On February 23, 2022, on the eve of the invasion of Ukraine by the Russian army, the Council of the European Union (EU) adopted the first package of sanctions in response to Moscow's recognition of the self-declared autonomous republics of Donetsk and Lugansk.
Since then, five more packages have followed, the last having been adopted on June 3, 2022. From the second package, the sanctions affected the exchange of goods. Let us take a look at the chronological sequence of these sanctions in order to better assess their effects.
- On February 25, the Council prohibited the export of dual goods (designed for civilian use but likely to be diverted for military purposes – their list is long, it covers chemical products, particular metal alloys, protection against chemical and biological agents, etc.), but also spare parts for aeronautics and goods intended for use by Russian refineries.
- On March 9, the export of certain equipment for maritime navigation and for radio communications was prohibited.
- On March 15, the list was extended with the ban on the export of luxury goods. This fourth package was also the first to introduce import bans on certain goods from Russia. However, this was a very small step: imports of certain steel and aluminum products, already affected by safeguard measures (i.e. limitations on the quantities imported), became totally prohibited .
- This will be the fifth package, that of April 8, which will really get into the hard part of bans on imports of products from Russia, covering imports of coal, cement, rubber products, wood, certain alcohols and fish products.
- The sixth package, banning 90% of oil imports from Russia by the end of 2022, was adopted on June 3. From there the trade sanctions become massive: by the end of the year, 65% of EU imports from Russia will be banned, compared to 10% in April 2022 after the fifth package.
As the economists Matthieu Crozet and Julian Hinz remind us, "the trade embargo is a weapon for the powerful“. Clearly, the larger the country, the more costs it inflicts on the sanctioned country, which loses a supplier and important outlets. And for the country which imposes the embargo, the costs will be all the higher as the country concerned is important.
In 2021, Russia was the EU's fifth largest trading partner, accounting for almost 6% of European trade with the world. The amounts at stake are considerable: 258 billion euros, including 159 billion of imports (for the EU).
The double advantage of the EU
Since the fifth package of measures, trade sanctions on Russian imports concern 10% of Russian goods crossing the European border, for a total amount of 14 to 17 billion euros (according to 2019 data). When the sixth package is fully implemented by the end of the year, this share will rise to 65%.
These shares are not negligible, nor are the expected negative effects. Nevertheless, the EU has two advantages over Russia: its significant commercial integration and its economic weight. Indeed, while European sanctions (sixth package included) cover 25% of Russian exports sent to all of Russia's partners, they represent 5% of total EU imports. The asymmetry is strong. To put it another way, Russian trade is more dependent on European buyers than European trade is on Russian sellers.
These aggregate figures hide strong disparities from one sector to another. For example, in the timber sector, the sanctions already in place apply to all European imports from Russia; in the energy sector (mineral fuels), more than 78% of imports from Russia will be banned by the end of the year*. On the other hand, the share of prohibited aluminum imports is ten times lower, equal to approximately 8%.
The high coverage of certain sectors can weaken European production chains. It is in the energy and fertilizer sectors that European importers are most dependent on Russian products. Just over 40% of the coal and fertilizers covered by the sanctions, as well as about 30% of the oil are imported from Russia. These goods have the particularity of entering upstream of the production chains as intermediate products.
In this sense, a disruption in the supply of these products could result in a reduction in European production in the sectors exploiting these goods, of a potentially higher value than that of the initial sanctions. The question of the extent of such a "snowball" effect is at the heart of the debate on the potential impact of sanctions on oil and natural gas. The estimated effect depends, on the one hand, on the ease of finding other suppliers of sanctioned goods and, on the other, on the possibility of substituting the sanctioned goods with similar products.
The bans on imports from Russia will therefore lead companies to adapt their production, either by seeking alternative sources for the prohibited products, or by replacing them with similar goods. These mechanisms will make it possible not to completely halt production in the sectors concerned but will of course generate additional costs. In part, these costs will be absorbed by business margins and in part passed on to increased prices to the end consumer or customer. It remains to be seen which other countries could supply the European Union.
This question can be very technical. Take the example of fertilizers. The sanctions concern potassium chloride, but also fertilizers which contain all three key elements in agronomy: potassium, nitrogen and phosphates. Russia provides a large share (44%) of EU imports of these products (Chart 3). Canada is the world's largest producer and exporter of potassium-based fertilizers, far ahead of Russia, but it produces almost no phosphate-based fertilizers and exports little nitrogenous fertilizers. Thus, Canada could replace Russia in supplying the EU with fertilizers mainly based on potassium. But production cannot increase instantly, the market will be tight in 2022.
The same goes for sanctions on mineral fuels. Almost a third of the coal and oil imported by the EU comes from Russia. For oil, the Russia is the first supplier of the EU, followed far behind by Norway, Kazakhstan and the United States, with 8% market share for each of these countries. OPEC+ announced on June 2 that it would increase its supply by around 1,5% from July, which represents around 25% of the quantities of oil that the EU will no longer import from Russia. It is indeed a game of musical chairs in the oil market coming up: Russian production would go to Asian countries, thus freeing up part of OPEC+ exports, which could be redirected to the EU.
Furthermore, European imports may also be limited by Russian reprisals targeting products in which Russia has a dominant position. This is what happened with the interruption of gas deliveries to certain EU countries. Other countries and other products could be targeted following the sixth package of European sanctions. But, as the French president pointed out, faced with Russia's choice to continue its war in Ukraine, it is difficult not to react "in Europeans united and united of the Ukrainian people".
In another ticket of the CEPII, we have shown that trade data are not necessarily reliable for natural gas trade. That said, the anomaly we found was particularly significant for data at individual Member State level, but less so when data were aggregated at EU level. After verification, the discrepancies between trade and energy data for Chapter 27 in the charts of this blog are small. A single source of data for all the graphs is therefore used: the BACI database of the CEPII.
Cecilia Bellora, Economist in charge of the “Trade policies” program, CEPII; Kevin Lefebvre, Economist, CEPII et Malta Thie, Economist, CEPII
This article is republished from The Conversation under Creative Commons license. Read theoriginal article.