Friday

1st Jul 2022

Analysis

Can Europe afford a Russia trade war?

  • (Photo: malyousif)

“We’ve known for more than 100 years that protectionism and trade barriers are very bad for your economy”.

So says Hosuk Lee-Makiyama, a trade lawyer and director of the European Centre for International Political Economy, a Brussels-based think tank. The evidence backs him up.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

  • EU sanctions have banned some of Russia's top banks from buying long-term bonds (Photo: sberbank.ru)

But such considerations did not stop Brussels from effectively waging a trade war on Russia this month – its ban on bond sales to some Russian banks and on sales of high-end technology to Russian oil firms swiftly leading Moscow to imposing a ban on imports of EU food.

Since then, however, support for the EU’s stand is starting to fray at the edges as national leaders start to count the costs.

Hungarian prime minister Viktor Orban and his Slovakian counterpart Robert Fico have publicly criticised the EU sanctions. Orban remarked that the sanctions “cause more harm to us than the Russians”, before adding in typically strident fashion that “in politics, this is called shooting oneself in the foot”.

For its part, Poland has made a formal request that the EU take Russia before the Swiss-based World Trade Organisation (WTO) to overturn the food ban, while a number of governments are already working out how much compensation they will claim from Brussels for their farmers.

The question is whether Europe can actually afford to fight a trade war with Russia?

Lee-Makiyama says that “mutually assured destruction”, at least in economic terms, will be the result of the sanctions and that neither side can afford the measures to last more than six to nine months.

It is still difficult to make anything more than an educated guess at the economic effect of the confrontation, while EU officials stress that its farmers may be able to replace the lost market in Russia with buyers elsewhere,

But there is increasing evidence that the sanctions battle will cause a sizeable dent in Europe’s collective wallet.

Research published on Wednesday (20 August) by Benelux bank ING forecasts that the import ban could cost the EU €6.7 billion, wiping out 6 percent of the EU’s production and 0.04 percent of its GDP.

For its part, ING remarked that its calculations were “a conservative estimate of the economic damage that can be caused by the crisis in Ukraine.”

The uncertainty has clearly dampened confidence, particularly in Germany, whose export-led economy is most reliant on trade with Russia.

The ZEW think tank’s index of financial market confidence in Germany’s economy fell to its lowest level since December 2012 this month. It remarked that the collapse in confidence was “likely connected to the ongoing geopolitical tensions in the Ukraine and elsewhere”.

The same week, Eurostat revealed that the eurozone economy was already flat between April and June, before the sanctions, leading to the bloc’s growth forecasts for 2014 being cut to 1 percent.

Carsten Brzeski, an economist with ING, told EUobserver that, ultimately, the ban “could shave off some 0.2 percentage points from Eurozone growth”. He added that it is “very hard to take into account whether there are any negative spill-over effects or positive off-setting factors like more demand from other countries or repatriation of foreign investments”.

In the pre-financial crisis years, losing 0.2 percent would have been the economic equivalent of a wasp or jellyfish sting – painful, but not for long. But with the eurozone economy flat-lining it could prove to be the difference between meagre growth and a triple dip recession – of high importance politically and psychologically to the bloc.

ING also estimates that the ban could jeopardise 130,000 jobs at a time when the EU is struggling to reduce a high unemployment rate.

While the US, Canada, Norway, and Australia are also subject to identical Russian bans, their trade with Russia is a fraction of the €270 billion in goods and services which were traded between Russia and the EU in 2012.

With the EU already in relative decline compared to the US and China, not to mention emerging economies, it can ill-afford to carry another economic millstone.

But if the EU’s sluggish economy is ill-prepared for a prolonged trade war, Russia is in even weaker shape to cope.

Since the start of the year foreign investors have withdrawn around €60 billion from Russia. Meanwhile, its economy, which grew by 1.3 percent last year, is heading back into stagnation, forecast to grow by less than 0.5 percent in 2014.

Agriculture minister Nikolai Fyodorov told national television on Wednesday (August 20) that the ban would cost “hundreds of billions of rubles” in extra farming subsidies.

While not catastrophic, these snap-shots make it clear that the West’s sanctions are hurting Moscow and will continue to do so.

But for the moment, diplomacy trumps short-term economic interests.

The threats of a Russian invasion of Ukraine remain high. This factor, coupled with Russian leader Vladimir Putin’s continued support for pro-Moscow rebels in Ukraine, despite their being implicated in shooting down Malaysian airlines flight MH17, left the West with little alternative other than to step up its sanctions regime.

In the words of Lithuanian foreign minister Linas Linkevicius, whose country shares a border with Russia: “Better shoot yourself in the foot, than let yourself be shot in the head”.

Russia relaxes EU food ban, counts costs

Russia has said its ban on EU food imports will cost it “hundreds of billions of rubles”, while taking several items off the blacklist.

EU demands WTO ruling on Russian trade tariffs

The European Commission accused Russia of breaking its trade commitments on Thursday, urging the World Trade Organisation to arbitrate on illegal import duties on a range of products.

EU lodges new WTO protest against Russia

The EU lodged its fourth formal complaint against Russia to the World Trade Organisation (WTO) on Friday in the latest round of the trade battle between the two blocs.

Opinion

Nato's Madrid summit — key takeaways

For the most part Nato and its 30 leaders rose to the occasion — but it wasn't without room for improvement. The lesson remains that Nato still doesn't know how or want to hold allies accountable for disruptive behaviour.

MEPs boycott awards over controversial sponsorship

Two MEPs have withdrawn their nominations from the MEPs Awards over the Swiss pharmaceutical company Novartis's participation as a sponsor — currently involved in an alleged bribery scandal in Greece.

News in Brief

  1. EU Parliament 'photographs protesting interpreters'
  2. Poland still failing to meet EU judicial criteria
  3. Report: Polish president fishing for UN job
  4. Auditors raise alarm on EU Commission use of consultants
  5. Kaliningrad talks needed with Russia, says Polish PM
  6. Report: EU to curb state-backed foreign takeovers
  7. EU announces trade deal with New Zealand
  8. Russia threatens Norway over goods transit

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  2. Nordic Council of MinistersNordic ministers write to EU about new food labelling
  3. Nordic Council of MinistersEmerging journalists from the Nordics and Canada report the facts of the climate crisis
  4. Council of the EUEU: new rules on corporate sustainability reporting
  5. Nordic Council of MinistersNordic ministers for culture: Protect Ukraine’s cultural heritage!
  6. Reuters InstituteDigital News Report 2022

Latest News

  1. Nato's Madrid summit — key takeaways
  2. Czech presidency to fortify EU embrace of Ukraine
  3. Covid-profiting super rich should fight hunger, says UN food chief
  4. EU pollution and cancer — it doesn't have to be this way
  5. Israel smeared Palestinian activists, EU admits
  6. MEPs boycott awards over controversial sponsorship
  7. If Russia collapses — which states will break away?
  8. EU Parliament interpreters stage strike

Join EUobserver

Support quality EU news

Join us