Why is Russia (economic) taking such a big risk against Europe

If Europeans’ dependence on Russian gas is a reality, Russia is still largely dependent on its trade with Europe, even if Moscow has been trying to reduce it for several years.

“We do not care”. So much for the official message, which the Russian ambassador to Sweden sent last week, when asked about possible European sanctions against the country. For several weeks, Europeans have been trying to cool the fervor of Vladimir Putin, who, according to the White House, is bent on invading his Ukrainian neighbor.

And there is no shortage of threats: Prime Minister Boris Johnson’s “tragic miscalculation” warned at the beginning of the month of “grave consequences” that French Foreign Minister Jean-Yves Le Drian also threatened.

precious russian gas

If, for the time being, direct armed conflict between Europe and Russia seems unlikely, the response will be above all economic. European Commission President Ursula von der Leyen said on Saturday that the Ukraine attack could cost Russia a “prosperous future”.

Until recent weeks, Europe was somewhat reluctant to go into arm wrestling. In the midst of an energy crisis, Russian gas is valuable, especially for Germany. So much so that the young German alliance showed the first signs of division over what position to take in the face of Russian threats, before Chancellor Olaf Schulz ended up showing his fangs under pressure from his neighbours.

Stalling shows that the conflict in Ukraine is also an economic issue. Even if Moscow claims it “does not care” about economic sanctions, its trade with the European Union remains an important part of its economy.

interdependence

Before the pandemic, the European Union was, in 2020, the leading outlet for exports (40.6% of the total, or $136.7 billion). These products are oil and gas products destined for the Netherlands, Germany and the United Kingdom.

The Eurosta’s latest newsletterYou On European foreign trade show that Russia remains one of the main partners of the European Union, despite the decline in international trade. For 2021, Russia has exported 158 billion euros to Europe, which is more than the United Kingdom (146 billion euros).

And the opposite is also true: the European economy depends on its exports to Russia (89.3 billion euros in 2021). Not to mention the presence of European companies in Russia such as Renault.

So a military conflict could dry up Russia’s main trade exchanges, just as financial sanctions would prove too heavy for the economy.

eyes on china

However, Putin’s response has been preparing for years. If the export of gas to Europe in particular Across The future Nord Stream 2 gas pipeline is important for Moscow, the country has already made strategic shifts towards China and emerging countries so as not to depend on the European Union. Exports to the European Union have been declining for several years and are mainly directed towards the Chinese neighbor as well as Brazil or India.

Similarly, Russia has successfully “removed the dollar” from its economy, selling its gas for other currencies to make US sanctions painless (such as banning dollar transactions). Thus, the dollar is no longer the number one foreign currency for Russian reserves. Trouble for Russia: The Euro Has Overtaken It…

With a low-debt economy (17.5% of GDP), Russia is currently benefiting from a sharp rise in hydrocarbon prices and has accumulated tons of gold to withstand conflict with Europe and the United States.

Indeed, Russia probably cannot afford the sanctions that would result from the invasion of Ukraine. The most terrible thing is their exclusion from the global financial system or the imposition of a ban on them. I’m not sure that the Russian economy, which is already showing inflation over 8%, has the kidneys strong enough to contend with it.