While the West threatens Russia with an economic catastrophe in the event of a war with Ukraine, Europe is preparing to take a hit on its own economy – the second largest in the world following the United States.
An armed conflict on the eastern borders will cost the European Union dearly, as it promises disruptions in the supply of raw materials, a wave of refugees, losses from the write-off of billions of loans, a surge in prices and spending at a time when three dozen European countries and almost 500 million of their inhabitants have barely recovered from the covid crisis .
Therefore, the EU countries are in no hurry to recklessly support the next “hellish sanctions” proposed by the US. At the EU summit later this week, the continent’s three key economies – Germany, France and Italy – raised the issue of compensating for possible losses for European businesses and citizens.
Sanctions will come back to haunt the West for three main reasons.
First, Russia is free to impose counter-sanctions, and it still has tools of economic pressure (they are listed below). Second, sanctions will hit Western banks and businesses that have invested in or trade with Russia. And finally, military operations are fraught with destruction: pipelines, fields, factories and mines burn well, and people flee from war.
The boomerang of sanctions will hit the United States a little, but the main blow will be in Europe, since it is closer and more economically connected with Russia and Ukraine.
For its part, Russia is more resilient to shocks and mobilization to defeat the enemy. Not only for political reasons, but also because the Kremlin has been setting up the economy to live in a besieged fortress since the annexation of Crimea in 2014.
The Russian authorities spent little, to the detriment of economic growth and incomes of citizens, but they accumulated a solid safety cushion. The National Welfare Fund is almost $200 billion, external debt is only 20% of the annual volume of the economy, and gold and foreign exchange reserves exceed $600 billion, and the share of the American currency is minimal there.
And if for the EU the loss of even a part of Russian energy imports is fraught with a serious crisis, then Russia, albeit with difficulty, but for some time, is able to replace lost income with a nest egg and partially compensate for them by selling more expensive raw materials in other markets.
And even more so, it is able to hold out for some time without purchasing anything in Europe.
The reduction in gas supplies from Russia to Europe (due to counter-sanctions or damage to gas pipelines) will turn into a crisis, but due to the seasonal nature of demand for natural gas, it will not be acute. The EU will hold out until the end of the heating season thanks to American gas, but a protracted conflict will be more difficult to survive, since it is impossible to completely replace Gazprom’s supplies in the coming years.
Things are worse with oil.
It is already trading at $100 per barrel, and if Russia, the world’s largest supplier, restricts deliveries either by choice or by force, it will be very costly to replace them.
Oil disruptions threaten to push prices for everything else, and inflation in the EU is already hitting multi-year records. Therefore, countries dependent on Russian energy imports, such as Italy, want to take the oil and gas industry out of harm’s way.
“We are discussing sanctions within the EU, and in these discussions, Italy takes a clear position: sanctions should be targeted and cannot concern energy,” Italian Prime Minister Mario Draghi said on Friday.
Following oil, jet fuel will rise in price. Carriers of passengers and cargo barely survived the pandemic, and here is a new blow. And fuel is only half the trouble, or even less.
The war will deprive airlines of their profits from flights to Ukraine and threaten them with losing their right to fly over Russia.
Russia is a big country, flying around it is long and expensive. As in the case of energy resources, the loss of the market promises her losses, but the costs of Western carriers – especially European ones – will grow even more significantly.
The only joy is that traffic has already decreased due to the pandemic. About 500 aircraft transit through Russian airspace every day, which is a third less than in 2019. It is easier for many to cover this route than to fly from Europe to Asia by the western route with a landing in Alaska.
And the problems don’t end there. Out of almost 1,000 aircraft in the fleet of Russian airlines, every second was leased in the West. Their market value is regarding $10 billion, according to Cirium analysts. Any interruptions in payments in foreign currency due to sanctions are fraught with losses for owners.
Disabling Russia from the international system of messaging between banks SWIFT bankers call “nuclear bomb” financial sanctions. The West is in no hurry to apply it, because, on the one hand, it will give Russian debtors the opportunity to postpone, or even avoid the repayment of the debt. On the other hand, it will reduce the role of the West in the global financial system.
But even without shutting down SWIFT, the West, and especially Europe, is threatened with losses in the event of sanctions once morest Russian state-owned banks or restrictions on dollar payments.
The majority of foreign banks represented in Russia are European. The largest of these are the Austrian Raiffeisen, the Italian UniCredit and the French Société Générale. The worst-case scenario (losing everything) will cost them 1.5-2.5 billion euros per brother – painful, but not critical.
In response to the sanctions, Russia may seize or expropriate the assets of Western companies.
The largest of them are once more Europeans.
Shares in Russian companies and projects are owned by the German retailer Metro, the Danish brewer Carlsberg, the British oil companies BP and Shell, and the Norwegian Equinor.
At worst, they will lose everything, at best, they will lose their profits due to the collapse of the ruble exchange rate or restrictions on the expatriation of earned money.
Food prices in Europe and around the world are already breaking decade-long records, and the war will inevitably lead to even higher food prices. For two reasons.
First, Russia is the largest grain exporter in the world. And the Black Sea is a strategically invaluable region for the food security of the planet, since not only Russia, but also Ukraine, Kazakhstan and Romania export wheat, barley, corn and sunflower through the Black Sea ports.
Secondly, Russia is the main supplier of both raw materials for the production of fertilizers and the fertilizers themselves. They are already in short supply, and the next crop in Europe is in danger of being scarce.
The wealth of Russia is not exhausted on this. The showcase would not be complete without metals and alloys.
Russia is a leading supplier of aluminium, palladium, titanium, nickel, cobalt, platinum, gold, copper and steel. And diamonds, even if they are not metal.
Palladium is indispensable for automakers, and titanium is indispensable in the aircraft industry, as is aluminum, which is already in short supply in the world, and with record electricity prices there will be even less.
Economic damage entails poverty and discontent of the population, but it can be at least temporarily repaid with loans and subsidies. It is more difficult to convince the population to accept refugees, as the experience of previous wars showed, because of which foreigners flooded into Europe.
Estimates of the potential influx of refugees from Ukraine to Europe are impressive, even if you make a generous allowance for the treatment of outsiders in Eastern Europe.
In Poland, where regarding 1.3 million Ukrainians already live, officials expect up to 1 million Ukrainian refugees. In Hungary, where elections are coming soon, Prime Minister Viktor Orban is scaring voters with an influx of “hundreds of thousands, if not a million refugees.”
Editor-in-Chief Prize-winning journalist with over 20 years of international news experience. Alexandra leads the editorial team, ensuring every story meets the highest standards of accuracy and journalistic integrity.
