As Russia’s Donbass offensive grinds to a stalemate, Europe is facing up to the costs of its solidarity with Ukraine.
A recent International Monetary Fund (IMF) analysis estimated that energy price increases in 2022 alone will take up 7% of the average European household’s income, with the poorest fifth of households in many cases seeing more than 10% of their income wiped out.
The worst may be yet to come. Inflation across the eurozone is expected to peak at 8.4% later in 2022, topping 10% across much of central and eastern Europe and reaching as much as 20% in the Baltics.
The UK is facing a particularly grim winter. Inflation is set to peak at 13% in October, heralding the start of a recession that the Bank of England expects will last through to the end of 2023. October is also expected to see the annual energy bill for an average household rise by nearly £1,400, adding to the pressure of an £800 increase earlier this year.
The pain will not be felt equally – the IMF estimates that the energy price increases alone will take up more than 15% of the income of the country’s poorest households over the course of 2022.
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Oil insurance ban shows West's dilemma
As winter approaches, politicians across the West seem to be feeling the heat. From December, the EU is set to implement a worldwide ban on the provision of insurance to ships carrying Russian oil, a move intended to undermine Russia’s ability to transport its most crucial export. The US, however, has expressed concern that by limiting the ability of Russian oil to enter non-Western markets, such bans could increase demand for non-Russian oil and push up global prices.
The UK subsequently declined to participate in a full global ban, instead promising to ban the provision of insurance only for ships transporting Russian oil to the UK. Europe’s measure has since been amended to allow for the provision of insurance to some ships carrying oil to third countries where “strictly necessary”, a move the bloc justified as necessary to “avoid any potential negative consequences for food and energy security around the world”.
The success of export sanctions now hinges on efforts to form a buyers' cartel, a global agreement to not pay above a certain level for Russian oil. Under the plan, which is being championed by the US Treasury, maritime insurers would be banned from insuring Russian oil shipments unless they had proof that the purchaser had paid less than the agreed cap. In theory, the move would depress Russia’s export revenues while simultaneously ameliorating rampant energy price inflation.
The plan has picked up momentum, with the powerful G7 nations pledging on 27 July to introduce a price cap by early December. However, the proposed enforcement agents, maritime insurers, argue that the plan is unworkable – it is simply not possible, they say, to reliably verify the price paid for a shipment.
Then there is the risk of retaliation. Analysts at JPMorgan have warned that Russia could respond to the price cap by temporarily slashing production by up to five million barrels per day without excessively harming its finances. Such a move could see global oil prices skyrocket to a “stratospheric” $380 per barrel, the bank said. Russia can’t restrict production for long without damaging its oil wells, but a short, sharp squeeze on oil markets just as Europe enters the depths of winter is no small threat.
Where Russian sanctions are proving effective
Efforts to prevent Russia’s ability to buy from, rather than sell to, the West have been rather more successful – at least according to a recent study by researchers at the Yale School of Management. Russia might be earning millions of dollars per day in energy exports, but this cash is of little use if it can’t be spent on imports.
According to the report, a strict US ban on the sale of key technological components is set to wreak havoc on Russian industry. Total imports are estimated to have fallen by upwards of 50% in the months immediately following the invasion, with knock-on effects for vital industries.
“The share of value added created abroad exceeds 50% in the pharmaceutical, auto manufacturing, textile, electrical and electronic equipment, and computer industries,” the authors write. The report suggests that Russian consumers are already paying the price, with monthly sales of automobiles down 73% in June.
The Yale report, which makes innovative use of the sparse available data on Russia’s economy, has been widely received as a definitive debunking of claims that sanctions are more painful for the West than for Russia. What it does not do, however, is directly engage with the question motivating the whole discussion: are sanctions working?
It is easy to see what “working” means for some sanctions, such as those aimed directly at degrading Russia’s military capabilities. For those aimed at general economic immiseration, however, the causal link between the sanctions’ effectiveness and Ukraine’s victory are much more opaque.
One co-author of the Yale report, Jeffrey Sonnenfeld, recently expounded his understanding of the mechanism. “Hopefully, better than [going to war with Russia] is to do what brought down Nicolae Ceaușescu in Romania, or Erich Honecker in East Germany or Wojciech Jaruzelski in Poland – to have a breakdown of civil society,” Sonnenfeld told the podcast A Little More Conversation.
“It would be much better to have a near bloodless change of leadership [in Russia]. That is what happens if you stall out civil society by these moves [sanctions].”
Despite their evident economic impact, the sanctions don’t appear to have galvanised Russia’s domestic opposition in the way Sonnenfeld hopes. Dissident movements have faced growing repression since 2012, repression which has only intensified since the start of the war.
The sanctions themselves may have also inadvertently undermined the social basis for the opposition. Oligarchs whose Western assets have been seized are now more reliant than ever on their Russian holdings, while Western-oriented urban young professionals have reportedly fled the country in droves.
Across-the-board sanctions may be hurting Russia more than Europe, but if they undermine support on the continent for more effective means of solidarity, such as arms shipments and military technology embargoes, the result will be no good for Ukraine.
Editor's note: This piece originally appeared on our sister site Investment Monitor.