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COMMENTARY

Cost of aggression: EU sanctions against Russia two years on






EU sanctions / COMMENTARY
Svitlana Taran

Date: 13/03/2024
Russia’s escalation at the frontline, along with the death of Alexey Navalny, should compel the West to be more active in supporting Ukraine and further increasing pressure on the aggressor, including via sanctions policy. Strengthening sanctions enforcement and preventing circumvention must remain the priority in 2024.  

 
Impact of EU sanctions, so far

Since February 2022, the EU has implemented 13 substantial sanctions packages to weaken Russia’s ability to wage war against Ukraine. A 14th package is under preparation. Many EU leaders and companies remain convinced that carrying out ‘business as usual’ with the aggressor is morally unacceptable.

The EU has imposed sanctions on more than 2100 individuals and entities, €200 billion worth of Russian state assets, and 61% of pre-war EU imports from Russia and 58% of pre-war EU exports to Russia (in 2021 terms). Over the past two years, the EU has gradually decoupled from Russia, with the most visible effect in 2023. Last year, the value of imports from Russia shrank by 69% compared to pre-war 2021 (to €51 billion), and EU exports to Russia by 57% (to €38 billion). The EU has also made crucial progress in reducing its dependencies on Russian natural gas, oil, iron, and steel.  

The war and EU/Western sanctions have been costly for the aggressor. The macroeconomic and fiscal pressure on Russia has significantly increased, with skyrocketing military expenses, a weakening rouble, and increasing inflation. Russia’s total export revenues decreased by 29% in 2023 vs 2022 and by 14% vs 2021, thus deteriorating Russia’s trade and current accounts. The rouble lost more than 30% of its value in 2023, fuelling inflation and forcing the central bank to raise the key interest rate to 16%. Furthermore, a lack of access to Western advanced technology, restricted access to long-term financing, and labour market shortages undermine the longer-term perspectives of the Russian war economy.

Still, the Russian economy has done better than expected mainly due to substantial state military spending, accumulated fiscal buffers, high energy prices, and the reorientation of trade to the Middle East and Asia (China, India, UAE, Türkiye), along with the circumvention of Western sanctions.


Loopholes and circumventions erode sanctions' impact

Despite the unprecedented number of sanctions, the EU has had a mixed track record on sanctions implementation and enforcement so far. Many EU sanctions had wind-down periods and exemptions, and targeting crucial Russian goods was delayed (the oil embargo only began to fully operate in February 2023), enabling substantial hard currency revenues for Russia. Since the invasion, the EU has paid more than €212 billion for Russian goods, mostly fossil fuels, amid a sharp increase in commodity prices in 2022. For comparison, Russia’s military spending is set to be around €109 billion in 2024.

Currently , there are still exemptions from the EU energy restrictions allowing direct imports of Russian LNG and pipeline gas, as well as pipeline crude oil imports to Hungary, Slovakia, the Czech Republic, and seaborn crude oil to Bulgaria. Additionally, imports of oil products refined from Russian crude oil in third countries are not restricted by the EU, with India, Türkiye, and the UAE having significantly increased purchases of Russian crude oil and expanded imports of refined oil products to the EU.

The degree of compliance with sanctions or circumvention affects Russia’s economic performance. During the first months after introducing of the EU oil embargo and oil price cap, discounts on Russia’s oil reached 30% and Russia’s export revenues dropped considerably. However, the effect of sanctions declined when Russia managed to leverage insufficient enforcement of the oil price cap and substantially decreased its reliance on Western maritime services by using a shadow fleet of “dangerous, practically uninsured and unaccountable old tankers”. As a result, Russia was able to sell a significant part of its oil at prices above the $60 price cap, rebound export revenues, and reduce the budget deficit in the second half of 2023.

There is also plenty of evidence proving that Russia still uses crucial Western components and high-tech items for boosting its military production. Russia accessed these items by redirecting its supply routes through third countries (although such schemes significantly increase the procurement costs for these goods). Trade data also supports this: EU exports of machinery and transport equipment to Russia fell by 82% in 2023 vs 2021, while EU supplies of these products to countries of Central Asia, the South Caucasus, and others soared (e.g., to Kazakhstan – up by 164%, Türkiye – 78%). Such trends raise concerns about sanctions violations and circumvention through these countries and require increased scrutiny, investigation, and, if necessary, penalties.


