why Russia is taking a big (economic) risk with respect to Europe

If European dependence on Russian gas is a reality, then Russia is still largely dependent on its trade with Europe, even if Moscow has been trying to reduce it for several years.

“We don’t care.” Here is the official announcement made by the Russian ambassador to Sweden last week in response to a question about possible European sanctions against the country. For weeks now, the Europeans have been trying to cool the ardor of Vladimir Putin, who the White House says is determined to invade his Ukrainian neighbor.

And there is no shortage of threats: a “tragic miscalculation,” Prime Minister Boris Johnson warned earlier this month, “massive consequences,” in turn, threatened French Foreign Minister Jean-Yves Le Drian.

Precious Russian gas

If a direct armed conflict between Europe and Russia seems unlikely at the moment, the answer will be primarily economic. An attack by Ukraine could cost Russia “a prosperous future,” European Commission chief Ursula von der Leyen said on Saturday.

Until recent weeks, Europe was rather reluctant to go arm wrestling. In the midst of an energy crisis, Russian gas is expensive, especially for Germany. So much so that the fledgling German coalition showed the first signs of a split in the stance to take in the face of the Russian threat before Chancellor Olaf Scholz showed his fangs under pressure from his neighbors.

The delay shows that the conflict in Ukraine is also an economic issue. And even if Moscow says it “doesn’t care” about economic sanctions, its trade with the European Union remains an important part of its economy.

Interdependence

Before the pandemic, the European Union was the leading exporter in 2020 (40.6% of the total, or $136.7 billion). These are mainly oil and gas products destined for the Netherlands, Germany and the UK.

The latest Eurostat bulletin on European foreign trade shows that Russia remains one of the main partners of the EU, despite the fall in international trade. In 2021, Russia exported 158 billion euros to Europe, which is more than the UK (146 billion euros).

The reverse is also true: the European economy relies on its exports to Russia (89.3 billion euros in 2021). Not to mention the presence in Russia of European companies such as Renault.

Thus, a military conflict could deprive Russia of major commercial exchanges, and financial sanctions would be very hard on the economy.

A look at China

However, Putin’s response has been in preparation for years. If gas exports to Europe, in particular across of the future Nord Stream 2 gas pipeline are important to Moscow, the country has already made a strategic shift towards China and developing countries to no longer depend on the European Union. Exports to the EU have been falling for several years now and are mainly directed to neighboring China, but also to Brazil or India.

Similarly, Russia has successfully worked to “de-dollarize” its economy by selling its gas for other currencies to make US sanctions painless (such as a ban on dollar transactions). Thus, the dollar is no longer the first foreign currency of Russian reserves. The problem for Russia: it is overtaken by the euro…

With a low-debt economy (17.5% of GDP), Russia is now taking advantage of soaring hydrocarbon prices and has stockpiled tons of gold to afford conflict with Europe and the US.

In reality, Russia probably cannot afford the sanctions that would result from an invasion of Ukraine. The worst would be to exclude him from the global financial system or impose an embargo. I’m not sure that the Russian economy, which is already showing inflation of over 8%, is strong enough to handle it.

Thomas Le Roy BFM Business journalist

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