How Europe Invited Its Economic Apocalypse By Sanctioning Russia

269 min readMar 3, 2024

Abstract

Two years ago, on February 24, 2022, Russia invaded Ukraine, after negotiations failed to resolve differences. Goaded by the USA, Europe immediately decided to economically sanction Russia with the biggest set of sanction packages any country has ever been subjected to. Essentially, what this meant was that Europe would not buy any energy from Russia. I opined in November 2022 that this was a huge mistake by Europe, that it would end in the “European Economic Apocalypse,” because Europe desperately needed Russian energy for its economic growth and heavy industry, and because Russia did not need Europe as much. As I show in this follow-up article, my predictions from a year and three months ago have more or less come true:

Europe has fallen into a bottomless abyss, with little hope of ever getting out. It has irreparably ruined its economy.
The Russian economy, meanwhile, is booming.
The sanctions, on which Europe risked everything, have utterly failed.
To add insult to Europe’s injury, Russia is also winning the military war on the ground.

Last Updated: May 11, 2024

INTRODUCTION

On February 24, 2022, after years of trying diplomacy and realizing that there was no hope in being able to achieve a diplomatic solution with a Ukraine that, egged on by the United States and NATO, was determined to have a confrontation, Russia invaded Ukraine.

Europe knew Ukraine was weaker than Russia and would lose without external assistance. They viewed Russia as an adversary, not only of Ukraine but of all of Europe, which is why NATO continued to exist, even after the fall and breakup of the Soviet Union, the destruction of the Berlin Wall, and the unification of Germany. They had decided back in 1994 that Russia must be defeated completely and a regime change effected, after which the country could be split into four or five smaller nations, which would be less threatening to Europe and the USA — countries with puppet regimes loyal to Washington. Europe did not want to have a direct military confrontation against Russia, for obvious reasons: Russia is a nuclear superpower, an a direct fight could ignite World War III. So they went for a slow encirclement approach, incorporating Warsaw Pact nations into NATO, one by one, as NATO moved ever closer to Russia.

When, after all negotitations between Russia and Ukraine failed in 2022, the Russian invasion finally came, Europe imposed a complete economic blockade of Russia by launching the most wide-ranging economic sanctions that had ever been launched on any country in history, hoping that the blockade would destroy the Russian economy and thereby cripple Russia’s ability to continue its war. Europe was encouraged to do this by the United States and followed by many countries with close ties to Washington: The United Kingdom, Australia, New Zealand, Canada, Japan, and South Korea, among others.

Europe hoped that its biggest play, the banning of imports of Russian gas, oil, and coal — would cripple the Russian economy and force it to its knees, thereby destroying Russia’s ability to continue the war and forcing Russia to sue for peace. This was based on the (faulty) premise that Russia was only a “giant gas station masquerading as a nation,” as the late Senator John McCain said, and therefore, if Europe was not there to buy gas from Russia, Russia would be economically destroyed. To help things along, Europe, along with the US and the other countries mentioned above, gave massive military and economic aid to Ukraine, essentially breaking their own banks. In addition, the US bombed the Nord Stream pipelines that supplied gas from Russia to Europe, making it impossible for Russia to supply gas any longer to Europe and making Europe dependent on (expensive) American LNG (Liquefied Natural Gas) derived from shale. The West realized that they could not do without Russian oil, at least for the time being, and so it imposed an “oil price cap” that was supposed to limit the revenue that Russia could earn from oil sales, and thereby destroy its economy and its capacity to wage war. The oil price cap was to be enforced by shipping companies who would not get insurance from the British insurance company Lloyd’s, the main shipping insurance company in the world, unless they could guarantee that the oil, which they carried from Russia, would be sold below the price cap determined by the West. However, the cap was ineffective, because Russia found many ways to bypass it, including selling oil to India and China (which refused to enforce the price cap), and using a shadow fleet of ships which were self-insured and not insured by Lloyd’s. The US and Europe also banned Russia from using the SWIFT mechanism for settling trades, effectively making Russia’s $300 billion in US dollar reserves worthless. But Russia was able to trade with China and Gulf countries in the Chinese currency, the Yuan, and with India in its national currency, the Rupee, thereby bypassing this restriction as well.

In November 2022, I wrote a detailed review of the impact of Western sanctions and other hostile actions on Russia on both Russia and on European economies. I concluded that:

Russia has a strong economy with extremely strong fundamentals: robust GDP growth between 2001–19 was better than any European economy as well as the US.
Russia had a proven ability (since 2014) to withstand sanctions.
Russia has an extremely strong manufacturing sector, with manufacturing contributing to 13% of GDP, a figure better than the US, UK, and any European country except Germany.
Russia has a very low debt-to-GDP ratio, at 20% (compare with the US, currently at 150%, and the UK, at about 100%).
Over the last decade, Russia had greatly reduced its dependence on the US Treasury bonds to store its wealth, preferring instead to invest in gold.
Russia has a very strong and self-sufficient armaments industry, capable of producing the most advanced weapons without dependence on the West, because of which it is a major arms supporter for many countries in the world, such as India and Egypt, thereby ensuring its immunity from a global boycott on defense supplies.
Russia enjoyed huge trade surpluses with both the Euro area as well as the world as a whole before the sanctions — therefore, the world needed Russia more than Russia needed the world. Russia enjoyed an export/import ratio relative to both the Euro area as well as the whole world of about 1.5 before the start of sanctions — in other words, it was exporting 50% more to other countries, on average, than it imported from them.
Europe’s green transition was being accomplished on the back of cheap Russian energy, and so, without it, it will take very long for Europe to achieve self-sufficiency and to achieve that green transition.
Natural gas formed only 6% of Russia’s exports, and so, it was not reasonable to hope that banning Russian gas exports to Europe would choke the Russian economy.
The total oil and gas exports from Russia to Europe only formed 24% of Russia’s exports. Therefore, banning those would not deal a death blow to the Russian economy.
The demand for Russia’s fossil fuel exports was not rigid. If Europe did not buy them, other countries were waiting to buy them.
China is a major trading partner for Russia. As China’s economy keeps growing, Russian energy is increasingly needed to completely develop the lesser developed regions of China, such as Xinjiang and Tibet. A smaller but significant buyer is India. With Russian oil not going to Europe, India has bought a large quantity of cheap Russian oil.
Russia will be able to get all its needs from China, in the event that Europe blocks all exports to Russia, because Russia’s trade with China is very diverse.
Russia can replace all its imports from Europe by importing from other countries.
Europe cannot cheaply replace Russian imports.
Before the war, Europe was importing about 20% of its total coal needs, about 40% of its total gas needs, and about 30% of its total oil needs from Russia.
Europe as a whole is extremely short of the energy it consumes, and needs to import energy. The world does not have sufficient spare capacity for producing extra energy to supply Europe if Europe decides to embargo Russian energy.
Europe can try to get energy sources from elsewhere, such as Qatar or the US, but these sources will be very expensive, and will take time to set up.
The increased costs will force permanent closure of Europe’s heavy industry: steel, glass, aluminum, chemicals, etc.
The economic crisis arising from the Ukraine war has come to Europe at a time when its capacity for withstanding shocks is very low because of the earlier shock of Covid-19.
Russia is a leading supplier of several commodities in the world other than fossil fuels, such as: grain products, such as wheat, barley, sunflower oil, and safflower oil; agricultural products, such as ammonia and fertilizers; precious metals, such as gold, platinum, and palladium; industrial metals, such as titanium, magnesium, nickel, cobalt, tungsten, and vanadium; and minerals, such as iron ore, copper ore, gallium, germanium, graphite, uranium, neon gas, krypton gas, tellurium, diamonds, silicon, sulfur, and antimony. Banning Russian imports will lead to every one of these commodities becoming much more expensive for Europe.
Europe does not have adequate storage capacity for the gas it needs to replace Russian pipeline gas imports.
If Europe decides to import LNG from the US and other places, it does not have as many LNG terminals as it needs, and will not for several years.
Renewables cannot be ramped up quickly enough to meet Europe’s energy demands.
While fossil fuels from Russia are extremely important from a volume standpoint (cubic meters or tons) to energy-starved Europe, their economic value (dollars or euros) is not very high, and so it is hard to hurt Russia financially through a boycott of fossil fuel imports. This is because the supply of fossil fuels is limited in the world, and it is not possible to remedy a shortage by mining more fuel, simply because of the long lead times and the need to have long-term contracts. Having long-term contracts is also a problem for Europe because it has had a decade-long mission to phase out fossil fuels in favor of green energy.
All this will lead to widespread de-industrialization of Europe.

To summarize, the three main conclusions of my detailed analysis of November 2022 were:

Russia would not be fatally damaged by Western sanctions, though there would of course be a short-term impact on its economy
Europe’s economy would be devastated if it bans the import of Russian oil and gas
Europe would be de-industrialized if it loses access to cheap Russian energy

The purpose of the present article is to review what has happened in Europe since I wrote this article, and examine whether my predictions have come true or not.

EUROPE’S COPING STRATEGIES

As discussed in the previous section, the most important consequence of the non-availability of Russian fossil energy to Europe would be that natural gas and oil would become much more expensive for Europe. In fact, I had explained that there simply wasn’t enough gas in the world to make up for the gas and oil that Europe had chosen to voluntarily forgo. I even speculated whether Europe could keep its citizens warm in the winter of 2022–2023 without Russian energy.

But that did not happen, because the energy shortage was offset in several ways:

One, Europeans voluntarily reduced consumption. Indoor temperatures in residences and offices in the winters has been kept fairly low (around 20 ˚C — down from 23/24 ˚C). This has reduced the gas demand to heat homes and residences.
Two, because Russia could still sell oil to India and China. The US sees India as an important strategic partner to contain China, and therefore did not sanction India for its imports of oil and defense equipment from Russia; and the US sees China as an irreplaceable trading partner, notwithstanding the differences between the two countries, and so did not sanction China as long as China was not sending direct military equipment and dual-use components to Russia. (However, of late, there has been a shift in Washington’s thinking on this, and the US has recently directly threatened sanctions on China.) As a result, Indian refiners bought large quantities of Russian oil at a discount and sold back petrol and diesel to European countries at a huge profit. This relieved scarcity at the petrol pump in Europe, albeit at a cost.
Three, shippers found ways to defeat the embargo by doing shadow ship-to-ship oil transfers. A Russian oil carrier could transfer its cargo to a legal oil tanker (say, one that was selling Qatari oil) that was approved by the West, and sell that oil to European countries. Many of these tankers were 25 year old tankers that would not be insured anyway because of their age and the risk involved in using them.
Four, in 2022, China was having an economic slowdown because of Covid-19 related shutdowns. As a result, factories in China were closed for extended periods because of the government’s “Zero Covid” policy. This meant China did not buy much LNG from the world market in the second half of 2022, and made it possible for Germany to stock up on gas.
Five, the 2022–23 winter ended up being one of the mildest winters in decades in Europe. Temperatures were often ten degrees higher than usual in the harsh winter months. This greatly reduced the need for gas for heating.
Six, because of the war, gas prices in 2022 shot up to unsustainable levels, causing a drop in industrial demand because industries simply shut down. By September 2022, gas prices in Europe had touched €350 per MWh after the outbreak of war, up from a pre-war level of around €75 per MWh. In the next three months, gas prices started reducing, but by the end of 2022, they were still at €115 per MWh. What needs to be understood is that, even before the war in Ukraine broke out, for about a year prior to the conflict, European heavy industry had been in crisis. In February 2021, gas prices were at a low level (the historical steady level) of €15 per MWh. They had been much lower than that a year ago, when the Covid-19 pandemic hit the world. When Covid hit in 2020, global demand slumped. Prices of natural gas and oil plummeted. Gas producers worldwide had to close down gas wells permanently, because gas cannot be stored if it is not used. And so, gas supply shrank in 2020 to meet the reduced demand for it. When countries came out of lockdown, there simply wasn’t enough gas supply for the economies that began to hum again, and so gas prices went up from €15 per MWh in February 2021 to €75 per MWh in February 2022. This was a huge cost increase to power plants, chemical plants, steel and aluminum plants, and glass factories, and all these industries in Europe were already at the breaking point. When prices shot to €350 per MWh after the war, it was simply too much for them to take. As a result, several heavy industries simply shut their factories. Many of them are still shut, because it is not economical to restart a cold furnace. Because of this, the gas demand in Europe fell by as much as 20%. This also meant that the gas that would have otherwise been used by these industries became available for domestic heating, even as citizens lowered their thermostats — and, as a result, Europeans did not freeze in the winter of 2022–23.

European Natural Gas Demand Tracker Showing Demand Destruction in 2022 Relative to Historical Averages

European Natural Gas Demand Tracker Showing Demand Destruction in 2023 Relative to Historical Averages

Thus, because of a combination of factors, Europe avoided a human catastrophe in the winter of 2022–2023, but only by sacrificing its core industrial strength. In addition, Europe was permanently divorced from its main energy source, Russia, and had to buy expensive American LNG, which had to be transported thousands of miles by sea. All this made manufacturing in Europe much more expensive and, therefore, less competitive.

In addition, the US unveiled its “Inflation Reduction Act,” which incentivized companies to manufacture in the US. Given the challenges of manufacturing in Europe, as detailed above, this incentivized European companies to shut shop in Europe and move to the US, thereby weakening the European industry base.

Although Europe avoided a catastrophic meltdown in 2022 by voluntarily reducing demand and de-industrializing, energy is still extremely dear in Europe, as is reflected by the cost of electricity in Europe. The next chart shows the price of electricity in Germany.

Electricity Prices in Germany, 2019–2024, EUR/MWh

The graph is very noisy, but it is enough to see the steady-state price before the Ukraine war — around 45 EUR/MWh and the steady-state price after the imposition of sanctions — around 65 EUR/MWh. Essentially, Germany chose to make their electricity 44% more expensive.

The next graph shows the same chart for France.

Here, the approximate steady price before sanctions on Russia was 50 EUR/MWh, and now is 80 EUR/MWh, an increase of 37.5%.

Italy:

Here the prices before and after sanctions are EUR 55/MWh and EUR 90/MWh, an 82% increase.

And, finally, the UK.

In this case, the prices have gone up from GBP 40/MWh to GBP 65/MWh, an increase of 62.5%.

This is why residents of the UK have to choose between food and heating.

WHY THERE IS A CRISIS TODAY

The basic premise of my article of November 2022 was that Europe needed Russia more than Russia needed Europe. In a broader sense, that the “West” needed Russia more than Russia needed the West. And so, I prophesied that the West would pay a huge price for sanctioning Russia, while Russia would be hurt by the sanctions, but survive and even thrive.

Have I been correct in my predictions? To answer that question, I need to define the metrics by which I judge whether an economy is doing well or failing. We must then apply those metrics on both Russia and the “West.” Before we can do that, though, there are two preliminaries. We must define which economies we are measuring. We must also understand why we expect seriously adverse consequences from the sanctions. What, indeed is driving the world economy today? If we do not understand what we are investigating, we are unlikely to understand what we find.

The first question is far easier to answer. So, without any further ado, let us revisit who the “West” are. The following figure is a figure of who has applied sanctions on Russia in the world. They are the collective “West”: the US, Canada, the UK, continental Europe, Australia, New Zealand, Japan, and Korea. Of these, I predicted that the highest price would be paid by Europe itself, including the UK, owing to its geographic proximity to Russia, followed by Australia, New Zealand, Japan, and Korea.

The “West” That Has Imposed Sanctions on Russia

We can see that the West comprises both countries close to Russia, in Europe, and countries far away from Europe, such as Japan and South Korea and Canada. In this report, we consider what the effects of the sanctions against Russia have been on the countries in red in the above map. We first start with the countries in Europe, then move to the non-European “West,” and finally to Russia.

But before we can do all that, we must understand the broader economic picture here, and that goes back several years. Europe is in the grip of a deep and asphyxiating crisis today, a crisis that threatens to cut off the economic oxygen of the continent, as I will show beyond any shade of doubt in this report, but the root cause of the crisis of today goes back many years. Let us understand how.

Following the Subprime Mortgage Crisis (SMC) of 2007–2009, the US made a recovery, but at great cost. By some accounts, Americans collectively paid a price of about $10 trillion between 2007 and 2009 due to the SMC.

One of the consequences of the SMC was the Global Recession of 2008–2012 in Europe, whereby a number of European nations became bankrupt due to a balance-of-payments crisis. To rescue these countries, first starting with Iceland and then moving on to the PIIGS countries — an acronym standing for Portugal, Italy, Ireland, Greece, and Spain — the EU set up a special-purpose vehicle, known as the European Financial Stability Facility, or EFSF. The EFSF had contributions from all the major European countries, with a total capital of €780 billion, of which Germany alone contributed €330 billion. Of this, the fund disbursed €544 billion to severely affected economies. I am not aware if anyone has measured the total economic loss suffered by Europe during the Great Recession of 2008–12, with multiple banks and lending agencies going bankrupt, and several European nations on the verge of insolvency, but one can imagine the losses at several trillion euros if the EFSF actually handed out €544 billion in support. To give just one example of just how widespread and destructive the economic crisis was, it was found that 17% of the total loans of Italian banks, amounting to about $400 million, were junk. The depreciation of global assets and the cumulative erosion of wealth because of the financial crisis may never fully be known. The housing sector, in particular, was badly battered on both sides of the Atlantic.

The financial assistance from the EFSF to the afflicted countries came with strings attached. Effectively, the welfare state in Europe was greatly downsized, leading to widespread unemployment. It has been estimated that approximately 6.7 million jobs were lost between 2008 and 2013 in Europe as a result of the “austerity measures” demanded by countries like Germany and France in return for financial assistance. Even more importantly, the balance of payments crisis in Europe led to the permanent impoverishment of the continent, a phenomenon that continues to this day. A report written in 2018 and published in 2019, commissioned by the European Union, showed that the percentage of people who were at risk of slipping into poverty had increased to one in ten, and had been continuously increasing since 2006. This is a shocking number. The total working population of Europe is around 200 million, and 10% of this is 20 million, and what this data shows is that, between 2006 and 2017, an additional 4 million workers were barely surviving.

Percentage of Working Population on the Edge of Poverty

The combination of the SMC with the Great Recession of 2008–2012 is generally referred to as the Global Financial Crisis (GFC). The point to note is that the GFC made the countries of North America and Europe significantly poorer. Any American or European would have dearly wished never to see another financial crisis again, given that the last one had wiped off trillions of dollars worth of their wealth.

It took until around 2015 for Europe to recover somewhat from the effects of the GFC (but, as the chart above showed, they would never fully recover). But then, in 2020, Covid-19 hit the world like a ton of bricks. The world reeled under the effects of the pandemic. Countries worldwide shut down production in factories to try and prevent the spread of the disease. As a result, the world did not need energy.

Now, you cannot suddenly stop an oil well or a gas well. The oil and gas will keep gushing out due to the huge pressure in the well under the ground. There are some ways of trying to close down a well temporarily, and these are not very satisfactory. What one needs to understand is that oil and gas flow through the ground through fractures. When a well is active, the fractures are kept open by the constant flow of oil and gas. In fracking, the fractures are usually kept open with sand particles that are specially injected into the well. In commercial oil drilling, in the unusual case where a productive well must be closed down, what oil companies must do is to pump a mud slurry into the well to block the upward flow of oil and gas. The mud slurry blocks the pores in the rock. Next, the well head is blocked by pouring cement over it after the flow has slowed down, so that oil or gas does not come out despite the mud.

Now, first of all, this is expensive to do. Second, if, after a year, you want to re-open the well, there is absolutely no guarantee that the well will function as before. The reason is that oil is a very complex mixture. In the blocked well, many heavy tars and high molecular weight waxy paraffins may completely block all the fractures in the rock in the absence of flow. So now, if you drill again through the concrete and reach the rock where the oil or gas used to flow, you may get nothing or just a trickle. And reopening a well, again, is quite an expensive operation. Essentially, there is a very high chance that you lost that productive well and have to try your luck somewhere else.

And so, for a short disruption, most oil companies would flare the oil or gas. That is, they would simply burn the unused oil and gas. But with a pandemic with no end in sight, this was not a viable option. In addition, it would lead to huge greenhouse gas emissions (methane, which is what natural gas is, has four times the greenhouse gas effects of the carbon dioxide it would be converted to if burned through flaring). With very little demand in the market, oil and gas rigs closed many wells permanently (capped) by sealing them with concrete so they were firmly and permanently plugged up.

In other words, what the pandemic did was to permanently reduce the oil and gas output of the world. To go back to pre-pandemic capacity, oil companies would have to do a lot of new prospecting and drilling, all of which takes time. Which means that currently, there is an oil and gas scarcity in the world that will take years to fix.

Managing a coal demand drop is easier. You simply lay off all the workers and close the mine, leaving a skeletal staff to manage the mine and prevent fires. Even this is not easy, as equipment not in use tends to rust and clog, and cannot be restarted without major maintenance or new investment in very expensive and niche equipment, such as 50-foot tall dump trucks and 100-foot tall earthmovers. In effect, the mine stays closed.

Once the first vaccine for Covid-19 had been discovered in December 2020, and employees could go back to work by early 2021, factories needed energy again. Office buildings needed electricity, which mainly came from coal or natural gas or oil; chemical plants needed the same things, steel and aluminum plants also needed the same. Cars and trucks needed diesel and petrol.

Only one problem: the fuel wasn’t there, for the reasons explained above. This meant that there was a global shortage of fossil fuels. And that meant the price of all fossil fuels went through the roof. There was global price inflation. Now, if the electricity used to light homes, the gas used to heat homes, the petrol and diesel used to drive cars and trucks all become expensive, that means all goods become expensive. This can be seen in the following chart from Trading Economics.

Inflation in Europe (the Eurozone) — the Pandemic Effect

Inflation in Europe in January 2020 was 1.4%. Because of the lockdowns due to Covid-19, this went down to -0.3%, indicating deflation. Nobody was producing anything, nobody was buying anything. Then the vaccine came in January 2021, and starting in January 2021, inflation came back to positive territory, hitting 5% by January 2022.

Now the interesting thing is that things changed within just over a year. While the first Covid-19 case emerged in November 2019 in China, and became widespread by the spring and summer of 2020, causing widespread lockdowns, the first vaccine was approved at the end of December 2020 in Europe. It took another five to six months for universal vaccination and the threat from Covid-19 to substantially reduce in the public consciousness. The energy industry cannot respond so soon. When demand came back up, the gas industry needed to dig new wells. To dig new wells, it needed tons of steel, but the steel factories had all been shut for 6–9 months. It takes years just for things to go back to normal in this supply chain, because the entire supply chain has to be rebuilt — steel, instrumentation, valves, pipes, etc. Meanwhile, due to fuel shortage, transportation costs skyrocket, and so the price of everything is very high.

What does a world on the cusp of skyrocketing inflation need? It needs stability, both economic and political, and peace; it needs time to repair and rebuild. It needs all these so that the countries of the world can agree to a common energy policy to dig new oil and gas wells as soon as possible to alleviate the global shortage of fuels and increase supply, so that prices can come down.

But what happened, instead? A war broke out in February 2022 in Ukraine — a conflict that, had the West behaved wisely and looked at the larger, non-ideological, economic picture, could have been solved through negotiations and have been prevented from escalating into a war. But the US was more interested in global dominance and in control of Russian and Ukrainian natural resources than in rebuilding its own economy and the economies of the rest of the world, and so pushed harder and harder for a conflict with Russia, rejecting all avenues of compromise, until it got the war it wanted.

And what happened because of the war? The West imposed sanctions on one of the most important fuel producers in the world, refused to buy any natural gas, oil, and coal from them, and refused to let them sell their gas, oil, and coal to anyone else, by banning them from world trade using dollars — all this at a time when the world was already battling a problem of low fossil fuel supply and inadequate renewable energy sources to replace them.

