Early signs that sanctions on Russia will cost Europe as well
ONE factor has long underpinned pushback by European governments and business over sanctions on Russia: concern for their own pocketbooks. But in the wake of Russia’s invasion of Ukraine, the continent has seen a rapid about-face and has begun to feel the effects.
When Russia annexed the Crimean peninsula in 2014 and backed separatists in Ukraine’s east, European business groups were among the most vocal sceptics of the EU sanctions that followed. Just weeks ago, a major German business association was celebrating a “gratifying” surge in trade with Russia, while Italian CEOS met virtually with Russian President Vladimir Putin to discuss stronger ties even as the crisis was heating up.
In a matter of days, the tone has changed. Since the invasion began last week, Russia, facing a flurry of sanctions, has become an economic pariah. Even Putin’s defenders among European businesses, especially in Italy and Germany, have rallied behind what France’s finance minister this week called an “all-out economic and financial war” against Russia, the EU’S fifth-biggest trading partner. (He later apologised for saying “war”.)
“It is beyond any discussion that the German business world supports the imposed sanctions,” read a statement by the chairperson of the German Eastern Business Association, a trade group in long-standing favour of robust ties to Russia.
The widespread support for sanctions has come at an economic cost, on top of those borne from the turmoil of war, affecting energy prices, inflation and the cost of raw materials. Experts warn that backlash could follow.
Many of the effects, including higher gas, electricity and food prices, have either set in or could hit in the next six weeks, said Andrew Kenningham, chief Europe economist at Capital Economics, a research consultancy. That spans the final stretch of the French presidential election campaign, potentially playing into the hands of the crowded field of populist candidates running against President Emmanuel Macron.
In a written address to parliament last Friday, Macron prepared voters for volatile weeks and months ahead.
“This major crisis will have consequences on our lives, our economy,” he said.
Sanctions “will have dramatic longterm
implications and, relatively soon, very strong price implications, starting first with energy but then trickling down through the entire economy,” said Georg Zachmann, a senior fellow at Bruegel, a Brussels think tank.
While much of the continent seems willing to bear the price for now, such effects could drive division, especially if Europe targets Russian gas and oil exports, or if Russia decides to withhold supplies.
Even in the absence of such moves, the international oil benchmark surged beyond $110 (about R1 800) a barrel on Wednesday, as buyers refrained from purchasing Russian crude amid financial uncertainty and the prospect of supply chain disruptions. European natural gas – of which some 40% comes from Russia – hit an all-time high this week.
“We will need gas, we will need oil. And if that doesn’t keep coming, then political unity in Europe will be difficult to maintain,” Zachmann said.
Germany, which imports more than 50% of its natural gas from
Russia, will be hard-pressed to find alternatives. The country has suspended the newly built Nord Stream 2 pipeline project, which was built to convey gas from Russia, last month.
Some see nuclear energy as a possible lifeboat. The crisis has reawakened one of the country’s most divisive debates – and one that appeared to have been settled, with all remaining nuclear power plants set to be taken off the grid this year.
But speaking last Sunday, Vice Chancellor Robert Habeck, whose Green Party is rooted in the country’s anti-nuclear movement, was no longer willing to rule out an extension. “Nothing is a taboo,” he said, also raising the possibility of more reliance on coal.
In the aftermath of the invasion, European leaders agreed to disconnect seven Russian banks from Society for Worldwide Interbank Financial Telecommunication (Swift), the world’s most important payment mechanism.
European companies and banks with subsidiaries or strong links to
Russia, including British multinational oil and gas company BP and French bank Societe Generale, are expected to bear the initial brunt.
Countries including Lithuania, Latvia and Estonia, which have reduced their dependency on Russia but remain more exposed than many other European nations, could also be among the first to feel the hit.
The EU has yet to impose import bans on some of the most lucrative Russian exports – including oil, gas and raw materials. But experts say it will be impossible for the bloc to fully disentangle desired sanctions targets from broader economic effects that will rebound on Europe.
Trade with Russia and Ukraine has been disrupted. Key Russian banks will be cut off from Swift, shipping companies have said they would stop most cargo deliveries to and from Russia, and flight bans are preventing some goods from reaching their destinations. For European consumers, the most noticeable impact could be surging inflation, which was up. A potential “2% reduction in purchasing power doesn’t sound much, but those households who have lower incomes and high heating and fuel costs will be much worse affected,” Kenningham said. As inflation rises, inequality could deepen – and consumers in countries including Spain and Germany, where governments have largely refrained from freezing gas and electricity prices, could be hit more severely than consumers in France, for example, where policymakers intervened early.
A senior French official, speaking on the condition of anonymity, said the European Commission was in contact with countries that could “if necessary, divert part of their production to the European Union”. The official cited Qatar and the US, along with Algeria, Nigeria and other exporters, as possible options.
The prospect of energy shortages – and a halt in Russian deliveries – could overshadow European politics. In the long-run, the disruptions could be a boost for supporters of renewable energy. But in the short run, the urgent need to find alternatives to Russian oil and gas will probably have the opposite effect.
Italy’s government is prepared to resort to coal or oil power plants, if gas supplies drop, Reuters reported. Germany has announced the establishment of a strategic stockpile of coal and gas last week, as conservative opposition members demanded a delay in the planned coal phaseout.
Energy analyst Georg Zachmann said he agreed policymakers should consider additional coal as a shortterm option.
“I’ve spent my entire life writing about the decarbonisation of the European energy system, about the way to net-zero,” he said. “But my feeling is that these are completely exceptional circumstances.”