What Russia's invasion means for the European Union

What Russia's invasion means for the European Union
Credit: ECB

The impact of Russia’s invasion of Ukraine goes well beyond Eastern Europe. This conflict is possibly the most severe and politically heated conflict on the European continent since the end of the Second World War. 

Russia’s invasion, and the European Union’s subsequent sanctions, have plunged relations between Russia and European nations to lows unseen since the height of the cold war. The prospect of nuclear war, unthinkable since the end of the eighties, has returned to the minds of European citizens.  

The invasion of Ukraine is already starting to have profound effects on the nature of EU policy making, and the ordinary lives of the citizens affected by it. 

Europe’s collective defence, energy security, migrant policy, economic security, and anti-money laundering policy have been radically altered. With no clear road to peace in Ukraine on the table, Europe is bracing for a different kind of “new normal.” 

European defence rethink

A conflict on the doorstep of the European Union has now forced European NATO members to radically rethink their continental security policy. 

The force imbalance between NATO and Russia in Europe has significantly worsened over the last decade. Since 2017, American think-tank RAND has warned that Russian forces outnumber NATO troops in the EU’s Baltic region by two to one.  

NATO has now deployed a significant number of extra troops to reinforce vulnerable eastern members of the alliance, triggering article four of the founding treaty of NATO for the first time in two years.  

Germany, once criticised by former US President Donald Trump for failing to meet the NATO military spending target of 2%, will now dramatically increase its military spending, far surpassing the targets established by NATO. 

German Chancellor Olaf Scholz announced on 27 February that it would invest €100 billion into military investment from its 2022 budget in direct response to Putin’s war. 

Previously, Germany had pursued cordial relations with Russia, lobbying for the completion of Russia’s now abortive Nord Stream 2 pipeline; the entire German defence budget amounted to a mere €47 billion.

French President Emmanuel Macron has also called on European nations to ramp up military spending. In a 14-minute address on French television on 3 March, Macron stated that the conflict had “changed the era” and that Europe needed to increase its defence capabilities.

“We cannot depend on others to defend us, whether on land, at sea, under the sea, in the air, in space or in cyberspace… Our European defence must take a new step forward,” Macron told viewers. 

Energy concerns looming

Despite attempts to diversify its energy portfolio, the EU remains hooked on Russian gas. As of 2017, 40% of its natural gas needs has been imported from Russia. Nord Stream 2, originally intended to provide up to 110 billion cubic metres of gas from Russia’s Yamburg and Bovanenkovo fields, is now unlikely to ever be turned on. 

Russia promised to relieve Europe’s energy crisis in exchange for the speedy certification of the project. With Russia now at war, and the project dead, it is unlikely that Europe will see any increases in natural gas deliveries. Far from it, Russia may seek to cut Europe off completely. 

This would send Europe into an energy crisis unlike any other. If Russia cuts off the gas supply, Europe would face up to a 40 million tonne gas shortage – roughly 10% of its annual consumption. During the winter, Russia blackmailed Europe by strangling the supply of gas and refusing to use Ukrainian gas transit infrastructure. As a result, the price of gas soared, and reserves dwindled. 

With gas prices reaching an all-time high of €199 per megawatt-hour in March, Europe’s gas stockpiles are now at their lowest in five years. The EU has been working to wean itself off Russian gas for years, diversifying its supply. However, a sudden cut-off would send brokers scrambling to ensure supply. 

Norway, Europe's second-largest gas supplier after Russia, would not be able to cover demand. Europe would likely seek to import liquified natural gas (LNG) from the United States.

Experts believe that a complete cut-off from gas is unlikely, but while the war wages, commodity prices will continue to skyrocket. 

Economic sanctions a headache for Europe

Economic sanctions have crippled the Russian economy, but they have also caused their fair share of problems at home. The decision to cut major Russian banks from the SWIFT payment system has had wide-reaching consequences for the greater EU economy. Commodities brokers are finding it increasingly difficult to trade as Russia is now unable to easily receive payments in different currencies.

Fears for the future of energy imports are driving up prices and with it, inflation. Eurozone inflation soared to a record 5.8% in February, according to data from the EU’s statistics agency Eurostat. 

Another major headache for Europe is food supply. Both Russia and Ukraine are major exporters of grain and oils. 

Together Ukraine and Russia account for 30% of global wheat exports, 20% of corn trade, and 80% of sunflower oil exports, according to German publication Deutsche Welle. Sanctions on Russian exports, and the disruption of production in Ukraine, is an additional burden to Eurozone inflation. 

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According to Politico, the European Commission is currently exploring options to shelter its economy from the side effects of Western sanctions on Russia. New measures, which could be adopted as early as next week, would divert funds towards loans and state subsidies. 

Belgian Prime Minister Alexander De Croo stated on Tuesday that "if you have a situation of sanctions and counter-sanctions, that will have an impact." The Belgian prime minister strongly urged the European Commission to "develop a package of measures to limit the economic impact."

Refugees could further complicate the picture. The United Nations estimate that up to four million refugees may enter the European Union over the course of the war. This will place enormous financial burden on national governments to accommodate them.

Belgium, already struggling to accommodate migrants and refugees from the Middle East and Africa, could quickly become overwhelmed by the influx. 

Sammy Mahdi, Secretary of State for Asylum and Migration, told RTL Info that Ukrainians would receive “automatic protection” upon their arrival in Belgium.

Russian money in the spotlight

Russian capital in Europe has become the target of international sanctions as the West seeks to crack down on Russia’s numerous oligarchs, who made ill-gotten wealth during the fall of the Soviet Union. 

For many years, critics have decried the ability of Russian oligarchs to hide great wealth inside the EU, which they often use as a playground for dirty money tied to the Russian government.

Europol once decried “huge inflows of criminal money” arriving in the EU from Russia, with major European banks such as Danske Bank and Swedbank becoming embroiled in laundering rackets in 2019. 

Russia’s aggression has reset the status-quo in anti money-laundering legislation. EU Member States are promising to get tough on Russian money, closing loopholes that allowed oligarchs to conceal wealth. 

Greece, Portugal, Malta, U.S, and Canada have scrapped their "golden visa" schemes for Russian citizens, which allowed wealthy individuals to buy citizenship. Other European nations are expected to follow suit. 

New EU sanctions have targeted key Russian oligarchs, notably Chief Executive of Rosneft Igor Sechin, Uzbek metal tycoon Alisher Usmanov, Co-founder of Alfa Group Mikhail Fridman, and Russia’s richest man Alexei Mordashov.

In response to Russia’s war against Ukraine, European sanctions have targeted Russian wealth in Europe. Sechin’s $120 million superyacht was seized by French authorities, and Usmanov’s $600 million superyacht was seized in Hamburg. 

New EU sanctions will seek to further target the wealth of Russia’s inner circle.

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