Russia has long been an important energy exporter to Europe and other parts of the world. The European energy imports from Russia have largely been based on the giant oil and gas fields in Western Siberia that were developed in the 1970s. In the beginning of the 1980s, a great battle arose between West Germany, which wanted to build large gas pipelines from Western Siberia to Germany, and the United States who under President Ronald Reagan wanted to stop them. Germany won that time. Gradually, the Russian export of oil and gas to Western Europe expanded. Russia’s war on Ukraine and the ensuing discussion about sanctions have focused attention on the mutual energy dependence of the European Union (EU) and Russia.

When the Soviet Union collapsed in December 1991, Russia's oil production was halved, while its gas production remained almost constant. Russia repeatedly cut off both oil and gas supplies to former Soviet republics such as the Baltic States, Ukraine, Moldova, and Georgia, while it did its utmost to maintain steady supplies to the West, above all to Germany and Finland. Despite persistent Russian proposals that Sweden should buy Russian gas, Sweden always declined for security policy reasons. This is an example of an EU country that made another choice than Germany, which turned out to be far-sighted. The varying European countries’ experiences of Russia as an energy supplier led to completely different attitudes. The Baltic States, Poland, and Sweden thus sought to minimize their dependence on Russian energy while Germany, Italy, the Netherlands, and Austria considered Russian energy to be cheap and safe. A few countries that imported a lot of Russian energy—the Czech Republic, Slovakia, Hungary, and Bulgaria—appeared to have no real energy policy but just carried on as before. Balmaceda (2013) discusses in more detail how countries in Europe handled the politics of Russian energy dependence while Gustafson (2012) focuses more specifically on the role of gas.

During the 1990s, the EU's electricity and gas sectors were state monopolies, while oil trading took place on an international market. Gradually, the EU began to develop an.

energy policy as part of the creation of the internal market. The key words were privatization, liberalization and “unbundling”, i.e. that individual actors would not own all parts of energy supply from production, network, and distribution. While the intention was to liberalize the European energy market, this had important consequences for Russia as its major gas company Gazprom, with majority state ownership wanted to control all parts of the energy supply, endeavouring monopoly. Gazprom represented the antithesis of the new European liberal market policy. Since the 1990s the EU has adopted four energy packages, which have liberalized the electricity and gas sectors. In this context, the EU's gas policy is important. The first two gas packages were adopted in 1998 and 2003, but they did little to develop the gas market, though they stimulated market economic thinking in the gas sector.

Gazprom's main pipeline to Europe passed through Ukraine. In January 2006, Gazprom cut off all gas transit through Ukraine to Europe for four days, which disturbed the Europeans. In January 2009, Russia stopped all gas transit through Ukraine for two weeks, affecting sixteen European countries. The myth of Russia as a reliable energy supplier had been shattered. The result was the EU's third energy package, which the Union adopted in 2009 (Commission of the European Communities, 2009). It was a real breakthrough for the market in the European gas sector. Gas producers would no longer be allowed to own pipelines, forcing Gazprom to sell its pipelines in the Baltics. The crucial role of Gazprom is further detailed in Stern (2005) while Nemtsov and Milov (2008) discuss the links between Gazprom and Russia’s President Vladimir Putin.

However, the conflict between Gazprom's friends in Europe and its enemies had not been resolved. Germany, Austria, and the Netherlands insisted that Russian gas was the best and safest option. Therefore, Gazprom was allowed to maintain its ownership of Nord Stream 1, which supplied gas from Russia to Germany through the Baltic Sea. Curiously, Russia and Germany also pushed through Nord Stream 2, although it was clearly against all the EU's market principles. In 2019, the “Clean energy for all Europeans” package was adopted, that aims to reduce the dependence of fossil fuels (European Commission, Directorate-General for Energy, 2019). This package changed the rules for electricity markets but for the gas market the third package still applied.

This chapter discusses the differences in Russian energy dependence between different EU countries and how these differences made it difficult to reach a consensus regarding sanctions against Russia in the EU before Russia started its full-scale invasion of Ukraine in February 2022. Even after the EU unanimously adopted several sanctions packages, tensions remain within the union, which in many cases are directly linked to the extent to which the various countries import Russian energy. These tensions risk leading to such great contradictions within the Union that individual member states may in the future reject important collaborations. A first sign of this was that both the Netherlands and Germany opposed proposals to introduce price caps on gas, but in May 2022, German Chancellor Scholz stated that the country will stop all imports of Russian energy, including gas. Hungary is in 2023 a far more difficult case. Its government has a much more positive view of Russia. It has pursued massive campaigns within the country to depict sanctions against Russia as a threat to Hungary. At the same time, the energy crisis has created a debate about how the EU should cooperate better and develop systems to reduce the risks of its external energy dependence. The research question addressed in this chapter is therefore whether the break from Russian energy dependence may persuade countries to leave the Union or whether it can instead act as a unifying force, leading to deepened cooperation within the Union.

We approach this question by first considering the EU countries’ energy balances and which types of energy they have imported from Russia. The other issue is Russia's dependence on energy exports in general and exports to the EU in particular. An account of EU sanctions against Russia follows, first after Russia’s 2014 Crimean and east Ukrainian invasion and then the EU sanctions imposed after Russia launched a full-scale war of aggression on Ukraine on 24 February 2022. Next, we briefly outline Russia's counter-sanctions before discussing their impact on the EU and then on Russia. The chapter concludes with our recommendations on how the EU can manage the energy transition to create cohesion within the Union and, at the same time, security at the external border.