Major recent steps to tighten sanctions

Russia is permanently looking for new tactics and sanctions-evading schemes. Therefore, the most recent EU sanctions packages include measures to address circumvention and strengthen the enforcement of existing sanctions.

A priority is to enforce compliance with the oil price cap and to tackle the Russian ‘shadow fleet'. New energy measures in the EU’s 12th package require 1) closely monitoring sales of tankers to third countries including notification of all sales of tankers by EU operators; and 2) more detailed attestation requirements such as sharing information about insurance and freight costs to verify compliance with the price cap. At the same time, recent US investigations and sanctioning of shipping companies and tankers operating outside of the price cap are having tangible effects leading to halts of these tankers and disruptions of Russia’s oil flows. The same step in sanctioning these tankers is expected from the EU.

Another step entails more active blacklisting of entities from Russia and third countries accused of supplying banned European components to Russia’s military sector, such as microchips. So far, the EU sanctions against facilitators in third countries of Russia sanctions circumvention have been rather limited. The EU has listed companies from Iran, Thailand, Sri Lanka, Kazakhstan, Uzbekistan, Serbia, UAE, and others. For the first time since Russia’s invasion, the EU also included three companies from mainland China, as well as companies from India and Türkiye in its 13th package. Despite the sensitivities in some member states and concerns about the possible impact on relations with these countries, the EU stepped up, amidst evidence of their significant increases in exports of critical goods to Russia, including of EU origin. These entities will be subject to tighter export restrictions concerning dual use and tech items.

In case of continued widespread circumvention, countries can also bear responsibility for bypassing EU sanctions. The anti-circumvention tool, introduced by the 11th sanctions’ package, can be applied to ban the export of certain sanctioned goods to third countries suspected of re-directing them to Russia. This punitive measure has not yet been applied as it is considered a last resort if all other measures and diplomacy fail. Meanwhile, the EU has established dialogue and outreach with third country authorities through the EU Sanctions Envoy, David O’Sullivan, where a risk of circumvention has been identified. The aim is to convince them to establish systems for monitoring, controlling, and blocking re-exports of sanctioned EU goods to Russia.

Moreover, the 12th package proceeds with a new “no re-export to Russia” clause requiring EU exporters to contractually prohibit the re-exportation of sanctioned critical components to Russia when dealing with third-country operators (it will take effect on 20 March 2024). It also requires EU operators to include contractual penalties to create a deterrent effect on non-EU companies and to establish risk-based due diligence frameworks to ensure sanctions compliance.

The EU also regularly expands the list of export bans and controls to further limit Russia's access to military technologies and components used for the production of drones and missiles, including those found on the battlefield in Ukraine. Such reviews should be undertaken swiftly and without loopholes/derogations. 

Finally, new long-awaited sectoral measures have been recently introduced (December 2023) to undermine Russia’s export revenues further. They target Russia’s imports of diamonds (as part of an internationally coordinated G7diamond ban), liquified petroleum gas (LPG), raw materials for steel production (pig iron), and processed aluminium products.


What is the next “moving target”? 

After two years of Russia’s aggression and ongoing escalation in Ukraine, it is time to further increase the costs of continuing the war on the Kremlin. When sanctions are properly enforced, and major loopholes are closed, their effectiveness has increased. As sanctions policy is “a moving target”, the EU and other Western partners should learn to be faster and more persistent in strengthening their scrutiny, detecting loopholes, and closing them without delays, as well as bolstering investigations and penalties in case of violations.

More actions are required to maintain the credibility of the EU sanctions policy:  


While sanctions policy is only one element of the EU’s response to Russia’s unlawful aggression against Ukraine, they are vital in weakening the Kremlin’s ability to wage war.


Svitlana Taran is a Research Fellow in the Europe in the World programme at the European Policy Centre.


The support the European Policy Centre receives for its ongoing operations, or specifically for its publications, does not constitute an endorsement of their contents, which reflect the views of the authors only. Supporters and partners cannot be held responsible for any use that may be made of the information contained therein.






Photo credits:
Michal Cizek / AFP

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