Over the last few months, several
European politicians and business leaders have called for a partial or full
lifting of the EU’s economic sanctions against Moscow. More often than not,
these voices fail to specify the conditions the Kremlin would have to fulfill
to benefit from such relaxation.
This contradicts the position
of the European Council – representing the unanimous view of the 28 EU member
state governments – which has linked the lifting of the economic sanctions to
the “complete implementation of the Minsk agreements.” The latter would involve
a full reversal of Russia’s illegal military presence in Ukraine’s Donets
Basin, or Donbas, region.
Most of the sanctions’ critics do not even mention
Moscow’s annexation of Crimea, or de facto occupation of Moldova’s Transnistria
region or Georgia’s Abkhazia and South Ossetia regions. Without a complete
implementation of the Minsk Agreements, any lifting of economic sanctions would
be an unwarranted act of appeasement.
Often, the proponents of a
softer Western stance towards Russia try to shift the debate away from
considerations of international law, European security and Western unity, and
towards calculations of commercial interests. They portray themselves as more
pragmatic and realistic than their supposedly idealistic opponents. They often
downgrade the national security concerns of Eastern European states, in favor
of the ostensibly more tangible benefits of better business relations with
Russian entities. Many of their arguments center on the Russian market’s
presumably high importance today and supposedly large potential in the future.
This vision leads to permanent complaints, from EU businesses and their
lobbyists, about allegedly high costs resulting from additional extensions of
the sanctions regime.
Yet, how much damage have the
sanctions actually caused to the European economy, as a whole? How important is
the Russian market for the EU’s foreign trade today? And how relevant would the
Russian market be in a hypothetical future, in which sanctions are indeed
lifted, in part or in full?
In the last two years,
EU-Russia economic ties have undergone a sharp downturn. According to Eurostat’s balance of payment statistics, the EU’s exports of goods to
Russia peaked in 2012 at 122.1 billion euros, and stood at just 73.1 billion
euros in 2015 – a fall of around 40 percent. EU exports of services to Russia
peaked in 2013 at 30.3 billion euros, falling to 24.4 billion euros in 2015 (a
fall of 19 percent). Investment income (inflows) from Russia into the EU went
from 26.7 to 19.1 billion euros between 2013 and 2015 (a fall of 28 percent).
At first glance, these figures
could suggest grave effects of the Western sanctions and of Russia’s so-called
counter-sanctions on the EU economy. But this is not the case. First, the EU
economy has come out rather well. While some sectors and businesses have
suffered more than others, the EU economy as a whole has shrugged off these
developments as other markets have, to varying degrees, filled the gaps. Overall,
in spite of the Russian economic downturn, the EU’s total goods exports rose
from 1,692 to 1,785 billion euros between 2013 and 2015. Over the same period,
services exports increased from 700 to 811 billion euros, and investment income
from 541 to 580 billion euros.
Second, the sanctions were not
the leading cause for the fall in trade with, and the fall in income flows
from, the Russian Federation. Most of the decline was driven by Russia’s
recession and by the depreciation of its currency, both of which occurred
primarily due to the steep fall in oil prices that unfolded from late 2014.
Structurally, Russia’s economic problems have far more to do with the country’s
high dependence on revenues from raw materials exports (chiefly crude oil, oil
products, and natural gas) as well as a lack of competitiveness in other areas
of economic activity. The latter situation is exacerbated by institutional
weaknesses, unpredictable state interventions in the economy, high levels of
corruption, and a worrying decline in Russia’s working age population. Western
sanctions, and Russia’s partly self-defeating ban on Western food imports, have
played a lesser role.
The most cited estimate of the
impact of sanctions on the Russian economy comes from the IMF, in its August 2015 Russia country report. It suggests a fall in GDP of
1 to 1.5 percentage points for the first year of the sanctions. These figures
should be put in the larger context of Russia’s 2015 recession, in which real
GDP shrank by 3.7 percent. Russia’s current equilibrium growth rate, assuming a
stable oil price, appears to be around 1.5 percent. The total size of Russia’s
2015 downturn, as compared to that equilibrium, was therefore somewhere around
5 percent. Thus, the impact of sanctions may have amounted to between a quarter
and a third of the total downturn.
As mentioned, losses to the EU
have been well contained as the Union’s total exports and investment incomes
have gone up, not down. The Russian market’s current importance for the EU is
thus low. Official balance of payment statistics reveal a picture at odds with
the rhetoric of Kremlin-friendly lobbyists. In 2015, Russia’s importance for
the EU, as a percentage of the world total and excluding intra-EU flows, was
4.1 percent for goods exports, 3.0 percent for services exports, and 3.3
percent for investment income. For comparison, the United States’ share in the
EU’s revenues from foreign economic relations stood, in 2015, at 21.3 percent
for goods exports, 26.1 percent for services exports, and 28.5 percent for
investment income.