The EU's Dependence on Russian Energy

The EU's 27 member states have energy balances that differ significantly (see Fig. 7.1). If we look at the main energy sources in order of the carbon dioxide emissions they generate, the average EU country has about 10 percent of its energy supply from coal. Poland stands out receiving 40 percent of its energy from coal in 2020. Yet, several countries use no coal as an energy source, and roughly two-thirds of the EU countries use coal for less than 10 percent of their energy supply.

Fig. 7.1
A stacked bar chart presents the percentage of energy balances in 27 E U countries and the overall E U 27. It plots for coal, oil, gas, nuclear, renewable, and others. Estonia and Malta almost use no coal, while they mainly use oil. Lithuania and Luxembourg account for almost 12% of other resources.

Energy balances of EU countries in 2020. Source Eurostat

Oil accounts for about 35% of the energy balance in the Union. Here, too, there are large variations between the member states, although oil in the 2020s is mainly used for transport. Cyprus tops the list in terms of oil dependence with a share of almost 90%, while for several countries in the eastern part of the Union oil account for less than 20% of their energy balances.

The next source of energy is natural gas, which accounts for about 25% of the EU’s overall energy balance. Sweden is at the bottom of the list with about 3 percent of its energy from gas, while the Netherlands tops the list with 40 percent. Like coal, gas is mainly used to generate electricity and for heating.

With regard to nuclear power, roughly half of the EU countries have no nuclear power, while the share of nuclear power in France is the highest at around 40% of the energy balance. The EU as a whole gets roughly 10 percent of its energy from nuclear power.

Finally, renewable energy supplies just under 20% of the Union’s energy. Sweden tops the ranking with renewable energy amounting to almost 50% of the energy balance, while Malta receives only 2 percent of its energy from renewable energy.

To conclude, the differences in the member states’ energy balances are a perfect breeding ground for political disagreements within the Union regarding everything from climate goals, taxonomy, and the relationship with Russia, including sanctions that we discuss below.

The Russian component in the EU countries’ energy balance is summarized in Fig. 7.2, which shows how much of the countries’ energy comes from Russia, broken down into different types of energy. First, before the war in 2022 the EU received about 30% of its energy from Russia. Of this 30%, gas accounted for one-third, while oil and some coal historically accounted for two-thirds of energy imports from Russia. The EU average hid large variations within the Union. Lithuania topped among importers of Russian energy, but it did not use all itself. Among the Baltic countries, Latvia was instead most dependent on Russian gas, which accounted for about 20 percent of its energy balance. Hungary is otherwise at the top in terms of dependence on Russian gas, which has been reflected in the Hungarian advertising campaigns against Russian sanctions. Several countries obtained about 15% of their energy from Russian gas, notably Germany, Italy, and the Netherlands. Yet, a handful of countries, such as Sweden, are not at all dependent on Russian gas. However, the most valuable Russian energy exports are crude oil and oil products. Finland received nearly two-thirds of its energy from there. Oil and oil products can be replaced more easily than gas which overwhelmingly comes in gas pipelines, but some oil is supplied through pipelines, causing logistical and technical challenges to changing suppliers, but as we discuss below, many of these challenges were overcome in 2023.

Fig. 7.2
A stacked bar chart plots the Russian component in the E U countries’ energy balance, with values in percentage. Lithuania and Cyprus are the largest and smallest importers, respectively. Across the EU-27 as a whole, oil products account for the highest percentage, followed by gas, crude oil, and coal.

Sources of the dependence on Russian energy for EU countries

Source: Eurostat.

Already in 2008, Le Coq and Paltseva (2008) created an index that describes the security of EU countries in terms of energy supply. The index summarizes the risks in relation to how diversified countries are with regard to suppliers of energy, political risk in supplier countries, supply risks, and the economic consequences of non-delivery. This index is calculated for each type of energy and not aggregated like many previous indices. Unsurprisingly, their calculations show major risks for Germany and Italy in terms of gas but also for France and Spain in terms of crude oil. One conclusion of their study is that the risk profiles of the various EU countries make it more difficult to arrive at a common energy policy in the EU. Although this was written back in 2008, this index is an important analytical tool for the time of Russia's invasion of Ukraine.

Russia’s Dependence on Energy Exports in General and to the EU in Particular

Russia's economy is heavily dependent on energy exports, mainly oil and gas, while coal exports are much smaller. Although the volume of energy exports has been relatively stable, its value varies significantly with market prices. When energy prices were high in 2011–13, oil and gas accounted for two-thirds of Russia’s merchandise exports by value. In 2021, oil and gas exports accounted for approximately half of the value of Russia’s goods exports. Revenues from oil exports are in the order of 10% of Russian GDP, while the value of gas exports is around 4 percent. For Russia’s GDP, it is evident that this export is crucial for economic growth.

Russia used to sell its oil on the spot market at the current market price which made it dependent on what happens to the world market price of oil. Admittedly, as the producer of 11% of the world's oil, Russia might marginally influence the international oil price in the short term, not least since it became a more active part of the negotiations of the Organization for the Petroleum Exporting Countries, OPEC+. But by and large, Russia is a price taker in the international commodity market and sells its oil at the price offered. Therefore, the Russian macroeconomic development is not controlled by the leaders in the Kremlin or anyone else in Russia, but by what is happening on the world market.

There are few countries where so much of the growth is dependent on a single exogenous variable as is the case of Russia and international oil price. Since the mid-1990s until 2021, 70 percent of Russian growth can be derived from changes in international oil prices. Since the Crimean invasion in 2014, this percentage has risen to 90 percent (see Becker, 2016 and 2017). This concentration has been maintained despite repeated discussions of diversification and modernization of the Russian economy and a move to a floating exchange rate when oil prices plummeted in 2014 (which was not a function of Russia’s illegal annexation of Crimea but the level of global demand). From 2020 to 2021, dollar earnings for oil exports rose by 50% and for gas earnings by more than 100% even though volumes were almost unchanged, i.e. the entire change was due to rising international prices. This leads to some problems regarding how to interpret Russia’s real economic development (Becker, 2021a).