This worsened an already bad situation. Inflation was already sky high, and it went even higher because of the war and the resulting sanctions on Russia. The inflation rate in Europe, that had reached 5% by January 2021, zoomed to 9.1% in August 2022.

Inflation Rate in the Eurozone from December 2020 to August 2022

The US Federal Reserve realized the compounded problem it had from the after-effects of the post-Covid-19 revival combined with the sanctions on Russia — only after it had imposed sanctions on Russia — and started raising interest rates belatedly in March 2022.

The US Fed Rate rose from around 0.25% in March 2022 to about 5.5% in September 2022, in a series of ten hikes. The European Central Bank (ECB) quickly followed suit, going from -0.5% in March 2022 to 3.0% in March 2023.

Interest Rate of the European Central Bank

In the United Kingdom, the problem was recognized even before the start of the war in Ukraine. Starting from December 2021, there have been a series of 14 interest rate hikes in the UK in order to combat rising prices, until the hikes stopped in August 2023, with the interest rate at a high level of 5.25%.

Interest Rate Hikes by the Bank of England

So the whole world had a serious inflation problem due to an energy shortage. The energy shortage was created by the Covid-19 crisis, but it was considerably worsened by the war in Europe due to Western sanctions against Russia.

The global rise in inflation, along with the scarcity of crude oil, led to a spike in petrol (gasoline) and diesel prices worldwide. In the US, this is a very sensitive issue, because Americans believe gasoline and diesel are their birthrights. A huge spike in transportation fuels can unseat an administration.

Because of this, the Biden administration has tried to prevent prices from rising too much at the pump by releasing the US’ strategic stocks of petroleum, as the following figure shows. From 638 million barrels on August 2, 2021, the Strategic Petroleum Reserve (SPR) level has come down to 362 million barrels at the time of writing, a drop of 43%.

As we will see further on in this report, this three-year wave of inflation has finally been tamed by Europe. But how does one tame inflation?

Understand the causes of the present inflation. There is a shortage of energy. This is the main cause. There are only two ways to address this root cause: increase the supply of energy, or lower the demand for energy.

Europe is trying very hard to increase the supply, in two ways. One is to ask energy producers like Qatar to drill more wells so that Europe can buy more gas and oil from them. But this is a problem for Qatar and the other Gulf states, like Saudi Arabia, because Europe is also, very publicly, saying that it wants to phase out fossil fuels. It is a time-consuming and expensive process to find new oil and gas wells. If Qatar does a lot of work and finds a new well, that well will keep producing oil or gas for 20 years. But Europe wants to phase out oil and gas by 2030. Who, then, will Qatar sell its oil or gas to? After all this time and expense, it will have to shut down the well. And Qatar or Saudi Arabia would not want to rely on Europe’s whims. So they will not drill new wells to help Europe’s inflation problem.

But the US is ready and willing. Its oil shale producers in West Texas, South Texas, New Mexico, and Louisiana are relying on Europe buying huge volumes of their shale oil and shale gas. The Texan slogan is “drill, baby, drill!” While Covid-19 was a disaster even for US shale gas, they do not expect another such event to occur in the near future.

While another Covid-19 disaster is unlikely to hit American shale production, what is far more likely to hit them is Europe’s green transition. Europe is on a mission to go green with solar and wind, especially now that they have no access to cheap Russian piped gas and have to buy American shale gas at twice the price because it is being shipped all the way from the Gulf of Texas to Hamburg or Rotterdam. But this is going to take years. In 2021, renewables only formed 12% of Europe’s overall energy mix. Increasing this to near 100%, or even 50%, is going to take many years, perhaps decades. And all those years, people will have to pay high prices for energy.

It is popular and fashionable to talk about solar, wind, and other renewables, but people forget that coal is still very important. About 10% of Europe’s energy came from coal in 2020; and the IEA has said that about 36% of the total electricity generation in the world came from burning coal in 2022. So the price of coal is very important to discuss, especially in the context of high inflation. The next chart shows the price of coal from June 2019, before the onset of the Covid-pandemic, to today, and it is very revealing.

The alert reader will immediately see a similarity between the coal price chart and the earlier shared chart on the natural gas price in Europe (TTF).

The price of coal in the “stable” period — before Covid and before the war in Ukraine — was US $55/ton (a ton here is the metric ton, or 1000 kg.) From there, it goes through the Covid dip, where prices fall to $34/ton in March 2020, before steadily climbing up as the economy reopened and offices and factories needed electricity again. On February 21, 2022, three days before the outbreak of war, coal was already at an all-time (upto that point) high price of $185/ton. Immediately after the war broke out, prices skyrocketed, and went to $425/ton on 7th March, 2022. Prices stabilized a little, and came down to $262/ton on April 4, but then again shot up and reached $397/ton on 11th July, 2022. Prices have gradually come down from that high level to reach a low point of $94/ton on 12th February, 2022. Currently, the price is upwards of $110/ton. Essentially, the new stable price of coal is double what it was in 2019. One can imagine the pressure this puts on economies everywhere in the world. Things are not the same as before, and will never go back to where they were. And so, governments and economy managers need to think not about worsening things with wars and other expensive propositions, but by bringing about stability in the world. As I had pointed out with oil and gas, restarting coal mines is also an expensive proposition because of the need for specialized, large-capital mining equipment such as giant earthmovers and dump trucks. And coal is not popular, either.

To round off the energy picture, let us look at oil as well. The graph below shows the price of West Texas Intermediate (WTI), a popular price benchmark for crude oil (others are Brent, Dubai, Urals, etc.)

What we see in this picture is that in the “stable period” before Covid and before the war in Ukraine, the price of WTI crude was in the range of $50/barrel. When the Covid crisis hit, demand dropped and the price dropped to as low as $40/barrel. Oil companies were forced to cap wells permanently. When the pandemic ended and everyone needed oil again, the oil wasn’t there, and the price started skyrocketing. On June 21, 2021, the price of WTI crude was $57.63/barrel; on December 10, 2021, it was $63.66/barrel; and on Feb 18, just a week before the war, $72.61/barrel.

Under normal circumstances, if the world had seen stability, new wells might have been drilled, and the world would see a return to saner prices. But the petroleum industry has been battling negative perception, especially in Europe, because of Europe’s desire to go green. That does not reassure an oil company and give it encouragement to drill new wells.

So what happened? In the immediate aftermath of the commencement of hostilities, prices skyrocketed to $86.84/barrel on June 10. But then prices stabilized somewhat, but things never went back to “normal.” Prices did go down a little, for example to $65.61/barrel on March 19, 2023, but they are again back up to $83/barrel in September 2023, and were back to $85/barrel in April 2024, a big jump from the 2019 stable price of $50/barrel. The prices will never go down, because there is simply no incentive for them to do so. New oil or gas wells are a huge capital investment. If the world has decided there is no long term future in oil, gas, or coal, because of global warming, companies are not going to restart oil, gas, or coal fields. It is too much of an economic risk to take.

What I am trying to highlight is that right at the time the American Alliance (AA) (a term that I think is a more accurate representation than saying “the West”) thought it fit to push Russia into a corner and provoke a war in Ukraine, the world was already in a deep economic crisis thanks to unplanned events — namely, the Covid pandemic. The heads of government of the American Alliance simply did not have the grasp of the global economic situation to realize that a war under these circumstances would be disastrous. They thought it was going to be business as usual, yet another war. But timing in geopolitics is everything, and the timing of the war in Ukraine and the resulting sanctions on Russia could not have been worse for the American Alliance.

It is the American Alliance that has imposed sanctions on Russia: the US, Canada, Australia, New Zealand, the countries of Europe, the UK, Japan, and Korea. That means that the supply of Russian goods have vanished from these countries, raising commodity prices, making goods expensive, increasing inflation, and reducing industrial competitiveness.

But Russia sells oil and gas to China and India at a discount, and grain to African nations at a discount in exclusive bilateral deals, while the global price of these commodities have risen because of the continuing sanctions — and it is the global price that Western nations pay.

Russian oil is still not available to Western markets which, other than China, are the biggest consumers of oil. As a result, crude prices are high, and prices of petrol (gasoline) and diesel are high throughout the developed world. This is a major cause of inflation in the West. This also lowers the productivity of Western industry. China, on the other hand, gets cheap crude from Russia, making its industry more competitive through reduced input costs.

Similar trends can be seen with other commodities as well. For instance, the price of wheat soared following the war.

Before the Covid-19 crisis, the price of wheat had hovered around $500 a bushel. In January 2021, it was $630 a bushel. Prior to the outbreak of war, it was $760 a bushel, and zoomed to nearly $1100 a bushel by May 2022. It took until January 2023 to come back to the same level of $760 a bushel. It has taken until March 2024 to come to a level of $550 a bushel, a level last seen in August 2020.

A similar story holds for sunflower oil, of which Russia is one of the top producers. On April 8, 2015, the global price of sunflower oil was $800 per ton. That was more or less the price of sunflower oil until the beginning of the Russia-Ukraine conflict in February 2020. Following the outbreak of war, global sunflower oil prices shot up to $2400 per ton by May 2020, before coming down to around $900/ton in May 2023, where it has stabilized (still about $100/ton higher than its pre-war price).

Global Sunflower Oil Prices (Source: Trading Economics)

Similar stories can be found all over in the commodities space, in which Russia is a superpower. Since natural gas is key to producing ammonia, the building block of all nitrogenous fertilizer, Russia is a major producer of fertilizer. Overall, Russia is the world’s largest exporter of fertilizer, accounting for 23% of global ammonia exports, 14% of urea exports, 19% of processed phosphate exports, and 21% of potash exports. It is instructive, therefore, to look at how sanctions on Russia have affected fertilizer prices.

The graph below shows the price of urea, one of the most common nitrogenous fertilizer, over time, in USD/ton.

We can see that in the “stable” period, before the Ukraine war and before Covid, Urea was trading at around $290/ton (July 2019). After the Covid crisis hit, all production came to a halt because of the demand shock, and so when countries came out of the pandemic, in late 2020, prices started skyrocketing because factories had to be restarted. From $300/ton in late December 2020, prices shot up to $940/ton in late December 2021 before coming down. By February 18, 2022, one week before the start of the war, urea was trading at $660/ton. Then the war hit, and the sanctions started. Immediately urea prices, which until then were going down to a more stable equilibrium as supply and demand had been starting to match, started shooting up. On April 20, 2022, urea prices hit an all-time peak of $1055/ton. From that high, urea prices have gradually come down back to around $300/ton, but it has taken two years. High urea prices affect the price of vegetables and lead to high food inflation. This is why food inflation (as will be seen elsewhere in this study) have been so high in the last two years. Now, one should ask why the prices have come down. It isn’t like the bans on Russian natural gas or ammonia have gone away. It is because people have learned to do with less. Essentially, the standard of living of the American Alliance has gone down.

Let us look at another important fertilizer, diammonium phosphate (DAP). In the stable period before Covid and before the Ukraine war, say November 2019, the price of DAP was around $230/ton. From June 2020, prices started going up as Covid-related bans began being lifted. On February 22, 2022, two days before the start of the war, the price was $705/ton. Then the war started, and the sanctions hit, and the American Alliance (AA) started feeling the scarcity of natural gas, and, with it, nitrogenous fertilizer. By March 31, 2022, the price had gone to $1020/ton. After that, over the last two years, prices have slowly come down, not because the world found more DAP somewhere, but because farmers in the AA countries learned to make do with less. Meanwhile, farmers in China and Africa, who did not sanction Russia, were getting fertilizer for cheap. Today, DAP has reached a new steady price of $490/ton, which is more than double the earlier stable price of $230/ton.

If fertilizer prices go up, then the prices of all food items go up.

Global Price of Di-Ammonium Phosphate (DAP), US $/Ton

What we are seeing is that sanctions on Russia did not just make petrol and diesel and natural gas expensive. They made everything expensive, because Russia is a vast treasure-house of natural resources (exactly the reason why the US tried to encircle Russia with NATO — in an attempt to control its vast natural resources.) And the result is not just a rise in gasoline and diesel prices, but a rise in the price of everything.

Essentially, the AA’s sanctions on Russia caused a permanent increase in core inflation, or the increase in prices other than fuel and food.

Similar trends can be seen in a wide variety of products in which Russia is a dominant world supplier. Take, for instance, naphtha, one of the key feedstocks of the petrochemial industry.

We can see that the “stable” “pre-crisis” price of naphtha was around $500/ton in 2019. After the Covid rebound, prices shot up. As explained before, without the sanctions on Russia, eventually the prices would have come down to the earlier equilibrium. But let us see what happened.

On January 13, 2020, just before the pandemic, naphtha was trading at $535/ton. Due to the lockdowns and demand destruction, its price went down to $144/ton in April 2020. From there, it rebounded fast, and on February 14, 2022, the price was around $850/ton. Then the war started, and the price shot up to $1080/ton on February 28, 2022. From there, it came down to saner levels by August 2022, but it has found a new steady state of $650/ton.

Prices of naphtha going up mean that prices of every plastic, every polymer, every composite material, every solvent, paint, nail polish remover, lubrication oil, wax, cosmetics, etc., go up. It affects every sector of the economy.

Let us look at metals. One of the key metals in the world is aluminum. Without aluminum, you cannot build cars and airplanes. Russia is the third-largest producer of aluminum, at 5.4% of global output. China and India are the top two producers in the world. The US imports 44% of its total aluminum requirement. Let’s look at what sanctions did to the price of this key raw material.

In the pre-crisis period, in most of 2019, the price of Aluminum was around $1700/ton. Then the pandemic arrived, and prices dipped to $1450/ton because of demand destruction in April 2020. But then the price of aluminum started to rally, and on January 31, 2022, the price was $3075/ton. Then the war happened, and the price immediately skyrocketed to $3850/ton on February 28, 2022. Thereafter, the price came down and stabilized, but at the time of writing, it is still around $2500/ton, a permanent 32% increase.

Russia is also a key supplier of steel and iron ore. Russia refines most of its iron ore into pig iron and steel before exporting it. Russia is the fourth-leading producer of pig iron, at 3.9% of global output, and sixth-leading producer of raw steel, at 3.8% of global output. Russia is the world’s largest exporter of pig iron, at 28% of global exports, and the top exporter of iron ingots, at 14.5% of global exports. Of the pig iron Russia exports, a third is bought by the US.

Given all this, the global price of steel and the price of iron ore are extremely important in understanding the cost that the AA is paying by sanctioning Russia. Below you can see the global prices of steel.

During the stable, pre-crisis period, the steel price hovers around $3700/ton. With the end of the pandemic, prices climb up, reaching a peak of $5800/ton in October 2021 before starting to come down and reaching a minimum of $4200 in December 2021. On February 21, 2022, the price was $4633/ton, and reaches a peak of $5176/ton on May 5, 2022. Then the price gradually comes down, and has finally now come down to the previous stable price. The price of finished steel is a bit more stable, because a lot of global players are involved in the process of iron ore to pig iron to steel, including China and India, and thus steel rebar prices only had a brief period of extremely high prices.

However, when one looks at the price of iron ore, the picture is somewhat different.

It can be seen that the price of iron ore in the pre-crisis stable period of 2019 was around $89/ton, but that the new stable price is around $115/ton — an increase of nearly 30% from the previous stable price.

Another key metal that is ubiquitous and extremely important is copper. Copper wire is used in most motors because of its high electrical conductivity, and it is a bulk metal of great importance. In 2022, the world consumed more than 22 million tons of copper. Russia is the third-largest exporter of copper, at 6.08% of world exports, after Chile (26%) and Zambia (9.7%). So sanctions on Russia will affect the global cost of this metal, as I had prophesied in 2022. The next chart shows the price of copper.

In the stable period of 2019, copper prices averaged around $2.70 per pound. After dipping to $2.10 in March 2020, copper prices rose spectacularly, reaching a peak of $4.8/lb in March 2021, and staying there for quite some time. On February 7, 2022, its price was $4.4/lb. After the outbreak of war, it touched $5/lb, before dropping to $3.2/lb in July 2022, but then went up high again as round after round of sanctions extended them to all of Russia’s output. Copper is currently trading at $4.6/lb, almost double its previous stable price.

Magnesium is an extremely important alloy metal used heavily in the aircraft and automotive industry. China manufactures 85% of total output; Russia is second at 6.3%. A ban on Russian sales through bans from SWIFT, etc., makes this important metal unavailable to the AA, especially considering that Washington also has China in its crosshairs. Let us see what sanctions on Russia have done to the price of magnesium. Because of China’s dominance in this commodity, prices are reported at CNY (Chinese Yuan)/ton.

It can be seen that the long-term steady price of magnesium over the years has been in the 15,000–16,000 CNY/ton range. The post-Covid inflation wave peaked on September 20, 2021, with a peak price of CNY 71,683/ton. On February 14, 2022, the price was CNY 42,185/ton, but again peaked at CNY 47,462/ton before reducing gradually. But its new steady price is around CNY 20,000/ton, a 25% increase over its earlier stable price.

Another extremely important industrial metal is nickel. Russia is the third-largest producer of this metal, producing 9.1% of world output. Russia is also the largest exporter of finished nickel, at 16.4% of world exports. What has economically blocking Russia from the world market with sanctions done to the nickel price?

It can be seen that the pre-crisis steady state price of nickel (in 2019) was around $13000/ton. The price was around $25,000/ton on February 14, 2022, before skyrocketing to $48,500 after the outbreak of war, on February 28, 2022. Although the price has come down since then, the current value is around $19,000/ton, a permanent rise of 46% in the steady state price.

Another very important metal is titanium, which is used in the manufacture of aircraft bodies and in the production of titanium oxide for white paints. Russia is the third-largest producer of titanium in the world, at 13% of world production, and the fourth-largest exporter of titanium, at 10% of world exports. The chart below shows what has happened to the price of titanium since the imposition of sanctions on Russia.

It is the same story all over again. During the stable period in 2019, prices were around CNY 40/kg. Prices shot up to CNY 50/kg in the post-pandemic period. On February 21, 2022, the price was CNY 57/kg. The price shot up to CNY 152/kg by April 25, 2022. It has taken two years for the price to gradually come down to CNY 52/kg.

I could give many more examples, but I think these make the point I wish to make: Russia provides the world with many extremely useful minerals and metals, and blocking Russia from trade with Europe and the rest of the AA only hurts the latter. Sanctions on Russia have directly contributed to core inflation by removing many important metals and minerals from the markets of the AA and creating shortages, driving up prices and making everything expensive.

If it is hard to increase supply to reduce prices, the second way to address high energy prices is to use the basic idea of economics: supply and demand. Since supply is fixed, one can only reduce the price by reducing demand. That means, on the consumer side, driving less, using public transport more, reducing thermostat settings at home to 20 C instead of 23 C, do the same in buses and trains (maybe 19 C instead of 22 C), use bicycles instead of motorized transport, and so on; and, on the industrial side, simply shut down large factories that use up huge amounts of energy — such as steel, glass, aluminum, and chemicals. Thus Europe’s inflation can only be addressed by reducing living standards and by shutting down European industry. Shutting down European industry will lead to unemployment unless governments spend more on social nets and increase their national debts. Of course, increasing debt has its own problems.

It should also be noted that only the West has imposed sanctions against Russia. India has not imposed sanctions, nor has China. That’s 2.8 billion people who are still buying from Russia. Add most of the people who live in Africa and Asia. These people need not suffer from energy shortages. But they are, currently, because they still rely on the US dollar for international trade, and so they cannot buy oil or gas or coal from Russia by paying Russia in dollars or by using SWIFT. China and India have made special arrangements to trade with Russia without inviting sanctions (in China’s case, by using the Yuan, and in India’s case, using the Rupee.) Other countries of the Global South are moving towards decoupling from the dollar and doing trade using the Yuan. This is a movement known as de-dollarization.

And therefore, it is to be fully expected that the countries that will be hurt the most, economically, are the countries of the collective “West.” These are the satellites of the USA — Europe, the UK, Japan, Korea, Australia, New Zealand, and Canada. How can we measure their economic loss? How can we quantify the loss in manufacturing that is essential to reduce inflation? By looking at various indicators, which are explained next.

CHARTING THE PROGRESS OF THE ECONOMIC CRISIS

There are several indicators one can use to measure the economic health of a country.

Purchasing Managers Index (PMI)

The first of these that we will look at is known as the Purchasing Managers’ Index, or PMI. The PMI is a composite index across industries, based on responses to five questions on five different parameters, which have different weights. These five parameters are new orders (30%), output (25%), employment (20%), supplies delivery times (15%), and stock of items purchased (10%). Each business manager gets a monthly questionnaire, in which they have to reply whether these parameters have improved, worsened, or stayed the same. The percentage of the total responses that say that a parameter has improved — say, for example, that new orders have gone up — is then tallied. Let us call it I, for improvement. Similarly, the percentage of the total responses that say that a parameter has worsened — say, that new orders have gone down — is also tallied. Let us call it W, for worsening. And, similarly, the percentage of responses that say that a parameter has stayed the same — say, that the number of new orders is about the same — is also tallied. Let us call it S. Then the PMI is calculated as

PMI = I + 0.5*S + 0*W

The PMI is calculated for each of the five parameters, and the weighted sum is reported. This is called a diffusion index. It can be seen that if all companies say that things are the same as before (S = 100), then the PMI is 50. Thus, for an economy that is neither expanding nor contracting, PMI stays at 50. For an economy in which all managers report an improvement, I = 100, S = 0, and W = 0, and therefore PMI = 100. For an economy in which everyone reports a worsening, I = 0, S = 0, and W = 100, and PMI = 0.

Thus, values of PMI above 50 indicate expansion of manufacturing, and values below 50 indicate contraction of manufacturing.

Capacity Utilization

If manufacturing is contracting, then it should show up in our second metric, which is capacity utilization. Capacity utilization, unlike PMI, is an objective measure that looks at how much of installed capacity of a factory is actually being used. For instance, if a chemical plant has a rated capacity of 1000 tons per year, and if only 700 tons per year are being manufactured in a particular year, then the capacity utilization for that year is 70%. Capacity utilization can be measured on a yearly, quarterly, monthly, or daily basis. The ideal for any factory manager is that capacity utilization be as close to 100% as possible. Low capacity utilization is an indication that demand is low. This could be due to multiple reasons. It could either be because your product is not competitive enough or because the target economy is in poor shape and unable to buy your products (demand destruction).

Products can be uncompetitive due to high cost or poor quality. High cost can be because of high capital or energy or labor or transportation costs (factors of production). An example is what American automaker Tesla is experiencing — Chinese carmaker Byd is making electric cars that are as good as (maybe better than) Tesla’s cars, and Tesla is losing market share to Byd globally. This phenomenon has already happened, with Volkswagen losing its position as top car seller in China to Byd. And an important part of price competitiveness is the cost of production factors such as energy.

Industrial Production

A third metric, which is also quantitative, is industrial production growth. It is a direct measurement of how much (in terms of the value of goods produced) is being produced in a country. It can be seen that this is directly related to capacity utilization. There will be some differences between the trends in the PMI and in the actual industrial growth rate because they are measured differently, but both are important and both are examined by serious economists to determine the health of an economy. But from the point of view of energy starvation, actual industrial production growth is extremely important.

GDP Growth Rate

A key macroeconomic indicator that is directly related to industrial production growth, capacity utilization, and the PMI, is the growth rate of the gross domestic product (GDP) of a country. The GDP of a country is the total value of goods and services produced by that country. GDP is usually measured both quarterly and yearly. If industrial growth rate is high, capacity utilization is high, and the PMI is above 50, then the chances are that the GDP growth rate is also high. The GDP is also related to a concept called a recession. Technically, a country is said to go into recession if it has two consecutive quarters of negative GDP growth, where growth is measured from quarter to quarter. To understand economic activity as a whole, though, it is more important to look at year-to-year variations in GDP. For example, economic growth in Western countries picks up during the Christmas season, and so the best way to compare growth across years is by comparing growth at the same time in the year (month or quarter) across years.

