Ukraine war: Sanctions helping Russia hurting Europe
It is almost one year that Russian forces marched on Ukraine to stop the expansion of NATO Eastwards.
Russia justified the attack on Ukraine with solid reasoning which, of course, NATO denied vehemently.
With direct military confrontation between NATO and Russia unthinkable, Western nations instead turned to economic sanctions as the primary means to hamper Putin’s war machine.
Given the major role which oil and gas exports play in filling the Russian state’s coffers, it seemed a logical next step for Western sanctions to be levelled on this strategically important industry.
That’s not what happened. The combination of sanctions and war disrupted energy and grain supplies, creating an economic opportunity that Russia has exploited.
Indeed, according to the Helsinki-based Centre for Energy and Clean Air, Moscow earned $100 billion in revenue from oil, gas and coal sales in the first three months of the war alone.
Yet, despite their vocal support for the Ukrainian people’s resistance, European governments have proven reluctant to act with any urgency to stop buying Russian fossil fuels.
As the war in Ukraine drags on, bringing more death and destruction with each passing day, European leaders are still dragging their feet.
Russia is the world’s largest oil exporter. Before the war, most of its oil – 60% – went to Europe, and 20% went to China. In 2021, Russia supplied 45% of Europe’s gas, although supplies began to drop near the end of the year.
A third of Europe’s oil comes from Russia. In 2021, the US did not import significant quantities of oil or gas from Russia.
The US did import some specialised petroleum products like crude oil from Russia and the country provides 20% of US imports of such products.
The US embargo on Russian fossil fuels has prevented the import of these specialised products.
Europe, as a region, is much more dependent on imports of oil and gas from Russia and has been much slower to follow up its expression of solidarity with action on fossil fuels.
In fact, as things stand it was completely legal to import Russian oil into the EU and UK until at least December – ten months after the invasion of Ukraine began.
Only a full embargo on Russian fossil fuels can ensure that European consumers aren’t financing Putin’s war through their fuel and energy bills.
While changing your gas supplier at home is relatively simple, the same can’t be said for switching suppliers at the international level.
The reason for this is that gas can’t simply be loaded into shipping containers and transported via normal supply routes.
It requires specialised infrastructure such as pipelines and shipping terminals that take a lot of time and money to build.
Therefore, buying gas from elsewhere wouldn’t be a short-term fix, but a long-term investment.
This would risk repeating the same mistake which was made with Russia by becoming locked into energy dependency with countries that harm their citizens or neighbours.
Two of main countries from which the US and European countries have sought to replace Russian fossil fuels – Venezuela and Saudi Arabia – also have humanitarian and human rights records issues.
While Russia continues to pay a heavy military price for its cruel invasion of Ukraine, things look different on the economic front.
Despite repeated assurances from President Biden and other Western leaders that “the toughest economic sanctions in history” would cripple Russia’s economy and starve its war machine, that hasn’t happened.
Russia’s current account, which measures global trade in goods and services, was strong in the second quarter of this year when its trade surplus rose to a record $70.1 billion.
The Rouble, too, has exhibited remarkable resiliency, ranking as the strongest performing currency so far this year, rising to its highest level against the euro since 2015 and making major gains against the dollar.
What accounts for Putin’s bulging coffers? The simple answer: high commodity prices and Russia’s continued ability to export oil, gas, grain and even gold to non-Western countries.
The economic picture isn’t as rosy for the countries sanctioning Russia. Europe is struggling to meet its energy needs, driving up inflation and forcing countries at the vanguard of the green movement to backpedal.
Germany, for example, whose Minister for Economic Affairs and Climate Action comes from the Green Party, was forced to reactivate seventeen coal-fired power plants it previously had shut down.
President Biden, with inflation sitting at a forty-year high, recently begged Saudi Arabia’s leaders—a regime it had been shunning—to come to the rescue by pumping more crude to help bring down gas prices and ease the inflationary pressure high fuel prices are placing on other goods.
In short, it appears that the economic response to Russia’s unprovoked war seems to be taking a greater toll on the rest of the world than on Russia itself.
Western leaders should have learned by now to take two factors into account when placing sanctions on a dictator: the moral case and the likely social and economic consequences.
There was clearly tension between the two in this instance. The moral case called for isolating Russia’s economy as much as possible.
But, given the existing supply and demand imbalance that became apparent as the world emerged from the pandemic—and rising inflation—the socio-economic calculator should have pointed to a sanctions regime that would avoid exacerbating the problems (if that is even possible).
While the Biden Administration was drawing down the Strategic Petroleum Reserve to increase available supplies and lower gasoline prices—plunging America’s emergency reserve to its lowest level since the mid-1980s—Russia’s oil exports had bounced back to pre-war levels by May.
Europe, meanwhile, which imported 40 percent of its natural gas from Russia last year, is now facing the double-whammy of severe shortages due to dwindling Russian imports and higher inflation fuelled in part by energy prices.
This has lead to a long, cold winter when the demand for energy explodes at the same time.
Europe is set to stop importing seaborne petroleum from Russia, as a European Union (EU) regulation introduced in June requires.
Things could get even worse if Russia decides to cut off natural gas exports to Europe through pipelines, which is temporarily allowed under EU edict.
The big picture can be seen in the numbers. In February, when Russia invaded Ukraine, the Federal Reserve’s global commodity price index stood at 203; by the end of June, it was 227, a 12 percent increase.
Instead of starving Russia’s war machine, commodity price increases have strengthened Russia’s finances.
The idea was for the West to help Ukraine win the war or at least make it extremely costly for Russia to continue its imperialist aggression.
While militarily the jury is still out, economically Russia has not suffered by any stretch of the imagination.
—The writer is former Civil Servant & Consultant: ILO and IOM.
