How to Win Friends and Influence People: EU Sanctions, Trade Distortions, and the Case for Reviving Economic Diplomacy

The response of the West to the Russian war in Ukraine has been to isolate the Russian economy. And although it might seem like they have been successful, given the scale and severity of the sanctions, the world is in fact much larger and western unity does not equate global consensus. 

The world’s reaction to Russia’s invasion of Ukraine is far more complex and has brought forth the importance of historical ties, economic dependencies, and national interests. Consider for instance, the UNGA vote on condemning Russia. In the latest tally, 141 of 193 member states condemned Putin’s blatant violation of international law. But the 35 that abstained account for almost half the world’s population. That includes China, India, Vietnam, Iraq and South Africa. Even among the countries that voted in favour of the resolution, there are many, such as Mexico and Brazil, that have refused to impose economic sanctions on Russia. In an increasingly multipolar world, for western sanctions to bite and its new geopolitical strategy to be successful, it’s important for the EU to re-evaluate its relationships and make more friends. 

In fact, it is not just about isolating Russia, but extends beyond to what will happen after the war. Sanctions on Russia are bound to distort trade, not only in large EU exports that have found attractive markets in Russia but also in those imports that the EU has stopped buying from Russia. Therefore, the EU must search for new markets and new suppliers, while expanding older ones. At the same time, another fallout from the war and sanctions, is the growing friendship between Russia and China. The EU has deemed China an economic competitor since before the war. As Sino-Russian alliances tighten, the EU will also be in need of partnerships that can counteract the arising challenges.

Consequently, understanding the different policy reactions towards Russia, and their rationales, becomes crucial for Western nations to find novel and effective channels for international cooperation. Because it is in the EU’s interest to make more friends and develop strategic alliances, a good starting point of the analysis could be to focus on swing countries. Like in politics, these are countries that have chosen to remain, either politically or economically neutral, and thus, there is potential to win them over. An often debated example of a neutral country in this context is India. India has maintained neutrality in the international fora, as well as in the economic sphere, abstaining from voting in the UNGA, purchasing oil from Russia, while also ensuring that its actions do not aggravate the West. India shares strong historical and geopolitical relations with Russia, who has served as an important strategic ally for it in the region. But at the same time, India is also strengthening its relationship with the West, through alliances such as the Quad (between United States, Australia, Japan, and India) and increased integration with EU member states, to ward off China in the region. It is pursuing a hard line of neutrality in an attempt to keep everyone happy. 

At the other end of the world, another interesting example of a neutral and strategically ambiguous country is Mexico. Mexico condemned Russia for its actions in Ukraine both at the UN Security Council, and at the UNGA emergency special session. However, it was also quick to refuse imposing sanctions on Russia. Russia and Mexico are not often seen as strong allies, but exactly one month after Ukraine’s invasion, within the chamber of deputies a group of legislators from the ruling coalition, installed a “Mexico-Russia friendship group”. Mexico’s president also recently declared that he “holds a high respect for president Putin”. Mexico is aware that it does not have the capacity to inflict damage on the Russian economy with sanctions. Its strategic ambiguity goes beyond being a rational actor, and can be explained by several motives. First, by clashing perspectives between the president and some top foreign policy officials; second by an anti-American obsession in the left-wing that continues to look at Russia with nostalgia from its Soviet past; and third as a result of the global trend of growing sympathy towards strong and authoritarian leaders, which is echoed in every corner of the world.

Countries that are currently hedging their support for sanctions, share different past and present relationships with Russia. Changing the past and the historical relationships that come with it, is not a feasible option. So, what else can the EU offer these countries to gain their favour? How can the EU make more friends? We attempt to shed some light on this question using trade data, focusing our assessment on countries that have remained neutral in the economic domain, i.e., those countries that have restrained from imposing commercial or financial sanctions on Russia. In doing so, we attempt to find out if expanding trade relations are enough to win countries over, or if more is needed. 

We start with an analysis of imports from Russia by the 5 largest trade partners who have chosen to remain economically neutral. These are: Brazil, India, Mexico, Turkey, and Vietnam. For these countries, there were 45 product categories worth €1.6 billion where the share of imports from Russia over imports from the world exceeded 75 percent. These product categories included fertilizers, coal, iron, graphic display tubes, caviar, and tomatoes. In terms of importing countries, Turkey was dependent on Russia for the import of 22 products, Vietnam for 10, Brazil for 9, India for 4, and Mexico for 3. Russia is a relatively small trade partner for these countries and the value of imports that these countries buy from Russia represents, on average, 2.4 percent of their total imports.  

