Why Russia carries a great (economic) risk to Europe

Given the reality that Europeans are dependent on Russian gas, Russia is still heavily dependent on trade with Europe, even if Moscow has tried to reduce it for several years.

“We do not have sexual intercourse.” This was the only official message the Russian ambassador sent to Sweden last week when asked about possible European sanctions against the country. For several weeks, Europeans have been trying to cool Vladimir Putin’s enthusiasm. Vladimir Putin, according to the White House, is determined to invade his Ukrainian neighbor.

And there is no shortage of threats. A “tragic miscalculation” warned Prime Minister Boris Johnson earlier this month, and a “massive result” threatened French Foreign Minister Jean-Yves Le Drian.

Precious Russian gas

If a direct armed conflict between Europe and Russia seems unlikely at the moment, the response is above all economical. European Commission President Ursula von der Leyen said the attack by Ukraine could bring a “rich future” to Russia.

Until the last few weeks, Europe has been quite reluctant to go to arm wrestling. In the midst of the energy crisis, Russian gas is especially valuable to Germany. The young German coalition even showed the first signs of division in the face of the Russian threat, before Prime Minister Olaf Scholz showed his fangs under pressure from his neighbors.

The procrastination shows that the conflict in Ukraine is also an economic problem. And even if Moscow claims to “don’t care” about sanctions, trade with the European Union remains an important part of its economy.

Interdependence

Before the pandemic, the European Union was the main export destination in 2020 (40.6% of the total, or $ 136.7 billion). These are mainly oil and gas products for the Netherlands, Germany and the United Kingdom.

The latest Eurostat breaking news on Europe’s foreign trade shows that Russia remains one of the EU’s major partners, despite declining international trade. In 2021, Russia exported € 158 billion to Europe. This is higher than the UK (€ 146 billion).

The reverse is also true. The European economy relies on exports to Russia (€ 89.3 billion in 2021). Not to mention the existence of Russian European companies like Renault.

Therefore, just as economic sanctions turn out to be very heavy for the economy, military conflicts can deplete Russia’s major commerce.

Turn to China

But Putin’s response has been prepared for years.Especially when gas is exported to Europe via The future Nord Stream 2 gas pipeline is important for Moscow. Moscow has already made a strategic shift towards China and emerging economies so that it is not dependent on the European Union. Exports to the EU have declined in recent years, mainly to Brazil and India as well as China’s neighbors.

Similarly, Russia has succeeded in “non-dollarizing” its economy and sold gas to other currencies to make US sanctions painless (such as a ban on dollar trading). Therefore, the greenback is no longer the main foreign currency for Russian reserves. Problem for Russia: It’s overtaken by the euro …

In a low-debt economy (17.5% of GDP), Russia is currently taking advantage of the sharp rise in hydrocarbon prices and is accumulating large amounts of gold to tolerate conflicts with Europe and the United States.

In reality, Russia cannot afford to pay the sanctions that could probably result from the invasion of Ukraine. The worst is to exclude it from the global financial system or impose an embargo. It’s unclear if the Russian economy, which has already shown inflation above 8%, has enough kidneys to stand up to it.

Thomas Le Roy Journalist BFM Business