An important point that needs to be kept in mind as far as GDP is concerned is that GDP is an aggregate measure that does not account for inequality. So, for instance, in a country like India, with high levels of income and wealth inequality, you could have a few extremely wealthy people, because of whom the GDP looks high, but a large number of people live in extreme hardship. GDP measures total output, not equality. So if the super-wealthy are buying Mercedes Benz cars and living in 10,000 sq. ft. mansions, that will increase GDP, even if there are large numbers of people living in horrible urban shanties. This is a fairly common occurrence in countries from the Global South, which are mired in ubiquitous corruption and widespread equality, where the benefits of economic progress are often reserved for a few social elites.

Imports and Exports

Another important couple of metrics are imports and exports. Exports measure the competitiveness of a country’s industry. If exports are high, then the country’s products are either of higher quality than those manufactured by other countries, or are cheaper because they are made with more cost-efficient technologies, or are safer, or are more technologically advanced than that of competitor countries. For example, Taiwan and South Korea make most of the computer integrated chips in the world, because they have a technological lead over the rest of the world in the manufacture of integrated circuits that other countries cannot easily bridge. In the early days of China’s post-1980 industrialization, China managed to become a huge export hub in manufacturing because they were able to export high quality manufactured goods at cheaper prices than the US or European countries. In those days, China’s export dominance was only in low-tech products. Today, it is leading the world in many high-tech categories as well, such as electric cars. So China leads in exports today because it is both cost-effective and has advanced technology. Another reason for a country’s export dominance in a certain domain is labor standards. For example, workers in Bangladesh’s textile sector do not have as high safety standards or as good labor conditions (such as minimum wage or number of hours), so they can make textiles more cheaply than the US can, for the same quality. So Bangladesh is a world leader in stitched goods. Every factor of production: labor costs, energy costs, capital costs, labor quality — affects the export competitiveness of a nation.

Imports increase if a country is producing more and needs more raw materials from outside. If it manages to discover more of the same raw materials internally, or can manufacture the inputs internally instead of importing them, then it can have high industrial growth even while reducing imports. An example, again, is that of China today. The US has restricted exports of high technology integrated circuit technology to China. So China’s imports are coming down. But China has started to manufacture those previously-imported components locally. But if industrial growth is falling and imports, too, are falling, then the country’s economy is shrinking. It is manufacturing less. This is undesirable.

Unemployment

Since we are worried about the impact of the energy shock, one possibility is that companies find the cost of energy too high and simply shut down because it is unprofitable to do business and maybe even move their factories overseas. This will cause unemployment. So unemployment rate is a key indicator to monitor the health of a country. High unemployment can lead to political and social instability. Unemployment data are not shown for all countries in this analysis, because often the data is not available. Further, it is difficult to measure unemployment accurately in Europe, because of that continent’s strong welfare policies. It is not as easy to terminate an employee’s employment in France or Germany as it is in the USA — so people may exist on the rolls and be paid a salary even if they are not contributing much economically. This is a phenomenon known as disguised unemployment.

Inflation

If gas, oil, petrol, and diesel become more expensive, everything becomes more expensive. Oil is the feedstock for the entire petrochemical industry, which means that every plastic item costs more. Oil is also the base for nitrogenous fertilizer, making food and meat more expensive. In addition, if petrol (gasoline) and diesel become more expensive, then every product in the market becomes more expensive because of increased transportation costs. All this will manifest itself in higher inflation rates, and so inflation rate is a key indicator for us to study. High inflation is a problem because it makes everything expensive for the population, leading to economic distress and social and political instability. One of the impacts of high inflation rates is low retail sales, which we track whenever possible and when data are available.

Inflation consists of two parts: one is called core inflation, and that takes the price of all commodities except fuel and food, because fuel and food are very volatile and can fluctuate a lot in a small time window, especially during times of energy shortage, thereby distorting the picture somewhat. To address this, we look both at the total inflation rate as well as the core and food inflation rates (food inflation is a part of the non-core inflation). The food inflation rate is particularly important, because it affects the poorest sections of society. If the cost of food goes up very much, then the poor have to starve. Because the current crisis in Europe is caused by the loss of cheap energy, both core and total inflation have gone up, as will be shown. Increases in core inflation are serious, because they point to serious structural problems in the economy.

Composite Business Confidence Index

The PMI is what is called a “leading indicator,” so called because it usually can be used to predict changes in the economy before they happen. In contrast, the GDP is a “lagging indicator,” because it is measured after changes in the economy have occurred. Other leading indicators are the so-called “confidence indicators” — the business confidence index and the consumer confidence index. A composite metric for business confidence is available, called the Composite Business Confidence Index. The OECD website says this about the Composite Business Confidence Index:

This business confidence indicator provides information on future developments, based upon opinion surveys on developments in production, orders and stocks of finished goods in the industry sector. It can be used to monitor output growth and to anticipate turning points in economic activity. Numbers above 100 suggest an increased confidence in near future business performance, and numbers below 100 indicate pessimism towards future performance.

The numbers are available on the internet at the OECD Data Centre.

Composite Consumer Confidence Index

Similarly, there is a Composite Consumer Confidence Index. The composite index is based on a number of separate indices, which are measured for a wide variety of things — such as, in the case of the consumer confidence index, whether respondents feel confident about buying a house, and how soon, or whether they think their job is stable, etc. Both the composite business confidence index and composite consumer confidence index are considered “leading indicators,” because they measure how the economy is going to turn out, from the perception of business leaders or consumers; whereas the GDP, or Exports, as examples, are “lagging indicators,” because they measure the health of the economy after events have taken place — both GDP and Exports are measured at the end of the year.

So we do not have to rely only on anecdotal evidence, such as newspaper reports, to understand the impact of the Post-Sanctions Crisis on the psychology of ordinary people. We know that rising inflation hits ordinary people very hard; especially food inflation. We have already seen these figures. But the Business Confidence Index and Consumer Confidence Index measure business leaders’ and consumers’ confidence in how the system is going to turn out; and the OECD maintains a monthly record of the prevailing sentiment through surveys in every one of the OECD geographies.

The OECD explains the CCI thus:

This consumer confidence indicator provides an indication of future developments of households’ consumption and saving, based upon answers regarding their expected financial situation, their sentiment about the general economic situation, unemployment and capability of savings. An indicator above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to spend money on major purchases in the next 12 months. Values below 100 indicate a pessimistic attitude towards future developments in the economy, possibly resulting in a tendency to save more and consume less.

With this understanding of the metrics, let us look at the effect of the sanctions on Europe as a whole. Detailed analyses on individual countries are given as appendices.

THE EFFECT OF ANTI-RUSSIA SANCTIONS ON EUROPE

The present discussion of “Europe” involves both the Eurozone (the 20-country region in Europe that uses the Euro as the currency) as well as the 27-country European Union, as well as the United Kingdom. The European Union consists of Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden. Of these, seven members, namely Bulgaria, the Czech Republic, Denmark, Hungary, Poland, Romania, and Sweden do not use the Euro. In 2022, the total GDP of the EU27 group of nations was US $15.9 trillion, and the countries that were not part of the EU27 had a combined GDP of $2.4 trillion, or 15.2%. Given that the Eurozone countries form 85% of the EU, I will use Europe for either the EU27 or the Eurozone 20 (plus the UK), because the conclusions will not significantly change. Wherever possible, I will clearly indicate which I am referring to. If not otherwise specified, data presented refer to the 27-country European Union (plus the UK).

Manufacturing PMI

The next figure shows the manufacturing PMI of the Eurozone.

It can be seen that, like most countries in Europe, manufacturing in the Eurozone has been contracting steadily since July 2022 — that is a straight 20 months of contraction.

The maximum drops in the manufacturing PMIs of the different countries in the PSC are shown in the chart below, which is called a choropleth plot.

Note that the above is an interactive map: you can hover (on a desktop computer) over the countries and see the country name and value (on the phone, if you click on the territory, you can see the country and value); and you can also hover over (or click on) the legend to see the countries with the value that the cursor is currently hovering over in the legend.

This is useful when we want to compare it with the drops in the manufacturing PMI for various countries in other crises, such as the Covid-19 crisis and the GFC.

Below, we show the same chart for the GFC. Note that I have used the same color scale in both cases, with an 8 point drop (-8) as the high end and a 42 point drop (-42) as the low end. In the case of the GFC, you can see that the colors shift to the green and blue, reflecting the greater overall impact of the GFC. Note that I will be referring to drops in values always as negative numbers to highlight the fact that these are, in fact, reductions of a metric for which a higher number is better. So I will talk about “a drop of -8 points” to refer to the fact that something that should ideally be higher has decreased by 8 points. A “drop of -8 points” in this article is not a double negative, and does not imply a rise of +8 points.

The Trading Economics website does not give data for the period of the GFC for all European countries. I have shown what is available. We can compare the drops for the countries that appear in both charts. Norway and Sweden show drops of -11.7 and -16.6 points in the PSC; in the GFC, the drops were deeper, with -22.2 and -29.1 points; however, it must be remembered that the GFC lasted much longer than the current crisis, which has just crossed two years.

Despite the shorter duration, the PMI drop for Germany during the PSC is -19.6 points, compared to -23.1 points in the GFC. So the situation is clearly grave. For the UK, the drop in the current crisis is -15 points, compared to -16.3 during the GFC. This tells us that the situation in the UK is quite severe.

The situation for Switzerland is quite serious. Despite being a very prosperous country, it recorded drops of -24.1 points in the PSC, compared to -26.1 points in the GFC.

Next, we plot the PMI drops for the Covid-19 case for all of Europe.

Comparison of this chart with the chart on the drops in manufacturing PMI in the PSC shows that they are quite similar. The same color map has been used, and this helps us understand at a glance that the impact of the post-sanctions economic crisis are very similar to that of the Covid-19 crisis — and just two years after that devastating crisis happened. Just take a look at the numbers (remember, bigger numbers are worse):

PMI Drops For Various Countries For Different Crises (Data are not available for some countries for the GFC)

The bottom line is that the Post-Sanctions Crisis, which Europe invited of its own accord, has caused economic devastation on a scale comparable to the economic disaster accompanying the Covid-19 pandemic.

Industrial Production Capacity Utilization

Similar to the previous section, it is instructive to compare the drops in capacity utilization for all European countries that have resulted because of the sanctions against Russia.

First, let us look at the composite picture for the entire EU.

Capacity Utilization, %, European Union, 2022–2024

It is seen that capacity utilization in Europe drops from 82.3% in Q2/22 to 79.9% in Q3/23, a drop of -2.4%.

The following map shows a more granular picture: the maximum drops in industrial production capacity utilization resulting from the Post-Sanctions Crisis in the 2022–2024 period in each European country.

The highest drops are in Estonia, with -21.7%, and Lithuania, at -11.7%. Given the damage that both Baltic nations have experienced as a result of the sanctions against Russia, it is astonishing to see the hawkish attitudes of both the Lithuanian foreign minister, Gabrielius Landsbergis, as well as the Estonian Prime Minister, Kaja Kallas, towards Russia.

We can also see how different countries fared in the crisis that happened just two years prior to the Ukrainian war, the Covid-19 crisis. The next figure shows the drops in Capacity Utilization experienced by different European countries due to the pandemic, in 2020.

The drops in capacity utilization are much higher for the Covid pandemic than the PSC, suggesting that as far as capacity utilization is concerned, while there definitely have been drops throughout Europe, they are not comparable to the far more damaging Covid-19 catastrophe. Note that the same scale is used in both graphs.

To complete the picture, the maximum drops in capacity utilization for the global financial crisis (GFC) are shown below.

Overall, the effects of the GFC on capacity utilization are far worse than that of the Covid-19 pandemic, which in turn are worse than the Post-Sanctions crisis. There are exceptions, of course, such as France, which suffered a bigger drop during Covid (-32.6%) than during the GFC (-14.6%). This can be seen by looking at specific country data:

Capacity Utilization Drops for Different Countries for Various Crises

The number of countries in which the drop in capacity utilization due to the PSC is equal to or greater than that during Covid (7), as well as the number of countries in which the drop in capacity utilization in the PSC is reasonably close to the drop in capacity utilization during the Covid pandemic (4), are significant, given that there are only 23 countries in the list above. So the post-sanctions crisis has had a very significant impact on Europe’s economy, especially the Eastern European countries, but also countries like Belgium, the Netherlands, and the Scandinavian countries.

GDP Growth Rate

What this has done to Europe’s GDP can be seen in the next figure:

GDP Growth Rate for the Eurozone (Source: Trading Economics)

It is clear that from the first quarter of 2023, the Eurozone has been flirting with recession (defined as two consecutive quarters of negative growth). There have been five quarters of practically flat growth.

The GDP of all European countries dropped as a result of the sanctions Europe imposed on Russia, as the composite graph for the Eurozone showed. This can be seen with greater detail in the following interactive plot, which shows the maximum drop in the year-on-year GDP growth rate % since the start of the sanctions (you can see the detailed trajectory of the y-o-y GDP growth rate over the past two years in each European country in Appendix I).

Every European economy has taken a beating. Of particular mention are the British and the Polish, two countries that have taken a particularly hard line on Russia, which are among the worst-hit, with drops in y-o-y GDP growth rate of -11.6% and -9.4%, respectively.

We can compare the above plot with a similar plot of the dip in y-o-y GDP growth rate % following the Covid-19 pandemic, which happened in the first six months of 2020. That is seen below:

The same plot can be made for Europe for the maximum dip in y-o-y GDP growth rate % during the Global Financial Crisis of 2007–12. This helps us in gauging the severity of the crisis that Europe is currently in, after sanctioning Russia.

We can then see how the drops in the y-o-y GDP growth rate % compares in the three crises: the Post-Sanctions Crisis (PSC), the Covid-19 Pandemic, and the Global Financial Crisis (GFC). This is seen below.

Comparison of % Drops in Y-o-Y GDP Growth Rate % Across European Countries For DIfferent Crises

That the sanctions against Russia have presented Europe with a crisis to rival both the Covid-19 pandemic as well as the global financial crisis is abundantly evident from the GDP table. Look at the United Kingdom, which suffered a -11.6% drop in its GDP because of the sanctions against Russia; but which only had a -9% drop during the Global Financial Crisis. Look at Sweden, which suffered an -8.2% drop in the PSC, but suffered a -9.9% drop during Covid, and only a -9% drop during the GFC; or Italy, whose -8.5% drop in GDP comes close to its -9.5% drop during the GFC. Or look at Poland. During the GFC, it suffered a drop of -5.1%; yet, so far, it has sustained a maximum drop of -9.4% in its GDP growth during the PSC. And the crisis is not over. If you look at Poland’s GDP growth rate history (See Appendix I), you can see that it has remained flat for the last three quarters. When will this economic winter end? Nobody knows; but what we do know is that European leaders, including those of Poland, whose leaders are among the most hawkish, have pledged to let these sanctions continue for as long as it takes to defeat Russia on the battlefield. And so, what we see here is only a partial picture. Look at energy-rich Norway, whose -8% drop in the PSC exceeds both its Covid-era -6% drop and its -7.9% GFC drop. The misery isn’t over by a long shot, and is likely to get both deeper and wider.

When a major power centre, like Europe, collapses, its reverberations are felt around the globe. So the global GDP has taken a beating because of the sanctions against Russia. The western allies of Europe, such as the US, Canada, Australia, New Zealand, Japan, and Korea, were more affected by the sanctions as they were active participants in the sanctions — i.e., they voluntarily decided to sanction Russian products. For example, the USA, which was importing Russian crude to the tune of 9% of its total crude imports, decided to stop those imports. Japan did something similar.

One useful way to see the impact of sanctions on any economy is to look at full-year GDP growth. This is the growth rate obtained by looking at the total yearly GDP in the January-December time frame and see how much it has grown. The war in Ukraine began in February 2022, and by the time all the sanctions were imposed, it was past June. So the best way to analyze the long-term impact of the sanctions against Russia is to look at the full-year GDP growth rate at the end of 2023 and subtract the full-year GDP growth rate at the end of 2021 (before any war) and look at the result. The next figure will illustrate how this is done, for the case of Germany.

Full-Year GDP Growth Rate (Y-o-Y), %, Germany, 2011–2023

The full-year GDP growth rate for Germany for 2023 was -0.3%, and for 2021 was 3.2%. Therefore, the GDP difference between 2023 and 2021 was -3.5%.

Let us look at what the full-year GDP growth rate for the world as a whole looks like. This data, too, comes from Trading Economics.

Full-Year GDP Growth Rate, %, World, 2011–2023

For the world as a whole, the full-year GDP growth rate for 2023 was 3.1%, and for 2021 was 6%. Thus the GDP growth rate difference for the world was -2.9%.

Thus, Germany’s deviation from the world is -3.5%-(-2.9%) = -0.6%. What this means is that the whole world has slowed down in the last two years by -2.9%, but Germany has slowed down a further -0.6% than the rest of the world. Germany is doing worse than the world by 0.6%.

Now let us look at another example, Egypt.

Full Year GDP Growth Rate, %, Egypt, 2011–2023

In 2021, Egypt’s full-year GDP growth rate was 1.9%; in 2023, its full-year GDP growth rate was 3.5%. So its GDP growth rate difference was 1.6%, and its deviation from the world was 1.6%-(-2.9%) = 4.5%. So Egypt is doing better than the rest of the world, by 4.5%.

We can do these calculations for all the countries in the world for which the full-year GDP growth rate is available, and this is shown in the world map plot (choropleth plot), below.

As with the other choropleth plots, this, too, is an interactive plot, and so you can hover over the country and see both the country’s name and its GDP growth rate deviation from the world in the 2021–2023 period. You can also zoom into particular areas of the world to examine individual countries more closely. The yellows and reds represent positive territory; the greens, blues, and violets represent negative territory — countries that are doing worse than the world average.

Most of Europe is between -2 and -3. The one bright red spot in Europe is Belarus, with a value of 4.4. Most of the African countries are doing quite well. It is no coincidence that most of them enjoy excellent relations with both China and Russia. With the exception of South Africa, the BRICS nations are all in positive deviation territory.

These can be seen in tabular form as well.

GDP Growth Rate Change for 2021–2023 Relative to Global Average

Some prominent names should be pointed out. The UK is in particularly desperate straits, at -5.7%. The South American countries, with the exception of Brazil, are in bad shape; although, it should be mentioned that for the last two years, Argentina has been through a major economic crisis quite unrelated to the Ukraine war. Japan and South Korea manage to survive the Western carnage. Russia is at a healthy 0.7% ahead of the world. France is also in bad shape, at -2.6%, and it is hard to fathom where the French President gets the confidence to suggest going into a war. Netherlands and Belgium are also in bad shape, at -3.2% and -2.5%, respectively, as is Meloni’s Italy, at -3.2%. Russia’s neighbours Kazakhstan, Kyrgyzstan, and Armenia are doing very well, at 3.6%, 3.8%, and 5.9%, respectively, as is Belarus at 4.4%. While there are local exceptions, it can be said, after looking at the chart earlier in this article which showed which countries sanctioned Russia and which did not, that the countries which did not sanction Russia, in general, have done much better after two years.

There is one important takeaway from this last graph, and that is that the previous crises we have looked at, viz., Covid-19 and the GFC, were global crises. But this Post-Sanctions Crisis is not a global crisis. It is a European and, by extension, a Western crisis.

Imports and Exports

We can also see how Europe’s imports/exports have been affected by its sanctions on Russia by looking at the imports/export indices of all the developed countries, combined — the countries which united to apply sanctions on Russia: the USA, Canada, the UK, the countries of Europe, Israel, Japan, South Korea, Australia, and New Zealand.

Developed Economies’ Import and Export Indices Since 2005 (100=2005) (Data Source: UNCTAD. Analysis by the Author.)

The import index for the Developed Economies fell from 118 points to 94 points, or a decline of -22 points, during the GFC. The export index fell from 123 to 99, or a -24 point drop. During Covid-19, the import index fell from 128 to 112, for a -16 point drop, while the export index fell from 137 to 113, for a -24 point drop. In contrast, the import index fell from 148 in September 2022 to 140 in Q3 2023, or an -8 point drop, after the imposition of sanctions in Europe. The export index fell from 147 to 143, for a -4 point drop. But what is more important than the drops in the indices is the momentum. At the nadir of the Covid-19 crisis, both the import and export indices in the developed economies had crashed to as low as 112. Once the pandemic restrictions were off, these economies roared into action, and from 112 in June 2020, these indices had both zoomed to 148 in September 2022 and were rising — but now they are on a headlong downward drop. This is an economic catastrophe, and a totally avoidable one at that. There were many points when this war could have been avoided, and the West chose not to take those paths. And the result is the wholesale destruction of Western economies.

Again, we look at choropleth maps to get a more detailed look at all this. The next plot shows the maximum dips in the import index due to the sanctions against Russia in different countries in Europe. As the chart above showed for developed countries, the import and export indices continue to go down, so this is not the final story. When comparing with Covid-19 and the GFC, this should be remembered — those crises are over, the present one is ongoing. (This choropleth map shows only the maximum dip. To get a complete time history since the start of the sanctions, please see Appendix I for detailed country-wise profiles.)

Not much explanation is needed, really. I had to choose different colors for a good map illustration, otherwise I would color everything blood red: an import index drop of -21 in the UK, -18.3 in Poland, -25.6 in Lithuania, -55.8 in Ireland. Note that the normalization of the index is a value of 100 for the total exports value of that country in 2005. These are serious dips.

We can see the same chart for the Covid-19 pandemic as well as the Global Financial Crisis.

It is useful to see the drops in the import index for the present post-(Russian) sanctions crisis in comparison with the drops in the import index for the Covid-19 crisis and the Global Financial Crisis. The next table shows this comparison.

Maximum Drops in Import Index for Different Crises

It is blindingly obvious that the PSC is of the same scale of destruction as the two previous crises. Examples abound in the table. Austria’s imports dropped by -14.7 points in the PSC, compared to -16.2 in the Covid crisis. Belgium’s import drop of -23.7 points is greater than its Covid drop of -16.6 points as well as its GFC drop of -20.1 points. This is particularly important because the PSC is only two years old, whereas the GFC lasted four to five years. The UK’s -21 point drop is already more than its Covid and GFC drops of -18 each.

We can similarly look at the maximum drop in the export index (2005=100) as reported by UNCTAD. Below is the choropleth map for the maximum drops in the export index for various countries in Europe due to the sanctions against Russia.

We can, similarly, show the maps for Covid-19 and the Global Financial Crisis.

The drops in the export index can also be tabulated as below.

Maximum Drops in Export Index for Different Crises

Again, the three crises are more or less in the ballpark, although different countries are affected differently. The Baltics, for instance, have fared much worse in their exports than in their imports. The UK has been badly hit in exports as well as in imports — in both, the magnitude of the present crisis is worse than the two earlier crises.

Inflation

We can also see the inflation rate for the Eurozone as a whole, which shows the same trend as the individual countries. It took more than a year for inflation to come back to the levels of February 2022.

