Sanctions against Russia have changed what Europe imports, but it’s still worth billions to Putin
Did you know there’s a critical product – one without which we’d all be dead – which Europe is actually importing more of from Russia now than before the invasion of Ukraine?
It might feel a bit pointless, given how much chat there is right now about the end of the Ukraine war, to spend a moment talking about economic sanctions and how much of a difference they actually made to the course of the war.
After all, financial markets are already beginning to price in the possibility of a peace deal between Russia and Ukraine. Wholesale gas prices – the ones which change every day in financial markets as opposed to the ones you pay at home – have fallen quite sharply in the past couple of weeks. European month-ahead gas prices are down 22% in the past fortnight alone. And – a rare piece of good news – if that persists it should eventually feed into utility bills, which are due to rise in April, mostly because they reflect where prices used to be, as opposed to where they are now.
But it’s nonetheless worth pondering sanctions, if for no other reason than they have almost certainly influenced the course of the war. When it broke out, we were told that economic sanctions would undermine Russia‘s economy, making it far harder for Vladimir Putin to wage war. We were told that Russia would suffer on at least four fronts – it would no longer be able to buy European goods, it would no longer be able to sell its products in Europe, it would face the seizure of its foreign assets and its leading figures would face penalties too.
The problem, however, is that there has been an enormous gap between the promise and the delivery on sanctions. European goods still flow in large quantities to Russia, only via the backdoor, through Caucasus and Central Asian states instead of directly. Russian oil still flows out around the world, though sanctions have arguably reduced prices somewhat.
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Luxury cars still getting to Russia
The upshot is Russia has still been able to depend on billions of euros of revenue from Europe, with which it has been able to spend billions of euros on components sourced, indirectly, from Europe. Its ability to wage war does not seem to have been curtailed half as much as was promised back in 2022. That in turn has undoubtedly had an impact on Russia’s success on the battlefield. The eventual peace deal is, at least to some extent, a consequence of these leaky sanctions, and of Europe’s reluctance to wage economic war, as opposed to just talking about it.
A stark example is to be found when you dig deeper into what’s actually happened here. On the face of it, one area of success for sanctions is to be seen in Europe’s gas imports. Back before the conflict, around half of all the EU’s imported gas came from Russia. Today that’s down to around 20%.
But now consider what that gas was typically used for. Much of it was used to heat peoples’ homes – and with less of it around, prices have gone sharply higher – as we are all experiencing. But the second biggest chunk of usage was in the industrial sector, where it was used to fire up factories and as a feedstock for the chemicals industry. And that brings us back to the mystery product Europe is now importing more of than before the invasion.
One of the main chemicals produced from gas is ammonia, a nitrogen-based chemical mostly used in fertilisers. Ammonia is incredibly important – without it, we wouldn’t be able to feed around half of the population. And since gas prices rose sharply, Europe has struggled to produce ammonia domestically, turning off its plants and relying instead on imports.
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Which raises a question: where have most of those imports come from? Well, in the UK, which has imposed a clear ban on Russian chemical imports, they have come mostly from the US. But in Europe, they are mostly coming from Russia. Indeed, according to our analysis of European trade data, flows of nitrogen fertilisers from Russia have actually increased since the invasion of Ukraine. More specifically, in the two-year pre-pandemic period from 2018 to 2019, Europe imported 4.6 million tonnes, while the amount imported from Russia in 2023-24 was 4.9 million tonnes.
It raises a deeper concern: instead of weaning itself off Russian imports, did Europe end up shifting its dependence from one category of import (gas) to another (fertiliser)? The short answer, having looked at the trade data, is a pretty clear yes.
Something to bear in mind, next time you hear a European leader lecturing others around the world about their relations with Russia.
Rachel Reeves has been urged by a think tank to cut national insurance and increase income tax to create a “level playing field” and protect workers’ pay.
The Resolution Foundation said the chancellor should send a “decisive signal” that she will make “tough decisions” on tax.
Ms Reeves is expected to outline significant tax rises in the upcoming budget in November.
The Resolution Foundation has suggested these changes should include a 2p cut to national insurance as well as a 2p rise in income tax, which Adam Corlett, its principal economist, said “should form part of wider efforts to level the playing field on tax”.
The think tank, which used to be headed by Torsten Bell, a Labour MP who is now a key aide to Ms Reeves and a pensions minister, said the move would help to address “unfairness” in the tax system.
As more people pay income tax than national insurance, including pensioners and landlords, the think tank estimates the switch would go some way in raising the £20bn in tax it thinks would be needed by 2029/2030 to offset increased borrowing costs, flat growth and new spending commitments. Other estimates go as high as £51bn.
Torsten Bell appearing on Sky News
‘Significant tax rises needed’
Another proposal by the think tank would see a gradual lowering of the threshold at which businesses pay VAT from £90,000 to £30,000, as this would help “promote fair competition” and raise £2bn by the end of the decade.
The Resolution Foundation also recommends increasing the tax on dividends, addressing a “worrying” growth in unpaid corporation tax from small businesses, applying a carbon charge to long-haul flights and shipping, and expanding taxation of sugar and salt.
“Policy U-turns, higher borrowing costs and lower productivity growth mean that the chancellor will need to act to avoid borrowing costs rising even further this autumn,” Mr Corlett said.
“Significant tax rises will be needed for the chancellor to send a clear signal that the UK’s public finances are under control.”
He added that while any tax rises are “likely to be painful”, Ms Reeves should do “all she can to avoid loading further pain onto workers’ pay packets”.
The government has repeatedly insisted it will keep its manifesto promise not to raise income tax, national insurance or VAT.
A Treasury spokesperson said in response to the think tank report it does “not comment on speculation around future changes to tax policy”.
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Is Britain heading towards a new financial crisis?
Chancellor urged to freeze alcohol duty
Meanwhile, Ms Reeves has been urged to freeze alcohol duty in the upcoming budget and not increase the rate of excise tax on alcohol until the end of the current parliament.
The Scotch Whisky Association (SWA), UK Spirits Alliance, Welsh Whisky Association, English Whisky Guild and Drinks Ireland said in an open letter that the current regime was “unfair” and has put a “strain” on members who are “struggling”.
The bodies are also urging Ms Reeves “to ensure there will be no further widening of the tax differential between spirits and other alcohol categories”.
A Treasury spokesperson said there will be no export duty, lower licensing fees, reduced tariffs, and a cap on corporation tax to make it easier for British distilleries to thrive.
Leave retailers alone, Reeves told
This comes as the British Retail Consortium (BRC) warned that food inflation will rise and remain above 5% into next year if the retail industry is hit by further tax rises in the November budget.
The BRC voiced concerns that around 4,000 large shops could experience a rise in their business rates if they are included in the government’s new surtax for properties with a rateable value – an estimation of how much it would cost to rent a property for a year – over £500,000, and this could lead to price rises for consumers.
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Latest ONS figures put food inflation at 4.9%, the highest level since 2022/2023.
The Bank of England left the interest rate unchanged last week amid fears that rising food prices were putting mounting pressure on headline inflation.
“The biggest risk to food prices would be to include large shops – including supermarkets – in the new surtax on large properties,” BRC chief executive Helen Dickinson said.
She added: “Removing all shops from the surtax can be done without any cost to the taxpayer, and would demonstrate the chancellor’s commitment to bring down inflation.”
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