The Russian state budget is also heavily dependent on raw material exploitation and exports and thus on what happens with international oil prices. Between 2020 and 2021, government revenues increased by 90 percent in nominal ruble terms or 65 percent in real terms. Given how difficult it is to forecast changes in oil prices, this creates great uncertainty regarding the state's income, whose revenues from extraction and export taxes on oil and gas varied from just under 30% to 50 % between 2017 and 2021. Changes in oil prices also affect the exchange rate and inflation which in turn affect the work both of the Central Bank and the Ministry of Finance.

The state’s income is strongly associated with exports to the EU countries, which is why the EU’s dependence on Russian energy has a clear counterpart in Russia’s dependence on the EU as an export market; at least in the short and medium term. In 2020, EU countries bought a total of three-quarters of Russia’s gas exports, half of Russia's crude oil exports, and basically all Russian exports of oil products. Russian statistics are not always consistent with those reported for the EU by Eurostat, so the numbers must be interpreted with some caution.

The Russian oil and coal companies act as individual sellers on the European market, while Gazprom has a monopoly on the sale of gas delivered through pipelines to Europe. This has led to gas sales being far more politicized than Russia's oil and coal exports. Since the EU does not act as a common buyer towards Russia (see Le Coq & Paltseva, 2012a) it is important to understand which EU countries are important buyers from the Russian perspective. Le Coq and Paltseva (2012b) also analyzed the risk with gas transits from Russia to the EU. Not unexpectedly, Germany is by a good margin Russia's most important customer in the EU. Figure 7.3 shows how much the EU countries paid for Russian energy divided into crude oil, oil products, and gas. In 2020, the estimated value of Germany’s imports of Russian energy was $28 billion, or almost double that of the Netherlands in second place with imports worth about $15 billion. Since available statistics are only for quantities, dollar values are estimates based on average prices for different types of energy for corresponding periods. However, the Netherlands also exports a large part of its energy imports. In total, the EU imported energy from Russia to a value of almost $115 billion in 2020, while the corresponding figure for 2021 would have been about $185 billion if the EU's share of Russian exports was unchanged, i.e. an increase of more than 60% due to price increases. In other words, it is not only the Russian state budget and the economy that are exposed to the development of international energy prices, but also EU countries. With these large swings in energy prices it is not surprising that the European Central Bank and the central banks of the other EU countries are having difficulties to keep inflation within their target ranges.

Fig. 7.3
A stacked bar chart plots values in billions of U S dollars versus 27 E U countries. It plots for crude oil, oil products, and gas. The bars are descending. Germany and Cyprus are the highest and lowest payers to Russia for energy, respectively. Oil products share the highest percentage in most countries.

Estimate of what EU countries paid Russia for energy in 2020

Source: Eurostat, Central bank of Russia (, and authors’ calculations.

A few EU countries made up a significant part of Russia's market in the EU. Figure 7.4 shows how large a share of Russia's total exports of various types of energy individual EU countries accounted for. The four largest importers of Russian energy in the EU, Germany, Italy, the Netherlands, and Poland, accounted for more than half of the EU's Russian energy bill in 2020. Meanwhile, a dozen EU countries bought energy from Russia for less than a billion dollars. These large differences mean that the economic interests among EU countries and from the Russian side can create divisions in the EU and give Russia opportunities for bilateral negotiations with a few important EU countries that will not always focus on what is best for the EU as a collective. It was not only Hungary that contributed to division within the EU in terms of sanctions against Russia. Large countries such as Germany and the Netherlands were doubtful about a joint price ceiling for gas in 2022. In addition, Italy's government, headed by Prime Minister Georgia Meloni who took office in October 2022, had coalition partners that considered themselves personal friends of Vladimir Putin, while she did not. Writing about European energy cooperation at this time may seem like an afterthought, but Le Coq and Paltseva (2008) have argued for this for a very long time and it is high time that the EU countries make this a reality for the good of the Union. After Russia’s invasion of Ukraine also Germany, the Netherlands and Italy have joined a broad EU consensus, while Hungary has remained a pro-Russian outlier.

Fig. 7.4
A grouped bar chart plots values in percentage versus 27 E U countries for crude oil, oil products, and gas. The highest and lowest bars are noted in Germany and Cyprus, respectively.

EU countries’ shares of total Russian energy exports in 2020. Source Eurostat, Central bank of Russia (, and authors’ calculations

Sanctions Against Russia After the 2014 Crimean Invasion

Russia had hardly expected such a strong and coordinated response to its renewed war of aggression against Ukraine in February 2022 from the EU, the United States, and many other countries. This was based on the Russian experience after the illegal annexation of Crimea and the subsequent war in Donbass in eastern Ukraine. The February 2014 invasion had indeed led to sanctions, but on a much more limited level. However, even these limited sanctions influenced Russian growth through increased uncertainty and lower investments (Becker, 2019 and 2021b). After the first EU meeting on March 3, 2014 after Russia's invasion of Crimea, EU leaders did indeed condemn Russia but emphasized that they would seek a peaceful solution that respected international laws with proposals that the OSCE should launch a “fact-finding mission” in Ukraine. The EU also declared that it would not participate in the planned G8 meeting in Sochi, Russia. Yet, this was not a forceful response to a Russian invasion of a European neighbour. At an extraordinary meeting for EU heads of government, the Prime Minister of Ukraine participated, but the conclusions were still that there would be an attempt at a dialogue between Russia and Ukraine in where the EU could participate.

