Page 61 - bne Magazine February 2023

bne February 2023 Eastern Europe I 61
Of course, both the EU and Russia have suffered considerable economic pain. In Russia the automotive sector has almost completely collapsed. At its low in March Russia turned out a mere 3,000 cars, as opposed the 100,000- plus a month it usually makes. Since then output has recovered somewhat but overall production remains down by about 60%. Many sectors have been deeply wounded and will not fully recover in the foreseeable future.
And long term, Russia’s growth potential has been cut from an already flaccid 2% to a mere 1% – far behind the global growth rates on the order of 4%. Russia is doomed to stagnate over the coming decades and steadily fall behind the rest of the world.
The EU has not gotten off scot-free either. The disappearance of Russian gas has been especially painful. As bne IntelliNews reported, Europe’s heavy industry has been shutting down as things like the fertiliser, chemical and other industrial subsectors that rely on gas as an input or a fuel have been forced to close because they can’t afford to buy gas, can’t get enough, or have simply become economically unviable with gas prices more than ten times their usual level.
Both Russia and the EU have to some extent de-industrialised as a result of the sanctions war.
In this context to ask “who’s winning”
is to oversimplify the problem. Europe can replace Russia’s gas with LNG and import the chemicals it can no longer make. Russia also can offset the pain of sanctions with the higher prices of the commodities it produces, as economists say that higher prices are here to stay as a result of the unprecedented attempt
to inflict sanctions on one of the world’s biggest producers of nearly every commodity under the sun. Nevertheless, much of the damage done to both sides is directly comparable, even if the sectors worst affected are different.
Sanctions weakness
One of the issues underpinning the EU’s relative good performance is that it has pulled its punches at nearly every stage
of implementing the nine packages of sanctions so far.
The first “massive package” of sanctions imposed in the first week of the war have probably done the most damage and will continue for the foreseeable future. Even if Russian President Vladimir Putin were to die tomorrow and the war ends, it is unlikely that
any of the biggest sanctions would
be withdrawn for decades, as was the case with the Soviet-era Jackson-Vanik sanctions.
The first sanctions to target energy were the fifth package of sanctions in April that included coal and limits on providing shipping services to Russia. But as this disproportionately hurt the Greek economy, its shipping lobby successfully won exemptions, so a month after the shipping bans went into effect on August 10 Russia was exporting more coal than ever before and at prices that are 165% higher than last year.
As bne IntelliNews detailed in a recent blog, as the sanctions regime progresses they are becoming increasingly more symbolic as Europe is being as careful to not hurt itself as it is enthusiastic
to punish Russia. Moreover, as the boomerang effects of sanctions become
energy dependent, and its leader Prime Minister Viktor Orban admires Putin’s strength.
Given the EU’s prerequisite for a unanimous approval amongst all 28 member states, each package is subject to a laborious process of negotiation and compromise that inevitably waters down their impact at each stage.
Even with the oil price cap scheme imposed on December 5 – potentially the most damaging sanction to date
– set the cap at a level that makes no difference to the Russian budget at all: the cap was set at $60 per barrel of oil, whereas Russia currently sells its Urals blend at $55 or less. The stated aim of the sanction is to cut the Kremlin off from its oil revenues but $60 allows the Kremlin earn just as much as before.
Effect on Europe
The main channel transmitting the effect of sanctions on Russia to Europe and the rest of the world has been through the polycrisis that has induced soaring inflation, fuelled by rising food, commodity and energy prices that have done significant damage that can’t be avoided.
As bne IntelliNews has written elsewhere, inflation, and food price
“The first sanctions to target energy were the fifth package of sanctions in April that included coal and limits on providing shipping services to Russia”
more pronounced the remarkable unity shown by the EU in March is already visibly cracking. In this context it is no surprise that Europe’s economy has been “largely spared” a lot of damage from
the sanctions as they were specifically designed with that goal in mind.
And they had to be, as the support
for sanctions runs the whole gamut from Poland, which see Russia as an implacable foe, to Hungary, which is
inflation particularly, is infectious. The US has suffered far less damage than Europe, as it is largely self- sufficient in most of the commodities Russia sells. Yet because of the way the food commodities market works, sky-high prices for grain in Cairo will immediately push the cost of wheat in Kentucky up to the same level, even
if the US imports no grain at all. (It’s because the farmer in Kentucky could
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