New EU Sanctions May Backfire and Benefit China

CommentaryThe proposals of the European Union and the United States to implement a complete energy embargo on Russia must consider the reality: Asia is importing all that Russia can offer. China, India, and the main Asian economies will send Russian exports to a decade high, according to the Financial Times. In fact, Russia’s trade account surplus was expected to reach $28 billion in March, an all-time high, according to Reuters. That doesn’t mean that sanctions don’t work. Estimates of Russia’s GDP fall between 10 and 15 percent for 2022 and inflation is close to 20 percent, according to Business Insider. However, the European Union and the United States must note that the sanctions will likely fade away, as Asian countries are purchasing all available Russian production at significant discounts. The European Union, the United Kingdom, and the United States must not make the mistake of thinking that they can bear 100 percent of the energy embargo when China is increasing its imports from Russia. The escape route from the sanctions is China, which maintains a neutral position and, although this doesn’t prevent Russia’s economic difficulties, without China’s collaboration there can’t be a successful embargo. In 2022, Russia’s exports to China, Asian, and emerging countries are estimated to exceed $170 billion, according to Goldman Sachs, significantly more than the 2021 figure for exports to the European Union of $158 billion. Russia is expected to export some $103 billion to China, well above the $79 billion figure for 2021. The evidence is clear. Without China, there is no real energy embargo. China accounts for 15.4 percent of Russia’s total crude oil exports, with only Saudi Arabia selling more, according to Reuters. We’re talking about 1.6 million barrels per day last year that’s expected to reach 3 million barrels per day in 2022. As for coal, Russia was the second-largest supplier of coal to China in 2021, some 57 million tons last year or 17.6 percent of its total coal imports. Russia is also China’s third-largest gas supplier. The Asian giant accounted for 6.7 percent of Russian natural gas exports in 2021, 16.5 billion cubic meters (bcm), the equivalent of 5 percent of China’s demand. Russia’s exports to Asian countries that don’t participate in the sanctions are massive, from Vietnam to Korea. India is also one of the great beneficiaries of the purchase of energy commodities from Russia at significant discounts. Russia is India’s sixth-largest coal supplier, 1.8 million tons in 2021, according to Reuters and Iman Resources. In oil and gas, India weighs much less than China, importing 43,400 barrels a day of oil from Russia in 2021 and a 20-year deal with Gazprom to buy 2.5 million tons of liquefied natural gas (LNG) a year, all according to Reuters and Platt’s. The European Union may find that new sanctions generate a severe crisis in its economy but little incremental damage to Russia, as China will likely import more and cheaper goods to then export Chinese finished products to other countries. Let us not forget that the European Union can’t afford to completely cut off energy imports from Russia. Of the 150 bcm of natural gas that it imports, only part could be replaced, and in the coming months the availability of idle LNG is almost non-existent according to Platt’s. The United States can afford to ban imports from Russia because it’s independent in natural gas and almost independent, with Mexico and Canada, in oil. The United Kingdom can substitute Russian imports with the North Sea and a very diversified portfolio of suppliers that it has used on many occasions. There’s no energy embargo on Russia if China doesn’t join. New sanctions may simply become a relative benefit for China. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. Follow Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

New EU Sanctions May Backfire and Benefit China

Commentary

The proposals of the European Union and the United States to implement a complete energy embargo on Russia must consider the reality: Asia is importing all that Russia can offer.

China, India, and the main Asian economies will send Russian exports to a decade high, according to the Financial Times. In fact, Russia’s trade account surplus was expected to reach $28 billion in March, an all-time high, according to Reuters.

That doesn’t mean that sanctions don’t work. Estimates of Russia’s GDP fall between 10 and 15 percent for 2022 and inflation is close to 20 percent, according to Business Insider.

However, the European Union and the United States must note that the sanctions will likely fade away, as Asian countries are purchasing all available Russian production at significant discounts.

The European Union, the United Kingdom, and the United States must not make the mistake of thinking that they can bear 100 percent of the energy embargo when China is increasing its imports from Russia.

The escape route from the sanctions is China, which maintains a neutral position and, although this doesn’t prevent Russia’s economic difficulties, without China’s collaboration there can’t be a successful embargo.

In 2022, Russia’s exports to China, Asian, and emerging countries are estimated to exceed $170 billion, according to Goldman Sachs, significantly more than the 2021 figure for exports to the European Union of $158 billion. Russia is expected to export some $103 billion to China, well above the $79 billion figure for 2021.

The evidence is clear. Without China, there is no real energy embargo.

China accounts for 15.4 percent of Russia’s total crude oil exports, with only Saudi Arabia selling more, according to Reuters. We’re talking about 1.6 million barrels per day last year that’s expected to reach 3 million barrels per day in 2022.

As for coal, Russia was the second-largest supplier of coal to China in 2021, some 57 million tons last year or 17.6 percent of its total coal imports.

Russia is also China’s third-largest gas supplier. The Asian giant accounted for 6.7 percent of Russian natural gas exports in 2021, 16.5 billion cubic meters (bcm), the equivalent of 5 percent of China’s demand.

Russia’s exports to Asian countries that don’t participate in the sanctions are massive, from Vietnam to Korea. India is also one of the great beneficiaries of the purchase of energy commodities from Russia at significant discounts.

Russia is India’s sixth-largest coal supplier, 1.8 million tons in 2021, according to Reuters and Iman Resources. In oil and gas, India weighs much less than China, importing 43,400 barrels a day of oil from Russia in 2021 and a 20-year deal with Gazprom to buy 2.5 million tons of liquefied natural gas (LNG) a year, all according to Reuters and Platt’s.

The European Union may find that new sanctions generate a severe crisis in its economy but little incremental damage to Russia, as China will likely import more and cheaper goods to then export Chinese finished products to other countries.

Let us not forget that the European Union can’t afford to completely cut off energy imports from Russia. Of the 150 bcm of natural gas that it imports, only part could be replaced, and in the coming months the availability of idle LNG is almost non-existent according to Platt’s.

The United States can afford to ban imports from Russia because it’s independent in natural gas and almost independent, with Mexico and Canada, in oil. The United Kingdom can substitute Russian imports with the North Sea and a very diversified portfolio of suppliers that it has used on many occasions.

There’s no energy embargo on Russia if China doesn’t join. New sanctions may simply become a relative benefit for China.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”