable datasets were found to be significantly statistically affected by the implementation of counter-sanctions. Overall, three of fourteen, or 21.4%, of testable Hungarian datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

Therefore, we cannot reject H0 for Hungary either.

For EU sanctioned Polish exports, three of seven testable datasets were found to be significantly statistically affected by the implementation of sanctions. For Russian counter-sanctioned Polish exports, six of seven testable datasets were found to be significantly statistically affected by the implementation of counter-sanctions. Overall, nine of fourteen, or 64.3%, of testable Polish datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions. Therefore, we can reject H0 for Poland.

For EU sanctioned Slovakian exports, two of five testable datasets were found to be significantly statistically affected by the implementation of sanctions. For Russian counter-sanctioned Slovakian exports, four of four testable datasets were found to be significantly statistically affected by the implementation of counter-sanctions. Overall, six of nine, or 66.7%, of testable Slovakian datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions. Therefore, we can also reject H0 for Slovakia.

In summary, I am able to reject H0, which states there is not a statistically significant change in US$ trade value for greater than or equal to 50% of export restricted product groups experience after the implementation of the 2014 sanctions, for only Poland and Slovakia.

However, I am unable to do so for Czechia and Hungary.

As expected, for all datasets where the implementation of 2014 sanction policies was statistically significant, the accompanying coefficient was negative, indicating a drop in trade. There was one exception to this â&#x20AC;&#x201C; the Slovakian HS 19 regression, which possessed a positive coefficient. The observation time period would indicate some level of statistical significance for the occasional regression as well. However, I do not see any sort of trend to this at this time. Rarer yet, the equivalent products US$ export value to Germany showed statistical significance for few regressions across V4 nations.

40

ECONOMETRIC ANALYSES

For ease of understanding for those unfamiliar with statistics and econometrics, I recommend one to view the Visualizations of V4-Russia Trade section, which can be found after the Summary Statistics. There, one can find detailed visualizations showcasing historical trade changes for each product in an easy-to-understand graphical format. Within each visualization, each V4 countryâ&#x20AC;&#x2122;s historical export data to Russia is displayed as a line chart for each regressed HS product. Included also are trend lines mapping the general trend of trade for each product to Russia before the implementation of 2014 sanctions, allowing for simple comparisons of reality to what could have been expected.

It is important to note I was forced to drop two regressions for Czechia, three regressions for Hungary, and two regressions for Poland due to significant missingness. Similarly, I was forced to drop seven datasets for Slovakia for the same reason. In addition, I tested each regression for heteroscedasticity and serial correlation. I found the majority of error terms for my initial regressions suffered from some form of either heteroscedasticity or serial correlation, and sometimes both. Via the use of standard errors robust to heteroscedasticity and serial correlation, namely Newey-West estimators, I was able to remedy this issue, and obtain more conservative results which I believe are as accurate as possible at this time. Through the use of kernel density plots, approximately one to two outliers could be identified for the majority of plots. However, without proper theoretical grounds, of which I could not find any, it is improper to remove these outliers from the datasets, so as to not bias the results in favor of a hypothesis. For greater insight into this, I recommend one to view the Summary Statistics section.

Discussion of Results and Further Considerations 1. Implications of Findings Based upon the results described in the preceding section, I was only able to reject H0 for Poland and Slovakia, but not Czechia or Hungary. Said again, for Poland and Slovakia only can the implementation of either EU sanctions or Russian counter-sanctions be statistically identified as causing a significant decrease in the US$ value of export-restricted products to Russia.

Here we must be careful though, as based upon generally held economic

41

ECONOMETRIC ANALYSES

theory, these results alone do not allow me to make substantiated conclusions that sanction policies alone explain total macroeconomic trade changes between V4 nations and Russia. Despite the significance of my results, this statement applies for changes in the Polish-Russian and Slovakian-Russian trade relationships as well. Care should also be taken in any interpretation of these results due to the level of necessary aggregation utilized during the data cleaning process. Such measures were necessary though, as without them, there would simply not be enough data to analyze. As a result of this aggregation, there exists some products within each respective HS code which are not restricted. This allows for some trade within these product codes between the V4 countries and Russia. If sanction policies were set at a higher HS code level (HS 2-digit level for Russian counter-sanctioned products, and HS 4-digit level for EU sanctioned products) and then tested, then trade should be close to $0 for all months after the introduction of sanctions, assuming businesses are in compliance with EU law.

A reminder – the purpose of this study is to measure direct changes in the export flows of restricted goods. Therefore this study is unable to speak to the indirect effects of sanction policies or the costs of decreased trade even where sanction policies have been found to be statistically significant.

Even still, it is important to acknowledge that for Hungary, Poland, and Slovakia respectively, of testable datasets, less datasets (products) were significantly statistically affected by EU export restrictions than were affected

by Russian export restrictions. Expanded upon, for Hungary, three more datasets were significantly affected by Russian export restrictions than EU export restrictions. For Poland the difference was also three datasets, and for Slovakia, two datasets. While not large, this fact could lend itself to political leverage for those who wish to maintain EU sanctions towards Russia. Furthermore, along these lines, for Czechia and Hungary, sanctions did not even affect 50% of restricted products.

Returning to the nature of the products restricted, it is important to keep in mind EU sanctions are much more precise than Russian countersanctions, and mainly target pipeline building materials. Russian countersanctions, intentionally broader, target agro-food products. For EU sanctioned products, it is highly unlikely these “self-inflicted” sanctions-related trade losses could truly affect the economic health of a whole country, or even a city. It is possible short-term sales for producers of these pipeline materials

42

ECONOMETRIC ANALYSES

were negatively affected. However, at this point in time, almost four years since European sanction policies began, any lingering losses speak to a poorly diversified and hyper-rigid value chain. This is extremely unlikely though as businesses within the heavy industry and manufacturing sector tend to be larger, multinational firms with agile and dynamic value chains.

Taking into the account the nature of the affected products and industries, and the small overall proportion of these products to the entire export mix for V4 nations, my findings provide evidence that the much discussed “massive” self-inflicted loss trade costs resulting from EU sanction policy are only a myth. There is little evidence that there are significant economic costs for V4 nations resulting from “friendly fire,” i.e. the EU’s own sanctions.

For Russian counter-sanctions, our results do bear evidence of significant decreases in the US$ value of agricultural exports to Russia for mainly Poland and Slovakia. By using the same arguments though, it is equally unlikely that Russian counter-sanctions have significantly and continually harmed V4 agro-food exporters. While the scope of restrictions is larger for Russian counter-sanctions, for V4 producers the broader EU market for agro-food products is many, many times larger than the Russian export market. For Hungary and Poland especially, due to their substantial agricultural sectors, any sort of restriction on exports to the Russian market has only led to increases in resilience and export destination diversity. This is evidenced by the initial EU subsidies provided to firms to help offset initial losses and EU help in identifying new export markets in East Asia, the Middle East, and North Africa (15). As an example, Poland, where agro-food exports comprised 7.1% of total exports in 2013, witnessed a 30% drop in the value of exports to Russia in 2014. However, during the same year, in total, Polish food-stuffs exports increased by 7.1%, which offsetting this drop. This trend continued the following year for Poland, along with a notable 13% increase in agro-food exports to nations outside of the EU and Commonwealth of Independent States (CIS). This is evidence that Polish agriculture has been extremely successful in finding new markets (16). Following this example, it is likely any initial losses will continue to be offset by the continued growth of new export partners. This strongly contradicts the findings of (Crozet and Hinz 2016, 2017). Based 15 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agrifood Sector 16 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agrifood Sector

43

ECONOMETRIC ANALYSES

upon my statistical analysis and the growth of new export destinations for agro-food products, the existence of significant costs resulting from export restrictions, even related to trade finance difficulties, simply does not follow as a significant possibility for the V4 at least.

Therefore, based upon the preceding paragraphs and my results, I also disagree with the findings of (European Parliament 2017) and (Christen, E. et al. 2015). While I did not take into account possible indirect costs associated with 2014 sanctions policies, I find it very difficult to believe that the total lost value of sanction policies amounts to a €34 billion loss in the short run and a €92 billion loss in the long run. While (European Parliament 2017) and (Christen, E. et al. 2015) are analyzing loss trade costs at the EU level, not the V4 level, such costs still seem too high, even if most costs are indirect, and not direct costs. I concede I cannot realistically assume that my results for V4 economies would apply equally to all other EU economies.

Even still, such results and conclusions are strongly countered when my results are combined with the findings of (Gros and Mustilli 2015, 2016) and (Tomášek, Jakub, et al. 2017).

As this research solely focuses on the V4, I cannot comment on the effects of sanction policies for German exporters and therefore cannot provide either support or a rebuttal to the findings of (Günther, J. et al.

2016). I would expect a similar outcome for Germany as I found for Czechia, Hungary, Poland, and Slovakia though. This topic should be taken up in future studies.

2. Irregular Trade Diversion Possibilities As noted within (European Parliament 2017), there is evidence of attempts at non-compliance and the legal use of non-sanctioning countries as pass-through vehicles for the trade of restricted products to Russia. In general, this seems unlikely and unprofitable. To use non-sanctioning countries in this way increases the risk (and therefore costs) born by firms and individuals who attempt this. Also, it is not aligned with the goals of profit-maximizing firms. Why incur additional transportation costs and value chain stress by adding another leg to the value chain in order for Russia to be the final destination of exported-restricted products? The possibility of this occurring does remain. (European Parliament 2017) shows there

44

ECONOMETRIC ANALYSES

has been some vague trade data describing the suspicious increase of EU exports to several non-sanctioning European countries, and a related increase in Russian imports from these nations. However these results are not conclusive, but are worthy of further investigation. Therefore, changes in total V4 exports to a sample of non-sanctioning European nations and total Russian imports from the same countries will be historically examined.

To investigate potential trade diversion, a three country sample has been created of Serbia, Belarus, and Moldova â&#x20AC;&#x201C; the three westernmost non-sanctioning countries who possess the best political and economic relationships with Russia. Even still though, there is a notable lack of statistical results to support the concern of trade diversion. If the hypothesized route for V4 countries is to export goods (restricted or even unrestricted) first to Serbia, Belarus, or Moldova, before they are rerouted to Russia, then there should be visible increases in the US$ value of exports from V4 nations to these countries, accompanied by a similar increase in the US$ value of imports for Russia from the same countries.

Figure 5. Annual Percentage of Total Czech Exports to Potential Pass-Through Destinations 0,35% 0,32% 0,22% 0,29%

0,30%

0,31%

0,30%

0,26% 0,24% 0,22%

0,17%

0,12%

0,03%

SERBIA

BELARUS 2011

2012

2013

2014

0,04% 0,04%

MOLDOVA 2015

2011

Source: Atlas of Economic Complexity, AJTK calculations

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ECONOMETRIC ANALYSES

0,03% 0,03% 0,03%

Figure 6. Annual Percentage of Total Hungarian Exports to Potential Pass-Through Destinations

Source: Atlas of Economic Complexity, AJTK calculations

46

ECONOMETRIC ANALYSES

Figure 7. Annual Percentage of Total Polish Exports to Potential Pass-Through Destinations

Source: Atlas of Economic Complexity, AJTK calculations

47

ECONOMETRIC ANALYSES

Figure 8. Annual Percentage of Total Slovakian Exports to Potential Pass-Through Destinations

Source: Atlas of Economic Complexity, AJTK calculations

With the exception of Polish exports to Serbia and Belarus, there is no significant uptick in export trade flows. In actuality, there is a downward trend for exports to these potential pass-through countries from 20112016. Outside of the Polish-Belarusian and Hungarian-Serbian export relationships (logical due to a shared border), Serbia, Belarus, and Moldova have continually possessed less than a 1% share of the total proportion of exports from each V4 nation.

48

ECONOMETRIC ANALYSES

Figure 9. Annual Percentage of Total Russian Imports from Potential Pass-Through Destinations

Source: Atlas of Economic Complexity, AJTK calculations

Similarly, on the Russian side, imports do not show large changes either.

In fact, Moldova has actually seen their respective share decline since 2011.

With Russian imports from Serbia and Moldova possessing an average share from 2011-2016 of 0.28% and 0.12% respectively, they do not seem to be major destinations for imports for Russia. Belarus seems to be an exception though, with the Russian share of imports increasing notably in 2016. This could be attributed to an increase in the importance of Russian-Belarussian trade relations, resulting from a decrease in the quality of EU-Russian trade relations.

While this could be seen as slight evidence of the use of Belarus as a passthrough, it could equally be attributed to the change in trade relations. Further analysis of this is needed and should be explored in later research. Despite the possibility remaining of these countries being used as pass-through entities for V4 exports, Russia has grown increasingly strict over this time period in regulating imports to ensure compliance with their own sanction policy. This lowers the probability of this sort of trade diversion as a continued method

49

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going forward. Therefore, any V4 non-compliance or use of these countries as pass-through vehicles, while possible, seems insignificant at best.

3. Further Methodological Considerations While I feel I used the most appropriate methodology to conduct this analysis, there are a few considerations that must be noted for this study: 1) Model Specification Difficulties: Due to the macroeconomic nature of this study, it is practically impossible to account for all possible explanatory variables. To the best of my abilities, I have used generally accepted economic theory to guide my model selection. Even so, the possibility remains of some significant explanatory variable not being directly accounted for, which could bias results. For future iterations of this work I intend to include additional explanatory variables, e.g. Eurozone exports, as a different control proxy to account for the general trend of exports for V4 nations. Also requiring further consideration is an explanatory variable for either the recent Russian economic downturn or the price of Brent crude oil, both of which could affect Russian purchasing decisions of V4 exports. Despite best practices to separate out the influences of the worsening Russian economy and the (until recent) low price of Brent crude oil, this remains extremely challenging in reality and practice.

2) Outliers: As touched on earlier, outliers did exist in most tested datasets. Without proper theory to justify the removal of these outliers, they were left within the dataset. While not large in quantity, there could be unforeseen effects of outliers on the final results. There will be continued efforts to better resolve this issue.

3) Data Missingness & Limits: Within the analysis, a total of 14/64 regressions (21.9%) were dropped due to significant missingness.

Within this, all four V4 countriesâ&#x20AC;&#x2122; HS 3 and HS 8905 regressions had to be dropped. Especially for HS 3 and HS 8905, there was oftentimes no data recorded at all from 01/2010 â&#x20AC;&#x201C; 07/2017. Missing this quantity of data makes interpretation of results difficult. While it is unlikely that having 0% missingness for each regression would

50

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result in significantly different results for Czechia, Hungary, Poland, and Slovakia, it remains not impossible. Furthermore, while data was collected from the UN Comtrade database, a premier source of international trade data, the possibility exists that missingness could be linked to a desire of either a V4 country, Russia, or Germany to either not report trade statistics at all or not report trade statistics accurately for political purposes.

4) Indirect Costs: One weakness of this study is its inability to statistically account for indirect costs related to the implementation of the 2014 sanctions. As discussed earlier, while I do not believe indirect costs are as high as those hypothesized by (Christen, E. et al. 2015), I concede though that possible significant indirect costs could exist. While difficult to measure, and outside the bounds of this particular study at this time, further efforts will be focused on accounting for them too in order to continue to provide a holistic view of sanctions-related effects on trade.

5) A Single Iteration: This work is but the first iteration of an attempt to accurately measure the monetary effects of EU sanctions and Russian counter-sanctions on V4 exports. In summary, for further iterations I look forward to testing additional explanatory variables, alternative remedies for outliers, and new methods for accounting for indirect costs all while continuing to gather more data.

Conclusion The goal of this first essay was to determine if there were statistically significant changes in US$ trade value for export restricted product groups after the implementation of the 2014 sanctions and counter-sanctions for the V4 nations of Czechia, Hungary, Poland, and Slovakia. With the introduction of EU export restrictions in July 2014 and the complementary Russian counter-sanctions a month later, there was great concern among V4 nations, and the EU as a whole, that economic health would suffer due to the change in trade relations with one of the EUâ&#x20AC;&#x2122;s largest trade partners.

For my analysis, I made use of an OLS linear regression model and NeweyWest estimators to determine for each V4 country whether 50% or more

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of export restricted product groups were significantly statistically affected by the implementation of the 2014 sanctions. Historical export data from January 2010 to July 2017 was sourced from the UNâ&#x20AC;&#x2122;s Comtrade data base.

I was able to reject H0, stating there was no statistically significant change in US$ trade value for export restricted product groups resulting from the introduction of the 2014 sanctions, for Poland and Slovakia. I was unable to reject H0 for Czechia and Hungary though. EU sanctions targeted mainly pipeline construction materials and related industrial products. Russian counter-sanctions targeted EU agro-food exports and were worried to strongly harm the V4 agricultural industry. In total, the export of EU sanctioned products to Russia is an extremely small portion of the total EU-Russia export mix. From the Russian counter-sanctionsâ&#x20AC;&#x2122; side, agro-food products represent a much larger share. However, there is strong evidence to suggest that affected firms have been successful in identifying new markets in order to offset the loss of Russia as an export destination (17).

There is data to suggest non-sanctioning European nations may be used as a pass-through instrument for EU products to reach a final destination in Russia. Having investigated this as well, I do not believe there is conclusive evidence that such trade diversion tactics are significantly large for the V4 nations, if they are indeed occurring.

Therefore, I believe this essay provides a robust econometric understanding of how EU and Russian sanction policy has affected the US$ value of export-restricted product groups for V4 economies. When viewing all of the qualitative and quantitative evidence from other authors and myself, I believe this essay only lends additional strength to the argument that V4 countries are not significantly harmed by costs related to sanctions. I welcome inquiries of my results and look forward to greater discussion of these findings. In the following four essays, I will investigate wider, sectoral relationships between each V4 nation and Russia. In doing so, further nuances will be explored to provide more color to the results of this paper and contribute to a better, more holistic understanding of how sanction policies may be harming or benefitting the V4 states.

17 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agrifood Sector

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Works Cited The Atlas of Economic Complexity, Center for International Development at Harvard University.

Christen, Elisabeth, et al. Effects of the EU-Russia Economic Sanctions on Value Added and Employment in the European Union and Switzerland. Austrian Institute of Economic Research (WIFO), June 2015.

Crozet, Matthieu, and Julian Hinz. Collateral Damage: The Impact of the Russia Sanctions on Sanctioning Countries’ Exports. Centre d ’Etudes Prospectives Et d’Informations Internationales (CEPII), June 2016.

Crozet, Matthieu, and Julian Hinz. Friendly Fire: the Trade Impact of the Russia Sanctions and Counter-Sanctions. Kiel Institute for the World Economy, 31 July 2017.

European Union, European Council, “EU Restrictive Measures in Response to the Crisis in Ukraine.” EU Restrictive Measures in Response to the Crisis in Ukraine, European Council, 2017.

European Union, European Parliament, Committee on International Trade, et al. “Russia’s and the EU’s Sanctions: Economic and Trade Effects, Compliance and the Way Forward.” Russia’s and the EU’s Sanctions: Economic and Trade Effects, Compliance and the Way Forward, European Parliament, 2017.

Günther, Jutta, et al. “Consequences of EU-Russia Sanctions for the German Economy.” Journal of Economic Policy, vol. 96, no. 7, July 2016, pp. 524–526.

Gros, Daniel, and Federica Mustilli. The Economic Impact of Sanctions Against Russia: Much Ado About Very Little. Centre for European Policy Studies, 23 Oct. 2015.

Gros, Daniel, and Federica Mustilli. The Effects of Sanctions and Counter-Sanctions on EU-Russian Trade Flows. Centre for European Policy Studies, 5 July 2016.

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Government of the Russian Federation, On the Introduction of Changes in the Resolution of the Government of the Russian Federation of 7 August 2014 No. 778. Vol. 830, Government of the Russian Federation, 2014.

Harmonized Commodity Description and Coding Systems (HS), United Nations International Trade Statistics Knowledgebase (UN Comtrade), unstats. un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-CommodityDescription-and-Coding-Systems-HS. Hlavac, Marek (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.1. https://CRAN.R-project. org/package=stargazer The Observatory of Economic Complexity (OEC), the MIT Media Lab Macro Connections Group.

Tomášek, Jakub, et al. Harsh Expectations versus a Modest Reality: Economic Relations between the Visegrad Countries and Russia Surrounding the Ukrainian Crisis. Prague Security Studies Institute (PSSI), Oct. 2017.

United Nations International Trade Statistics Database (UN Comtrade), United Nations.

World Development Indicators, The World Bank.

Wyciszkiewicz, Ernest. The Impact of Russian Sanctions on the Polish Agrifood Sector - Economic Relations between the Visegrad Countries and Russia: Before and After Ukraine. The Centre for Polish-Russian Dialogue and Understanding, Jan. 2017.

Wyciszkiewicz, Ernest. Political and Social Perception of Sanctions - Economic Relations between the Visegrad Countries and Russia: Before and After Ukraine. The Centre for Polish-Russian Dialogue and Understanding, Feb. 2017.

Wyciszkiewicz, Ernest. The Russian-Ukrainian War’s Imprint on Polish- Russian Trade - Economic Relations between the Visegrad Countries and Russia: Before and After Ukraine. The Centre for Polish-Russian Dialogue and Understanding, Dec. 2016.

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Summary Statistics 1. Czechia Table 11. Czechia-Russia Exports (EU Sanctioned Products)

Table 12. Czechia-Germany Exports (EU Sanctioned Products)

Table 13. Czechia-Russia Exports (Russian Counter-Sanctioned Products)

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ECONOMETRIC ANALYSES

Table 14. Czechia-Germany Exports (Russian Counter-Sanctioned Products)

2. Hungary Table 15. Hungary-Russia Exports (EU Sanctioned Products)

Table 16. Hungary-Germany Exports (EU Sanctioned Products)

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ECONOMETRIC ANALYSES

Table 17. Hungary-Russia Exports (Russian Counter-Sanctioned Products)

Table 18. Hungary-Germany Exports (Russian Counter-Sanctioned Products)

3. Poland Table 19. Poland-Russia Exports (EU Sanctioned Products)

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ECONOMETRIC ANALYSES

Table 20. Poland-Germany Exports (EU Sanctioned Products)

Table 21. Poland-Russia Exports (Russian Counter-Sanctioned Products)

Table 22. Poland-Germany Exports (Russian Counter-Sanctioned Products)

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ECONOMETRIC ANALYSES

4. Slovakia Table 23. Slovakia-Russia Exports (EU Sanctioned Products)

Table 24. Slovakia-Germany Exports (EU Sanctioned Products)

Table 25. Slovakia-Russia Exports (Russian Counter-Sanctioned Products)

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ECONOMETRIC ANALYSES

Table 26. Slovakia-Germany Exports (Russian Counter-Sanctioned Products)

Visualizations of V4-Russia Trade 1. Czechia a. Russian Counter-Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017) HS 02

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ECONOMETRIC ANALYSES

HS 04

HS 07

HS 08

HS 16

HS 19

HS 21

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ECONOMETRIC ANALYSES

b. EU Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017) HS 7304

HS 7305

HS 7306

HS 8207

HS 8413

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ECONOMETRIC ANALYSES

HS 8430

HS 8705

2. Hungary a. Russian Counter-Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017)

63

HS 02

HS 04

HS 07

HS 08

ECONOMETRIC ANALYSES

HS 16

HS 19

HS 21

b. EU Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017) HS 7304

64

ECONOMETRIC ANALYSES

HS 7306

HS 8207

HS 8413

HS 8430

HS 8705

3. Poland a. Russian Counter-Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017) HS 02

65

ECONOMETRIC ANALYSES

HS 04

HS 07

HS 08

HS 16

HS 19

HS 21

66

ECONOMETRIC ANALYSES

b. EU Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017)

67

HS 7304

HS 7305

HS 7306

HS 8207

HS 8413

HS 8430

ECONOMETRIC ANALYSES

HS 8705

4. Slovakia a. Russian Counter-Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017)

68

HS 04

HS 16

HS 19

HS 21

ECONOMETRIC ANALYSES

b. EU Sanctioned Product Historical Trade Visualizations (January 2010 â&#x20AC;&#x201C; July 2017) HS 7304

HS 8207

HS 8705

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ECONOMETRIC ANALYSES

HS 7306

HS 8413

II ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS 70

ECONOMETRIC ANALYSES

Introduction

Whenever discussing European geopolitics, the topic of energy is at the forefront of many leadersâ&#x20AC;&#x2122; minds. In this second essay on V4Russian relations, the pressing issue of energy security is explored in order to better understand how Czechia, Hungary, Poland, and Slovakia rely on Russia for their energy needs. First, I will review how the 2014 EU sanctions are designed to specifically target certain individuals and entities deemed critical to the Russian energy industry. Next, an overview of the V4 dependence on Russian energy imports will be explored. After this, the V4-Russian energy relationship will be further separated into two major categories â&#x20AC;&#x201C; natural gas and petroleum. Finally, a discussion will be undertaken to explain current developments in the field and how the dependence on Russian energy may expand or shrink in the coming years. As a stated EU goal is to diversify energy supply away from Russia due to Russian action in Ukraine, the future of EU and V4 energy security is of the utmost importance.

Review of Energy-Related Sanctions 1. Overview of Western Sanction Policy & Significant Actors Targeted Following the Russian annexation of Crimea in February 2014, Russia was harshly criticized by the international community for their perceived aggression in the region. Deemed a violation of Ukrainian national sovereignty by many, the United States and EU legislated a series of diplomatic and economic sanctions against Russia to express Western displeasure. As described in the Preface, these sanctions fall within five broad categories. For this study, my focus is on two specific types of EU sanctions: 1) individual restrictive measures (asset freezes and travel restrictions) on 149 people and 38 entities and 2) economic sanctions limiting Russian access to Western capital markets and sensitive military technologies and restricting the Russian import of certain strategically important goods.

Among individual restrictive measures against non-governmental actors, individuals and entities tied to the energy industry make up a

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significant portion of the list. As the poorly-diversified Russian economy is highly reliant on their energy industry, many expected sanctions to particularly target Russia’s most vital economic sector.

Table 1. Significant Russian Entities Targeted by Western Sanction Policy

Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/CFSP

As Table 1 shows, the largest Russian energy companies have all been restricted in some way by sanction policies. Among the entities listed above, all possess significant shares of the Russian energy industry. Particular numbers related to this will be explored in the following sections. Sanction policy affects each of these entities by restricting their access to long-term debt, defined as debt possessing a maturity period longer than 30 days.

2. EU & United States Energy Sanction Policy Differences Significant reasons exist which explain the discrepancy between the EU’s sanction policy and the United States’ policy, related to the Russian energy sector. While both, the EU and the United States, prohibit the sale of technology to sanctioned firms for deep water oil drilling, Arctic oil exploration, and shale oil exploration, the EU policy specifically applies to the oil industry, but not the natural gas industry. The United States however names both industries– oil and natural gas (1). The strategic motivation for the EU to only sanction oil, and not natural gas, arises from the European dependence on Russian natural gas.

1 Rapoza, Kenneth: Here’s How Europe’s Russian Sanctions Differ From Washington’s

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In 2016, Russian natural gas imports compromised 39.5% of the total share of EU natural gas imports (2). For 2016, of this 39.5%, Gazprom’s share amounted to 33%. In 2017, this share increased to 35% (3). Therefore, it would be unwise for the EU to restrict a firm that accounts for at least one third of the EU’s annual total natural gas imports. Differing from the natural gas market, the oil market showcases much greater diversity of suppliers due to its globalized nature. The United States is nowhere near as reliant upon Russia for natural gas as their European counterparts, therefore allowing them to sanction Russian natural gas actors without fear of significantly affecting their supply base. The difference in import dependency explains the discrepancy in American and European sanction policy, and the lack of European sanctions targeting Gazprom, Lukoil, Surgutneftegaz, and Novatek. However, as Gazprom Neft and Transneft are inherently oil-focused entities, these same natural gas supply considerations do not apply for the EU. Rosneft, the only dually sanctioned entity, while an integrated energy firm specializing in both oil and natural gas, does not possess a similar European natural gas market share as Gazprom though. Therefore, this affords the EU the ability to sanction Rosneft without severely affecting their natural gas supply base.

Introduction to V4 Energy Market Structures 1. Overview In order to appropriately understand the energy security concerns of each V4 nation, it is first important to recognize each countries’ respective energy mix. Czechia, Hungary, Poland, and Slovakia all exhibit a strong reliance upon traditional fossil fuels for their primary energy supply. In this section, each V4 countries’ energy mix will first be explained. Next, electricity generation and consumption patterns will be analyzed. Finally, we will look at trends for each country, in order to understand what the future may hold for each country.

2 Eurostat: ec.europa.eu/eurostat/statistics-explained/index.php?title=File%3AExtra-EU_ imports_of_natural_gas%2C_shares_in_value_of_main_trading_partners.png&oldid=357708 3 Reuters: www.reuters.com/article/gazprom-europe/update-1-russias-gazprom-buoyantover-its-position-in-europe-idUSL8N1PP21K

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2. Energy Mix by Country Figure 1. V4 2015 Gross Inland Energy Consumption by Type (Megatoes) 4

Data Source: EU Energy in Figures Statistical Handbook (2017)

As shown, the energy consumption of Czechia, Hungary, Poland, and Slovakia are all primarily concentrated within solid fuels, petroleum products, and gases for their energy needs. Looking at this data in percentage terms, this dependency becomes even clearer.

4 Megatoes is defined as one million toe, or tonne of oil equivalent, which is a measurable form of energy released.

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Figure 2. Czechia Gross Inland Consumption Energy Mix (2015)

Source: EU Energy in Figures Statistical Handbook (2017), AJTK Calculations

Figure 3. Hungary Gross Inland Consumption Energy Mix (2015)

Source: EU Energy in Figures Statistical Handbook (2017), AJTK Calculations

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Figure 4. Poland Gross Inland Consumption Energy Mix (2015)

Source: EU Energy in Figures Statistical Handbook (2017), AJTK Calculations Figure 5. Slovakia Gross Inland Consumption Energy Mix (2015)

Source: EU Energy in Figures Statistical Handbook (2017), AJTK Calculations

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While varying in magnitude for each V4 country, petroleum and natural gas make up significant portions of each nationâ&#x20AC;&#x2122;s energy mix.

3. Consumption & Efficiency Measures by Country Continuing on now, since the economic transitions of the early 1990s, Czechia, Hungary, Poland, and Slovakia have all made significant strides within their energy consumption patterns. Each countriesâ&#x20AC;&#x2122; consumption of energy has remained fairly constant since 1995, as can be seen in Figure 6. No notable final energy consumption increases or decreases exist for any one country. In fact, it seems that Czechia and Slovakia consumption patterns have actually displayed a downward trend since 1995, albeit this a small trend.

Figure 6. V4 Final Energy Consumption (1995-2015)

Data Source: EU Energy in Figures Statistical Handbook (2017)

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Next, since 1995, each V4 country has made significant strides to increase their energy efficiency, as measured by energy intensity. Defined as units of energy per unit of gross domestic product, energy intensity is a simple way of understanding the cost of converting energy into GDP. The higher the intensity value, the costlier it is to convert energy into GDP. The converse is defined equivalently; the lower the intensity value, the cheaper the cost of converting energy to GDP. Figure 7 displays strong downward trends for all V4 countries.

Figure 7. V4 Energy Intensity (1995-2015)

Data Source: EU Energy in Figures Statistical Handbook (2017)

Since 1995, energy intensity has decreased by 37%, 38%, 56%, and 57% respectively for Czechia, Hungary, Poland, and Slovakia.

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The V4-Russia Petroleum Relationship 1. Respective Market Shares of Russian Petroleum Companies Turning first to the petroleum markets, the Russian oil industry displays oligopolistic tendencies due to the small number of major players. Figure 8 provides of visualizing this market structure.

Figure 8. Russian Crude Oil Production Market Share by Company (2016)

Source: Statista, AJTK Calculations

Rosneft displays a massive 37.8% market share in terms of total oil produced, based upon 2016 figures. Rosneft is followed by Lukoil, Surgutneftegaz and Gazprom Neft, an oil-focused subsidiary of natural gas giant Gazprom, who owns 95.7% of Gazprom Neftâ&#x20AC;&#x2122;s shares (1). In part due to Western sanction policies, these percentages are expected to remain constant in the near-term. Without collaboration from Western oil companies, Russia is not likely to develop their substantial arctic offshore and shale resources (2).

1 Gazprom Neft: ir.gazprom-neft.com/share-data/shares/ 2 U.S. Energy Information Administration: Country Analysis Brief: Russia

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Returning to the United States and EU list of sanctioned entities, it is clear that sanctions have been designed to target the most significant Russian oil firms. Uniquely, Rosneft is the only oil firm to be sanctioned by both the United States and the EU. As this work focuses on the V4, and therefore EU sanctions, sanction policy referenced only applies to Rosneft and Gazprom Neft, unless noted otherwise. Also important to note here is the sanctioning of Transneft, an oil transportation entity.

Transneft is the largest oil pipeline (midstream) transporter in the world and transports 85% of oil extracted in Russia. It is 100% owned by the Russian federal government (3). Transneft is also the owner and operator of Druzhba (Friendship) pipeline, one of the largest in the world, which transports between 1.2 and 1.4 million barrels of oil a day over its almost 5,500-kilometer length (4). In total then, EU sanctions target entities which produce 48.3% of Russiaâ&#x20AC;&#x2122;s total crude oil production and transport 85% of Russian-extracted crude oil.

2. V4-Russia Crude Oil Supply Dependencies Back to Central Europe, if EU sanctions target entities that produce approximately 50% of Russiaâ&#x20AC;&#x2122;s total crude oil and transport 85% of that oil, what percentage of V4 crude oil imports originate from Russia? Figure 9 displays the historical share of oil imports originating from Russia for Czechia, Hungary, Poland, and Slovakia since 1995.

3 Transneft: www.en.transneft.ru/about/ 4 International Association of Oil Transporters: www.iaot.eu/en/oil-transport/druzhba-pipeline

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Figure 9. V4 Crude Oil & NGL Import Dependency (1995-2015)

Data Source: EU Energy in Figures Statistical Handbook (2017)

As easily seen over the last 20 years, V4 countries have not just looked to Russia as their primary source of oil imports, but almost as their exclusive source. More recently, these import shares have shown relatively little change, as shown in Figure 10, even with the implementation of EU sanction policy.

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Figure 10. Russian Share of V4 Crude Oil Imports (2010-2016)

Source: Observatory of Economic Complexity, AJTK Calculations

The statistics bear that even with the introduction of EU sanctions in July 2014, Russia has retained their dominant share of V4 petroleum imports.

