Fractured Ties: How Sanctions Are Redefining EU-Russia Trade

The conflict between Ukraine and Russia has tested the resilience of the global economy, which has long thrived on the principles of free trade and globalization. Trade restrictions, commonly seen as a way to curb aggressive actions by violating nations, have proven to be more complex in implementation, especially against a country as interconnected with global markets as Russia. This complexity becomes evident when analyzing the trade dynamics between the European Union (EU) and Russia, particularly before and after Russia's large-scale invasion of Ukraine.

A Historical Perspective on EU-Russia Trade Relations

The EU and Russia have long been vital trading partners, owing to their geographical proximity and deep-rooted historical ties. A wide array of goods and services are exchanged between the two, ranging from commodities to high-tech equipment. While many of these goods can be easily replaced on the global market, a significant portion remains critical and irreplaceable in the short term.

Although Russia plays an important role in EU trade, it is far from being a dominant partner. For Russia, however, the EU has traditionally been much more significant in terms of trade volume. The situation is further complicated by the fact that the EU is not a singular market but rather a collection of individual economies, some of which rely on Russia much more than others.

The Impact of the Ukraine Conflict on EU-Russia Trade

Since the onset of Russia's invasion of Ukraine, trade between the EU and Russia has undergone a dramatic transformation. The EU has implemented a series of sanctions targeting both the import and export of goods, resulting in a sharp decline in trade. Between the second quarter of 2022 and the second quarter of 2024, EU exports to Russia plummeted by 59%, while imports from Russia dropped by 87%. In the second quarter of 2024 alone, exports to Russia fell by 9.5%, and imports from Russia shrank by 16% compared to the previous quarter.

The trade deficit between the EU and Russia has shrunk considerably, standing at just €0.2 billion in mid-2024—significantly lower than the peak deficit of €45.8 billion recorded in the second quarter of 2022. This significant drop reflects the success of sanctions in curtailing trade, but it also highlights the ongoing difficulty in fully severing economic ties with Russia.

Russia's Shrinking Share in EU Trade

Looking at the broader picture, Russia's share in EU trade has dropped far below pre-conflict levels. In the first quarter of 2022, Russia accounted for 3.2% of EU exports and 9.3% of EU imports. By mid-2024, these numbers had shrunk to just 1.2% and 1.3%, respectively. This decline underscores the far-reaching effects of sanctions on both sides, as well as the shifting dynamics of global trade as the EU seeks alternative trading partners.

A Closer Look at Exports and Imports

The overall trade balance between the EU and Russia has historically been closely tied to energy prices. In 2021 and 2022, soaring energy prices contributed to a significant trade deficit, peaking at €45.8 billion in the second quarter of 2022. However, by mid-2024, the combination of lower energy prices and strict import controls had reduced this deficit to just €0.2 billion.

A deeper analysis of EU imports from Russia reveals a heavy concentration in five key categories: nickel, natural gas, petroleum oil, fertilizers, and steel. These commodities accounted for more than 60% of all EU imports from Russia. Sanctions targeting natural gas, coal, and oil had a profound impact on trade, while partial restrictions on steel and fertilizers also played a role in reducing import volumes.

While sanctions effectively cut off much of the trade in these key products, other factors also contributed to the decline. Even in the absence of specific sanctions on nickel, for example, imports from Russia fell significantly. Between the second quarter of 2022 and the second quarter of 2024, Russia's share in imports of a specific product to the EU market for nickel imports dropped by 15 percentage points, while oil imports fell by 20 percentage points. In contrast, natural gas imports only declined by 5 percentage points, and steel imports fell by 4 percentage points. Interestingly, the share of fertilizers imported from Russia into the EU rose by 8 percentage points during the same period, indicating that some sectors remain resilient to trade restrictions.

Natural gas serves as a cautionary tale for the EU, which learned the hard way about the dangers of over-reliance on a single supplier. In 2022 and 2023, many EU countries experienced inflationary shocks as they scrambled to diversify their energy sources away from Russia. This painful lesson was not lost on other Russian trading partners. For example, China has been notably hesitant to greenlight the construction of a second pipeline from Russia—the "Power of Siberia 2"—as it fears becoming overly dependent on Russian gas, much like Europe did. Instead, China has been focusing on diversifying its gas imports from Central Asian countries.

The EU exports a diverse range of goods to Russia, with machinery, vehicles, pharmaceuticals, electrical equipment, and plastics being the top categories in 2021. However, between 2021 and mid-2024, exports in four of these five categories experienced significant declines. Pharmaceuticals were the notable exception, with exports peaking at €2.89 billion in the fourth quarter of 2022, before falling to €2.03 billion by mid-2024.

The decline in EU exports to Russia has been felt unevenly across EU member states. While overall exports to Russia were down by 57% in 2023 compared to 2021, some countries experienced sharper declines than others. For example, Malta's exports to Russia dropped by 98%, while Ireland saw only a 13% decrease. Interestingly, a few countries, such as Croatia, Bulgaria, Latvia and Slovenia, saw their exports to Russia increase by 9%, 10%, 14% and 32%, respectively.

Similarly, the impact of sanctions on EU imports from Russia has been uneven across the bloc. While total EU imports from Russia were 69% lower in 2023 compared to 2021, the scale of the decline varied greatly between countries. Sweden, for instance, saw its imports from Russia shrink by 98%, while Austria experienced only a 1% decline. In some cases, imports from Russia even increased—Bulgaria's imports rose by 9%, and Hungary’s by 34%.

The Breakdown of Long-standing Trade Relations

Since February 2022, trade between the EU and Russia has undergone the most dramatic transformation in decades. Long-standing trade relationships, some of which had persisted since the Cold War era, have been disrupted. In their place, a complex web of bilateral trade restrictions has emerged, with sanctions impacting not only the EU and Russia but also dozens of third countries that find themselves entangled in the fallout.

Russia's integration into the global economy over the past 30 years has enabled its economy to continue functioning despite the sanctions. However, the challenges of enforcing these restrictions have been acknowledged by the EU itself. The effectiveness of the sanctions regime against Russia has been significantly lower than that of previous measures imposed on countries like North Korea or Iran. Ironically, the market-oriented aspects of Russia's economy are what allow the country to endure sanctions, even as its leadership promotes policies that are inherently anti-market.

Diverging Approaches to Trade Restrictions

The relative ineffectiveness of sanctions can largely be attributed to the differing approaches taken by the EU and Russia. European policymakers, driven by economic rationality and pragmatism, have focused on the immediate and long-term damage to Russia’s economy, expecting this pressure to lead to a resolution of the conflict. In contrast, Russia's leadership operates within a different framework, where the preservation of the ruling elite’s power takes precedence over the economic consequences for the broader population.

As long as the Russian government has the resources to maintain its grip on power, the future costs to its economy and society are secondary. In this context, sanctions that target the elite rather than the economy as a whole are likely to be the most painful and effective. The sluggish implementation and enforcement of these sanctions have significantly blunted their effectiveness, leaving the EU and its allies with a challenging, protracted path ahead. As they strive to weaken Russia’s economic foundation, the ultimate goal remains distant: bringing an end to the war in Ukraine.