According to Eurostat, 2022 was a year of transition for the EU in terms of fossil fuel imports. With unprecedented speed, it has gradually reduced its trade with the Russian Federation (RF) and found other exporters. Contrary to all pessimistic forecasts, it has not lacked supplies, with stable quantities of imported fossil fuels. Its supplier base is now more diverse, and relatively less concentrated. The decline in Russian deliveries (27% in 2022) is steadily increasing. In January 2023, this country accounted for only 9% of fossil fuels imported outside the EU. It was 70% offset by three suppliers: the United States (38%), Norway (19%) and the United Kingdom (13%). This process has unbalanced local and global coal, oil and gas markets, leading to speculation and price increases that have benefited all exporters.
The EU bill increased by EUR 664 billion in 2022 (of which EUR 485 billion for suppliers located outside the EU). Norway, the United States, the RF and the United Kingdom captured respectively 18%, 15%, 9% and 8% of this surplus (EUR 86.5 / 70 / 44 / 38 billion). With this reorganization almost complete, prices fell again in 2023, apart from gas prices, which remain twice as high as in 2021. US LNG, which has replaced Russian gas transported by pipeline, is not charged at the same price given the costs of transport and (de)gasification. With the decline in its RF imports, the EU is only marginally benefiting from the discount of Russian energy prices to world prices, which has been steadily widening since August 2022. The resulting additional inflation since March 2022 would amount to EUR 366 billion for the euro area. According to the Bruegel Institute , EU countries’ state aids to protect their taxpayers and businesses would amount to EUR 681 billion. France would have allocated them EUR 92.1 billion, generating a record budget deficit of EUR 158.2 billion . Its fossil fuel bill has doubled, to EUR 109.8 billion in 2022 from EUR 49 billion in 2021 , leading to a historic trade deficit of EUR 164 billion .
In addition, Germany has nationalized Russian energy infrastructure on its territory, while those in Italy have been sold. Following the sabotage of the NordStream pipelines, the EU’s energy dependence on the RF is reduced to an absolute minimum. In fact, the objective of the US Energy Security Strategy defined in 2014 and gradually implemented from 2018, namely the replacement of a major part of the EU’s Russian supplies by their own, and in particular LNG, has been achieved with EUR 100 billion in fossil fuel exports in 2022.
Incidentally, this change of suppliers, whose fossil fuels, including shale oils, transit by sea from the other side of the world, shows that for the EU, the climate emergency appears secondary to the Ukrainian issue.
In 2022, the EU’s nine packages of sanctions against the RF have had considerable effects on the country’s economy with a 6% drop in corporate added value and an additional 8% inflation. The public losses of Western companies leaving the RF would exceed USD 88 billion, including USD 19.3 billion for French firms. These effects were offset by a record trade surplus of USD 282.5 billion and additional fossil fuel-related fiscal revenues of USD 36 billion, resulting in a GDP contraction of only 2.1%. The current account surplus of USD 227 billion enabled the RF to repay USD 100 billion of external debt. The additional budgetary costs of sanctions relief and the « special military operation » can be estimated at USD 84 billion. 43% of its financing came from sanctions-induced fossil fuel revenues and 57% from a budget deficit covered by sovereign wealth fund (NWF) reserves and domestic borrowings.
In 2023, the sanctions will produce opposite effects to 2022. RF’s inflation would be limited to 4%, while, under current conditions, the decline in RF’s fossil fuel exports could generate a deficit of USD 72 billion. Thus, over the first two months, revenues fell by 25% and expenses increased by 56%. This deficit can only be financed by a decrease in the rouble exchange rate and the NWF’s liquid assets reserve balance. However, the RF will not be forced to make significant budgetary decisions before 2024 and the sanctions will therefore not materially be able to put an end to hostilities in 2023. These consequences could be mitigated by a rise in global growth led by China that would lead to an increase in the price of fossil fuels in the second half of the year.
The United States has also achieved a second objective set in 2018: the increase of the EU’s defence budgets, allowing the rearmament of European countries. Since the end of 2021, US military sales to the EU have reached USD 51 billion and their direct military aid to Ukraine USD 33 billion.