Accounting for the capital market restrictions applied to Rosneft, Gazprom Neft, and Transneft, and the high import percentages of V4 countries, how strongly should policymakers be concerned with sanction policy harming V4 energy security? The answer lies within the structural nature and pricing factors of the petroleum market.

3. Structural Nature Midstream, one of the three major stages of the oil industryâ&#x20AC;&#x2122;s operations, involves the transportation, transformation, storage, and sale of raw crude oil into more usable final products (1). For Russia, once crude oil is extracted from the Arctic region or Siberia, it moves into the midstream.

Unlike Rosneft and Gazprom Neft, who are active in all three major oil value segments (upstream, midstream, and downstream), Transneft is 1 Investopedia: www.investopedia.com/terms/m/midstream.asp

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Figure 11. Eurasian Oil Pipeline Network

Source: CSS Analyses in Security Policy (ETH Zurich)

solely involved in the midstream operational arena. Figure 11 provides a cartographical view of the scale of Russian midstream industry and a preliminary understanding of how oil moves into Central Europe.

The EU, in total, receives 80% of their crude oil via sea transport and vehicular transport though. Only 20% of EU crude oil arrives via pipeline (2).

The highly developed European oil tanker industry provides Poland, alone of V4 nations, with the ability to directly alter their supply source anytime.

However, for land-locked Czechia, Hungary, and Slovakia, the extensive use of vehicular transport to move crude oil within the EU provides a lesser, but still significant level of security against Russian supply risk.

Once crude oil is imported, before it can be used, it must be refined.

The refinery process, another aspect of the midstream, is not dependent on possessing a domestic upstream industry. Therefore, the refining of oil can be considered geographically independent of the source of oil. Once

2 European Parliament: An Assessment of the Gas and Oil Pipelines of Europe

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refined, oil products are typically transported via rail or truck (3). To date, Czechia, Hungary, and Slovakia possess little refining capabilities. As of 2016, Czechia, Hungary, and Slovakia operated 3, 1, and 1 refineries respectively (4). While this is a concern, due to the ease of ability to transport refined products within the EU, if a shock affected supply, V4 countries could simply import from neighboring EU countries with greater refining capacities.

4. Nature of Prices In addition to the structural design of oil markets for V4 nation, the pricing mechanism of oil can act as a hedge for energy security for inland Czechia, Hungary, and Slovakia. As oil is an internationally traded commodity, capable of being shipped or transported via a variety of means anywhere in the world, the baseline price of oil is determined by global supply and demand factors. Depending on a countryâ&#x20AC;&#x2122;s geographical position, it looks to a particular crude benchmark price for national crude oil prices.

The largest and most important global oil benchmark is the Europeanbased Brent oil spot contract (i.e. Brent), which forms the foundation of prices for five continents. Hundreds of refined oil products, in addition to national crude prices, are tied to the price of Brent (5). Therefore, despite the size of the Russian oil industry, it cannot single-handedly maneuver prices to fit Russian interests. Simply too many other actors and market dynamics are in play.

In my own previous research, I attempted to use a difference-indifferences analysis to establish a link between the average national price of gasoline for Eastern European nations more than 50% on Russian crude oil imports and the implementation of EU Sanctions.

Under the hypothesis that EU sanctions would result in increased operational costs for Rosneft, Gazprom Neft, and Transneft, which would then be passed onto end European consumers, I found that no statistically significant relationship existed. As expected, while gasoline prices demonstrated a significant correlation with the price of Brent,

3 European Parliament: An Assessment of the Gas and Oil Pipelines of Europe 4 Wood Mackenzie: www.oil.fi/en/statistics-2-oil-production-and-refining/23-europeanoil-refining-capacity 5 Intercontinental Exchange: www.theice.com/brent-crude

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no significant increase in prices was seen after the implementation of EU sanctions (6).

5. Conclusions With the sanctioning of Russian oil giants Rosneft and Gazprom Neft, who account for almost 50% of total Russian crude oil production, and transportation firm Transneft, who transports 85% of Russian crude oil, V4 countries have reason to worry about the security of their energy supply.

The significance of these sanctions cannot be overlooked due to the almost exclusive V4 dependence on Russian crude oil imports. However, due to the structural nature of the European midstream, the V4 can easily adjust their supply away from the Druzhba, and Russia, if necessary. Another hedge exists as well â&#x20AC;&#x201C; the globalized structural nature of oil prices. As the majority of global oil prices strongly correlate with the Brent benchmark, there is limited power for Russia to leverage prices for political aims.

Between the structural nature of petroleum markets and globalized prices, fallback options do exist for V4 petroleum demand. By employing greater use of railway and road transportation, Czech, Hungarian, Polish, and Slovakian markets can weather Russian-linked supply shocks to crude and refined petroleum markets. However, such shifts would not be ideal, as economic theory dictates that prices would rise to accommodate the additional transportation. The size of such a price increase is difficult to determine for such a drastic situation where Russia reduces all crude oil exports to zero. However, EU sanctions have not resulted in such extreme geo-political maneuvering. Nor would creating such an artificial supply shock be in the best interest of the Russian oil industry. Referencing my own research again, to date no substantial price increases have been seen for V4 nations, or other highly dependent European countries due to assumed rising operating costs for Rosneft, Gazprom Neft, and Transneft. Even so, the extremely high V4 share of Russian crude oil imports should remain a geo-political energy security concern.

6 Peters, Eric: An Inquiry into the Effect of the 2014 Russian Sanctions on European Gasoline Markets

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The V4-Russia Natural Gas Relationship 1. Respective Market Shares of Russian Natural Gas Companies Similar to the petroleum market, the Russian natural gas market displays a small number of actors, but with a more monopolistic bend, in favor of oft-discussed Gazprom.

Figure 12. Russian Natural Gas Production Market Share by Company (2016)

Source: Statista, AJTK Calculations

Of EU Sanctions, only Rosneft faces significant capital market restrictions. Even still, despite sanction policy restricting European private firms from engaging in joint ventures with Rosneft on arctic and shale exploration, this only applies to oil ventures for Rosneft, not natural gas.

EU sanctions do not directly target the Russian natural gas industry, in stark contrast to their American counterparts.

Particularly important here is gas giant Gazprom, with a market dominating 65.5% share. While legally a private company, the Russian

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government owns a 50.23% majority stake in Gazprom of 2016 (7). Due to its quasi-governmental status, Gazprom has been afforded the exclusive right of being the sole legal exporter of pipeline natural gas, much to the chagrin of competitor Rosneft (8). Therefore, in some ways via their control of gas transportation, Gazprom possesses a legal monopoly on the Russian natural gas industry. This easily affords the Russian government an incredible amount of economic and political leverage over countries dependent on Russian natural gas.

2. V4-Russia Natural Gas Supply Dependencies How dependent are Czechia, Hungary, Poland, and Slovakia upon natural gas imports? As can be seen in Figure 13, incredibly dependent.

Figure 13. V4 Natural Gas Import Dependency (1995-2015)

Data Source: EU Energy in Figures Statistical Handbook (2017)

7 Statista: www.statista.com/statistics/273267/shareholder-structure-of-gazprom/ 8 Reuters: www.reuters.com/article/russia-rosneft-gas/russias-rosneft-seeks-end-to-gazpromgas-export-monopoly-ria-idUSL5N10243N20150722

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Since the mid-1990s, each V4 country has looked outside their own borders for at least 60% of their natural gas supply. Oftentimes this number is significantly higher, as is the case for Czechia, which sources almost their total supply of natural gas from other nations. What share does Russia possess of these import dependencies?

Figure 14. Russian Share of V4 Natural Gas Imports (2010-2016)

Source: Observatory of Economic Complexity, AJTK Calculations

As Figure 14 shows, since 2016, Russia has possessed a significant share of each V4 nationâ&#x20AC;&#x2122;s gas imports. Ranked for every year from 2010 â&#x20AC;&#x201C; 2016, Russia is the #1 import originator for natural gas for all V4 countries.

On average, over this same time period, Czechia, Hungary, Poland, and Slovakia have imported 65%, 63%, 42%, and 67% of their natural gas from Russia respectively. However, there is reason to believe that these numbers may be even higher than reported.

On the European continent, outside of Russia, only one other nation possesses sizable natural gas reserves â&#x20AC;&#x201C; Norway (9). Knowing this, 9 The World Factbook (CIA): www.cia.gov/library/publications/the-world-factbook/ rankorder/2253rank.html 88

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and understanding that a re-export market exists for energy products, could V4 countries actually be importing Russian-originating natural gas from other EU countries?

Figure 15. Suspicious Third Party Nation Share of V4 Natural Gas Import Shares

Source: Observatory of Economic Complexity, AJTK Calculations

Figure 15 displays V4-European natural gas import relationships that could be considered suspicious under this guise. Care must be taken in interpretation of this figure. As Germany, Austria, Belarus, and Czechia each do not possess their own significant natural gas reserves, what is the source of their natural gas exports? While German, Austrian, Belarusian, and Czech natural gas exports could originate from Norway, or even Romania, it is equally, if not more likely, that they originate from the world’s largest natural gas producer – Russia. Assuming all of this gas originates from Russia, when combined with Russia’s visual share of each V4 country’s natural gas imports, the V4 reliance on Russian gas is magnified:

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Table 2. Potential Natural Gas Imports Originating from Russia (2010-2016)

Source: Observatory of Economic Complexity, AJTK Calculations

While simply speculation regarding the total share of Russianoriginating V4 natural gas imports, such conjectures illustrate the same message – Russia controls the V4 natural gas market. Considering the influence of Russia then on the V4’s supply of natural gas, how do EU sanctions play into this? For V4 natural gas security, are the effects of sanctions simply concerning, like they are for the petroleum industry, or is the situation must more dire?

3. Structural Nature To understand the impact of EU sanction policy for Central European natural gas markets, one must understand the supply chain of natural gas.

Comparative to the three stages of the petroleum industry, the natural gas industry also possesses three stages – production, transmission, and distribution. These mirror the petroleum industry’s upstream, midstream, and downstream arenas directly. Transmission, or the natural gas midstream equivalent, is the geopolitical key to Gazprom’s, and therefore Russia’s, hold on the supply side. Outside of the still developing liquefied natural gas (LNG) and compressed natural gas (CNG) markets, the only cost-efficient means of transporting large quantities of natural gas is via pipeline. Therefore, due to the nature of the transmission component, the European natural gas market possesses a much less liquid design than the petroleum market. For each pipeline connecting Russia (and Gazprom) to the EU market, Russian market power grows over the EU, and therefore V4. In hopes of hedging against this risk, EU sanctions intentionally target these pipelines.

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Figure 16. European Energy Supply Pipeline Map

Source: Atlantic Council

As shown, many of the most critical gas pipelines either originate in Russia or pass through Russian territory. Due to instability in the UkrainianRussian relationship relating from the 2014 Russian Invasion/Annexation of Crimea, the original cause of EU sanction policy, Russia has aimed to shift supply away from pipelines passing through Ukrainian land, like the NEL and Brotherhood (Druzhba Gas). To counter, EU sanction policy is designed to limit the construction of future pipelines, like the now-canceled South Stream pipeline. Harkening back to Essay 1: Econometric Analyses, and the descriptions of product level economic sanctions, EU sanctions almost solely restrict the export of pipeline construction materials and machinery. While there is an ongoing discussion regarding the political costs of the oft-mentioned Nord Stream II, as of today, Nord Stream II remains under construction. This is due to legal agreements signed prior to the

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implementation of EU sanctions. If completed and utilized, Nord Stream II has been marketed as a way of providing cheaper gas to EU states, including the highly dependent V4 nations. While this remains to be seen from a cost perspective, if Nord Stream II is constructed, one fact is certain – Russian market power over the V4 natural gas industry will increase.

4. Nature of Prices Unlike the petroleum industry’s Brent spot contract, European natural gas markets are driven by market fundamentals more than an internationally traded benchmark (10). Therefore, prices experience much greater influences from local market determinants, such as weather and supplier competition. Traditionally, natural gas has been delivered via longterm contracts between each country and Gazprom. Owing to Gazprom’s massive V4 market share and the structural nature of gas transmission, Gazprom has historically controlled price negotiations. The ability to provide a cost advantage over any other supplier for Czechia, Hungary, Poland, and Slovakia is also incredibly influential during contract negotiations. In 2015, Gazprom indicated a shift to more flexible contracts in the future (11).

However, the ultimate flexibility and price benefits of these new contracts are still to be determined.

5. Conclusions The Russian natural gas industry, led by legal monopolist Gazprom, exerts massive influence on European energy economics and politics. For the V4 countries of Czechia, Hungary, Poland, and Slovakia in particular, Russia ranks as the #1 source of natural gas imports by a wide margin. Through MIT’s Observatory of Economic Complexity data and my own calculations, Russia has recorded an average 65%, 63%, 42%, and 67% import share for each V4 country respectively. Unlike the highly liquid and transportable petroleum industry though, the natural gas industry is structurally rigid. In economic terms, EU sanctions only affect pipeline construction materials and machinery, and do not directly target Russian natural gas entities, outside of Rosneft. Despite the limited to-date economic effects of EU sanctions 10 Avis, Patrick: What Drives European Natural Gas Prices?

11 Roux, Lucie: Russia’s Gazprom Edges towards Flexible Gas Market-Driven Auctions

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for V4 natural gas markets, the design of the market is cause for concern.

With the continued Russian pursuit of an operational Nord Stream II, V4 natural gas supply security is facing great danger.

Future Geopolitical Considerations 1. Changing Energy Dynamics With both V4-Russian energy relationships now explored, it is evident that V4 energy security risks related to the natural gas industry are much more significant than the petroleum industry. Despite sanctions targeting petroleum-affiliated Rosneft, Gazprom Neft, and Transneft, and neglecting natural gas giant Gazprom, greater V4 economic and political concern should stem from the design of the Central European gas market. Tied to the discussed transportation and price mechanisms of gas, increased risk stemming from strained EU-Russian relations could ultimately harm V4 energy security. As supply (Russia) and demand (EU & V4) struggle against one another for market power, each side is developing new tactics to gain an edge. For Gazprom and Russia, the further construction of pipelines to Europe remains the objective. Specifically, there are three pipelines either being constructed or considered which satisfy the dual goals of 1) bypassing Ukraine and 2) creating a direct supply link with Western Europe. For the EU and V4, especially in light the 2014 EU sanctions, the aspiration of energy diversification has never been greater. In diversifying their supply base, Central and Eastern Europe in particular aim to loosen the economic influence of their easternmost neighbor.

2. Russian-led Initiatives a. South Stream & Turk Stream Even prior to the 2014 Crimean Crisis, Russian-Ukrainian relations had been strained for some time. In 2006, a pricing dispute arose between Russia and Ukraine which ultimately disturbed supply availability for Gazpromâ&#x20AC;&#x2122;s Western European customers. This was possible as at that time 80% of

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total Russian gas destined for Europe passed through Ukrainian land (12).

Combined with increasingly unreliable energy relations with other ex-Soviet republics, Russia has looked to diversify away from Ukraine and other former Soviet partners.

The first of these efforts began in 2007, with the proposed South Stream pipeline, which would connect Russia, Bulgaria, Serbia, Hungary, Slovenia, and Italy. A massive pipeline capable of transporting 63 billion cubic meters per year (bcm/y) of natural gas, South Stream looked to connect Russia into the heart of Europe. However, the South Stream was ultimately not constructed. Resulting from a 100 decrease bcm/y drop in European natural gas demand, projected total costs exceeding $40 billion, and EU challenges to its legality, the South Stream project was abandoned in December 2014 (13).

On the same day the South Stream project was canceled a new pipeline project was announced by Russian President Vladimir Putin â&#x20AC;&#x201C; Turk Stream.

Instead of constructing a 63 bcm/y pipeline to ship gas to Bulgaria, a 63 bcm/y pipeline would now be built between Russia and Turkey (14). Essentially a rerouted South Stream, Turk Stream, via connecting to the expanding non-EU Turkish market, could avoid EU jurisdiction over its construction.

The planned Turk Stream crosses the Black Sea, reaching the Turkish port of Kiyikoy, before stopping at the Turkish-Greek border town of Ipsila, right on the edge of the EU. With the stated goal of reducing Russian natural gas transit through Ukraine to 0 by 2019, Turk Stream positions Turkey as a viable alternative as a transit country (15). Even still, EU regulation could still limit the construction of the necessary energy infrastructure needed to move gas the short distance over the border and into Greek territory (and further into Central Europe), e.g. the Tesla pipeline. On the Turkish side, a level of uncertainty remains as well. For a short period in 2016, Russia suspended talks on Turk Stream after a Russian aircraft was shot down by a Turkish jet close to the Syrian border (16). Relations were restored shortly 12 Franza, Luca: From South Stream to Turk Stream 13 Franza, Luca: From South Stream to Turk Stream 14 EURACTIV: www.euractiv.com/section/energy/news/pipes-for-south-stream-keep-arrivingin-bulgaria/ 15 Franza, Luca: From South Stream to Turk Stream 16 Dyomkin, Denis: Putin Says Russia Hasnâ&#x20AC;&#x2122;t Canceled South Stream, Turkstream Gas Projects

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thereafter though. Now, with the strengthening of Russian-Turkish relations, Turk Stream looks likely to be built. With its completion, Russia will possess a foothold right on the edge of EU borders, with increased potential to make true on its promise to eliminate natural gas transits through Ukraine.

As the V4 is highly dependent on gas transit through Ukraine, gas supply paths would change drastically. For V4 nations, the Ukrainian hedge against greater Russian natural gas hegemony would be removed. b. Nord Stream II The second Russian effort to diversify transit lines away from Ukraine is Nord Stream II. Perhaps more significant for V4 gas supply security, Nord Stream II would expand the carrying capacity of the already constructed Nord Stream pipeline. The original Nord Stream pipeline passes underneath the Baltic Sea to connect Russia directly to northern Germany and Western Europe. With the expansion of the Nord Stream pipeline to include Nord Stream II, the two lines would increase the carrying capacity from the current 55 bcm/y to 110 bcm/y, all while avoiding passing through Ukraine (17). A unique aspect of Gazprom-owned Nord Stream II is the level of collaboration and financing it has secured from Western partners. Agreed upon in April 2017, Nord Stream II secured €4.75 billion in long-term financing from five European firms: Shell, Wintershall, OMV, ENGIE, and Uniper (18).

Split evenly between each company, this total will cover 50% of the €9.5 billion cost, with the other half being contributed by Gazprom itself (19).

By enlisting buy-in from European companies, Gazprom has intentionally intertwined European business interests with Russian geopolitical strategy.

Planned to be completed in 2019, the sheer operational capacity of Nord Stream II would change the geopolitical landscape for Central Europe and the V4. Germany, predominantly sourced by Russia and Nord Stream and Nord Stream II, would become the EU’s (and V4’s) largest supplier of gas.

Similarly, as V4 supply diversity decreases, Russian market power would inversely increase.

17 Gazprom: www.gazprom.com/about/production/projects/pipelines/built/nord-stream2/ 18 Shell Global: www.shell.com/media/news-and-media-releases/2017/shell-and-foureuropean-energy-companies-sign-financing-agreements.html 19 Shell Global: www.shell.com/media/news-and-media-releases/2017/shell-and-foureuropean-energy-companies-sign-financing-agreements.html

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Due to the potential of Nord Stream II, the pipeline has faced numerous political and legal challenges. First and most important, new American sanctions against Russia related to the 2016 U.S. presidential election were upgraded in 2017. These new sanctions allow the U.S. Treasury Department to fine non-American firms who collaborate with Russian companies named by the 2014 U.S. sanctions (20). Recall that U.S. sanctions do name Gazprom, unlike their EU counterparts. While the financing agreement between Shell, Wintershall, OMV, ENGIE, and Uniper with Gazprom was finalized before these sanctions, the Treasury Department’s expanded power allows them to fine these European companies. On these grounds, if the Treasury Department decides to collect their fine, the construction of Nord Stream II could be heavily affected.

Outside of Germany, Nord Stream II has faced heavy criticism from EU, V4, and transatlantic leadership. European Union Council President Donald Tusk stated, “The [European] commission has assessed that if Nord Stream II were to be constructed, it would increase Europe’s dependence on one supplier and concentrate 80 percent of Russian gas imports on one route… It would also lead to a dominant position of Gazprom [a Russian state firm] on the German market, by increasing its share to over 60 percent.”

(21). The V4’s Czechia, Hungary, Poland, and Slovakia, along with Estonia, Latvia, Lithuania, Romania, and Croatia, signed a joint letter declaring Nord Stream II “poses certain risks for energy security” for their respective nations (22). Additionally, U.S. Secretary of State Rex Tillerson expressed similar concerns in 2018 (23). Of additional concern for V4 nations would be the loss transit fees entailed by a supply shift to an operational Nord Stream II (24).

Finally, and still under discussion, is the legality of Nord Stream II under EU law. Poland has been particularly vocal, arguing that an operating Nord Stream II is in direct contrast to the spirit of sanctions, and could violate the

20 Rapoza, Kenneth: Remember Those Funny European Sanctions Against Russia?

21 Teffer, Peter: Tusk: Nord Stream II Doesn’t Help 22 Rettman, Andrew: Eastern EU Leaders to Warn Juncker on Nord Stream II 23 Goettig, Marcin, and Lidia Kelly: U.S. Says Planned Russian Pipeline Would Threaten European Energy Security 24 Rettman, Andrew: Eastern EU Leaders to Warn Juncker on Nord Stream II

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EU Energy Union’s supply security and ownership liberalization goals (25).

With Gazprom’s recent success in overcoming a Polish-led antimonopoly case regarding increased Russian capacity use of the OPAL pipeline, Gazprom’s market share looks to be secure at this time, with potential to grow. However, much still depends on the success establishment of Nord Stream II. The coming months should provide insight into the Nord Stream II decision, and with it the future of Gazprom’s position in V4 gas markets.

3. EU-led & V4-led Counter-Initiatives a. The Three Seas Initiative & North-South Corridor Having discussed the most pressing Russian-led developments for V4 natural gas supply security, we turn to EU-led and V4-led initiatives. While Gazprom has pursued the construction of the Turk Stream and Nord Stream II pipelines to maintain and grow their position in Europe, Czechia, Hungary, Poland, and Slovakia have been involved in a number of counter-initiatives.

Each such effort is ideologically linked to the Three Seas Initiative, created to counter the Gazprom hegemony in Central, Eastern, and Southern Europe. The Three Seas Initiative, also known as the Baltic, Adriatic, and Black Sea initiative, is usually referred to as simply Three Seas. Membership consists of the Baltic states (Estonia, Latvia, and Lithuania), the V4, Austria, Slovenia, Croatia, Romania, and Bulgaria. Three Seas provides a forum for V4 leaders to collaborate with other regional decision makers in order to develop infrastructure and diversify their energy supply sources (26). The most notable projects discussed involve the development of the liquefied natural gas industry in their respective countries and the creation of a north-south energy corridor for providing greater infrastructural flexibility. b. Liquefied Natural Gas Growth Compared to pipeline transported natural gas, liquefied natural gas (LNG) is growing seven times faster. Currently making up 32% of globally traded natural gas, by 2035, the LNG market is projected to account for

25 Wyciszkiewicz, Ernest: Polish-Russian Energy Relations Following the Aggression against Ukraine – Part 2 26 Reza, Zainab: What Is The Three Seas Initiative?

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50% of globally traded gas. As LNG is moved via sea transport, in a similar way to the crude petroleum, cargoes can be redirected to equilibrate supply and demand around the world (27). The development of the LNG market provides an unprecedented opportunity for supplier diversity for V4 countries. Currently LNG markets are more developed in East Asia, but there is evidence of growth in Europe now as well. Of Three Seas members, there are only two operational LNG regasification terminals; the Świnoujście LNG Terminal is located in Poland and the FSRU Independence Terminal is located in Lithuania. Five more terminals are planned – the Muuga (Tallinn) LNG terminal (Estonia), the Paldiski LNG terminal (Estonia), the Skulte LNG terminal (Latvia), the FSRU Polish Baltic Sea Coast terminal (Poland), and the Krk Island terminal (Croatia). For V4 countries, the two Polish terminals and single Croatian terminal are of primary significance.

With the establishment of these terminals, Poland (and therefore the V4), can look outside the European continent for their natural gas supply. In 2016, Poland’s Świnoujście LNG Terminal received their first delivery via a long-term contract with Qatargas. The following year, the first shipment of American LNG arrived (28). While the American shipment was only a short-term transaction designed for testing the capabilities of the Świnoujście LNG Terminal, the potential is exciting. Due to the expected growth of LNG, Gazprom and Novatek have also planned five of their own LNG terminals to be focused on the European market. Only one, located on the Yalma peninsula and owned by Novatek, is currently operational. Yet, even if Gazprom (or Novatek) becomes an LNG power, this works against Russian natural gas monopoly power.

As the LNG market grows, a globalized market will develop to equalize world supply and demand with prices tied to global spot prices. The Henry Hub natural gas spot price, or some other contract for natural gas prices, will develop into a price benchmark, similar to the petroleum market’s Brent crude. With prices tied to globalized benchmarks instead of the monopoly power of a politically-influenced supplier, V4 bargaining power would increase drastically during contract negotiations with Gazprom.

27 BP Global: The Effect of LNG Growth on Global Gas Markets 28 Wyciszkiewicz, Ernest: Polish-Russian Energy Relations Following the Aggression against Ukraine – Part 1

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c. V4 Dual-flow Infrastructure Potential To supplement the growth of the LNG market, V4 nations are also exploring new pipeline options to further counter Gazprom. Via the planned Baltic Pipe, which would connect Poland to Norwegian natural gas markets, Poland could become a gas hub for the Central and Southern European markets. This strategy is directly tied to Three Seas and the development of a North-South energy corridor. As exciting as this is, the infrastructure to transport natural gas to more southern V4 nations is still needed. Currently a Polish-Czech pipeline exists with dual-flow capabilities allowing for the transmission of Polish gas to Czechia (29). The proposed Eastring pipeline would provide dual flow ability between Slovakia and Hungary (30). However, a connection is still lacking between Poland and Slovakia, and therefore Hungary. Similarly, dual-flow capacity is also lacking between Hungary and Croatia, but with the completion of the Croatian Krk Island LNG terminal, there is hope that this will be constructed in the near future as well. With the development of a complete North-South corridor with dual-flow capabilities, a V4 not dependent on Russian gas becomes a much greater possibility. d. Southern Supplier Development Lastly, there exists additional potential for V4 nations to receive natural gas supply from more southern sources. Currently, two new pipelines of great significance are being developed that would connect Europe to Azerbaijani gas: the Trans-Anatolian pipeline (TANAP) and the TransAdriatic pipeline (TAP). Acting as an extension of the South Caucasus Pipeline (SCPx), which begins in Azerbaijan, TANAP would create a gas route reaching the far south-eastern edge of the EU. From there, TAP would carry Azerbaijani gas through Greece and Albania, underneath the Adriatic Sea, to Italy. From there, via the dual-flow Trans Austria Gas (TAG) pipeline, this gas could reach the V4 markets (31). The development of TANAP and TAP are integral parts of a proposed South Gas Corridor to complement the previously mentioned Polish diversification efforts. While TANAP faces

29 Gawlikowska-Fyk, Aleksandra: How the European Union Is Shaping the Gas Market in Poland 30 The Slovak Spectator: spectator.sme.sk/c/20684893/slovakia-and-hungary-sign-memorandumon-eastring-project.html 31 Trans Adriatic Pipeline: www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor

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Russian challenges due to both Russia and Azerbaijan sharing Caspian Sea borders, there is evidence of both northern and southern efforts to realize a true North-South gas corridor aligned with the goals of Three Seas.

Via Three Sea nations’ (and therefore V4 nations’) efforts to develop LNG capabilities, dual-flow infrastructure, and northern and southern pipeline alternatives, Gazprom (and Russia) faces significant challenges to their key European market in the coming years.

Conclusion The goal of this second essay was to explore the connection between the V4 nations of Hungary, Czechia, Poland, and Slovakia and Russia within the context of the energy industry and EU sanction policy. I believe we have completed this in a thorough and robust manner. EU sanctions target Russian entities whose primary business interests are within the petroleum industry – Rosneft, Gazprom Neft, and Transneft. With the exception of Rosneft, EU sanctions do not affect Russian natural gas-focused businesses (e.g. Gazprom) though, contrary to US sanctions. Despite recent strides to decrease energy imports and intensity, all V4 nations demonstrate considerable dependency on petroleum and natural gas to satisfy their energy needs. Russia ranks as the #1 source of these products for each V4 nation (32). While Russia possesses a greater V4 import share of crude petroleum than natural gas, oil markets showcase markedly different transport and price structures, which render Russian dominance much less strategically important. The robust nature of the European midstream when combined with a globalized market pricing design allow V4 nations to respond sufficiently to Russian oil supply shocks. Unfortunately, equivalent hedges to the Russian natural gas hegemony are not present for Czechia, Hungary, Poland, and Slovakia.

Via majority state-owned Gazprom, Russia is the most critical supplier of natural gas to Central Europe by a wide margin.

Supplementing the EU’s own sanction policy, the EU has suggested countries that show strong Russian natural gas dependencies, like the V4, should attempt to diversify their energy suppliers. Russia aims to negate these efforts by constructing additional pipelines into the heart of the EU 32 Observatory of Economic Complexity: atlas.media.mit.edu/en/

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which bypass Ukraine. Via the Turk Stream pipeline and Nord Stream II pipeline, Gazprom has dedicated considerable resources to maintaining their monopoly. While both pipelines either have faced challenges (Turk Stream) or continue to face challenges (Nord Stream II), the construction and finalization of both look likely in the near future. To counter these Russian-led challenges, the V4, in collaboration with other Central, Eastern, and Southern European countries have banded together to create the Three Seas Initiative with the stated goal of creating a North-South energy corridor. Through this informal alliance, equivalent efforts have been dedicated to the development of the LNG industry, appropriate dual-flow energy infrastructure, and southern gas pipeline alternatives (TAP & TANAP). With both sides, V4 and Russian, exerting resources to counter one another for market power, the future of the Central European energy industry is as dynamic and geopolitically critical as ever before. With all preceding initiatives either having their impetus rooted in EU sanction policy or affected by it, the future of V4 energy security looks to change significantly in the coming years, hopefully in favor of the V4 countries.

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Works Cited “About.” Nord Stream 2, Gazprom, www.gazprom.com/about/production/ projects/pipelines/built/nord-stream2/.

Avis, Patrick. “What Drives European Natural Gas Prices?” Energy Analyst, 18 Mar. 2016, energyanalyst.co.uk/what-drives-european-natural-gas-prices/.

“Company.” Transneft, Transneft, 2018, www.en.transneft.ru/about/.

“COUNTRY COMPARISON : NATURAL GAS - PROVED RESERVES.” The World Factbook, Central Intelligence Agency, 2017, www.cia.gov/library/ publications/the-world-factbook/rankorder/2253rank.html.

“Druzhba Pipeline.” Oil Transport, International Association of Oil Transporters, 2015, www.iaot.eu/en/oil-transport/druzhba-pipeline.

Dudek, Jerzy, and Andris Piebalgs. “Nord Stream 2 and the EU Regulatory Framework: Challenges Ahead.” Robert Schuman Institute for Advanced Studies, European University Institute, Oct. 2017, fsr.eui.eu/publications/ nord-stream-2-eu-regulatory-framework-challenges-ahead/.

Dyomkin, Denis. “Putin Says Russia Hasn’t Canceled South Stream, Turkstream Gas Projects.” Reuters, Thomson Reuters, 7 June 2016, www.reuters. com/article/us-russia-gas-exports/putin-says-russia-hasnt-canceledsouth-stream-turkstream-gas-projects-idUSKCN0YT228.

“The Effect of LNG Growth on Global Gas Markets.” BP Global, BP Global, 2018, www.bp.com/en/global/corporate/energy-economics/energyoutlook/lng-and-global-gas-markets.html.

European Commission, Publications Office of the European Union. “EU Energy in Figures - Statistical Handbook 2017.” EU Energy in Figures - Statistical Handbook 2017, European Union, 2017.

European Union, European Council Decision, 512, vol. 2014, 2014. CFSP. European Union, European Council Decision, 659, vol. 2014, 2014. CFSP.

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European Union, European Parliament, DIRECTORATE GENERAL FOR INTERNAL POLICIES, et al.

“An Assessment of the Gas and Oil Pipelines in Europe.” An Assessment of the Gas and Oil Pipelines in Europe, Policy Department Economic and Scientific Policies, 2009.

“Extra-EU Imports of Natural Gas, Shares in Value of Main Trading Partners.”

Eurostat, Eurostat, 27 Oct. 2017, ec.europa.eu/eurostat/statisticsexplained/index.php?title=File%3AExtra-EU_imports_of_ natural_gas%2C_shares_in_value_of_main_trading_partners png&oldid=357708.

Franza, Luca. “From South Stream to Turk Stream.” Clingendael International Energy Programme, Clingendael International Energy Programme, Nov. 2015, www.clingendaelenergy.com/publications/publication/ from-south-stream-to-turk-stream.

Gawlikowska-Fyk, Aleksandra. “How the European Union Is Shaping the Gas Market in Poland.” PISM Policy Paper, Polish Institute of International Affairs, Apr. 2013, www.pism.pl/Publications/PISM-Policy-Paper-no-56.

“Gazprom Neft Shares.” Gazprom Neft, Gazprom Neft, 2018, ir.gazprom-neft. com/share-data/shares/.

“Gazprom’s Shareholder Structure as of 2016.” Statista, Gazprom, 2018, www. statista.com/statistics/273267/shareholder-structure-of-gazprom/.

Goettig, Marcin, and Lidia Kelly. “U.S. Says Planned Russian Pipeline Would Threaten European Energy Security.” Reuters, Thomson Reuters, 27 Jan. 2018, www.reuters.com/article/us-europe-nordstream-usa/us-says-planned-russian-pipeline-would-threaten-european-energysecurity-idUSKBN1FG0CY. Hlavac, Marek (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.1. https://CRAN.R-project.org/ package=stargazer “ICE Brent Crude Oil.” Intercontinental Exchange, Intercontinental Exchange, www.theice.com/brent-crude.

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Khvostunova, Olga. “Rosneft vs. Gazprom.” Institute of Modern Russia, Institute of Modern Russia, 29 Aug. 2013, imrussia.org/en/economy/543rosneft-vs-gazprom.

“LNG Map.” LNG Map, Gas Infrastructure Europe, Dec. 2017, www.gie.eu/index. php/maps-data/lng-map.