Only at a meeting on March 17, 2014, the EU imposed sanctions against 21 individuals who were involved in the illegal referendum in Crimea (EU Foreign Affairs Council, 2014a). On March 20, a few more individuals were added to the EU's sanctions list and the planned EU-Russia summit was canceled. The EU announced that member states would also not hold any bilateral summits. The EU also put on the table that if Russia continued to “destabilise” Ukraine, there may be economic sanctions against Russia. After further meetings on sanctions, it took until June 23 for the EU to ban imports of goods from occupied Crimea and a few days later to sign the Association Agreement with Ukraine (EU Foreign Affairs Council, 2014b). In mid-July, the European Investment Bank (EIB) was stopped from further investments in Russia and the European Development Bank (EBRD) as well as bilateral financiers were called on to stop implementing projects in Russia.

On July 17, 2014, the Malaysia Airlines flight MH17 was shot down by Russia over eastern Ukraine—which resulted in nearly 300 deaths (of which roughly 200 from EU countries). Then, the tone regarding the need for EU sanctions was sharpened. On July 29, the first more extensive economic sanctions from the EU against Russia were launched (European Council, 2014). They had been coordinated with US sanctioned two weeks earlier and targeted three sectors—finance, military technology, and oil technology. They included certain restrictions on the maturity with which Russian state financial institutions could finance themselves on the EU's capital markets, bans on the import and export of military equipment, and bans on the export of other technology that can be used for military purposes (“dual-use goods”). Technology for the oil sector focused on deep sea, arctic, and shale extraction was also limited. These sanctions were slightly tightened in September 2014, but no more extensive financial sanctions were launched. In the years leading up to Russia’s full-scale attack on Ukraine in 2022, some individuals and companies were added to the sanctions lists and the (very limited) economic sanctions were extended but no more extensive sanctions were added during the period.

Sanctions Against Russia, 2022

In late 2021, Russia built up a large military force on the border with Ukraine (Congressional Research Service, 2022). The US and allied intelligence services stated openly that this was a preparation of another attack on Ukraine. Discussions in the West started about potential sanctions against Russia, including stopping Nord Stream 2, if Russia went further in its war preparations. In January 2022, the United States stated that it, together with partner countries, was ready to impose comprehensive sanctions on Russia, far beyond what it had done in 2014 and that this time there would be no question of an escalation of sanctions, but comprehensive sanctions would immediately follow a Russian attack (The New York Times, 2022). However, many in the West as well as in Russia and Ukraine did not believe that Russia would carry out a full-scale attack on Ukraine, and several Western leaders went to Moscow to hold talks with Putin in order to avoid a war. Apparently, the Kremlin did not take the threat of far greater Western sanctions seriously and launched its invasion on February 24, 2022.

Some did see the war coming; for example, Gudrun Persson, a researcher at the Swedish Defence Research Agency (FOI), announced at the People and Defense conference on February 3, 2022 that “no one can say that we didn't know anything”. In December 2021, Russia had escalated its political demands, insisting that the West should accommodate Russian interests not only to stop NATO enlargement but to reduce NATO (Reuters, 2021).

On February 21, Putin recognized the so-called People's Republics of Donetsk and Luhansk. Germany responded by halting the certification of Nord Stream 2. The next day, on February 23, the EU agreed on a first package of sanctions that targeted Duma parliamentarians and economic relations with Donetsk and Luhansk.Footnote 1 But on February 24, Russia nevertheless launched its full-scale assault on Ukraine.

On February 25, the EU immediately responded with a second package of sanctions which, among other things, froze Putin and Lavrov's assets in the EU and included personal sanctions against Russia's Security Council. Sanctions were introduced against financial transactions with Russian counterparties, against the oil sector, against the aviation industry and the sale of spare parts for Russian aircraft, extended sanctions against “dual-use” technological exports, as well as aggravating visa rules for Russian officials and business persons.

Already on February 28, the EU introduced a third package of sanctions, which, among other things, prevented transactions with Russia's central bank and froze its foreign exchange reserves within the EU. All Russian aircraft were banned from taking off, landing, and flying over the EU, and the EU funded lethal military equipment to Ukraine for the first time. It might appear a bit late as the sanctions after the Crimean invasion, but these sanctions were far more serious. They were welcomed by Ukraine and probably came as a surprise to the Russian leadership. A few days later, the EU added new sanctions to the third sanctions package that excluded seven Russian banks from SWIFT, the international messaging system for financial transactions, further financial restrictions, and stopped Russia Today (RT) and Sputnik, Russian state-funded propaganda channels in the EU. Sanctions were added against Belarus because it allowed Russia to use its territory for the attack against Ukraine and against a number of so-called oligarchs and politicians in Russia. The severe EU sanctions against Russia's central bank and the exclusion of Russian banks from SWIFT came as a surprise to most.

On March 15, the EU delivered a fourth package of sanctions. It targeted Russian state-owned enterprises, the financial sector via credit rating agencies, and investments in the Russian energy sector. In addition, more people classified as oligarchs and lobbyists were sanctioned. The EU also initiated processes within the World Trade Organization (WTO) to remove rules that favour Russia's foreign trade and pause Belarus’ application for membership in the organization.

Barely a month later, on April 8, the EU delivered its fifth package of sanctions against Russia. For the first time, the EU sanctions targeted Russian energy exports to the EU through an EU import ban on Russian coal. However, this ban was of little economic importance as coal can be imported from many other countries. The EU also banned shipments by land and sea from Russia and Belarus to the EU and added a number of other goods to the import ban list (cement, wood, seafood, and spirits). The export ban to Russia was extended and several Russian banks were shut out of the EU and had their assets in the EU frozen. More individuals who were considered complicit in the war or who may be involved in circumventing the sanctions imposed were also added to the sanctions lists.