One can also see the country-wide maximum inflation increases since the start of the sanctions against Russia in a map:

Interestingly, the highest inflation rate is seen in Hungary, the country that was least enthusiastic about sanctioning Russia — a rise in the inflation rate relative to February 2022 of 17.4%. This suggests that the leaders of Hungary were well-aware of how adversely the sanctions would affect them. In general, the sanctions seem to have affected Eastern Europe disproportionately, probably because all these countries continued to have strong economic ties with Russia ever since the end of the Cold War in 1991 because of historical reasons. And so, we see a rise of 6.9% in total inflation over the level in February 2022 in the Czech Republic, 6.4% in Slovakia, 9.9% in Poland (this is the rise in inflation rate, not the absolute value!), 8.3% in Romania, and 8.7% in Bulgaria. The Baltic republics have been badly hammered, with Lithuania at 9.9% rise, Latvia at 13.5% rise, and Estonia at 12.8% rise. As explained earlier, some of this inflation is a leftover effect of the Covid-19 pandemic and the reopening of the economy. But, as also explained earlier, those inflationary pressures would likely have cooled down as supply increased to keep up with demand. The war interrupted that recovery and made things much worse. The long-term inflation rates for all these countries are in the 2–4% range, so to see inflation rate increases that are so high is extremely worrisome for European economies. Even a peak inflation rate rise of 4.9% in the UK is very high, given that the long-term stable inflation rate in the UK has been around 3%. A 4.9% rise on top of this makes for an unsustainable 8% inflation rate in the UK. Similar things can be said about France and Germany as well. Given all this, the insistence of several eastern European countries (the hardest-hit) to continue support for Ukraine and increasing sanctions on Russia (e.g., Poland, Estonia, Lithuania) seems to be not driven by rational thinking but by ideology.

Retail Sales Growth

With inflation rates topping 10% in Europe, it is natural that most goods would become too expensive for the consumer to buy. We can examine whether this happened by looking at retail sales growth. The chart below shows the retail sales growth across all of Europe in the last two years.

It is seen that y-o-y retail sales growth, which was at 9.6% in January 2022, rapidly slumps, and reaches a minimum of -3.9% in March 2023, a drastic drop of -13.5%. And even into 2024, retail sales growth continues to be negative, after a whole year of shrinking sales. The bottom has fallen out of the market.

To understand this at a more granular level, the choropleth map that shows the maximum decline in different countries of the retail sales growth over the last two years may be useful.

The devastation in Europe is clear. It is astonishing that the countries hardest hit by the sanctions — where inflation is soaring and where retail sales have collapsed — Poland (-26.3%), Lithuania (-23.6%), Latvia (-23%), and Estonia (-31.3%) are countries where the governments want to extend these self-destructive sanctions even further.

This information is summarized in the table below.

Maximum Retail Sales Growth, %, Y-o-Y, 2022–2024

Housing Sector

With such high inflation, and retail sales bottoming out, it is logical to think that people would not be able to buy houses. Indeed, construction output took a plunge, as can be seen in the following picture.

Growth in European Construction Output, %, Y-o-Y, 2022–2024

From 8.8% y-o-y in February 2022, the output growth slumps to -0.3% in December 2022, a drop of -9.1% in a year. Growth improves in 2023, but is again negative in January 2024 with a value of 0.9%. The point is that this is not yet something in the past. This is a continuing crisis.

With demand flat, nobody has money to buy houses, and the house price index has been on a steady decline.

From 10.5% growth y-o-y, the house price index has plummetted to -1.1% in Q3/2023, a drop of -11.6%. And it is not over — there are no signs of a recovery.

Food Inflation

The most drastic impact of the sanctions imposed by Europe on Russia is the effect on food prices. The chart below shows the rise in the food inflation rate, relative to the food inflation rate that existed in February 2022, at the start of the war, in each country in Europe.

This is a devastating picture of human suffering. The outlier is Hungary, at 36.4%, but the numbers are brutal everywhere: 14% in France and the UK, 16.3% in Germany, 15.5% in Poland, and 17% in Sweden, for example. The poor have starved. The Baltic states were again hammered: Lithuania at 20.9%, Latvia at 17.7%, and Estonia at 17.4%. This kind of suffering leaves long-term scars. One has to wonder how many people died because they could not afford medical care because food itself was so expensive.

Core Inflation

Finally, we look at country-wise data for core inflation, the part of inflation that is obtained by taking out food and fuel prices from the basket. However, keep in mind that energy prices still affect core inflation, because energy is required to make products. What we are doing here is removing the dependence on transportation fuel prices: gasoline (petrol) and diesel prices.

The next graph shows the rise in core inflation in the 2022–2024 period over and above the core inflation rate in February 2022.

These are alarming core inflation rate increases: 3.8% rise in France, 4.6% rise in Spain, 4.6% increase in Italy; 3% in Germany; 6.1% in Austria, etc. Everything will become expensive with such high core inflation rates. Steel and aluminium become expensive, and consequently, so do cars, housing, and the like. Buying a house becomes impossible. And such high core inflation rates eat into savings at unprecedented rates.

The Impact on Industry: Chemicals, Construction, Metals

The picture on industrial production growth rate is one of a bottomless abyss: barely holding on in 2022, deeply shrinking in 2023. With the war nowhere near an end, one must ask, how low will Europe go?

Industrial Production Growth Rate, Year-on-Year, Eurozone

Natural gas prices about a year before the war were around €15 per MWh; today, they are €24 per MWh, much better than the €350 per MWh at the peak of the energy crisis, but too high for economical operation of Germany’s energy-intensive factories.

This has several industry titans in Germany wondering about leaving the country, such as specialty chemicals giant Evonik’s chairman Christian Kullman. As Kullman says, “the loss of cheap Russian gas painfully damaged the business model of the German economy.” It is a measure of Germany’s ideological blindness that they believe that the mistake they made was to rely too much on Russia for the last two decades, not that they erred in sanctioning Russia after February 2022. While renewable energy has been touted as the answer to Germany’s energy problems, this has been proved to be hard, because people do not want wind turbines near their homes due to the huge noise they cause. People also do not want overhead electric lines from wind farms to their homes. The other solution is to go back to coal and nuclear power, but with the Greens in power as part of Scholz’s coalition, that would be impossible.

Evonik is not the only chemicals giant that is downsizing because of high energy costs. BASF, Germany’s largest chemical company, laid off 2,600 employees in its headquarters of Ludwigshafen, closed down two ammonia plants and related fertilizer units in February 2023, because it could not afford the high cost of energy. But that was just the beginning. In October 2023, BASF announced that it was looking at reducing costs in Europe by another $1.1 billion by 2026 because European costs were too high, and was planning to invest more in its China operation. BASF said that third-quarter operating income was down 57%, because of both lower prices and lower volumes. And, again, in February 2024, BASF announced that it would slash another $1 billion in annual costs in its Ludwigshafen headquarters, citing weak demand and high energy costs in Europe. The company cited the poor economy in Germany as the reason that it would have to cut jobs in Germany, and said, “Higher production costs due to structurally higher energy prices predominantly burden the upstream businesses.” The company said that the construction industry was a big market for its products, and because the construction sector in Germany was in crisis (more on this later in this article), sales were being affected.

Another energy-intensive sector, the aluminum industry, is in serious trouble. In the period from January to September 2023, aluminum output in Germany fell 40% relative to the same period in 2022, because of extremely weak demand in automotive and construction sectors, and also because of high energy prices making German aluminum uncompetitive.

Steel is another highly energy-intensive industry. WV Stahl, Germany’s national steel industry association, said on January 23, 2024, that over the whole of 2023, crude steel output in Germany dropped 3.9% year-on-year, saying that “this is the lowest production volume since the financial market crisis in 2009.” The association also said that the major factors behind the low production were the high energy prices and the weak construction sector. The association also said that such a long negative cycle had never before been seen in Germany’s steel industry. The association also said that they were skeptical that markets would improve in 2024.

The problem was not limited to Germany. Europe’s biggest steelmaker, ArcelorMittal, had a terrible year in 2023, attributable both to the collapsing European economies, leading to weak demand, as well as high electricity and energy prices. In 2022, ArcelorMittal reported a net income attributable to equity of $9.3 billion; in 2023, that figure was $919 million. Earnings-per-share dropped from $10.21 in 2022 to $1.09 in 2023, according to 4th quarter results reported on February 8, 2024. Various factors caused these losses for the company — all of them attributable to the declining European economy and the steep electricity and gas prices in Europe. For instance, ArcelorMittal had to close down its steel plant in Bosnia, because of a loss of $88.2 million, caused by a 12% annual drop in demand, a 20% rise in electricity prices, and 22% lower prices of the metal on the global market. The company has suspended or completely shut down many of its European facilities due to the same factors (see figure).

Inflation skyrocketed due to high energy prices in Europe for more than a year. Food inflation made it difficult for people to even feed themselves. At times like that, nobody has any disposable income to buy homes. They find it a struggle merely to survive. And so, demand for housing collapses, as we have already seen. When the housing market sinks, it sinks the economy as a whole, because housing requires so many materials — steel, chemicals, glass, etc. This is the reason the chemical industry all over Europe is in a deep slump, and why BASF is in crisis.

The European Chemical Industry Council (CEFIC) said in its January 2024 monthly report that the output of the entire 27-nation European Union in 2023 was down 8% in comparison with 2022. As the following chart from the January 2024 monthly report of CEFIC shows, even with such a steep decline, the chemical industry is not the worst-hit. Worse than the chemical industry at -8% are printing at -9.5%, paper (one of the most energy-intensive industries) at -9.8%, computer electronics at -9.9%, and other non-metallic products at -11.7%. Interestingly, basic metals is better off than chemicals, at -4.9%, even though it is also extremely energy-intensive. The CEFIC report also mentioned that capacity utilization levels for the chemical industry in Europe are at 74.7%, close to the lowest historical levels seen earlier during the Covid-19 pandemic lockdown in 2020.

Sectoral Decline in Main Industrial Sectors in Euro-27 countries in 2023 (Source:CEFIC)

The decline of production has been across the board, as the next chart shows, with the sole exception of consumer chemicals (soaps, cosmetics, shampoos, detergents, etc.) Petrochemicals and polymers, which are barometers for the wider economy because of how widely they are used in consumer products in different industries, have both suffered almost two consecutive years of double-digit decline.

EU Chemical Industry Production Growth by Sector (Source: CEFIC)

The CEFIC report also compared the growth of the chemical industry in Europe with that in the US and China, and it is this graph that should worry European industry the most. As seen in the next figure, while the European chemical industry is suffering catastrophic losses, the chemical industry in China is booming.

Comparison of EU, US, and China Chemicals Growth Rate, 2017–2023 (Source: CEFIC)

What this chart also shows us is that China has grown most robustly among the three regions, whereas Europe has been shrinking for five of the last seven years, and the US chemical industry has been in negative territory for four of the last seven years.

A better idea of how much the EU has lost in just one year, viz., 2023, can be seen in this broader comparison of chemical production across geographies. It can be seen that the countries of the “West” — the US, the EU27, South Korea, Germany, Japan — are all in negative territory. The only countries that are in positive territory in 2023 are China (9.6%), Russia (4.6%), and India (0.1%).

Chemical Production Growth for Main Countries in 2022 and 2023 (Source: CEFIC)

This is a serious problem for the EU, as it shows that the European chemical industry is losing competitiveness because of the energy crisis. It should not surprise anyone, therefore, that EU exports of chemicals are no longer competitive in the world. The next chart shows how exports of chemicals from the EU have dropped in 2023. Export prices are usually contracted in advance, and so prices of European chemicals would have remained low even though energy costs went up, because they had already been fixed. However, the impact of higher energy prices would have shown up in product prices in 2023, making the European chemical industry uncompetitive, as the next chart shows.

Exports of EU27 Chemicals to Destinations Outside the EU27 (Source: CEFIC)

The EU27 countries exported $208 billion in 2023, which is a -$16 billion drop from 2022, when they exported $224 billion worth of chemicals to destinations outside Europe. The net effect of all this is for Europe’s chemical sector to lose its competitiveness and market to players like China and Russia.

Industry leaders are worried. As Markus Steilemann, president of German chemical industry association VCI and CEO of polyurethane raw materials producer Covestro, said in an interview to S&P Global in December 2023, “High energy and raw material prices as well as the lack of orders will continue to weigh on business. Therefore, our companies are forced to cut their costs — whether by shutting down production plants, giving up some individual business segments or shifting investments abroad.” People like Steilemann would have been shocked at French President Macron’s suggestion that France might send ground troops into Ukraine — a development that would only deepen the crisis for Europe’s chemical industry.

Even though gas prices have dropped considerably since their peak in September 2022, they still remain high compared to historical levels. BASF CEO Martin Brudermuller said in an equity call with investors that even in November 2023, BASF was paying 40% more for gas in Europe than they paid on average between 2019–2023. So the energy crisis has not gone away — and the longer this war lasts, the worse the crisis for Europe’s chemical sector will become.

BASF is not sitting idle, waiting for Europe’s leaders to make wise decisions. They have to answer their shareholders. And, therefore, Europe’s loss might well be China’s gain. BASF has invested $10 billion in a new giant facility in Zhanjiang, China. In time, BASF might move all its production to China, leaving massive unemployment in Germany in its wake.

There is plenty more bad news for the chemical industry, one of the biggest users of fossil fuel energy. And the intensity of fossil fuel energy sources means that other sources, such as electrical heating, cannot easily be used as substitutes. One of the biggest commodity chemicals is PTA, or Purified Terephthalic Acid. PTA is the feedstock to create PET, or Polyethylene Terephthalate, which is used to make plastic bottles. As a mass consumer commodity, this is extremely price sensitive. If gas costs 40% more than it did two years ago (before the war), PTA manufacture becomes unviable.

That is exactly what happened when INEOS, one of the biggest chemical manufacturers in Europe, decided to mothball a 442,000 metric ton PTA plant in Geel, Belgium. In their public notice on the move, on 29 November, 2023, INEOS said that “Sustained increases in energy, raw material and labor costs have made European production on PTA increasingly uncompetitive against exports from Asia.” The unit had already been offline since 2022; INEOS decided that there was no hope of reopening the plant at any time in the near future. This plant will most likely be shut down permanently. Indorama Ventures has also mothballed a 700,000 metric ton facility to produce PTA in Sines, Portugal, for the same reasons. Celanese shut down their Nylon 66 plant in Uentrop, Germany, for similar reasons. Another chemical giant, LyondellBasell, decided to close its 235,000 tons per year polypropylene plant in Brindisi, Italy, for the same reasons, in September 2023. In October 2023, specialty polymer maker Trinseo decided to shut down its Ethylbenzene Styrene Monomer (ESBM) plant in Terneuzen, Netherlands. More recently, on March 18, 2024, Trinseo announced the upcoming shutdown of its polycarbonate plant in Stade, Germany.

Another major European chemical manufacturer, Kem One, a leading player in the chlor-alkali business, decided in November 2023 to suspend production at all its production sites in France for the same reasons — low demand, high energy cost, etc. Kem One has two facilities in France — one in Lavera, with an annual capacity of 341,382 tons of chlorine and 333,373 tons of caustic soda; and the second in Fos, with a capacity of 635,710 tons of chlorine and 2,202,200 tons of caustic soda per year. That’s a total of nearly one million tons of chlorine and 2.5 million tons of caustic soda. It must be remembered that chlorine and caustic soda are basic chemicals. They affect a huge range of downstream products. For instance, caustic soda is a very important input in the paper and pulp industry. Shortage of caustic soda will lead to increased paper prices.

As I had pointed out in my November 2022 article, natural gas is a very important feedstock for the production of ammonia by reaction with air. With natural gas supplies from Russia being shut off by Europe, it was only a matter of time before ammonia production in Europe became unviable. CF Fertilizers, a British company, announced in 2022 the mothballing of its Billingham ammonia plant because of rising gas prices. The plant had an annual capacity of 1.2 million tons of ammonia, ammonium nitrate, and other nitrogen fertilizers. In July 2023, CF announced the permanent shutdown of the ammonia plant, but said that it would continue to manufacture ammonium nitrate and nitric acid using imported ammonia. Ammonia is the basic feedstock for nitrogenous fertilizer, and this shutdown will make agriculture more expensive for the citizens of the UK, who are already reeling under economic hardship.

The pace of plant closures is increasing. There has been a wave of shutdowns in the second half of 2023. Another example is Italian chemical manufacturer Versalis, a subsidiary of chemical giant Eni, which announced its decision in December 2023 to close down its polymer plant in Grangemouth, Scotland. The plant was manufacturing 105,000 tons/year of butadiene and 70,000 tons/year of styrene-butadiene rubber, used in rubber tyres. The news was a double whammy for Grangemouth — just a month back, PetroIneos — a joint venture of Malaysian oil giant Petronas and British INEOS — announced its decision to permanently close down its refinery in Grangemouth. The refinery in Grangemouth is Scotland’s last oil refinery. In October 2023, Saudi Arabian Basic Chemicals (SABIC) decided to close down its high-tech polycarbonate facility in Cartagena, Spain. A partial list is given in the next figure.

Chemical Industry Plant Shutdowns in 2023 and 2024

There are more that I have not listed here for lack of space, but I trust the point is clear — Europe is de-industrializing before our eyes. Europe’s citizens may not be freezing in the winter for lack of heating gas, but its entire infrastructure — steel, aluminum, chemicals, plastics, glass — everything is vanishing in real time as we watch. And the reason is clear — an ill-conceived, knee-jerk reaction to cut the branch on which it was standing — of cutting the nose to spite the face — of voluntarily deciding not to use Russian energy, which had been the basis of its prosperity.

The De-Industrialization of Europe (Source: Reddit)

European chemical companies are facing challenges of high inflation, high energy costs, and weak demand at the same time that European governments are mandating stricter environmental laws, which lead to even more costs on them. Specifically, Europe is considering a ban on perfluoroalkyl and polyfluoroalkyl substances (PFAS) in Europe. This will make it even more of a struggle for European companies to be competitive. Europe’s problem is that its leaders want to have their cake and eat it too — they want to have a green economy and at the same time want to fight a war in Ukraine. Fighting a war requires single-minded focus. You cannot fight a war and also say that the environment matters to you and so you will not use the coal that you have in abundance and instead buy expensive LNG from the USA; or that you are going to saddle your companies with extremely expensive regulations. But that is the dilemma confronting Europe.

Europe does not want to give up on any of their objectives, and so they must fail in every one of them.

Business Confidence Index

The high inflation rates seen in the last two years, as well as the catastrophic retail sales and poor housing market, as well as the widespread destruction of the industrial base, are manifested in the bleak business outlook in Europe, which is measured by the Composite Business Confidence Index, which was described earlier. The graph below shows the composite business confidence index at the highest level of granularity , by showing how the EU27 drags down the G7.

The composite business confidence index drops for the GFC, Covid-19, and the Post-Sanctions Crisis for Europe are -8.5, -4.5, and -3.6 points, respectively.

The following table summarizes the drops in the composite business confidence index for the three crises considered here: the GFC, the Covid-19 crisis, and the Post-Sanctions Crisis, for Germany, France, the United Kingdom, Italy, Spain, Switzerland, the EU, the G7 group of developed countries, and the USA. (Detailed summaries of the impact of the Post-Sanctions Crisis on Japan, Korea, Australia, New Zealand, Canada, and the USA are given in Appendix II, after the summary of European countries in Appendix I.)

Composite Business Confidence Index Summary

The cells highlighted in red are the cases wherein the impact of the Post-Sanctions Crisis are as bad as or worse than one of the two preceding crises. We see that for Switzerland, the United Kingdom, Germany, the G-7, and the USA, the Post-Sanctions Crisis is worse than Covid-19.

One can take a more granular view of the business confidence drops in the last two years by looking at choropleth maps of the composite business confidence index within individual countries in Europe (where it is reported.)

The choropleth plot below shows the maximum drop in the composite business confidence index in each country in Europe (for which data are available) in the last two years since the imposition of sanctions on Russia by the American Alliance. (Details can be found for each country in Appendix I.)

We see significant dips in the composite business confidence index, especially in the UK (-5 points), Sweden (-4.4 points), Finland (-5.5 points), Austria (-5 points), not to mention outliers like Estonia (-10.1 points) and Lithuania (-6.4 points).

To get a sense of how big these dips are, let us examine the corresponding plot for the Covid-19 pandemic.

The plot shows that the dips seen in the Post-Sanctions crisis are comparable to the dips seen in the Covid-19 crisis. For example, the UK has a -4.8 point dip in the Covid era, and a -5 point in the post-sanctions era. The drop for Germany after the sanctions on Russia was -3.4 points; during Covid, it was -1.8 points. Sweden and Finland have fared worse during the PSC than during Covid. The point is that the current crisis is comparable in magnitude to the Covid crisis, which at the time was viewed as one of the most devastating crises to hit the world.

To complete the picture, let us look at the dips in the composite business confidence index during the Global Financial Crisis.

The table below compares the drops in the composite business confidence index in the three major economic crises in Europe over the past 20 years: the global financial crisis, the Covid-19 pandemic, and the sanctions on Russia (Data were found only for the 20 countries listed in the table; however, they cover all the major economic contributors to the European economy.)

Comparison of Composite Business Confidence Index Drops for the Three Major Economic Crises in Europe

Overall, it is seen that the drops in the composite business confidence index are lower in the GFC than in the PSC and Covid — but, notably, not in an exaggerated way. For instance, the UK had a drop of -7.7 points during the GFC and -5 points during the PSC. Sweden had a drop of -4.4 for the PSC as compared to only -3.2 for Covid, but a higher drop of -6.3 for the GFC. So these economic disasters are comparable.

And the important thing to note is that the Post-Sanctions Crisis is not yet over; so these numbers for the PSC could yet get much worse, maybe even worse than the GFC, depending on how long Europe decides to continue its sanctions on Russia (or, more truthfully, on itself — because it is denying itself access to cheap Russian energy.) Unless, of course, Russia is thoroughly defeated in the war and is forced to supply free energy to Europe as reparations — but honestly, that is not looking very likely today.

Bankruptcies

The tough business conditions are also reflected in an increasing number of bankruptcies and insolvencies in Europe. The next graph shows the monthly number of declared bankruptcies, both in the EU as a whole and in select, wealthy economies.

Increasing Bankruptcy Declarations in Europe Since the Start of Sanctions Against Russia (Data Source: Eurostat)

The source of the data is the European Commission’s Eurostat database. The graph shows the trend for the 27-member European Union (blue line), along with those for Germany (black line), France (red line) and the Netherlands (orange line). I could not find data for all the nations at the website. Further, the data is noisy, so I have used Excel’s polynomial smoothing trendline to help you understand how the trends are evolving.

This is an indexed data series, with the number of bankruptcy filings on 1 January 2021 being set as the base (100). The EU line shows a peak of 181.4 in August 2023 before starting to flatten. Germany also shows a steadily increasing trend, with a peak value of 137.1 in September 2023. The curve-fits for all three countries still show an increasing trend. France is also increasing, with a peak of 232.6, and Netherlands has the highest number of bankruptcies, with a maximum of 263 and the rate of bankruptcies still increasing fast, two years after the start of sanctions.

All this should be extremely worrisome to a European, because the war is far from over. It has already gone past two years and there is no end in sight, and already the impact of the Post-Sanctions Crisis is almost as bad as that of Covid-19. If the war continues for another year or two, the current crisis might even dwarf the GFC in its impact.

Treasury Bonds Yield

Another useful indicator of the health of the European economy is a macroeconomic parameter: the yield on the European Central Bank (ECB)’s 10-year treasury bond. The yield on a treasury bond is an indicator of how confident the rest of the world is in putting their surplus wealth into your economy and how safe they feel it is to invest their hard-earned money in your central bank. A lower yield implies that the fundamentals of the economy are seen to be very safe, and so the bank can offer a low yield and still attract deposits. In this context, it is instructive to see what the war in Ukraine has done to the desirability of the ECB 10-year bond.

European Central Bank 10-Year Treasury Bond Yield

Just before the start of the Ukraine war, the interest rate was 0.8%. A few months prior to the conflict, the interest rate was close to zero. But by January 2023, the yield had gone up to 3%. In other words, the ECB had to offer a higher interest rate because investing in Europe was seen as riskier.