Observatory of Economic Complexity, The MIT Media Lab Macro Connections Group, 2018, atlas.media.mit.edu/en/.

“Oil Pipelines in Europe and Asia.” CSS Analyses in Security Policy, Center for Security Studies, ETH Zurich, www.korea-cbms.ethz.ch/Maps/index.htm.

Peters, Eric S., “An Inquiry into the Effect of the 2014 Russian Sanctions on European Gasoline Markets” (2017). University of Tennessee Honors Thesis Projects.

“Pipes for South Stream Keep Arriving in Bulgaria.” EURACTIV, EURACTIV, 5 Jan. 2015, www.euractiv.com/section/energy/news/pipes-for-southstream-keep-arriving-in-bulgaria/.

Rapoza, Kenneth. “Here’s How Europe’s Russian Sanctions Differ From Washington’s.” Forbes, Forbes, 23 June 2017, www.forbes.com/sites/ kenrapoza/2017/06/23/heres-how-europes-russian-sanctions-differfrom-washingtons/#2d32ee3c5161.

Rapoza, Kenneth. “Remember Those Funny European Sanctions Against Russia?” Forbes, Forbes, 30 Aug. 2017, www.forbes.com/forbes/ welcome/?toURL=https%3A%2F%2Fwww.forbes.com%2Fsites%2Fke nrapoza%2F2017%2F08%2F30%2Fremember-those-funny-europeansanctions-against-russia%2F&refURL=&referrer=#48a884854fac.

Rettman, Andrew. “Eastern EU Leaders to Warn Juncker on Nord Stream II.” EUobserver, EUobserver, 17 Mar. 2016, euobserver.com/foreign/132726.

Reza, Zainab. “What Is The Three Seas Initiative?” WorldAtlas, WorldAtlas, 29 Nov. 2017, www.worldatlas.com/articles/what-is-the-threeseas-initiative.html.

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Roux, Lucie. “Russia’s Gazprom Edges towards Flexible Gas Market-Driven Auctions.” S&P Global, Platts, 16 Sept. 2015, www.platts.com/latestnews/natural-gas/london/russias-gazprom-edges-towards-flexiblegas-market-26210724.

“Russian Oil Production by Top Company 2016 | Statistic.” Statista, Statista, 2018, www.statista.com/statistics/305372/oil-production-in-russiaby-company/.

“Russia’s Natural Gas Production by Company 2016.” Statista, Eastern Bloc Energy, 2018, www.statista.com/statistics/305384/russian-naturalgas-production-by-company/.

“Russia’s Rosneft Seeks End to Gazprom Gas Export Monopoly.” Reuters, Thomson Reuters, 22 July 2015, www.reuters.com/article/russia-rosneft-gas/ russias-rosneft-seeks-end-to-gazprom-gas-export-monopoly-riaidUSL5N10243N20150722.

“Shell and Four European Energy Companies Sign Financing Agreements with Nord Stream 2 AG for Pipeline Project.” Shell Global, Shell Global, 24 Apr. 2017, www.shell.com/media/news-and-media-releases/2017/shelland-four-european-energy-companies-sign-financing-agreements. html.

“Slovakia and Hungary Sign Memorandum on Eastring Project.” The Slovak Spectator, The Slovak Spectator, 30 Oct. 2017, spectator.sme. sk/c/20684893/slovakia-and-hungary-sign-memorandum-on-eastringproject.html.

“Southern Gas Corridor.” Trans Adriatic Pipeline, Trans Adriatic Pipeline, 2018, www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor.

Staff, Investopedia. “Midstream.” Investopedia, 23 Jan. 2018, www.investopedia. com/terms/m/midstream.asp.

Teffer, Peter. “Tusk: Nord Stream II Doesn’t Help.” EUobserver, EUobserver, 18 Dec. 2015, euobserver.com/energy/131605.

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United States, Congress, U.S. Energy Information Administration. “Country Analysis Brief: Russia.” Country Analysis Brief: Russia, U.S. Energy Information Administration, 2017.

United States, Executive Order. No. 13662, 2014. OFAC sanction list.

“UPDATE 1-Russia’s Gazprom Buoyant over Its Position in Europe.” Reuters, Thomson Reuters, 30 Jan. 2018, www.reuters.com/article/gazpromeurope/update-1-russias-gazprom-buoyant-over-its-position-ineurope-idUSL8N1PP21K. Wood Mackenzie. “European Oil Refining Capacity.” European Oil Refining Capacity, Finnish Petroleum and Biofuels Association, www.oil.fi/en/statistics2-oil-production-and-refining/23-european-oil-refining-capacity.

Wyciszkiewicz, Ernest. “Polish-Russian Energy Relations Following the Aggression against Ukraine – \Part 1.” The Centre for Polish-Russian Dialogue and Understanding, The Centre for Polish-Russian Dialogue and Understanding, Aug. 2017, cprdip.pl/en,projects,russias_influence_ activities_in_cee,polish-russian_energy_relations_following_the_ aggression_against_ukraine_part_1.html.

Wyciszkiewicz, Ernest. “Polish-Russian Energy Relations Following the Aggression against Ukraine – Part 2.” The Centre for Polish-Russian Dialogue and Understanding, The Centre for Polish-Russian Dialogue and Understanding, Sept. 2017, cprdip.pl/en,projects,russias_influence_ activities_in_cee,polish-russian_energy_relations_following_the_ aggression_against_ukraine_part_2.html.

Zaslavskiy, Ilya. “The Kremlin’s Gas Games in Europe: Implications for Policy Makers.” Atlantic Council, 24 May 2017, www.atlanticcouncil.org/ publications/issue-briefs/the-kremlin-s-gas-games-in-europeimplications-for-policy-makers.

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Index Figure 17. European, African, and Middle East LNG Terminal Map

Source: Gas Infrastructure Europe

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III ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS 108 FINA NCI A L SERV ICES & GOV ER NA NCE

Introduction As the world has grown in commercial and political interconnectedness over the last 60 years, Western capital markets have moved into the heart of the global economy. Never before has there been such rapid increases in wealth and prosperity. In combination with technological innovation, much of this growth is the result of the liquidity and funding provided by Western capital markets. Without access to debt, equity, and other financial products, global economies grind to a halt, in ways analogous to a car without gasoline. Due to the importance of access to debt financing and liquidity, when Russia annexed/invaded the Crimean Peninsula and provided support for the violence in the Donbass region, the United States and EU made sure to include capital market restrictions within their 2014 sanction packages.

Coming up on four years later now, how have these restrictions affected the Russian economy? Due to Czechia, Hungary, Poland, and Slovakiaâ&#x20AC;&#x2122;s historical inclusion in the Russian sphere of influence, and current inclusion in the EU, how have V4 nations navigated potential financial difficulties with a historic partner? In this third essay, the V4-Russian financial relationship will be explored. First, an overview of sanctions related to the capital markets and financial services industries will be reviewed. Next, an exploration of the Russian banking sector and V4 banking sectors will be undertaken. Third, a variety of metrics will be analyzed in order to provide a quantifiable picture of the changing V4-Russian financial dynamic. Finally, this essay will conclude with a discussion of various governance topics that require additional consideration. Each of these sections will be framed within the context of the 2014 EU sanctions to provide a nuanced perspective of the financial relationship and health between the V4 nations and Russia.

Review of Capital Markets-Related Sanctions 1. Overview of Western Sanction Policy and Significant Actors Targeted Resulting from the Ukrainian Crisis of 2014, the EU collaborated within its member states to craft an appropriate set of economic sanctions that would express displeasure with Russian action in the region. In addition to the aforementioned sanctions targeting the energy industry (covered in Essay 2: Energy), EU economic sanctions were designed to harm the financial health

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of the Russian economic system. One of the simplest ways to accomplish this task is to target the institutions critical to financial health â&#x20AC;&#x201C; the Russian banking industry. Outlined in Table 1, the resulting July 2014 EU Council decision targeted five Russian banks and their subsidiaries.

Table 1. Significant Russian Entities Targeted by Western Sanction Policy

Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/CFSP

US sanction policy targets the same group of five, in addition to a number of smaller banks that do not appear in Table 1. Furthermore, several individuals associated with the Russian banking system are targeted by EU sanction policy as well.

Table 2. Significant Russian Individuals Targeted by Western Sanction Policy

Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/CFSP

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As illustrated, Western sanction policy targets a range of influential entities and individuals associated with the Russian financial system. An additional reminder, individuals named by Western sanctions were chosen due to their close ties to the Kremlin and Russian President Vladimir Putin.

There does not seem to be any strategic differences between EU and U.S. sanction policies.

2. Significant EU Sanction Policy Details Regarding the entities and individuals listed above, sanctions drastically affect the financial flexibility of those named. As of September 12th, 2014, sanctioned individuals and entities are barred from access to long term debt (defined as instruments exceeding 30 days in maturity) (1),(2). Important to note though is that EU entities and individuals can continue the financing of long term debt for the sanctioned as long as said agreements were finalized before September 12th, 2014, with the exception of export-restricted products (3). A list of restricted products can be found in Essay 1: Econometric Analyses. Furthermore, EU entities and individuals cannot extend loans to sanctioned entities and individuals which were agreed to before September 12th, 2014, nor cancel these loans in order to allow the sanctioned to retain loaned capital (4).

The Russian Banking Sector 1. Introduction to Banking in Russia Even before the introduction of Western sanctions, the Russian banking industry faced severe structural challenges. With a worsening recession, deepened by a falling Ruble and oil price, the sector has experienced a high

1 European Parliament, European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 2 European Commission: Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014 3 European Commission: Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014 4 European Commission: Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014

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level of consolidation over the last few years (5). This has led to an overconcentrated industry, with a small number of major players and many smaller, less significant banks facing acquisition. This consolidation, along with a significant rise in overdue domestic loans since December 2014, has drawn the eye of the European Banking Federation (EBF). The EBF, an entity which analyzes stress tests, found the Russian banking industry faired particularly poorly against a single-factor stress test. This test measures the effects of bankruptcy for the five largest lenders in a market. Such a result speaks to high systemic risks from loan concentration patterns for the Russian banking sector (6).

2. Market Structure Of the five banks and their subsidiaries named by EU sanction policy, Bank Rossiya, Gazprombank, Sberbank, and VTB Bank make up 53% of the total market share. Vnesheconombank does not possess an easily comparable market share due to its nature as a governmental export-import bank. A breakdown of the Russian banking market share can be seen in Figure 1.

Figure 1. Russian Banking Market Share by Company (2012) Data Source: A.T. Kearney

5 Angel, Gustavo, et al.: Russia Industry Research â&#x20AC;&#x201C; Banks 6 Angel, Gustavo, et al.: Russia Industry Research â&#x20AC;&#x201C; Banks

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Sberbank is not only the largest bank in Russia by market share, but also is the fourth largest company in Russia as measured by annual revenue (7). Outside of governmental bank Vnesheconombank, Sberbank is the only EU-sanctioned bank where the Russian government owns a majority share. The Bank of Russia, the nationâ&#x20AC;&#x2122;s central bank, possesses a 50% + 1 share majority stake in Sberbank (8). Sberbank, due to its size and backing, is the sole Russian bank to maintain significant operations in Central Eastern Europe (CEE). Owning subsidiaries in V4 nations Czechia, Hungary, and Slovakia, Sberbank is geographically present far away from its Moscow headquarters (9).

While not directly government controlled like Sberbank, various Russian oligarchs own controlling stakes in Bank Rossiya, Gazprombank, and VTB Bank. Due to this, and the nature of relationships between the Russian oligarch class and the Kremlin, a high enough level of federal influence exists to justify sanctions.

3. Avoidance Efforts a. Motivations for Avoidance For the sanctioned entities and their associated oligarchs, there is a tremendous incentive to avoid the impacts of Western sanctions. In 2014, after being placed on the U.S.â&#x20AC;&#x2122;s Office of Foreign Assets Control (OFAC) sanction list, over $640 million worth of assets for Bank Rossiya and SMP Bank were seized. Of the $640 million frozen, $572 million belonged to Bank Rossiya, whose largest shareholders are the black-listed Yuri Kovalchuck and Nikolai Shamalov (10). Bank Rossiya has been frozen out of US$ dollar transactions (11). The remaining balance seized, around $65 million, belonged to SMP Bank (U.S. sanctioned only). While SMP Bank is not officially named by EU sanctions, its owner, Arkady Rotenburg, is named. In sorting through 7 RBC: raexpert.eu/files/Industry_report-Banks_26.08.2016.pdf 8 Sberbank: www.sberbank.com/investor-relations/share-profile/shareholder-structure 9 Sberbank: www.sberbank.ru/en/about/global_business/subsidiary_banks/ce_en/se_ag_en 10 Shishkin, Philip: U.S. Sanctions Over Ukraine Hit Two Russian Banks Hardest 11 Finextra: www.finextra.com/newsarticle/25873/visa-and-mastercard-cut-off-russiassanctions-hit-smp-bank

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the small discrepancies between U.S. and EU sanctions, many firms have simply cut off transaction processing for Russian customers, e.g. Visa and MasterCard, or moved away from the sector entirely (12). While service was restored shortly thereafter for SMP Bank customers, many others were not so lucky. To this day, even PayPal accounts have been frozen for the Russian-backed separatist militias in eastern Ukraine (13).

Economically, the EU-Russia relationship is highly asymmetrical, with the Russians far more reliant on the EU market than the EU on the Russian market. Between the interaction of EU sanctions and a faltering Russian banking sector, many western firms are reluctant to provide financing for even non-sanctioned banks. While the Russian central bank has attempted to fill these gaps, such a solution only aggravates existing structural problems (14). Between the European hesitation to provide long-term debt to non-sanctioned entities, the imbalanced EU-Russia trade relationship, and the actual effects of sanctions, an additional layer of de facto sanctions has materialized. This has only magnified costs for those targeted and increased the incentive to get around them. b. Bank Rossiya Yuri Kovalchuck and Bank Rossiya provide an example of the lengths that sanctioned entities and individuals have gone to avoid the pain of EU sanctions. Finding a loophole in Western sanctions, Bank Rossiya, who had owned 51% of Sogaz, an insurance company, moved 2.5% of its shares to a newly formed subsidiary. This move shifted Bank Rossiya ownership of Sogaz under the 50% mark, making them exempt from sanctions. Yet before this loophole could be closed, on August 11th, 2014, Bank Rossiya moved their existing shares of Sogaz to Gazprom (15). As Gazprom is not a target of EU sanctions, due to the European reliance on Gazpromâ&#x20AC;&#x2122;s natural gas, Bank Rossiya successfully managed to avoid capital restrictions for Sogaz.

12 Finextra: www.finextra.com/newsarticle/25873/visa-and-mastercard-cut-off-russiassanctions-hit-smp-bank 13 Shishkin, Philip: U.S. Sanctions Over Ukraine Hit Two Russian Banks Hardest 14 Bond, Ian, et al.: Frozen: The Politics and Economics of Sanctions against Russia 15 Johnston, Cameron: Sanctions against Russia: Evasion, Compensation and Overcompliance

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c. Gennady Timchenko The actions of Gennady Timchenko, owner of the sanctioned Novatek and Volga Group and influential investor in physical commodity trading firm Gunvor, showcase another example of Russian avoidance efforts. The same day he was named to the U.S. sanction list, Timchenko sold his shares in Gunvor and in parts of the Volga Groupâ&#x20AC;&#x2122;s portfolio (16). These actions were sold using the same strategy of Bank Rossiya â&#x20AC;&#x201C; moving ownership of businesses that would be sanctioned to non-sanctioned entities and thereby avoiding asset freezes and capital restrictions. Despite these maneuvers, there is no guarantee that such transfers hold any real significance, other than superficial legal ones. While impossible to prove, many are skeptical that sanctioned individuals have actually relinquished control of these companies. In reality, it remains very possible that Timchenko and Rotenburg still manage these offloaded firms, just in an unofficial sense (17).

4. Conclusions Within the over-concentrated Russian banking sector, EU sanctions directly affect Bank Rossiya, Gazprombank, Sberbank, and VTB Bank, who in total control a 53% market share. Vnesheconombank, a governmental export-import bank, also faces severe capital restrictions. Unable to access Western debt products exceeding 30 days in maturity, sanctions only increase stress on an already structurally problematic Russian banking sector. The role of Sberbank, the only sanctioned Russian bank maintaining a significant presence in V4 countries, will be further analyzed in the following section.

Despite the words of sanctioned Russian individuals, asset freezes on their personal assets and capital restrictions on firms have provided enough motivation to spur creative avoidance actions. Through the provided examples of Bank Rossiya and Gennady Timchenko, one can see that those sanctioned are exerting great effort to avoid the full economic weight of American and European law.

16 Johnston, Cameron: Sanctions against Russia: Evasion, Compensation and Overcompliance 17 Johnston, Cameron: Sanctions against Russia: Evasion, Compensation and Overcompliance

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The V4 Banking Sector 1. Introduction to Banking in the V4 Turning to the other side of sanctions now, V4 banking markets display much healthier characteristics than their Russian counterparts.

As a part of the EU banking system, there is a certain level of institutional control and governance that stands in stark contrast to the murky waters of the Russian banking sector. Even so, financial markets are global markets, and contain Russian players, namely Sberbank. Of the five Russian banks named, how many possess significant shares in the Czech, Hungarian, Polish, and Slovakian banking markets? Also, what level of exposure to sanctions-related Russian risk do these countries possess?

2. Market Structure Looking first to V4 banking market, do Bank Rossiya, Gazprombank, Sberbank, and VTB Bank own a significant share of the market? Figures 2, 3, 4, and 5 illustrate the respective market shares of leading banks within each V4 nation.

Figure 2. Czech Banking Market Share by Company (2017)

Source: Statista, UniCredit, EBF, AJTK Calculations 116 FINA NCI A L SERV ICES & GOV ER NA NCE

Figure 3. Hungarian Banking Market Share by Company (2015)

Source: BankRรกciรณ, AJTK Calculations

Figure 4. Polish Banking Market Share by Company (2017)

Source: Statista, PRNewswire, AJTK Calculations

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Figure 5. Slovakian Banking Market Share by Company (2016)

Source: EBF, UniCredit, AJTK Calculations

As can be seen, no V4 market records any EU sanctioned Russian bank as a leader in market share. While, Sberbank, the largest Russian bank, owns subsidiaries in Czechia, Hungary, and Slovakia, they do not register as a significant player in any of these three countries. At most, they rank as the 14th largest bank in Hungary with a 1.386% market share, based upon 2015 numbers (18). Despite the capital restrictions legislated against them, Sberbank clarified in 2014 that they had no intentions of leaving Hungary (19). They have continued to operate in Czechia and Slovakia as well, despite facing increasing difficulties despite their struggles in obtaining Western long-term debt (20). While sanctioned Russian banks may not possess significant market shares in V4 nations, another concern still exists in evaluating the risk posed by lending to Russian entities for European financial health.

18 BankRรกciรณ: www.bankracio.hu/bankok/bankok 19 Fedorova, Maria: Sberbank Not Leaving Hungary 20 Sberbank: www.sberbank.ru/en/about/global_business/subsidiary_banks/ce_en/se_ag_en

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3. The Russian Risk Despite not possessing significant market shares nor having access to Western capital markets, outstanding European loans to Russian companies agreed to prior to the 2014 sanctions still exist. How large are these loans, i.e. how sizable is EU and V4 financial exposure to the Russian economy?

Depending on the bank and the source of information, it seems this exposure is not insignificant. Measured in 2014, of the $209 billion worth of foreign loans to Russia, $154.6 billion worth of loans are attributed to European banks (21).

Table 3. Significantly Exposed Banks to Russia (Billions)

Source: Reuters, AJTK Calculations Table 4. Top 5 Countries Most Exposed to Russia (Billions)

Source: Reuters, AJTK Calculations

As displayed in Table 3, Hungarian bank OTP showcases a significant quantity of loans to the Russian market. While in terms of national exposure 21 Reuters Staff: European Banksâ&#x20AC;&#x2122; Exposure to Russia

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to Russia, no V4 country ranks within the top 5, yet even still, the size of OTP’s position cannot be ignored. However, OTP has an indirect level of backing from the Hungarian government via the government’s 25% stake in oil group MOL, which in turn owns a 8.5% stake in OTP (22). This provides a hedge to any default risk of the Russian lendees of OTP’s €4.4 billion worth of loans. In such a situation, OTP could simply write off these loans. Due to their systematic importance in the Hungarian banking sector and their ownership structure, OTP could rely on some level of government funding to maintain their liquidity if necessary.

Now, despite no V4 country holding a position within Table 4, and with the exception of Table 3’s OTP, it would seem that V4 countries do not seem to be too exposed to the Russian market. However, this is not accurate in reality. Societe Generale, Raiffeisen, and UniCredit are French, Austrian, and Italian banks, respectively. By reexamining Figures 1, 2, 3, and 5, UniCredit, the largest foreign bank in Russia in 2015, and the third most exposed bank to the Russian market at the time of sanction legislation, actually ranks as a top 5 bank in the Czech, Hungarian, and Slovakian markets. Similarly, highly exposed bank Raiffeisen ranks within the top 5 largest banks in Hungary too. Therefore, UniCredit and Raiffeisen, via their loans to Russia and large market shares in Czechia, Hungary, and Slovakia, connect the V4 to Russian credit risk, although in a less direct way than seen with OTP. Following the introduction of 2014 EU sanctions, UniCredit reported that sanctions could result in lost revenue opportunities in the €10-€15 million range. Furthermore, UniCredit, via their Central Eastern European (CEE) subsidiary Bank Austria, reported a €29 million loss before taxes due to their efforts to sell their Ukrainian branches (23). Despite these alarming figures, UniCredit reaffirmed their commitment to maintain a presence in Hungary and V4 markets, and their ability to stabilize profit levels despite sanctions due to the bank’s access to Western capital markets (24),(25). Because of the interconnectedness of the European banking 22 Szakacs, Gergely, and Marton Dunai: Hungary Raises $265 Mln from Sale of OTP Bank Stake 23 Shields, Michael, and Angelika Gruber: Bank Austria Says Can Prosper in Russia despite Sanctions 24 Shields, Michael, and Angelika Gruber: Bank Austria Says Can Prosper in Russia despite Sanctions 25 Szakacs, Gergely: Only Five Major Banks May Survive in Hungary: Bankers

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sector, analysis from German investment bank Berenberg concluded that â&#x20AC;&#x153;the direct impact of Russian sanctions would be limited, but the indirect fallout could include weaker demand for debt, funding restrictions and deteriorating asset quality.â&#x20AC;? (26) 4. Conclusions V4 banking markets demonstrate much healthier fundamentals than their Russian equivalent. In general, there is a far greater degree of diversity and a far lesser degree of government influence. Sberbank, the only sanctioned Russian bank present in V4 countries, does not own a particularly high market share in either Czechia, Hungary, or Slovakia. Still, at the time of the implementation of EU sanctions, a number of European banks had lent considerable sums of money to Russian firms. The most exposed of these banks included leading Hungarian bank OTP, and Raiffeisen and UniCredit, who maintain significant market shares in Czechia, Hungary, and Slovakia.

While OTP enjoys a small level of government ownership, which could translate to favorable treatment in case of liquidity issues, Raiffeisen and UniCredit enjoy no such advantage. Still, Raiffeisen and UniCredit maintain strong access to borrowing channels, and the ability to weather significant defaults on loans issued to Russia. To date, there is no evidence that these banks should fear defaults from all their loans to Russian entities. However, due to the geopolitical climate of Russia, and combined with a faltering economy, Western sanctions, and a volatile ruble, should give exposed banks pause when performing risk assessments of their outstanding loans.

When looked at in total, while I do not believe that these Russian-linked credit risks are systematically dangerous to Western capital markets, such loans do deserve closer examination and consideration by countries and European banks alike. At worse, the effect of sanctions on Russia could result in negative long-term indirect effects for both European economies and V4 banking markets (27).

26 Shields, Michael, and Angelika Gruber: Bank Austria Says Can Prosper in Russia despite Sanctions 27 Ficenec, John: Banks Most Exposed to Russia Sanctions

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Comparable Metrics 1. Introduction Having now explored both the Russian banking sector, V4 banking markets, and the interaction between the two in the context of sanction policy, we turn to more direct measures of comparison between Russia and V4 countries. Using two popular methods to compare the financial health of Russia to Czechia, Hungary, Poland, and Slovakia, a forecast of currency rates and a comparison of changes in sovereign credit ratings will be undertaken. By utilizing these two methods, I aim to paint a fuller picture of the interactions between V4 economies and Russia and how they both fare in the global economy.

2. Currency Forecasts a. Understanding Forecasting Foreign exchange rates are one of the simplest ways to measure the financial and economic relationship between two nations. Each V4 nations possesses a different currency that can be historically tracked. Do the exchange rates between V4 currencies and the Russian ruble change at the same time as EU sanctions are implemented? Such a question can be statistically resolved via a forecast. By comparing the forecasted rate to the actual rate, a degree of insight can be gained regarding the relationship between economic sanctions, currency fluctuations, and national financial relationships.

To forecast exchange rates, I collected daily exchange rate data for each respective V4 currency to the Russian ruble from January 1st, 2008 through December 6th, 2017. In total, almost 10 years of foreign exchange rate data has been collected. Data is present for each day, with the exception of public holidays (and weekends in the case of Hungary only). To forecast exchange rates, I used an autoregressive integrated moving average (ARIMA) model, which does not rely on theory, but on the momentum of a dataset itself.

A further advantage of using an ARIMA model is how it combines both autoregressive and moving average forecasts techniques, while allowing for differencing, all into one clean model. Due to this, ARIMA models have

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emerged as a popular method for forecasting within the field of econometrics.

To properly fit an ARIMA forecast, three parameters must be correctly specified: the quantity of lags for the auto-regressive model, the quantity of differencing, and the order of the moving average model. Typically listed with a forecast, each of these parameters respectively corresponds to the three variables in a (x, y, z) format to describe the type of forecast produced.

To determine the correct variables, one must find the variable combination that minimizes a forecastâ&#x20AC;&#x2122;s Bayesian information criterion (BIC) or Akaike information criterion (AIC), both of which are measures of statistical fit and error variance. Reiterated, of all possible variable combinations, the best forecast will result in the combination of variables (x, y, z) with the lowest BIC or AIC term. Using Râ&#x20AC;&#x2122;s auto.arima functionality, I can easily identify the ideal combination of variables with the lowest BIC or AIC terms. For our Czech koruna/Russian ruble forecast, the ideal combination was (1, 1, 1), or one lag for the auto-regressive model, one difference, and one order for the moving average model. For the Hungarian forint/Russian ruble forecast, the ideal combination was (0, 1, 0). For the Polish zloty/Russian ruble forecast, the ideal combination was (0, 1, 1). Finally, for the euro/ Russian ruble forecast, the ideal combination was also (0, 1, 1).

Figure 6. Czech koruna/Russian ruble Rate Forecast (ARIMA [1, 1, 1])

Figure

Source: Investing.com, AJTK Calculations

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7

.

Hungarian forint/Russian ruble Rate Forecast (ARIMA [0, 1, 0])

Source: Magyar Nemzeti Bank, AJTK Calculations Figure 8. Polish zloty/Russian ruble Rate Forecast (ARIMA [0, 1, 1])

Source: Investing.com, AJTK Calculations

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Figure 9. Euro/Russian ruble Rate Forecast (ARIMA [0, 1, 1])

Source: Investing.com, AJTK Calculations

b. ARIMA Foreign Exchange Forecasts Shown graphically in Figure 6, 7, 8, and 9, a noticeable shock occurs at the same time EU sanctions were introduced. The forecasted rate, denoted by the orange line, stands in stark contrast to the actual rate, assigned to the existing color scheme for each V4 country. More so, the actual exchange rate for each forecast usually falls outside the 95% confidence intervals, set to gray, for each ARIMA forecast, after sanctions are implemented. From these results, could we intuit that V4 currencies appreciate in relation to the Russian ruble due to the implementation of sanctions? c. Correlation â&#x2030; Causation While the findings of our ARIMA forecasted exchange rates are informative, they should not be weighed too heavily. As taught in every introductory statistics class, correlation dsoes not equal causation. Despite the initial appearance that the introduction of Western sanction policy negatively affected the Russian rubleâ&#x20AC;&#x2122;s value, in reality, many other factors contributed to the depreciation of the ruble. The ruble, along with a number

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of currencies, are often referred to as petrocurrencies, due to their high correlation with the price of oil (28). This link primarily exists due to an overconcentration in oil & gas production as a portion of gross domestic production. Saudi Arabia’s riyal exemplifies another currency often referred to as a petrocurrency. A 2015 analysis by the German Institute of Economic Research found that “A one-percent increase in oil prices is followed, in equilibrium, by a revaluation of the ruble by more than one percent. This underscores the critical impact that the oil price has on Russian currency. By contrast, the influence of other variables seems to be significantly smaller; the sanctions, in particular, are only marginally significant…the recent devaluation of the ruble is due in large part to the declining oil prices. The sanctions are only playing a rather subordinate role.” (29).

Recently though, the strong correlation between petrocurrencies and the price of oil has weakened, from around 80% in June 2016 to 30% in November 2017. Much of this is due to an increase in American shale production and a U.S. dollar denomination of the Brent crude oil price (30). Despite this, the influence of a dropping oil price, which corresponds simultaneously with sanction implementation, cannot be overlooked in explaining the strong devaluation of the ruble post-sanctions.

In summary, while EU sanctions (and U.S. sanctions) may not have been the primary driver of an appreciating koruna/ruble, forint/ruble, zloty/ruble, and euro/ruble rate after sanctions, it would be naïve to think that sanctions had no effect, however small. Still, the ARIMA forecasts performed are valuable and insightful in understanding the financial relationship between V4 nations and Russia. However, any theories which attribute a large impact to sanction policy on V4/Russia exchange rates are not supported by contemporary research. Therefore, these forecasts should be interpreted with extreme care for only a baseline understanding of a changing V4-Russia financial relationship.

28 Doff, Natasha: The Dollar Is Now More Correlated With Oil Than Some Petrocurrencies 29 Dreger, Christian, and Konstantin Kholodilin: The Ruble between the Hammer and the Anvil: The Impact of Oil Prices and Economic Sanctions 30 Doff, Natasha: The Dollar Is Now More Correlated With Oil Than Some Petrocurrencies

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3. Credit Rating Changes A second comparable metric of national economic health is a country’s sovereign credit rating. Sovereign credit ratings are determined by Standard and Poor’s (S&P), Moody’s, and Fitch, the three largest credit rating agencies.

Sovereign debt, or debt issued by a government, is evaluated by the three credit rating agencies to provide investors with information about the level of risk associated with purchasing a nation’s governmental bonds (31). Table 5 illustrates S&P’s evaluations of V4 and Russian sovereign debt before, during, and after EU sanctions were introduced.

Table 5. V4 & Russian S&P Sovereign Credit Ratings (2011-2017)

Source: Trading Economics

Interestingly, Russia’s sovereign debt rating decreased in 2014, the year sanctions were introduced, but rebounded to BB+ the following year.

Czechia and Slovakia’s ratings have either remained constant or increased throughout the time frame. Hungary and Poland’s ratings have worsened from 2016 on, due mainly to increased political risk in each country. Overall, it seems that with the exception of Russia’s 2014 BBB- rating, no easily identifiable changes are present that correspond with the implementation of sanctions. As discussed in the previous section, Russia’s 2014 rating could be attributed to the falling price of oil from simply analyzing changes in credit ratings. However, there is no way to ascertain this connection completely.

31 Investopedia: www.investopedia.com/terms/s/sovereign-credit-rating.asp

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4. Conclusions From the preceding forecasts of V4/Russian currency rates and analysis of sovereign credit rating changes, a disjointed picture comes into focus of a changing V4/Russia financial dynamic. Using an ARIMA forecast to compare expected exchange rates with actual rates, it seems that rising exchange rates, in favor of V4 currencies, correspond with the introduction of EU sanctions. Expected rates diverge strongly from estimates, so much so to even be outside of 95% confidence intervals. Despite this, it is theoretically incorrect to assume this visual correlation is causally related to sanction policy. The Russian ruble, a petrocurrency, is strongly associated with the price of crude oil. Crude oil, which also simultaneously dropped in value in 2014, fell for a variety of non-Russian related supply and demand dynamics. The drop in oil price explains the majority of the depreciation of the Russian ruble against European currencies. Even still, the forecasts performed provide a valuable way to directly compare V4 economies to the Russian economy, albeit a comparison with limited causal value. The second comparative test undertaken was an analysis of changes in sovereign credit ratings for V4 nations and Russia. Few sanctions-related changes were seen, with the possible exception of Russiaâ&#x20AC;&#x2122;s 2014 rating. The two comparable metrics investigated yielded little information on any negative exchange rate or sovereign credit rating effects caused by sanction policy. This could be considered a success for V4 nations regarding their own economies, but not for the Russian economy, if the telos of sanctions was to negatively affect Russian economic health. However, EU sanction policy (i.e. capital restrictions and asset freezes) is aimed at Kremlin-associated entities and individuals in order to accomplish an EU-designed political goal. Despite this, more analysis is needed to determine the financial implications of EU sanctions on Russia for V4 economies and the Russian economy, at least regarding exchange rates and sovereign debt ratings.

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Governance Considerations 1. Significant Russian Governance – A Political Worry The final section of this essay aims to fill any remaining gaps in the V4-Russian financial narrative. Thus far, the question of foreign governance and ownership has yet to be addressed. While differing slightly from the role of Russian financial institutions in V4 markets, the topic of Russian investment and governance in Czechia, Hungary, Poland, and Slovakia is worthy of discussion too. What type of corporate governance role does Russia occupy in Czechia, Hungary, Poland, and Slovakia? After providing an overview of this topic, a case study of Russian governance and economic influence in Hungary will be undertaken to better illustrate developments in this field.

2. Foreign Direct Investment Trends What does Russian foreign direct investment (FDI) look like in the V4 nations? A high level of Russian FDI, and therefore ownership, in V4 economies would provide Russia with significant degree of power and influence in the region. FDI is divided into two categories – inflows and outflows. Defined by the World Bank, inflows are “the value of inward direct investment made by non-resident investors in the reporting economy”, while outflows are “the value of outward direct investment made by the residents of the reporting economy to external economies.”

(32). Negative values for either inflows or outflows are possible as well and represent disinvestment. To answer this question, Figure 10 and 11 provide a visual representation of historical V4 and Russian FDI net inflows and outflows.