In early June 2022, the sixth EU package of sanctions against Russia arrived with a significant energy component, namely an EU embargo on the import of crude oil and refined oil products from Russia. This is the part of Russia’s foreign trade that has the greatest economic value of all products traded between Russia and the EU. It has an annual trade of about 100 billion dollars, depending on the year's international oil prices. But the process of shutting off the Russian oil takes time and a phase-out period of 6–8 months was part of the package with additional exceptions for countries that received their oil via pipelines. Thus, at the beginning of 2023, the EU's oil embargo was still a threat rather than a reality for Russia. This round of sanctions also added Russia’s largest bank, Sberbank, to the list of Russian banks suspended from SWIFT.

The seventh sanctions package from the EU on July 21, 2022 was officially called a “maintenance and alignment package”. It focused on transactions in gold (and precious stones) from Russia to limit another source of income that could generate international currency. The EU also made clear that it did not target Russian food exports as food exports from both Ukraine and Russia had become an important part of the global discourse among poorer countries outside the EU, not least in Africa. This package indicated that the EU had lost momentum. Everyone knows that oil and gas are the most important subjects, but the EU had failed to agree on such sanctions. Hungary, in particular, opposed any sanctions against oil and gas, but it also received support from Germany and other central European countries heavily dependent on Russian energy exports. The US had already banned all imports of Russian energy to the US on March 8, 2022, but it was easier for the US because it had not imported much Russian energy.

At the beginning of October 2022, Russia annexed additional parts of Ukraine in violation of international law, which led to a new package of sanctions on October 6. The EU laid the foundation for a price ceiling for the export of Russian oil to countries outside the EU together with restrictions on maritime transport of Russian oil. It added new goods that the EU should not import or export to Russia and more individuals directly involved in the illegal Russian activities in Ukraine were also sanctioned. With this, the sanctions work within the EU gained new momentum after a few months of silence. However, it took until December 3 before a price cap of 60 dollars per barrel for Russian seaborn oil was agreed upon with the so-called Price Cap Coalition (PCC) that includes G7 countries, the EU, and Australia. The reinforcement mechanism is tied to maritime services, in particular insurance and reinsurance, provided by companies in the PCC.

A ninth sanctions package was then announced on December 16, which focused on four areas. First, several individuals and organizations were added to the list subject to freezing of assets. Many directly connected to the Russian armed forces and military-industrial complex. Then the package introduced additional export bans on dual-use and other technologies and services that are used in the production of drones and other military equipment and also the export of drone engines through third countries such as Iran. More banks were also added to the list of entities with transaction bans and four additional media channels were also sanctioned.

Sanctions package ten followed on February 25, 2023, exactly one year after the second package that was introduced on the first day after Russia’s full-scale attack on Ukraine. The first part of the package listed more Russian individuals and entities focusing on politicians, government officials, and military leaders but also individuals from Iran and members of the Wagner mercenary group. The list of sensitive and dual-use goods with export bans to Russian was also extended to trucks and various industrial goods. At the same time, more Russian high-value goods were banned from import to the EU. The packages also focused on limiting circumvention possibilities and a reporting requirement on Russian central bank assets, which is an important first step in not only freezing but later transferring central bank assets to Ukraine.

On June 23, the eleventh package was adopted by the EU. The focus was on reducing the possibilities to circumvent trade sanctions and the packages included restrictions on Russian transports by land and sea. The package also ended the possibility to import oil via pipeline to Germany and Poland, further underlining the EU’s move away from Russian energy. Later in August, additional sanctions were introduced to make it harder to circumvent sanctions via Belarus.

EU's sanctions against Russia are coordinated and largely in line with the sanctions imposed by the US and other G7 countries. Yet, many countries, not least China and India, have not imposed sanctions against Russia but instead take advantage of the sanctions imposed by the EU and other countries. These countries have bought Russian oil at deep discounts and continued to do so after the formal price cap was introduced. This is in line with the PCC sanction and helps preserve stability on the international oil market. However, when it comes to exports to Russia, these countries together with Turkey and Central Asian countries clearly help Russia buy some of the high-tech and dual-use goods they cannot produce at home.

If the Russian war of aggression continues, we can expect more sanctions packages against Russia. An important part of the work on developing effective sanctions is done by the group coordinated by the former American ambassador to Moscow Michael McFaul, who is now a Professor at the Stanford University, and the head of the presidential administration of Ukraine, Andriy Yermak, and goes under the guise of The International Working Group on Russian Sanctions.Footnote 2 The group is now working on several proposals for more specific areas and with the aim of closing various loopholes in the sanctions that have already been introduced.

The EU is determined to reduce its consumption of Russian oil and gas in the medium term. The European Commission set a target to reduce gas imports from Russia by two-thirds by the end of 2022, which was achieved. By the second quarter of 2023, EU had made significant progress in weaning itself off Russian energy; only 2.7 percent of EU imports of petroleum oil came from Russia compared with almost 16 percent in the second quarter of 2022. For pipeline gas, the import share from Russia declined from 28.3 percent in the second quarter of 2022 to 13.8 percent by the second quarter of 2023 and for LNG from 15.2 to 12.4 percent. Finally, for coal, the share of imports to the EU from Russia went from 32.8 percent to zero over the same period (Eurostat, 2023a).

