European industry cohesion toward sanctions on Russia

The effectiveness of sanctions also depends on the choices of the European industrial system

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Foreign markets Foreign market analysis

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EU response to Russian invasion of Ukraine

In the face of Russia's aggression of Ukraine, the EU has reacted with multiple actions that aim on the one hand to enable Ukraine to defend itself and on the other hand to reduce the political and social consensus of the Russian government, which is guilty of this crime.
In this crisis the EU has moved with a degree of unity that has surprised not a few commentators. Important decisions have been made in a short time, such as sending arms to the Ukrainian army and multiple economic sanctions including constraints on exports to Russia by EU companies. Included in the five sanctions packages decided, and in the sixth being decided, are the following constraints:

  • Blocking exports of products that can be used in the military (dual use)
  • Blocking exports of products used in the petroleum, aviation and marine industries
  • Blocking exports of luxury products
  • Blocking exports of products that can contribute to the growth of Russian industry.

The publication of export data by product from the European Union to Russia allows an initial examination of how far these sanctions have translated into consistent choices and behavior among the industrial systems of the 27 EU countries.

Degree of cohesion of European industry

A metolodogy

EU exports to Russia fell in March 2022 compared to the corresponding month in 2021 by 53 percent. However, this fall may be the result of very different situations ranging from an extreme in which all European companies have reduced all exports to Russia by the same amount to the opposite situation in which a part of companies have zeroed out exports compared to another part of companies that have not changed their choices toward the Russian market. Clearly these two cases represent different situations and would lead to different judgments of the degree of consistency of behavior in the European industrial system.
In order to qualify the situation more precisely, we have broken down the more than 8,000 products in the combined nomenclature into three classes:

  1. products (probably) not sanctioned: this group includes products that have not been affected by sanctions. We have identified these products indirectly, considering products in which no EU country has experienced a significant1 reduction in exports to Russia as belonging to this group. Clearly, if no country has reduced exports to Russia, this fact turns out to be an indirect indication of the absence of sanctions on the product;
  2. products (probably) sanctioned: the membership of products in this group was also measured indirectly. Thus, we considered as belonging to this group those products in which all 27 countries of the European Union experienced a collapse2 in exports to Russia;
  3. Other products: includes the remaining products for which it is not possible to know the presence or absence of sanctions based on the performance of EU companies because for some countries exports to Russia have plummeted, while for other countries they experienced less intense reductions.
The following table shows for each group, their weight in the total of EU exports to Russia, calculated considering the exports of the different products recorded in March 2021 and March 2022.

Importance to different groups of EU exports to Russia
GROUP WEIGHT (%)
Non-sanctioned products 4.09
Sanctioned products 17.34
Other products 3 78.57

The results

The results obtained report some facts:

  • the first group has very little weight. This means that either EU exports to Russia of non-sanctioned products are limited, or many companies have taken note of the existing conflict between the EU and Russia and drawn business consequences from it, regardless of the sanctions;
  • the share of the second product group is not high, but it is still significant. It was not to be taken for granted, that a share close to 20 percent of companies in all 27 countries of the European Union would decide to drastically reduce their sales to the Russian market. This seems to us to confirm how in this crisis the European Union has been able to show unity not only institutionally but also on the side of the business system.

The possible triangulations

However, information on direct exports to Russia may be tainted by triangulation transactions of sales to third countries but with the purpose of serving through the country of triangulation the Russian market.
Countries with the potential to play this role are those countries that have strong trade ties with both the EU and Russia. These include: Turkey, Kazakhstan and Uzbekistan, and Serbia.
We then looked at the EU's exports to these four countries and checked whether there are any statistical signs to suspect that some of the exports not directed to the Russian market have transited through these countries. The analysis focused on products in the second group.
An index of change in exports to Russia and exports to this group of countries was calculated for the sum of these groups and for each EU country. In order to capture the elements of acceleration and deceleration, this index is calculated as the change between March 2022 and March of 2021 minus the average change in the previous two months. If this index is positive, it means that the flow under consideration has accelerated and therefore specific facts related to the month of March 2022 of export support have occurred; vice versa if this index is negative.
In the scatter here, each country is positioned based on the value of this index calculated with respect to the Russian market and with respect to the four countries considered. Countries where this index is negative for Russia and positive for the group of four countries considered, signal situations where triangulation transactions may have occurred. Among the countries whose exports to this group of countries as of March 2022 have seen the the greatest acceleration are Italy, Poland and Portugal.

This signal is, however, only an initial indication. This could be more accurate by breaking down the analysis to the individual product level.

Source: ExportPlanning Processing

Conclusions

This analysis signals a high degree of cohesion in the behavior of European industry in the context of the sanctions applied to Russia as a response to the invasion of Ukraine. From this point of view, the surprise of the unified reaction by the EU concerns not only the institutions but also the industrial system.
There is, however, the possibility that in some cases the lower exports to Russia were partially offset by triangulations to Turkey, Kazakhstan, Uzbekistan and Serbia.


[1]Insignificant reductions are defined as a reduction that did not exceed -20% between March 2022 and March 2021.
[2] We considered a reduction of more than -60% between March 2022 and March 2021 as a collapse.