We then turned to look at if EU exports to the world could make up for Russia’s sales to the 5 countries in the 45 dependent products. There were 12 product categories out of the 45 for which the EU did not possess enough trade capacity. Diversifying trade away from Russia can prove difficult in some cases because Russia is a large primary supplier of these products to these countries. Particularly, out of these 12 product categories, there were 5 product categories – mostly coal, sunflower seeds, and fertilizers – where EU exports were not even half of Russian exports to the neutral countries. For these 5 categories, however, the share of Russian exports to the world over its total exports was only 0.8% which is not a large number in the mission to further alienate the Russian economy.

In turn, we also looked at Russia’s importance as a market for the 5 countries. Russia was also not a huge market for the neutral countries. On average, exports to Russia represented  only 0.01 percent of their total exports. In terms of trade dependencies, however, there were 88 products, for which Russia was dependent on the 5 neutral countries. These products primarily belong to the agriculture, minerals, textiles, and machinery sectors including product categories such as fish, yarn, cotton, cement, lead, aircraft engines, and ammunitions. Dependencies by country were highest on Turkey (42 product categories), followed by India (33), Vietnam (8), Brazil (4), and Mexico (1).  

The fact that the EU can substitute Russia in more than 70 per cent of the products that neutral countries might be dependent on Russia for, does not mean that it will be enough. The EU is one of the largest global suppliers. In fact, for all five countries, it was one of the top 5 exporters. Yet, despite existing trade relationships with these countries, the EU has not been able to persuade them to join its cause. At the same time, export controls from the West on Russia, present a huge market opportunity for neutral players. The lack of suppliers will not only hike up prices, but also provides neutral countries with a large new market they can sell to. Some neutral countries have already started going out of their way to help Russia, by finding loopholes in the sanctions. For instance, India and Russia are already working on a Rupee-Ruble trade agreement in light of the SWIFT sanctions imposed, in order to let Indian exporters continue their businesses with Russia. 

What the EU needs, therefore, is not just more but deeper trade relationships. It needs to complement its existing trade relationships with more comprehensive economic, cultural, and political relationships. One way to do so is through cooperation agreements. There are ongoing trade talks with Mercosur on the EU-Mercosur Association Agreement, as well as with India, on the proposed India-EU free trade agreement. These agreements have an important role to play in the current scenario, particularly, because they might just be the leverage needed by the EU to swing countries in its favour.

To highlight the importance of the EU-Mercosur Association Agreement, for instance, consider the events of Russia’s annexation of Crimea. In 2014, Russia imposed an import ban on agricultural products against the US, EU, Norway, Australia, and Canada, in retaliation to the sanctions on the annexation of Crimea. The Russian import ban contributed to an imbalance in food prices by reducing world import demand for the prescribed products. As a consequence, some major agricultural exporting and non-banned countries such as Brazil, shifted exports to Russia, benefiting from the spike in prices. Brazilian pork exports to Russia in 2016 were 75% higher in volume than in 2013. These trade relations also translated into closer political relations when, less than a week before Russia’s invasion of Ukraine, president Bolsonaro of Brazil, shook hands with Putin at the Kremlin, remarking that Brazil stands in solidarity with Russia. If the EU truly wants to make more friends, then there is no doubt that approving the EU-Mercosur Association Agreement should be the urgent next step. 

Although there are several strong historical and geopolitical relationships between the five neutral countries and Russia, there is also the possibility of creating new and stronger ties with the EU. The EU has the capacity to make up for the trade benefits that Russia provides. It is now a question of forging more comprehensive relationships with its partners, ensuring that it can provide similar strategic benefits. Before the Russian invasion of Ukraine, globalisation patterns were already rapidly changing. In order to secure their interests, countries started resorting to the use of economic statecraft tools. The EU, in a similar vein, is building an arsenal of trade policy instruments to address the new types of challenges, inequities, and restrictions arising in global trade. In doing so, however, maybe the EU should also consider adding to its arsenal more strategic alliances, the importance of which has only increased with the current conflict. While western sanctions continue, the EU needs to start finalizing collaboration plans that have been gathering dust in its drawers and make more friends!