Is the European economy permanently weakened by sanctions against Russia? (Jacques Sapir v. Agathe Demarais)

The year 2023 does not look good for the European economy. GDP should stagnate at best, and at worst decline in the eurozone, negating the rebound effect of post-Covid growth. Germany is coughing in the face of an explosion in raw material prices and the loss of Russian hydrocarbons, until now the lungs of its industry. The war in Ukraine has underscored the deterioration of an already troubled economy due to the disorganization of global supply chains and the various shortages it has caused. In response to Russia’s aggression, the European Union decided to impose major sanctions against Russia on the financial sector, industrial supplies, some minerals and soon hydrocarbons. So many natural resources that Europeans sometimes critically depend on.

The European political class generally supported the waves of sanctions against the Russian economy and its oligarchs, despite the cost of such a decision. Nevertheless, some dissonant voices were heard in the Old Continent, mainly in populist formations. Hungarian nationalist Prime Minister Viktor Orb├ín, who is close to the Kremlin, continues to call on Europe to lift sanctions by the end of the year, saying the sanctions have weakened Hungary, but not only him. “Europe is suffering more than Russia from the restrictions imposed in response to the war in Ukraine.”claims Peter Szijarto, Minister of Foreign Affairs of Hungary. The National Rally in France and a message received by the French Disobedients.

In addition to the current challenges, a long-term question arises: Is the European economy permanently weakened by sanctions against Russia?

At present, discussions about the impact of sanctions against Russia on the EU countries are focused on short-term results. Rising energy prices and inflation in general are seen as very negative outcomes for the next 6-18 months. This is an undeniable reality, and in Germany, as in France – we think of Duralex – the announcement of the closure of companies, because they cannot cope with the increase in the prices of raw materials at the moment, reflects the importance of the problem. The European economy seems to be weakening. But if we look to the near future, we risk missing a more serious problem.

The industry of the EU countries, especially the German industry, built its competitiveness model on cheap energy, as well as the availability of raw materials such as gas and oil for chemicals from Russia. Gas and oil transit by pipelines (gas pipelines and oil pipelines) was cheaper than the same raw materials delivered by tankers or LNG carriers. There is a question about gas in particular. LNG is much more expensive than transiting gas through pipelines.

However, Russia has largely limited its exports to Europe. Of course, in the medium term, alternatives are perfectly available by developing import capacity for LNG and other energy sources (including highly polluting ones such as coal or lignite). But if we think in the short term, of course, the question does not arise in terms of volume. We can imagine that in the next three years, the replacement will be fully achieved, even if at a high cost, through the construction of new facilities and new ships, especially LNG carriers. Nevertheless, the question of the cost of these substitute products will emerge, whether they are used in energy production or as raw materials in industry.

Thus, the total cost increase will be between 20% and 40%. This will undermine the competitiveness of European industry. This is evident in the example of Germany, which built its economic model entirely on the basis of cheap hydrocarbons bought from Russia. The impact may be less for other countries that have already deindustrialized or are less dependent on Russian exports. But if German industry is facing relocations and site closures, how can we not see that this also affects all its subcontractors, whether they are located in Central and Eastern Europe or Western Europe? Therefore, the risk of general weakening is very real.

Which model can restore competitiveness to German and European industry against its international rivals? We know that China and India can take advantage of these cheap Russian energy and hydrocarbon resources through the construction of new gas and oil pipelines within a few years. As the Covid-19 crisis has clearly shown, the shift towards an economy more dependent on services is a dangerous illusion and a direct path to the overall impoverishment of societies and the increase of inequalities within them. In fact, it is re-industrialization that is considered a priority today. But will we be able to preserve the existing industry in this new environment? This is the task facing European countries in the medium-term perspective. Even if we dramatically increase the skills of the workforce through a massive education and training program, adaptation will necessarily be painful and costly in terms of purchasing power.

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v. Agathe Demarais

The connection between the looming recession in Europe and sanctions against Russia is not clear. The increase in energy prices did not start from February 24. Before the invasion of Ukraine, the prices of energy and food raw materials were already high. This conflict caused a new shock in the hydrocarbon and food markets. This price increase is not due to Western sanctions, but to Vladimir Putin’s decision to invade Ukraine.

Today, there are no European sanctions on the export of Russian gas: it is Russia that decides to close the gas tap (even blow up gas pipelines). European sanctions against Russian oil imports will not come into effect until next year. As for the increase in the price of grains, it was associated with the blockade of Ukrainian ports by the Russian navy before the agreement on the resumption of exports in the Black Sea.

We hear the Kremlin’s little musings that Russia would not have turned off the gas tap without sanctions. But if the EU lifted these sanctions, are we sure that Russia would resume gas supplies? Putin’s promises bind only those who believe them (for the record, he also swore he had no intention of invading Ukraine). As the Kremlin sees it, Western military support for the Ukrainians could very well justify shutting down gas pipelines to Europe.

The withdrawal of European companies from the Russian market is not directly related to the sanctions. The 2022 sanctions did not fundamentally change the situation of European companies already in Russia, which have been subject to Western sanctions since 2014. If it was difficult for these companies to stay in Russia after February 24, it is primarily due to public pressure. In addition, Russia is in recession and therefore no longer an attractive market.

This obviously does not mean that sanctions are painless. The measure that could have the biggest economic impact would be the suspension of Russian oil imports from Europe. But the Europeans took care to delay this embargo to mitigate its consequences. This measure will not be implemented before 2023 in the context of a global economic slowdown and therefore an expected drop in crude oil prices to prevent a sudden increase in oil prices.

The calculation of the EU is also part of the long-term logic. The combined effect of sanctions against Russian oil imports for five years and Russia’s decision to freeze gas exports to Europe means the EU will be freed from its dependence on Russian hydrocarbons. This will encourage the development of renewable energy and the import of gas from other countries such as Norway, the USA or Australia.

Did the Europeans have a better alternative than sanctions? Imposing sanctions fills the gap between two options: doing nothing (or settling for diplomatic reprimands that won’t sway the Kremlin) or engaging militarily (which would entail a high human cost). To paraphrase Churchill about democracy, sanctions may be the worst diplomatic response to the war in Ukraine, bar none.