Jean Pisani-Ferry: It’s time for Europe’s economic sanctions against Russia

In 2003, American conservative pundit Robert Kagan wrote that Europe “is turning away from power; it goes beyond power in an autonomous world of laws and rules”.

After Russia invaded Ukraine in late February, the European Union decided it was time to prove Kagan wrong. The EU mobilized economic might, at least, against Russia’s military aggression, and deployed an array of monetary, financial, trade and investment sanctions.

Europe’s quick and forceful response has been rightly welcomed. The shock effect of freezing a large part of Russia’s foreign exchange reserves has been dramatic. But as the war continues, will the sanctions remain effective? And if their impact weakens, as seems likely, will the EU be able to significantly strengthen them?

A worrying sign is that after the EU’s decision on March 15 to ban steel imports and luxury goods exports to Russia, there were no further announcements at the meeting. March 24 leaders.

Europe will not force Russian President Vladimir Putin to back down by depriving Russian oligarchs of the latest Ferrari and Louis Vuitton handbags.

EU leaders cannot dodge the question of possible additional sanctions. On March 7, days after the freezing of Russian reserves, 100 rubles were worth just $0.72, down from $1.30 in early February. But on March 27, the ruble had returned to $0.99.

As Robin Brooks of the Institute of International Finance has pointed out, Russia is accumulating huge current account surpluses and is therefore on the way to rebuilding both its reserves and its import capacity.

Banning the Russian central bank from accessing its reserves has cost the EU nothing. But virtually any additional measure – cutting oil and gas imports, banning a wider range of exports or telling European companies to pull out of Russia – would come at an economic cost for Europe.

This is why the EU dithers. Policymakers are discussing an energy embargo or a tax on Russian oil and a gradual reduction in gas imports. But German Chancellor Olaf Scholz remains opposed, warning that a sharp cut in Russian energy imports would plunge Germany and Europe into recession.

What would be the cost of tightening the screw on Russia? The war in Ukraine is already clouding the economic outlook. The OECD recently estimated that assuming energy and commodity prices remain high, euro area growth will be reduced by around 1.5 percentage points and inflation will rise by two percentage points. percentage. Other valuations are more benign, but only because they start from less unfavorable assumptions.

On March 23, Russian President Vladimir Putin announced that Russia would only accept payments in rubles for gas deliveries to “hostile countries”, including all EU members. Image: Mikhail Klimentyev, Sputnik, Kremlin Pool Photo via AP

These negative adjustments seem significant, but two caveats apply. Until the start of the war, growth in 2022-23 was expected to be sustained; lowering a 4% growth forecast by two percentage points is not the same as cutting a forecast by 1% by that amount.

And the OECD rightly observes that government policies – such as targeted fiscal support to the most affected low-income households – can help cushion the blow and reduce the growth gap.

The more difficult question is how much it would cost Europe to reduce and eventually eliminate its dependence on Russian energy – or, equivalently, to resist a Russian export ban. The data is frightening: in 2019, the EU imported 47% of its coal, 41% of its gas and 27% of its oil from Russia.

And while coal and oil are global commodities, which means that one supplier can be largely replaced by another, gas flows depend on the infrastructure of pipelines and liquefied natural gas terminals.

Currently, Russia can hardly export its gas anywhere other than to the West, while the EU’s greater substitution capacities place it in a position of strength in relation to its adversary. But moving away from Russian gas will not be painless. The two protagonists thus play a game of chicken.

On March 23, Putin announced that Russia would only accept payments in rubles for gas deliveries to “hostile countries”, including all EU members. This is probably first and foremost a ploy to force the EU to violate its own ban on transactions with the Russian central bank. But it is also Putin’s way of signaling that Russia is ready to stop exporting gas to Europe and do without the corresponding revenue.

Is the EU ready to call Putin’s bluff? Past experience, such as the sudden shutdown of nuclear power plants after the Fukushima disaster in 2011, suggests that the economic system can adapt quickly to disruptions.

In the case of Germany, a widely cited article by Rüdiger Bachmann and others puts the overall cost of a sudden halt in Russian energy imports at between 0.5% and 3% of GDP. The results for the EU as a whole appear to be similar, but the impact on countries like Lithuania and Bulgaria would be much greater.

Today’s uncertainty naturally makes European policymakers nervous. But an energy embargo is now within the range of possibilities for the immediate future.

Because the West has invested all its credibility in the effectiveness of economic sanctions against Russia, irresolution can quickly become a fatal weakness. The EU has little time to prepare.

The concern is that instead of drawing up contingency plans to adapt the European energy system, develop new collective energy security mechanisms and support the most affected Member States, European governments have started by rushing to conclude individual supply agreements with producers in the Middle East. The absence of a common goal was striking. It is hoped that the agreement reached on March 25 to organize joint gas purchases will trigger a change in attitude.

European leaders should make it clear to the public that they cannot defeat an adversary willing to take a 20% drop in national income if Europeans are not willing to risk a 2% drop in theirs.

But the same leaders who recently dared to lock up their fellow citizens to fight Covid-19 no longer want to tell them to drive a little slower to save fuel.

The economic conflict between Europe and Russia is entering a dangerous new phase. The risk of failure is too great to take.

  • Jean Pisani-Ferry is a senior fellow at the Brussels think tank Bruegel and a non-resident senior fellow at the Peterson Institute for International Economics. He holds the Tommaso Padoa-Schioppa Chair at the European University Institute.
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Mary I. Bruner