More Sanctions Against Russia Would Further Harm Europe, ‘Keep Crisis from Ending’

By Yang Sheng and Chi Jingyi

Apr 05, 2022 09:24 PM

Peace talks Illustration: Liu Rui/GT

To keep the Russia-Ukraine crisis a long way from ending is a clear goal of the US and Western countries as the US and the EU are considering more sanctions against Russia after the unverified alleged "war crimes" in Bucha were exposed. Analysts said on Tuesday that sanctions will not end the crisis but would bring huge harm to both the EU and Russia, especially Germany, the biggest EU economy. 

The US will benefit the most, and this would be a big and hard test for EU leaders on how to balance the economy and handle the ongoing crisis, they said.

The EU is working on a new package of sanctions against Russia that is likely to restrict the leasing of airplanes and the import and export of products like jet fuel, steel products and luxury goods, two sources with knowledge of the discussions told CNBC on Monday. CNN reported that European officials have signaled they could sanction Russia's energy exports after images emerged of "mass killings of civilians in Bucha," near the Ukrainian capital Kiev. 

The plan to increase sanctions is dividing the West since Germany, the biggest economy of the EU, is heavily reliant on energy imports from Russia. Businesses in Germany worry that the country "could face its biggest economic crisis since 1945," while Poland blamed that Germany is "the main roadblock" to imposing tougher sanctions on Russia, Reuters reported.

Worsening situation

After Ukrainian forces recaptured the city of Bucha as a result of Russia's shift of military activities from around Kiev, images of humanitarian crisis were exposed. Ukraine claims the "mass killings" were conducted by Russian troops while Russia strongly denies such accusation and said the Ukrainian government is "manipulating the media to smear Russia." The UN has called for an independent investigation, and the EU on Monday announced that it will send a team of investigators to Ukraine to probe alleged war crimes on the ground. 

Apart from sanctions, major EU powers Germany and France said they were expelling dozens of Russian diplomats on Monday in response to Moscow's alleged "war crimes against civilians" in Ukraine.

The US is the one that is unwilling to see positive signals at the negotiation in Turkey, and now the alleged "war crimes" in Bucha have ruined the positive trend toward peace, and the hostility between Russia and Ukraine, as well as the tensions between the EU and Russia have reemerged. "This makes the situation return to the playbook that favors the US," said Wang Yiwei, director of the institute of international affairs at the Renmin University of China.  

If the EU finally decides to impose more sanctions against Russia, EU members would need to purchase more expensive energy and weapons from the US, and the business environment in the EU, or the eurozone will be worsening due to high energy prices, increasing numbers of refugees and rising inflation, even stagflation, and this serves the US interests to seriously damage both its strategic competitor Russia and the "unnamed major economic competitor" - the EU, said a Beijing-based expert on international relations who asked not to be named.

Heavy prices dividing West

The EU will reportedly propose to broaden sanctions on Russia on Tuesday, including bans on imports of Russian timber, cement, rubber, chemicals, caviar, and vodka, worth an estimated 5 billion euros ($5.49 billion) a year. The EU will also ban exports to Russia of equipment in the fields of semiconductors, high-tech machinery and LNG extraction technology, according to media reports.

Imposing an immediate ban on Russian gas, oil or even coal has been a topic of huge debate within the EU since Russia started its military operation in Ukraine in February. While some nations are supportive of banning Russian energy, other EU countries argue that they are too dependent on Russian energy and sanctions would hurt their own economies more than Russia's.

Europe imports 40 percent of its natural gas from Russia, according to Bruegel, a European think tank specializing in economics. Russian natural gas accounted for 65 percent of all of Germany's gas imports in 2020, and 67 percent of Finland's imports, according to Eurostat, the statistical office of the EU. All the Czech Republic's and Latvia's gas imports were from Russia.

Calculated by natural gas consumption, Italy is about 40 percent reliant on Russian gas. For Austria, Hungary, Slovenia, and Slovakia, the figure is roughly 60 percent, and for Poland, 80 percent, per a Bruegel report released in February.

Analysts said that of course EU has other choices of natural gas sources, but it is all about price and time.

Without Russian gas, the EU's energy supply would certainly be disrupted in the short term. Other natural gas suppliers, such as the US and Australia, can supply gas for a short time, but the price will be very expensive, Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Tuesday.

US natural gas, for example, is shipped to Europe in the form of liquefied natural gas (LNG), which needs to be compressed, transported and decompressed.

According to Lin, the EU needs to build new infrastructure to receive US LNG. Infrastructure construction will take about two years at the earliest.

Germany could face its biggest economic crisis since 1945 should imports of Russian gas and oil be stopped or disrupted in the long-term, the Frankfurter Allgemeine Zeitung reported, citing Martin Brudermueller, chief executive of BASF, one of the Germany's biggest electricity consumers.

Germany received 55 percent of its natural gas, 50 percent of its coal, and 35 percent of its oil from Russia, said Germany's Economy Minister Robert Habeck in March.

Christian Sewing, the chief executive of Deutsche Bank, said that the situation would be even worse if imports or supplies of Russian oil and natural gas were to be halted. A significant recession in Germany would then be virtually unavoidable, Reuters reported, citing Sewing.

If Russia were to cut supplies at the end of April, a short-term energy shortage would surely cause a deep recession in Germany and hit the EU economy. EU and global industrial and supply chains will suffer a huge impact as Germany is the biggest economy in the EU and a major supplier for various industries in the world, an analyst of the Chinese Academy of Social Sciences (CASS), who preferred not to be named, told the Global Times on Tuesday.

The EU and the US have imposed an unprecedented more than 6,000 sanctions on Russia. Russia's foreign reserves are frozen and it is unable to recover the value of the ruble. Therefore, selling Russian natural gas in rubles is a countermove, which works as the value of the ruble has continued to rise after it depreciated nearly half in the international market, said the analyst.

"In any case, the US must be the big winner in the Russia-EU tension. The US has been trying to sell its shale gas to the EU. It couldn't sell its gas before because the price was too high," said Lin.

But once Europe decides not to use Russian gas, the Russian pipeline is virtually dead. If Russia cuts off supplies to Europe, it will lose much of its global discourse on gas, Lin noted.

"If Russia does cut off supplies to Europe, both sides will be stuck in no-win situation. Neither the EU nor Russia wants to take the worst step, and Russia will not wait for Europe to get rid of Russian energy," said the CASS analyst.

The COVID-19 pandemic has continuously driven up inflation in Europe. And the Russia-Ukraine tensions just added insult to injury for pushing up energy prices.

"Soaring energy prices have already stoked inflation in the EU and could further lead to stagflation," said the CASS analyst.

Euro area annual inflation is expected to be 7.5 percent in March 2022, up from 5.9 percent in February. Energy is expected to have the highest annual rate of 44.7 percent in March, compared with 32.0 percent in February, according to a flash estimate from Eurostat released on Friday.