EU-Russia Sanctions

The weak links in the EU in perspective energy sanctions

Since the beginning of the Ukrainian stand-off, a series of sanctions came into effect by the EU 28 member states against Russia and private companies in a number of sectors. A noticeable absence is the ones supplying in oil and gas businesses, due to the boomerang effects that they will have in the European and global economy.

Nevertheless, it is of importance to note that in the scenario where further sanctions would be enacted in that field, certain EU countries will bear the consequences more than others, in terms of energy exposure to Russian commodities and the economy as a whole. As prime examples that could be noted, are Austria and Greece while even larger states such as Italy and Germany will certainly be strongly negatively affected.

Greece, has become since 2011 and the Iranian ongoing oil embargo a major importer of Russian hydrocarbons, since it is supplied with crude oil in favorite open credit terms. The major Greek oil refineries of Motor Oil and ELPE, due to the deteriorating domestic market which has witnessed a 45% drop since 2009, rely on Russian corporations for their supply, by ordering oil and paying it 3-6 months later, as was the case with Iranian oil as well. Moreover the refined products are a major source of export revenue for the Greek industry and a vital element of the state budget. Thus nowadays around 73% of crude oil imported comes from Russia, a figure of approximately 270,000 barrels per day. The country has an insignificant domestic production of no more than 2,000 barrels, thus its whole oil sector is inexorably related to the Russian one. As long as the Libyan crude, plus the Iranian one (two past traditional suppliers of Greece) are off the market, a potential sanction against Russian oil, could have disastrous results for the Greek oil sector that covers more than 10% of the state budget revenues each year.

In natural gas, Greece through its DEPA Company imported 2.8 bcm in 2013 from Gazprom, out of a 3.7 bcm total consumption in the country, with the remaining amounts covered by Azerbaijan transit quantities through Turkey and LNG shipments by various producers. In the case of a cut off of Russian deliveries there is no other capacity to cover the missing amounts, due to lack of suppliers and lack of infrastructure in LNG to absorb more costly imports by other markets. That would have as a result a severe gas and energy power crisis in the country. It scheduled that the Trans-Adriatic Pipeline to be completed by 2020, would be able to cover such an event, but for the moment no alternative exists.

By taking into account other sectors such as tourism where Russian tourists cover 12% of the revenues of that industry in Greece and the fact that Russia is the main market with percentage up to 80% for certain Greek products such as furs, fruits and frozen fish that are vital for local countryside communities, then the assumption that could be made, is that Athens would be in a great systemic risk towards bankruptcy in case of energy sanctions escalation, a fear shared by policy makers in the country that are struggling to keep the local economy afloat since 2009.

Austria is another case, due to its use as a hub for Russian businesses in Europe and its financial exposure in East Europe and Eurasian countries.

There are more than 1,200 Austrian entities doing regular businesses with the Russian market, and 550 are based in the country, mostly in Moscow and Saint Petersburg who have already suffered an around minus 20% in revenues this year. Moreover, Russian corporations such as Sberbank have big presence in Vienna, such as the Volksbank International bank with around 20,000 employees and 300 branches in 10 European countries. Further the Russian VTB bank is using Vienna as the headquarters for its EU transactions and also Gazprom and Lukoil have a significant global outfit there. A number of multimillion corporate accounts are also permanently kept in Austria by many Russian companies.

Continuing, Austrian banks such as Bank Austria, Raiffeisen Bank have exposure in monetary terms of more than 25 billion Euros in the Russian market which is equivalent to 7% of Austria's GDP. Austria has also even larger with the countries bordering Russia- and potentially affected as well- primarily Ukraine and the Balkan countries, as well as Czech and Slovakia, whilst the Vienna stock market is consequently closely attached to all the aforementioned territories.

Austrian companies exported around 3.5 billion Euros to Russia in 2013 and imported a similar amount, whilst around 1.2 billion Euros was the tourism revenue by Russian in the country. The foreign direct investments by Austrians in Russian Federation are 8 billion Euros. The Gazprom imports in the country were 5.5 bcm in 2013 and covered around 55% of the local markets. In case of a severe sanction prohibiting the flow from Russia, Austria will have to turn to the larger market of Germany to import, but due to the hypothetical strained situation in the whole of Europe, prices will increase sharply in the domestic market, damaging industry and citizen's disposable income alike, which if taken into account with all the above it will lead the country in a spiral of economic consequences that were witnessed by Greece during 2009-2010.

For the whole of the EU a potential embargo on gas imports for Russia will have disastrous results by taking into account that for the foreseeable future, and certainly for winter period 2014-2015 the maximum amounts that can be imported in LNG via third markets are not more than 10% of the Russian supplies (and of a much higher price tag if en mass) and that the overall gas depots cannot hold more than 25% of yearly consumption, then a significant gap would be present that will lead to power cuts, great loss of competitiveness of European industry, major negative effect on the service sector and eventually will push the EU budgets to the wall due to increased public and private debt that will incur. In that sense the EU will be dealt with a real blow that could take years to be recovered whilst major competitors such as Chinese and US industries will most certainly replace European competitors across the world, leading to higher unemployment in the Union as well.

As an overall assessment, it is highly unlikely that any further sanctions regarding EU-Russian relations will touch upon the gas and oil sectors to an extent of disrupting deliveries. It should be noted though, that this could be a possibility, due to the rapid political and diplomatic developments occurring and it would be a wise move by concerned policy makers to have this scenario strongly in mind as summer season closes in and the six-month long autumn to winter period begins.