The Coming European Economic Apocalypse
Written by Dr. Seshadri Kumar, 25 November, 2022
Copyright © 2022 Dr. Seshadri Kumar. All Rights Reserved.
At the start of the human tragedy that is the Ukraine war, I delved into the underlying causes of the conflict from the perspective of a historian and political scientist. That analysis, “Understanding The Great Game in Ukraine,” is available here.
Events have progressed since then, and an important fallout of the war has been economic. In this article, I look at the role and situation of Europe from the perspective of an economist.
The European Union has taken a very definite political stance on the Russia-Ukraine conflict, aligned with the United States. It has applied 8 rounds of economic sanctions against Russia, and at the time of writing, is working on a 9th package.
What has the economic impact of these sanctions been - on Russia and on Europe itself? What will happen in the months to come? That is the focus of the present article. I conclude that
The war in Ukraine that started on February 24, 2022, is going to be the most consequential change in the world since the Second World War. It is going to fundamentally change power relationships in the world. The dominance of the Western world will end and be replaced by a multipolar world.
Europe’s prosperity of the past few centuries is likely to end because of short-sighted and poorly-thought-out decisions related to the Ukraine conflict, taken by European leaders with the full support of their people. These have to do primarily with the ill-considered economic sanctions that Europe has unilaterally applied on Russia, that have started to boomerang on Europe, with the high probability of things getting much worse in the coming months.
The analysis presented here is primarily an economic one, and mainly looks at the effect on the economies of Europe of prolonged sanctions (and, in the present context, “prolonged” could even mean another six months) imposed by the West on Russia.
I present evidence that makes the case that Western sanctions on Russia have hurt Europe a lot more than they have hurt Russia in the nine months since they were imposed, and in the coming months will continue to severely degrade Europe’s economies, while only marginally affecting Russia’s. The primary reason for this is that Russia is far more self-sufficient than Europe is. The only action that will save Europe is an unconditional revocation of its self-destructive sanctions and a peace agreement in Ukraine on Russia's terms.
The only major assumptions I have made in this analysis are that, in the next two to three months,
The war in Ukraine does not end in complete defeat for Russia
Ukraine and Russia do not reach a peace agreement, and
Vladimir Putin is not ousted in a coup in Russia — and hence, the current economic and military policies of both Europe and Russia will continue for the foreseeable future.
Although Russia looks unlikely to be affected very significantly by Western sanctions, and is in a strong position on the battlefield, because of its high inherent economic and military strength (recent reported gains by Ukraine notwithstanding), I argue that in the unlikely case event that Russia were to appear likely to lose the war on the battlefield or on the economic front, China will do whatever it takes to prevent such outcomes, to secure its own future.
This essay is organized in six chapters, followed by a summary and conclusions chapter:
Chapter I details the background of the events that have happened since February 24, 2022, until today, especially the West’s economic sanctions as a response to Russia’s invasion, and highlights the fact that these sanctions, as well as the West’s military and economic aid to Ukraine, have not had the effect on Russia that the West had hoped for.
Chapter II discusses various indicators related to the Russian economy and concludes that it is in better health than many Western nations, especially in the context of the protracted economic war between Russia and Europe that has been initiated by Europe through the enforcement of Western sanctions on Russia.
Chapter III talks about Russia’s interconnectedness with the rest of the world and, especially, with Europe, in terms of trade balances, and concludes that Russia is far more important to Europe than Europe is to Russia. It also concludes that an embargo of Russian goods would not fatally harm the Russian economy.
Chapter IV talks specifically about Europe’s energy dependency on Russia, and shows that Europe’s energy crisis is not one of price but of supply — that the energy supplied by Russia cannot be replaced by any other source; that most European nations are critically dependent on irreplaceable Russian supplies of natural gas, crude and refined petroleum, and coal; that a European energy embargo on Russia will be devastating to European economies and cause the de-industrialization of Europe, while causing minimal and manageable losses to Russia.
Chapter V talks about the de-industrialization of Europe which has started to happen because of the West’s sanctions on Russia that have resulted in depriving Europe’s economies, not only of Russian gas, oil, and coal, but potentially of food, fertilizer, and several valuable minerals that Russia is a dominant supplier of, and how this de-industrialization is going to intensify in the coming months and years. It also explains how this crisis is two years in the making, and that the war in Ukraine is just the last nail in Europe’s economic coffin. It also talks about the negative consequences on Europe of the impending oil price cap that it plans to impose on Russian oil exports.
Chapter VI talks about what Europe can do in response to these challenges, by discussing the most commonly floated solutions: gas storage in Europe, LNG (Liquefied Natural Gas), and renewable energy; and shows how none of these options will be adequate to stave off the coming economic apocalypse for Europe.
Finally, a SUMMARY AND CONCLUSIONS chapter talks about the longer-term impact of the West’s sanctions on Russia, and how they will fundamentally change the power calculus in the twenty-first century.