While the West considers sanctions against Russia over the occupation of Crimea in Ukraine, they need to realize that it will be a double-edged sword.
Today, Russian President Vladimir Putin said that EU countries considering sanctions should think first of the damage they may incur if such measures were imposed.
He is absolutely correct. The situation is summed up in this image from Reuters.
Already facing economic malaise that has lingered for 5 years, EU nations could easily find themselves without critical energy imports as Russian reciprocity deprives them of natural gas that they cannot easily replace.
Overall, just under 30% of Europe’s natural gas is imported from Russia. Soaring energy costs could push many EU nations back into economic contraction.
A mild winter in western Europe has increased storage levels at the main gas hubs to about 20% higher than they were last year.
Germany, Europe’s biggest gas consumer and Russia’s largest customer is seeing reserves at over 60% of total capacity. This stock could meet demand for up to two months.
However, spot prices are already soaring, and there certainly is no end of the Ukrainian stand-off in sight.
The only question is if Russia is willing to live without the funds derived from it’s massive natural gas exports to the region.
Russia’s natural gas exports are worth almost $100 million per day, accounting for an estimated 3% of economic output.
Russian GDP growth is predicted to be around 2% this year, so a complete ban on exports could cause it’s national economy to shrink even further after GDP growth went negative in the first month of this year.
However, Russia’s government debt to GDP ratio is a low 8.4%. For comparison, the USA’s government debt to GDP ratio is over 100% while the average ratio for EU nations is approaching 90%.
Russia could easily take the hit as long as lenders are willing to buy it’s debt. Over a short time period, officials in Moscow may be comfortable with the lost revenue.
It is unclear if their counterparts in the EU are as comfortable with the consequences they face.