32 World Bank Data Help Desk: datahelpdesk.worldbank.org/knowledgebase/articles/114954what-is-the-difference-between-foreign-direct-inve

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Figure 10. V4 & Russian FDI Annual Net Inflows (2011-2016)

Data Source: UN FDI Report (2017) Figure 11. V4 & Russian FDI Annual Net Outflows (2011-2016)

Data Source: UN FDI Report (2017)

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Russian FDI inflows and outflows, understandably larger than respective V4 inflow and outflow values, displays an interesting trend. In absolute terms from 2014 to 2016, Russian annual net outflows decreased substantially. As developing economies typically rely heavily on FDI, decreases in Russian inflows and outflows represent a notable observation. Such decreases in 2014 and 2015 are logical due to the financial stress of low oil prices, sanctions, and a weak ruble over this time period. While net FDI inflows and outflows have remained fairly constant for Czechia, Slovakia, and Poland over the visualized time period, Hungary does seem to represent an outlier. Varying much more than its V4 counterparts, Hungarian FDI possesses noticeably different trends. Hungary in 2015 recorded negative net inflow and outflow numbers. While these figures look at FDI net inflows and outflows in total, who are the largest contributors to these flows for V4 economies? Is Russia a major investor?

3. The Russian Place in V4 FDI If Russia does represent a significant foreign direct investor in V4 economies, then Russia would actually maintain a greater degree of economic influence in the V4 than previously discussed. While the Russian banking presence in V4 banking sectors is limited, substantial Russian investment in V4 economies would represent a greater degree of financial interconnectedness than observed in the preceding essay sections. Using the latest easily accessible data available for bilateral FDI inflows to V4 nations, Russia did not rank as a top 10 FDI source for any V4 country. For Czechia, as of 2015, Russia did not rank as a top 10 source of FDI inflows.

No information was found as to their exact rank though (33). For Hungary, as of 2016, Russia ranked as the 19th largest source of FDI inflows (34). For Poland, as of 2016, Russia ranked as the 25th largest source of FDI inflows (35). For Slovakia, as of 2012, Russia ranked as the 13th largest source of FDI inflows (36). Also considered was Cyprus, a country popularly used 33 Czech National Bank: www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/statistics/ bop_stat/bop_publications/pzi_books/PZI_2015_EN.pdf 34 Magyar Nemzeti Bank: www.mnb.hu/en/statistics/statistical-data-and-information/ statistical-time-series/viii-balance-of-payments-foreign-direct-investment-internationalinvestment-position/foreign-direct-investments/data-according-to-bpm6-methodology 35 Narodowy Bank Polski: www.nbp.pl/home.aspx?f=%2Fpublikacje%2Fzib%2Fzib.html 36 UNCTAD: unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx

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by Russian companies and nationals to mask the true source of financing.

Cyprus ranked outside of the top 10 largest sources of FDI for all V4 countries except for Slovakia, where it placed 3rd (37),(38),(39),(40). While this may be concerning, it is difficult to ascertain what portion of FDI inflows from Cyprus is truly Cypriot, and not truly originating from another source, such as Russia. From these results, it seems that Russian influence via FDI inflows (i.e. Russian governance influence) is limited. However, this a tentative conclusion, especially for Slovakia. Therefore, the source of FDI inflows is something that should be monitored continually by V4 governments.

While Russian FDI and Russian governance is not intrinsically bad, such things should be closely watched due to the existing geopolitical climate.

4. Governance in Hungary â&#x20AC;&#x201C; A Brief Case Study a. Historical Russian Activity Of all V4 nations, Hungary demonstrates the warmest political relationship with Russia. Economically similar, there has been notable collaboration between Russian and Hungarian businesses within the last 10 years. However, due to the stated concerns of increasing foreign influence via FDI inflows, the Hungarian government has intervened to ensure that Russian ownership of strategically vital firms is not excessive. The following paragraphs provide brief descriptions of the involvement of significant Russian firms in the Hungarian market. i. Surgutneftegaz The most notable case of a Russian attempt to obtain a significant presence within the Hungarian market involves the 2009 purchase of the Hungarian energy company MOL by Surgutneftegaz (41). A reminder,

37 Czech National Bank: www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/statistics/ bop_stat/bop_publications/pzi_books/PZI_2015_EN.pdf 38 Magyar Nemzeti Bank: www.mnb.hu/en/statistics/statistical-data-and-information/ statistical-time-series/viii-balance-of-payments-foreign-direct-investment-internationalinvestment-position/foreign-direct-investments/data-according-to-bpm6-methodology 39 Narodowy Bank Polski: www.nbp.pl/home.aspx?f=%2Fpublikacje%2Fzib%2Fzib.html 40 UNCTAD: unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx 41 Csaba Weiner: Tracking Russian FDI in Hungary

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Surgutneftegaz was named by U.S. sanction policy. Surgutneftegaz acquired a 21.2% stake in MOL for €1.4 billion. This made it the largest stakeholder in MOL at that time. Over the following years, MOL attempted to keep Surgutneftegaz from exercising its ownership rights and was promptly targeted by five different lawsuits. In 2011, just two years later, Surgutneftegaz sold their stake to the Hungarian government for €1.88 billion (42). Following the sale, Prime Minister Viktor Orban stated, “We have taken an important step on the path to a strong Hungary, as a country cannot be strong if it is entirely vulnerable in terms of energy supply.” (43). ii. Gazprom Natural gas supply security is of paramount importance for Hungary, who is highly reliant on natural gas imports. For a greater overview of this dependency, please see Essay 2: Energy. Of the natural gas traders operating in Hungary, Gazprom possesses an ownership in two. These two traders are Centrex Hungary and WIEE Hungary Kft. A third natural gas trader, MET Hungary Zrt., is also Russian-owned, although the identity of the Russian owners is difficult to identify (44). Gazprom previously collaborated with Hungarian energy companies on the now-abandoned South Stream pipeline project (45). Gazprom is targeted by U.S. sanction policy, but not

by EU sanction policy. iii. Lukoil Lukoil, the largest private oil company in Russia, entered the Hungarian market at the end of 2003. Lukoil, which is targeted by U.S. sanctions, maintained a retail presence in Hungary until 2014. At this time, Lukoil sold its stores to Norm Benzikút Kft., registered as a Hungarian company, but which maintains considerable Russian ties (46).

42 Csaba Weiner: Tracking Russian FDI in Hungary 43 Budapest Business Journal: bbj.hu/business/hungary-buys-back-mol-stake-fromsurgutneftegas_57986 44 Csaba Weiner: Tracking Russian FDI in Hungary 45 Csaba Weiner: Tracking Russian FDI in Hungary 46 Csaba Weiner: Tracking Russian FDI in Hungary

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iv. Sberbank Sberbank, sanctioned by both the EU and U.S., first acquired a presence in Hungary in 2012. It acquired its presence through the purchase of Austrian Volksbanken International AG (47). In 2008, a few years prior, rumors existed that Sberbank had considered OTP, the largest bank in Hungary, as a potential acquisition target. However, Sberbank denied these rumors (48). Sberbank has maintained their presence in Hungary since 2012 (49). b. Present Day Russian Activity: Paks II Nuclear Power Plant In 2014, three agreements were signed between the Hungarian and Russian governments to construct the Paks II nuclear power plant. Paks II represents a construction of another nuclear power plant next to the original Paks power plant, which was built in 1982 and is set to complete its effective life in 2032. The original Paks power plant supplies 45.9% and 37.3% of the gross electrical produced and consumed in Hungary, respectively. With a price tag estimated at 7-10% of Hungarian GDP, the construction of a second nuclear power plant in Paks represents a massive undertaking by the two involved governments. Russian nuclear energy company Rosatom was selected as the chosen contractor to construct the new power plant. While designed to minimize Hungarian risk due to the turnkey style of the intergovernmental agreement, serious governance and corruption issues exist for the construction of the Paks II power plant. First, to encourage the Hungarian selection of Rosatom over other contractors, the Russian government offered a loan which would account for 80% of expected costs. Furthermore, during the negotiation period, the Hungarian and Russian governments collaborated entirely in a closed-door fashion. To this day there is little transparency with the three signed construction agreements being completely classified for 30 years (50). Due to the intergovernmental nature of the Paks nuclear 47 ABUDAPEST.com: www.abudapest.com/popularnews/sberbank_enters_into_hungary/ 48 Budapest Business Journal: bbj.hu/business/russia%E2%80%99s-sberbank-eyes-otp-bank--update_45539 49 Fedorova, Maria: Sberbank Not Leaving Hungary 50 Deák, András, et al.: HUNGARY: Exploring New Frontiers for Russian Energy Policy Capture – the Hungarian Case

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power plant agreement, this is not technically considered an FDI project, although it is of significant importance (51).

Assuming Paks II will possess the same output capacities as the original Paks power plant, the actual governance concerns and energy security issues are a national security worry. Such an agreement avoids the issue of EU sanctions as well. Due especially to the non-transparent way the Paks II agreements were accomplished, such collaboration seems particularly unwise while tensions exist between the West and Russia.

Despite the smaller successes of some Russian companies to enter the Hungarian market (Gazprom and Sberbank), and the failure of others to remain (Surgutneftegaz and Lukoil), Paks II represents an entirely different realm of potential Russian economic influence and governance in a V4 economy. Paks II is an ongoing project and will continue to be monitored going forward.

Conclusion As sanction policy approaches the four year mark, understanding the V4-Russian financial relationship has never been more important.

Differing slightly from U.S. sanction policy in detail but not in spirit, EU sanctions target five of the largest financial institutions in Russia â&#x20AC;&#x201C; Bank Rossiya, Gazprombank, Sberbank, Vnesheconombank, and VTB Bank.

Western sanctions severely limit these banks, which in total possess a 53% share of the Russian banking market, from access to capital in Western markets. Combined with asset freezes for individuals associated with these banks, EU sanction policy severely limits the financial flexibility of these banks and their leaders. Therefore, sanctioned entities and individuals have gone to great lengths to avoid the full impact of these restrictions.

Only Sberbank, of sanctioned Russian banks, maintains a substantial presence in V4 markets. Still, after scrutinizing financial market structures for Czechia, Hungary, Poland, and Slovakia, I found that no Russian bank possesses a significant market share in any country, therefore limiting the direct risk of self-inflicted sanctions-related harm. However, at the time of sanctions, a number of banks possess sizable outstanding loans 51 Csaba Weiner: Tracking Russian FDI in Hungary

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to Russian-based companies. Hungarian market leader OTP was one of these banks. UniCredit, who also possesses sizable shares in multiple V4 banking markets, also held significant exposure to Russian companies too. Despite this, due to the additional capital markets access these firms enjoy, and their systematic importance, I have concluded that any such risks to the health of the V4 financial system are not overtly worrisome.

After exploring the Russian and V4 banking sectors, I reviewed more comparable measures of economic health between two industries. First, I forecasted V4/Russian foreign exchange rates using an ARIMA model.

Our results demonstrated significant deviation from the expected foreign exchange rate after EU sanctions were implemented. These results should be carefully interpreted though, due to the high correlation between the Russian ruble and the price of oil. Next, an analysis of sovereign credit rating changes was performed. Outside of Russiaâ&#x20AC;&#x2122;s 2014 BBB- credit rating, which could also be potentially attributed to a falling oil price and ruble value, it was difficult to isolate the effect that EU sanctions may have played in Russiaâ&#x20AC;&#x2122;s sovereign credit rating.

Finally, Russian governance and investment were inspected within the context of the V4. Russia fell outside of the top 10 contributors of FDI inflows for all V4 countries. A case study of Russian investment in Hungary was reviewed for Hungary. After surveying the attempts of Surgutneftegaz, Gazprom, Lukoil, and Sberbank to penetrate the Hungarian market (with varying success) and the ongoing Paks II project, notable trends were unearthed. It appears that Russian entities, especially with governmental connections, desire to possess strategic positions in V4 markets. This is something that should be carefully monitored by V4 governments in order to limit Russian economic power (and therefore political influence) in Central Europe.

In summary, during an age of EU-Russian tension, V4 governments should continue to investigate the effects of sanctions on Russia for domestic economic health. While it appears that current sanctions-related risks are not too high, at least for financial markets, V4 countries would be wise to be considerate of the interplay between their own banking market structures and the Russian financial system. In a globalized age, what affects one player can reverberate through the whole system and have

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unintended consequences. What affects the Russian financial institutions (i.e. EU sanctions) can impact V4 economies. Considering the preceding nuanced explanations of the V4-Russian financial relationship within the context of sanction policy, it seems that V4 banking and capital market industries are sufficiently safe-guarded from Russian-originating risks.

However, the example of the Paks II power plant agreements should give pause to V4 policymakers. If given access to strategic positions within V4 economies, Russian economic power will grow in the V4. In order to maintain economic sovereignty, V4 should continue to monitor Russian market power, exposure, and FDI levels in their domestic markets. In doing so, V4 policymakers can avoid compromising the structural strengths of EU sanctions and maintain the high costs of Western sanction policy.

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“Poland - Credit Rating.” Trading Economics, Trading Economics, 2018, tradingeconomics.com/poland/rating.

Reuters Staff. “European Banks’ Exposure to Russia.” Reuters, Thomson Reuters, 21 Aug. 2014, uk.reuters.com/article/russia-banking/refile-factboxeuropean-banks-exposure-to-russia-idUKL5N0QR2OJ20140821.

“RBC 500: Russian Business Rating.” RBC, Reuters, AP, Interfax, 2017, www. rbc.ru/rbc500/.

“RUB/CZK Historical Data.” Investing.com, Fusion Media Limited, 2018, www. investing.com/currencies/rub-czk-historical-data.

“Russia - Credit Rating.” Trading Economics, Trading Economics, 2018, tradingeconomics.com/russia/rating.

“Russia’s Sberbank Eyes OTP Bank - Update.” Budapest Business Journal, Budapest Business Journal, 2 Dec. 2008, bbj.hu/business/russia%E2%80%99ssberbank-eyes-otp-bank---update_45539.

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“Sberbank Enters into Hungary.” ABUDAPEST.COM, ABUDAPEST.COM, 25 Jan. 2012, www.abudapest.com/popularnews/sberbank_enters_ into_hungary/.

“Sberbank Europe AG.” Sberbank of Russia, Sberbank, 2018, www.sberbank. ru/en/about/global_business/subsidiary_banks/ce_en/se_ag_en.

“Shareholder Structure.” Shareholder Structure, Sberbank, 2018, www.sberbank. com/investor-relations/share-profile/shareholder-structure.

Shields, Michael, and Angelika Gruber. “Bank Austria Says Can Prosper in Russia despite Sanctions.” Reuters, Thomson Reuters, 6 Aug. 2014, www.reuters.com/article/unicredit-bankaustria-results/ update-1-bank-austria-says-can-prosper-in-russia-despite-sanctionsidUSL6N0QC2X520140806.

Shishkin, Philip. “U.S. Sanctions Over Ukraine Hit Two Russian Banks Hardest.”

The Wall Street Journal, Dow Jones & Company, 5 Mar. 2015, www. wsj.com/articles/u-s-sanctions-over-ukraine-hit-two-russian-bankshardest-1425597150.

“Slovakia - Credit Rating.” Trading Economics, Trading Economics, 2018, tradingeconomics.com/slovakia/rating.

“Slovakia.” UNCTAD | Bilateral FDI Statistics, United Nations, 2014, unctad. org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx.

“Slovakia’s Banking Sector: Facts & Figures.” European Banking Federation - Slovakia, European Banking Federation, 2018, www.ebf.eu/aboutus/slovakia/.

Szakacs, Gergely. “Only Five Major Banks May Survive in Hungary: Bankers.”

Reuters, Thomson Reuters, 2 Oct. 2014, www.reuters.com/article/ hungary-banks/only-five-major-banks-may-survive-in-hungarybankers-idUSL6N0RX2M820141002.

Szakacs, Gergely, and Marton Dunai. “Hungary Raises $265 Mln from Sale of OTP Bank Stake.” Reuters, Thomson Reuters, 29 Oct. 2015, www.

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reuters.com/article/hungary-otp/update-4-hungary-raises-265-mlnfrom-sale-of-otp-bank-stake-idUSL8N12T3JG20151029.

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by Csaba Weiner, Hungarian Academy of Sciences, 2016, pp. 120–145.

Eastern European Studies.

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Index Table 6. ARIMA Forecast Expanded Output

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IV ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS 144 FINA NCI A L SERV ICES & GOV ER NA NCE

Introduction As modern economies have grown and matured, one particular industry has arisen to become uniquely intertwined with national governments.

This industry, the defense and dual-use sector, is a critical contributor to the ever-pressing topic of national security. In this essay, the fourth of six, we will turn our attention to this sector. Within the context of the 2014 Crimean Annexation/Invasion, the usage and transfer of goods within this industry is especially relevant. Following this event, and the simultaneous (and ongoing) violence in the Donbass region, the European Union (EU) and United States (U.S.) enacted multiple rounds of sanctions against Russia for their perceived role in the unrest. Of these sanctions, a number of defense and dual-use companies were named, as well as certain strategic products.

Continuing with our theme of analyzing sectoral relationships between Russia and the V4 nations of Czechia, Hungary, Poland, and Slovakia, how significant of an impact have 2014 EU sanctions had on the health of V4 defense industries?

Within this essay, four aspects of this question will be explored. First, who is sanctioned and what products face export restrictions? Second, how is the Russian defense industry organized and what strategic shifts have been made since sanctions were implemented? Next, how are the equivalent V4 defense sectors structured and how have they been affected?

Finally, what other significant EU defense sector actors and sanctionsrelated developments have occurred since 2014? By scrutinizing each of these questions, in turn, I aim to identify any significant shifts and dependencies in the V4-Russia defense relationship since the Ukrainian Crisis. In understanding the complex economic and geopolitical relationships between the V4 nations and Russia, leaders will be equipped to better develop an economic and defense policy that best protects national security interests.

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Review of Defense-Related Sanctions 1. Overview of Western Sanction Policy & Significant Actors Targeted In the aftermath of the 2014 Ukrainian Crisis, the U.S. and EU, along with several other Western nations, developed sets of economic and diplomatic sanctions to increase Russian costs related to perceived Russian involvement in the escalating situation. As touched on in previous essays (see Essay 2: Energy and Essay 3: Financial Services & Governance), economic sanctions target strategic Russian industries. The final sector affected by EU sanction policies is the defense and dual-use industry. Table 1 provides a concise overview of the most significant actors targeted.

Table 1. Significant Russian Entities Targeted by Western Sanction Policy

Source: U.S. Executive Order 13662; European Council Decision 2014/512/CFSP, 2014/659/CFSP

Almaz-Antey and the other listed firms find themselves targeted due to the Western belief that they “materially or financially supported actions which undermine or threaten the territorial integrity, sovereignty, and independence of Ukraine” (1). As of September 12th, 2014, sanctioned entities are barred from access to long term debt (defined as instruments

1 General Court of the European Union: “Judgment in Case T-255/15 Joint-Stock Company ‘Almaz-Antey’ Air and Space Defence Corp. v Council.”

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exceeding 30 days in maturity) (2),(3). Additionally, since that day, it is now illegal for Western firms to trade or collaborate with Russian firms specializing in dual-use and military goods. Stronger still, for AlmazAntey and Technopromexport specifically, no business of any kind can be conducted with these companies. Important to note is that the provided list of sanctioned firms is not exhaustive, but only records the most significant actors sanctioned. A number of the firms sanctioned possess a large quantity of subsidiaries (especially in the case of Rostec), which also face the same capital financing flexibility difficulties. However, for the sake of brevity and clarity, these firms are not included (4). There are no strategic reasons for the existing differentiation between EU and U.S. sanctions.

While the Russian government owns a majority stake in some of the sanctioned firms, none of these actors are by definition a governmental entity, unlike the Russian Federal Security Service (FSB). The FSB, the successor of the KGB, is not explicitly named by 2014 sanction policies. Allegedly involved in the Crimean Annexation/Invasion and the maintenance of Crimea as a part of Russian territory, it is noteworthy that they are not named by 2014 Western sanction policies (5). However, they were later targeted by the U.S. for their involvement in the 2016 U.S. Presidential elections (6). To date, American transactions with the FSB may not exceed $5,000 in a single calendar year. Also, American individuals and firms are not allowed to aid FSB investigations, do not have to comply with FSB rules, and cannot trade goods or provide services to the Crimean region (7).

One significant individual not included in Table 1 is Rostec director Sergey Chemezov, who is sanctioned by both the EU and U.S. He is rumored to possess a close personal relationship with Russian President Vladimir Putin dating back to 1980s in East Germany, when both were Soviet KGB

2 European Parliament, European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 3 European Commission: Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014 4 For a list of all sanctioned firms, please see: news.riskadvisory.net/sanctioned-individuals/ 5 Nevar, Vitaly: Russiaâ&#x20AC;&#x2122;s FSB Says It Detained a Ukrainian Agent in Crimea 6 Pramuk, Jacob: Trump Administration Modifies Sanctions against Russian Intelligence Service 7 United States, Office of Foreign Asset Control: Executive Order 13694 of April 1, 2015, GENERAL LICENSE NO. LA: Authorizing Certain Transactions with the Federal Security Service

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officers (8). Sanctioned individuals, like Chemezov, face asset freezes and travel restrictions (9).

2. Defining Dual-Use Goods In addition to the firms sanctioned, a number of dual-use goods now face export restrictions. For an intensive econometric analysis of the historical trade of these goods between Russia and V4 nations, please see Essay 1: Econometric Analyses. Table 2 lists these products, organized by Harmonized System (HS) trade code and aggregated at the 2-digit level.

Table 2. EU Sanctioned Products by HS Code

While initially seeming to simply address products aligned with the energy industry, when aggregated at smaller 4-digit and 6-digit levels, certain products within these 2-digit levels are classified as dual-use goods.

The consistent use of the term “dual-use” in EU sanction policy begs the question: what are “dual-use” products? Defined by the European Parliament, “dual-use” goods “are items, ‘including software and technology, which can 8 Reid, David: US Sanctions Imposed against Russian Firms Cannot Succeed, Says Rostec CEO 9 BBC: www.bbc.com/news/world-europe-28400218

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be used for both civil and military purposes. These items include all goods, which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices’ (Article 2 (1), Regulation 428/2009)” (10). Dual-use goods are involved in industries ranging from telecommunications, information security, energy, defense, security, aerospace, life sciences, chemicals, navigation, and electronics, among others (11). These goods are subject to additional trade requirements due to their military potential. International treaties such as the United Nations Security Council Resolution 1540 (2004), the Chemical Weapons Convention (1993) and the Biological Weapons Resolution (1972) provide governance for dual-use good trade. Additionally, particular international regimes like the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, the Nuclear Suppliers Group, and the Australia Group add further legal frameworks on top of the previously mentioned treaties (12).

The Russian Defense Sector 1. Introduction to the Defense Industry in Russia Before turning to the V4 & EU defense sectors, the structure and dynamics of Russian defense industry will first be explored. By understanding the sector, and how it has reacted to the implementation of sanction policy, I aim to underscore the size of the Russian industrial military complex and its global reach. First, a structural overview of the Russian defense industry will be provided. Next, noteworthy aspects of particular sanctioned Russian defense entities will be discussed. Last, strategic developments in the industry since the introduction of EU & U.S. sanction policy will be examined.

10 European Parliament, European Parliamentary Research Service, and Milan Remáč: Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items 11 European Commission, Directorate-General for Trade: Dual-Use Export Controls 12 European Commission, Directorate-General for Trade: Dual-Use Export Controls

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2. Market Structure Of the six firms listed in Table 1, only four are targeted by EU sanctions: Almaz-Antey, Kalashnikov Concern, United Aircraft Corporation, and Uralvagonzavod. The preceding four, along with NPO Mashinostroyeniya and Rostec, also face U.S. sanctions. Together these corporations make up the largest players in the Russian defense sector. Table 3 provides summary statistics on these large firms. Kalashnikov Concern, as a smaller player in the market, is not included, despite being the maker of the well-known AK-47 assault rifle.

Table 3. Largest Russian Defense Firms Key Statistics (2016)

Source: Defense News Top 100 Defense Firms (2017), Rostec Annual Report (2015), AJTK Calculations

As seen, each of these firms generate large quantities of revenue.

Rostec is by far the largest player in the market, with a 2015 total revenue of $15,616,740,000, over double of the next closest company, Almaz-Antey.

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Additionally, despite the recent Russian economic downturn, each firm in Table 3 displays extremely high year-to-year growth rates. The reasons for this growth will be explained in following sections.

3. Significant Actors a. Rostec Rostec, the largest Russian defense firm by every significant metric, differs from other entities in the industry via its sheer size. Rostec, founded in 2007 and wholly owned by the Russian federal government, is a conglomeration of various civil and defense businesses (13). Rostec aims to increase the efficiency and profitability of their subsidiaries, in order that these subsidiaries may be privatized. The Rostec umbrella encompasses 23 strategic subsidiaries, along with sizable stakes in a number of other companies. Rostec’s subsidiaries are involved in everything from helicopter, small arm, and missile manufacturing to bio-chemicals and financial services (14). Subsidiaries of Rostec operate in all 60 regions of Russia and provide services and goods to customers in more than 70 countries around the world (15). Looked at holistically, Rostec accounts for 70% of Russia’s industrial defense base (16).

Of Rostec subsidiaries, Rosoboronexport, Technopromexport, and Russian Helicopters are among the most notable. These three companies are also subject to U.S. sanctions. Rosoboronexport, ranking #2 globally in arms exports, is an export-import firm specializing in the entire spectrum of military and dual-use goods, technology, and services. Products within their catalog include the entire line of MiG fighter jets, as well as tanks, submarines, ground-to-air missile defense systems, and small arms (17).

Technopromexport, an energy engineering firm, has developed plans to construct thermal and gas power plants in Iran, Syria, and Crimea

13 Reid, David: US Sanctions Imposed against Russian Firms Cannot Succeed, Says Rostec CEO 14 Rostec State Corporation: rostec.ru/en/about/companies/ 15 4-Traders.com: www.4-traders.com/KAZANSKIY-VERTOLETNYI-ZAV-9059305/news/ Kazanskiy-vertoletnyi-zavod-OAO-Russian-Helicopters-names-Rostec-Deputy-CEOVladimir-Artyakov-as-C-17109694/ 16 Tweed, David: Russia’s Rostec Banks on Asia to Join Defense Elite 17 Rosoboronexport: roe.ru/eng/rosoboronexport/

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(18),(19),(20). Technopromexport’s plans to develop such energy resources within the Crimean peninsula are in direct violation of Western sanction policies. Russian Helicopters ranks globally as the #1 seller of military attack helicopters (21). b. Almaz-Antey Almaz-Antey, the second leading firm in the Russian defense industry, is structured similarly to Rostec. Both are conglomerates and controlled by the Russian government (albeit less directly for Almaz-Antey than Rostec).

Almaz-Antey, most renowned for their ground-to-air missile defense systems, offers a wide variety of services and products to satisfy military needs worldwide. Almaz-Antey systems are likely to have been used by Ukrainian separatists to shoot down Malaysian Airlines flight MH17 as it flew over eastern Ukraine in July 2014, which killed 298 people (22). In 2016 Almaz-Antey appealed the decision of the European Council to include them within the sanctioned firms list. On January 25th, 2017, the General Court of the European Union dismissed Almaz-Antey’s action, and upheld their inclusion within EU sanctions. While the decision to maintain their sanctioned-status was not tied to the destruction of Malaysian Airlines flight MH17, the continued use of Almaz-Antey products by the Russian military, whom supports and supplies equipment to eastern Ukrainian separatists, was deemed a sufficient reason (23).

18 Iran Business News: Tehran, Moscow Start Construction of Power Plant at Bandar Abbas 19 CNBC: www.cnbc.com/2018/02/02/reuters-america-russias-technopromexport-mayrebuild-four-syrian-power-plants--tass.html 20 Shandra, Alya: Russia’s Technopromexport Finally Admits Turbines in Occupied Crimea Are from Siemens 21 4-Traders.com: www.4-traders.com/KAZANSKIY-VERTOLETNYI-ZAV-9059305/news/ Kazanskiy-vertoletnyi-zavod-OAO-Russian-Helicopters-names-Rostec-Deputy-CEOVladimir-Artyakov-as-C-17109694/ 22 General Court of the European Union: “Judgment in Case T-255/15 Joint-Stock Company ‘Almaz-Antey’ Air and Space Defence Corp. v Council.”

23 General Court of the European Union: “Judgment in Case T-255/15 Joint-Stock Company ‘Almaz-Antey’ Air and Space Defence Corp. v Council.”

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c. Kalashnikov Concern Of firms within the Russian defense industry, Kalashnikov Concern enjoys an unmatched level of global brand awareness. Most of this is due to their notoriety as the creator and producer of the AK-47 assault rifle.

Kalashnikov Concern, until recently, was a wholly owned subsidiary of Rostec. Beginning with a 49% privatization in 2013, Kalashnikov Concern became a majority-owned private company in November 2017. Kalashnikov Concern recorded a 2016 sales and profit of US$ 308 million and 51 million, respectively (24). Prior to sanctions, the United States was Kalashnikov Concern’s largest market. However, with the loss of the American and European markets, and combined with the negative connotation of being sanctioned, Kalashnikov Concern has rebranded and sought opportunities in new markets.

4. The Turn to the East Since being named by Western sanction policies, how have firms like Rostec and Kalashnikov Concern responded? Since July 2014, each sanctioned firm has made the same strategic shift – a focus on Asian markets.

While previously maintaining significant market shares in European and American markets, especially in the case of Kalashnikov, these firms have increased their sales efforts towards underdeveloped nations in South and Southeastern Asia. Although such a strategy directly competes with Chinese efforts in the region, Russia’s intensity to establish a significant market presence is logical. While not a market leader at this time due to said Chinese competition, Russian defense firms have found a receptive customer base thus far.

Viktor Kladov, Rostec’s Director for International Development, in an interview on May 24th, 2017, outlined Asia as a key part of the firm’s plan to become a global top five defense company within the next decade (25). While not publicly finalized due to their nature, Rostec has aimed to soon complete significant defense contracts with four Asian nations: India,

24 Kramer, Andrew E.: Kalashnikov, AK-47 Maker, Goes Private as Russian Government Sheds Stake 25 Tweed, David: Russia’s Rostec Banks on Asia to Join Defense Elite

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Indonesia, Thailand, and the Philippines. Rostec plans to sell and deliver 200 Ka-226T attack helicopters, numerous Su-35 fighter jets, and four Mi17V-5 transport helicopters to India, Indonesia, and Thailand, respectively.

Furthermore, Filipino President Rodrigo Duterte has expressed an interest in closer collaboration with Rostec, as opposed to the traditional source of Filipino military goods – the U.S. (26).

Kalashnikov Concern, who planned to open a U.S. production facility before Western sanctions were implemented, has found similar degrees of interest in South Asia. Kalashnikov Concern is now considering opening a production facility in India, and seeking a tender to open another facility in Pakistan. By shifting their strategic focus to Asia, Kalashnikov Concern doubled revenue from 2015 to 2016, to the tune of US$ 300 million. They expected to double revenues again from 2016 to 2017. Alexey Krivoruchko, CEO of Kalashnikov Concern, explained that “the sanctions turned a civilian-focused company into a military one” (27).

5. Conclusions With our exploration of the Russian defense industry now complete, the strength and global reach of the Russian industrial defense complex is now clearly visible. Led by conglomerates like Rostec and Almaz-Antey, and supported by aircraft, missile, and small arms manufacturers (i.e. United Aircraft Corporation, Tactical Missiles Corporation, and Kalashnikov Concern), it appears that EU and U.S. sanctions have only strengthened the sector, via their year-to-year growth rates and strategic shifts. How does the size and market positions of these firms interact with the defense industries of V4 nations? Are V4 nations’ defense sectors highly reliant on the Russian firms for supplies, finished goods, and services? Have there been any significant value chain shifts or loss trade costs since the introduction of sanction policy?

26 Tweed, David: Russia’s Rostec Banks on Asia to Join Defense Elite 27 Marson, James, and Thomas Grove: Kalashnikov Finds Success Even After U.S. Sanctions

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The V4 Defense Sector 1. Introduction to the Defense Industry in the V4 How are the defense industries of Czechia, Hungary, Poland, and Slovakia structured? Does Russia play a major role in the private sector most tied to national security? By undertaking an exploration of these topics within the lens of the 2014 EU sanctions, answers to these pressing security questions shall be resolved in three parts. First, the Western defense industry will be introduced with how V4 nations fit within its paradigm.

Second, a data-driven approach to historical trade trends between the V4 and Russian defense sectors will be explored. For the sake of ease, these first two sections of this chapter will focus on arms primarily, due to data availability and comparability. Third, brief V4 nation-specific case studies will be discussed to provide additional color to any uncovered topics of the V4-Russia defense relationship.

2. Western Defense Industry Overview Prior to their accession into the EU in 2004, Czechia, Hungary, and Poland joined the North Atlantic Treaty Organization in 1999. Slovakia joined later, in 2004 (28). It is through this lens that the defense sectors of the V4 must be viewed, having solidly moved into the Western and Transatlantic sphere of defense.

Of the existing trade between the EU and Russia, only a very small portion is within the defense and arms industry. Prior to sanctions, in 2012, direct EU-Russia defense and military trade only managed â&#x201A;Ź193 million in total (29). However, the EU has historically maintained a much more robust trade of supplies and other parts (i.e. dual-use goods) than explicitly military goods. In 2013, total EU dual-use exports reached US$ 26 billion, with Russia ranking as the #4 export destination for dual-use items the following year

28 North Atlantic Treaty Organization: www.nato.int/nato_static_fl2014/assets/pdf/ pdf_2016_07/20160627_1607-factsheet-enlargement-eng.pdf 29 Bond, Ian, et al.: Frozen: The Politics and Economics of Sanctions against Russia

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(30), (31). Russia may find it difficult to find comparable goods without Western trade, whose nations specialize in advanced electronics, lasers, and other technologies ( 32).

At a high level, trends in the global transfer of arms may better illustrate any EU-Russia trade ties for these industries. Arms in this context, as defined by the Stockholm International Peace Research Institute (SIPRI), includes aircraft, air defense systems, anti-submarine warfare weapons, armored vehicles, artillery, military engines, missiles, sensors, satellites, large military ships, and other large arms (33). From 2012-2016, the five largest exporters of arms accounted for 74% of total arms exported globally. Respectively, the top five largest exporters were: 1) the U.S., 2) Russia, 3) China, 4) France, and 5) Germany. Together, the U.S. and Russia account for 56% of all arms exports (34). Europe, on the rare occasion when they sourced arms from extra-EU destinations, consistently imported mostly from the U.S., not Russia, due to existing NATO relationships. The U.S. share of EU imports has increased during the last six years, with the United Kingdom, Italy, the Netherlands, Norway, and Denmark developing agreements for current and future shipments of F-35 fighter jets. Poland, of V4 nations, received its first U.S. shipment of long-range 68 AGM-158A missiles in 2016 (35).