Consumer Confidence Index

When you have high inflation, high core inflation, high food inflation, low retail sales, the bottom falling out of the housing market — when all these things happen together, consumer confidence will be low. Let us look at the drop in the composite consumer confidence index in different countries over the last two years.

We start by looking at the consumer confidence in the G7 group of countries: the US, the UK, Germany, France, Italy, Canada, and Japan. (Details on the individual EU countries can be found in Appendix I and on the individual non-European countries in Appendix II; here we first look at them as a group).

Composite Consumer Confidence Index for the G-7 (Data Source: OECD)

The composite consumer confidence index drop for the G7 in the Post-Sanctions Crisis is -1.3, as compared to the EU, whose corresponding drop is higher, at -3.1. What this tells us is that people in the US, Canada, Japan — geographies far away from Ukraine — feel more confident about the future than the people of Europe themselves. Not surprising considering that it is Europe that has given up its source of cheap energy (Russia) and is buying energy at twice the price. Look at the drops in the composite consumer confidence index for the different crises in the table below. The GFC was a global crisis, so everyone was affected — the drop for the EU was -4.8; that for the US was -4.2; for the G7 was -4.1. It was a similar story for Covid: -3.0 for the US, -4.5 for the EU, -2.9 for the G7. But for the PSC, the US’ drop is only -1.0, the G7’s drop is only -1.3, but the EU’s drop is -3.1. This crisis is primarily Europe’s problem.

Summary of Composite Consumer Confidence Index Drops for Various Crises

As before, the cells highlighted in red are the ones where the impact of the Post-Sanctions Crisis is as bad as or worse than one or more of the two previous crises. In Germany, the current crisis is worse than Covid-19 and as bad as the GFC; in Switzerland, the current crisis is much worse than both the previous crisis; in the UK, the current crisis is as bad as the Covid-19 crisis, and in Italy, the current crisis is statistically as bad as the previous two crises. In the G7, the present crisis is not as bad as the two previous crises, largely because of the US, which is actually benefiting from European misery: Europe now has to buy natural gas at double or four times the price it was paying for piped gas from Russia, and European companies are closing down plants in Europe and setting them up in the US, putting Europeans out of jobs and creating jobs for Americans. What’s not to like, if you are America?

But we can take a more granular view of consumer confidence by looking at individual countries in Europe (at least those that have data available). The choropleth map shows the detailed data for the PSC.

To get a sense of what these values mean, let us also look at the corresponding plot over the Covid-19 period.

What is clear that the drops in the consumer confidence index are, in general, lower than the drops in the business confidence index. It is also clear that the decline in consumer confidence in the Post-sanctions period are comparable to that during Covid-19. For example, the drop in the composite consumer confidence index is the same for the UK in both the PSC and during Covid-19, at -3.7.

Again, to complete the picture, let us also see the drops in the consumer confidence index during the GFC.

The table shows the detailed data for the drops in the composite consumer confidence index for the three major crises of the last 20 years: the GFC, Covid-19, and the PSC.

Peak Drops in Composite Consumer Confidence Index for Various European Countries, 2022–2024

It is clear from this table that the PSC is a disaster of comparable magnitude to the Covid-19 and GFC. For example, Germany’s composite consumer confidence index drop for the GFC was -2.7, and its values for Covid and PSC are -2.1 and -2.7, respectively. The UK has values of -5, -3.7, and -3.7 for the GFC, the Covid crisis, and the PSC, respectively. Sweden’s PSC drop is -4.7, whereas its Covid drop was only -0.8, and its GFC drop was -3.8. Italy has values for the PSC, Covid, and GFC of -1.8, -2.1, and -2.2 — essentially a statistical tie.

The bottom line is: the Post-Sanctions Crisis is the third major economic disaster to hit Europe in two decades, and the second major economic disaster to hit Europe in two years, after Covid-19.

THE IMPACT OF THE SANCTIONS ON RUSSIA

And what has been the effect of all these sanctions on the intended target, Russia?

Well, apart from the first three months of the war — February 2022, March 2022, and April 2022, Russia’s manufacturing PMI has not been lower than 50 even once. In fact, it has, on average, been steadily increasing, indicating a robust economy.

The next graph shows Russia’s industrial capacity utilization.

Capacity Utilization, %, Russia, 2022–2024

The lowest value of capacity utilization for Russia in the last two years has been 59 — in other words, Russia’s manufacturing has been constantly expanding, in contrast with European economies that have been shrinking.

How have the sanctions affected Russia’s GDP growth rate? The data show that the sanctions did affect Russia’s growth rate, but not as much as anticipated. The first quarter after the invasion, the April-June 2022, had the worst performance as Russia took the biggest hit to its economy from the sanctions, recording a contraction of -4.5%. Russia bounced back in the next three quarters, with GDP growth rates of -3.5%, -2.7%, and -1.8%, before finally breaking through with an expansion in GDP in the April-June quarter of 2023, with a growth rate of 4.9%, among the best in the world. Russia followed this up with an even better performance in the July-September quarter of 2023 of 5.5%. The October-December quarter data are not available.

One can look at the full-year GDP growth of Russia and look at the three years of 2021, 2022, and 2023, and see what the GDP growth rates at the end of the years were. This allows us to bookend the effects of the war by considering a year (2021) that is before the start of the sanctions and a year (2023) that is when the war is fully engaged and the sanctions have been firmly in place. This is because 2022 is an ambiguous year — the war started in February, and there were several rounds of sanctions that continued until late into the year.

The next figure shows the full-year GDP growth rate of Russia.

In 2021, Russia’s full-year growth rate was 5.9%; in 2022, it was -1.2%; and in 2023, it was 3.6%. So it suffered a 2-year drop of GDP growth of (3.6–5.9), or -2.3%.

Contrast this with Europe’s full-year GDP growth, in the next figure.

Full-Year GDP Growth Rate (%) for Europe

In 2021, Europe, too, was growing at 5.9%. In 2022, that fell to 3.4%; and in 2023, it fell further, to 0.4%. So Europe suffered a 2-year drop of (0.4–5.9) = -5.5%. So Europe has fared much worse than Russia.

Let us look at retail sales growth. The sanctions initially hit the Russian economy hard, as retail sales slumped.

Retail Sales Growth, %, Y-o-Y, Russia, 2022–2024

From 7% y-o-y in February 2022, retail sales slumped to as much as -10% for a whole year, and then bounced back in April 2023 with an 8.2% y-o-y growth. That robust growth has continued through the rest of 2023 and into 2024. Russia was able to successfully weather the sanctions.

Since Russia was involved in a war, it transitioned into a war economy. This pulled in the available labor force into productive employment, dramatically decreasing the unemployment rate, as can be seen below.

We can also see the imports/exports performance of the Russian economy. During the GFC, Russia saw a -70 point dip in its imports index, and a -20 point dip in its exports index. In the Covid-19 crisis, Russia only saw a -14 point dip in its imports index, and a -12 point dip in its exports index. In contrast, after the imposition of sanctions on Russia in March 2022, the imports index went from 179 to 143, a dip of -36 points, in the next quarter, but recovered immediately in the following quarter, to 167, and is currently at 186, higher than its pre-war level. The exports index dropped from 143 in March 2022 to 120 in the subsequent quarter and continued to drop, and is currently at 114 — a drop of nearly -30 points. This implies that Russia has not made up the shortfall in its exports that occurred due to Western nations deciding to sanction its exports — however, as all the other indicators suggest, this has not been enough to cripple its economy.

And, finally, one might be interested in knowing what the effect of two years of sanctions has been on the inflation rate in Russia. One may recall that in the early days of the war, there was wild euphoria in Europe and the US that, with access to Western markets cut off, inflation would skyrocket in Russia, leading to no bread on the shelves, with the Russian populace starving. So, it is instructive to look at the inflation rate in Russia over the past two years:

It should be no surprise that, given the nature and severity of the sanctions, the inflation rate in Russia went almost to 20%; but the Russian central bank responded with alacrity, implemented strong measures, such as an immediate moratorium on funds transfers outside Russia to prevent a panic and a run on the bank, and very quickly stabilized the situation. It took the rest of the year to gradually bring the situation completely to normal, but now Russia has a normal inflation rate that is not very different from the normal ups and downs that its economy has seen for many years. What is interesting is that while inflation in Russia fully stabilized by the end of 2022, it had reached crisis proportions in Europe at the same time (as shown later in this article). In other words, Europe threw everything it had at Russia in February-May 2022, and Russia already recovered in large part by the end of that year — but Europe has still not recovered from the shock of the sanctions it imposed on Russia, two years on.

As one would expect, with the largest package of sanctions ever leveled on a country in history, the sanctions definitely had an impact on Russia’s industrial production growth: April-June 2022 saw negative industrial production growth, followed by two positive months, then negative growth right up to February 2023. Then a dramatic reversal in March 2023, of around 5%, followed by positive growth all through 2023. Essentially, Russia took Europe and America’s best punch, and rebounded. Some may want to fact-check me and tell me that these are year-on-year figures, and so the growth in 2023 is on top of a lower base, a weak 2022. That is true, but look at the magnitudes. The entire April 2022-February 2023 stretch which saw negative industrial production growth had a maximum of -2% growth. In contrast, the 2023 positive growth is mostly in the range of 4–6% — which means that this is net positive industrial production growth (a net positive of 2–4%), even taking the poor performance in 2022 into account.

Industrial Production Growth Rate, Year-on-Year, for Russia

ANALYSIS OF SANCTIONS IMPOSED BY EUROPE ON RUSSIA

After this survey of European economies since the start of the war in Ukraine and the subsequent sanctions by the Western world on Russia, it is now worthwhile revisiting the three questions I posed at the beginning of this article:

Will Russia be fatally damaged by Western sanctions? The answer is clearly and unequivocally no.
Will Europe’s economy be devastated by the sanctions it imposed on Russia? Again, the answer is clearly and unequivocally yes. Manufacturing in Europe as a whole has been contracting since July 2022 and has not looked up ever since. Imports and Exports have been savaged. Economies have been ruined. This is what being united in sanctioning Russia has done to Europe.
Will Europe be de-industrialized as a result of its sanctions against Russia? After seeing the graphs just presented, the answer is a resounding yes. No industrial sector in any group of countries can withstand such a prolonged hammering for two years (and counting) and go back to where they were. They have already lost huge market share to China and the US, among others, and will continue to do so.

It is interesting to compare these effects with the facts that I had unearthed in November 2022 in my earlier article on “The Coming European Economic Apocalypse.”

In that article, I had analyzed the dependence of several European countries on Russian energy. Let us compare with what I had then reported, based on information that I had gleaned from the websites of the European Union, on the dependence of many of the same countries that I have talked about above on Russian energy: Germany, France, The UK, Italy, Spain, The Netherlands, and Poland.

As I reported then, before the war, Germany imported 62.8% of its total gas requirement from Russia; 44% of its total crude oil requirement, and 23% of its total coal requirement from Russia. The corresponding figures for the other countries are: France: 20.2% (gas), 17.5% (oil), and 32% (coal); The UK: 4.5% (gas), 22.5% (oil), and 33% (coal); Italy: 44% (gas), oil (19%), and coal (59%); Spain: 10% (gas), 5% (oil), and 47% (coal); The Netherlands: 42% (gas), 21% (oil), and 53% (coal); and Poland: 68.9% (gas), 81.6% (oil), and 16.7% (coal). From this, it can be inferred that Germany, Italy, The Netherlands, and Poland were extremely dependent on Russia, whereas France, The UK, and Spain were only moderately dependent on Russian energy.

Another way to understand energy dependence is to look at the total energy requirement (Petajoules) of a country, as well as the total fossil energy (Petajoules) requirement of a country, and calculate how much of that energy comes from Russia. The idea behind this is the recognition that, after the outbreak of a war, countries would rebalance their energy sources — so, for example, if some processes required a lot of coal, and that coal was not going to be available — for example, with The Netherlands not getting 53% of its Russian coal — then the country would have to try substituting some other fuel in place of coal to run those processes. Another thing to look into is how much fossil energy the country uses in the first place. If the country is very high on the green transition, then fossil fuels do not play a big role in its economy, and so the absence of Russian fossil energy should not matter to it very much. With this intention, I had plotted the percentage of the total fossil fuel energy needs of a country that came from Russia, as well as the percentage of the total energy needs of that country that came from Russia. I am pasting that same chart below.

This is very revealing. It tells you, for example, that 45% of Germany’s fossil fuel energy came from Russia before the start of the war; but because some of Germany’s energy came from non-fossil sources, only 34% of Germany’s total energy needs came from Russia. The corresponding figures for the other countries in the above list are: France: 19% (fossil), 9% (total); The UK: 14% (fossil), 12% (total); Italy: 35% (fossil), 28% (total); Spain: 12% (fossil), 8% (total); The Netherlands: 72% (fossil), 63% (total); and Poland: 49% (fossil), 44% (total). Again, this tells us that Germany, Italy, The Netherlands, and Poland were extremely energy-dependent on Russia, but France, The UK, and Spain, were not as energy-dependent on Russia.

But if you look at the figures on manufacturing PMI, inflation rate, and GDP growth rate that I presented a little earlier, you can see that every country in Europe has been hammered by the sanctions that they imposed on Russia. France, which had a manufacturing PMI of 56 before the war, saw its PMI drop to as low as 42 in December 2023, with manufacturing mostly contracting since the start of the war, despite being only 9% dependent for its total energy on Russia; the UK, which had a manufacturing PMI of 57 before the war, saw its PMI drop to 43 by August 2023, with manufacturing mostly contracting since the start of the war, despite being only 12% dependent for its total energy on Russia, with its economy technically going into a recession at the end of 2023; and Spain, which had a manufacturing PMI of 57 before the war, saw its PMI going to nearly 44 in October 2022, and again to 45 in October 2023, with manufacturing mostly contracting since the start of the war, despite being only 8% dependent on Russia for its total energy.

Why is this the case? It would have been reasonable to assume, from my November 2022 analysis, that these countries — France, the UK, and Spain — would be less affected by the sanctions against Russia, because they were less dependent on Russian energy before the war than other countries. Every one of these countries had reasons to feel more confident than the other countries: the UK had oil and gas from its North Sea drilling; the French had abundant power from nuclear reactors; and Spain was getting a lot of oil and gas from countries in Africa and the Persian Gulf, such as Algeria, Nigeria, and Qatar. And yet, everyone in Europe has been hit very badly.

European Nations’ Interdependence

Why is this? I believe that it is because Europe is a very tightly integrated ecosystem. If Germany and half the countries in Europe go down, they take down all the countries in Europe with them, because of the strong trade links between the countries. Even the UK, despite leaving the EU, retains very strong trade connections with all the European countries simply because of geography. So, what has essentially happened is that the economic disaster that has unfolded upon Europe has been worse than even I anticipated in 2022, because of synergistic effects. It goes back to the analogy I presented a little earlier — even a healthy person will become sick in the company of sick people.

This can be easily seen by looking at the destinations of German exports over the last 17 years. More than two-thirds of German exports are to European destinations. As a result, a slowdown in Europe will strongly affect the German economy. Note that I have clubbed together both North and South Americas together, because the focus of this discussion is to know how much trade is done within the EU and how much outside the EU.

Distribution of German Exports by Destination Continent (Data Source: UNCTAD)

A similar story holds true for German imports by source. Roughly two-thirds of German imports originate in Europe.

Distribution of German Imports by Source Continent (Data Source: UNCTAD)

Let us look at another leading European country, France. The figure below shows the distribution of French exports by destination continent.

French Exports by Destination Continent (Data Source: UNCTAD)

The same holds for French imports. 70% of French imports originate in Europe.

French Imports by Source Continent (Data Source: UNCTAD)

Let us also look at the United Kingdom, because although it is geographically part of Europe, it has left the European Union. The next figure shows the distribution of UK exports by destination continent.

UK Exports by Destination Continent (Data Source: UNCTAD)

The fraction of UK exports that goes to European destinations is not as high as for Germany and France. For the last decade, it has been around 55%, in contrast with the 67% for Germany and France. But it is still a very high number, suggesting that the UK will be strongly influenced by what happens in Europe.

UK Imports by Source Continent (Data Source: UNCTAD)

The percentage of the UK’s imports that originate in Europe is higher. Before the pandemic, the average percentage of UK imports that originated in Europe was around 60%. It reduced in the two years prior to the war, to just around 50%. Still, a fairly high number.

This high degree of connectivity of European nations to other European nations is the reason why even extremely strong economies like Switzerland still get pulled down when Europe is in a recession. Most of Swiss companies’ clients are in Europe, and they get their raw materials mostly from European companies. To verify this, let us look at the combined exports of Switzerland and Leichtenstein (because that is how UNCTAD reports them, as a single combined entity) by continent, as in the figure below, for the years 2006–2022.

Combined Switzerland and Leichtenstein Exports by Destination Continent (Data Source: UNCTAD)

The figure shows that Europe’s share in the combined exports of Switzerland and Leichtenstein has been reducing over the 17 years represented in this graph, from 60% in 2006 to 46% in 2022. Let us take a time before the pandemic for reference as a “normal” value — 2019. In 2019, the combined exports from Switzerland and Liechtenstein going to Europe was 52% of the total exports.

The imports picture is even more skewed towards Europe, as the following figure shows.

Combined Switzerland and Leichtenstein Imports by Destination Continent (Data Source: UNCTAD)

Europe’s share of the combined imports of Switzerland and Liechtenstein drop from 73% in 2006 to 55% in 2022. Again, choosing a pre-pandemic reference, the value in 2019 was 60%.

What this shows is that, even a strong economy like Switzerland is heavily dependent on Europe for its fortunes. With Europe constituting 52% of exports and 60% of imports, Switzerland will swim or sink as Europe does.

WHY DID THE SANCTIONS FAIL TO HURT RUSSIA AS EXPECTED?

A key reason as to why Russia has remained resilient in the face of so many sanctions is, as I had reported in my November 2022 article, that they are such an important source of so many raw materials, and not only fuels. As a result, sanctions against Russia can never be truly effective, at least in the short term.

To test this hypothesis, we have data from 2022. The 2023 data is not out yet, and I will revise this section once that information is available. But, given that most European nations stopped trading with Russia at most by June 2022, one should expect European trade with Russia to be lower in 2022 than in past years. If the same flow of trade happened in 2022 as in years past, European nations should only have done half the trade with Russia as in years past. Has that happened?

The West also threatened to sanction any country in the world that still did trade with Russia despite the West’s diktat. India, for example, had to get a special exemption from the US allowing it to buy both oil as well as defence equipment because of legacy issues. But one would still expect an inhibiting effect of US sanctions on trade with Russia in 2022. Has that happened?

These questions can be answered by looking at bilateral trade between Russia and various countries over the years. We first look at Russia’s exports to other countries, and then at Russia’s imports from other countries.

We start with Russian exports to Germany, the biggest industrial power in Europe.

Exports to Germany

Clearly, out of nearly $30 billion in exports from Russia to Germany in 2022, over $23 billion comes from fuels. Manufactured goods form around $2.9 billion, whereas ores and metals form around $2.5 billion. Note that these are current billion dollar values, and so comparison over a long period of years is not advisable, because the amounts presented are not corrected for inflation. However, in any particular year, the partition of the total exports between different headings can be seen, and comparisons with two or three years next to the current year make sense.

Note also the high values in 2022 in the export values to Germany, even though Germany, along with the West (driven mainly by America), imposed severe blockades on import of goods from Russia. We do not have the values for 2023 yet, which would show very clearly what the impact of the trade blockade on Russia by the West has been, but the data on 2022 show that the sanctions on Russia were not very effective. In Germany’s case, despite the ban on Russian fossil fuels, total exports from Russia to Germany remained at the same level as in the previous year. Of course, this in itself could be seen as a fall, because the world was coming out of the pandemic, and therefore 2022 should have seen higher figures than 2021. The fossil fuel figures are interesting. Despite the sanctions against Russian gas, oil, and coal, Germany bought significantly more (in dollar amounts) fossil fuels from Russia in 2022 than in 2021. This is partly because of the high cost of oil and gas in 2022 because of the Ukraine crisis. Not adjusted for inflation, in 2022, Germany bought $23.3 billion worth of fossil fuels from Russia, compared to $12.2 billion in 2021. Also on the chart are two other items that are dwarfed by the huge fuel imports, but important nevertheless: manufactured goods and ores and metals.

Despite the popular propaganda that Russia is merely a “giant gas station,” it is, in fact, a technologically advanced nation. So much so that even Germany, among the most advanced nations in the world, bought $2.92 billion worth of manufactured goods from Russia in 2022, up from $2.77 billion in 2021. This fact becomes more pronounced when you see Russia’s dealings with countries from the Global South, most of whom buy large quantities of manufactured goods from Russia. Russia may not be in the same league as the US, China, or Germany when it comes to manufactured goods, but its strength in manufacturing is enough for Third World countries to want Russian manufactured products, as I will show later.

The other important category that wasn’t affected by the war was ores and metals, which remained fairly unchanged at around $2.5 billion. As I had mentioned in my November 2022 analysis, Russia is a huge supplier of many important metals and ores, including precious metals like gold, platinum, and palladium, and many industrially important ores.

Exports to France

Let us now look at Russian exports to France. In 2022, Russia exported $12.75 billion worth of total exports to France, of which fuels formed $11.28 billion. That means that nearly $1.5 billion worth of goods is exported in other sectors. What is even more interesting is that the total exports from Russia to France increased from about $10 billion to around $12.7 billion, but the fuels component increased from $3.6 billion to $11.2 billion (unadjusted for inflation). That means France cut down its imports from Russia in every other area. The UNCTAD data does not give clarity on this, except to say that “unclassified products” came down from about $4.8 billion to practically zero. The UNCTAD classification system has headings for Food and Beverages (Category 1), Industrial supplies not elsewhere specified (Category 2), Fuels and Lubricants (Category 3), Capital Goods (except Transport Equipment) and Parts and Accessories Thereof (Category 4), Transport Equipment and Parts and Accessories Thereof (Category 5), Consumer Goods Not Elsewhere Specified (Category 6), and Goods Not Elsewhere Specified (Unclassified). That nearly $5 billion of imports from Russia to France in 2021 was under the unclassified label and vanished deserves more scrutiny.

Exports to the United Kingdom

In the case of the UK, the trade in fuels is dwarfed by the much larger trade in gold. Russia is one of the biggest suppliers of gold in the world to the bullion market, and much of the London bullion market was traditionally supplied by Russia. After much wrangling, the UK started imposing sanctions on Russian gold. Total Russian exports to the UK went down from around $22 billion in 2021 to around $20 billion in 2022. Of this, fuels went up from $3.3 billion to around $6.3 billion, whereas gold bullion went down from $15.4 billion to $11.7 billion. It will be interested to see the 2023 figures when they come out.

Russian Exports to the UK (Source: UNCTAD)

Exports to Italy

Russia’s exports to Italy increased in 2022, like many other European countries, mainly on the back of fuel exports, as seen the graph below. But what is not insignificant is a rise in the export of manufactured goods, from $2 billion in 2021 to $3.1 billion in 2022; and non-ferrous metals, from $1.1 billion in 2021 to $1.8 billion in 2022.

Exports to China

Russia’s exports to China are mainly of fuels, specifically oil, and to some extent LNG and coal. Total exports went down, from $68.7 billion in 2021, to $67.7 billion in 2022; of this decline, fuel exports actually increased, from $45.7 billion to $52.2 billion, whereas manufactured goods declined, from $6.2 billion to $4.6 billion.

