Europe is on the brink of another recession, which threatens to be deeper and longer than its pandemic-induced forerunner. Most concerning of all is the fact that this downturn is largely self-inflicted – the result of an energy crisis brought on by a clumsy and hastily implemented sanctions policy.
A recent OECD report entitled “Paying the Price of War” paints a grim picture of lingering inflation, stagnating GDP, and possibly even gas rationing in Europe, with a high risk of disruption if consumers don’t start economising their gas use soon.
“Taken together, these shocks could reduce growth in the European economies by over 1.25 percentage points in 2023, relative to baseline, and raise inflation by over 1.5 percentage point. This would push many European countries into a recession in 2023,” the report finds.
But the inception of the crisis pre-dates the events of February: it has its foundations in the sanctions programme implemented by the Council of the EU in 2014 over Russia’s annexation of Crimea.
Following America’s lead, the EU decided to widen the net of its sanctions beyond just military participants and local officials coordinating Russia’s campaign in Crimea and Eastern Ukraine to include any “persons and entities associated with actions and policies undermining stability or security in Ukraine.”
This loose definition allowed bureaucrats drawing up the list of designated entities to justify the inclusion of more or less any individuals, companies, or organisations they saw fit, without the need to link them specifically to events on the ground.
Instead, sanctions became a blunt instrument ostensibly designed to hobble the Russian economy. First, on 12 May 2014, the EU began targeting companies which had been “confiscated” by the Russian-installed Crimean administration.
Next, in July 2014, Russian Duma deputies and members of the economic and security elites were added to the list.
Soon, the EU was targeting Russian companies which weren’t actively involved in the war, but were deemed to be sources of revenue or influence for the Russian government.
The Trump administration broke new ground in 2018 when it tried to sanction the companies of Oleg Deripaska, including the world’s second largest aluminium manufacturer Rusal.
Andrea M. Gacki, the director of the Treasury’s Office of Foreign Assets Control, wrote a letter to congressional leaders highlighting the chaos which ensued on global markets following the implementation of the sanctions, when aluminium prices surged to a seven-year high.
“The designation of Rusal, the world’s second largest aluminum producer, was felt immediately in global aluminum markets. The price of aluminum soared in the weeks following the designation, and Rusal subsidiaries in the United States, Ireland, Sweden, Jamaica, Guinea, and elsewhere faced imminent closure without limited sanctions mitigation,” Gacki said.
After receiving assurances that Deripaska’s companies would implement corporate governance changes, the Treasury Department reversed the sanctions in an oblique admission that their consequences on global markets risked damaging American geopolitical credibility.
In March 2022, former British Foreign Secretary Liz Truss summed up the thrust of the Western sanctions programme when she called on European allies to “make sure that the Russian economy is crippled” at a speech in Lithuania.
In the rush to pass new sanctions and respond to the increasing pace of Russia’s actions in Ukraine, officials began to avail themselves of the broad definition established in 2014 to designate individuals with tenuous links to the conflict.
After gaining access to documents relating to the implementation of the sanctions in 2022, the Financial Times concluded that “Many of the case files justifying the sanctions provided by the EU… appear to be hastily cobbled together from news articles, corporate websites and social media posts.”
At this point, some unexpected names began featuring on sanctions list. Having exhausted the obvious military targets, Western jurisdictions resorted to designating businesspeople and executives of private Russian companies. In the UK, an asset freeze and travel ban were implemented against banking tycoon Oleg Tinkov in spite of his outspoken anti-war position. Britain has since reversed some of the travel restrictions imposed against Tinkov, Vedomosti reports.
Executives of private companies are now facing sanctions from the West too, although many of them have no clear connection to the government and are do not appear to be in a position to influence change.
Thus, Tigran Khudaverdyan of tech giant Yandex, Alexander Shulgin of e-commerce company Ozon, and Dmitry Konov of petrochemicals manufacturer Sibur have all been forced to step down from their roles as CEO due to sanctions. Needless to say, this has neither led to increased condemnation of the Kremlin’s actions in Ukraine nor deprived Russia’s government of the tax income it collects from these companies.
The EU has now sanctioned a total of 1236 Russian individuals and 115 entities since 2014, as well as implementing a spate of import and export bans. And yet fighting continues in Eastern Ukraine. Nor have the expected holes begun to show in Russia’s economy.
Russia expects a current-account surplus of $265bn this year, second only to China’s. And whereas proponents of sanctions once triumphally forecasted a 15% drop in Russian GDP, the OECD now only anticipates a 5.5% decline.
This comedy of errors speaks to a serious problem in the heart of the EU: a fundamental lack of expertise on Russian political economy. This misunderstanding risks not only rendering EU policy towards Russia ineffective, but also precipitating disastrous consequences within Europe itself.
In an article entitled “The Sanctions Against Russia are Working”, Josep Borrell admitted that the EU’s embargo on Russian oil was of limited use given that “Yes, Russia is able to sell its oil to other markets”. He contended that the discount at which Russia will have to sell to other markets will nonetheless deprive the Kremlin of revenue.
But since Borrell penned that article, OPEC has unanimously agreed cuts on production of oil, driving up prices and mitigating the effect of Europe’s withdrawal from Russian crude. Nor does demand for Russian hydrocarbons seem to be dropping outside of Europe – two new pipelines are being built to divert Europe-bound gas to China, with an expected combined capacity of 88bln billion cubic metres (bcm) of gas per year.
In Europe, on the other hand, energy prices have risen steeply as a consequence of the demand shock – Russia was Europe’s fifth largest trading partner in 2021. In particular, Russian gas flows to Europe are down by around 80% since the beginning of 2021. As a result, production has stalled, driving inflation to its another record of 9.1% in August.
Liz Truss, who recently called on the West to cripple Russia’s economy, has become the shortest serving UK Prime Minister, forced to resign, ironically, precisely as a result of the economic crisis induced by sanctions against Russia. Similar political crises are brewing across Europe as consumers chafe under the strain of spiralling prices.
To create a workable Russia policy which prevents further erosion of its own geopolitical clout, Europe needs to go back to the drawing board. The approach of indiscriminate sanctions has failed to bring about change in Russia, but it’s not too late to stop it from unleashing waves of unrest in Europe.