The War of Sanctions: New Casualties for the European Union

The War of Sanctions: New Casualties for the European Union

The Russian Ministry of Economic Development has published some statistics that many in the West still prefer to ignore. Those reveal that the European Union, US, Canada, Norway, and Australia have lost an annual market worth $8.6 billion, due to the sanctions they introduced against Russia. In tonnage, Russian food imports from those countries decreased by 98.9% – from 4.331 million tons to 46,500. “You could say that a sales market has been lost within the Russian Federation that was equivalent in value to the reduction in such agricultural imports from those countries,” emphasized the Russian Ministry of Economic Development in a statement.

That office also offered a rough estimate of the financial toll on the countries of the EU – as much as 50 billion euros per year. That is equal to approximately 0.4% of the EU’s total gross domestic product.

That is a significant figure, considering that in 2015, according to Eurostat, total economic growth in the EU amounted to 2% of GDP, but only 1.7% in the eurozone nations. Even more revealing are the comparative figures for the last decade, which are able to include in their calculations not only the period of the financial and economic crisis, but also the EU’s “fatter” years.

According to Eurostat’s data, the economy of the entire European Union has grown by an average of 1% per year since 2004. But in the eurozone that growth was only 0.8%. The war of sanctions against Russia is eating up about half of the EU’s average annual economic growth.

However, this is averaged data from across the entire EU. An even clearer picture is obtained if this is extrapolated to individual countries, taking into account not only their direct but also their indirect losses. Thus, according to the analysts at the General Invest holding company, in 2014 alone – the first year of the sanctions – the toll suffered just by companies in Italy amounted to approximately 20-22 billion euros. This includes the losses incurred not only by companies that trade directly with Russia, but also by those that maintain an indirect presence on the Russian market through other European Union member states.

The Italian newspaper La Stampa has sounded the alarm: the sanctions war with Russia has touched off a “perfect storm” that has wrought havoc on Italy’s manufacturing sector. Italian exports to Russia effectively imploded last year, plunging 34% – from 10.7 billion euros in 2013 to 7.1 billion in 2015. La Stampa writes, “Machine-building, which accounted for 34% of all our exports to Russia, lost 648 million euros in 2015, while the apparel industry lost 539 million (a drop of 31%), motor vehicles – 399 (down 60%), footwear – 369, and furniture – 230”.

Long ago, Italian experts were among the first to warn of the dire effects of the sanctions war with Russia. In the next few months Italy could prove to be the “bomb” that will blow up the fragile financial (and hence political) stability in the European Union.

Federico Santi, an analyst with the Eurasia Group, a political-risk consultancy, claims that as we enter the second half of the year, the situation in Italy and its consequences for the rest of Europe may prove to be the biggest macro-political risk. The Italian banking system is weighed down under the massive ballast of non-performing loans and the aggressive policies of Germany and Deutsche Bank, which are using the crisis in the eurozone to strengthen their own positions. Government officials in Italy have reported 200 billion euros worth of “bad” loans (about 10% of their total), and independent experts would bump that up by another 160 billion euros (which is an unprecedented figure for the national banking system and comparable only to the numbers found in Greece).

In 2015 Italy’s third-largest bank – Monte dei Paschi di Siena – held 46.9 billion euros of overdue loans. Matteo Renzi’s cabinet has already launched into a fierce polemic against Berlin and Brussels, accusing them of the inability and unwillingness to effectively address the eurozone’s financial problems and demanding that national governments be given the right to take their own measures to combat the crisis, with an eye toward their particular socioeconomic situations, which would include recapitalizing debt.

But Nicholas Spiro, a consultant with Lauressa Advisory, believes that the stakes are too high in Italy for politicians not to adopt a plan to recapitalize Italian banks. At the same time, Brussels and Berlin are hesitant to take their own emergency measures to rescue the Italian banking system at European taxpayers’ expense, given the upcoming elections in Germany and France.

The results of the stress tests on EU banking institutions that were conducted by the European Central Bank and released in late July show that the Siamese triplets known as Italy, France, and Germany could soon bring down the entire financial system of the European Union. Just in the last few months Deutsche Bank shares have dropped 25%, those of the French bank Société Générale – 23%, and the Italian bank UniCredit – almost 30%. And the 47 billion euros of “bad” loans found on the balance sheet of Banca Monte dei Paschi di Siena account for more than 40% of the bank’s total credit portfolio.

Financial problems, coupled with the decline in manufacturing, make for a truly explosive mix, not only for Italy but throughout the European Union. However, Brussels is apparently still focused not on that, but on continuing the sanctions war against Russia.