The European Union A Peaceful Solution Of The Crisis

In March 2014 the Russian Federation (Russia) annexed the Ukrainian territory of Crimea following escalating tensions and conflict within Ukraine. The European Union (EU) considers the annexation of Crimea â€Å"a clear violation of Ukrainian sovereignty and territorial integrity by acts of aggression by Russia†. Russia considers the inclusion of Crimea within its territory as an expression of the democratic free will of the people following a local referendum on 16 March 2014. The EU believes negotiations can lead to a peaceful solution of the crisis. The EU has imposed a series of escalating ‘restrictive measures’ (economic sanctions) in an attempt to apply diplomatic and economic pressure on Russia in response to its annexation of Crimea.†¦show more content†¦In order for sanctions to be effective, the EU must ensure the cost of sanctions to Russia is larger than the benefit of annexing Crimea. The EU has implemented ‘targeted’ economic sanctions against Russia. To date these targeted economic sanctions have been applied to five major state-owned Russian banks, three major energy companies, three major Russian defence companies, provision of certain financial services and on providing loans to state-owned Russian banks (further detail is provided at Appendix A). In response Russia has implemented counter economic sanctions against the EU, specifically targeting food and agricultural products. The effectiveness of sanctions in applying economic pressure can be understood by examining its impact on demand, output, cyclical unemployment and inflation in the Russian economy. As shown in figure 1 these economy components are inextricably linked, changes in one component causes flow on effects to the others. Changes in each of these components will be considered in turn. Changes in Output The difference between actual and potential Gross Domestic Product (GDP) is known as the ‘output gap’. In December 2014 the Central Bank of Russia (CBR) measured the output gap for the economy at -2%, indicating a ‘recessionary gap’. In March 2015 the CBR revised its forecasts and estimated the