THE “Bouka massacre” brought Europe one step closer to the energy embargo against Russia, as both public opinion and political forces influencing developments are pushing more and more in that direction.
The debate on the final rupture with Moscow has already opened for good and is now on the table of choices that European leaders have in their quiver for the next set of sanctions they appear willing to impose, with Germany, however, to stick to its line, stressing that the embargo is not a solution at this stage. Both Chancellor Olaf Soltz and the German Minister for Economic Affairs and Climate Change, Robert Hubeck referred to the tightening of sanctions against Russia, stating that a strategy of energy independence from Moscow is being pursued.
Pressure from other European leaders, however, is mounting, with pressure from the United States, which has a vested interest in Brussels, to decide on a total rupture with Moscow, which would be nothing more than an energy embargo.
Cracks in EU unity – The consequences of a possible embargo
The decision to impose an energy embargo on Russia is a major issue of unity for the European Union, as views – and at this level – are different.
As reported by kathimerini.grlast week Poland – one of the main supporters of the embargo – along with the Baltic states – decided to move unilaterally and announced that it would end coal imports from Russia by May and zero by the end of the year. oil and gas imports.
But how feasible is it for other, more Russia-dependent EU economies? to do the same? And how dependent is Russia itself on its exports to Europe?
Last week, Spanish economist and MEP Luis Garizano and Lukacs Rachel, a postdoctoral researcher at Princeton, published a brief analysis of the issue. The authors of the analysis liken the current regime of sanctions to “mopping with the tap open”.
According to the data provided, the EU countries have paid 21 billion euros to Russia for the purchase of fossil fuels from the day of the invasion until March 28 (636 million per day). As a result, they explain, the ruble has recovered from its initial collapse, which reached 70%, and is now approaching – albeit artificially supported – the pre-invasion exchange rate.
Historically, Garicano and Rachel note, Russia relies on energy exports for 40% of its state revenue (in 2021 it was 35%). Without the inflow of these resources, they explain, trying to meet the wage obligations of the Russian state “will lead to hyperinflation.”
Europe’s dependence on Russian gas is very high. In 2021, 46% of EU gas imports came from Russia.
For different reasons, countries such as Germany, Slovakia, Hungary, Bulgaria, Austria and Italy are particularly vulnerable.
According to a recent analysis by nine economists in the scientific journal of the ECONtribute initiative (of the Universities of Bonn and Cologne), the blow to the German economy from the complete cessation of energy imports from Russia will range between 0.5-3 percentage points of GDP .
The European Central Bank estimates that in the worst case scenario of a sharp decline in Russian imports, the growth rate of Eurozone GDP will be reduced by 1.4 percentage points. Goldman Sachs, in case of zero gas flows from Russia, forecasts that growth will be lower by 2.2 percentage points in the Eurozone, by 2.6 points in Italy and by 3.4 points in Germany.
Russia plunges 40% of GDP if it loses EU
According to the latest data on gas stocks (AGSI), the occupancy rate at storage is 12.99% in Austria and 13.17% in Belgium. Less than 20% are also in Bulgaria, Croatia, Romania and Hungary. Already last week, Germany and Austria took the first steps in launching contingency plans to deal with a possible disruption to Russian exports.
However, Russia is even more dependent on gas exports to Europe. According to the US Energy Information Administration, 74% of Russia’s gas exports last year went to European OECD countries. In fact, in contrast to oil, where the corresponding percentage is 49%, it will be very difficult for Russia to find other buyers for its gas, as there is no infrastructure (pipelines, terminals) for its transportation.
According to Robin Brooks, chief economist at the IIF, a European embargo on Russian fossil fuels would lead to a sharp drop in Russian GDP by more than 40% in 2022.
Gas imports from Russia last year reached 155 billion cubic meters (bcm). According to the European Commission, new wind and solar units can already replace 20 billion cubic meters of Russian imports this year, while reducing the thermostat in homes and offices by one degree Celsius would save another 10 bcm. Reducing industrial production could significantly reduce demand (eg by temporarily increasing imports into sectors such as steel and chemicals).
The US, meanwhile, in partnership with other international EU partners, recently pledged to supply an additional 15 billion cubic meters of liquefied natural gas this year (last year the US exported 22 bcm to the EU). Georg Zackmann, Bruegel’s senior fellow on energy, told a European Parliament workshop hosted by Mr Garizano that if liquefied natural gas (LNG) imports continued at the pace of recent weeks, they would exceed 100 levels by 2021 bcm. Covering about 2/3 of Russian imports. He acknowledged, however, that these rates are difficult to maintain and that the more realistic goal is for increased LNG imports to make up for half of last year’s imports from Russia.
The ban on oil
Imposing an embargo on Russian oil would have to replace three million barrels of crude oil a day and one million barrels of oil. OPEC’s back-up capacity reaches 4 million barrels per day, a fact that contributes to the possibilities of replacement but also exerts downward pressure on prices. The disruption of Russian oil supplies would pose three key challenges, according to experts in the European Parliament’s workshop: reversing intra-European flows from Western to Eastern Europe (oil is currently being imported from ports in the Baltic and Black Seas). and the transfer from there to Europe); the adaptation of European refineries to other types of crude oil; and the replacement of imports of refined Russian products (eg diesel) from other countries or the increased refining activity within the EU.
For Russia, however, adjustment will be even more difficult. The potential for increased exports to Asia is limited both due to infrastructure and shipping costs, and because refineries e.g. of China are not adapted to the processing of Russian crude. It is recalled that oil and petroleum products are by far the most important revenue for the Russian economy, generating three times the amount of gas.
Accordingly, coal imports can be replaced by an increase in the use of deposits within the EU. There is also the possibility of increasing imports from countries such as Australia, South Africa, Colombia, India and China.
They pay in euros, they receive in rubles
On Friday, meanwhile, Vladimir Putin’s deadline for “friendly countries” to pay in rubles for Russian gas purchases expired. “If these payments are not made, we will consider it non-compliance with the buyer’s obligations, with all the consequent consequences,” the Russian president said on Thursday.
The Russian side insisted that the Europeans should open accounts in rubles in Russian banks, otherwise they risked a power outage (the grace period for gas payments is usually 20 days).
Countries such as Germany and France reacted immediately on Thursday, insisting that they would continue to pay in euros, as stipulated in the relevant agreements.
It remains to be seen how Russia will implement the new decree, which stipulates that buyers will have two accounts in the Russian bank that will handle the transaction: one in foreign currency in which they will pay the amount for the purchase and one in rubles, in which the purchase amount will have been converted by the bank. The purchase will be formalized by depositing in the second account.
The measure lacks economic logic: Gazprom is already forced to convert 80% of its foreign exchange earnings into rubles.
Analysts see the move as an attempt by Putin to show that he can impose his will on Europe. However, uncertainty over its implementation – and especially concern about the possibility of circumventing sanctions against Russia – strengthens the incentive for European buyers to look for alternative sources of supply.
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