Despite the EU’s refusal to acknowledge the detrimental effect of sanctions against Russia on its own economy, the true cost is finally hitting home
The economic crisis in Russia has far worse consequences for the countries of the European Union (EU) and Switzerland than was expected. According to a calculation by the Austrian Institute for Economic Research (WIFO), there are more than two million jobs and 100 billion euros worth at risk.
The scientists’ study, done exclusively for the Alliance of Leading European Dailies (LENA), assumed a “worst case scenario”.
“The export failures that we had assumed last autumn at worst, are now a reality,” says Oliver Fritz, one of three authors of the study. The sanctions against Russia and the Russian response played a decisive role.
“If the basic situation goes unchanged, our most pessimistic scenario is foreseeable.”
The effect could only be mitigated if the companies export more to other countries. There were some signs of this, at least in respect of agricultural products.
European foreign ministers will decide on Monday [June 21] in Brussels about continuing sanctions against Russia. [See: EU extends Crimean trade and investment ban, Reuters, June 21, 2015, and Russia reacts to renewal of EU sanctions, Russia Insider, June 21, 2015] Already at the G-7 summit in Elmau, the heads of state had agreed to maintain the sanctions against Russia until the Minsk II agreements, set in February, are fully implemented.
Putin could see his words confirmed
In this regard, there is some suspense vis-a-vis Russian President Vladimir Putin’s appearance on June 19 at the St. Petersburg International Economic Forum. As a prelude to the summit, spectacular deals in the billions were announced between Russia and the energy conglomerate E.ON and with Siemens.
Putin will feel confirmed in his warnings that trade restrictions will have serious consequences for the economies of the EU as Russia came up with counter-sanctions in August. In Germany alone, the calculations according to WIFO amount to half a million jobs and about 27 billion euros.
The ongoing crisis could cost Germany something more than one percentage of economic performance in the coming years, if there is no change in the framework of data, the WIFO has calculated.
No other major European economy would be so severely affected. Italy would lose a little more than 200,000 jobs and 0.9 percent of economic power, France, almost 150,000 jobs and 0.5 percent.
European Commission comes to a different conclusion
The assumptions and conclusions of the WIFO study differ from those in the latest sanction confidential report from the European Commission, which circulated in diplomatic circles. The Commission concludes that the impact of trade restrictions on the European economy are “relatively small and manageable”, especially for companies selling some of their goods abroad, as well as in the agricultural sector.
The Commission at the end of May was optimistic that the existing negative effects of trade restrictions would again come down. The different assessments stem from the fact that the Commission carries out a short-term view and assumes that the negative effects are now getting milder.
The scenario of WIFO economists is, however, based on the assumption that the bad situation in the first quarter will continue through 2015. They also take into account so-called knock-on effects because of higher unemployment and lower demand.
In the WIFO scenario, there is a distinct drop in economic strength. If one uses not just the export trend in the first quarter 2015 but also last year’s far better final quarter, about 1.9 million jobs and almost 80 billion euros in added value are vulnerable to the Russian crisis, including sanctions in Europe.
Economist Fritz also points out that because of the oil price fluctuations and the decline of the ruble, it is impossible to distinguish the direct effect of trade restrictions. “We consider the Russian import activities as a whole,” says Fritz. “Here we firmly maintain that the sanctions have a significant adverse effect, if we also take into account Russia’s reaction to the EU’s measures.”
Eckhard Cordes, Chairman of the Eastern Committee of German Economy, is hardly optimistic: “The first quarter of 2015 is a good indicator for the assessment of the situation. Through then, since spring 2014 we’ve been sinking. Now perhaps we’ve hit bottom… we don’t know yet. “
Yet the situation is manageable, says Cordes, who as chairman of the wholesaler Metro, used to have close connections to Russia. “But if this development continues any longer – let’s say for another year – then the German-Russian relations will suffer serious harm.”
The Chairman of the Eastern Committee is especially concerned that competitors from China or other countries will step in and take advantage. “We are hearing it more and more: ‘The Chinese aren’t so much worse than the Germans.’ This is worrying. “
Public information deficit is unmistakable
Beginning August 2014, the Kremlin prohibited the import of many agricultural products and foodstuffs such as milk, fruit, vegetables, cheese and meat from the European Union. This has especially hurt countries such as Italy, Spain and the Netherlands.
From the scientific side, the monitoring of the sanctions is sharply criticized. “The European Union has no benchmarks or models to measure the effectiveness of sanctions,” says Borja Guijarro-Usobiaga of the London School of Economics.
This is contested in the EU Commission. One reflects on data from member states’ own figures, and public sources, and assesses them with a view to the overall context.
A deficit of public information is at least unmistakable. After researching, the LENA reporter in Brussels interrogated the Commission in strict confidence about the economic consequences in the EU countries. But not even the MEPs know this Commission report.
Even the ministries of the member states were only informed orally about reports to the Commission on the consequences of the sanctions – presumably so that the numbers would not reach the public. The big fear was not to hand to Russia important information.