From 2012 to 2016, Russia only accounted for 5.9% of total European arms imports, with the bulk of Russian exports (68%) sent to Asia & Oceania.

India, Vietnam, and China possess the three largest shares of Russian arms imports, with 38%, 11%, and 11%, respectively (36). This nicely exemplifies Rostec and Kalashnikov Concern’s post-sanctions Asia-focused strategies discussed in the previous section.

30 Morley, Jefferson: U.S., EU Sanction Russia’s Arms Sector 31 European Parliament, European Parliamentary Research Service, and Milan Remáč: Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items 32 Morley, Jefferson: U.S., EU Sanction Russia’s Arms Sector 33 SIPRI: www.sipri.org/databases/armstransfers/sources-and-methods/ 34 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016 35 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016 36 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016

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3. The Economics of Defense in the V4 For Czechia, Hungary, Poland, and Slovakia, only Czechia (22nd) and Poland (25th) ranked within the top 25 of largest global arms exporters from 2012 to 2016. Iraq, Vietnam, and Nigeria ranked as the top Czech arms export destinations, with 48%, 14%, and 8.7% shares, respectively. For Poland, the U.S., Algeria, and the Philippines ranked as the top arms export destinations, with 66%, 9.8%, and 9.8% shares, respectively (37). On the import side, only Poland ranked within the top 40 global arms importers during the same time period. Germany (24%), Finland (20%), and Italy (16%) placed as their top 3 arms sources (38).

A massive gap exists when strictly comparing V4 countries to Russia in the global arms trade. Figure 1 demonstrates this for global shares of arms exports.

Figure 1. V4 & Russian Annual Global Share of Arms Exports (2010-2017)

Source: SIPRI Arms Transfers Database, AJTK Calculations

37 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016 38 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016

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From 2010-2017, no V4 nation records a global export share higher than 0.6%, while Russia consistently possesses a share of around 20% or higher.

For Figure 2, looking at global import share, the figures are more comparable.

Figure 2. V4 & Russian Annual Global Share of Arms Imports (2010-2017)

Source: SIPRI Arms Transfers Database, AJTK Calculations

Despite the numeric comparability of import shares from 2010-2017, the global position of the Russian defense industry must be considered.

With the second largest share of global exports from 2012-2016, Russia simply does possess a need to import a great deal of arms (39). The Russian defense industry, led by Rostec and Almaz-Antey, is self-sufficient. In fact, they do not even rank within the top 40 largest importers of arms from 2012-2016 (40).

39 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016 40 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016

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By directly comparing the Russian share of V4 imports and exports, the lack of a trade relationship within this industry is even starker.

Table 4. Annual Russian Origination Share of V4 Arms Imports (2010-2017)

Table 5. Annual Russian Destination Share of V4 Arms Exports (2010-2017)

As Table 4 illustrates, no V4 country during the last seven years sourced more than 0.33% of their arms from Russia. For Table 5, only Czechia exported any arms to Russia from our 2010-2017 timeframe. 2011 demonstrates a notable outlier to the rest of the data, with 100% of Russian imported arms originating from Czechia. However, this is misleading as Russia imported 90% less arms in 2011 when compared to their historical average volume of imported arms from 2010-2017. Therefore, interpretation of 2011 Czech arms exports to Russia must be taken with great care.

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4. Historical V4 Defense Industry Case Studies a. Czechia Turning to historical case studies of each V4 nation’s defense industries, Czechia has historically been a major global arms player. As is the case for most Warsaw Pact countries, Czechia possessed a large industrial military complex during the Cold War due to the arms race. During this time, Czechia, then Czechoslovakia, ranked as the largest producer of training jet aircraft, with the Model L-39 (41). However, as the Cold War ended, and Czechoslovakia transitioned to a market economy, their defense industry significantly fell behind Western counterparts. To expand market potential, Czechoslovakia, and later Czechia, sought diversification and the development of dual-use technologies. Today, the Czech descendants of the previously state-owned defense sector is dominated by Aero Holding and Omnipol. Both firms possess significant state-ownership still (42). Since the end of the Cold War, there has been a conscious effort to shift away from an “arms race mentality” and reduce the economic dependence on the arms industry. While the Czech army has been dependent on Ukrainian and Russian carriers for transport crafts in recent years, the supply of this equipment can be sourced from NATO partners when needed. As evidenced by recent Czech difficulties to sell aircraft since the implementation of EU sanctions on Russia, previously a large purchaser, the Czech defense industry remains only a shadow of its Cold War self (43). b. Hungary During the Cold War, Hungary sourced most military products and services directly from the Russian Soviet Federative Socialist Republic of the Soviet Union, modern day Russia (44). Compared with other Warsaw Pact states, Hungary possessed a relatively small defense industry. In 1988, defense and military output represented 3% of industrial output. With the 41 Pike John: www.globalsecurity.org/military/world/europe/cz-industry.htm 42 Pike John: www.globalsecurity.org/military/world/europe/cz-industry.htm 43 PSSI: Briefing Paper IV - Links to Russian Companies in the Defence Industry in the Czech Republic and the Wider Region; Danish and British Models for Foreign Direct Investment Screening 44 Pike, John: www.globalsecurity.org/military/world/europe/hu-industry.htm

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regime change, the defense industryâ&#x20AC;&#x2122;s workforce was reduced from between 18,000-20,000 workers to between 1,500-1,600 workers (45). Additionally, with the dissolution of the Soviet Union, the Hungarian defense sector lost its largest market. As of 2014, there were between 480-500 corporations, employing 1,726 workers, registered to engage in defense industry work. Of these corporations, only ~120 companies are directly involved in continuous defense sector work, with the others focusing more on the dual-use and technology industries. Smaller still, only 10-20 companies are truly significant players in the Hungarian defense sector (46). Compared to American and other Western firms, these companies are comparatively small. Today, the Hungarian defense sector mainly engages with the defense industries of other NATO nations. c. Poland Similar to the Czech (Czechoslovakian) defense industry at the end of the Cold War, the Polish defense sector found itself technologically behind Western counterparts. Even today, the Polish defense industry struggles to bridge the technological gap, leaving them unable to purchase certain multipurpose aircraft, tanks, and other goods (47). Like Hungary, Polish defense companies are heavily focused on trade with NATO partners, especially via international associations (e.g. Western European Armaments Group) (48).

Poland possesses the largest V4 defense industry, in no large part due to their size advantage over Czechia, Hungary, and Slovakia. Polish Armaments Group (PGZ) is the successor of the Cold War era state-owned Polski Holding Obronny (49). It employs over 19,000 workers and grosses over PLN 5 billion in annual revenue. PGZ is capable of satisfying 90% of domestic demand (50). Additionally, each year Poland hosts the MSPO International Defense Industry Exhibition, the largest event of its kind in the region. The Polish defense sector is highly reliant on the American defense industry (51).

45 Pike, John: www.globalsecurity.org/military/world/europe/hu-industry.htm 46 Pike, John: www.globalsecurity.org/military/world/europe/hu-industry.htm 47 Pike, John: www.globalsecurity.org/military/world/europe/pl-defense-industry.htm 48 Pike, John: www.globalsecurity.org/military/world/europe/pl-defense-industry.htm 49 Pike, John: www.globalsecurity.org/military/world/europe/pl-defense-industry.htm 50 PSSI: Briefing Paper IV - Links to Russian Companies in the Defence Industry in the Czech Republic and the Wider Region; Danish and British Models for Foreign Direct Investment Screening 51 Pike, John: www.globalsecurity.org/military/world/europe/pl-defense-industry.htm

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d. Slovakia While the Czech portion of Czechoslovakia was a large arms producer prior to World War II, the Slovakian part of Czechoslovakia emerged as the national hub during the Cold War. In terms of people employed, the Czechoslovak defense industry peaked in 1988, with 140,000 people involved, whether directly or indirectly. From 1971-1988, Czechoslovakia was the 7th largest producer of defense and military goods in the world and 2nd largest producer in the USSR, only behind the Soviet Union (52). However, following the regime change, output dropped by 90%. Today, Slovakia relies on Russia for supplies for purchased MiG-29 fighter jets, Mi-17 attack helicopters, and S-300 missile systems. Since the implementation of EU sanctions, Slovakia has shifted towards its NATO partners (53). Similar to other V4 defense industries, the Slovakian defense sector has struggled since the end of the Cold War, and exists as only a fraction of what it once was.

5. Conclusions Having now explored the dynamics of the Western defense industry, the ties between the V4 and Russia defense sectors (or lack thereof), and the historical background of each V4 nationâ&#x20AC;&#x2122;s industrial defense complex, I conclude that there are few economic links between the V4 and Russia in this sphere. While Russia is the second largest exporter of arms globally, they only account for 5.9% of imported arms in Europe. Having shifted their focus to South and East Asian markets, Russia remains influential in the world, but simply does not possess a strong economic foothold within NATO countries. While Czechia and Polandâ&#x20AC;&#x2122;s defense sectors place them among the 25 largest arms exporting countries, the industries are relatively small, with neither nation possessing over a 0.6% share globally (54). When comparing the direct trade relationships between V4 defense industries and their Russian counterparts, the lack of a connection is even more magnified. The annual Russian origination share of V4 arms imports has not exceeded 0.33% for any given year from 2010-2017.

52 Pike, John: www.globalsecurity.org/military/world/europe/sk-industry.htm 53 PSSI: Briefing Paper IV - Links to Russian Companies in the Defence Industry in the Czech Republic and the Wider Region; Danish and British Models for Foreign Direct Investment Screening 54 Fleurant, Aude, et al.: Trends In International Arms Transfers, 2016

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Since the end of the Cold War, V4 defense sectors have experienced a severe recession. Reasons for this include the technological gap with the West and the loss of markets and demand reductions following the dissolution of the USSR, among others. As all members of the V4 further integrate politically and economically into NATO following the implementation of sanction regimes, there is little evidence to suggest any change in the economic relationship between the V4 and Russian defense industries.

Additional Considerations & Recent Updates 1. Dual-Use Sanctions in Action Having explored the Russian and V4 defense sectors, and the connection (or lack thereof) between the two, there are still a few more topics that require our attention. The first of these topics regards examples of how sanctions on dual-use and military have been applied thus far. The second provides an update on the current state of arms and dual-use legislation.

Following the 2014 implementation of the EU sanction policy, there have been successes in restricting the export of dual-use and military products to Russia. The cancellation of trade contracts has resulted in large one-time loss revenue opportunities for a small number of European firms. While none of these firms have been V4-based, they are still worth noting. The largest of these canceled contracts belonged to Germany and France. In 2012, the German defense company Rheinmetall finalized a â&#x201A;Ź100 million contract to provide the Russian military with a high-tech combat training center. Following EU sanctions, the German government blocked the export of goods and services tied to this contract (55). Similarly, Thames, a French company, had a contract in place to deliver 331 infrared gun sights for use in Russian tanks. This contract, while agreed upon in 2007, also faced cancellation. There is limited public data on how many of these sights were actually delivered, but a number of Russian tanks in the Ukrainian Donbass region were seen outfitted with these products (56). On the transatlantic side, the U.S. government canceled all existing contracts 55 Bond, Ian, et al.: Frozen: The Politics and Economics of Sanctions against Russia 56 Bond, Ian, et al.: Frozen: The Politics and Economics of Sanctions against Russia

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with sanctioned Russian company Rosoboronexport. A part of the nowcanceled U.S.-Rosoboronexport contracts included the delivery of Russian Mi-17 attack helicopters for dual U.S.-Afghan use in the Middle East (57).

One specific European-Russian military contract survived cancellation though. Signed in 2011, France agreed to provide Rosoboronexport with two Mistral amphibious assault ships. These ships were to be delivered in October 2014 (58). With a total contract size of €1.2 billion, France faced cancellation and legal fees of more than €1 billion if this contract was not honored. Ultimately, the deal was exempted by EU leadership due to fears of future effects on the French defense sector, and the Mistral ships were delivered (59).

2. Weaknesses in Dual-Use Trade Controls While a number of arrangements exist that dictate how dual-use goods are traded, the current legislation contains a number of weaknesses that could affect the ability to enforce sanction policy. For the EU, determining how to regulate the trade of dual-use goods is a pressing need not just to ensure an effective sanction policy, but also for general trade purposes. Without the appropriate governmental authorization, dual-use goods cannot leave the EU customs territory (60). In recent years, the EU has expanded their definition of what constitutes “dual-use” goods. Broadened, this definition affects many more sectors and actors than in the past, such as, but not limited to, brokers, suppliers, transport and distribution providers, and research institutes (61). The expansion of this definition is partly in reaction to the fear of growing internationalization in the sector. Understandably, the European Parliament aims to ensure European independence and security of goods and services with military applications. It would not be desirable for a portion of the supply chain of critical goods to be operated or owned by an enemy power.

57 Morley, Jefferson: U.S., EU Sanction Russia’s Arms Sector 58 Morley, Jefferson: U.S., EU Sanction Russia’s Arms Sector 59 Bond, Ian, et al.: Frozen: The Politics and Economics of Sanctions against Russia 60 European Parliament, European Parliamentary Research Service, and Milan Remáč: Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items.

61 Bauer, Sibylle, et al.: CHALLENGES AND GOOD PRACTICES IN THE IMPLEMENTATION OF THE EU’S ARMS AND DUAL-USE EXPORT CONTROLS

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However, in attempting to avoid this, and ensure the security of the supply of European dual-use goods and research, the definition of “dual-use” has not been appropriately clarified and specified. Therefore, while expressing a desire to reduce the burden of compliance, the EU has instead increased it (62). The weight of compliance changes per firm and group, as it is dependent on the sector, product, and export destination (63). Many firms, newly involved in the dual-use market, struggle to comply, not out of a wish to avert the law, but simply due to the difficulty of interpreting the existing EU legislation. The European Parliament admits to the difficulties involved in developing dual-use trade legislation. A December 17th, 2015 resolution explained, “implementation of Common Position 2008/944/CFSP: In this resolution, Parliament noted that because of technological developments it is difficult to distinguish between pure military and civilian use (para. 43).

Parliament welcomed the European Commission’s initiative to modernise EU dual-use export controls and its intention to submit a new legislative proposal related…” (64). To date, no solutions have been found to improve dual-use trade controls, although the conversation continues. Developing clearer regulation for the export of dual-use goods and services should be a priority for the EU. In identifying better ways to regulate the trade of dualuse products with a military application, the risk of sensitive technology and knowledge unintentionally or intentionally passing into Russian hands will be lessened. Restated, developing better dual-use regulation will only strengthen the level of compliance with sanction policy (and therefore its long term effectiveness).

62 Bauer, Sibylle, et al.: CHALLENGES AND GOOD PRACTICES IN THE IMPLEMENTATION OF THE EU’S ARMS AND DUAL-USE EXPORT CONTROLS 63 Bauer, Sibylle, et al.: CHALLENGES AND GOOD PRACTICES IN THE IMPLEMENTATION OF THE EU’S ARMS AND DUAL-USE EXPORT CONTROLS 64 European Parliament, European Parliamentary Research Service, and Milan Remáč: Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items

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Conclusion Here marks the conclusion of the fourth essay on V4-Russian economic relations in light of 2014 EU sanction policy. From the European side, multiple Russian firms face capital and trade restrictions (e.g. Almaz-Antey, Kalashnikov Concern, United Aircraft Corporation, and Uralvagonzavod).

Other firms face sanctions from the U.S., like Russian defense conglomerate Rostec. Sanctioned Russian defense firms are among some of the largest in the world, and are global market leaders in the production and delivery of military aircraft, missile systems, and arms. Since the implementation of EU sanctions, the Russian defense sector has focused on expanding their presence in the South and East Asian markets, with notable success.

Regarding Russian connections to V4 defense industries though, the Russian defense sector does not possess a significant presence. Since the dissolution of the Soviet Union, V4 defense sectors have remained fairly small.

Today, Czechia, Hungary, Poland, and Slovakia possess miniscule presences in the global import and export of arms. Even when involved, V4 nations look to the West for supplies and technology due to their membership in NATO. From 2010 on, the Russian defense sector has never possessed more than a 0.33% origination share of V4 arms imports.

While the impact of sanctions-related defense and dual-use restrictions has been negligible for V4 economies, it has impacted various German and French defense contracts. Although this counts as some form of success, challenges still exist in maintaining and developing effective dual-use trade regulations. By increasing the clarity and ease of compliance with EU law, the strength of sanction policy in this arena can be increased not just for V4 economies, but for all member states. Updating dual-use regulation presents a unique opportunity for policy makers to better defense-related sanctions while simultaneously supporting V4 and EU firms who operate in this space.

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Works Cited Bauer, Sibylle, et al. “CHALLENGES AND GOOD PRACTICES IN THE IMPLEMENTATION OF THE EU’S ARMS AND DUAL-USE EXPORT CONTROLS.” SIPRI, Stockholm International Peace Research Institute, July 2017, www.sipri.org/sites/default/files/2017-07/1707_ sipri_eu_duat_good_practices.pdf.

Bond, Ian, et al. Frozen: The Politics and Economics of Sanctions against Russia. Centre for European Reform, www.cer.eu/sites/default/files/ publications/attachments/pdf/2015/frozen_sanctions-10787.pdf.

“Briefing Paper IV - Links to Russian Companies in the Defence Industry in the Czech Republic and the Wider Region; Danish and British Models for Foreign Direct Investment Screening.” Mapping Mechanisms for Protecting the Czech Republic from the Non-Standard Economic Behavior of the Russian Federation, Prague Security Studies Institute (PSSI), Feb. 2018, mailchi.mp/b9c2fe1c5070/briefingpaper-i-the-gas-sector-in-the-czech-republic-and-the-widerregion-the-role-of-gazprom-2038113?e=fe5fdac074.

“Consolidated List of Ukraine Related Sanctions.” RiskAdvisory, The Risk Advisory Group, news.riskadvisory.net/sanctioned-individuals/.

Crozet, Matthieu, and Julian Hinz. Friendly Fire: the Trade Impact of the Russia Sanctions and Counter-Sanctions. Kiel Institute for the World Economy, 31 July 2017.

European Commission, “Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014.” Commission Guidance Note on the Implementation of Certain Provisions of Regulation (EU) No 833/2014, 833rd ed., vol. 2014, European Commission, 2014.

European Commission, Directorate-General for Trade. “Dual-Use Export Controls.” Dual-Use Export Controls, European Commission. ec.europa.eu/trade/import-and-export-rules/export-from-eu/ dual-use-controls/.

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European Parliament, European Parliamentary Research Service, and Martin Russell. “Sanctions over Ukraine: Impact on Russia.” Sanctions over Ukraine: Impact on Russia, European Parliament, 2018.

European Parliament, European Parliamentary Research Service, and Milan Remáč. “Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items.” Briefing, Implementation Appraisal: Control of Trade in Dual-Use Items, European Parliamentary Research Service, Sept. 2016. www.europarl.europa.eu/RegData/etudes/ BRIE/2016/587340/EPRS_BRI%282016%29587340_EN.pdf.

European Union, European Council Decision, 512, vol. 2014, 2014. CFSP. European Union, European Council Decision, 659, vol. 2014, 2014. CFSP. European Union, European Court of Justice, General Court of the European Union. “Judgment in Case T-255/15 Joint-Stock Company ‘AlmazAntey’ Air and Space Defence Corp. v Council.” Judgment in Case T-255/15 Joint-Stock Company ‘Almaz-Antey’ Air and Space Defence Corp. v Council, General Court of the European Union, 25 Jan. 2017. curia.europa.eu/jcms/upload/docs/application/pdf/2017-01/ cp170006en.pdf.

Fleurant, Aude, et al. “Trends In International Arms Transfers, 2016.” SIPRI Fact Sheet, Stockholm International Peace Research Institute, Feb. 2017, www.sipri.org/sites/default/files/Trends-in-internationalarms-transfers-2016.pdf.

“History and Status of Rosoboronexport.” Rosoboronexport, Rostec State Corporation, 2018, roe.ru/eng/rosoboronexport/.

Hlavac, Marek (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.1. https://CRAN.R-project. org/package=stargazer “How Far Do EU-US Sanctions on Russia Go?” BBC News, BBC, 15 Sept. 2014, www.bbc.com/news/world-europe-28400218.

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“Increase in Arms Transfers Driven by Demand in the Middle East and Asia, Says SIPRI.” SIPRI, Stockholm International Peace Research Institute, 20 Feb. 2017, www.sipri.org/media/press-release/2017/increasearms-transfers-driven-demand-middle-east-and-asia-says-sipri.

“Kazanskiy Vertoletnyi Zavod OAO : Russian Helicopters Names Rostec Deputy CEO Vladimir Artyakov as Chairman of the Board of Directors.” 4-Traders.com, Superformance, 18 July 2013, www.4traders.com/KAZANSKIY-VERTOLETNYI-ZAV-9059305/news/ Kazanskiy-vertoletnyi-zavod-OAO-Russian-Helicopters-namesRostec-Deputy-CEO-Vladimir-Artyakov-as-C-17109694/.

“Key Companies.” Rostec State Corporation, Rostec State Corporation, 2018, rostec.ru/en/about/companies/.

Kramer, Andrew E. “Kalashnikov, AK-47 Maker, Goes Private as Russian Government Sheds Stake.” The New York Times, The New York Times, 13 Nov. 2017, www.nytimes.com/2017/11/13/business/ dealbook/kalashnikov-ak47-sale.html.

Marson, James, and Thomas Grove. “Kalashnikov Finds Success Even After U.S. Sanctions.” The Wall Street Journal, Dow Jones & Company, 13 July 2017, www.wsj.com/articles/kalashnikov-finds-success-evenafter-u-s-sanctions-1499943603.

Morley, Jefferson. “U.S., EU Sanction Russia’s Arms Sector.” Arms Control Today, vol. 44, no. 7, Sept. 2014, pp. 33–44. JSTOR [JSTOR], www. jstor.org/stable/24336272.

“NATO Enlargement & Open Door.” NATO, North Atlantic Treaty Organization, July 2016, www.nato.int/nato_static_fl2014/assets/pdf/ pdf_2016_07/20160627_1607-factsheet-enlargement-eng.pdf.

Nevar, Vitaly. “Russia’s FSB Says It Detained a Ukrainian Agent in Crimea.” The Moscow Times, The Moscow Times, 15 Aug. 2017, themoscowtimes. com/news/fsb-detained-sbu-agent-in-crimea-58661.

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Pike, John. “Czech Republic - Defense Industry.” GlobalSecurity.org, GlobalSecurity.org, 14 Dec. 2012, www.globalsecurity.org/military/ world/europe/cz-industry.htm.

Pike, John. “Hungarian Military Industry.” GlobalSecurity.org, GlobalSecurity. org, 12 Oct. 2016, www.globalsecurity.org/military/world/europe/ hu-industry.htm.

Pike, John. “Polish Defense Industry.” GlobalSecurity.org, GlobalSecurity. org, 6 Jan. 2016, www.globalsecurity.org/military/world/europe/ pl-defense-industry.htm.

Pike, John. “Slovak Republic - Defense Industry.” GlobalSecurity.org, GlobalSecurity.org, 3 Apr. 2012, www.globalsecurity.org/military/ world/europe/sk-industry.htm.

Pramuk, Jacob. “Trump Administration Modifies Sanctions against Russian Intelligence Service.” CNBC, CNBC, 2 Feb. 2017, www. cnbc.com/2017/02/02/us-treasury-eases-some-sanctions-againstrussian-intelligence-service.html.

Reid, David. “US Sanctions Imposed against Russian Firms Cannot Succeed, Says Rostec CEO.” CNBC, CNBC, 14 Nov. 2017, www. cnbc.com/2017/11/14/us-sanctions-cannot-succeed-says-rostecceo-sergey-chemezov.html?view=story&%24DEVICE%24=nati ve-android%E2%80%A6.

“Rostec State Corporation Annual Report for 2015.” Rostec State Corporation, Rostec State Corporation, 15 June 2016, rostec.ru/upload/ iblock/716/7165429a8fb2f26581d105aa978957b5.pdf.

“Russia’s Technopromexport May Rebuild Four Syrian Power Plants - TASS.” CNBC, CNBC, 2 Feb. 2018, www.cnbc.com/2018/02/02/reutersamerica-russias-technopromexport-may-rebuild-four-syrianpower-plants--tass.html.

Shandra, Alya. “Russia’s Technopromexport Finally Admits Turbines in Occupied Crimea Are from Siemens.” Euromaidan Press,

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Euromaidan Press, 29 July 2017, euromaidanpress.com/2017/07/29/ russias-technopromexport-finally-admits-turbines-in-occupiedcrimea-power-stations-came-from-siemens/.

“SIPRI Arms Transfers Database.” SIPRI: Importer/Exporter TIV Tables, Stockholm International Peace Research Institute, 2018, armstrade. sipri.org/armstrade/page/values.php.

“Sources and Methods.” SIPRI, Stockholm International Peace Research Institute, 2018, www.sipri.org/databases/armstransfers/sourcesand-methods/.

“Tehran, Moscow Start Construction of Power Plant at Bandar Abbas.” Iran Business News, Iran Business News, 23 Feb. 2017, www.iran-bn. com/tag/technopromexport/.

“Top 100 for 2017.” Defense News, Sightline Media Group, 2017, people. defensenews.com/top-100/.

Tweed, David. “Russia’s Rostec Banks on Asia to Join Defense Elite.” Bloomberg. com, Bloomberg, 28 Mar. 2017, www.bloomberg.com/news/ articles/2017-03-28/russia-s-rostec-sees-asia-as-ticket-to-joinglobal-defense-elite.

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Executive Order 13694 of April 1, 2015, GENERAL LICENSE NO. LA: Authorizing Certain Transactions with the Federal Security Service, Office of Foreign Assets Control, 2 Feb. 2017. www.treasury.gov/ resource-center/sanctions/Programs/Documents/cyber_gl1a.pdf.

United States, Executive Order. No. 13662, 2014. OFAC sanction list.

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V ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS 172 DEFENCE & DUA L-USE

Introduction Agriculture, one of humanityâ&#x20AC;&#x2122;s oldest commercial endeavors, has blossomed in the last century into a multi-trillion dollar industry, capable of feeding the entire globe. Alongside this growth, never before have so many different foods and goods been available to more people. Exemplifying this, through the marvels of international trade and modern industrial agriculture, Swedish residents can receive bananas, mangos, and other tropical fruits all year round. Similarly, people living in Singapore can eat New Englandgrown cranberries anytime. As we dive now into this fifth essay, this topic, agriculture and the agro-food trade, will be the focus.

In response to the implementation of EU sanctions on Russia for their perceived military involvement in the Crimean and Donbass regions of Ukraine in 2014 (and to this day in Donbass), Russia enacted their own set of economic and political sanctions. Russian sanctions, referred to as â&#x20AC;&#x2DC;counter-sanctions,â&#x20AC;&#x2122; target the agriculture and agro-food industries of sanctioning Western countries. Have these counter-sanctions impacted V4 agricultural producers significantly? Do V4 producers heavily rely on the Russian market? How have the V4 and Russian agro-food industries reacted to the economic shock of counter-sanctions? To answer these questions, this work will be broken into six parts: 1) a review of Russian agro-food counter-sanctions, 2) an explanation of the importance of agriculture for V4 and Russian national economies, 3) an overview of the Russian agricultural sector, 4) an overview of the V4 agricultural sector, 5) a statistical and historical analysis of V4 agro-food exports to Russia, and 6) a discussion of how V4 and Russian markets have evolved since counter-sanctions were introduced.

By looking at each of these topics in turn, I aim to sketch a holistic picture of Czech, Hungarian, Polish, and Slovakian agriculture in light of 2014 countersanction policy. By having access to this knowledge synthesized and clearly communicated, V4 policymakers will be able to continue to appropriately mitigate any negative effects of Russian foreign policy for their constituents.

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Review of Agricultural Counter-Sanctions 1. Overview of Russian Counter-Sanction Policy On August 7th, 2014, in response to the sanction policies of the EU, United States, and other Western nations, Russia announced their own set of retaliatory economic sanctions. Effective immediately, Russian counter-sanctions targeted not the energy or financial sectors, like their Western counter-parts, but the agricultural industry. More similar to a traditional embargo, Russian counter-sanctions ban food imports from the EU, United States, Canada, Australia, Norway, and Denmark (1),(2).

While Russian counter-sanctions also include individual sanctions (i.e. travel bans) for certain Western political leaders, the primary power of counter-sanction policy is the trade restriction of agro-food products (3). Therefore, this will be the focus of this essay.

Interestingly, these restrictions, when announced, were not framed as a response to Western sanction policies, but enacted under the guise of health and sanitation measures instead (4). Counter-sanctions fall into a wider theme of the Russian restriction of agro-food imports on these same health and sanitation grounds. Used numerous times in 2014 prior to the announcement of counter-sanctions, the import of EU pork imports, Dutch dairy imports, Ukrainian meat and dairy, and Polish fruits and vegetables were already prohibited (5). While the specific reason for these decisions varied each time, from cases of African swine fever in the wild boar populations of Lithuania and Poland to excessive pesticide residue, the theme of using the “insufficient sanitation standards” argument to accomplish political goals remains constant.

1 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 2 W., Christian: Russia Extends Import Ban on Danish Food Products 3 Seymat, Thomas: The Complete Blacklist of EU Officials Banned from Russia 4 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 5 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment

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Similar again to Western sanctions, Russian counter-sanctions have been extended since their introduction, and are still currently in effect.

While Russia has stated that they wish to maintain counter-sanction policies indefinitely, barring any geopolitical changes, they have not stated any intentions to expand the list of embargoed products (6).

2. Specifics of Agro-food Restrictions Russian agro-food counter-sanctions target eight product categories.

Table 1 lists these products, organized by Harmonized System (HS) trade code and aggregated at the 2-digit level.

Table 1. Russian Counter-Sanctioned Products by HS Code

Source: Russian Federation Resolution 830 (2014), Crozet and Hinz (2017)

Technically counter-sanctions specifically address products at smaller levels of aggregation (4-digit, 6-digit, and 8-digit). However, for sake of ease, we will look at these products at the highest (2-digit) level of aggregation. While I acknowledge that not all products encompassed by the 2-digit level are counter-sanctioned, the majority of products within these categories do face restrictions. Therefore, I feel this view is most appropriate. For an intensive econometric analysis of the historical trade of these goods between Russia and V4 nations, please see Essay 1: Econometric Analyses. A lesser, non-statistical view of this trade will be explored in coming sections.

6 Medvedev, Sergei: Russia Extends Food Counter-Sanctions until End of 2017

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The Importance of Agriculture in V4 & Russian Economies In order to appropriately frame this essay on V4 and Russian agriculture and the impact of counter-sanctions, the importance of the agricultural industry must be evaluated. Is it a large contributor to national economies?

For the V4 and Russian economies, agriculture and the agro-food industries do represent key components of the national economy mix. Therefore, concerns about the agro-food industry being negatively impacted are not simply sectoral business worries, but national economic worries. Figure 1 details the total value added by agriculture to each of these nationsâ&#x20AC;&#x2122; economies. Figure 2 displays agricultural output in percentage terms, compared to the GDP of each respective nation.

Figure 1. Annual US$ Value Added to National Economies by Agricultural Output (2010-2016)

Source: World Bank, AJTK Calculations

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Figure 2. Percentage of GDP Contributed by Agricultural Output (2010-2016)

Source: World Bank, AJTK Calculations

Unsurprisingly, output is correlated with nation size, with Russia and Poland ranking as the largest agricultural producers, respectively. In percentage terms, for over half of the time frame measured, Hungarian agriculture contributed the highest share to GDP. On average, from 20102016, the percentage share of GDP contributed by agriculture was 4.40%, 4.07%, 3.66%, 2.93%, 2.43% for Hungary, Russia, Slovakia, Poland, and Czechia, respectively. Therefore, for V4 countries, I can conclude from Figure 1, Figure 2, and these average values that agriculture is most vital for the health of the Hungarian and Slovakian economies. While not as critical for Poland and Czechia, agriculture still maintains an important place in the national economy mix. For Russia, the agricultural and agro-food industry is objectively quite large and occupies a crucial role in the economic mix.

With the importance of agriculture now established, we will first examine Russian agriculture. How is the sector structured and how does it fit within the wider, global agricultural marketplace?

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Russian Agricultural Markets 1. Introduction to Agriculture in Russia Recently overtaking the arms and defense industry, the Russian agricultural industry is now the second largest sector of the Russian economy, behind only the energy sector (7). Before examining the market dynamics of the V4 and EU agricultural markets, the Russian agricultural sector will be first analyzed. While there is less data on Russiaâ&#x20AC;&#x2122;s agricultural sector than for comparative Western sectors, by looking at what is available for the Russian marketplace, we will be greatly aided in understanding what impact counter-sanctions could have for V4 producers and policymakers. In this section, two topics will be discussed: 1) the market structure and global position of Russian agriculture and 2) the output mix of Russian producers.

2. Global Position & Market Structure At the time of the implementation of counter-sanction policy, Russia ranked globally as the 7th largest agricultural producer (8). While on average accounting for roughly 4% of GDP, Russian agriculture employs 16% of the population (9),(10). Russiaâ&#x20AC;&#x2122;s primary agricultural product, wheat, possesses a global export share of approximately 10.5% (11). 50% of agriculture is dedicated to farming, while the other half is dedicated to processing and other related functions (12). While in the last three years (since counter-sanctions), the concentration and importance of Russian agriculture has only grown, its exposure to risk has only increased as well.

Russian agriculture is intensely sensitive to fluctuations in weather, due to a lack of trade and land diversification (13). Counter-sanctions have selfimposed a limited marketplace where it is difficult for prices to recalibrate.

In addition to this, considering the geographical position of Russia, only the southernmost areas of the nation are best-suited for industrial agriculture.

7 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 8 Statistics Times: statisticstimes.com/economy/countries-by-gdp-sector-composition.php 9 See Figure 2.

