Who is really hurt by sanctions: the real causes of the crisis

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To say that the sanctions imposed on Russia are dragging Europe down is a gross exaggeration, but it is certainly easier for the overseas US economy to cope with their consequences

Jakub Woziński

For many months, the biggest critic of sanctions in Europe – not counting Russian politicians, of course – has been Hungarian Prime Minister Victor Orbán. A few months ago, he said that by imposing them, the European Union shot itself not so much in the foot as in the lungs, and is slowly beginning to suffocate. This kind of rhetoric is also being replicated across the continent by politicians known for their pro-Russian sentiments, such as Marine Le Pen, Matteo Salvini, and the leaders of Germany’s Alternative für Deutschland. According to them, the economic measures that have been applied have only had the effect that Europe is suffocating under the weight of sanctions, while Russia does not feel them at all.

Although the initial surge in oil and gas prices, with the need for European countries to continue buying, created the illusory impression of great financial benefits enjoyed by Russia, the country is now undeniably beginning to suffer more and more disadvantages. The cut-off from Western capital, technology, and supplies, as well as the loss of lucrative export markets, is creating increasing pressure not only on the Russian economy, but also on the Russian military’s combat capabilities in some areas. The best symbolic summary of the state in which the Russian economy has found itself is represented by the fact that the authorities have stopped regular reporting of selected economic indicators (and these, reported officially, are highly questionable).

COST DIFFERENTIAL

As the European Union recently announced its ninth package of sanctions against Russia, Victor Orbán, who has been critical of them, decided to modify his message somewhat. Having picked up on Emmanuel Macron’s statement about the difference in costs paid by Europe and America as a result of the war, the Hungarian prime minister called for an immediate solution to the energy crisis on the Old Continent, or the industry risks collapse.

Macron-Orbán’s assessment deserves special attention, because it is something else to impose sanctions on Russia when it is the fourth largest trading partner (the European Union) and something else when it is only the 30th (the US). Bordering Russia directly, Europe has necessarily maintained far more economic relations with it, the severance of which entails certain costs. In the case of the United States, however, it is already quite different, as the most important import commodity from Russia has long been oil (as much as 43% of the value of all trade). However, oil from Russia alone accounted for only 3.5% of all U.S. imports of this commodity, so severing economic ties with the Putin-ruled state is proving mostly painless for Americans. The list of major commodities imported from Russia includes iron or shrimp, which are readily available elsewhere, and only the lack of access to platinum, palladium, or nickel may cause more trouble.

For obvious reasons, it has proven much more painful to restrict trade with Russia in Europe. This is particularly true of natural gas, as its prices on the Old Continent, despite recent declines, still remain up to six times higher than overseas. However, such a large disproportion is not only the result of the sanctions imposed – after all, the European Union has deliberately banned the extraction of shale gas on its territory for environmental reasons, although today it imports it on a massive scale from the US.

A lot of suffering is also caused by Europe’s lack of access to Russian oil. Before the outbreak of war, EU countries imported as much as 30% of this resource from the East, which translated into overcharged prices in gas stations. In early December, Americans were paying more than half as much for a liter of gasoline as residents of Western European countries. Concerned about the impact of sanctions on the European economy, Viktor Orbán should not complain, as his country has been exempted from the oil embargo by the European Union.

EU COMMISSION REPORT

As Bloomberg recently reported, EU member states supposedly asked the European Commission to prepare a special report on the economic impact of the measures applied so far, before imposing the ninth series of sanctions against Russia. According to the document, which has not been officially published, the impact of the sanctions is proving to be relatively small and limited to certain industries. In addition to oil and gas, the sanctions are being felt most, among others, in terms of access to valuable metals and timber (oak and plywood in particular are in short supply).

The countries of the European Union have done a great deal since the end of February to ensure that Russia is replaced by other countries when it comes to importing many important goods. As a result, trade turnover has increased significantly with Turkey, Brazil, India, Qatar, and South Korea, among others. At the same time, the report prepared by the European Commission indicates that the community countries have not closed off the possibility of importing Russian aluminum, nickel, palladium, or titanium. In the case of some of them, imports have even increased since the beginning of the war. It should also not be forgotten that its own sanctions have been imposed by Russia itself, which, by halting the export of noble gases (neon, xenon, krypton), has significantly restricted the ability to manufacture microchips, among other things. By restricting Ukraine’s grain exports or fertilizer exports, it has also contributed to rising global food prices.

As the European Commission’s experts have carefully calculated, since the beginning of the Russian aggression, the EU authorities have authorized a total of more than 150 emergency measures applied by member countries aimed at reducing the impact of sanctions on the condition of the economy. They were mainly related to the loosening of rules limiting the scope of state aid to domestic companies. A total of €525.5 billion was allocated between February and November. Thus, it is evident that dealing with sanctions does not come without significant sacrifices in the fiscal area.

PANDEMIC-CLIMATE BACKGROUND

Missing from the entire discussion of the true impact of sanctions on Russia is, as usual, the pandemic and climate component. Both Viktor Orbán and his far-left adversaries carefully avoid discussing what a disaster their radical sanitation policies have been for the European economy, and that there remains an equally radical policy of pursuing zero-carbon.

From the very beginning of Russia’s aggression against Ukraine, governments across Europe have consistently tried to obscure their many mistakes with the person of Vladimir Putin. The “Putinflation” humbug has been abundantly exploited not only in Poland, but almost all over the world. Restricting access to Russian raw materials has indeed exacerbated the inflation problem, but its real source lies elsewhere. Had it not been for the massive money printing, carried out during the period of the introduction of completely unjustified lockdowns, and the constant tightening of the huge-cost-generating “green screw,” most of the measures used against Russia would not have had as much impact.

As one can learn from the European Commission’s report, the sanctions against Russia were deliberately designed to keep the very foundations of member states’ economies intact. In the wake of the climate-pandemic fiasco, however, it can be sincerely doubted whether the foundations are holding firm. The average inflation rate in the eurozone was 11.5% in November, compared to 7.7% in the U.S. The total fiscal cost of mitigating the effects of high energy prices on households across the European Union will reach as much as 0.9% of total GDP this year. By the last quarter of 2022, the Eurozone and most EU member states will have already entered a recessionary phase for good.

DEINDUSTRIALIZATION

The temporal convergence of several of the most important causes of the current economic turmoil has provided politicians with an opportunity to juggle them very conveniently and present them as the sole determinants of the growing crisis. By blaming Putin or sanctions against Russia, however, policymakers carefully overlook the heart of the problem, which is making itself known through the accelerating deindustrialization of the Old Continent. The world’s highest energy prices and the green utopia’s most zealous politicians have already led to a growing number of businesses moving to other continents, including even North America. The United States, unlike rapidly declining Europe, has significant amounts of exploitable gas deposits and a more friendly investment climate.

Viktor Orbán is right when he says that the sanctions imposed against Russia are contributing to the decline of European industry. However, they have accelerated the activities of much more important processes devastating Europe for a long time. Through the government’s passive stance, Poland is also increasingly affected by a policy that, in the absence of an urgent response, will bring the entire continent down a very steep economic trough.

This article was published in December 2022 in “Do Rzeczy” magazine