Russia's Response to EU Sanctions

Russia's response to EU sanctions has varied in strength and clarity. One response to Western sanctions is that Russia has prevented trade and financial transactions with individuals and companies from “unfriendly” countries, i.e. countries that have imposed sanctions against Russia, which includes the member states of the EU, the US, and other countries in the West as well as Japan.Footnote 3

In terms of energy transactions, the most notable counter-sanction is that on March 31, 2022, Russia required payments for gas to be made in rubles.Footnote 4 When countries like Poland and Bulgaria refused to pay in rubles, their gas supplies were cut off, and the same happened to Finland, Denmark, the Netherlands, and Latvia. Russia also imposed sanctions on a number of companies in the energy sector in the EU, the US, and other countries, including Gazprom's former subsidiary in Germany. Energy companies from Germany, Hungary, France, and Italy instead chose to carry out transactions in rubles via Gazprom's bank, which was not sanctioned by the EU, and the European Commission did not get involved - presumably because these countries were too influential in the Union.

All major European energy companies operating in Russia have declared that they intend to leave Russia and have done so to varying degrees. Putin threatened to nationalize abandoned energy resources, and he has done so with Shell's gas extraction on the Russian island of Sakhalin, UNIPER, and Fortnum. Russia will presumably continue to nationalize all major abandoned energy companies.

Initially, Russia did not try to reduce its oil exports, but in October 2022, OPEC+, which includes Russia, concluded that their combined production should decrease by 2 million barrels per day due to “economic factors” (OPEC, 2022). The US has so far unsuccessfully pressured Saudi Arabia and other countries to prevent this from happening, as it drives up the world market price of oil, but with little or no success.

Although OPEC+ negotiations are political, Russian oil exports beyond these negotiations have taken place in a relatively free market, while Russian gas exports have been much more politicized. For years, Russia has limited its gas supplies via the large pipeline through Ukraine. Now Gazprom has also stopped its deliveries through Belarus and Poland. After Germany blocked the newly built pipeline Nord Stream 2, Gazprom also cut its deliveries through Nord Stream 1. In a situation when no more gas was delivered through these pipelines, several of Nord Stream 1 and 2's pipelines burst just off the coast of Sweden in September 2022. The Nord Stream pipes will most likely not deliver any Russian gas for the foreseeable future even if they were repaired. Russian gas can be imported through Turkstream and the Ukrainian transit line, but this is a fraction of what Russia exported to the EU in previous years. Russian gas has become toxic as too political and too unreliable. To the surprise of many, the EU has succeeded to replenish its gas reserves from alternative sources, such as Norway and through a greatly increased import of liquefied natural gas, mainly from the US. It may seem strange that Russia is much more aggressive with gas than with oil, but gas deliveries are almost exclusively via pipelines and by state-controlled Gazprom, which has a long tradition of cutting off supplies for political reasons.

What is Happening in the EU?

For many years, the EU has discussed and planned its green energy transition and to simultaneously reduce its dependence on Russian fossil-based energy. This had no impact on the energy prices the EU paid. Gas prices were relatively constant and predictable, while oil prices fluctuated with global economic fluctuations and occasionally due to conflicts in the Middle East. As a result of the global COVID-19 pandemic, both oil and gas prices fell sharply in Europe in 2020. With the global economic recovery in 2021, prices turned upwards again. Oil prices followed their historical pattern, while gas prices in Europe skyrocketed towards previously unimagined heights. Just as other forces had set energy markets in motion before Russia invaded Crimea in 2014, other factors had been affecting energy markets even before Russia invaded all of Ukraine in February 2022.

In 2014, several factors coincided to cause the price of oil to drop like a stone; America's shale oil had made the country self-sufficient in oil, which created an oversupply in the market. When OPEC led by Saudi Arabia did not want to reduce its supply and lose market share at the same time as demand in Europe and China decreased, the prices of crude oil were depressed. The price drop was further reinforced by the fact that the dollar strengthened by 15–20 percent against other important currencies in the world. This matters as the oil market is priced in dollars but the consumers are in countries that use other currencies that have become less valuable.

In 2021, gas prices had already started to rise due to structural factors in the gas markets both in Europe and other parts of the world. Demand in Asia was high coming out of the COVID-19 pandemic, while gas deals in Europe had moved towards shorter contracts with prices based on spot prices. This led to a complicated market dynamic where Gazprom, thanks to its strong market position, was able to reduce supply and drive up spot prices. When customers in Europe turned to the market for liquefied natural gas, LNG, they faced competition from buyers in Asia. The reduced gas deliveries from Gazprom coincided with discussions about Nord Stream 2, which created further incentives for Russia to hold down deliveries.

Superficially, this can be explained by Gazprom's business interests, but this was also a way to reduce Ukraine's transit income and hurting Europe’s economy with high gas prices, when Russia was preparing to invade Ukraine. Yet, it was not Western sanctions that drove up prices before the war started.

Gas prices in Europe have fluctuated greatly in recent years. In 2022, this drove the price of electricity to multiples of prior heights that led to support packages, tax adjustments, and subsidies around Europe. Gas contracts in Europe were traded in 2022 between 100 and 340 euros/MWh, which should be compared to the years before the pandemic when they were around 25 euros/MWh. Le Coq and Paltseva (2022) discuss what the gas crisis reveals more generally about energy security in the EU. The increased gas prices affected households as well as industry, not least in Germany, where large parts of the economy have been dependent on relatively cheap energy for their competitiveness at the same time as many households get their heat from gas. In 2023, European gas prices fell by 90 percent to a normal level as storage of gas before the winter season reached record levels in the EU (Reuters, 2023a).

