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On 23rd February - the eve of the Russian invasion of Ukraine - the Council of the European Union (EU) adopted the first package of sanctions in response to Moscow's recognition of the self-proclaimed autonomous republics of Donetsk and Lugansk. Since then, five further packages have followed, the last of which was adopted on 3rd June. From the second package onwards, sanctions affected trade in goods.
Par Cecilia Bellora, Kevin Lefebvre, Malte Thie
 Billet du 15 juin 2022


Let us review the chronology of these sanctions in order to better assess their effects.

  • On 25th February, the Council banned exports of dual-use goods (designed for civilian use but likely to be repurposed for military ends - their list is long, covering chemicals, special metal alloys, protective equipment against chemical and biological agents...), but also spare parts for aeronautics and goods for use by Russian refineries.

  • On 9th March, exports of certain maritime navigation and radio communication equipment were banned.

  • On 15th March, the list was extended with the prohibition of luxury goods exports. The fourth package was also the first to introduce bans on imports of certain goods. However, this remained a rather small step: imports of certain steel and aluminium products, already affected by safeguard measures (i.e. limitations on the quantities imported), were halted altogether.

  • It will be the fifth package, adopted on 8th April, that begins to set the tone for the ban on Russian imports, covering coal, cement, rubber products, wood, certain alcoholic beverages and fishery products.

  • The sixth package, banning 90% of oil imports from Russia by the end of 2022, was adopted on 3rd June. Thereafter, trade sanctions become massive (Figure 1): by the end of the year, 65% of EU imports from Russia will be banned, compared to only 10% after the fifth package in April 2022.

 

Figure 1: Share of EU imports from Russia affected by sanctions, the last three packages

Notes: Each package includes the previous sanctions. Thus, the last bar covers all imports banned since the fourth package. Mineral fuels and oils include restrictions on coal and oil.
Source: Authors' calculations based on CEPII, BACI database.

 


65% of imports from Russia are banned                                                        

As Matthieu Crozet and Julian Hinz point out, "trade embargo is a weapon for the powerful". Clearly, the larger the sanctioning country, the higher the costs it inflicts on the sanctioned country, which loses both a key supplier and important markets. Conversely, for the country imposing the embargo, the costs will be all the higher the larger the targeted country.

In 2021, Russia was the EU's fifth largest trading partner, accounting for almost 6% of European trade with the world. The amounts involved are considerable: €258 billion, of which €159 billion are EU imports.

Since the fifth package, trade sanctions on Russian imports cover 10% of Russian goods crossing the EU border, for a total amount of €14-17 billion.[1] When the sixth package becomes fully effective by the end of the year, this percentage will rise to 65%.

These shares are not negligible, nor are the expected negative effects. Nevertheless, the EU has two advantages over Russia: its significant trade integration and its economic weight. Indeed, while European sanctions (including the sixth package) cover 25% of total Russian exports, they represent only 5% of EU imports. The asymmetry is large. In other words, Russian trade is more dependent on European buyers than European trade is on Russian suppliers.

Yet, the aggregate figures hide strong disparities between sectors. For example, in the wood sector, the sanctions already in place cover all European imports from Russia (Figure 2); in the energy sector (mineral fuels and oils), 78% of imports from Russia will be banned by the end of the year, an increase of over 71 percentage points compared to the fifth package. [2] In contrast, the share of banned aluminium imports is ten times lower, around 8%.

 

Figure 2: Share of EU imports from Russia banned by sanctions (by sector)

Reads as follows: In the “fertilisers” sector, sanctions cover 36.3% of EU imports from Russia. The grey bar represents the additional effect of the sixth package.
Note: The sanctions also apply to silver in the “precious metals” sector. However, this product represents only 0.005% of imports in the sector. For the sake of clarity, this sector is excluded from the graph.
Source: Authors' calculations based on CEPII, BACI database.

 

The high coverage of certain sectors can weaken European production chains. European importers are most dependent on Russian products in the energy and fertiliser sectors. Over 40% of coal and fertilisers covered by sanctions, as well as around 30% of oil are imported from Russia. These goods have the particularity of entering production chains at an early stage. Thus, a disruption in their supply could result in reductions of European production in sectors using these goods as intermediates inputs, potentially inflicting higher costs than the initial sanctions. The magnitude of such a "snowball effect" lies at the core of the current debate on the potential impact of sanctions on oil and natural gas. The effect depends, on the one hand, on the ease of finding alternative suppliers of banned goods and, on the other hand, on the possibility of substituting them with similar products.
 

Figure 3: Russia's share in EU imports of products covered by sanctions (by sector)

Reads as follows: For products covered by sanctions in the “fertilisers” sector, 44.3% of EU imports come from Russia.
Note: Sanctions also cover silver in the “precious metals” sector. However, Russia accounts for only 0.01% of imports of this product. For the sake of clarity, this sector is excluded from the graph.
Source: Authors' calculations based on CEPII, BACI database.

 

The import bans will therefore force companies to adapt, either by seeking alternative sources for banned products, or by replacing them with other, comparable goods. While ensuring that production in affected sectors does not come to a complete halt, these mechanisms will generate additional costs. Some of these costs will be absorbed by company margins and some will be passed onto final consumers through higher prices. The question remains of how easily firms can find alternative suppliers. This issue can be very technical. Taking the example of fertilisers, EU sanctions cover potassium chloride, but also fertilisers that include all three key crop nutrients, namely potassium, nitrogen and phosphates. Russia supplies a large share (44%) of EU imports of these products (Figure 3). Canada is the world's largest producer and exporter of potash (used to produce fertilisers containing potassium), far ahead of Russia, but it produces almost no phosphate fertilisers and exports little nitrogen fertiliser. Thus, Canada could replace Russia mainly for the supply of potassium-based fertilisers. However, production cannot increase instantly; the market will be tight in 2022.

The same logic applies to import restrictions on mineral fuels. Almost a third of the EU's coal and oil imports come from Russia. For oil, Russia is the EU's largest supplier, followed by a large margin by Norway, Kazakhstan and the US, each having an 8% market share. Reconsidering its initial stance, the Organization of Petroleum Exporting Countries and Russia (OPEC+) announced on 2nd June that they would increase supply by about 1.5% starting next July. This increase represents only around 25% of the oil that the EU will no longer import from Russia. Hence, a game of “musical chairs” on the oil market is likely to take place: Russian production would go to Asian countries, thus freeing up some OPEC+ exports, which would be redirected to the EU.

Further, European imports may also be limited by Russian retaliation measures targeting products in which Russia has a dominant position. This is what happened with the interruption of gas supplies to some EU countries. As a result of the sixth package of EU sanctions, other countries and products could now also be targeted. But, as underlined by the French President, faced with Russia's choice to continue its war in Ukraine, it is difficult not to react "as Europeans, united and in solidarity with the Ukrainian people".

 


[1] These figures are calculated using 2019 trade data, in order to avoid any confounding effects from the Covid-19 crisis.

[2] In another blog post, we showed that trade data on gas flows are not necessarily reliable. However, the incoherence that we pointed out was particularly striking for data at the level of individual EU states, but less so when the data was aggregated at the level of the Union. After checking, the spread between energy data and the trade flows used in this blog post are small. Hence, we only rely on a single data source in the present blog post: CEPII’s BACI database.

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