On April 7th the European Union (EU) announced further sanctions against Russia due to the conflict with the Ukraine. The EU plans to restrict shipping, sanction more individuals and completely ban Russian coal imports starting in August. Europe purchases about 8 billion euros ($8 billion) of coal per year from Russia. Joseph Borrell, Europe’s top diplomat shared that the EU has paid 35 billion Euros ($38 billion) for energy since the start of the Russian/Ukraine conflict.
The general view from political analysts is that a ban on Russian coal is the path of least resistance for EU members, as most Russian coal can be replaced in a few months from alternate sources like Australia and South Africa – despite logistical problems and higher prices. The challenge for European governments in light of their changed relationship with Russia is to wean itself off of its dependence on Russian oil and gas via a total energy embargo. For example, Russian gas, oil and coal make up 4.5, 10.5 and 15 percent respectively. Europe spends about 850 million euros ($928 million) a day on Russian oil and gas – so it would appear that the EU will continue to be the main customer for Russian resources for the long term.
However, there is a contrarian view from some economic experts that are suggests that, although European nations would fall into a recession as a result of a partial or total embargo, it wouldn’t be as damaging to the economies of respective EU members as expected. For example, Germany (Europe’s richest country with a GDP of 3.8 trillion), during the COVID-19 global pandemic – which featured a general slow down of economic activity, had their GDP fall by only 4.5 percent.
The EU with its access to capital and resources, could potentially weather the storm as alternative sources of energy are found. The German government has confirmed that the desire to phase out all Russian energy imports completely within the next 2 years, but the roadmap to accomplishing this appears unclear. According to the International Energy Agency, Russia accounts for 45% of the EU’s gas imports.
Russia has affectively defaulted on its foreign debt after offering to make payments on interest in roubles (instead of dollars), according to credit rating agency S & P Global. The U.S. Treasury Department would not allow the transaction to go through – Russia no longer has access to most of its US dollar assets due to sanctions. S & P Global downgraded Russia’s credit rating to “selective default” meaning that the country has defaulted on specific obligations but not its entire debt. The credit rating agency expects the country to entirely default within 30 days.
This will raise borrowing costs for Russia, and increase its pain from inflation. The World Bank expects Russian’s GDP to decrease by 11% and the Ukraine GDP to effectively collapse, falling by 50% this year. The conflict has resulted in a 90% reduction in Ukraine’s grain exports, destroyed infrastructure and approximately 50% of Ukrainian businesses to close. In response to supply tightening, the US and its European allies have released unprecedented amounts of oil from its reserves in order fight inflation / gas and oil hikes.