Oil prices also rose sharply in 2022, but that trend started long before Russia's attack on Ukraine. The oil price bottom occurred during the 2020 pandemic when certain types of contracts briefly produced negative prices for oil but more generally only generated very low oil prices seen in our near term. From lows around $20 for Brent oil in 2020, oil prices rose to over $80 per barrel in early 2022. With Russia's invasion and subsequent sanctions, the price of oil skyrocketed further, passing $120 per barrel before oil prices turned downward. During the autumn of 2022 and afterwards, the oil price dropped to a level that was lower than before the outbreak of the war at about $80 per barrel. Nevertheless, many voices are heard in the EU that this is too high an oil price and the question is what it means for consumers and companies in the EU? Obviously, many motorists and transport companies in the EU pay a lot for their petrol and diesel, but the price of crude oil was at the same level in 2013 and even higher before the global financial crisis in 2008 when the price of crude oil was more than $140 per barrel. After the period of declining international oil prices in the second half of 2022 prices then started to increase again in the summer of 2023 after output cuts by OPEC. Later in the fall, the prices again fell and instead of surpassing $100 per barrel as some feared it reversed back to $85 per barrel but with significant uncertainty remaining about the longer-term trend as OPEC did not manage to agree on further cuts in production and there are worries about a global recession (Reuters, 2023b).

EU leaders and member states have tried in different ways to deal with the price increases for energy and have made plans for how reduced flows from Russia can be replaced with other suppliers and a changed energy mix. On March 8, 2022, the EU held a meeting where the President of the European Commission, Ursula von der Leyen, said that EU member states must become independent from Russian oil, gas, and coal, diversify energy sources and speed up the green transition. Given the way Russia has behaved, this seems to be the natural outcome. Who dares to trust Russian energy anymore?

The European Commission was tasked with drawing up a plan to achieve it which was presented on 18 May 2022 and goes by the name REPowerEU (European Union, 2022). The goal is to phase-out dependence on Russian fossil energy through a combination of measures: saving energy, accelerating the transition to clean energy, and diversifying the EU's energy sources. The plan places great emphasis on justice and solidarity and on faster achievement of the climate goals the EU has set. The phasing out of Russian energy and the transition to renewable energy enjoys great popular support within the EU; and according to the European Commission's REPowerEU report, 85 percent of the respondents supported this change in an opinion poll (Eurobarometer, 2022).

Energy saving is the fastest measure, and much money can be saved according to the European Commission, which claims that the EU countries can save around 100 billion euros by stopping importing Russian energy. The EU Commission wants to achieve energy savings by raising the binding targets for energy efficiency. In addition, the EU must focus on changing consumer behaviour, which could reduce the consumption of oil and gas by 5 percent. This can be done by information and “nudging” (Le Coq, 2022).

Energy saving targets have been further tightened with the plan from July 2022 to reduce the EU's gas use by 15 percent. Given the differences that exist in terms of gas use in the EU countries, this plan met resistance from several countries, which led to several exceptions and compromises to get the proposal adopted. An important part of the plan is solidarity and coordination between the countries to cope with the reduction. Le Coq (2022) also discusses how market mechanisms can be used to reduce gas use, but this could in turn lead to further price increases for some consumers. If market solutions are also introduced nationally, it can affect solidarity within the EU to deal with reduced gas flows.

The European Commission intends to set aside an additional 200 billion euros until 2027 for investments to achieve the goals of the plan for alternative energy, but it will take time before these investments are implemented. Di Bella et al (2022) focused on what could happen at the macro level if natural gas deliveries from Russia decrease in various EU countries. For many countries in the EU, the estimated GDP loss was less than in connection with the COVID-19 pandemic and other crises the EU has gone through in recent decades. The study concluded that the EU could manage a 70 percent reduction in Russian gas supplies in the short term through a combination of other suppliers, switching gas to other energy sources, and reduced demand as a result of previously high prices. However, there would be major challenges if the gas from Russia is shut off completely. Yet, that was what happened in 2023, and the European spot market price of gas fell by some 90 percent from the peak of August 2022. This was due to a combination of factors that included a mild winter and a successful switch away from Russian gas to gas delivered by other countries, notably Norway and Algeria.

What Will the Effects Be for Russia?

The Russian economy has always been driven by international energy prices via export earnings and state budget revenues. With energy prices rising sharply in 2022 the Russian economy without sanctions could have flourished, with GDP growth returning to the levels of around 7–8 percent (based on calculations from a model in Becker, 2017) that Putin enjoyed in his first eight years as president before the global financial crisis hit in 2008.

The IMF's forecast for Russia in October 2022 (IMF, 2022) projected a decline of 3.4 percent for 2022 which later was revised to a 2.1 percent drop in GDP. In light of this, what is a realistic assessment of the immediate effect of sanctions? Any assessment of this need to start with a realistic counterfactual, which in this case is growth of 7 percent, so a 2 percent decline of GDP in 2022 means that the effect of sanctions that year was a 9 percentage point reduction in GDP.

In 2023, Russia’s GDP is projected to grow by between 1 and 2 percent due to the massive fiscal stimulus the war implies. This can be funded in the short run by savings, but in the longer run, President Putin faces the challenges that savings will run out at the same time as capital, foreign companies, and highly productive people are leaving the country. Again, this is a very poor growth number in a normal year and a sign that sanctions are having a real (but perhaps too small) effect on Russian GDP.

Since 2009, Russia has faced major challenges to generate growth without support from rising international oil prices. In several reform programs, modernization and diversification have been discussed, but with the lack of fundamental reforms of legal certainty and property rights since 2002, the investments needed for a new growth model have not been generated. Åslund (2019) discusses how the Russian economy has transformed into a kleptocracy that lacks the law enforcement institutions that are so central for secure property rights in a market economy. Instead, many talented and successful Russian scientists and entrepreneurs have left the country to build businesses and fortunes in the West. Russia has tried to attract companies from the West to modernize its economy, but the war against Ukraine has effectively thwarted all these efforts and instead turned the flow of knowledge and capital out of Russia at breakneck speed. The start of the war on Ukraine and the mobilization in September 2022 are likely to have scared around 1 million highly qualified Russians to leave their country (The Economist, 2023).

