Is European Union economically dependent on Russia?

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Is European Union economically dependent on Russia?

The war in Ukraine is a major crisis that will impact global geopolitics and economy in many years to come. Russian attack on Ukraine causes suffering to innocent people which should not have happened in the twenty-first century.

Economic relations are one of the main areas that are changing to a great extent. The major question is, whether and how EU is economically dependent on Russia? Or maybe Russia depends more on EU?

European Union trade with Russia

Russia is one of the major trade partners of European Union countries. However, Russia’s position is much stronger in terms of imports, as it is a third import partner of the EU. In terms of export, Russia is the fifth major partner of the EU as a whole.

The following chart presents the development of trade value between the EU and Russia. As we can see, European Union has a constant trade deficit. The value of imported goods reached its peak in 2012, and it was much lower in the last decade. This decrease may have been affected by many factors, for example, fluctuating commodity prices. Worth noting is a decrease of value of import in 2015 and 2016. It was affected by sanctions and the Russian response following the war in Donbas and the annexation of Crimea.

However, import from Russia started to increase again in 2017. The coronavirus pandemic caused a big drop in 2020. The import rebounded in 2021.

source: Eurostat

What findings can be drawn from the chart above? The countries of the European Union (although not all) did not take into account the character of the Russian government. The actions Russia performed in 2014 (and even earlier) show that the way of thinking of Russian leadership is drastically different from the Western world. For this reason, increasing imports from Russia which directly finances the war, is a mistake allowed to happen by European leaders.

Export to Russia

The trade structure between the European Union and Russia does not come as a surprise. Russia is predominantly the source of minerals fuels. The ways of overcoming this dependency would be the focus of discussions in many months to come.

If we take a look at what the EU exports to Russia, we can see that the majority of trade is covered by manufactured goods (machinery, chemicals, and other manufactured goods). Goods that Europe exports to Russia are usually technologically advanced.

source: Eurostat

Germany is the country that accounts for most of the exported goods to Russia. 22% of the entire export from the EU to Russia comes from German companies. It is reasonable due to the large industrial base of this country. The Netherlands, Poland, and Italy are also among the major exporters to Russia. We can assume that many companies from those countries are going to be negatively impacted by the ongoing crisis.

source: Eurostat

Another point of consideration is the importance of Russia in the share of export from all EU countries. The picture is relatively different here. The countries with the largest share of export to Russia are its closest neighbors — Latvia, Lithuania, Finland, Estonia, and Poland. Especially companies from the Baltic countries may be severely affected by an ongoing war, as Russia accounts for more than 10% of their total export. On the other hand, Russia accounts for only 2% of total German export. In the export world, Germany is less dependent on Russia than many smaller state.

source: Eurostat

What does it mean for the European Union? The block should support all countries affected by the diminishing trade relations with Russia. The Baltic states have a very determined policy to counter the Russian invasion. Other members of the European Union should support the smaller countries. There is also no time for increasing tensions within the EU. For example, the Polish government should try to find a compromise in the ongoing disputes with the European Commission.

The loss of the Russian market, although not devastating, would affect European citizens across all countries. It may lead to an economic slowdown and temporary problems across selected sectors or companies. However, the impact on export will not be decisive for the future of the European Union. On the contrary, it may have a more negative effect on Russia, as it may lose the source of many modern manufactured goods. It may be a crucial long-term effect for many Russian industries, stating from the arms industry.

Import from Russia

Most of the reports analyzing the economic impact of war in Ukraine describe the EU dependence on Russia in the mineral fuel area. It is visible in trade statistics. In 2021 European Union imported mineral fuels worth 99 billion EUR. This category accounts for 62% of import value from Russia.

source: Eurostat

When investigating import value from Russia by country, we can once again see Germany as a top trading partner. It is followed by the Netherlands, Poland, Italy, and France. All the trade statistics can partially explain the German government’s previous reluctance to antagonize Russia.

source: Eurostat

As in the case of export, we can investigate the share of Russia in the value of imports of individual countries. The top countries with the largest percentage of Russia in the value of imported goods are again its neighbors — Lithuania, Finland, Estonia. The high position of Bulgaria and Greece is interesting. It shows the dependency of those countries on Russian fossil fuels, especially natural gas.

The chart below looks different when we take into consideration fossil fuels. For example, Russia accounts for around 60% of the value of Slovakia’s imports in this category. Countries that rely heavily on Russia to import fossil fuels include Poland, Hungary, and Romania.

source: Eurostat

The question is how the indicated numbers will translate into political decisions. It seems that in the long run, the European Union countries will strive to become completely independent from Russia. Lithuania is a country that is an example of this type of action. The Lithuanians have abandoned gas imports from Russia. Other countries announced that they intend to do so within a few years.

It may not be feasible to completely cut off Russian gas imports in the short term. However, we have to remember that the revenue from this trade directly finances Russia’s war. For this reason, the European Union should take as many measures as possible to at least compensate the Ukrainians by supporting them in every potential field in the fight against the invader

The website of the Centre for Research on Energy and Clean Air (CREA) presents the scale of this issue. It shows that since the beginning of the Russian invasion of Ukraine, European Union has paid 59 billion euros to Russia for fossil fuels.

source: https://crea.shinyapps.io/russia_counter/, 10th of May 2022

Trade balance

Let’s take a look at one last chart. All bars marked as green show categories in which the EU exports more to Russia than imports. The red bars present the area with a trade deficit with imports larger than export. It shows that areas mainly affected by the war in Ukraine would be the import of mineral fuels. On the export side — machinery, chemicals, and manufactured goods

It leads us to the final question — is the EU economically dependent on Russia? The short answer to this would be no. However, as is usual with economic issues, it is a more complex topic. In the short term, the import of mineral resources determines the margin of freedom for Europe’s action. A complete cessation of imports from Russia would have a very negative impact on the European economy. And of course, European Union should prepare for such a scenario.

In the long term, it is reasonable to assume that EU countries will find other suppliers of fossil fuels. The most significant emphasis should be placed on the growing importance of renewable sources. Additionally, it may prove premature to abandon nuclear energy.

From the export perspective, European goods are more important for Russia than Russia as a market for European companies. We can expect problems in some sectors or companies, but it does not seem that they will be of breakthrough importance to the European economy.

In my opinion, the consequences of the Russian war will be much more harmful to the invader. Russia will lose a big chunk of its revenue from fossil fuels export. Finding a different European-scale market will not be easy. In the long term may lead to growing dependence on China. Additionally, Russia will lose access to European manufactured goods and technology, which may not be easy to replace. All of this predicts enormous economic problems for Russia in the coming years or even decades.

All in all, we can expect economic problems in Europe in the coming months and even years. It is up to European governments and citizens to mitigate their effects, which is possible. It must not be forgotten that all short-term costs are incomparable to those suffered by the Ukrainians.