Exports to India

Another major exporter for Russia is India. Russia’s trade with India is very broad, as the graph below shows. Total exports from Russia to India increased from $9.1 billion in 2021 to $12.1 billion in 2022, but fuels only form one component of that trade, increasing from $2.3 billion in 2021 to $5.2 billion in 2022. Machinery and transport equipment, especially in defense vehicles (tanks, aircraft, and naval vessels) also form an important part of Russia-India trade. Manufactured goods went up from $3.1 billion in 2021 to $4.1 billion in 2022, of which machinery and transport equipment went up from $1.3 billion in 2021 to $1.5 billion in 2022. Pearls, gold, and precious stones also went up (mainly gold, because of India’s insatiable appetite for the yellow metal) from $1.2 billion to $1.4 billion. Because of the diverse nature of India-Russia trade ties, it is almost unthinkable for New Delhi to sanction Russia.

Exports to Turkey

Another key trade partner of Russia is Turkey. Total exports rose from $26.4 billion in 2021 to $34.9 billion in 2022. That is a rise of $8.7 billion. The rise in fuel exports to Turkey is actually more than the overall rise — a rise from $6.9 billion in 2021 to $17.1 billion in 2022, or $10.2 billion. Turkey depends very strongly on Russian wheat and oils, so there is a rise in imports of grains and oils, from $4.3 billion in 2021 to $6.7 billion in 2022. Manufactured goods went up from $5.3 billion in 2021 to $6.8 billion in 2022, and ores and metals went up from $3 billion in 2021 to $3.6 billion in 2022. If the numbers do not add up, it is because, according to the UNCTAD data, exports of “unclassified products” went down by $6.4 billion.

Exports to Egypt

We round off the exports picture for 2022 with Egypt, an important Arab state. The purpose of showing all these export profiles is to show how, despite the Western sanctions on Russia, including barring Russia from SWIFT, and freezing Russia’s dollar funds in Western banks as early as March 2022, exports to Russia in 2022 actually were more than in previous years, thereby rendering the sanctions impotent. The reason for this is that Russia is too important a country in the world, with so many valuable natural resources, that the rest of the world cannot afford not to trade with Russia.

Total Russian exports to Egypt zoomed from $4.2 billion in 2021 to $7 billion in 2022. Unlike most other countries, Egypt’s main need from Russia was not oil or gas, but grain. Exports of grain and oils (sunflower oil, safflower oil) from Russia to Egypt went up from $1.8 billion to $3.9 billion. Exports of manufactured goods also went up, from $1.1 billion to $1.6 billion.

With that, we conclude our discussion of the impact of sanctions on Russia’s import revenues in 2022. It is clear from the foregoing discussion that sanctions did not curb Russia’s import income — on the contrary, because of rising prices and possibly the fear of scarcity in the future, import volumes substantially increased, enriching the Russian treasury. What is also evident is Russia’s overall strength — countries imported not only fuels from Russia, but also substantial quantities of manufactured goods, fertilizers, foodgrains, ores and metals, and gold and other precious metals. Undoubtedly, this is only a partial picture, because the data for 2023 are not available yet; when they do come, it will be possible to get a better idea of the impact of sanctions on Russian exports.

Limiting Russian revenues was only part of the objective of Western sanctions against Russia. Western nations wanted to starve Moscow of essential manufactured goods and various other commodities. Let us see how successful they have been in that endeavor, by analyzing imports of foreign goods into Russia. As before, we start with Germany, Russia’s biggest trading partner in Europe before the war.

Russian Imports from Germany

Most of Russia’s imports from Germany consists of manufactured products. In 2021, total imports amounted to $31.6 billion, and they came down to $21.5 billion. Manufactured goods came down from $28.9 billion to $19.5 billion, a drop of $9.4 billion. Of the manufactured goods, machinery and transport equipment came down from $15.9 billion to $9.2 billion, a drop of $6.7 billion. Imports of chemical products came down from $7 billion to $6 billion, a drop of $1 billion.

Russian Imports from France

Russia’s imports from France follow a similar trend. Total imports came down from $9.8 billion in 2021 to $7.3 billion in 2022, a drop of $2.5 billion. Of these, manufactured goods came down from $7.6 billion in 2021 to $6.4 billion in 2022, a drop of $1.2 billion. Of this, machinery and transport equipment came down from $3.8 billion in 2021 to $2.7 billion in 2022, a drop of $1.1 billion.

Russian Imports from the United Kingdom

The same pattern is seen in Russian imports from the UK. Russia imported $4.3 billion worth of goods from the UK in 2021, and this figure dropped to $3.2 billion in 2022 — a drop of $1.1 billion. Of this, manufactured goods contributed $3.8 billion in 2021 and $2.8 billion in 2022, a drop of $1 billion. And, of manufacturing, machinery and transport equipment contributed $2.1 billion in 2021 and $1.3 billion in 2022, a drop of $800 million.

Russian Imports from the UK (Source: UNCTAD)

Russian Imports from Italy

The same pattern is seen in Russian imports from Italy. In 2021, these amounted to $10.7 billion. In 2022, that went down to $9.3 billion, a drop of $1.4 billion. Of this, manufactured goods contributed $9.4 billion in 2022 and $7.9 billion in 2022, a drop of $1.5 billion.

Russian Imports from China

Lastly, we turn to China, who has characterized their friendship with Russia as a “no-limits” friendship. Total imports from China into Russia were $54 billion in 2020, rose to $73 billion in 2021 (an increase of $19 billion), and further rose to $85 billion in 2022 (a further increase of $12 billion). Of this, manufactured goods rose from $52 billion in 2020 to $69 billion in 2021 (a rise of $17 billion) to $80 billion in 2022 (a further increase of $11 billion). It is clear that any loss of manufactured goods from European countries (the total decline of imports from Germany, France, Italy, and the UK was $15.1 billion in 2022) is more than made up for by imports from China (a $19 billion increase in 2021 followed by a $12 billion increase in 2022, totaling to $31 billion). Lest anyone think that I am being unfair in counting two years worth of increases in imports from China to Russia, while only counting one year’s worth of imports decline from Germany, France, the UK, and Italy, I should mention that between 2020 and 2021, all four major European countries increased their exports to Russia. Russia’s imports from China are wide-ranging, as I had pointed out in my November 2022 article. The figure below illustrates this by showing one category, that of textiles, yarn, and clothing. This sector alone rose from $7.1 billion in 2021 to $8.2 billion in 2022. With the decoupling of Russia from Europe complete, trade between Russia and China will increase even more.

In summary, just going by the data up to the end of 2022, it is clear that Western sanctions on Russia have utterly failed, both on the imports side and on the exports side.

CONCLUDING THOUGHTS

I had titled my November 2022 review of Europe’s dependence on Russia and the projected impact of Europe’s sanctions on Russian energy as “The Coming European Economic Apocalypse.” A year and half later, reviewing the economic situation of Europe, I believe that “economic apocalypse” was the right expression to use in that article.

In seeking to aid Ukraine militarily and choke Russia economically, Europe has shot itself in the foot. It has destroyed its own heavy industry, which is rapidly leaving Europe for better climes such as China and the US; and it has caused extreme pain to its people via skyrocketing inflation, reducing their standard of living to a level from which they might never recover.

To summarize, the macroeconomic effects of the West’s sanctions have been to

Increase energy costs in Western countries due to their self-denial of Russian energy
Increase the cost of manufacturing
Cause a general decline in manufacturing in Western countries
Push countries into negative GDP growth rate and recession by reducing both exports and imports
Increase unemployment
Cause an economic crisis that is, in many countries, comparable to the Covid-19 crisis, and in some, even comparable to the GFC
Cause price rise in all commodities, not just fossil fuels, and in nations far removed from Europe, so as to cause global inflation

One might well ask: all this for what? Russia has not been destroyed in the way that Europe has been — in fact, quite to the contrary, its economy is doing very well — and, in addition, it is winning the war on the ground as well. The US is tiring of supporting an unwinnable conflict in Ukraine. The Republicans, whose candidate, Donald Trump, might well end up becoming the next US President, are completely opposed to supporting Ukraine either financially or militarily, and so if a Republican like Trump ends up winning the election, Russia will win the war in Ukraine (they will anyway win it, regardless of who wins the American election in November, but it will be sooner if Trump comes back to the White House).

In addition, America’s attention is now focused on the conflict in West Asia. Ukraine is an inconvenient distraction for them. But European countries have destroyed themselves, and are continuing to destroy themselves, while America has moved on. In addition, the conflict in West Asia is going to be an added burden for Europe because of the uncertainties it creates. It may create further uncertainties in energy supplies for a Europe that is already reeling from energy shortages. In addition, the attacks of the Houthis on shipping in the Red Sea means that all seaborne vessels must now come to Europe via the much longer route going past the Cape of Good Hope instead of going through the Suez canal. This will further increase costs for Europe. It is not clear if Europe will survive its third major shock in four years — first, Covid, then the Ukraine war and its sanctions on Russia, and now the war in West Asia. Given that it was just recovering from Covid, Europe should have been extremely circumspect in supporting any war just two years after the pandemic. But it was not, and rushed headlong into supporting Ukraine in its conflict with Russia, and is now in extremely dire straits. Now another global black swan event has happened, albeit this time not of Europe’s choosing, and Europe has nothing left in the tank to deal with it.

Ganesh Prasad’s Cartoon to Illustrate how Europe Foolishly Took on a Much More Powerful Russia and Lost

Europe made one cardinal mistake. It forgot that it does not have huge natural resources. Europe’s success in centuries past was based on robbery, exploitation, and colonization. Every European country had colonies in Asia, Africa, or South America, and became prosperous by exploiting those colonies. They used the profits from those colonies to build up prosperous economies at home that used the fruits of the industrial revolution to create first-world, technologically advanced nations in Europe, even as they kept their colonies backward. For their continued prosperity and leadership in the world, it was necessary that Europe had access to cheap energy — and Russia provided that to them for 30 years. Europe led a wonderful existence for 30 years with the specter of nuclear annihilation lifted from their lives and enjoyed a great partnership with Russia which allowed them to lead the world in technology with assured cheap energy behind them. They had peace, prosperity, and luxury. But they abandoned all of this at the urging of their master, the United States, by declaring sanctions on Russia and cutting themselves off from cheap Russian energy. And, thanks to those actions, today Europe is a shadow of what it was before 2022.

There are no more third world colonies for Europe to loot to recover their prosperity. There is now only one direction for Europe to go — down.

The worst is yet to come for Europe.

Empires usually fall when they start to believe in their own myths. One of the reasons often postulated for the decline of India as a great power (collectively) on the world stage around the turn of the first millenium is that Indians became overconfident and started to think that they had all the answers and did not need to learn from anyone else. And so, while travelers from China, such as Faxian and Xuanzang visited India and learned about India and told the Chinese about India, India did not send anyone to China to learn about that civilization. Marco Polo visited India during the time of King Krishnadevaraya of Hampi and wrote extensively about his impressions of India; but no Indian traveler ventured to Europe to learn about Europeans. Alberuni visited India and understood the mathematical advances of Indians, but Indians did not send anyone to Iran to learn about their culture. The result of all that overconfidence was that India fell back in science, technology, and progressive ideas, and as a result was repeatedly conquered by foreigners.

Europe has shown similar overconfidence in dealing with both China and Russia. I have heard astonishingly ignorant comments about Russia and its economic capacity, both from lay people as well as people high up in government and important members of think tanks. One of the common talking points from these people is that Russia is a “small” economy and so cannot affect giant Europe because its GDP is so small in relative terms (only about $2 trillion). What these people did not seem to understand is that Russia’s value cannot be gauged in dollar terms. Russia supplied 40% of Europe’s gas by volume, but that amounted to just 6% of Russia’s total exports in monetary value. Because there was no other source for that gas, Russia was an extremely important trading partner. And it isn’t like this information was hidden somewhere. The EU’s own data banks have all the information about how much Russian gas mattered to Europe, and that is where I have obtained all my information. Nobody in Europe bothered to even read their own reports. That’s how overconfident Europe was, and even today is. Their opinion makers still display the same kind of arrogance.

A very good analogy to understand Russia’s importance to Europe is perhaps through human biology. The big blood vessel that takes blood from the heart and supplies it to the body, the aorta, is around 3 cm in diameter near the heart, and carries a lot of blood. Clearly, the aorta is a very important blood vessel. But the heart muscles need blood to sustain them and provide oxygen to them to keep pumping. One of the main arteries that supplies blood to the heart muscle is the left anterior descending (LAD) artery. The LAD is around 3 mm in diameter. That is one-tenth the size of the aorta, and that means it has a cross-sectional area only around one-hundredth that of the aorta. It is also not next to a major pump like the aorta, and so the flow of blood will be much much smaller even than one-hundredth the flow through the aorta.

But if the LAD is blocked or the flow slows in some other way, the heart muscle gets no blood, and it will stop working. That’s when you have a heart attack. Then surgeons try to take blood vessels from elsewhere in the body and try to bypass the LAD to get another path for the blood to flow. That’s how important the LAD is.

Russian energy supply to Europe is like the LAD supplying blood to the heart muscle, and Europe is like the heart. Europe’s GDP is huge, just as the output of blood from the heart through the aorta is huge. The blood the LAD provides to the heart is like the gas and oil that Russia was providing to Europe to keep it going. In monetary value, it wasn’t much, just as the blood supplied by the LAD is not huge in volumetric terms. But without it, Europe is having an economic heart attack. And it is not yet clear if it will survive this heart attack. It’s almost like the US cut the LAD on purpose (the bombing of the Nord Stream pipeline) and is doing a bypass surgery on Europe by trying to provide LNG in tankers to Europe. But a bypass surgery is never as good as the heart’s original plumbing.

I will pause here to put in one caveat. I am engaging in a very hazardous hobby — predicting the future. My hands have been burnt in the past as I have made predictions which did not happen. In the case of the war in Ukraine itself, I made the rather bold prediction that Europe would freeze in the winter of 2022–23. What I learnt then is that the huge uncertainties in the world can upturn any prediction. In that case, I could never have predicted that a) Europe would have its mildest winter in decades, b) China would have an economic downturn, thereby making more LNG available for Europe, and c) European industry would close down so completely that demand for energy in Europe would be down by more than 20% for the year, thereby nullifying my prediction.

And so it is with this prediction. There are always unknowns. I don’t have a crystal ball. I don’t look at star signs and constellations, I look at GDP and PMI and gas and oil prices. Maybe a surprise factor will suddenly happen in 2024 that will save Europe from what certainly is looking like a bleak future. But I cannot be deterred by that. I have to try to make the best sense of the available facts. And those suggest that Europe is doomed.

A few comments on the bigger picture are warranted at this stage, two years after the US provoked a catastrophic war of Ukraine against Russia — and lost.

The Russia-Ukraine war has permanently altered the future of great power politics. When this war began, one of the common refrains in Western capitals was that a mighty military and economic defeat must be inflicted on Russia in order to put any other nations that might dream of defying the US and the “Rules-based International Order" on notice — defy us, and what happened to Russia will happen to you. This was particularly aimed at China vis-a-vis Taiwan.
Instead, we have seen the US greatly diminished after two years, both militarily and economically. It seems like another world a long time away where claims were being made such as “the ruble has been reduced to rubble.” One has to pinch oneself and remind oneself that all that was only two years ago. Equally amazing are the claims of Western military superiority, when you recall them — all we have to do is give HIMARS to Ukraine, and the Russians will be finished. Or Bradleys. ATACMS. Javelins. Stingers. Caesars. Challengers. Leopards. The list is endless. And yet none of these so-called miracle weapons managed to turn the tide in favor of Ukraine. The sanctions failed; the weapons failed.
It makes you understand how much the world can change in 20 years. The glory days of the two Gulf Wars seem like an eternity away. The defeat in Ukraine just reinforces the feeling that we got when America ran for dear life from Afghanistan, leaving everything behind and abandoning their Afghan collaborators to the mercies of the Taliban. And, in the current conflict in West Asia, we are seeing a tiny country, Yemen — in fact, a non-state actor from that tiny country, the Houthis — being able to hold the entire West to ransom by virtually ending traffic through the Red Sea, and the US being powerless to do anything about it.
The message that goes to American vassals is: the US is no longer capable of protecting you. They cannot even protect themselves. Forget military might, they don’t even have economic might. And the implication is obvious: we are on our own, and from now on, we must look to our own benefit. Some countries in Europe, like Turkey, Serbia, and Hungary, realized this even in 2022, but by now every European nation has got the memo. And countries like India, which are flirting with American vassalhood, will be forced to take note. In fact, quite the reverse of Western expectations before the war is the reality today. The Taiwanese must be thinking: if we defy China as foolishly as the Ukrainians defied the Russians, depending on the Americans, we, too, could be utterly destroyed, like Ukraine is. The US will likely be looking at more and more countries slipping out of its grasp.
I had written in my November 2022 article that if the going got tough on the battlefield for Russia, China would weigh in on the side of Russia for geopolitical reasons. Some disagreed with me, and with justification, saying China is an extremely pragmatic country and would hesitate to go to war. In addition, its leaders are imbued in the Confucian philosophy, which preaches patience and prioritizes the waiting game over precipitate action. In the event, that proved to be an academic debate, because Russia didn’t need any help to defeat the West.
One of the geopolitical changes this American defeat will doubtless accelerate is the phenomenon of de-dollarization — of moving away from the dollar to a different medium of exchange for trade. Many countries would have hesitated to do this two years ago for fear of angering the US, lest it unleash its hitherto feared sanctions on them. But now we have seen the fiercest possible sanctions imposed by Washington on a country they didn’t even deign to consider a peer competitor (see any of the lectures of John Mearsheimer to understand the American view of Russia), and the country successfully fought back. This conflict has also told the rest of the world that the US is not deserving of the tremendous responsibility the world placed in it when they voted to make the dollar the world’s reserve currency. As the line in the movie “Spiderman” goes, with great power comes great responsibility. And the US has not been responsible. It has weaponized the dollar and used it to settle scores. And now, the US has become entangled in its own web, and is unable to extricate itself from it. I would expect the pace of de-dollarization to greatly accelerate in the next year.
The sun is setting on the American Empire, just as it set on the British Empire 75 years ago. Nobody can “Make America Great” again. There will be no superpowers in the multipolar future. The age of Colonialism is over. We may not see the end of war; countries will still fight to settle bilateral conflicts. But the age of global wars, where countries travel thousands of miles to fight other countries, will thankfully be over with the end of the American Empire. And this is a development to be welcomed by every peace-loving person.

Appendix I: Detailed Country-Wise Discussion of Impact of Western Anti-Russia Sanctions on European Nations

GERMANY

Manufacturing PMI

The figure below shows the PMI for Germany since January 2022 (Source: Trading Economics).

It can be seen that German manufacturing has been continuously contracting (PMI less than 50) since July 2022, up to the present. From 59.8 in January 2022 and 58.4 in February 2022, the manufacturing PMI for Germany drops to 45.1 in October 2022, before rising to 47.3 in January 2023, and then again dropping to as low as 38.8 in July 2023. By January 2024, it had recovered to 45.5. The maximum drop in manufacturing PMI for Germany was -20.8 points (59.6–38.8).

Note that ups and downs in the chart are not very important as long as the value is below 50, because a value below 50 means that the value under consideration is lower than in the previous month/quarter.

It is also instructive to look at the long-term manufacturing PMI for Germany since 2006.

The manufacturing PMI for Germany drops from 55.1 in March 2008 to 32 in January 2009, a drop of -23.1 points, because of the global financial crisis (GFC). There is another drop in the PMI, due to the Covid pandemic: in February 2020, the PMI is seen to be 48; it decreases to 34.5 in April 2020, a drop of -13.5 points. In contrast, the drop due to the present crisis (which I am calling the Post-Sanctions Crisis — the PSC — to refer to the downturn in Europe and other regions since the start of the Russia-Ukraine war in February 2022) is -20.8 points, which is significantly more than the Covid drop, and almost reaches the GFC drop in PMI of -23.1 points.

Capacity Utilization

This is also seen in the capacity utilization in Germany, which has been steadily reducing since the start of the war. There seems to be a worsening of capacity utilization between Q3 of 2023 and Q4 of 2024, which can be attributed to the worsening economic climate in Europe.

The capacity utilization gradually drops from 85.8% in the first quarter of 2022 (Q1/22) to 81.9% in Q4/23, a drop of -3.9%. To see how significant this is, let us look at the capacity utilization over a longer time frame and see how the capacity utilization decreased in past economic crises. This is seen in the next figure.

Capacity Utilization, %, Germany, 2006–2024

During the GFC, capacity utilization in Germany decreased from 88.8% in Q1/08 to 70.3% in Q3/09, a drop of -18.5%; during the Covid-19 crisis, capacity utilization decreased from 83% in Q1/20 to 70.3% in Q2/20, a drop of -12.7%. In comparison with these numbers, the PSC drop in capacity utilization is milder, at -3.9%.

Industrial Production Growth

The next graph shows the percentage growth of industrial production output by month, year-on-year, for Germany. That is, to eliminate seasonal effects, the industrial production in a particular month is compared to the industrial production in the same month in the previous year. In a healthy economy, one would expect at least a small amount of growth every month, year-on-year.

It can be seen that, barring seven sporadic months, Germany’s industrial production has been in continuous decline for almost the whole of the last two years. This depressed industrial production growth seen above directly correlates with the fact that Germany is in a recession.

GDP Growth Rate

It is no surprise, then, that Germany officially fell into recession last year, which is defined by two consecutive quarters of zero or negative quarter-on-quarter growth. This can be seen from the plot of GDP growth rate of Germany (Source: Trading Economics), which has been abysmal since the war began in February 2022. Not seen in the graph is the data point for Q4 2023, which was -0.3%.

We can also examine the year-on-year growth rate picture to understand the devastation. As mentioned earlier, annualized rates of growth are useful because they eliminate seasonal variations. In the January-March and April-June quarters of 2023, the annualized GDP growth has been almost zero, and in the July-September quarter, growth was negative. From 4% in Q1 2022, the annual GDP growth rate in Germany has gone to -0.3% in Q3 2023, a drop of -4.3% in the last two years.

Germany is in dire straits.

GDP Growth Rate, YoY, Germany, 2022–2024

It is worthwhile comparing the -4.3% drop in Y-o-Y GDP growth rate experienced by Germany due to the sanctions against Russia with the drops in the annualized GDP growth rates during the GFC and the Covid-19 pandemic: for the GFC, the drop is (-6.9%-4.3%) = -11.2%; for the Covid-19 pandemic, it is (-10.6–0.9) = -11.5%.

GDP Growth Rate, %, Y-o-Y, Germany, 2006–2024

Why did this happen? Actually, the real question should be, given Germany’s huge energy dependence on Russia, why did this not happen sooner after Germany voluntarily stopped importing Russian energy?

Germany avoided freezing temperatures for its citizens by furiously buying natural gas in the fall and winter of 2022–23 at hugely inflated prices, and it also experienced massive shutdowns of industry ever since because of the high fuel prices. This made German industry uncompetitive in the world. High energy prices forced low capacity utilization, leading to lowered industrial production growth. Since industrial demand for energy went down, there was gas available for domestic heating, and people did not freeze and die. But the once-mighty German industry died.

Germany used to be the powerhouse of Europe. Now it is just the sick old man of Europe.

Unemployment Rate

The massive shutdowns in Germany (both temporary and permanent) led to a spike in the unemployment rate. From 5.1% in January 2022, unemployment shot up to 5.9% in January 2024. This is despite massive state intervention to prevent social distress.

Imports and Exports

As explained earlier, if energy prices are high, capacity utilization rates are low, and industrial growth is weak, as reflected also in the PMI. Therefore, Germany had less to export, and what it could offer for export was more expensive than its competitors because of high input costs. High energy prices also led to high inflation (discussed below), and these in turn lowered domestic demand because products became too expensive. As a result of both — weakened demand overseas because Germany’s products were more expensive, as well as lowered demand at home because of high inflation, Germany’s demand for imports also lowered. This is what led to Germany’s recession.