The near stagnation that the IMF and others predict for the Russian economy for the coming years is likely to be a permanent deterioration of the Russian economy as long as the current leadership remains in power. It becomes clear once again that the economic prosperity of citizens is not at the top of the agenda of the Kremlin, although this is important for Putin's popularity in more normal times (Becker, 2019). The uncertainty that the Russian leadership already created after the invasion of Crimea in 2014 left its mark on the Moscow stock market, on investments and on the economic growth discussed above. When in the future we can analyze the full economic effect of the war, the economic costs will prove to be enormous.

In the fall of 2022, important changes occurred. First, Russian statistics-producing authorities became more restrictive about publishing data, which arouses the question of whether the data published is correct. This is a question that the much-paraphrased paper by Sonnenfeld et al (2022) addresses. Russia recorded an extraordinary current account surplus of $236 billion in 2022, but this was the result of very high prices for energy exports. Since the start of the war, exports from EU countries to Russia fell sharply, from €8.4 billion in January 2022 to €2.9 billion in June 2023, i.e., two-thirds of EU exports to Russia have gone over this period (Eurostat, 2023b). Thanks to the extremely high energy prices and maintained export volumes in 2022, Russia was not much hurt by the financial sanctions. The price cap for oil and the end of most gas exports to Europe in 2023 sharply changed the situation for the worse for Russia. The Kyiv School of Economics (2023) estimates that Russia lost 140 billion dollars in revenue due to sanctions on oil and gas.

In February 2022, Russia ended up in financial panic. For a month, the exchange rate of the freely floating ruble collapsed from 73 rubles per dollar to 135 rubles per dollar. The Central Bank of Russia reacted by shock-hiking the interest rate from 9.5 percent to 20 percent, and it worked. The ruble rose to some 55 rubles per dollar. In August 2023, however, the ruble has sunk again reaching 102 rubles per dollar. The causes are multiple. Russia has increased its budget deficit to increase military expenditures; the capital flight has been enormous, and it is still legal; the credibility of the Russian state has decreased. The Central Bank once again responded by raising the interest rate, but the outcome is not clear as yet. Thus, Russia’s macroeconomic situation is unstable, but it cannot be excluded that the authorities manage to salvage the situation once again. However, using savings to wage a war while capital and people leave the country does not bode well for Russia’s longer-term economic development and strength.

How the EU Can Manage the Energy Transition to Create Cohesion Within the Union and Security at the External Border

Russia’s full-scale war compelled the EU to impose extensive sanctions against Russia. Although sanctions have not been able to immediately stop the Russian aggression, they have certainly weakened the Russian economy.

Perotta Berlin (2022) notes that when sanctions are introduced, the deterrent effects of threatened sanctions have by definition not worked. Studies of sanctions thus risk underestimating the effect of sanctions because their possible deterrent effect is often missed. In addition, if it is uncertain what sanctions may be imposed, a country's leaders may implement a policy that they will later regret but not be able to undo, which can again make sanctions look ineffective. When evaluating the effects of sanctions against Russia, the signalling effect they have had on other countries need to be included to provide a more complete evaluation of these sanctions.

When policymakers try to predict future sanctions on the basis of their past experiences, the lack of strong sanctions by the EU and other countries against Russia after the 2014 Crimean invasion may have contributed to Russia's full-scale attack on Ukraine in 2022. That Russia's military forces are not withdrawing when comprehensive sanctions are being implemented is hardly a sign that sanctions are ineffective but that Putin and his supporters realize that it would be a domestic political disaster to admit their miscalculations about both EU and Western collective sanctions as well as Ukraine's resistance. The EU response must be to stick to the current sanctions and prevent that they are being circumvented. How this could and should be done is a central part of the current policy discussion in the EU and other sanctions coalition partners and it is clear that it will involve a close dialogue with some of the countries that are currently part of rerouting trade to Russia.

As long as the war in Ukraine continues, Europe's sanctions against Russia and its energy sector have to become stricter. Although an outlier such as Hungary does not appreciate sanctions, the EU has more generally steered clear away from Russian energy. Through its countermeasures, Russia has reinforced EU unity by discrediting itself as a reliable energy supplier to Europe. Politically, this means that the Baltic States and Poland have won over Germany and Austria, who previously believed in Russia as an energy supplier. Therefore, it is likely that Europe will come closer together in its energy policy vis-à-vis Russia. It seems clear that Europe will reduce its imports of both Russian oil and gas over the next few years. Such a development is consistent with the EU's policy to gradually abandon fossil fuels. High energy prices push the EU in the same direction.

A strong cohesion within the EU is required to once and for all end the dependence on Russian energy and together convert the entire EU to green energy. In order for all member states to move in the same direction, financial transfers within the Union may be needed so that the transition does not become financially unmanageable for poorer countries or those countries that cannot easily become independent of Russian energy. This is an investment that will yield returns for generations to come in terms of both safety and environmental and climate goals and adds to the credibility of continued sanctions on Russian hydrocarbon-based energy.

The mutual energy dependence between the EU and Russia has created economic and political problems for both sides after Russia's renewed war on Ukraine. But the EU can deal with these problems by switching suppliers and energy types in a few years, which is in line with a necessary switch to fossil-free energy to meet the EU climate goals. Russia's transition, on the other hand, is much more complicated and deeply structural, and may take decades to implement with great financial costs for the Russian population. Russia's current leadership will find it difficult to manage the transition and Russia's dependence on the EU as a market for its energy could be the beginning of the end for Putin's regime. If it turns out that this leads to the fall of the Russian regime, the EU must be ready to support all the liberal and democratic forces that after all exist inside and outside of Russia and that in the future can work for a peaceful Russia at the EU's external border.