The ongoing conflict in Ukraine and the subsequent sanctions imposed by the EU and its partners have led to a dramatic shift in Russia’s trade relations with the EU and the rest of the world. Prior to the war, Russia was an essential trade partner for the euro area, supplying around a quarter of EU crude oil imports, close to 40% of EU natural gas imports, and nearly half of EU coal imports. The sanctions and voluntary boycotts have caused a substantial drop in trade between the euro area and Russia, now at roughly half of pre-war levels.
Repercussions on Imports and Exports
Following the sanctions, Russia has restructured its supply chains, with countries that are not imposing sanctions increasing their exports to Russia. As a result, the value of Russia’s imports has risen close to pre-war levels, with China alone providing almost half of Russia’s goods imports. However, it remains unclear whether the new imports are of the same quality as those that were lost, potentially impacting Russia’s productivity growth and long-term growth prospects.
In terms of exports, Russia still heavily relies on energy exports. Despite EU and G7 sanctions, the volume of Russian oil exports has increased, with flows redirected from Europe to China, Türkiye, India, Africa, and the Middle East. However, these larger volumes are being offered at a significant discount. Russian gas exports have been harder to redirect, and overall, Russian gas exports in 2022 were around 25% lower than in 2021.
The Role of China in Russia’s Trade Shift
As of January 2023, China alone provides almost half of Russia’s goods imports, making Russia more dependent on non-sanctioning trade partners. This shift towards China and other eastern countries for its imports has made Russia’s economy more fragile overall. The heavy reliance on China also raises questions about the quality of goods being imported, as Russia previously relied on high-tech goods from Western trading partners before the war. The sanctions imposed on these products mean that they are either unavailable, have been replaced by low-quality substitutes, or have become much more expensive. This setback will likely weigh on productivity growth in Russia, reducing the economy’s long-term growth prospects.
The EU’s Diversification of External Energy Dependency
The sanctions and voluntary boycotts have led to a considerable diversion of Russian trade with the euro area, making Russia more dependent on non-sanctioning trade partners and more fragile overall. The EU has also had to divert trade away from Russia, diversifying its external energy dependency. Europe has replaced gas from Russia with pipeline gas from Norway, Algeria, and Azerbaijan, while also substantially increasing its imports of liquified natural gas (LNG), which is mainly transported by sea. Russia’s market power in European energy markets has consequently diminished substantially.
Conclusion
The reorientation of trade relations between Russia and the euro area highlights the significant impact of the conflict and sanctions on both Russia and the euro area economies. The sanctions and voluntary boycotts have led to a considerable diversion of Russian trade with the euro area, making Russia more dependent on non-sanctioning trade partners, making the country’s economy more fragile overall. It has also been forced to offer discounts on its commodity exports to attract new customers to replace the euro area. The nature of Russian goods trade also means that re-directing its supply chains will likely lead to a squeeze on productivity growth in the country’s economy. The EU has also had to divert trade as a result of the war, in particular commodities trade away from Russia and thus diversifying its external energy dependency.