The magnitude of Germany’s recession can be seen by looking at its imports and exports since the start of the war in Ukraine, and comparing these levels to historical levels to get a sense of proportion. The next figure shows the seasonally-adjusted volume index for imports and exports for Germany, with 2005 as the base (=100). Data from the data center of the UN Conference on Trade and Development, or UNCTAD.

Germany’s Import and Export Indices Since 2005 (100=2005) (Data Source: UNCTAD) Analysis by the Author.

This picture is valuable, because it shows us how bad the PSC is in relation to historical crises that Europe has faced. We can see from the chart the effect of the Global Financial Crisis (GFC) post-2007, that led to a global recession. Now, what happens in any recession is that both imports and exports fall. The reason for both is the same — a drop in demand.

In addition, if your own economy is in the doldrums, people in your country do not have the money to buy things. And if nobody is buying, there is no point in manufacturing anything for domestic consumption as well, which means that you do not need to import raw materials (which Europe seriously lacks to produce anything), which leads to a fall in imports. And, going by how long the PMI has been in contraction territory in Europe, the problem is severe and possibly permanent. To reiterate, a PMI below 50 means that orders for products are declining month-on-month. And Germany’s PMI has been declining for 20 straight months (up to February 2024 and counting). This has serious chain effects. A big corporation like BASF can withstand such a large period of contraction. But a lot of smaller firms cannot withstand such a long period of losses. Many of them will simply shut down.

Within Europe, imports and exports are connected, because, as will be shown later in this article, the primary consumers for European countries are other European countries, because of the nature of the European Union binding them. Even the UK is not immune from this, even though it has exited the EU, because it is bound to the EU through geography. So, if a smaller country, with a lesser ability to bear energy shocks than Germany has, starts falling into recession, that will affect Germany, because the citizens of the smaller economy can no longer buy German cars and other products.

So this is the vicious cycle that Germany has gotten into. Because energy prices are so high, manufacturing has become unviable since March 2022. Exports have been dropping. People are going out of work and living on government welfare. Businesses have been shutting down because of high energy prices, and so imports have sunk because people have been manufacturing less. Unemployment has risen (it has risen in real terms, but the German government has kept people on the rolls through state intervention). All this means demand will continue to drop, leading to a lower need for manufactured goods. This is Germany’s Post-Sanctions Crisis (PSC).

The problem is that even if energy becomes cheap in the future, it is not easy to reverse this, because of two reasons: one, companies that have already left for foreign shores will not return; and two, it is expensive to restart factories that have been shut down. Germany’s economy is in a tailspin. And in the middle of all this, they want to spend more on helping Ukraine financially and militarily in a war, when their own world is imploding around them.

To get a sense of the depth of the crisis, let me point out some of the highlights of the exports-imports chart for Germany. During the GFC, exports dipped from a high volume index of 124.2 to a low of 94.5 — a drop of -29.6 points — and imports dipped from a high volume index of 121 to a low of 100 — a drop of -20.5 points. During the Covid-19 shock of 2020, exports dropped from a high of 118.7 (March 2020) to a low of 92.6 (June 2020), a drop of -26.1 points; whereas imports dipped from a high of 131.1 in March 2020 to a low of 112.8 in June 2020, a drop of -18.3 points.

In the present Post-Sanctions Crisis, the effects of the sanctions took some time to be felt, and so were not evident by June 2022, which we can therefore take as the high point (pre-crisis), where the export volume index was 121.7 and the import volume index was 145.8. It is also clear from the chart how well Germany (and the rest of Europe, as we shall see) was rebounding from the forced contraction due to Covid-19 by March 2022, and how Germany’s imports were booming, meaning that manufacturing was going into overdrive because the world was buying. From that high, the current values of the exports and imports volume indices slumped to 116.7 and 135.8 in Q3 of 2023 — drops of -5 and -10 points in exports and imports. The -10 point drop in imports seem to be headed towards the -17 point drop of the Covid-19 recession.

It is not only the magnitude of the drop, but the change in direction of Germany’s fortunes before and after the start of sanctions against Russia. Before the war, Germany’s manufacturing was soaring towards the stars; now, two years after the war, it seems to be aiming for a crash-landing.

Inflation

The inflation rate is plotted from September 2021 onwards to the present, to see both the effects of the inflation resulting from the reopening of the world economy after the Covid-19 pandemic and the subsequent effect of the war in Ukraine. What we see is that the inflation continuing from 2021 ends by December 2021, when it reaches a value of 4.9%; it subsequently dips to 4.2% in January 2022. It then increases incrementally to 4.3% in February 2022, and then shoots to 5.9% the next month, as soon as the war started, reaching a high value of 8.8% in October 2022. It takes another year for the inflation rate to go below the pre-war value, which it finally does in October 2023 (3.8%). This illustrates the degree to which Germany was dependent on Russian energy. We can get an idea of the severity of the PSC by looking at the maximum rise in the inflation rate due to the crisis, which in this case is the maximum inflation rate in the last two years minus the inflation rate in February 2022, which is the start of the crisis. For Germany, that is the difference between 8.8% and 4.3%, or 4.5%.

It is also instructive to look at the long-term picture on inflation rates, and understand just how high these rates are compared to inflation rates in previous crises — such as the GFC and Covid-19. The next chart shows the long-term inflation rate in Germany.

Inflation Rate, %, Y-o-Y, Germany, 2006–2024

This chart is alarming. What it shows is that the inflation of the past two years dwarfs both Covid-19 and GFC in its severity. This will undoubtedly have caused huge human suffering and destroyed businesses — which is what we will see in what follows.

What this chart also shows is that at the beginning of 2022, just before the PSC, the inflation rate was already rising rapidly, for reasons we have already discussed earlier — viz., the closing down of capacity during the pandemic, followed by the rapid reopening of the economy after the Covid-19 pandemic, resulting in huge scarcities and therefore price rise. So the high inflation rate in February 2022 and the later months was not only because of the war in Ukraine; rather, the war in Ukraine exacerbated an already serious inflation problem that the world had been facing for a whole year since the end of the Covid-19 pandemic.

The Housing Sector

This high inflation during the past two years has severely damaged the German economy. For instance, because of inflation, the housing market in Germany completely bottomed out, because demand for housing vanished. The reason for this is that to address high inflation, governments raise interest rates. This increases the cost of borrowing and makes buying homes unaffordable for people. Because of vanishing demand, home prices have plummeted nearly 10% in Germany in the second quarter of 2023, year-on-year.

When inflation rates are high, everything is more expensive, and this means that wages are insufficient to cover the cost of living. This is measured by wage growth that takes inflation into account, as shown below.

Real Wage Growth in Germany Over the Past Two Years, Showing the Effect of Inflation Due to the Energy Shock (Source: Trading Economics)

It can be seen that ever since the war, real wage growth was negative in Germany for five quarters, surfacing above zero only in the second quarter of 2023. This obviously made it hard for Germans to spend on anything — retail, housing, cars, etc. And the first casualty of high inflation is housing.

Building Permits Granted in Germany Have Steadily Decreased Over the Past Two Years, A Sign of Weakened Demand (Source: Trading Economics)

Although the inflation rate has finally normalized in Germany after nearly two years, the housing market continues to be in free fall. One of the country’s largest landlords, TAG, said that housing markets could continue to fall in value in 2024 because of zero demand, and home values could be 30% below their 2022 values. This is a catastrophe.

New Construction Orders for Housing in Germany Have Seen Double-Digit Shrinkages Because of Inflation (Source: Trading Economics)

Retail Sales Growth

Another consequence of high inflation is catastrophic retail sales, which were mostly negative for the last two years since May 2022, going as low as -7.8%. People in Germany do not have much money to spend.

Bankruptcies

Not surprisingly, this led to rising bankruptcies in Germany over the last two years. From 1060 bankruptcies in January 2022, the number rose to 1510 bankruptcies in December 2023. This is a composite annualized growth rate (CAGR) of 20% in bankruptcies in Germany.

Not surprisingly, all these factors have led to a significant loss in business confidence across Europe. The following figures are based on the datasets from the OECD Data Centre. The methodology followed in obtaining these indicators is explained here.

Business Confidence Index

The graph below shows the composite business confidence index for Germany from 2006 up to February 2024 with data for every month, along with the data for the entire 27-country European Union, which I am using as a reference. Since this index is not a fundamental quantity, we need some way to understand the spikes and depressions that we see. For this reason, I have included the values from January 2006 onwards and up to February 2024. This ensures that the periods of the global financial crisis (GFC) and the Covid-19 crisis are included. By looking at the drops in the confidence index for previous crises, one gets an idea of how bad the current crisis that has emerged after the imposition of sanctions on Russia is.

Of the three major crises since 2006, the GFC was the most serious, so it is useful to see how bad the confidence index was at the worst point. For the EU as a whole, the confidence index was 102.4 at the approximate start of the crisis (January 2007) and went down to 93.9 at its lowest point (March 2009). So this was a dip of -8.5 points. The start of the Covid-19 crisis can be measured very precisely. The value of the EU27 index (the blue curve) at the end of January 2020 was 99.8, and the lowest confidence index during the crisis was in May 2020, which was 95.3. So this was a dip of -4.5 points. Now let us look at the business confidence index of the Post-Sanctions Crisis which began in March 2022, which was 102.8 for the EU27. The index seems to have plateaued at 99.2, after dropping 3.6 points. This gives us an idea of the scale: GFC (-8.5 points), Covid-19 (-4.5 points), and Post-Sanctions Crisis (-3.6 points and continuing). So, the dent in business confidence caused in the EU27 has almost been of the same order as what happened during the Covid-19 pandemic.

Now let us come to Germany (the red curve). The value of the business confidence index was 102.1 in January 2007 and 96 in March 2009, leading to a drop of -6.1 points for the GFC. For the Covid-19 pandemic, the high and low values were 99.4 (January 2020) and 97.6 (May 2020), leading to a drop of -1.8 points. For the Post-Sanctions Crisis, the values for Germany are 102.2 (March 2022) and 98.8 (February 2024) — the index has not yet bottomed out, and is still decreasing at the time of writing — for a drop of -3.4 points.

So already, one can see that for Germany, the Post-Sanctions Crisis has caused a worse crisis of business confidence than even the Covid-19 pandemic did. This is why Europe is being destroyed by this crisis.

To address the inflation problem, countries widened their social nets to provide relief to citizens; but this, in turn, increased their budget deficits to dangerous levels. One of the measures instituted in Germany was the energy price cap, which provided €200 billion in relief to citizens for their gas and electricity bills to keep them under control. Despite the relief, gas prices still rose by 52% and electricity prices by 26.2% over the first 6 months of 2023.

But Germany faced serious problems when trying extend this measure beyond 2023, mainly because of legislation it created on its own more than a decade ago (in 2009) to impose fiscal discipline, whereby the fiscal deficit in any year was not allowed to exceed 0.35% of GDP — known as the debt brake. Olaf Scholz’s government was trying to provide relief to high energy industries as well as provide incentives to accelerate the green transition to ride out the energy shock after the start of the war in Ukraine, but Germany’s top court recently struck down the government’s attempt to reallocate €60 billion for climate and transformation projects (from unused Covid-19 funds) because it would run afoul of German law. The top court ruling assumes even more importance because it affects not only the €60 billion that Scholz was planning to use this year, but a total of €289 billion that are parked in 29 different “special funds” that the government is not allowed to use except in emergencies such as Covid-19 and the energy crunch that happened immediately in the wake of the Ukraine war. In theory, Scholz could legislate his way out of this crisis; but Germans are very fiscally conservative, and the debt brake, adopted into law in 2009 in the wake of the global financial crisis, is extremely popular in Germany.

Food Inflation

A particular aspect of inflation is the component of food inflation, which is very important because it affects the poorest sections of society disproportionately. This is because the poor spend a greater proportion of their income, such as it is, on food. Hence any price shocks in food affect them greatly and cause severe human suffering. The graph below shows how extreme food inflation became in Germany because of the war and Germany’s sanctions against Russia which led to a huge rise in the price of transportation fuel and fertilizer.

Before the war, in January 2022, the food inflation rate was 4.9%. After the start of the war and after the imposition of sanctions, the food inflation rate in Germany skyrocketed to as much as 21.2% in May 2023 (that’s more than four times the pre-war rate), before coming back slowly to the pre-war inflation rate in December 2023 — two years after the start of the war. That’s a rise of 16.3% in food inflation because of the PSC.

To see how absolutely horrific a food inflation rate of 21.2% is, let us look at the long-term food inflation rate in Germany from 2006–2024.

Food Inflation Rate, %, Y-o-Y, Germany, 2006–2024

As we can see, nowhere in the past two decades has the food inflation rate even crossed 10%. The human suffering that such a high food inflation rate must have caused cannot be imagined.

The total inflation rate, discussed earlier, consists of a “core” inflation rate and a “non-core” inflation rate. Core inflation refers to the rise in prices excluding food and fuel, because these are often highly volatile and short term. The food inflation just discussed is part of the non-core inflation. Let us now look at the Core inflation rate.

Core Inflation Rate

The core inflation rate in Germany was 2.7% y-o-y in January 2022, rose to 2.8% in February, and steadily rose to peak at 5.8% in May 2023, before gradually coming down. This is a rise of 3% in the core inflation rate. To understand how serious this is, we need to look at the long-term core inflation rate over a nearly-20 year period, comprising the periods of the GFC and the Covid-19 crises. This is shown below.

Core Inflation Rate, %, Y-o-Y, Germany, 2006–2024

How bad the nearly 6% peak core inflation rate of the PSC is can be understood by the fact that over the nearly last two decades, core inflation has rarely crossed 2%. During the Covid-19 pandemic, all economic activity came to a halt, and this led to the unprecedented negative core inflation. The reason for this extreme peak in the core inflation rate, of course, is Germany’s extreme energy insecurity, and the fact that it is a high-tech economy that is extremely dependent on energy inputs. Essentially, Germany invited this catastrophe on itself by sanctioning cheap Russian energy.

Consumer Confidence Index

Similar to the Business Confidence Index, OECD gives us the composite consumer confidence index. As in the case of the composite business confidence index, we look at the drop in consumer confidence for the three major crises in the last 20 years: the GFC, the Covid-19 crisis, and the PSC.

For Germany, the composite consumer confidence index drops for the GFC, the Covid-19 pandemic, and the Post-Sanctions Crisis are -2.7, -2.1, and -2.7. That is, already the people of Germany feel that the impact of the sanctions on Russia has made their lives as bad as it was during the Global Financial Crisis, and they feel worse about their predicament than they did during the Covid-19 pandemic. Strangely, it does not look like anyone in Brussels or Berlin is listening to the German people.

Just as the business confidence index was based on hard data about plant shutdowns and employee layoffs, the consumer confidence indices are based on ordinary people’s struggles to keep their families afloat amidst rising prices and growing hardship.

This graph (as well as all the other graphs in this section) also show the consumer confidence index in Europe as a whole (the 27-country zone) as a reference, so let us note our observations on the whole of Europe.

For the EU, the composite consumer confidence drops for the GFC, Covid-19 crisis, and the Post-Sanctions crisis are -4.8, -4.5, and -3.1, respectively. That is, the pain level is gradually getting to the level of the previous two major crises in the last 20 years, but still not there. If the war is prolonged, it might well exceed those levels.

FRANCE

Manufacturing PMI

The situation is the same for France, the other behemoth in the European economy. Starting in July 2022, apart from a couple of months, France’s manufacturing has been continuously contracting (PMI < 50. Note that the slope of the graph of PMI vs time is not important — all that matters is whether or not the value is lower than 50).

From a value of 55.5 in January 2022, the manufacturing PMI goes to 57.2 in February, and then steadily declines, crossing 50 in July 2022, and going down as low as 41.5 in December 2023, before coming back up. The maximum drop in manufacturing PMI due to the PSC, therefore, is -15.7.

It is useful to compare this drop in the PMI with the drops in past crises. To see this, the next graph shows the long term manufacturing PMI in France.

Data for the GFC are not available; but the drop in PMI for the Covid-19 pandemic was -18.3 points, compared to the -15.7 points in the current PSC. This gives one an idea of just how badly manufacturing suffered because of the sanctions imposed on Russia.

Capacity Utilization

It can be seen that, since September 2022, capacity utilization in France has been on a steady decline, in lock-step with the PMI. This is the direct effect of high energy prices. In January 2022, capacity utilization was at 79%; by January 2024, two years later, this had declined to 75.8%, resulting in a -3.2% drop in capacity utilization.

This decline in capacity utilization can be compared with the corresponding decline in past crises to get a sense of how severe the PSC is. The next graph shows the capacity utilization from 2006–2024.

Capacity Utilization, %, France, 2006–2024

From the data, it can be seen that the drop in capacity utilization for the GFC is -14.6%, whereas for the Covid-19 pandemic, it is -32.6; and for the current PSC, it is just -3.2%.

Industrial Production Growth

One would have expected French industrial production growth to be more robust than that of Germany because 30% of French energy comes from its own nuclear plants, but as can be seen, industrial growth has been quite patchy over the last two years.

GDP Growth Rate

The annual (y-o-y) GDP growth rate of France reflects this sluggish and declining trend in manufacturing. Since the war in Ukraine began, and after the imposition of sanctions by Europe on Russia, GDP growth in France has been anemic, hovering low over zero for most of the time. From 4.5% at the end of 2021 (Jan 2022) to 0.6% in September 2023, this is a maximum drop in GDP growth rate of -3.9% (yoy).

The quarter-on-quarter GDP growth rate is also extremely worrisome. In Q1 2022, growth was negative at -0.1%. The next two quarters had slightly positive growth, with Q3 2022 at 0.6%. But the following two quarters, Q4 2022 and Q1 2023, barely avoided recession with values just slightly above zero. Q2 2023 was another weak quarter at 0.6%, and Q3 2023 again saw zero growth. France is only technically not yet in a recession.

GDP Growth Rate, %, Quarter-on-Quarter, France, 2022–2024

Finally, to get a historic perspective, the GDP growth rate (YoY) is plotted since 2006. The drop in YoY GDP growth rate for the GFC (between Q1/07 and Q1/09) was -6.5% (2.6% to -3.9%); the drop for the Covid-19 pandemic was -19% (1% to -18%). Compare these with the 3.9% GDP growth rate drop for the PSC.

GDP Growth Rate, %, Y-o-Y, France, 2006–2024

Imports and Exports

An examination of France’s Imports and Exports reveals trends similar to those of Germany’s.

Import and Export Indices (100=2005), France, 2005–2024 (Data Source: UNCTAD. Analysis by the Author.)

One can make the same kinds of comparisons to the GFC and the Covid-19 crash as we have done for Germany. In the GFC, the exports volume index (relative to 2005) dropped from 107.5 to 84.9 — a drop of -22.6 points. The import volume index dropped from 108.1 to 90.4 — a drop of -17.7 points. During the Covid-19 pandemic, the export index dropped from 100.3 (Jan 2020) to 67.4 (June 2020) — a drop of -32.9 points. The import index dropped from 96 to 73.2 — a drop of -22.8 points — in the same period.

It is important to note that, unlike the German economy, the French economy was more resilient to the energy shocks arising from Europe’s sanctions against Russia. This is because of France’s strong nuclear energy sector. As a result, it took a long time for France’s imports to be affected, because of its relative energy independence — it is only after September 2022 that imports started going down. This reduction in imports is because of Europe’s general weakness — who was France to produce for? (We will explore this a little later in this report.) This is also seen in their weak exports after the start of the war. Exports had started to recover after the end of the pandemic, but their recovery came to an abrupt halt after the start of sanctions. With European economies tanking, there was nobody to buy French products. That’s why, after the imposition of sanctions against Russia, the import index rose from about 100 to about 103 in September 2022 before starting to come down steadily to about 95 in September 2023 — a drop of -8.6 points. The export index has been hovering around 95 from the start of the war until now. Because of the sanctions against Russia, exports in France never got a chance to recover after the Covid-19 pandemic. As in the case of Germany, France’s imports appear to have been increasing quite rapidly before the start of sanctions against Russia, and seem to be plummeting after the sanctions on Russia were imposed, with no tapering in sight.

Unemployment

Unemployment in France held up during 2022 and even dropped, but has been steadily rising in 2023, from 7.1% in Q1 2023 to 7.5% in Q3 2023. This reflects the lowering of the capacity utilization rate, shown earlier. If manufacturing capacity reduces, then industry does not need as many workers.

Inflation

As in Germany, the inflation due to the end of the Covid-19 pandemic ended in January 2022, when the inflation rate flattened out at 2.9%. But, after the commencement of hostilities, the inflation rate immediately went up to 3.6%, going up as high as 6.1% in July 2022, staying at that level until April 2023 (5.9%), before coming back to 3.1% in January 2024, which is almost the same rate as in January 2022, two years earlier. So the maximum rise in the annual inflation rate in France in the PSC is 2.5%.

The long-term annual inflation rate is also investigated in order to understand just how catastrophic this high inflation rate is. This is seen in the next graph.

Inflation Rate, %, Y-o-Y, France, 2006–2024

The PSC peak of 6.1% is the highest inflation rate in France in decades. It eclipses the inflation rate seen during the GFC.

As in Germany, in France too, inflation caused lending rates to rise from 1% in December 2021 to 3.8% in August 2023, almost a fourfold rise.

Retail Sales Growth

Not surprisingly, all this inflation has led to negative retail sales for almost the whole of the last two years, as people do not have disposable income to shop.

Bankruptcies

Again, as in Germany, this has led to increasing bankruptcies each month in France over the past two years. Bankruptcies have almost doubled, from 2,690 bankruptcies in January 2022, to 5,230 in December 2023. This corresponds to a Compounded Annual Growth Rate (CAGR) of 41% in bankruptcies.

Business Confidence Index

Based on the indicators seen so far, there should be no surprise of a serious drop in business confidence. The drops in the business confidence index for the GFC, the Covid-19 crisis, and the PSC are, respectively, 6.6, 3.5, and 2.2. To recapitulate, the corresponding values for the EU27 countries (blue line) are 8.5, 4.5, and 3.6, respectively.

Food Inflation

As in Germany, food inflation has been huge in France, too, as a result of the sanctions against Russia.

From 1.9% in February 2022, the food inflation rate in France soared to 15.9% in March 2023 — a spike of 14%. It has still not returned to its pre-war value — as of January 2024, the food inflation rate in France was 5.7%, nearly 4 times its value two years earlier.

As before, let us look at the long-term tear-on-year food inflation rate in France.

Food Inflation Rate, %, Y-o-Y, France, 2006–2024

The catastrophic rise in the year-on-year food inflation rate in the PSC is evident, especially when you see that the maximum year-on-year food inflation rate during the GFC is only around 6%.

Core Inflation Rate

The core inflation rate is also charted to remove the direct effects of food and fuel from the inflation rate. The core inflation rate rises from 1.6% in January 2022 to 2.4% in February, just at the onset of war, to rise to a high of 6.2% in April 2023, a rise of 3.8%, before gradually reducing again to reduce to the pre-war levels after about two years.

The long-term core inflation rate shows how unprecedented these levels of core inflation are in the last 20 years.

Core Inflation Rate, %, Y-o-Y, France, 2006–2024

Consumer Confidence Index

Given all this, one would expect that consumer confidence in France should have taken a big hit due to the PSC.

For France, the composite consumer confidence index drops for the GFC, the Covid-19 pandemic, and the Post-Sanctions Crisis are -3.4, -2.2, and -1.1. The corresponding values for the EU are -4.8, -4.5, and -3.1. So Macron can at least breathe easier than Scholz, because clearly his people do not think the present crisis is as bad as Covid-19, let alone the GFC; and because France is not doing as bad as Europe as a whole. Maybe that is why Macron believes the French will let him take France into a hot war with Russia.

