New EU Sanctions May Backfire and Benefit China

The proposals of the European Union and the United States to implement a complete energy embargo on Russia must be reviewed in order to be more effective.

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 could reach $28 billion in March, an all-time high, according to Reuters.

That does not mean that sanctions do not work. Estimates of Russia’s GDP fall range between 11 and 15% in 2022 and inflation is close to 200%, according to JP Morgan, Quartz, and Business Insider.

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

The European Union, the United Kingdom and the United States cannot make the mistake of thinking that they can bear 100% 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 does not prevent Russia’s economic difficulties, without China’s collaboration there cannot be a successful embargo.

In 2022, Russia’s exports to China, Asian and emerging countries would exceed $170 billion, according to Goldman Sachs, significantly more than the 2021 figure for exports to the European Union of $158 billion. Russia will export almost $103 billion to China, well above the $79 billion figure for 2021, according to the investment bank.

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

China accounts for 15.4% of Russia’s total crude oil exports, with only Saudi Arabia selling more. We are talking about 1.6 million barrels per day last year that could reach three million barrels per day in 2022.

As for coal, Russia is the second largest supplier of coal to China in 2021, fifty-seven million tons last year or 17.6% of its total coal imports.

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

Russia’s exports to Asian countries that do not 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 import more and cheaper goods to then export Chinese finished products to other countries.

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

The United States can afford to ban imports from Russia because it is 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.

There is no energy embargo on Russia if China does not join. New sanctions may simply become a relative benefit for China.