Europe suffers bitter consequences in sanctions war due to underestimating Russia

Europe gets bitter fruit in the sanctions war

The West has said its main achievements in confronting Russia have been its rapid consolidation of unity in the war in Ukraine, its ability to deter Russia with the harshest sanctions and its provision of billions of dollars in weapons to Ukraine. While politicians insist the West will continue to do so, experts say economic problems will erode that unity.

Illustration: Financial Times

Europe is being rocked by a series of problems, from rising energy prices to gas rationing to cuts in aid to the poor and the risk of an economic downturn. Disagreements over aid to Ukraine have partly caused the collapse of Italy’s coalition government. The hard-won transatlantic unity that diplomats have built is also in danger of collapsing.

These pessimistic signs have surprised many Americans, who have long believed that the costs of the war would be minimal and whose media coverage has been optimistic about Ukraine’s prospects for victory. Most analysis has focused on Russia’s weaknesses, such as its economic crisis, military setbacks, and political isolation. But the idea that Russia will suffer a strategic defeat is increasingly unrealistic as the balance of economic and political support tilts in Moscow’s favor. While the Javelin missiles and HIMARS rocket launchers have been effective, they have not changed the course of the war in Ukraine.

The West believes that Russia - an economy smaller than Italy's - will not be able to withstand the pressure of sanctions, but Moscow is not competing to catch up with the Western economy but focusing on producing enough weapons and mobilizing forces to deal with the Ukrainian forces supported by the West.

While the West predicted sanctions would collapse Russia’s currency, the ruble is stronger than ever. Russia’s economy could shrink by 6% or more in 2022, but that’s still far less than Ukraine’s 45%. Russia’s ability to withstand negative growth of 6% is even greater than many European countries’ ability to withstand negative growth of 3%.

What Europe is facing now, from gas shortages to soaring commodity prices, is reminiscent of what the continent experienced during the Covid-19 pandemic in 2020-2021 or the financial crisis in 2008-2009. The issue here is not a measure of economic or military strength but the ability of Russia, Ukraine and the West to pay the price of war. And Moscow has shown greater flexibility and endurance than expected.

The West underestimated Russia.

Some observers believe that the West has underestimated Russia and overestimated its influence. In 2014, when Russia annexed Crimea, President Putin’s approval rating rose to more than 80% despite the harsh sanctions Russia faced in the aftermath of the move. Western observers believed that the sanctions would weaken the Russian economy, especially the oil industry, which accounts for the bulk of Russia’s budget. However, Russia quickly completed gas pipelines to China and Türkiye, built a new liquefied natural gas terminal in Serbia, and hastened the construction of major roads and railways to Crimea.

The West also underestimated Russia’s resilience. To be fair, the sanctions imposed by the West over the war in Ukraine were unprecedented. More than 1,000 people and their assets were sanctioned. Exports to Russia of everything from high-tech to luxury goods were halted, while hundreds of companies shut down operations in the country. More seriously, Russian banks were cut off from the SWIFT international payment system and Russia’s more than $600 billion in reserves were frozen.

The West thought it had strangled Russian trade, but Moscow had been prepared for it. A new export payment system and huge cash reserves helped Russia survive the wave of sanctions more easily than expected. After a period of decline, the ruble quickly recovered thanks to a clever adjustment of interest rates and capital controls.

The ruble has also benefited from rising oil prices and Moscow’s insistence that customers pay in rubles. While some customers have refused, major importers such as Germany and Italy have been quick to comply. While Europe may be tempted to use the “stick” against Russia, their dependence on Russian oil and gas means that Moscow is, in fact, the “handle”.

Now, as the weather gets hotter, demand for gas in Europe is rising, both for electricity generation and for air conditioning, and to replace the loss of hydroelectric power due to drought. Another economic blow to Europe is the Covid-19 pandemic lockdown in China, which has disrupted supply chains. Meanwhile, illegal immigration into Europe has increased by about 80% compared to last year. The EU also estimates that the cost of rebuilding Ukraine will be at least $1 trillion, and that Ukraine’s burden on Europe could be as much as 10% of the EU’s annual GDP.

The majority of European public opinion on the war in Ukraine has changed, with more and more people disapproving of the government's policy of supplying weapons to Ukraine instead of urging Kiev to negotiate a ceasefire.

So far, EU and NATO officials have largely ignored those comments and called for patience in efforts to defeat Russia.

Divided in support for Ukraine

Tensions exacerbated by the influx of migrants, rising nationalism, and disputes over burden-sharing of war could destroy European unity, weaken transatlantic ties and undermine support for Ukraine.

New international pledges to Ukraine “dried up in July,” raising concerns about the West’s continued support for Ukraine, according to a monitoring group. Ukraine received just 1.5 billion euros ($1.51 billion) between July 2 and August 3. During that time, “no major EU country made significant new pledges,” despite fierce fighting between Russian and Ukrainian troops.

The “game of patience” will continue around the world as the war in Ukraine drags on, according to András Kosztur, a senior research fellow at the Institute for 21st Century Studies. Winter will be the deciding moment for how long the EU can bear the burden of war and sanctions, he said.

The expert believes that Russia could enter the winter in a more favorable position. Meanwhile, Ukraine continues to be militarily and financially dependent on the West. Ukraine's energy system is vulnerable to Russian attacks and the country has lost control of its largest power plants and a significant portion of its energy resources.

"The EU is heavily dependent on Russian energy, which is irreplaceable, and if replaced, the EU would have to pay a significant price."

The expert also said: "The energy crisis, inflation, the risk of recession and the subsequent political crises have shaken the already shaky stance of European countries while the US seems unwilling to bear the entire cost of the war in Ukraine alone."

Europe has now realized that while focusing on Russia’s weaknesses, it also needs to assess its own vulnerabilities and threats. Providing more and more weapons to Ukraine may help it win, but it may also cause more destruction, and the burden of that destruction will fall not only on Ukraine but also on the EU./.