The magnitude of these amounts, compared to Ukraine’s GDP of EUR 151 billion in 2021, testifies that the stakes of the confrontation in Ukraine go far beyond the question of this country’s non-participation in NATO. This is a battle to impose a multipolar world. Since 2007 the RF has indicated that it is not ready to accept submission to the US-led transatlantic family. To date, it has already lost most of the economic, financial and energy relations it had forged with the EU for 30 years. It has understood that there would be no changes to this policy without alternating government in the United States and Germany. The RF will have the means to finance its military spending at the same rate for at least a year and therefore has no reason to back down.
The United States have achieved their strategic objectives of arms and energy sales to Europe and isolation of the RF. However, these gains have setbacks that could eventually overshadow them.
First, while desirable, there is no indication that a military victory for Ukraine on the battlefield is an achievable goal. The cost in destruction and human lives paid by the Ukrainian people is becoming more unsustainable every day. In the event that the RF continues its territorial expansion, parties that refused to discuss Ukraine’s neutrality until 2021 and then negotiations in April 2022 would find it increasingly difficult to justify their previous positions. This could lead to a dangerous escalation in the ever-increasing delivery of military equipment to Ukraine and NATO’s less and less indirect involvement.
For the first time since the end of the Second World War, the EU has authorized arms delivery to a country at war and Germany decided to go beyond its status as an industrial, commercial, and financial power, to become a military power.
Finally, the sanctions against the RF go far beyond Ukraine and lead to the creation of a composite bloc opposed to the West. The result is two parallel fossil fuel markets, one in the West and the other in the BICS. The RF has become one of the leading suppliers of oil, gas and coal to China and India, which thus benefit from energy 30 to 50% cheaper than the EU. To prevent against a unilateral political use of Western technical means of banking exchanges (SWIFT) and their currencies, China, the RF and India, which want to preserve their sovereignty, are developing independent systems. These countries will impose the use of their own currencies (the yuan, the rupee and the ruble) as alternatives to the euro and the dollar for the settlement of commercial transactions, the constitution of foreign exchange reserves and the financing of their economies.
In September 2022, our first study of the effects of European Union (EU) sanctions against the Russian Federation (RF) focused mainly on their consequences in terms of financial flows and investments. It noted that the economic impacts were already reaching incredible amounts, some of which were irreversible and structuring for relations between the two blocs. It concluded that these sanctions were ineffective in stopping the conflict in Ukraine and that they did not benefit European businesses, consumers, or taxpayers. It is now time to clarify which parties they could have benefited.
According to Eurostat, until the beginning of 2022, the RF supplied around 30% of fossil fuels imported outside the EU. The export sanctions against the RF have produced considerable effects both for coal (under embargo effective since August 2022), crude oil and petroleum products (voluntary reduction of imports and cap at USD 60/bbl from December 2022). Regarding gas, several European countries had quickly decided to stop their imports. For its part, the RF, after demanding payment of its deliveries to the EU in ruble, gradually reduced them. To date, only Russian gas pipelines transiting through Turkey and Ukraine are operating normally. To compensate for the decline in Russian energy, the EU has had to diversify its suppliers. In a world where demand exceeds supply, this sudden change in global logistics flows has generated local imbalances that have led to higher commodity prices. These upheavals are analysed in Chapter III.
Chapter IV focus on the sabotage of the Nordstream pipelines, the nationalization of Russian energy assets in Germany, and the sale of the Russian refinery in Italy.
Chapter V is devoted to the study of the EU’s fossil fuel suppliers, to identify those who have benefited from these changes and to quantify them.
The sanctions were intended to limit the financial resources of the RF, and particularly budgetary ones, for the continuation of its war effort. In 2022, wouldn’t the rise in commodity prices have had the opposite effect? How does the RF manage to finance itself without access to Western markets? Will it be able to continue like this in 2023? Chapter VI will answer these questions.
How and by trading with which countries has the RF been able to contain the effects of the trade sanctions? The concentration of financial, payment and currency systems in Western hands has reminded all countries of their potential vulnerability. Regardless of the Ukrainian issue, can the emerging powers tolerate such an potential attack on their sovereignty? This will be the subject of Chapter VII.
Finally, Chapter VIII will examine the evolution of US arms sales to the EU.
