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Kanishka Ajmera
Mar 154 min read

HOW EU’s SANCTION REGIME HAS CHANGED THE POLTICAL ECONOMY OF RUSSIA-UKRAINE WAR


Introduction


The willingness of Ukraine to join NATO since 2008 triggered the 2021 Crimean attack, but one should be aware that this move was not just a matter of Russia's security but other factors come into play like Ukraine's resources (wheat, gas, and lithium), ports (Sevastopol) and heavy industries which Russia have highly benefited to have under its jurisdiction.


Russia benefits militarily from strategic advantages derived from the Black Sea Fleet station in Crimea, especially from its proximity to warm-water ports. Also, Russia's larger military goals in the area may benefit from control over eastern Ukraine.


The invasion led to geopolitical tensions between the West and Russia, and it diminished the global growth forecast due to uncertainty about the effect of the invasion on the global supply chain. (ozili, 2022, 3). 


Impact on Sanctions on Global Economy


The EU’s line of thinking was assuming that economic sanctions would be the ones to sap economic vitality of the Russian economy but highly undermined the spillover effect to their own GDPs and also towards the international trade system; the most hard-hit ones were Germany and Hungary which almost depended on Russia for all of their gas supplies. Even so, in contrast a massive inflow of demand from EU countries really sped up the gold and gas production in the US, but all European nations saw high inflation and a decline in FDI, which pushed for a global recession. 

The sanctions, an extension of 2014 sanctions, began with the EU banning Russian banks from the SWIFT global payment system and froze around 300 billion dollars’ worth of Russian monetary reserves. 


The invasion caused gas, crude oil, and food prices to soar; firstly, for energy fuels, the EU addressed a 70% drop in demand for Russian oil and gas resources, which led to an increase in price and LNG supplies from other countries like the USA, Norway and Qatar came to the forefront. The EU also planned a gradual phase-out towards Renewable energy by 2027. 


Inflation in food prices was due to disruptions in wheat supply as Russians acquired Crimea and stopped all export and import activity from Ukraine (the breadbasket of Europe), threatening global food security. Lastly, the major streak came from a massive inflow of immigrants from war-stricken territories into European countries that expanded these countries' budget allocation to sustain, plus a discharge for military and humanitarian aid in Ukraine.


Moreover, many private companies quit their production or withdrew their investments. It is also important to note that, beyond the upstream sphere of oil and gas production, other services critical for Russia are also at risk, like services and infrastructural investments. One instance in point is shipping in the Arctic, where bans on technology transfer have cast doubt on building next-generation icebreakers and ice-class LNG tankers.


Calculations Gone Wrong?


Russian consumers were impacted by the import restriction in three ways: consumption decreased, food costs increased significantly, and Russia's import of agricultural and food items decreased. However, Russia's supply of staple foods remained unaffected by the import embargo. 


Instead, by encouraging domestic agricultural production, the import prohibition ensured food security for the embargo duration. Russia maintained capital command by asking for all the incoming payments from energy trade through the Ruble and not in Dollars, which reduced its dependence on the American dollar. Furthermore, Russia froze all bonds and shares that foreign private companies or individuals owned to maintain the capital within the domestic financial system.


The IMF and World Bank originally predicted a 6% decline in Russia's GDP, which was only 2.1% less than forecast. But all of this does not prove that Russia was not affected by the sanctions, but in reality, the middle-class group is most affected by the war, as businesses' exit has caused high unemployment rates and cuts in retail spending, which the government can somewhat maintain through subsidies and policies. However, in the long run, the effect will cause a reduction in per capita income and living standards with no sight of infrastructural and technological developments. Over time, the impact of budget constraints brought on by the 2022 sanctions may intensify the public unrest sparked by the newly declared mobilization.


Sanctions will permanently impair Russia's economic and technological potential and lead to a long-lasting decline in living standards among the population while reducing the economic resources available to the elites. (Portela & kluge, 2022). 


EU's collaborative solutions and drawbacks


It is phenomenal to witness that despite a massive energy crisis, the EU could stick with its decarbonization strategy and phase out dependence on Russian oil and gas by focusing more on wind and solar energy. In addition, EU-established rules on higher carbon pricing might usher in the decarbonization of ETS sectors and venture into significant new ones within the European Union. 


As part of its 2023 reforms regarding emissions trading, Europe has committed itself to reducing carbon emissions from power plants and heavy industry by 62 percent by 2030 and reducing emissions from road transportation and buildings by 43 percent by 2030. (Kirkegaard, 2023). 


Conclusion


Examining the relationship between political motivations, strategic objectives, and economic effects might illuminate how the Russian invasion of Ukraine fits into the framework. In order to lessen the long-term effects of the war, cooperative measures for de-escalation, reconstruction, and economic stabilization are crucial. The world could see a shift towards a more multipolar world order where other players emerge to gain influence through the crisis.


Vulnerabilities in everything from supply chain fragility to energy reliance have been made clear by the conflict. It will be essential to build resilience in the face of upcoming upheavals, which calls for increased cooperation and innovation, resource diversity, and investments in renewable energy. Though diplomatic efforts to end the crisis are ongoing, the invasion's long-lasting effects are still felt in regional and international politics.




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