10 Invest in Russia: www.investinrussia.biz/industry/agriculture/agriculture-industry-russia 11 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture 12 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture 13 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture

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Much of this business is concentrated in one region, an area inclusive of the North Caucasus, Southern, Central, and Volga regions of the country. In a governmental attempt to manage prices and risk, harvesting was delayed one month in 2017. Other methods used include the expansion of storage facility capacities from the current level of 120 million tons of grain to 130 million tons by 2030. Currently around 25 million tons of grain is stored per harvest, with another 75 million tons consumed annually (14). The Russian government aims to increase production and storage in order to more appropriately manage price levels and hedge against the lack of diversification.

3. Output Mix The output mix of Russian agriculture is split fairly evenly between animal husbandry and crops, with crops tending to possess a slightly larger share annually. Figure 3 provides a historical illustration of output levels and the share of the animal and crop industries within total production.

Figure 3. Production Mix of Russian Agriculture (2010, 2013-2016)

Source: FSSS Agriculture, AJTK Calculations 14 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture

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Of crops, Russia relies on grains more than any other agro-food product. Of crops farmed, 80% harvested is some form of grain product.

Of this 80%, 60% is wheat specifically (15). The second most commonly farmed product is similar â&#x20AC;&#x201C; barley (16). Outside of grains, various roots and tubers are also quite popular. Potatoes, a base for vodka, are grown widely.

Recently, production and yield capacity has increased sharply for beets and sunflower seeds. Among animal husbandry, pig and poultry holdings outnumber cattle. Total pig and poultry holdings increased in 2016, while cattle holdings decreased (17). More time is needed to determine if this represents a supply-side shift towards the pig and poultry market over the cattle market.

While the Russian agricultural sector is a major actor in the global grain markets, they are not globally competitive in the production and trade of corn, sugar, or meat. Much of this is due to the use of genetically modified organisms (GMOs) being banned. Additionally, Russia is not present in the trade of sugar. This is related to the high transport costs of shipping sugar.

Without the infrastructure to handle large container shipments of sugar in a financially viable way, it is unlikely Russia will enter this market for some time (18).

4. Conclusions Accounting for the 7th largest agricultural economy in the world and employing 16% of the national population, Russian agriculture is a massive and profitable industry (19),(20). While the sector displays an expertise in the production and export of grains, this has left the industry poorly diversified. The Russian agricultural industryâ&#x20AC;&#x2122;s lack of diversification is a symptom of their cultivation and husbandry choices as well as the current geopolitical climate. Therefore, Russian output is subject to a greater dependency on good weather conditions (21). Having now reviewed the 15 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture 16 Invest in Russia: www.investinrussia.biz/industry/agriculture/agriculture-industry-russia 17 Invest in Russia: www.investinrussia.biz/industry/agriculture/agriculture-industry-russia 18 Medetsky, Anatoly: How an Oil Giant (Russia) Came to Dominate Wheat 19 Statistics Times: statisticstimes.com/economy/countries-by-gdp-sector-composition.php 20 Invest in Russia: www.investinrussia.biz/industry/agriculture/agriculture-industry-russia 21 Colibasanu, Antonia: Predicting the Unpredictable in Russian Agriculture

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Russian agricultural and agro-food sectors’ global position, market structure, and output mix, we see an industry with obvious strengths coupled with glaring weaknesses. How does the Russian agricultural market structure and output mix compare to their EU (and V4) counterparts? Are there strategic advantages or weaknesses of one versus the other?

V4 Agricultural Markets 1. Introduction to Agriculture in the V4 Having explored the fundamentals of agriculture in Russia, what do agricultural and agro-food markets look like in the V4? What role do Czech, Hungarian, Polish, and Slovakian agriculture play within the wider EU market? Before turning to review historical agricultural trade data between V4 nations and Russia, it is equally important to understand the baseline dynamics of the sector in Central Europe. In this section the initial reactions to Russian counter-sanction policy, the role of the EU in the agricultural sector, and the place of V4 output within EU production will all be inspected.

2. Initial V4 Reactions to Counter-Sanctions Immediately following the announcement of Russian counter-sanctions, V4 nations expressed significant concerns about the possible harm such counter-sanctions could have for their national agricultural industries. For Czechia and Poland, among others, Russia ranks as the largest non-EU export destination (22),(23). In 2013, Czech exports to Russia totaled 2.4 billion Czech korunas. The Czech Ministry of Agriculture forecasted that Czech farmers could lose 250-300 million korunas in revenue in the last 5 months of 2014 alone. Further, the Czech Ministry of Agriculture worried that the Russian agro-food embargo would increase intra-EU competition and lower the price of

22 Lazarová, Daniela: Agriculture Ministry – “Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo” 23 Devitt, Polina, and Wiktor Szary: Warsaw Says Russian Ban on Polish Produce Is Revenge for EU Sanctions

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competing Russian products (24). These sentiments were echoed by Slovakian and Polish farmers alike. While Russia is not a key agricultural partner for Slovakia, Slovakian farmers expressed concerns that even producers not directly exporting to Russian entities could be impacted (25).

Are these concerns justified? What does the EU marketplace look like? Is it structured in such a way that counter-sanctions could represent a serious systemic problem for European and V4 producers?

3. Overview of EU Agriculture In 2016, total EU agricultural output value amounted to €405 billion. Of this, crop-growing contributed the majority share of value at 51.9%. Behind crops, animal husbandry’s share added 39.2% of value, with secondary and agricultural services rounding out the final 8.9% (26). Viewed by country, France, Italy, Germany, and Spain accounted for the four largest agricultural economies in 2016. At 17.4%, 13.2%, 13.1%, and 11.6% respectively, these four nations’ combined output totaled over half of the EU’s total agricultural output (27). As much of traded agricultural goods passes through the Belgium-Netherlands-Luxembourg (“Benelux”) area due to these countries’ prime geographical position, the Netherlands is the EU’s largest re-exporter.

Both Belgium and the Netherlands serve as critical trading hubs within the greater European agricultural supply chain (28).

Broken down further by product, EU countries exported €18.7 billion in fresh fruit and €14.9 billion in fresh vegetables during 2014. Spain was the largest exporter of fruits and vegetables, with the majority of their production being shipped outside of their national borders (29). Italy also is a notable producer and exporter of vegetables (30). From 2010-2013, the most produced fruits within the EU were grapes, apples, and oranges, respectively. For apples,

24 Lazarová, Daniela: Agriculture Ministry – “Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo” 25 Balogov, Beata, and Michaela Terenzani: Slovakia to Feel Sanctions 26 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 27 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 28 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 29 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 30 Heidorn, Eleonora, et al. (Eurostat): Agriculture, Forestry and Fishery Statistics, 2017 Edition

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V4 nation Poland numbers as the largest producer and exporter of apples.

2013 figures placed total Polish apple exports at €438 million (31). Within vegetables and over the same time frame from 2010-2013, potatoes outpaced all other vegetables, roots, and tubers by a significant margin (32). A fun additional note, the EU is the world’s largest producer of sugar beets. Most V4 nations, with the exception of Poland, are not significant global players in the export of fruits and vegetables (33). The EU does figure prominently in the global production of oilseeds, olives, cereals, and wine (34).

Agriculture in the EU is supported by the EU’s Common Agricultural Policy (CAP). As quoted in Eurostat’s 2017 edition of Agriculture, Forestry, and Fishery Statistics, the goals of CAP are threefold: “to ensure a decent standard of living for farmers, to provide a stable and safe food supply chain at affordable prices for consumers, and to ensure the development of rural areas throughout the EU” (35). The common collaboration promoted by CAP has allowed for successful intra-EU trade to benefit of all EU member states’ agricultural industries.

Due to the usefulness of CAP, the large production abilities of Spain, Italy, and other southern EU member states, and the logistical excellence of Belgium and the Netherlands, EU agricultural trade tends to be focused on other member states. While numbers vary depending on the year, source, good, and nation, almost all EU agricultural exports can be classified as “intraEU.” For the EU fruits and vegetables production, from 2010-2013, only 15% and 7% respectively, were exported to nations outside the EU (36). Looking through the V4 lens more so, for Hungary, 90% of exported agricultural goods were exported to other EU countries (37). Numbers are similar for Slovakia, with 96.6% of agricultural output staying within the EU (38).

31 Devitt, Polina, and sWiktor Szary: Warsaw Says Russian Ban on Polish Produce Is Revenge for EU Sanctions 32 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 33 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013) 34 Heidorn, Eleonora, et al. (Eurostat): Agriculture, Forestry and Fishery Statistics, 2017 Edition 35 Heidorn, Eleonora, et al. (Eurostat): Agriculture, Forestry and Fishery Statistics, 2017 Edition 36 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013) 37 Novak, Benjamin: Hungarian Agricultural Producers Find Way around Russian Sanctions 38 Balogov, Beata, and Michaela Terenzani: Slovakia to Feel Sanctions

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The statistics of intra-EU trade for agricultural trade may be among the most critical figures in this essay. Taken at face value, these would indicate that the possible negative effects of Russian counter-sanctions may not be quite as detrimental as initially worried by V4 producers. However, to properly contextualize these statistics for effective policymaking and guidance, more work must still be done. We will return to this topic in coming sections for a proper discussion.

4. Framing V4 Agriculture Returning to our V4 focus, what role do Czech, Hungarian, Polish, and Slovakian agriculture play within the wider EU market? Poland, while not a top four producer, is undoubtedly a major producer, albeit due to its size and geography. Where do other V4 countries place? Are they key players?

Figure 4 displays total agricultural output for each V4 nation in relation to total EU output for selected years. Figure 5 illustrates the same data, but in a percentage form.

Figure 4. V4 & EU Annual Agricultural Output (2010, 2013-2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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Figure 5. Annual V4 Share of Total EU Agricultural Output (2010, 2013-2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

As can be seen in Figure 5 especially, Poland contributes slightly over 5% of total EU agricultural output. Hungary possesses about a 2% annual share, with Czechia and Slovakia contributing less than 1.5% each annually.

Poland and Hungary both possess land much more suited for agriculture than Czechia and Slovakia. It is true that both Polandâ&#x20AC;&#x2122;s and Hungaryâ&#x20AC;&#x2122;s shares are small in comparison with nations like Spain and Italy. However, considering the location of Poland and Hungary, and their respective shares, it would be unwise to see their production as unimportant to a 28-member state bloc. To a lesser degree, this is valid thinking for Czechia and Slovakia as well. For a more detailed breakdown of 2016 output shares by V4 country, I would encourage the reader to review Figure 14, 15, 16, 17, and 18 in the Index. There one can view 2016 EU output shares for specific products within the cereal, root, fruit and vegetable, meat, and milk and dairy segments.

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5. Conclusions Due to the diversity found within the EU, the EU agricultural market is broader and much more complex than the Russian market. With a combined total agricultural output value of â&#x201A;Ź405 billion in 2016, the EU is involved in the production and sale of most major agricultural goods.

Despite being led by agricultural giants France, Italy, Germany, and Spain, V4 nations also remain notable contributors (39). Ranked, Poland is the largest agricultural producer of the group, with Hungary, Czechia, and Slovakia following afterwards (40). Most agricultural and agro-food products are traded within the EUâ&#x20AC;&#x2122;s common market, as orchestrated by the political and structural designs of the CAP (41),(42),(43). With our reviews of EU, V4, and Russian agricultural markets now completed at a high level, how do the V4 and Russian markets interact on more granular levels?

V4-Russian Agricultural Trade 1. Primer on Direct Trade Having explored the fundamentals of both the V4 and Russian agricultural sectors, how have V4 exports of counter-sanctioned goods to Russia changed over the last 7 years? Here we will explore literature directly related to this topic and also V4 historical export data in order to lay a more robust foundation for understanding the impacts of countersanctions on V4 markets.

39 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe 40 Heidorn, Eleonora, et al. (Eurostat): Agriculture, Forestry and Fishery Statistics, 2017 Edition 41 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013) 42 Novak, Benjamin: Hungarian Agricultural Producers Find Way around Russian Sanctions 43 Balogov, Beata, and Michaela Terenzani: Slovakia to Feel Sanctions

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2. Relevant Literature a. United Nations In September 2014, the Food and Agriculture Organization of the United Nations published a report titled Russia’s restrictions on imports of agricultural and food products: An initial assessment. In terms of domestic consumption percentages, Russia sources approximately 25% of meat consumed, 20% of milk and dairy products consumed, and 70% of fruit consumed from international sources. Based upon the authors’ assessment, and based upon 2013 statistics, in total, Russia’s own counter-sanction policy affects 56% of these agro-food imports (44). Table 2 displays the overall import percentages by banned product and by nation or nation group.

Table 2. Import Share of Counter-sanctioned Products by Original Destination

Source: Food and Agricultural Organization of the United Nations, AJTK Calculations

Countries within the EU with the largest exposure to the Russian market and the effects of counter-sanctions include Germany, Finland, and France.

Specifically exposed national agricultural sub-industries include Dutch pork, Lithuanian milk and dairy, and Polish fruit (45). Here we have our first mention of a V4 nation, Poland, the V4’s largest agriculture-producing

44 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 45 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment

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country. Based upon the trade statistics used by the United Nations (UN), Polish fruit bore the V4’s most significant exposure to Russia at the time Russian counter-sanctions were first introduced. 30.4% of exported Polish fruit was destined for Russian markets. Also notable was that 19.8% of Polish vegetables and 8.9% of Polish milk & dairy products were exported to Russia in 2013 (46). Initially, this UN report concluded that notable risks existed for the producers of exposed nations due to the nature of trade flows at the time of counter-sanctions (47). b. European Commission During the same time frame, the European Commission authorized Analysis of the EU fruit and vegetables sector, EU production and exports to Russia (2011-2013): Recent market trends and measures taken to address market disruptions following the Russian import ban. This study specifically focused on the European fruit and vegetable trade. Of total agriculture, 7% can be categorized as fruits and 10% as vegetables. Of this, 5% of produced fruit and 2% of produced vegetables are exported to extra-EU destinations. At the time counter-sanctions were implemented, Russia was the largest purchaser, buying 34% and 26% of extra-EU exported fruit and vegetables, respectively (48). While counter-sanctions affecting fruit and vegetables are a larger concern overall for southern EU nations, the European Commission ultimately found a similar conclusion to the UN’s report. This result – the impact of counter-sanctions is worrisome for the agricultural economies of EU states. Exposure should be limited as possible and prescriptive policy solutions will be necessary to protect commercial interests (49).

46 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 47 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 48 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013) 49 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013)

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c. Other In addition to these two supranational studies, journalists also commented on V4 exposure to the Russian market. Of the many written, two notable articles appeared addressing this topic specifically for Czech and Polish agriculture. At the time counter-sanctions were announced, the Czech milk and dairy product industry possessed a large exposure to countersanctions-related risk (50). Poland, as has been mentioned previously, was also highly exposed, with Russia buying more than €2 billion in fruits and vegetables annually prior to counter-sanctions (51).

3. Analysis of Historical V4-Russia Export Data a. Data Description Having covered literature related to the initial exposure of EU and V4 nations to the possibility of detrimental counter-sanction impacts, what narrative does historical trade data tell of the impact of Russia’s policies?

The historical data used is the same data used in Essay 1 – Econometric Analyses. It is sourced from the UN Comtrade’s historical trade database.

For this essay, the monthly trade data was annualized, covering from 20102016. It includes country-specific export data for all banned HS 2-digit level product categories as covered in Review of Agricultural Counter-Sanctions.

50 Lazarová, Daniela: Agriculture Ministry – “Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo” 51 Devitt, Polina, and Wiktor Szary: Warsaw Says Russian Ban on Polish Produce Is Revenge for EU Sanctions

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b. Export Visualizations Figure 6. HS 02 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

Figure 7. HS 03 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

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Figure 8. HS 04 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations Figure 9. HS 07 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

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Figure 10. HS 08 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

Figure 11. HS 16 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

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Figure 12. HS 19 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

Figure 13. HS 21 Annual V4-Russia Export Value (US$)

Source: UN Comtrade, AJTK Calculations

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c. Discussion of Findings As expected, for each visualization, Poland is typically the largest producer for each product group. Also as expected, since Russian counter-sanctions were implemented in August 2014, the Czech, Hungarian, Polish, and Slovakian export of these goods to Russia has either decreased sharply or remained negligible. This trend is particularly noticeable for Poland in Figure 9 and 10.

Figure 9, representing vegetables and certain roots and tubers, and Figure 10, representing fruit, nuts, and fruit peel, both showcased Polish exports to Russia in the hundreds of millions range prior to counter-sanctions. During countersanctioned time periods, the annual export value for these products dropped to well below $2 million. Looking outside of Polish fruits and vegetables, the export of Hungarian meat, fish, and shellfish preparations, as displayed in Figure 11, showcased the same tendencies, although on a smaller scale. From 2010-2014, Hungarian exports to Russia of HS 16 products averaged almost $16 million per year. After counter-sanctions, 2015 and 2016 figures totaled $5.1 billion and $4.1, respectively. This represents a drop of almost 66% when comparing these two time periods to previous years. Contrastingly, when compared to Poland and Hungary, Slovakian and Czech direct exports of counter-sanctioned products are quite minimal, even prior to August 2014. This serves as an intriguing response to Slovakian and Czech actors who expressed strong worries about the potentially harmful effects of Russian counter-sanctions.

Putting It All Together â&#x20AC;&#x201C; Developments Since 2014 1. Introduction & Important Questions Raised Having reviewed the market dynamics of Russia and the V4, the literature surrounding the impact of counter-sanctions, and the historical data of V4 exports, how can we make sense of the true effects of counter-sanctions? Has the exposure of European agriculture actually manifested in significant losses?

How has the economic shock of counter-sanctions changed the Russian market?

For Europe, export data would indicate minimal direct effects for Czechia and Slovakia, but substantial decreases for Hungary and Poland. Has this spelled disaster for the Hungarian and Polish agricultural sectors? For direct and indirect effects alike, have V4 countries been able to mitigate the effects of losing the EUâ&#x20AC;&#x2122;s largest non-EU agricultural market?

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2. Russia Agriculture Today a. The Good Russian counter-sanction policy emphasizes import substitution, with a goal of self-sufficiency (52). Unfortunately for European interests, this Russian goal has been realized. Since the introduction of countersanctions, Russia has imported less and less agro-food products each year, decreasing from 36% in 2013, to 28% in 2015 and 24% and 22% in the first and second quarters of 2016 (53). Russia has fully substituted the imports of pork and poultry with their own domestic production (54). The Russian aquaculture industry has boomed since 2014, with production growing six times over in 2017 alone (55). 2017 also saw greenhouse vegetable production increase 30% from 2016 figures (56). The Russian fruit industry also expects to harvest 14% more fruit this year than last year due to new orchards (57).

From a financial standpoint, counter-sanctions have been a boon for Russian agricultural and agro-food companies. Russian firms Cherkizovo, PhosAgro, and Acron have seen their stock prices increase 63%, 85%, and 300% respectively, in ruble terms, since August 2014 (58). Russia has also focused on new agro-food trade partners as well. Unable to source products from sanctioning European and North American nations, New Zealand has become a key source of milk and dairy products (59). Egypt, Turkey, and China have also become increasingly important trade partners as well (60),(61).

The most important growth in Russian agriculture and agro-food has taken place in the grain industry. Of 2016 total agro-food production, wheat grains 52 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 53 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 54 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 55 Foy, Henry: Russian Agriculture Thrives as Sanctions Close off Imports 56 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 57 FreshPlaza: www.freshplaza.com/article/192138/Russia-expects-fruit-production-togrow-by-nearly-14-procent-in-2018 58 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 59 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 60 Medetsky, Anatoly: How an Oil Giant (Russia) Came to Dominate Wheat 61 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy

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represented 61.5%. Wheat production grew by 18.6% in 2016 alone to 119 million tons, of which 34 million tons was destined for export after domestic demand was satisfied (62),(63). This increase in production led to Russia seizing the title of largest global grain exporter from the U.S. (64). Increases in farming subsidies and the addition of another Black Sea port in Sevastopol (thanks to the annexation of the Crimean peninsula), have aided in Russia’s establishment as a grain superpower (65).

Despite Russian attempts to frame agricultural outputs as simply the result of self-sufficiency measures and hard work, climatic and macroeconomic reasons have contributed to the rise of Russian agriculture more than anything else. First, prior to climate change, the growing season for most Russian agro-food products was quite short. However, with rising global temperatures, more Russian land is useful for farming. This has resulted in longer growing seasons and better crop yields as well (66).

Russia has wisely managed their farming land soundly to take advantage of this (67). Secondly, and even more influential, has been the devaluation of the Russian ruble, in no small part due to Western sanction policy and falling oil prices (68). The drop in value has allowed Russian agrofood exports to enjoy a significant price advantage relative to Western exports. Exemplified, cheaper prices have cajoled almost 50% of the world into becoming purchasers of Russian wheat, hugely contributing to their new role as the world’s largest grain exporter (69),(70). b. The Bad However, things are not as rosy as they may seem. Becoming the world’s largest grain exporter as a result of the devaluation of one’s national currency is not a recipe for solid macro-economic health. First, the growth 62 Russian Investment Forum: rusinvestforum.org/en/news/rossiya-uvelichilaselkhozproizvodstvo-do-5-6-trilliona-rubley-za-2016-god/ 63 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 64 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 65 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 66 Bershidsky, Leonid: Russia Is an Emerging Superpower in Food Supply 67 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 68 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 69 Medetsky, Anatoly: How an Oil Giant (Russia) Came to Dominate Wheat 70 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy

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in the grain industry has placed a high burden upon Russian infrastructure, which is not designed for the increased loads (71). Secondly, and for the citizenry, the combination of counter-sanctions and a less valuable ruble has contributed to rising inflation (72). In 2015, food prices increased by 14%. This increase has enlarged the cost of food to about 1/3 of household income, compared to about 1/9 of household income for British citizens (73). Rising food prices have incentivized consumers to switch from more expensive pork to cheaper meats, like poultry. From 2013-2015, pork consumption decreased by 7.7%, despite Russia becoming self-sufficient in pork production. While self-sufficiency measures have allowed Russia to satisfy domestic demand, it must be considered that the total consumption of Russian citizens is decreasing as well, in order to accommodate new prices (74). One additional anecdote on this topic are the rumors of widespread fake foods. Due to the inability of Russian consumers to buy banned European dairy products, and price increases for products imported from furtheraway destinations, it has been said that fake, cheaper cheeses have been sold in supermarkets. Excited about their good luck in finding an affordable cheese product, some Russian citizens have unwrapped a block of cheese only to find a block of grease instead (75).

3. EU and V4 Agriculture Today a. The Bad For Russia, the results of their own counter-sanction policy have seemingly produced mixed results. How has the EU and V4 agricultural and agro-food industry reacted since 2014? Initial results were not encouraging.

The elimination of the EU’s (and therefore V4’s) largest extra-EU market contributed to the aforementioned worries of European farmers. EU agrofood exports to Russia decreased from €11.8 billion in 2013 to only €5.6 billion by 2016 (76). An estimate by ING Groep N.V. found that the loss of 71 Medetsky, Anatoly: How an Oil Giant (Russia) Came to Dominate Wheat 72 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 73 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 74 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 75 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 76 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers

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business could cost 130,000 European jobs (77). Cheaper imports from Russia (due to the devaluation of the ruble) increased price competition in EU markets as well, even forcing some British farmers out of business (78). In Slovakia, pork prices dropped by 18% in 2014, compared to 2013 prices. Similar effects were seen in the Slovakian apple and dairy markets and the Polish apple market. While Slovakian and European consumers enjoyed lower prices, some businesses were forced to operate at a loss in the short-run (79). Some commercial entities attempted to navigate around the export ban, by re-exporting through non-counter-sanctioned nations. While this was initially successful for some Hungarian businesses via Serbia, this route is no longer as used due to Russian efforts (80). In 2015, Russia began to more heavily enforce counter-sanction policies in re-exporting countries via the criminalization of food smuggling. Thus, the loophole through which EU and V4 agro-food exports flowed through Kazakhstan and Belarus, among other nations, was closed (81). Following this, Russian authorities intercepted and destroyed 1,650 kilograms of Polish apples and Belgian pears that were re-exported through Belarus and Lithuania, respectively (82). Fortunately for EU and V4 farmers, this is not where the story ends. b. The Good Seeing the risks posed to the agricultural community, the EU has utilized CAP and other policy tools to mitigate many of the most harmful economic effects of Russian counter-sanctions. Sponsoring multiple aid packages, the EU has successfully opened new markets for V4 producers and minimized the losses of oversupply. In August 2014, the European Commission authorized a €125 million aid package for fruit and vegetable producers to compensate losses (83). This was continued in early 2015, via 77 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 78 Doward, Jamie, and Anthony Cornish: Cheap Imports Force UK Pig Farmers out of Business 79 Cuprik, Roman: Food Producers Worry about Sanctions’ Effect 80 Novak, Benjamin: Hungarian Agricultural Producers Find Way around Russian Sanctions 81 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 82 FreshPlaza: www.freshplaza.com/article/142830/Polish-apples-and-Belgian-pearsintercepted 83 Lazarová, Daniela: Agriculture Ministry – “Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo”

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another €30 million package, on top of the already €60 million annually allocated via CAP. October 2015 saw further aid with a €500 million package for farmers, of which €420 million was designated for the milk and dairy and animal husbandry industries. Finally, in July 2016, another European Commission aid package was finalized for €500 million, with an additional €350 million for milk and dairy products producers (84). The funds designated through these packages served two primary purposes. The first was to pay farmers to store products for up to five months, in order to stabilize prices (85). The second was to promote export destination diversity. Following this, EU representatives were sent to North and South American, North African, and East Asian countries in order to develop new markets, with great success (86),(87).

Following the success of the EU in opening new markets, alongside individual businesses’ efforts, the statistics demonstrate that the fears of significant losses for EU and V4 producers were never realized. While European agro-food exports to Russia dropped 38% in the last 5 months of 2014, these losses have been compensated by growth in new markets as well as old (88). Total EU agro-food exports increased to €131.1 billion in 2016, a year-over-year growth of 1.6% on 2015 statistics, and 29% from 2011 (89). Much of this was driven by the inherent market structure of EU agriculture. Remember, the majority of EU agricultural trade is of an intraEU nature. This is exemplified well via Hungary and Slovakia’s intra-EU export statistics. 90% and 96.6% of agricultural trade is with EU partner countries (90),(91). Trade with extra-EU nations had grown by 2% by the end

84 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 85 Doward, Jamie, and Anthony Cornish: Cheap Imports Force UK Pig Farmers out of Business 86 European Commission: Draft Rule Paves the Way for EU Exports of Apples and Pears to the US 87 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 88 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 89 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 90 Novak, Benjamin: Hungarian Agricultural Producers Find Way around Russian Sanctions 91 Balogov, Beata, and Michaela Terenzani: Slovakia to Feel Sanctions

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of 2014, and has continued to grow into 2017 and beyond (92). Therefore, EU countries are trading more and more often with other member states and with new partners. In fact, 12 month exports from April 2016 to April 2017 with extra-EU nations saw a 3.4% increase in value. Today, the U.S., China, Switzerland, and Japan register at the top four extra-EU agro-food destinations for member states. Russia, previously the largest extra-EU market, has dropped to a much less consequential fifth place (93). Large gains in EU imports was also seen by South Korea and Hong Kong (94).

These new destinations have aided in cancelling out any Russianrelated losses to the pork industry – good news for the previously mentioned British pork industry in particular (95). Examining export changes further at the product levels, even embargoed dairy products and poultry, who saw decreased overall export value, saw increases in total volume (96). Beef products also showed small gains in total value exported. Export losses for oft-worried fruits and vegetables producers was partially offset by increases in the export of fruit and vegetable preparations (97).

Focusing on the V4’s largest agro-food economy as a case study, Poland has seen similar results as the EU as a whole. In 2013, agro-food exports totaled €20.4 billion, of which €1.25 billion was sent to Russia. The following year, with counter-sanctions in effect, agro-food exports to Russia had dropped 30%. However, total agro-food exports had increased 7.1% to €21.9 billion. Polish total agro-food exports continued to increase in 2015 with total exports equaling €23.6 billion, of which €19.3 billion was sold to other EU nations. 2015 also saw Polish agro-food exports to non-EU and non-CIS nations increase 13%. Growth in value and extra-EU trade was 92 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 93 European Commission, Agriculture and Rural Development: Monitoring EU Agri-Food Trade: Development until April 2017 94 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 95 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 96 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 97 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers

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again seen in 2016 (98). For Polish fruit (i.e. apple producers), export value and volume did decrease in 2014 and 2015. In the milk and dairy products category though, while export value fell, volume increased slightly (99). This gives evidence again that counter-sanctions affect EU and V4 producers asymmetrically â&#x20AC;&#x201C; exposure matters. Overall, since the implementation of counter-sanction measures, EU aid packages and the introduction of new markets has blunted the Russian embargo for affected agro-food sectors.

The share of Polish exports to the Middle East, North African, and East Asian markets has increased notably and helped sustain Polish agriculture across industry sub-sectors (100). In summary, the Polish agro-food industry, along with their V4 counterparts, has adapted well to losing the Russian market.

4. Summarized Findings While managing new market conditions has not been easy, V4 agrofood sectors can rest assured that they are not dependent on a volatile Russia. Such good news is not as clear cut for a more economically isolated Russia. While they have increased their fruits, aquaculture, vegetables, and grain production tremendously, and become the global leader in grain exports, the self-inflicted costs of counter-sanction policy are greater than the Russian government wishes to acknowledge. The negative economic fundamentals of decreasing consumption, increasing domestic prices, and a weak ruble cannot be overlooked.

For the EU though, the European Commission has acted wisely to provide aid packages and open new markets for an initially vulnerable agricultural industry. With time, these initiatives will only strengthen European agriculture. This is especially true for V4 producers. Poland exemplifies this well via their resilience and growth since August 2014.

As time continues to pass since the imposition of counter-sanctions and the lack of a Russian market normalizes, the conviction for diversification has only grown within the V4. The agricultural and agro-food industries of Czechia, Hungary, Poland, and Slovakia have weathered the initial shock, and will only be more robust going forwards.

98 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector 99 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector 100 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector

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Conclusion Agriculture, a constant cornerstone of society, has evolved and grown in the last 100 years into a globalized industry. Never before has trade been so important for the economic health of the industry, and the physical wellbeing of citizens. Due to its important role in daily life in Europe especially, and in response to Western sanction policies, Russia chose to enact a set of counter-sanctions in August 2014, targeting the Western agriculture and agro-food industry. In this essay we analyzed the impacts of Russian counter-sanctions for V4 producers, Russian producers, and the wider EU. Has V4 agriculture experienced the severe retraction that so many predicted would result from the loss of the Russian market?

Russian counter-sanctions are designated at the product-level and effectively ban the import of most EU and Western agro-food goods. For the V4 and Russia, agriculture has and will continue to register as an important contributor to gross domestic output. Russian agriculture, ranking 7th globally in total production, displays a focus on grain and wheat production (101). However, while excelling in the growth of grain crops, the Russian agricultural industry is overall poorly diversified. Partially due to cultivation and animal husbandry choices, Russia is also susceptible to increased costs from self-created geopolitical uncertainty and volatile weather conditions.

On the other side, European agriculture is structurally incredibly diverse and profitable, as supported by the variety of production of southern member states and the logistical excellence of more northern ones (102). This framework has allowed Czech, Hungarian, Polish, and Slovakian agro-food producers to thrive as well. While Poland possesses the largest agricultural economy by a wide margin in the four-nation group, Hungary, Czechia, and Slovakia are still valuable pieces of the EU agricultural production mix.

After reviewing the minutiae of Russian counter-sanction policy and the market structures of the Russian and EU (and V4) agriculture, we reviewed literature and data concerning the direct V4 export of banned products to Russia. Based upon a small literature review, I found that product exposure to the Russian market in August 2014 was deemed to be the most important 101 Statistics Times: statisticstimes.com/economy/countries-by-gdp-sector-composition.php 102 Peperkamp, Michel: CBI Trade Statistics: Fresh Fruit and Vegetables in Europe

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factor in determining how detrimental counter-sanctions would be for industry sub-sectors. Annual export data was collected from 2010-2016.

For product groups that showcased non-negligible trade amounts, strongly negative trends were present for banned exports once counter-sanctions were enacted. While this was expected, it was beneficial to examine the annual amounts of now-banned V4 agro-food exports to Russia.

The results of counter-sanction policy for the Russian agro-food market are mixed. While Russia has become the world’s largest grain exporter and seen significant growth in the production of various product groups, the long-term effects of counter-sanctions may ultimately cause more harm than benefit (103),(104),(105),(106). For V4 producers, has the loss of the Russian market significantly harmed business? The trends seen in historical data may seem to support this argument. However, looked at holistically, I conclude that counter-sanctions did not have the negative impact expected. Following the announcement of counter-sanctions, the European Commission authorized numerous aid packages to stabilize prices and developed new markets for EU (and therefore V4) producers (107),(108). Supplementing the already robust intra-EU agro-food trade market, where the vast majority of EU and V4 agricultural trade occurs already, a notable shift away from the Russian market has taken place.

While once the EU’s largest extra-EU agricultural trade partner, Russia has been replaced by North and South American, Northern African, and Asian partners (109). Poland, as discussed, exemplifies the success of V4 nations appropriately adjusting to counter-sanction policies. While some segments of the agro-food industry have faced short-term difficulties, total EU and V4 trade of agricultural has annually grown since 2014 (110).

103 Sheftalovich, Zoya, and Christian Oliver: Russia’s Boom (Farming) Economy 104 Buckley, Neil: Russian Agriculture Sector Flourishes amid Sanctions 105 Foy, Henry: Russian Agriculture Thrives as Sanctions Close off Imports 106 FreshPlaza: www.freshplaza.com/article/192138/Russia-expects-fruit-production-togrow-by-nearly-14-procent-in-2018 107 European Commission: Draft Rule Paves the Way for EU Exports of Apples and Pears to the US 108 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 109 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector 110 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products

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Works Cited “Agricultural Production by Types of Enterprises.” FSSS. Agriculture, Russian Federation Federal State Statistics Service, 2018, www.gks.ru/wps/ wcm/connect/rosstat_main/rosstat/en/figures/agriculture/.

“Agriculture Industry In Russia.” Invest in Russia, Hanko Hackberry Group, 2016, www.investinrussia.biz/industry/agriculture/agricultureindustry-russia.

“List of Countries by GDP Sector Composition.” StatisticsTimes.com, Statistics Times, 2018, statisticstimes.com/economy/countries-by-gdp-sectorcomposition.php.

