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Economy

Russia Sanctions, EU Reality

Sep 02, 2022
  • Wu Zhenglong

    Senior Research Fellow, China Foundation for Int'l Studies

In the wake of the Russia Ukraine conflict, the West imposed a series of sweeping sanctions on Russia in finance, technology, online publicity and energy. Central among these are the sanctions on energy imports, primarily to cut off the source of funding for Russia's special military operations and ultimately defeat Russia on the battlefield.

The European Union, following the lead of the United States, loosed three arrows of energy sanctions at Russia in quick succession.

First, in April, it announced a total ban on imports of Russian coal, to take effect in the second week of August.

Second, in June, it announced an embargo on imports of Russian crude oil for six months and Russian petroleum products for eight months, with countries such as Hungary enjoying full or partial exemptions.

Third, the EU has still not announced a ban on imports of Russian gas but it said that between Aug. 1 this year and March 31 next year — depending on circumstances — that it would reduce gas usage by 15 percent from the average of the past five years. 

Will is willing, flesh is weak 

The first arrow was counterproductive in that it made coal even more sought after in the EU energy market. As the EU sought to import coal from faraway countries such as South Africa, Australia and Indonesia, it saw an increase in the price, further pushing up electricity costs at a time when Europe is engulfed in a heat wave and a consequent surge in electricity consumption. In addition, the Netherlands, France, Austria and Germany have restarted their coal-fired power plants in response to soaring oil and gas prices and sought to fill the gap caused by shrinking hydro and nuclear power production in Europe during drought spells. This sequence of actions has resulted in soaring electricity prices.

The second arrow is best described as “two steps forward, one step back.” On the face of it, the EU has imposed severe sanctions on Russia, which aims to reduce EU oil imports from Russia by 90 percent by the end of this year. However, under the latest (seventh) round of sanctions, the EU will exempt oil shipments from Russia to third countries. This clears the way for Russia to export oil to Europe by way of other countries.

Apparently, the EU has quietly backed off from its allegedly “devastating” sanctions. In fact, this is not the first time the EU has backed down. Initially, Russia insisted on getting payments for gas in rubles. While the EU rejected that, it later softened its stance. 

The third arrow was the EU’s defensive approach to the possibility of a Russian gas cutoff. The main elements of the EU’s gas reduction rules are that EU member states must save enough gas to ensure a safe energy supply level for winter this year. If they fail to meet the target, the EU will enforce the rules. That said, the threshold for the EU to institute mandatory measures is high, requiring the consent of at least 15 of its 27 member states and representing at least 65 percent of the EU population.

However, there are two flaws in this provision. First is that reducing gas consumption is determined by Russian gas supplies. While Russia is the main supplier of gas to Europe, Russian gas has now been partially replaced by American, Central Asian and Middle Eastern (liquefied) gas, although a significant amount still is sourced from Russia. By switching the Nord Stream-1 gas pipeline on and off, Russia has a say in how much gas can be saved in the market. German authorities have already stated that even if Germany fills its underground gas storage facilities to 95 percent of capacity by November, in the event of a gas cutoff it will only have enough reserves to run heating and industrial facilities for two to two and a half months.

Second, the threshold for initiating coercive measures is too high. With nearly half the member states disagreeing on the European Commission’s mandatory jurisdiction power, there is high uncertainty as to whether such a motion will be adopted. It seems that reducing gas consumption is unlikely to work, and so the third arrow may be off target.” A bleak winter is coming for Europe. 

Tough it out or back off 

Because of the EU’s deep dependence on Russian energy, the fallout from its offensive and defensive moves against Russia has been enormous. A few lessons could be drawn.

First, as Hungarian Prime Minister Viktor Orban said, “Sanctions are killing the European economy.” Soaring energy and food prices have added to the public’s burden. The European economy is mired in a vicious circle of high inflation. The locomotive — Germany — has had zero economic growth for two consecutive quarters, which is recession. A recession in the eurozone is also probable. The situation is dire in and the outlook ahead is not promising.

Second, a new paradigm of life and economy is needed for Europe if it is to decouple from Russian energy. Russia and Europe rely mainly on pipelines to transport oil and gas, with pros and cons. On one hand, it is the most economical, secure and convenient way of transporting energy. On the other, if pipeline transportation is blocked, it will be difficult to find alternative sources. They can be weaponized easily and used as a tool against other EU states.

Now the EU is determined to uproot the established Russia-Europe energy supply chain at great cost. This entails not only a change in the form of energy but more important a reconfiguration of people’s lifestyles and economic operating paradigms. If the EU is to create an alternative energy supply chain from scratch, it would be a huge undertaking, requiring the identification of suitable alternative sources of Russian oil and gas, the construction of appropriate infrastructure and so on, all of which would require money and time. Before making a decision, the EU needs to ask itself seriously whether it is ready.

Third, the fallout will affect the internal political dynamics of the EU. The process of conceiving the three arrows revealed serious differences among member states and debunked the appearance of EU solidarity on supporting Ukraine against Russia. The third arrow was put to a vote and passed by a simple majority, while Poland and Hungary strongly opposed it on the grounds that the legal basis of the provision was flawed, as Brussels did not have the right to set energy policy for member states.

Polish Prime Minister Mateusz Morawiecki recently published an article in German media criticizing the imperialism within the EU, where the big powers hold the reins. The article’s publication at this time was a response to Germany’s proposal to abolish the veto. The essence of the argument is whether the EU will adopt a system of simple and qualified majority voting, further centralizing power and ceding the sovereignty of member states to Brussels; or whether it will insist on a veto and retain the character of a union of sovereign states. The EU is facing a choice between centralization and decentralization.

Fourth, Europe is backpedaling on its climate change commitment. Ambitious climate goals have taken a back seat as it grapples with the fallout of energy sanctions against Russia. A return to coal-based power generation in Europe would frustrate Europe’s efforts to shift from fossil fuel dependence, delaying Europe’s transition to renewable energy and imperiling Europe’s energy transition plans.

Fifth, the energy sanctions have not destroyed the Russian economy. After the initial shock, the Russian economy has stabilized, and the ruble is one of the strongest currencies in the world. Unemployment is at an all-time low. Of course, a contraction in the size of the economy is inevitable. Still, Russian revenues from oil exports have risen rather than fallen, and the government recently raised pensions and wages. Russia has weathered the storm of sanctions. The plans of the United States and Europe to cut off Russia’s military spending through sanctions are unlikely to succeed.

Of course, the EU will by no means give up its sanctions against Russia as guided by the transatlantic aspiration to weaken Russia. It will see them through regardless of cost. But the EU is suffering from the backlash of the energy sanctions, and as those continue to advance, the pain will ferment, amplifying the differences of member states on energy sanctions, aggravating their losses and eroding their resolve. Whether the EU will be able to tough it out still hangs in the balance.

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