Looking to the mid-term
future, most economic forecasters assume that sanctions will be lifted at some
point. These assumptions are not political predictions, let alone political
opinions. Rather, they are part of the working assumptions that need to be
plugged into the mathematical models that economists use for their forecasts.
For example, in its latest World Economic Outlook from April 2016, the IMF assumes,
implicitly, that conditions will return to “normal” from 2018. The IMF also
assumes that the average price of oil will be US$34.75 a barrel in 2016
and US$40.99 a barrel in 2017, and will remain unchanged in real terms over the
medium term.
Using the IMF’s projections
for Russian GDP growth and for the ruble exchange rate, we construct a rough
estimate of the EU’s future income flows from Russia in 2020, as compared to
its income values from the rest of the world. For each type of flow separately
(goods exports, services exports, and investment income), our assumption is
that the ratio between the size of the flow in euros at current prices, and an
EU partner’s GDP in euros at current prices, will be the same in 2020 as it
was, on average, between 2010 and 2015. These ratios are then multiplied by the
IMF’s forecasts for Russian GDP, and for world GDP, in 2020, converted into
euros. Our approach assumes that the EU’s market penetration ratios, in Russia
as well as in the world economy as a whole, will be at similar levels in 2020
as they were over the 2010-2015 period.
On the basis of these
projections, we suspect that even if sanctions are fully lifted, trade and
investment income flows with Russia are unlikely to recover to, let alone
surpass, their peak levels of 2012-2013. For instance, we estimate that goods
exports to Russia could be below 100 billion euros at current prices in 2020,
as compared to the peak level of 122 billion euros in 2012. Immediately before
the escalation of the so-called “Ukraine crisis,” Russia’s share in the EU’s
foreign trade revenues was 7.1 percent for goods exports, 4.3 percent for
services exports, and 4.9 percent for investment income. Our projections point
to a steep fall—even if sanctions are lifted by 2018—in Russia’s relative
importance for the EU in 2020 to around 3.9 percent for goods exports, to
around 2.4 percent for services exports, and to around 2.4 percent for
investment income.
The main reason why our 2020
projections are so low is that, according to the IMF’s forecast, Russia’s GDP,
when expressed at current prices and converted into euros, could still be lower
in 2020 than it was in 2013. The IMF forecasts a positive but quite subdued
recovery in Russian GDP when expressed in rubles, in combination with a slow
and incomplete recovery in the value of the ruble. Of course, caveats, as
always, apply. Above all, the oil price could recover much more strongly than
the IMF currently assumes. As a result, the Russian economy, and its currency,
would recover more strongly. Our predictions are also speculative insofar as
they proceed from a ceteris paribus condition—that all other factors will
remain equal. Many things could, however, change in the next five years.
We nevertheless make
the following four conclusions.
First,the Russian market
was, in comparative terms, of limited importance to the EU even
at its peak in 2013, when the price of oil was above US$100 per barrel and the
ruble was strong.
Second, this already small Russian share in EU trade has been
further reduced by the combined effect of the oil price slump, Western
sanctions, and other repercussions of the Kremlin’s aggression against Ukraine,
its Syria campaign, and its clashes with Turkey, as well as various other
economically damaging actions.
Third, a partial recovery from the low levels of
2015 is possible in the medium-run, but cannot be taken for granted.
Fourth,
whether a recovery happens or not, Russia’s relative economic importance for
the European Union—its share compared to other markets—will, for many years, be
below or even far below what it was before the Ukraine crisis.
Western politicians and
business leaders should take note of these realities. Extrapolating dated
experiences into the future leads to illusory expectations. Policy
recommendations should not be based on loudly circulated misperceptions. Russia’s large geographic size and prominent role in international
diplomacy should not mislead Western decision-makers into seeing opportunities
that are not there, at least in the near future. A possible lifting of
sanctions, if discussed, should thus follow a political and security-based
logic, rather than one based on narrow commercial interests. Specific EU
businesses would almost certainly benefit from a relaxation of sanctions, but
the effect on the EU economy as a whole would be very marginal.
To be sure, post-Soviet Russia’s
considerable human and natural resources contain great promise. However,
Moscow’s current rulers were not able to bring this potential to fruition in
the recent period of favorable conditions. During the first decade of the new
century, although energy prices were high and Western countries were eager to
develop partnerships, Russia did little to modernize itself before the window
of opportunity closed in 2014. For more than ten years, high oil and gas prices
enabled the Kremlin to paper over the deep structural defects in the Russian
economy. This period of (self-)deception is now over, both for the people of
Russia and for their foreign partners. The Russian market they knew does not
exist anymore, and will not reappear in the foreseeable future.
Edward Hunter Christie is a Defense Economist at NATO Headquarters, Brussels. The views expressed in this article do not necessarily reflect those of NATO or its member nations. Andreas Umland is a Research Fellow at the Institute for Euro-Atlantic Cooperation, Kyiv, and editor of the book series “Soviet and Post-Soviet Politics and Society,” ibidem Press, Stuttgart.
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