Will EU Sanctions Produce a Winner and a Loser?

1 year ago 85

The feedback effects of sanctions on European economies have yet to be fully revealed. The sum of these effects, the so-called “boomerang effects”, will indeed only be known within a year. It could turn out to be far greater than the effects on Russia. In the long term, Russia may well do well while the EU, mired in thoughtless support for Ukraine, may have to pay a prohibitive price.

The European Union seems irretrievably engaged in a showdown with Russia. After having rolled out nine successive waves of sanctions since February 22, 2022, without counting the sanctions already implemented since 2014, it has prepared a tenth wave recently. But what are the real consequences? Does this harsh policy, which can even be described as aggressive, against Russia have a chance of producing effects?

Very clearly, in the conflict between Ukraine and Russia, the European Union has taken Ukraine’s side. It did that on an emotional more than a rational basis. It engaged wholeheartedly with the latter country and issued unprecedented sanctions against Russia. Diplomatically, the European Union aligned itself not only with the United States but, internally, with the countries that expressed the most anti-Russian sentiments, such as Poland and the Baltic countries. What results did this yield?

Politically, these sanctions were initially intended to convince Russia to stop its operations in Ukraine. From this point of view, and as one might expect, they were a complete failure. It should be remembered that, over the past century, the ability of economic sanctions to stop military operations between two countries has never been satisfactorily demonstrated. Overall, EU political support for Ukraine has been of questionable effectiveness. Behind the great speeches of unwavering support for this country, there are deep differences within the EU. European countries have neither the military nor the industrial means to support what has become a so-called “high intensity” war in Ukraine. Even the Secretary-General of NATO, Mr. Stoltenberg, had to recognise this. What have the EU countries gained from this one-sided commitment? This question will have to be asked one day.

Economically, the purpose of these sanctions was to deprive Russia of the ability to continue its military operations and to confront it with an economic collapse, so that it would have had no choice but to put an end to what it calls “the Special Military Operation”. We remember the calamitous declaration made by the Minister of Economy and Finance of France, Mr. Bruno Le Maire, according to which, by declaring an all-out economic war on Moscow, the European Union would cause the collapse of the economy and financial sector of Russia. However, nothing happened.

The impact of the sanctions on the Russian economy has been moderate, or more precisely concentrated in a few months. After fairly apocalyptic forecasts were made by either the OECD or the World Bank, forecasts which in April and June announced a fall in GDP of between 9% and 12%, the various experts became aware of the resilience of the Russian economy and its ability to adapt. In fact, in its data update published on January 30  the International Monetary Fund estimated Russia’s GDP decline at −2.2% for 2022, with a forecast for 2023 and 2024 of + 0.3% and +2.1%, respectively.

It is true that these sanctions, and in particular the various measures restricting oil and gas imports, have had little effect. The gas trade has indeed been affected, but more by the sabotage of the Nord Stream gas pipeline than by the sanctions. This sabotage, in which Russia was exonerated, was later attributed by the American journalist Seymour Hersh to the United States itself. The European Union continues to import gas on a massive scale from Russia, but in the form of liquefied gas or LNG. It still imports, albeit through circuitous routes, oil and especially diesel. But, of course, the prices are no longer the same…

The sanctions did, however, cause a drop in trade between Russia and the EU. This drop was estimated, in October 2022 compared to October 2021, at −4.5 billion USD. However, EU exports to Russia were worth $4.2 billion that same month. Moreover, it could be seen that the sanctions had above all led to a reorientation of Russian foreign trade, to the benefit of China and India, but also (and this is less well known) Turkey, Belarus and Kazakhstan.

This is an important point, when you remember that the EU was Russia’s main trading partner, both for imports and for exports. The consequences of Russia’s economic pivot to Asia will be far-reaching.

While the sanctions imposed by the European Union have had little impact on Russia, they have had an obvious impact on the EU itself. The first impact has been a rise in energy prices, which has forced the EU countries and Britain to spend 785 billion euros, as explained by a note from the Bruegel think tank, to support households and businesses. The sum is considerable, more extensive than what was spent to combat Covid-19. Germany has thus spent nearly 7% of its GDP to protect energy consumers. France, which was much less exposed to energy flows from Russia, has had to spend nearly 3.25% of its GDP on various “energy shields”. These expenses only concern the winter of 2022-2023. However, the EU countries had been able to build up gas stocks before the pipelines were interrupted. The overall impact can only be truly estimated for winter 2023-2024.

This extra spending and the process of inflation caused by the rise in energy prices have also seriously damaged the economic competitiveness of EU countries. Take Germany for example. This country, which had a trade surplus of around 6% of its GDP, may soon find itself with a negative trade balance, which would be a real economic earthquake.

The situation just described shows that apparently there was no winner, at least in the short term. Of course, Russia suffered from the EU sanctions, mainly in the first months, from April to June 2022. But, the more time passes, the easier this suffering will be to endure. Above all, the sanctions have proved incapable of producing the desired political effect and the deterioration of relations between European countries and Russia condemns the former to an uncomfortable head-to-head with the United States.

On the other hand, the feedback effects of sanctions on European economies have yet to be fully revealed. The sum of these effects, the so-called “boomerang effects”, will indeed only be known within a year. It could turn out to be far greater than the effects on Russia.

In the long term, Russia may well do well while the EU, mired in thoughtless support for Ukraine, may have to pay a prohibitive price.

If, instead of setting off on a war footing without having the means, the EU had positioned itself as a force for peace; if it had pushed for genuine dialogue, it would have been able to retain its strategic and economic independence from the United States. Certainly, with “if” we can probably put “Paris in a bottle” to use a French saying, but not play politics. The fact remains that the loss of autonomy and even independence (both strategic and economic) of the countries of the European Union is an exorbitant price to pay to support Ukraine.

There will probably be no clear and indisputable winner in this showdown between the countries of the European Union and Russia. But there will be an indisputable loser: European strategic autonomy. With the latter, no doubt, it is the very idea of the EU which will have to die in the years to come, because it was based on the idea of strategic autonomy for European countries.

If we add to this the strategic shift made by Russia towards Asia, it will then be necessary to note that the European Union and its support for Ukraine will therefore have been the decisive instrument of Europe’s exit from history.

Valdai Discussion Club
Read Entire Article