Following the downing of Malaysia Airlines Flight 317, many Europeans are eager for their governments to do something—anything—to punish Vladimir Putin for fomenting instability in the Ukraine.
But the debate over economic sanctions is shining an awkward spotlight on the large and important trade relations between Russia and Europe. As European Commission data shows, the European Union is the most significant foreign investor in Russia, providing up to three-quarters of foreign direct investment. France is moving ahead with the sale of expensive ships to Russia’s military. In Sweden earlier this month, I noticed large groups of Russian tourists in Stockholm (they were the ones, alas, who were shoving people aside in the museum bathroom lines). London’s high-end real estate and other trophy properties (like Chelsea F.C.) continue to act as safety-deposit boxes for Russian money. In 2013, the European Union imported 206.5 billion euros worth of goods from Russia.
If Europe were to refuse to do business with Russia—by declining to house the country’s cash, invest in its factories, and buy its exports—it could really cause some damage while limiting its own exposure. After all, Russian consumers can’t really afford to buy much of what Europe makes. In 2013, Russia imported only 120 billion euros in goods from the EU.
But a look inside the trade numbers reveals that Europe’s ability and willingness to punish Russia economically is severely compromised. Simply put, Russia is Europe’s gas station. If you refuse to patronize the gas station, you’ll certainly inflict some pain on the owner. But then you wouldn’t be able to get to work or drive to the mall or get your kids to school.
As an economy, Russia is relatively poor and stupid. Which is to say that it subsists largely by mining, drilling, digging, and harvesting natural resources and selling them to foreigners without turning them into manufactured goods or otherwise adding value. Oil and natural gas are among the most valuable of those resources. According to the Energy Information Administration, oil and natural gas accounted for 70 percent of Russia’s export revenues in 2012.
Most of the oil and gas that Russia exports goes to wealthy countries in Western Europe where energy production is problematic. Oil reserves, largely in the North Sea, are dwindling. Europe has yet to embrace fracking to produce natural gas in large quantities. And some policies—a desire to move away from coal, Germany’s phasing out its nuclear fleet—are boosting demand for natural gas in the electricity sector. As the BBC notes, European countries account for 84 percent of Russia's oil exports, and for about three-quarters of its natural gas exports. Europe depends on Russia for about 30 percent of its natural gas.
In fact, the trade between Europe and Russia largely consists of fuels. In 2013, the EU imported 166.3 billion euros of fuels from Russia, accounting for about 80 percent of Russia’s total exports to the EU. In 2011, Netherlands—which has the most reason to be angry at Russia—imported virtually all the petroleum it used, and about one-third of that oil came from Russia. The Netherlands also runs the largest trade deficit with Russia of any EU country.
It should come as no surprise that many of Europe’s biggest corporate entities are directly involved in importing fuel from Russia, and that the rest of Europe’s biggest entities—utilities, power-hungry manufacturers, car manufacturers, transportation systems, anyone who uses electricity—are engaged in purchasing Russian fuel. After German Chancellor Gerhard Schroder lost the 2005 election to Angela Merkel, he joined energy company Nord Stream as chairman of the shareholders committee. Nord Stream, which is owned by Russian state-controlled energy giant Gazprom and a group of European companies, builds and operates pipelines that funnel energy from Russia to Western Europe. In April, Schroeder bought a vacation home in Crimea. All the big European oil companies do business in Russia.
In some instances, Western European governments are implicated in the Russian energy trade. The New York Times reported on Tuesday on the difficulties of OMV, “Austria’s largest industrial corporation, which has a long, tangled history with Gazprom.” (The Austrian government owns about one-third of OMV.) “At present, about 60 percent of Austria’s gas supplies come from Russia, and OMV’s pipeline network serves as an important transit hub for about a third of the Russian gas sold to Europe.” Is it any wonder why Austria hasn’t been leading a charge for aggressive sanctions?
If the EU were suddenly to shut down all the gas pipelines and order Russian oil tankers to turn around, it would certainly inflict some short-term damage on Russia. But there are plenty of other customers out there for Russia’s oil, which is pretty fungible. As for natural gas, the huge new supply deal Putin inked with China means that a large customer will be emerging in Russia’s east. And while European countries could make a point of purchasing oil from non-Russian sources, they don’t have a ready replacement for Russia’s natural gas.
Taking serious steps to reduce purchases of Russian energy would require European leaders to show both moral courage and an overt willingness to inflict financial pain on large and well-connected companies. But both of these things are in short supply—just like natural gas and oil.