“Polish Apples and Belgian Pears Intercepted.” FreshPlaza, FreshPlaza, 10 July 2015, www.freshplaza.com/article/142830/Polish-apples-andBelgian-pears-intercepted.

“Russia Expects Fruit Production to Grow by Nearly 14% in 2018.” FreshPlaza, FreshPlaza, 3 Apr. 2018, www.freshplaza.com/article/192138/Russiaexpects-fruit-production-to-grow-by-nearly-14-procent-in-2018.

“Russia Increases Agricultural Production to RUB 5.6 Trillion in 2016.”

Russian Investment Forum, The Roscongress Foundation, 25 Jan. 2017, rusinvestforum.org/en/news/rossiya-uvelichilaselkhozproizvodstvo-do-5-6-trilliona-rubley-za-2016-god/.

“Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment.” Food and Agricultural Organization of the United Nations, United Nations, Sept. 2014, www.fao.org/3/a-i4055e.pdf.

“Why Russia’s Import Ban Has Mostly Failed.” Stratfor Worldview, Stratfor Enterprises, 27 Aug. 2015, worldview.stratfor.com/article/whyrussias-import-ban-has-mostly-failed.

Balogov, Beata, and Michaela Terenzani. “Slovakia to Feel Sanctions.”

Spectator.sme.sk, The Slovak Spectator, 6 Aug. 2014, spectator.sme. sk/c/20051630/slovakia-to-feel-sanctions.html.

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Bershidsky, Leonid. “Russia Is an Emerging Superpower in Food Supply.” The Japan Times, The Japan Times, 15 Sept. 2017, www.japantimes.co.jp/ opinion/2017/09/15/commentary/world-commentary/russiaemerging-superpower-food-supply/.

Buckley, Neil. “Russian Agriculture Sector Flourishes amid Sanctions.”

The Financial Times, FT Group, 19 Apr. 2017, www.ft.com/ content/422a8252-2443-11e7-8691-d5f7e0cd0a16.

Colibasanu, Antonia. “Predicting the Unpredictable in Russian Agriculture.” Geopolitical Futures, Geopolitical Futures, 18 July 2017, geopoliticalfutures.com/predicting-unpredictable-russianagriculture-1/.

Crozet, Matthieu, and Julian Hinz. Friendly Fire: the Trade Impact of the Russia Sanctions and Counter-Sanctions. Kiel Institute for the World Economy, 31 July 2017.

Cuprik, Roman. “Food Producers Worry about Sanctions’ Effect.” Spectator.sme. sk, The Slovak Spectator, 23 Nov. 2014, spectator.sme.sk/c/20052728/ food-producers-worry-about-sanctions-effect.html.

Devitt, Polina, and Wiktor Szary. “Warsaw Says Russian Ban on Polish Produce Is Revenge for EU Sanctions.” Reuters, Thomson Reuters, 30 July 2014, www.reuters.com/article/us-europe-russia-trade-poland/ warsaw-says-russian-ban-on-polish-produce-is-revenge-for-eusanctions-idUSKBN0FZ1K120140730.

Doward, Jamie, and Anthony Cornish. “Cheap Imports Force UK Pig Farmers out of Business.” The Guardian, Guardian News and Media, 16 Jan. 2016, www.theguardian.com/environment/2016/jan/16/cheapimports-hit-pig-farmers.

European Union, European Commission, “Draft Rule Paves the Way for EU Exports of Apples and Pears to the US.” Draft Rule Paves the Way for EU Exports of Apples and Pears to the US, European Commission, 15 Jan. 2016. europa.eu/rapid/press-release_STATEMENT-16-78_en.htm.

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European Union, European Commission, Agriculture and Rural Development.

“Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013).” Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013), European Commission, 26 Sept. 2014. ec.europa.eu/agriculture/sites/ agriculture/files/russian-import-ban/pdf/fv-production_en.pdf.

European Union, European Commission, Agriculture and Rural Development.

“EU Responses to the Russian Import Ban: Questions and Answers.”

EU Responses to the Russian Import Ban: Questions and Answers, European Commission, 22 Feb. 2017. ec.europa.eu/agriculture/ russian-import-ban/questions-and-answers/qa1_en.

European Union, European Commission, Agriculture and Rural Development.

“Monitoring EU Agri-Food Trade: Development until April 2017.”

Monitoring EU Agri-Food Trade: Development until April 2017, European Commission, July 2017. ec.europa.eu/agriculture/sites/agriculture/ files/trade-analysis/monitoring-agri-food-trade/2017-04_en.pdf.

European Union, European Commission, Agriculture and Rural Development.

“Russian Import Ban on Agricultural Products.” Russian Import Ban on Agricultural Products, European Commission, 22 Feb. 2017. ec.europa.eu/agriculture/russian-import-ban_de.

Fedoseeva, Svetlana. “RUSSIAN AGRICULTURAL IMPORT BAN: QUANTIFYING LOSSES OF GERMAN AGRI-FOOD EXPORTERS.” Institute for Agricultural Policy and Market Research, Justus Liebig University, 2016.

Foy, Henry. “Russian Agriculture Thrives as Sanctions Close off Imports.”

The Financial Times, FT Group, 3 Sept. 2017, www.ft.com/ content/09632e20-88bf-11e7-8bb1-5ba57d47eff7.

Heidorn, Eleonora, et al. Agriculture, Forestry and Fishery Statistics.

2017 Edition, European Union, 2017, ec.europa.eu/eurostat/ documents/3217494/8538823/KS-FK-17-001-EN-N.pdf/c7957b31be5c-4260-8f61-988b9c7f2316.

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Hlavac, Marek (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.1. https://CRAN.R-project. org/package=stargazer Lazarová, Daniela. “Agriculture Ministry: Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo.”

Radio Prague, Czech Radio, 25 Aug. 2014, www.radio.cz/en/ section/business/agriculture-ministry-czech-exporters-may-losehundreds-of-millions-of-crowns-due-to-russian-food-embargo.

Medetsky, Anatoly. “How an Oil Giant (Russia) Came to Dominate Wheat.”

Bloomberg.com, Bloomberg, 13 Nov. 2017, www.bloomberg.com/ news/articles/2017-11-13/how-an-oil-giant-russia-came-todominate-wheat-quicktake-q-a.

Medvedev, Sergei. “Russia Extends Food Counter-Sanctions until End of 2017.” Russia Beyond, Rossiyskaya Gazeta, 29 June 2016, www.rbth. com/news/2016/06/29/russia-extends-food-counter-sanctionsuntil-end-of-2017_607435.

Novak, Benjamin. “Hungarian Agricultural Producers Find Way around Russian Sanctions.” The Budapest Beacon, The Budapest Beacon, 4 Mar. 2015, budapestbeacon.com/hungarian-agriculturalproducers-find-way-around-russian-sanctions/.

Peperkamp, Michel. “CBI Trade Statistics: Fresh Fruit and Vegetables in Europe.” CBI Market Intelligence, Confederation of British Industry, Oct. 2015, www.cbi.eu/sites/default/files/market_information/ researches/trade-statistics-europe-fresh-fruit-vegetables-2015. pdf.

Russian Federation, Chairman of the Government of the Russian Federation, Medvedev, D. “On the Introduction of Changes in the Resolution of the Government of the Russian Federation of 7 August 2014 No.778.” On the Introduction of Changes in the Resolution of the Government of the Russian Federation of 7 August 2014 No.778, vol.

2014, ser. 830, Government of the Russian Federation, 2014. 830.

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Seymat, Thomas. “The Complete Blacklist of EU Officials Banned from Russia.”

Euronews, Euronews, 2 June 2015, www.euronews.com/2015/06/02/ the-complete-blacklist-of-european-officials-barred-from-enteringrussia-putin.

Sheftalovich, Zoya, and Christian Oliver. “Russia’s Boom (Farming) Economy.”

POLITICO, POLITICO, 8 Nov. 2016, www.politico.eu/article/russiasboom-farming-economy/.

United Nations International Trade Statistics Database (UN Comtrade), United Nations.

W., Christian. “Russia Extends Import Ban on Danish Food Products.”

CPHPOST Online, The Copenhagen Post, 30 June 2016, cphpost.dk/ news/russia-extends-import-ban-on-danish-food-products.html.

World Development Indicators, The World Bank.

Wyciszkiewicz, Ernest. “The Impact of Russian Sanctions on the Polish AgriFood Sector.” The Center for Polish-Russian Dialogue and Understanding, The Centre for Polish-Russian Dialogue and Understanding, Jan. 2017, cprdip.pl/en,projects,russias_influence_activities_in_cee,the_ impact_of_russian_sanctions_on_the_polish_agri-food_sector.html.

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Index Figure 14. V4 Share of EU Cereals Production (2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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Figure 15. V4 Share of Primary EU Roots Production (2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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Figure 16. V4 Share of Primary EU Fruits &Vegetables Production (2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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Figure 17. V4 Share of Primary EU Meats Production (2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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Figure 18. V4 Share of EU Milk & Primary Dairy Products Production (2016)

Source: Eurostat Agriculture, Forestry, and Fishery Statistics (2017), AJTK Calculations

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VI ECONOMETRIC ANALYSES ENERGY FINANCIAL SERVICES & GOVERNANCE DEFENCE & DUAL-USE AGRICULTURE POLICY RECOMMENDATIONS 214 AGR ICU LTU R E

Introduction The 2014 actions of Russia in Ukrainian Crimea, Donetsk, and Luhansk represented the first forcible change of European borders since the end of World War II. An unacceptable breach of international law, multitudes of Western nations enacted economic and political sanctions against the Russian Federation for their perceived role in Ukraine. Shortly thereafter, Russia responded with their own set of counter-sanctions. The cumulative aim of this work has been to analyze the repercussions of these sanctions and counter-sanctions for the Czech, Hungarian, Polish, and Slovakian economies since 2014. Having explored the sector-specific effects of sanction policies for each V4 country on a more granular level, the bigger picture still has yet to be painted. In short, what is the overall significance of the previous essays and what do we (policymakers) do about it?

The aim of this essay, the sixth and final, is to answer this very question.

This paper will be split into three core parts: 1) a summary and contextualization of the findings of the previous five papers, 2) an update on the current diplomatic relationship between the EU, U.S., and Russia since 2014, and 3) a forward-looking 11-point policy recommendation.

More specifically, for the third, and most important section of this essay, the twelve recommendations will be split into four topical categories: (1) Foreign Policy, (2) Energy Policy, (3) Governance Policy, and (4) Agricultural Policy. Via presenting the findings and application of this work, I aim to provide V4 decision-makers with actionable steps to better manage their current and future relationship with Russia.

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Summary of Previous Research Introduction EU sanctions can be categorized into five distinct categories (1): 1. Diplomatic Measures (i.e. suspension of Russian voting rights in supranational organizations) 2. Individual Restrictive Measures (asset freezes & travel bans) 3. Restrictions on Economic Relations with Crimea 4. Economic & Sectoral Sanctions 5. Restrictions on Economic Cooperation (e.g. removal of eligibility for EU development funds) As the nature of this work is primarily economic, and secondarily political, the previous works focused on individual restrictive measures and economic and sectoral sanctions. Economic and sectoral sanctions targeted three Russian sectors connected to the Kremlin and deemed strategically important to the Russian economy. These three sectors were the energy, financial services, and defense industries. Additionally, the trade of certain key products to Russia was restricted (2).

Russian counter-sanctions are similar, but only fall into two categories: 1. Individual Asset Freezes & Travel Bans 2. Trade Restrictions Of these two categories, trade restrictions are the more notable piece of Russian sanction policy and the category primarily reviewed for this work. Trade restrictions specifically target the agricultural sector of European and other Western countries (3).

1 Council on Foreign Relations: What are Economic Sanctions?

2 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 3 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia

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Structurally, I divided my analysis of the effects of EU and Russian sanction policies on V4 economies into five pieces. The first essay is primarily a statistical piece, looking for statistically significant changes in V4-Russian exports resulting from the implementation of sanctions and counter-sanctions. The following four are categorically sector-specific pieces, looking at the energy, financial services, defense, and agriculture sectors in turn.

Essay 1: Econometric Analyses EU and Russian export restrictions were first introduced in July and August 2014, respectively. EU restrictions disallowed the European export of pipeline construction materials, dual-use goods, and other strategic goods to Russia. EU sanctions restrict the trade of products within eight HS codes (7304, 7305, 7306, 8207, 8413, 8430, 8705, 8905) (4).

On the other side, Russian counter-sanctions created a de facto embargo on European agricultural goods. Russian counter-sanctions restricted the import of goods categorized by eight different HS codes (2, 3, 4, 7, 8, 16, 19, 21) (5). V4 nations expressed strong concerns about the possible harm these policies could have for their national economies (6).

In order to study the initial validity of V4 concerns, I made use of an OLS linear regression model with Newey-West estimators to determine whether sanction policies have resulted in statistically significant changes in V4 exports to Russia for these sanctioned and counter-sanctioned product groups. To perform this research, I collected data from the United Nations Comtrade database from January 2010 â&#x20AC;&#x201C; July 2017, ultimately resulting in 64 panel data samples, divided evenly between V4 nations (16 per country). All data was denominated in US$.

My research question asked: Do 50% or more of export restricted product groups experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions? My null 4 Crozet, Matthieu, and Julian Hinz: Friendly Fire: the Trade Impact of the Russia Sanctions and Counter-Sanctions 5 Crozet, Matthieu, and Julian Hinz: Friendly Fire: the Trade Impact of the Russia Sanctions and Counter-Sanctions 6 Website of the Hungarian Government: www.kormany.hu/en/ministry-of-foreign-affairsand-trade/news/hungary-lost-usd-6-5-billion-due-to-sanctions-against-russia

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hypothesis stated: 50% or more of export restricted product groups experience do not experience a statistically significant change in US$ trade value after the implementation of the 2014 sanctions.

My econometric model:

My results did not allow me to reject my null hypothesis for Czechia and Hungary. At 21.4% for both Czechia and Hungary, less than 50% of affected testable datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions. I was able to reject the null hypothesis for Poland and Slovakia though. For Poland and Slovakia, at 64.3% and 66.7% respectively, more than 50% of affected testable datasets experienced a statistically significant change in US$ trade value after the implementation of the 2014 sanctions. These mixed results made interpretation of my outcomes difficult without further context. In reality, EU export restrictions target a very small range of the EU-Russia export mix. Russian restrictions are much broader, and initially did result in difficulties for V4 agricultural producers. However, as outlined in Essay 5 â&#x20AC;&#x201C; Agriculture, V4 agricultural markets have experienced substantial success in finding new markets and trade partners to help offset the loss of the Russian market (7). These factors would indicate that sanctionsrelated shocks did not cause out-sized and long-term harm to the Czech, Hungarian, Polish, and Slovakian markets. Still, further qualitative analyses of each affected sector was needed to determine the true effects (and costs) of EU and Russian sanction policies for V4 economies.

Essay 2: Energy The energy industry is the main driver of economic growth and income in Russia. EU sanctions target three Russian energy firms â&#x20AC;&#x201C; Rosneft, Gazprom Neft, and Transneft (8). Each of these firms is primarily focused on the 7 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector 8 Risk Advisory: news.riskadvisory.net/sanctioned-individuals/

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petroleum industry, not the natural gas industry (9). However, I investigated V4 import dependencies, market dynamics, and price structures of both petroleum and natural gas. For Czechia, Hungary, Poland, and Slovakia, sanctions-related risks to petroleum markets are negligible. This is due to the variety of sourcing methods available for obtaining crude oil and refined products and the globalized nature of oil prices. For natural gas, the opposite is true. Most natural gas is transported via pipeline, creating significant difficulties for supply diversification. Additionally, Russia is the #1 supplier of natural gas to V4 nations, by a wide margin (10). This presents a substantial energy security risk.

Recognizing the political and economic benefits of a strengthened natural gas hegemony, Russia has supported various pipeline projects (e.g.

Nord Stream II) to further their market power (11). Conversely, the EU and V4 have both undertaken initiatives to promote greater supplier diversification away from Russia. The Three Seas Initiative is the primary institutional example of this, which aims to create a North-South transportation and energy corridor through Central, Eastern, and Southern Europe (12).

Additionally, the EU and V4 are supporting the development of liquefied natural gas (LNG) markets and the creation of alternative pipeline routes to source Azerbaijani gas via the Trans-Anatolian and Trans-Adriatic pipelines (13). With both sides, Russian and European, struggling against one another for greater market power, the future development of the energy industry poses the greatest risk and opportunity for V4 nations.

Essay 3: Financial Services & Governance Shifting from the energy sector to the financial services sector, EU sanctions target five key Russia banks – Bank Rossiya, Gazprombank, Sberbank, Vnesheconombank, and VTB Bank (14). Combined, these banks control over 50% of the Russian banking industry (15). The inability of these 9 Rapoza, Kenneth: Here’s How Europe’s Russian Sanctions Differ From Washington’s 10 Observatory of Economic Complexity: https://atlas.media.mit.edu/en/ 11 Teffer, Peter: Tusk: Nord Stream II Doesn’t Help 12 Reza, Zainab: What Is The Three Seas Initiative?

13 Trans Adriatic Pipeline: www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor 14 Risk Advisory: news.riskadvisory.net/sanctioned-individuals/ 15 Winkler, John, et al.: A Chessboard Strategy for Russia’s Banking Market

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five Russian banks to raise long-term debt in Western capital markets has proven to be the most effective use of EU and U.S. sanctions to date (16). Of sanctioned Russian banks, only Sberbank is present in the V4, in Czechia, Hungary, and Slovakia. Sberbank does not possess a significant market presence in any of the three countries though (17). This limited exposure to sanctioned Russian banking has insulated V4 economies from any detrimental direct repercussions of EU sanctions. However, indirectly, at the time sanctions were announced in 2014, a number of European banks had loaned significant sums to Russian firms. This represented a substantial risk, albeit a less direct one. Italian bank UniCredit and Hungarian bank OTP each possessed exposure to the Russian market numbering in the billions of euros (18). While some of these banks were forced to write off large quantities of their loans to Russian companies, ultimately the access of European banks to Western capital markets allowed them to weather any short-term effects. Four years later, exposure to the Russian economy is minimal for V4 banks, and does not constitute any systemic risk.

This essay also examined corporate governance in the V4. Numerous Russian firms have attempted to enter V4 markets several times in the past ten years, although with limited success. For Hungary, Surgutneftegaz, Gazprom, Lukoil, and Sberbank have all attempted to obtain large ownership positions in strategic industries (19). The Hungarian government has done well to foil these efforts. Similar stories exist in each V4 country, with Russian companies so far unable to infiltrate segments and possess any sort of significant market share. One notable exception does exist though, the Paks II nuclear power plant in southeastern Hungary. A lack of transparency, combined with the economic potential of an operational Paks II, could provide Russia (via nuclear energy company Rosatom) with a worrisome amount of influence in the Hungarian energy market (20).

16 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 17 Sberbank: www.sberbank.ru/en/about/global_business/subsidiary_banks/ce_en/se_ag_en 18 Reuters Staff: European Banksâ&#x20AC;&#x2122; Exposure to Russia 19 Csaba Weiner: Tracking Russian FDI in Hungary 20 Csaba Weiner: Tracking Russian FDI in Hungary

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Essay 4: Defense & Dual-Use The Russian defense and dual-use industry, a key supporter of rebel groups in Eastern Ukraine, faces substantial sanctions as well. Almaz-Antey, Kalashnikov Concern, United Aircraft Corporation, Uralvagonzavod, the subsidiaries of these companies, and a number of other, smaller firms all face capital restrictions and the inability to collaborate with Western firms (21). While Russia is the second largest arms dealer globally, since losing access to Western markets, these companies have focused on expanding to Asian markets (22). Currently, each V4 nation possesses relatively small defense and dual-use industries, and has historically since the end of the Cold War. Regarding imports, V4 arms imports from Russia has not reached even 1% since 2010 (23). Czechia, Hungary, Poland, and Slovakia all are full NATO members, and therefore look towards the U.S., France, Great Britain, and other Western nations for their military and defense needs.

Economically, any detrimental effects of EU sanctions for V4 defense and dual-use markets are minimal due to their respective size and their lack of dependency on Russian manufacturers.

Essay 5: Agriculture Russian counter-sanctions, enacted in response to EU and Western sanction policy, targeted the agricultural and agro-food industry (24),(25).

Overnight, a de facto embargo was created on EU and V4 agro-food products.

Suddenly, V4 and EU producers lost the Russian market, previously their largest extra-EU agricultural partner (26). Russian agriculture benefited greatly from the loss of competition, growing quickly to become the largest grain exporter in the world (27). Additionally, Russian production of fruits and meats increased substantially, allowing them to become 21 Risk Advisory: news.riskadvisory.net/sanctioned-individuals/ 22 Tweed, David: Russia’s Rostec Banks on Asia to Join Defense Elite 23 SIPRI: armstrade.sipri.org/armstrade/page/values.php 24 Food and Agricultural Organization of the United Nations: Russia’s Restrictions on Imports of Agricultural and Food Products: An Initial Assessment 25 Lazarová, Daniela: Agriculture Ministry: Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo 26 European Commission, Agriculture and Rural Development: Analysis of the EU Fruit and Vegetables Sector, EU Production and Exports to Russia (2011-2013) 27 Medetsky, Anatoly: How an Oil Giant (Russia) Came to Dominate Wheat

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mostly self-sufficient (28). However, this new-found self-sufficiency has magnified structural weaknesses and led to decreased consumption and a lessened ability to handle poor harvests (29). For V4 producers, the EU, via aid packages aimed at stabilizing prices and compensating farmers for initial losses, helped offset short-term losses resulting from losing Russian customers (30). Also, on the EU, national, and local level, there have been notable efforts to diversify the customer base to include new South and North American, Northern African, and Asian markets (31),(32). This has been accomplished with great success. Four years later, counter-sanctionsrelated losses have been offset by the growth in these new markets (33). Total EU agro-food trade has only grown since 2014, aided by the diversification efforts spurred by Russian counter-sanctions (34). Despite Russian efforts, counter-sanctions have actually strengthened V4 agricultural markets and producers fundamentally and monetarily.

Current Updates 1. Introduction Since 2014, when Western sanction policies against Russia first began, there have been many notable political developments that are deserving of discussion before we move to my policy recommendations. These updates will be split into four distinct segments, divided by their primary region of importance.

28 FreshPlaza: www.freshplaza.com/article/192138/Russia-expects-fruit-production-togrow-by-nearly-14-procent-in-2018 29 Sheftalovich, Zoya, and Christian Oliver: Russiaâ&#x20AC;&#x2122;s Boom (Farming) Economy 30 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products 31 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector 32 European Commission, Agriculture and Rural Development: Monitoring EU Agri-Food Trade: Development until April 2017 33 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 34 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products

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2. V4 Within the V4, Hungary has seen the most critical developments in their relationship with Russia. Since 2014, when sanctions began, Hungarian Prime Minister Viktor Orban and Russian Prime Minister Vladimir Putin have met numerous times in both Budapest and Moscow. For Hungary, Russia’s involvement in Ukraine marked a critical point in Hungarian-Russian relations, with the relationship strengthening, as opposed to weakening, as it has for almost every other EU country. Orban has expressed vocal admiration for Putin’s illiberal regime, even going so far as to question the value of economic sanctions against Russia (35). In a February 2017 meeting between the two leaders, Orban stated that, “Non-economic problems cannot be treated with economic measures… it is hard to imagine a successful Hungary without establishing open, vigorous, and fruitful economic and trade relations with one of the biggest players in the global economy” (36). Despite these worrisome statements, to date, Hungary has not voted against continuing sanction policies. Critically, this can be perceived as a Hungarian attempt at ‘realpolitik,’ to balance the benefits of stronger ties with a major economic power with minimal risks due to Hungary’s geographical distance from Russia (37). Despite the “cleverness” of this approach, the warming Hungarian-Russian relationship does not bode well for greater EU unity on this topic. This will continued to be monitored.

Poland has taken the opposite approach to relations with Russia.

Currently, the Polish military is in the midst of a modernization process to increase their military capabilities. Fundamentally, this process is to be perceived as a deterrent against further Russian aggression in the region.

Poland has expressed great concern with NATO capabilities in their specific region. However, if the EU and NATO do not provide further confidence to Poland that their security will be ensured in the region, Polish insecurity will only increase, and the cohesion of NATO countries in Central Eastern Europe will be further tested (38).

35 Kalan, Dariusz: Hungary in the Grip of a Bear Hug 36 About Hungary: abouthungary.hu/the-spokesmans-blog-zoltan-kovacs/pm-orban-on-russiaand-eu-sanctions-we-cannot-treat-non-economic-problems-with-economic-measures/ 37 Kalan, Dariusz: Hungary in the Grip of a Bear Hug 38 Buras, Piotr, and Adam Balcer: An Unpredictable Russia: the Impact on Poland

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Both Hungary and Poland are currently under increased scrutiny from the EU due to the rise of Polish and Hungarian populism and illiberalism (39),(40). Czechia and Slovakia are also experiencing similar domestic leanings at this time, although not to the extent of the aforementioned countries (41),(42). Similar to Hungary, Czechia and Slovakia have both expressed concerns about the long-term effect of sanctions and questioned their effectiveness in Ukraine (43). Whether in their domestic political landscape, or within their foreign policy statements, there is a growing wedge between the EU’s eastern flank of V4 countries and the other nations of the bloc.

3. Ukraine Since the initial unrest in Ukraine, Russia has maintained their position that Crimea is a legally annexed region and has continued to quietly support the rebel groups in the Donbass region (44). Since annexation, only six nations have officially recognized Crimea as a legal part of Russia – Cuba, Nicaragua, Venezuela, Syria, Afghanistan, and North Korea (45). There have been no major changes in the situation in Ukraine, despite the efforts of the EU, U.S., and other nations to resolve the situation via the Minsk I and II protocols. Despite the European Council offering the removal of economic sanctions in return for the full implementation of the Minsk agreements, neither protocol has been fully enacted. Thus, the failure to reach an agreement has allowed unrest to continue in the region. A silver lining does exist though – violence and skirmishes have decreased and Russia has not supported further territorial progress by rebels nor attempted to annex the land currently held by rebels (46).

39 Bayer, Lili: Hungary and Poland to EU: Don’t Shut Us Out 40 Smyth, Patrick: Poland and Hungary Could Threaten the EU More than Brexit Does 41 Tait, Robert: Far Right to Gather in Prague as Fears Grow of Rising Czech Populism 42 Deutsche Welle: www.dw.com/en/inside-europe-the-appeal-of-populism-in-slovakia/ av-40151490 43 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 44 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 45 Bender, Jeremy: These Are the 6 Countries on Board with Russia’s Illegal Annexation of Crimea 46 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia

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4. Russia Within Russia specifically, the effects of Western sanctions and Russia’s own counter-sanctions on their domestic economy are mixed. For a further review on this, see Summary of Previous Research and the preceding essays.

The Russian government has attempted to spin the effects of EU sanctions to their own benefit by propagating four primary myths.

The first myth being communicated is that sanctions are too expensive for Western businesses and will be removed soon. Many Russian state-run media outlets cite costs estimated by the Austrian Institute of Economic Research (WIFO) which place a price tag of approximately €100 billion on EU economies for maintaining sanction policies (47). While I, and numerous other researchers disagree with these figures, and estimate them to be much lower, such a cost would actually indicate a more negative reality for Russia. If sanctions cost EU economies €100 billion, and the EU has decided to maintain this foreign policy stance, this would communicate the EU feels so strongly about Russian intervention in Ukraine as to justify this exorbitant cost (48).

The second myth spread within Russia is that sanctions have a minimal effect on the Russian economy (49). Based upon economic theory, this is difficult to justify. If sanctions strongly effect EU commerce, in a globalized world, how could they not have some sort of cost for Russian business too? Additionally, Russian leaders (i.e. Russian Finance Minister Aleksey Kudrin) have admitted to sanctions against the Russian banking sector have proven difficult to overcome (50). Despite efforts to switch to East Asian capital markets, Hong Kong, Shanghai, and other financial centers simply cannot be substituted for the funding opportunities provided by London and New York (51).

A third myth propagated by the Russian government states that the Russian economy has become immune to economic sanctions over time 47 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 48 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 49 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 50 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 51 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia

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(52). Again, this is simply not true. While the Russian agricultural economy has adapted and grown, Russia’s attempt at increased self-sufficiency only highlights structural weaknesses within the sector. Additionally, any sort of smuggling efforts will involve increased legal risks and transport time, both of which increase costs (53). Sanctioned Russian banks, limited to short-term debt products now, also face increased risk-related costs too.

Fourth, and finally, Russia has attempted to sell the idea that sanctions help their national economy (54). While this may be true in some ways, via reduced competition, this idea cannot be true holistically. For healthy growth and diversification, Russia must rely on external Western trading partners (55). Again, as the Russian economy is already over-reliant on energy commodity prices and a strong ruble for growth, sanctions and counter-sanctions only increase the challenges for further development.

For the foreseeable future, it seems that sanctions will remain in place.

Similarly, the Russian government will continue to spread misinformation within their national borders for their own benefit. While these Russian efforts are based more in propaganda than in truth, as long as the current Russian administration remains in power, changes to sanction and counter-sanction policies appears unlikely without different approaches from both sides.

5. Trans-Atlantic Having looked at updates for V4 countries, Ukraine, and Russia, we turn now to the Trans-Atlantic relationships between the United States, the EU, and Russia. The relationships between these three groups have changed drastically since the introduction of the original Western sanctions in 2014.

The implementation of United States President Donald Trump’s “America First” policies in 2017 represented the first of many seismic shifts between the three. In order to protect American industries, and in retaliation for perceived Russian influence in the 2016 U.S. presidential election, the United States imposed additional sanctions upon Russia (56). Instead of supporting 52 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 53 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 54 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 55 Buklemishev, Oleg: Myths and Realities of Sanctions in Russia 56 Nougayrède, Natalie: As the US and EU Square off over Russia Sanctions, Only Putin Can Win

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these American policies, the EU expressed strong displeasure with these actions. The EU worries that due to the structure of these new sanctions, EU business could be negatively affected. The German energy industry has been particularly vocal on this front, due to the possible ramifications for the Nord Stream II pipeline. Additionally, the German Foreign Ministry even went so far as to suggest that the motivations for the structure of new American sanctions was purely commercial (to promote the attractiveness of American LNG in the region), and not so much diplomatic. The French government also asked about the legality of such measures (57). Regardless of the specifics, a rift can be seen opening between the EU and the U.S. for how to handle an increasingly aggressive Russia. This topic is still developing.

More recently, in 2018, former Russian spy Sergei Skripal and his daughter, who live in the U.K, were found to have been poisoned by a military-grade nerve agent. While the poison left both critically ill, it has not proven fatal thus far. They are both still being treated currently (58).

The resulting British investigation into the causes and culprits found that Russia was most likely behind this attempted assassination. The British diplomatic response was swift and extremely harsh – the expulsion of 23 Russian diplomats from the U.K. These 23 diplomats were accused of espionage. Russia countered with their expulsion of 23 British diplomats (59).

Simultaneously, British Prime Minister Theresa May asked for coordinated and multilateral actions to be taken by British allies in order to show Western unity and validate the seriousness of such actions on U.K. soil.

Many of Britain’s allies heeded May’s call. The United States closed the Russian consulate in Seattle and expelled numerous Russian diplomats (60). 17 nations of the EU also heeded May, expelling 34 Russian diplomats in total. Expelling countries included Croatia, Czechia, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Ireland, Latvia, Lithuania, the Netherlands, Poland, Romania, Spain, and Sweden. Also, non-EU European nations Albania, Macedonia, Norway, and Ukraine followed suit. Latvia, Lithuania, and Poland even went so far as to recall their Ambassadors from Moscow, as did EU for the head of their permanent delegation (61). When 57 Nougayrède, Natalie: As the US and EU Square off over Russia Sanctions, Only Putin Can Win 58 Petkova, Mariya: US, EU Expel More than 100 Russian Diplomats over Skripal Case 59 Gye, Hugo: 23 Russian Spies Kicked out of Britain by Theresa May Land Back in Moscow 60 Petkova, Mariya: US, EU Expel More than 100 Russian Diplomats over Skripal Case 61 Petkova, Mariya: US, EU Expel More than 100 Russian Diplomats over Skripal Case

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the dust finally settled, overall more than 100 Russian diplomats had been expelled from their host nation in response to the Skripal poisoning (62).

Between the introduction of new American sanctions related to the 2016 American presidential elections and the diplomatic responses to the Skripal poisoning, Trans-Atlantic-Russian relations have not reached such a depth since the Cold War. While there is some divergence between American and European tactics for handling Russia, the unity shown related to the Skripal poisoning is at least promising. Overall though, the escalation of tension between Russia and Western nations represents a severe and worrisome challenge for the world.

6. Conclusions In summary, since the implementation of the original 2014 Western sanction policies, the majority of the Western world has experienced an extreme deterioration in their relationship with Russia. While some V4 nations seem open-minded to bettering their relationship with Russia, to date, this has yet to manifest in action, with the exception of Hungaryâ&#x20AC;&#x2122;s Paks II nuclear power plant. The situation in the Crimea and Donbass regions of Ukraine has seen little real change. The Russian government began an information campaign to convince the Russian populace of the irrelevance of the effects of Western sanction efforts. However, there is little statistical backing to support the claims propagated by Russian authorities. American and European authorities in the last two years have increased their efforts to punish Russia for perceived attempts to influence electoral processes and espionage (i.e. the poisoning of Sergei Skripal).

Without getting too broad, each of these developments represents the worsening of ties with Russia. With a seeming stalemate in Ukraine, the combative Trans-Atlantic-Russian relationship has expanded to include other regions of the globe now â&#x20AC;&#x201C; mainly Syria and the greater Middle East.

As tensions rise globally between nations, the importance of dialogue and new policy solutions has never been greater. With an ultimate goal of deescalation with Russia, we move to the list of my policy recommendations for bettering EU and V4 relations with Russia, even if such suggestions may 62 Herszenhorn, David M.: US, Europeans and Allies Kick out More than 100 Russian Diplomats

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only result in incremental improvement. Based upon the previous two years of research, I have developed a list of 11 policy recommendations which I believe could prove beneficial for EU and V4 leaders to consider. First we will consider 3 foreign policy recommendations, then 5 energy policy recommendations, next a governance policy recommendation, before finishing with 2 agricultural policy recommendations.

Policy Recommendations â&#x20AC;&#x201C; Foreign Policy 1) Maintain Original Sanctions Policies Against Russia First, the continuation of sanction policies against Russia is of the utmost importance. The use of economic sanctions as a foreign policy tool is the strongest non-military option available for nations, and should be continually used against nations who demonstrate extreme disregard for international law. Russia fits these requirements due to their actions in Ukraine. Russian involvement in Ukraine in 2014 constituted the first use of force to change European borders since the end of WWII. Simply, such a violation of Ukrainian national sovereignty cannot stand. Sanctions, as decided in 2014 by EU leadership, still represent the best method to express displeasure with the Russian government and increase the respective costs of their course of action in Ukraine. An escalated response involving direct military action is still not appropriate or warranted. Also, a prospective conflict with a nuclear power would simply not justify the costs.

Despite the usefulness of economic sanctions, they are not without their flaws. Russia is a difficult country to effectively sanction due to their size and level of connectedness to the global economy. Russia has and may still continue to realign the supply chains of sanctioned companies to avoid the legal structure of sanctions (63). This reduces the long-term effectiveness of economic sanctions. Despite the questionable viability of sanctions as a long-term solution, economic sanctions do present certain strengths and weaknesses for this particular situation.

In terms of advantages, economic sanctions against Russia have 63 Nossel, Suzanne: Itâ&#x20AC;&#x2122;s Time to Kill the Feel-Good Myth of Sanctions

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proven to raise costs for sanctioned individuals and entities. For example, sanctioned individuals Arkady Rotenburg and Gennady Timchenko were especially affected. Rotenburg was frozen out of â&#x201A;Ź30 million of assets in Europe, while Timchenko was forced to sell his stake in commodity trading firm Gunvor (64). Sanctions have inflamed an already structurally fragile Russian banking sector as well. Shortly after EU sanctions were announced, in one single week in December 2014, Russian customers withdrew 1.3 trillion rubles (US $22 billion) from sanctioned entity Sberbank. Unable to access further funding, due to the lack of Russian access to Western capital markets, Russiaâ&#x20AC;&#x2122;s largest bank faced a major liquidity crisis. To avoid a systematic failure of the national financial system, the Russian government designed a 1 trillion ruble (US $17 billion) bailout scheme for the struggling bank and sector. The banking sector has continued to struggle since 2014, with three more banks needing bailouts in 2017 (65).

While the Russia banking sector has not struggled solely due to sanctions, sanctions have definitively contributed to their notable challenges (66).

The energy sector has also struggled too, with Rosneft (and sanctioned CEO Igor Sechin) facing sanctions. Arctic exploration with American energy companies, like ExxonMobil, has been halted, while other forms of collaboration have increasingly been deterred for fear of fines (67). FDI inflows from non-sanctioning countries, usually Asian countries, has not been able to replace the previous amount of Western flows. Similarly, Asian investors have not had a desire to fill the gap in the Russian market too, as Russia is simply not a fundamentally attractive place to invest at this moment (68).

In terms of disadvantages, there is some cost affiliated with EU sanctions, and the resulting counter-sanctions, for sanctioning countries.

This presents a risk to EU unity. While larger EU nations (e.g. France and 64 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 65 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 66 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 67 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 68 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia

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Germany) and EU countries sharing a border with Russia (Poland and the Baltic nations) may be willing to accept these costs, other, smaller countries may find this unpalatable. As mentioned earlier, Hungary, Czechia, Slovakia have questioned the costs of sanctions and the long-term effectiveness of this policy. Further challenges have been made by Italy, Greece, and Cyprus (69).

Despite these challenges, the general public perception of sanctions remains either positive or relatively neutral. For example, a Polish polling group, the Public Opinion Research Center (CBOS), found that 64% and 68% of polled Poles supported sanctions in 2014 and 2015, respectively (70). While Poland is notoriously hawkish towards Russia, most nations have demonstrated lesser, but still similar feelings about sanction policy.

As time passes, it remains important to communicate to EU citizens the “why” of sanctions. In doing this, the populace is more likely to understand and support sanctions – therefore, weakening the threats to EU unity.

Without any significant changes in Ukraine, economic sanctions remain the best option available for EU leadership, even in spite of the mixed results. I advocate for the continuation of sanctions this year, in 2018, and beyond, barring some major change in Crimea or Donbass. The inherent “smart” design of sanctions, targeting only the Russian oligarch and decision-making class, should remain the default system for economic sanctions. Maintaining “smart sanctions” design will minimize self-inflicted losses for the EU and unintended harm for the general Russian citizenry.

2) Encourage Honest and Continuous Dialogue with Russia & Redevelop Minsk Agreements Next, while maintaining sanction policies is of primary importance, EU leaders must not be content to simply maintain a penal stance towards Russia, and in doing so disrespect Russia. By encouraging Russia to come to the bargaining table, EU leaders respect the dignity of Russia. Through continuing efforts to engage with Russia in respectful and tactful ways, the possibility of finding a solution to the unrest in Ukraine does exist. While

69 European Parliament Research Service, and Martin Russell: Sanctions over Ukraine: Impact on Russia 70 Wyciszkiewicz, Ernest: Political and Social Perception of Sanctions

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the probability of this may remain small in reality, a small chance at peace is better than no chance.

Efforts have been made to accomplish this in 2014 and 2015 through the Minsk I and II agreements, although both have failed thus far. While unsuccessful, there is intrinsic value in these efforts. Physical force to resolve these disputes should continue to be reserved as the very final option. Diplomacy is the best tool for resolving the widening EU-Russia relationship. Therefore, efforts should continue to be made to have such conversations, like the ones that led to the development of the Minsk I and II agreements. While the particularities of a potential Minsk III agreement fall outside the realm of my expertise, I do believe that efforts should still be made.

Of course, this is easier said than done. One must consider the longterm goals of the Russian government here in order to find a working solution.

Explained by Stefan Bielanski of the Italian Institute for International Political Studies: “One should consider an ultimate goal of Putin’s policy as a radical change of the current spatial design of Central and East Europe with the intention of rebuilding Moscow’s direct or indirect power over these territories. Putin seriously and repeatedly said that the dissolution of the USSR (which to him means also the rule of Russia) was the “greatest geopolitical catastrophe” of the 20th century. Putin’s wars, from Georgia to Ukraine but also military intervention in Syria (the latter differs from the former ones, and is conducted formally in the name of the “war on Islamic terrorism”), have a territorial and, above all, geopolitical character. In this context, NATO and the European Union should play a leading role, call upon development and implementation of a real Ostpolitik (in a conjunction with the new reality of a Visegrad Group). Only in this way - considering the new geopolitical balances - it is possible to preserve the stability of the international security system.” (71)

71 Bielanski, Stefan: Polish-Russian Relations and the Burden of History: A Neighbour’s View

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Such aggressive and ambitious designs are not easier to satisfy without overturning the norms of international law and conduct. EU leadership should look to Finland for inspiration on effectively engaging with Russia. The historical Finnish policy of “Finlandisation” could serve as a better framework for future EU-Russia interactions. “Finlandisation” refers to a relationship dynamic between a smaller country and a much larger, more powerful large neighbor. The smaller country allows it policies to be influenced by its stronger neighbor (72). The term, referencing the historical Finnish-Russian dynamic, does not mean though that Finland simply acquiesces to Russian desires in the region. Finland accounts for Russian power, but focuses on pragmatism for each interaction with its eastern neighbor (73). Obviously, the analogy of Finland to the EU and the U.S. is not completely applicable due to the differences in geopolitical power, and does not account for the grievous nature of Russia’s violations of international law. However, the usefulness of such an approach remains.

Helsinki aims to maintain an on-going open and direct conversation with Moscow (74). Copying this pragmatism-based idea could produce more useful results than attempting to isolate Russia politically, as EU nations have leaned towards via the withdrawal of diplomatic staff from Russia.

Focusing on realism more than punishment may provide a better foundation for a potential Minsk III agreement. The EU (and the U.S. to a lesser extent) made strides towards this in 2015 by tying the removal of economic sanctions to the full implementation of the Minsk agreements and the restoration of Ukraine’s eastern border. While this represents progress by providing clarity to Russia about how they can resolve the crisis, there remains work to be done, as evidence by the ultimate failure of these agreements.

More dialogue is needed. Not talking cannot lend itself to anything positive.

3) Pursue the Further European Alignment of Serbia Thirdly, while I do advocate for further dialogue with Russia, it is still important to be aware of the dynamics at play within the wider European landscape. Increasing bargaining power with Russia should be pursued

72 Ponniah, Kevin: How Pragmatic Finland Deals with Its Russian Neighbour 73 Ponniah, Kevin: How Pragmatic Finland Deals with Its Russian Neighbour 74 Ponniah, Kevin: How Pragmatic Finland Deals with Its Russian Neighbour

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simultaneously with dialogue. Serbia remains Russia’s greatest ally in the greater EU sphere. While not an EU member state, Serbia’s proximity to the EU lends itself to a premier place of geopolitical importance. Seeking the increased integration of Serbia with the West is the third and final foreign policy recommendation.

Serbia holds strong cultural and religious ties with Russia, and has long supported Russian efforts (75). Similarly, Serbia has not enacted Ukraine-related sanctions against Russia (76). Considering that NATO pursued military action against Serbia over the contested Kosovo region less than 20 years ago, the alignment of Serbia with the West would be a huge geopolitical success for the EU (77).

The easiest way to ensure the Serbia alignment is via EU membership.

Such a course is extremely difficult though due to the considerable Russian influence in Serbia. Related, Serbia fears the destabilization of the Balkans without Russian defense and economic support (78). However, a further push into Russia’s sphere of influence could also aggravate tensions as well. In 2016, Russia expressed a desire to provide more technologically advanced weaponry to Serbia, namely via the delivery of S300 surface-toair missile systems. Understandably, EU member state Croatia objected strongly to this (79). Therefore, further collaboration with Russia in the defense space could actually increase tensions, not decrease tensions in the Balkans, despite Serbia publically desiring the latter.

EU leadership should utilize Montenegro’s EU accession as a roadmap for accomplishing the same goal with Serbia. Montenegro faces similar geopolitical threats as Serbia, considering they occupy the same region.

Additionally, Montenegro is strongly economically tied to Russia, with up to 40% of real estate rumored to be Russian-owned (80). Despite these significant hurdles, Montenegro succeeded in joining both the EU and NATO. A greater EU and NATO presence in the Balkans could aid in promoting 75 Slobodchikoff, Michael: Eastern Europe Faces a Tough Choice on Russian Sanctions 76 Savic, Misha, and Gordana Filipovic: Serbia Will Choose EU Over Russia If Forced, Premier Says 77 Slobodchikoff, Michael: Eastern Europe Faces a Tough Choice on Russian Sanctions 78 Stojanovic, Dusan: Russia Ready to Arm Balkan Ally Serbia 79 Stojanovic, Dusan: Russia Ready to Arm Balkan Ally Serbia 80 Bechev, Dimitar: Russia Sanctions: Balkan Countries React

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stabilization efforts as well, therefore calming Serbian concerns about shifting away from Russian military support.

Finally, the Serbian government has already stated that joining the EU is a long-term priority. Former Serbian Prime Minister Aleksandar Vučić pledged to pursue EU membership, and his successor, current Serbian Prime Minister Ana Brnabić, has ensured that this effort will be continued (81). Furthermore, Brnabić has even gone so far as to say, “The EU is where we’re going -- that’s clear … We do have emotional ties with Russia because of tradition, culture and religion. There are many people in Serbia who completely perceive Russia as our big brother, our protector… but our strategic path is the EU” (82). Despite the warm relations between Serbia and Russia, and Russian objections to Serbian EU membership, it is encouraging to see these types of statements. However, there is still work to be done – a 2016 poll conducted by the Serbian European Integration Office found that only 47% of Serbs support EU accession (83). Therefore, while the EU courtship of Serbia is already underway, it is still important for EU leaders to communicate the tangible benefits of a greater EU-Serbia alignment to not just governmental leaders, but also to the Serbian populace.

Policy Recommendations – Energy Policy 1) Institutionalize Three Seas Initiative & Invite Germany Turning to energy policy recommendations, the main aim of these five recommendations is to increase EU market power via supply diversification.

A more passive initiative than sanction policies, the reduction of Russian leverage on EU and V4 economies through diversification should result in a weaker Russian ability to retaliate against sanctioning countries. As Russia demonstrates considerable geopolitical influence via their energy supply capabilities, it is vital that the EU continues to investigate ways to diversify their supply base away from Russian natural gas. I do not advocate for a

81 Savic, Misha, and Gordana Filipovic: Serbia Will Choose EU Over Russia If Forced, Premier Says 82 Savic, Misha, and Gordana Filipovic: Serbia Will Choose EU Over Russia If Forced, Premier Says 83 Savic, Misha, and Gordana Filipovic: Serbia Will Choose EU Over Russia If Forced, Premier Says

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complete shift away from Russian natural gas, but only the option to switch suppliers if needed. Such optionality cannot be accomplished without the necessary infrastructure and institutions in place to facilitate this.

For V4 nations, the ideal way to pursue supply diversification is through the Three Seas Initiative, commonly referred to as just Three Seas.

Consisting of nations bordering the Baltic, Adriatic, and Black Seas, hence the name, in addition to land-locked V4 nations, Three Seas creates a forum in which leaders of these countries can develop new energy capabilities and transport means (84). Ideally, it is through Three Seas that the following four recommendations should be viewed. At this moment, Three Seas remains a loose confederation of nations, without any institutional framework. Due to the lack of a formal structure, progress facilitated by Three Seas has progressed very slowly to this point. A more formal structure, with official bi-annual meetings could spur quicker developments. Also allocating a small portion of funds from each member nation may work towards the same purpose. While a formal alliance or treaty may not be in the best interests of member nations, a more pseudo-formal arrangement would prove beneficial for creating tangible progress. A comparable organization, which has made steps towards institutionalization, would be the namesake of the V4 – the Visegrád Four. An informal alliance, the Visegrád Four arrangement combines a non-burdensome design along with funding for the International Visegrád Fund (IVF). The IVF coordinates greater cooperation between Czechia, Hungary, Poland, and Slovakia via scholarships and grant financing (85). The creation of a similar body as the IVF for Three Seas (perhaps for energy research?) could prove to be a useful first step for further institutionalization.

One of the fears of increased institutionalization for Three Seas would be the potential message it may send to excluded nations. However, an appropriate framing, as in conjunction with EU energy policy goals, could remedy this. Furthermore, inviting Germany to Three Seas could also aid in calming isolationist concerns from other EU powers. Adding Germany to the Three Seas mix would shift the geopolitical conversation surrounding Nord Stream II as well. German businesses, the main (and perhaps only) 84 Reza, Zainab: What Is The Three Seas Initiative?

85 Visegrad Fund: www.visegradfund.org/

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EU beneficiary of an operational Nord Stream II, base their support of the pipeline in commercial interests. Discussed at length in Essay 2: Energy, the completion and use of Nord Stream II would increase Russian market power in the EU multiple times over, much to the chagrin of more eastern EU nations. What if the German business lobby could be incentivized towards a different energy project though? The addition of Germany to Three Seas would provide such an opportunity. From liquefied natural gas (LNG) growth to new southern pipelines and alternative energy opportunities, comparably massive commercial potential exists for Three Seas projects via the development of a North-South energy corridor. The Germans could provide much needed experience in developing resources and infrastructure as well. By creating this incentive for Germany, an alternative to Nord Stream II would finally exist, an alternative that could be supported by all EU member states. A more institutionalized Three Seas could ensure that the balance of power remains democratically equivalent across members, while simultaneously promoting integration and progress.

2) Invest in LNG Infrastructure Within the natural gas industry, LNG growth is quickly outpacing the growth of pipeline-transported natural gas. Today, LNG accounts for 32% of globally traded natural gas, with projections expecting this figure to increase to 50% by 2035 (86). The development of LNG markets will revolutionize natural gas markets, tying prices closer to global supply and demand inputs. This fundamental shift will reshape and weaken Russiaâ&#x20AC;&#x2122;s natural gas hegemony on the European continent â&#x20AC;&#x201C; but only if V4 nations ensure access.

To date, only two Three Seas members possess operational LNG terminals, one each in Poland and Lithuania. Five more are planned, with the most important planned terminals for V4 nations being located in Poland (the FSRU Polish Baltic Sea Coast terminal) and Croatia (the Krk Island terminal) (87). However, once the Croatian Krk Island terminal comes online in either 2019 or 2020, V4 nations will be unable to access LNG without the construction of a dual-flow connector between Croatia 86 BP Global: The Effect of LNG Growth on Global Gas Markets 87 Gas Infrastructure Europe LNG Map: www.gie.eu/index.php/maps-data/lng-map

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and Hungary (88),(89). The current connector only allows for natural gas flows from Hungary to Croatia, not the other way around. In 2017 the Croatian and Hungarian governments signed a letter of intent to create such an interconnector which would be operational by March 2019 (90).

While this is a significant action, this agreement must not remain simply verbal, but put into action. I advocate for the construction and completion of such a connector between Hungary and Croatia as soon as possible.

Again, an institutionalized Three Seas could help ensure this project is completed in a timely manner. Once linked into the Hungarian system, Croatian LNG could be transported to either Slovakia or Czechia, to the benefit of all V4 members.

A final caveat for LNG, if LNG is not competitive on cost with Russian natural gas, it will not matter what transport infrastructure is available, as it will not be demanded. The Croatian Krk Island terminal is not currently profitable, due to a lack of current infrastructure and cargo through-put (91). This of course affects the price at which Croatian LNG can be offered to customers. A poignant effort by V4 and Three Seas members to commit to the demand of this LNG could provide a useful boost to expected profitability. Once increased demand is promised, the EU would be more likely to commit to co-financing Krk Island in the meantime as well, aiding in the infrastructure development efforts (92). In short, the development of LNG in Central and Eastern Europe can only be accomplished through multi-lateral efforts. While this is a considerable challenge to balance so many regional interests, Three Seas was formed for challenges such as these. As LNG markets develop and globalize, further research will be needed to determine the best way forward to ensure LNG can compete with Russian pipeline natural gas.

88 Pavlic, Vedran: With LNG Terminal on Krk, Croatia to Become Important Energy Player 89 Sadecki, Andrzej: Reverse-Flow Capability for Hungarian-Croatian Gas Pipeline Interconnector – Breaking the Deadlock 90 Sadecki, Andrzej: Reverse-Flow Capability for Hungarian-Croatian Gas Pipeline Interconnector – Breaking the Deadlock 91 Obućina, Vedran: Polish Company Oz Logistics in Charge of Croatian Port of Rijeka 92 Obućina, Vedran: Polish Company Oz Logistics in Charge of Croatian Port of Rijeka

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3) Complete V4 Dual-Flow Capabilities While the completion of dual-flow capabilities between Hungary and Croatia is important, the finalization of dual-flow connectors between all V4 nations is equally imperative. Currently such connectors exist between Czechia and Poland, and a proposed connector is under consideration between Hungary and Slovakia, via the Eastring pipeline (93),(94). Therefore, there is no dual-flow capability between Poland and Slovakia, and thus Poland and Hungary. Whether for pipeline natural gas, or LNG natural gas from Polish terminals, the construction of a Polish-Slovakian connection is of the highest importance. The main reason for the lack of an existing connection is based on geography. Slovakia possesses a highly mountainous landscape, due to the presence of the Carpathian mountain range through most of the country. This makes energy and transport infrastructure extreme costly, hence why it has not been created. V4 nations should communicate the critical nature of this project to the EU in order to seek funding so as to lessen the funding burden upon V4 national economies. Establishing dual-flow capabilities between Poland and Slovakia would be a significant step towards realizing a true North-South corridor, connecting Poland and Baltic Sea nations to Croatia, Adriatic Sea nations, and beyond.

4) Fund Additional Pipeline Developments Similar in form to the preceding recommendation, EU and V4 countries should continue to fund the development of alternative natural gas pipelines in Northern, Eastern, and Southern Europe. Specific projects include Baltic Pipe, the Trans-Anatolian pipeline (TANAP), Trans-Adriatic pipeline (TAP), and the previously touched on Eastring pipeline. Baltic Pipe would form a direct link between Poland and Norwegian natural gas reserves in the Baltic Sea (95). TANAP and TAP would connect Three Seas nations to Azerbaijani natural gas reserves in the Caspian Sea. Finally, Eastring would form still another linkage between Slovakia and Hungary to Romanian and Bulgarian

93 Gawlikowska-Fyk, Aleksandra: How the European Union Is Shaping the Gas Market in Poland 94 The Slovak Spectator: spectator.sme.sk/c/20684893/slovakia-and-hungary-sign-memorandumon-eastring-project.html 95 Gawlikowska-Fyk, Aleksandra: How the European Union Is Shaping the Gas Market in Poland

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natural gas reserves in the Black Sea (96). Each of these pipelines are either under development or construction. All four prospective pipelines (Baltic Pipe, TANAP, TAP, and Eastring) will be necessary to hedge against the possible completion of Russia’s Nord Stream II pipeline. Nord Stream I, already operational, and II, each possess a carrying capacity of 55 billion cubic meters of natural gas/year (97). Baltic Pipe, TANAP and TAP, and Eastring will be capable of transporting 10, 10-16, and 20-40 billion cubic meters of natural gas/year, respectively (98),(99). Therefore, on the low end, these alternative projects could supply at least 40 billion cubic meters of natural gas/year, and on the high end, a maximum of 66 billion cubic meters of natural gas/year. Realistically, the amount delivered per year will fall somewhere in the middle. This will provide Three Seas and V4 nations with the capability to source close to an equivalent amount of natural gas each year as would be provided by an operational Nord Stream II, assuming all pipelines are built and used. Due the importance of such a hedge existing against Russia’s Nord Stream II, I recommend continued support for each of these alternative pipeline projects. Again, the goal of these energy recommendations is not to completely shift away from Russian natural gas, but simply the existence of an alternative to Russian natural gas, if needed.

Via supply diversification (alternative pipeline options), the market power of V4 nations will be increased, and Russian geopolitical influence will be lessened in the region.

5) Promote Alternative Energy Options Finally, V4 and Three Seas nations should investigate furthering their alternative energy capabilities. Whether, wind, solar, or hydro-electric power, an increased use of such options could achieve similar diversification goals as the preceding recommendations as well. This is a more popular method in Western European countries like Belgium, Luxembourg, the Netherlands, Germany, and Sweden than in V4 and Three Seas countries (100). Much of 96 The Slovak Spectator: spectator.sme.sk/c/20684893/slovakia-and-hungary-sign-memorandumon-eastring-project.html 97 SouthFront: southfront.org/network-of-power/ 98 Larsen, Søren Juul: Baltic Pipe: Gas Pipeline, Connecting Denmark and Poland with Norway’s Gas Fields 99 SouthFront: southfront.org/network-of-power/ 100 Obućina, Vedran: The Future of an LNG Terminal in Croatia

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this linked to extensive use of coal and other traditional forms of energy in these countries, yet still, the possibility should be considered. While the development of alternative energy would face significant cultural and structural barriers in V4 countries especially, their benefits still stand. Thus, I would encourage V4 and Three Seas countries to look into promoting the use and development of such resources in the future, after the preceding recommendations are first considered. The increased use of alternative energy sources should be seen more as a long-term project for Central and Eastern European nations, but a worthwhile project nonetheless.

Through one or all of the energy policy recommendations discussed here, substantial progress can be achieved in ensuring V4 energy supply security. By weakening the Russian energy hegemony in Europe, the EU and V4 can pursue sanction policies with substantially lessened fears of Russian economic retaliation. Ultimately this will help ensure greater effectiveness for European foreign policy efforts directed towards Russia when violations of international law occur, such as those in Ukraine in 2014.

Policy Recommendations – Governance Policy 1) Continue Strengthening EU Ownership Transparency Policies Next, regarding the EU’s transparency of ownership policies – I recommend the continual strengthening of these measures. The EU has made recent strides within this realm, which is encouraging. The EU’s Fourth Money Laundering Directive (MLD4) is the primary example of this. MLD4, explained by Baker McKenzie: “In Europe, from 26 June 2017, member states are obliged by the EU’s Fourth Money Laundering Directive (MLD4) to maintain a central register detailing the ultimate beneficial owners of their corporate and other legal entities. All corporate groups with EU entities will need to comply with the obligation and identify their beneficial owners (regardless of whether those individuals are located within or outside the EU).

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Although the directive applies to all EU member states, each jurisdiction must adopt national implementing legislation. The regime may therefore look slightly different in each jurisdiction.

Countries can choose, for example, whether they make the register of beneficial owners publicly available (it must, in any event, be made available to anyone with a “legitimate interest”).” ( 101) The full implementation and execution MLD4 is especially critical at this time of escalated tensions between the EU and Russia. An effective MLD4 will aid the EU (and V4) in two ways – 1) the better identification of Russian ownership and interests in member states and 2) the assurance of compliance with EU sanction policies. Considering the aggressive ambitions of Russia as of late, it would be objectively worrisome for there to be significant Russian ownership of strategic industries within an EU member state. Specifically for Hungary, Russia has made attempts to own such a place within their national economy in the past 10 years. Despite the relatively warm relationship between the two nations, Hungary has been successful in rebuffing significant Russian ownership of their banking and energy sectors. For more information on this, please see Essay 3: Financial Services & Governance. While most Russian corporate ownership and business interests are clear, not all are. Oftentimes, it can be difficult to tell who actually owns an entity after sorting through the multiplicity of shell companies and offshore accounts. With this ambiguity, a host of illicit organizational and governmental activities becomes all too easy. Therefore, first, strengthening transparency policies will make such efforts all the more difficult, ensuring member states are able to continually recognize and react to Russian attempts to acquire large stakes in critical industries. Secondly, a fuller knowledge of ownership will only strengthen the effectiveness of individual-level and economic-level EU sanction policies. With increases in transparency comes increases in difficulty for sanctioned Russian individuals and entities to circumvent sanctions within EU jurisdictions.

Thus, transparency efforts are in the best interests of the EU and V4. MLD4 represents a good step in this direction.

I do have one critique of MLD4 in its current form – I do not think it goes far enough. I would recommend continuing strengthening transparency 101 Baker McKenzie: www.bakermckenzie.com/en/insight/publications/2017/06/transparencyof-ownership

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efforts via greater EU involvement in the process, as opposed to just delegating to the national level. While this could be perceived as an overreach of EU policy, I argue that this in an appropriate place for an EU-level solution, as I believe the benefits of transparency policies can be more fully realized via centralization.

The motivation for this suggestion stems from the failure of the EU to halt the 2014 Hungarian-Russian agreement for the Paks II nuclear power plant in Paks, Hungary. Paks II is a particularly worrisome development due to the possible influence it could provide to Russia within the Central European energy system. The contract for the power plant, awarded via a no-bid setup to Russian government-owned Rosatom, is in the billions of euros in size, and financed by Russia as well. Most notable of all, the Hungarian government has classified the details of the Paks II deal, justifying this under the guise of national security and privacy (102),(103). While Hungary is entitled to exercise their national sovereignty by developing energy sources as they see fit, they do not seem to be considering the wider geopolitical ramifications of Paks II. Thus, considering the importance of a project like Paks II for Hungary and the potential leverage it could provide Russia within an EU member state, I do believe there is still a need for greater transparency and accountability within Europe. The EU should assume such an increased role, objecting more to projects like Paks II, and pushing for greater transparency in business dealings within member states as is possible.

Policy Recommendations â&#x20AC;&#x201C; Agricultural Policy 1) Communicate Recent Successes of EU Agricultural Fourthly, for agriculture policy, there are two recommendations which EU leaders should consider. When EU and Russian sanctions were implemented in 2014, the agro-food industry expressed the greatest concerns about a future without the Russian market. At the time, Russia was the

102 Herszenhorn, David M., et al.: Shrugging off Concerns, Europe Waves through Hungaryâ&#x20AC;&#x2122;s Controversial Nuke Deal 103 Additional background on Paks II can be found in Essay 3: Financial Services & Governance

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largest extra-EU market for the agro-food producers, and the loss of the ability to export to Russian partners was definitely worrisome. Producers and governmental leaders in V4 nations Czechia, Slovakia, and Hungary were especially vocal in the following months and years (104),(105),(106).

However, as explained in Essay 5: Agriculture, the demise of the V4 and EU has been greatly exaggerated. In fact, via EU aid policies aimed to support farmers and the diversification of export destinations, the agro-food sector has thrived since 2014. By the end of 2014 EU agro-food trade with non-EU nations had grown 2%, and has continued on this upward trend (107). In the 12 month period from April 2016 to April 2017, trade with extra-EU nations saw a year-over-year gain of 3.4% in value, led by growth in the American, Chinese, Swiss, and Japanese markets in particular (108). Within the V4, Poland experienced large gains in new Middle East, North African, and East Asian markets, and overall increases in agro-food export value of 7.1% and 7.7% in 2014 and 2015, respectively (109). This is a theme for other V4 nations as well. Thus, EU and V4 nations, despite losing Russia, have diversified their export partners, and seen continual growth in the sector for which there was the most concerned.

Despite trade statistics painting an encouraging picture, it is unclear whether local populations and the agro-food sector are aware of these successes. In order to maintain support of sanction policies on local levels and invalidate the myth that Russian counter-sanction policies (seen as a result of EU sanction policies) significantly harm EU agriculture, I recommend the continued communication of the growth and robustness of the agro-food industry. This EU-led marketing campaign, which targets the agricultural sector, should be designed in an easily accessible way. By promoting the successes that member statesâ&#x20AC;&#x2122; agricultural economies have seen since 2014, the affected populations will be less likely to object to the 104 Balogov, Beata, and Michaela Terenzani: Slovakia to Feel Sanctions 105 LazarovĂĄ, Daniela: Agriculture Ministry: Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo 106 About Hungary: abouthungary.hu/the-spokesmans-blog-zoltan-kovacs/pm-orban-on-russiaand-eu-sanctions-we-cannot-treat-non-economic-problems-with-economic-measures/ 107 European Commission, Agriculture and Rural Development: EU Responses to the Russian Import Ban: Questions and Answers 108 European Commission, Agriculture and Rural Development: Monitoring EU Agri-Food Trade: Development until April 2017 109 Wyciszkiewicz, Ernest: The Impact of Russian Sanctions on the Polish Agri-Food Sector

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continuation of the EUâ&#x20AC;&#x2122;s own sanction policies. This will increase unity on this topic for V4 nations especially, who seem most likely to protest against sanctions.

2) Consider Continuing Aid Packages for Disadvantaged EU Produces As Needed The success of the preceding recommendation is of course completely reliant on the continued ability of EU and V4 agricultural producers to weather the loss of Russian customers. This worry should not be of great concern due to the diversification efforts undertaken by the agro-food sector since counter-sanctions were implemented. However small, the possibility does exist. The EU has already shown their awareness of the importance of supporting agriculture via multiple aid packages in 2014, 2015, and 2016 aimed to support and compensate farmers for Russia-related losses (110),(111). In the case of some fundamental shift back to the Russian market, and the lost revenues that would follow such a course, I advocate for additional EU aid packages designated for producers. Again, while unlikely for a multitude of reasons, the importance of this remains.

110 LazarovĂĄ, Daniela: Agriculture Ministry: Czech Exporters May Lose Hundreds of Millions of Crowns Due to Russian Food Embargo 111 European Commission, Agriculture and Rural Development: Russian Import Ban on Agricultural Products

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Concluding Remarks So we come to the close of this sixth essay, and the conclusion of this work as a whole. Western (EU, U.S., etc.) sanction policies are rooted and reasoned for as an appropriate response to Russian involvement in unrest in the Ukrainian regions of Crimea, Donetsk, and Luhansk in 2014. The first use of force to change European borders since the end of World War II, Russian actions in Ukraine are a grievous violation of not only international law, but of the post-war order. Reacting to Western sanctions, Russia instituted their own set of counter-sanctions. Four years later, questions remain unanswered about the effects of EU and Russian sanction policies on European economies. The task of this work was to investigate these effects, in particular for the V4 nations of Czechia, Hungary, Poland, and Slovakia.

The previous essays in this collection look at five different aspects of sanction repercussions. Essay 1: Econometric Analyses used a linear regression model to identify if restricted V4 exports have been affected in statistically significant ways by sanction policies. The following four essays, Essay 2: Energy, Essay 3: Financial Services & Governance, Essay 4: Defense & Dual-Use, and Essay 5: Agriculture, looked at affected economic sectors to provide more qualitative analyses of how sanctions have impacted V4 economies. In this sixth essay, we summarized the findings of each of these five, preceding essays, before providing an overview of current updates influencing the EU-Russia relationship. Finally, and most importantly here, I outlined 11 policy recommendations aimed at bettering the EU and V4 position within the EU-Russia relationship, while attempting to deescalate tensions between the two groups where possible.

As relevant today as it was in 2014, understanding the impacts of sanctions and our relationship with Russia matters, especially as tensions continue to rise between the West and Russia. Due to the dearth of V4specific research on sanction policies and their economic impacts, I have attempted to begin to fill this void. This has been accomplished via undertaking a unique analysis of this topic which provides both breadth and depth in an equivalently accessible way not just for economists, political scientists, and policymakers but for everyday citizens too.

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By arming decision-makers with the necessary information to continue navigating an increasingly volatile world, I hope to aid in the creation of thoughtful foreign and economic policy on the European continent by all parties. Even if the reader is not a policymaker though, I desire that you may find value in this work too. The V4 nations are a critical part of the EU, with a combined population of over 60 million people. Understanding the interactions between policy and economic impacts will be beneficial not just for Czechia, Hungary, Poland, and Slovakia, but the EU as a whole, for the purpose of a stronger and more integrated European bloc.

Through each of these essays, I have ultimately attempted to communicate one fundamental goal – creative policies do exist that can benefit V4 nations and promote peace on the European continent. Now more than ever, V4specific research matters. The role of V4 countries in European affairs only looks to increase in the future. Thus, there is still much work to do in investigating V4 topics, not just regarding the continued economic impact of sanctions and counter-sanctions, but more so for their increased integration within the EU as V4 nations look to achieve their potential as significant players on the world stage. I welcome all inquiries into my research and will continue to monitor the development of V4 economies and the EU and V4 relationship with Russia. With hope, I look forward to furthering conversations on these topics in order that all European countries may achieve a lasting peace based on mutual respect for one another. A final reminder, it is only though these types of conversations and dialogues that we may resolve our differences and disagreements, whether they be economic, political, or some combination of the two.

Köszönöm, Eric S. Peters Fulbright Fellow Antall József Knowledge Center Budapest, Hungary

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255 POLICY RECOMMENDATIONS