THE UNITED KINGDOM

Similar trends are seen in the United Kingdom, one of the strongest votaries of sanctions against Russia. The UK also has the distinction of being the country that ensured that peace did not happen between Ukraine and Russia — on the verge of a peace deal, UK PM Boris Johnson personally flew to Kiev to convince Ukraine President Zelensky not to sign a peace deal with Russia. Now you can see the consequences of that fatal decision.

Manufacturing PMI

The PMI chart for the UK shows that, from August 2022 onwards, the UK was in shrinking manufacturing territory.

In January 2022, it was 57.3, rising to 58 in February, then gradually dropping to below 50 in August 2022, reaching a minimum value of 43 in August 2023. The maximum drop in PMI due to the PSC was -15 (43-58).

It is also useful to plot the manufacturing PMI over a longer time horizon to see the drops due to the GFC and the Covid-19 crisis. This is seen below.

Manufacturing PMI, The United Kingdom, 2006–2024

From this longer-range data, we can see that the drop in the manufacturing PMI due to the GFC was -16.3 points, and due to the Covid-19 crisis was -19.1 points. The -15 point drop in the present PSC is, therefore, of comparable severity.

Industrial Production Growth

The UK, along with France, was one of the two major economies of Europe that was not too dependent on Russian energy. And yet, look at the catastrophic impact of the sanctions, which the UK helped impose on Russia, on its own industrial production.

It can be seen that industrial production growth was negative until mid-2023, when it went above zero for four months, and even now is barely above zero (it was just 1.5% in June 2023). Maybe Johnson, Truss, and Sunak should not have been so keen to sanction Russian energy and minerals. But Mr. Sunak has just recently confirmed that he will support Ukraine in this war “for as long as it takes.”

Industrial Production Growth Rate, %, Y-o-Y, The United Kingdom

GDP Growth Rate

This can also be seen from the chart on GDP growth rate by quarter of the UK. The UK formally entered a recession at the end of 2023, although a look at the UK’s GDP growth chart (quarter-on-quarter) shows that ever since the start of the war, the UK’s economy has been in the doldrums. It was never a question of whether the UK would technically slip into a recession, but when.

The annual (y-o-y) GDP growth rate chart of the UK is equally depressing. On an annual basis, growth in the UK since the 4th quarter of 2022 has essentially been flat.

GDP Growth Rate, %, Y-o-Y, The United Kingdom, 2021–2024

The UK opened 2022 with a robust year-on-year quarterly growth of 11.4% (Q1/22), but this rapidly deteriorated as the war started and the UK started imposing sanctions on Russian energy. From Q4/22, the growth rate was barely above zero, and in Q4/23, it officially became negative, at -0.2%. The maximum drop in annual GDP growth rate for the UK in the last two years since the start of the war is -11.6%.

As in the case of the other countries, we also examine the long-term performance of the UK economy by looking at the y-o-y GDP growth rate going back to 2006, so we can compare this drop with the drop in GDP growth due to the GFC and the Covid crisis.

GDP Growth Rate, %, Y-o-Y, The United Kingdom, 2006–2024

From the long-term data, we see that the drop in the y-o-y GDP growth rate for the GFC and the Covid-19 crisis were -9% and -23.7%, respectively. Thus, the -11.6% drop in the PSC reflects a very serious crisis, worse than the GFC.

Imports and Exports

A look at the UK’s imports and exports shows a decline in both since the start of the Russia-Ukraine war, similar to France and Germany.

Import and Export Indices (100=2005), The United Kingdom, 2005–2024

The GFC drop in imports for the UK was -18 points, from 119 to 101, and its decline in exports was also -18 points, from 117 to 99. The Covid-19 drop in imports for the UK was -18 points, from 125 to 107, while the decline in exports was -10 points, from 125 to 115 (March to June 2020). Note that one has to take a wider window to look at the drop due to the GFC, because of the extensive period over which it unfolded, whereas in the case of Covid-19, the pandemic had a definite start date, and worldwide effects started to be felt only after February or March 2020. The definite economic impacts of Covid-19 became evident by mid-2020, which is what the charts show.

From its low point during the pandemic at 107, the import index of the UK rose to nearly 160 in March 2022, reflecting a remarkable post-Covid recovery, before the sanctions against Russia caused it to plummet to 139 in Q3 of 2023 — a drastic drop of -21 points. Note that this drop is worse than what the UK experienced during both the GFC (-18 points) and during Covid-19 (-18 points). That is the level of self-damage the UK has done by sanctioning Russia, and it shows in every metric one can measure about the UK economy. The export index remained unaffected by the war for two more quarters, rising from 117 in March 2022 to 145 in December 2022, before starting to sink catastrophically to 121 by September 2023, a drop of -24 points. Note that this, too, is a bigger drop in the exports index than the UK suffered either during the GFC (-18 points) or during the Covid-19 crisis (-10 points).

Unemployment

Reflecting the trend in the PMI, the unemployment rate in the UK goes down until August 2022, when it reaches a low of 3.6%, and then steadily rises until it reaches a value of 4.3% in July 2023. As in the case of the other countries, the UK, too, goes through a period of heightened unemployment that peaks in July 2023, which presages its lowest point in its imports in July 2023, when demand has plummeted, before starting to go down again, reflecting the positive industrial growth seen around the same time.

Inflation Rate

The inflation rate trend in the UK is the same as that seen in Germany and France. The period of high inflation caused by the end of the Covid-19 pandemic ended in January 2022, when the inflation rate was 5.5%. However, the very next month, the rate shot up to 6.2% after the start of the war, and went as high as 11.1% in October 2022. The maximum rise in the y-o-y inflation rate due to the PSC was, therefore, 4.9%.

Thanks to high energy prices, the inflation rate remained high, and went below the rate that prevailed in January 2022 only in October 2023 (4.6%). This led to a severe cost-of-living crisis in the UK.

Inflation Rate, %, Y-o-Y, The United Kingdom, 2022–2024

To understand how high an inflation rate of 11.1% is, and how high a rise of 4.9% is, we look at historical levels of the y-o-y inflation rate in the UK.

Inflation Rate, %, Y-o-Y, The United Kingdom, 2006–2024

We can see that, throughout the GFC, the y-o-y inflation rate does not touch even 6%. As mentioned before, the closure of productive capacity due to the pandemic and the reopening of capacity after the pandemic led to rising inflation starting in late 2020, and inflation was already rising meteorically at the start of 2022; the war and the subsequent sanctions on Russia only made things a lot worse than they would otherwise have been.

Retail Sales Growth

With less money in their pockets, Britons were not spending, and this is evident from the chart of retail sales over the past two years, which have been almost completely in negative territory since the war started, with the lowest value being -7.1% y-o-y.

Bankruptcies

Again, as in Germany and France, this has led to increasing quarterly bankruptcies as the war and the sanctions continue. From 5000 bankruptcies in Q1/22, bankruptcies in the UK steadily rise to 6250 in Q3/23, reflecting a CAGR of 16%.

Business Confidence Index

It should be no surprise that the business confidence has taken a plunge. The composite business confidence index drops for the GFC, Covid-19, and the Post-Sanctions Crisis are -7.7, -4.8, and -5.0, respectively. So, here we see that already (and the Post-Sanctions Crisis is not yet over) British businesses are having a bigger crisis of confidence about the post-sanctions era following the start of the Ukraine war than they even had during the entire Covid-19 pandemic! This is a stunning finding.

It is also instructive to recall that the drops in the composite business confidence for Europe as a whole are -8.5, -4.5, and -3.6 points, respectively. And so, not only is the PSC confidence drop deeper than that of the UK’s own Covid-19 confidence drop, it is also worse than the business confidence drop of the EU as a whole. Some might notice that the Covid-19 business confidence drop was also worse in the UK than in the EU, and say that perhaps this is a result of Brexit — after 2016, the UK was not connected to the EU, and perhaps this is evidence that crises hit the UK harder.

The only thing more stunning than this is the UK Prime Minister’s pledge to carry on supporting Ukraine, “whatever it takes.” At the rate the UK is going, this crisis is going to be a bigger disaster than the Global Financial Crisis.

Composite Business Confidence Index, The United Kingdom, 2006–2024 (Data Source: OECD)

Food Inflation

Food inflation (y-o-y) rose from 5.1% in February 2022 to a high of 19.1% in May 2023 (a maximum rise of 14% above the level at the start of the war), almost a fourfold increase — and nearly two years later, the food inflation rate in the UK is still 6.9% in January 2024, higher than the rate in February 2022.

Looking at the long-term picture tells us just how serious the present crisis is. Even during the GFC, food inflation did not touch 14%; and in the PSC, it has crossed 19%.

Food Inflation Rate, %, Y-o-Y, The United Kingdom, 2006–2024

Core Inflation

From 4.4% in January 2022, the y-o-y core inflation rate goes up to 5.2% in February, right before the start of the war; and then goes up to a maximum of 7.1% in May 2023, a peak rise of 1.9%.

Again, comparison with historical levels shows that these levels of core inflation are unprecedented. The maximum rate in the last 18 years has been below 4%.

Core Inflation, %, Y-o-Y, The United Kingdom, 2006–2024

The devastation of the people of the UK is easy to see if you have been paying attention to the news. The United Kingdom is an excellent example of the misery that governments have subjected their populations to because of ideological reasons. If this were the first calamity to strike the people after a long period of prosperity, perhaps it would be bearable. But, coming as it has after a global financial recession and a destructive Covid-19 pandemic, this might well be the last straw for many people.

Just looking through the headlines of the Guardian over the last three months, one is stunned to see the number of stories on the cost of living crisis in the UK:

A story from November 8, 2023, talking about how almost a third of all nurseries run by non-profit organizations have shut down in the poorest areas of England, and how it is causing unbelievable hardship for parents;
A story from November 17, 2023, talking about a 2.7% fall in retail year-on-year in October 2023 that hit clothing and household goods the hardest, signaling a high street recession in the run-up to Christmas;
A story from November 17, 2023, explaining how mortgage arrears are rising all over the UK because of 14 interest rate hikes by the Bank of England to combat inflation since the end of 2021;
A story from December 4, 2023, that showed that one in ten UK households missed a monthly bill payment because they could not afford to pay it, and went into default; and that one in six skipped meals because they could not afford it;
A story from December 6, 2023, that mentioned that 6.5 million people in the UK would have difficulty heating their homes in the coming Christmas, while 2.7 million will have to choose between buying food or presents;
A story from December 28, 2023, that said that record numbers of people in the UK were accessing homeless services, food banks, and energy bill support in 2023;
A story from December 29, 2023, that reported that Barclays Bank had reported a significant reduction in discretionary spending among its card customers;
A story from January 15, 2024, that reported that the UK’s largest nightclub chain was calling administrators to restructure their business and close many outlets because 2023 had been an extremely difficult year for the late-night sector because of the cost of living crisis;
A story from January 15, 2024, that talked about how an increasing number of Britons were unable to pay for the funeral of a loved one, and were relying on public authorities to do the funeral for them or opting for cremation as a cheaper option;
A story from January 18, 2024, which reported the steepest rise in defaults since 2009 on unsecured borrowing such as credit cards and loans, as well as a sharp rise in defaults on mortgage payments since the end of 2023;
A story from January 19, 2024, which talked about disastrous Christmas sales across the UK;
A story from January 23, 2024, which mentioned that more than 2.3 million people were going to be cut off from their electric or gas connections because they could not pay for heat in the winter;
A story from February 6, 2024, which reported that the traditional January sales failed to revive consumer spending because of the cost of living crisis;
A story from February 7, 2024, which mentioned that a new report had come out that said that those hit hardest by the cost of living crisis would not see their living standards recover to pre-pandemic levels until 2027 at the earliest;
A story from February 8, 2024, about how an increasing number of Britons can simply no longer afford to stop working and retire, because their pensions are insufficient to cover their cost of living;
A story from February 12, 2024, that reported that more than 11 million people in the UK had less than £1,000 in savings because of the effects of the cost-of-living crisis;
A story from February 20, 2024, that said that even people earning £60,000 a year were leading insecure lives because of the high cost of housing as well as the uncertain jobs situation;
A story from February 23, 2024, that mentioned that the total fertility rate in England and Wales had come down to 1.49 (replacement level is 2.1) because procreation was being viewed as a “luxury item”; and
A story from February 27, 2024, that mentioned that 15% of all British households went hungry in the previous month because of high food inflation.

These are not even all the stories that I found in the period I was looking at; I had to drop many for reasons of space, and also because these stories convey the point very well. Note that, although the inflation rate in the UK returned to pre-war levels in October 2023, the effects of high inflation for 1.5 years prior to that time are still lingering, and will likely continue to haunt the UK for years to come.

Consumer Confidence Index

From all this, one would expect consumer confidence in the UK to be fairly poor in the PSC. And, indeed, from the figure below, it is very bad.

The composite consumer confidence index drops for the UK, for the GFC, Covid-19, and the Post-Sanctions Crisis are -5.0, -3.7, and -3.7 points, respectively. Again, to recapitulate, the corresponding values for the EU27 countries are -8.5, -4.5, and -3.6 points. That means that already, most Britons feel that the Post-Sanctions Crisis has been worse for them than even the terrible Covid-19 crisis, which caused immense suffering to the people of the UK, thanks to the mismanagement of the epidemic by then-PM Boris Johnson. It also means that the people of the UK are less hopeful about their future (a drop of -3.7 points) after the present PSC than the people of Europe as a whole (-3.6 points). And finally, let us not forget that the PSC is not yet over.

The UK’s imposition of sanctions on Russian energy has ended up shooting its own people in the foot.

Not surprisingly, there have been many strikes in the UK by people protesting against these unlivable conditions for the past 2 years. There is even a helpful online UK strike calendar to help people understand who is striking on any given date (see screenshot below): the NHS (National Health Service), Tube operators, train drivers (ASLEF), Bus workers, Nurses, Doctors, Pension Regulators, Waste/Refuse workers, Rail maintenance workers, Fire and Rescue workers, Underground Maintenance Engineers, School support staff, the UNITE trade union, Housing workers, Airport Staff, Royal Mail, University Staff, Security Services (OCS) workers, the Education Authority, the English National Opera, etc. That the BBC does not spend all its time, or indeed any time at all, in discussing these strikes (the calendar is chock-full — every single day, there are multiple strikes in the UK) is proof, if it ever were needed, that the media in every electoral democracy is state-controlled. There are similar strikes all over Europe by people who are fed up of poor living conditions caused by inflation because of high energy prices resulting from sanctions on Russian energy.

In light of all this, UK Prime Minister Rishi Sunak announcing a 2.5 billion aid package to Ukraine and vowing to stand by Ukraine in a “hundred-year partnership” boggles the mind. Mr. Sunak clearly cares more about the welfare of the people of Ukraine than about the people who are starving in the UK and who are being evicted by their landlords because they cannot pay their rent; or those who are freezing in the winter because they cannot afford to pay their gas or electricity bills and have to save up their meagre savings for food.

UK PM Rishi Sunak (R) with Ukrainian President Zelensky (L) in a Military Hospital in Kiev in January 2024

Mr. Sunak’s pledge to boost aid to Ukraine follows Germany’s decision in November 2023 to double its annual aid to Ukraine, from €4 billion to €8 billion, at a time when Germany’s own economy is spiraling down the toilet.

ITALY

Let us now turn our attention to the third largest economy in continental Europe, Italy.

Manufacturing PMI

The following figure shows the Manufacturing PMI of Italy. The same tragic story is played out in Italy — the PMI drops below 50 starting in July 2022, and stays below 50, except for 3 months in 2023 where it appears to recover slightly, and then goes back into contraction territory.

Given how high the PMI was at the beginning of 2022, it is hard to imagine that things would be so bad today: in Jan/22, the value was 58.3; Feb/22, 58.3; and then things start dropping drastically, until the value goes below 50 in July. The manufacturing PMI reaches a minimum of 43.8 in June 2023, and so the maximum dip in manufacturing PMI in the last two years in Italy is -14.5 points (43.8-58.3).

We also look at the long-term picture to understand how things were during the GFC and during Covid-19. The GFC data are not available, but the graph below shows that the peak drop in the current PSC (-14.5 points) is comparable to the peak drop during the Covid-19 crisis (-17.6 points).

Capacity Utilization

There has been a steady decline in capacity utilization in Italy. Europe is becoming poorer, so nobody has money to buy trendy Italian goods. The trend seems to be getting worse, when you see the difference between Q2 and Q3 of 2023. Recall that Germany showed the same sudden jump between Q3 and Q4 of 2023. The drop between Q1/22 (79.3%) and Q3/23 (76.3%) is -3%, which is quite significant.

When we compare with the GFC and Covid, we find that the drops in capacity utilization for the GFC crisis was -13.7%, and for the Covid-19 crisis was -13% — so the current -3% drop does not seem so severe — except when you realize that the crisis is nowhere near an end yet.

Capacity Utilization, %, Italy, 2006–2024

Industrial Production Growth

Italy manages a few months of positive industrial growth in 2022 after the imposition of sanctions on Russia, and then there is almost continuous gloom. For almost the whole of 2023, industrial growth in Italy has been negative. This corresponds very well to the PMI graph, which shows that manufacturing has been in decline since July 2022.

GDP Growth Rate

From a y-o-y GDP growth rate of 8.1% on January 2022 (Q4/21), Italy’s GDP growth slumps to 0.5% in Q3/23, a drop of -7.6%.

The long-term picture tells us that the corresponding drops for the GFC and the Covid crisis are -9.5% and -17.9%. The PSC drop of -7.6%, therefore, is in the ballpark, and things will continue to worsen as the conflict in Ukraine drags on.

GDP Growth Rate, %, Y-o-Y, Italy, 2006–2024

Imports and Exports

The Import-Export data for Italy show that during the GFC, the import index fell by -24 points while the export index fell by -28 points; during the Covid-19 recession, the import index fell by -15 points, while the export index fell by -24 points; and following the sanctions on Russia, the import index has so far fallen by -5 points, while the exports index has fallen by -6 points so far. And, as in the case of the other countries, what is most dramatic is the upward slope of both exports and imports before the start of sanctions against Russia, and the downward slope of both after the sanctions, leading to recession.

And, as can be seen, both curves are still going down pretty fast; a plateau is not yet in sight, although the exports curve seems to be slowing down slightly.

Import and Export Indices (100=2005), Italy, 2005–2024 (Data Source: UNCTAD. Analysis by the Author.)

Unemployment

Despite Italy’s declining manufacturing, capacity utilization, and industrial growth, Italy’s unemployment rate has been going down steadily. Maybe the reason for this is that it started off at a very high rate (8.6%) in January 2022.

Inflation

Italy’s inflation curve shows the same trend as in the other countries: the high inflation period due to the end of the Covid-19 pandemic ends in early 2022 — in Italy’s case, it seems to be a bit later, when the inflation rate seems to drop from 6.5% in March 2022 to 6% in April 2022. It then increases to 6.8% in May, and then skyrockets to 11.8% in October 2022 because of high energy prices following the sanctioning of Russian energy. It takes until July 2023 to reach the same inflation rate as April 2022, a gap of more than a year. One can imagine how much hardship the people of Italy, Germany, France, and the UK endured with such high rates of inflation. The peak rise in the y-o-y inflation rate due to the post-sanctions crisis is 11.8–5.7 = 6.1%.

The long-term graph of y-o-y inflation rates shows how the peak inflation rate of nearly 12% dwarfs previous inflation highs, which are around 4% at most.

Inflation Rate, %, Y-o-Y, Italy, 2006–2024

Retail Sales Growth

Italy’s retail sales do not show the drastic drops that we saw in Germany, France, and the UK. Instead, the growth rate has been gradually decreasing, and is now approaching zero. If the war continues, it might go negative. From 8.6% in Jan 2022, the retail sales growth rate sinks to 0.2% in December 2023 — a complete wipeout.

Bankruptcies

Bankruptcies in Italy have also not been remarkable, as they had been in the three other countries discussed earlier.

Business Confidence Index

However, the drops in the composite business confidence index for Italy for the Global Financial Crisis, the Covid-19 crisis, and the Post-Sanctions Crisis are -5.4, -3.2, and -2.0, respectively. This shows that business confidence has taken a hit — however, compared with the values for the EU as a whole, Italy’s drop of -2.0 is better than the EU’s value of -3.6. Italy did better than the EU during the GFC (-5.4 v/s -8.5) as well as the Covid-19 crisis (-3.2 v/s -4.5).

Keep in mind that these are not merely opinion polls. These are based on responses given by hard-headed business managers who are seeing the situation on the ground — people who have to make decisions daily as to whether to shut a plant down or lay off workers or file for bankruptcy. So these are extremely meaningful indices.

Food Inflation

Food inflation has been a major problem in Italy since the start of sanctions against Russia, as it was in Germany, France, and the UK.

Food inflation (y-o-y) was 4.8% in February 2022, before the war; rose to 13.6% in November 2022 (a peak rise of 8.8%); and then decreased, but its value in December 2023 is still 5.9%, higher than it was before the sanctions.

Food Inflation Rate, %, Y-o-Y, Italy, 2006–2024

As before, the long-term picture on y-o-y food inflation rates only serves to show how completely (and literally) off the charts these values are, and consequently how difficult they must be making life for the common person in Italy.

Core Inflation

Core inflation has been separated from total inflation to remove the effect of volatile components like food inflation and inflation on transportation fuels. But the sanctions against Russia makes all energy expensive, and hence the cost of every product goes up. Core inflation rises are more enduring and, therefore, more painful.

Core inflation (y-o-y) in Italy went up from 1.5% in Jan/22 to 1.7% in Feb/22 to a peak of 6.3% in Feb/23 — a peak rise of 4.6%.

To see how high a core inflation rate of 6.3% is, let us look at the long-term picture of core inflation in Italy, going back to 2006.

Core Inflation Rate, %, Y-o-Y, Italy, 2006–2024

The graph shows that the highest the core inflation rate (y-o-y) has been in the last 18 years was 3%. Today’s 6.3% is more than double that peak.

Consumer Confidence Index

Italy’s Prime Minister, Giorgia Meloni, is another staunch supporter of Ukraine and wants to keep fighting until Ukraine wins. But how do the people of Italy feel about the effects of the sanctions on their lives?

For Italy, the composite consumer confidence index drops for the GFC, Covid-19, and the Post-Sanctions Crisis are -2.2, -2.1, and -1.8, respectively. Considering the standard deviations in these measurements, one could call this a statistical tie. Basically, what the people of Italy are saying is that the current crisis is as bad as both the Covid-19 crisis and the GFC. Their lives are miserable. They have no hope. For reference, the EU27 values for these confidence drops are -4.8, -4.5, and -3.1, respectively. So Italians are feeling better about their lives than Europeans as a whole, but that is not saying too much.

SPAIN

Manufacturing PMI

Spain is not much different from the previous countries — its manufacturing is in expansion territory until June 2022, and then goes into contraction — except that last month was a slight bright spot for its PMI; otherwise, like the others, manufacturing has almost continuously contracted in Spain since July 2022, except for February and March 2023.

From 56.2 in Jan/22 and 56.9 in Feb/22, the PMI goes to a minimum of 44.7 in Oct/22 (a peak drop of -12.2 points).

Manufacturing PMI, Spain, 2022–2024 (Source: Trading Economics)

The longer-term picture shows that the peak drop during the Covid-19 crisis was -19.3 points. But the Covid-19 dip was short-lived, whereas this drop in PMI is long-lasting.

Capacity Utilization

Spain’s capacity utilization seems to have recovered in the last quarter of 2023, after continuously declining for five quarters since the start of the war. This is consistent with the PMI picture. From 80% in Q2/22, the capacity utilization drops to 76.2% in Q3/23, a peak -3.8% drop.

The -3.8% peak drop during the PSC can be compared with the -10% drop during the Covid-19 crisis and the -13.3% drop during the GFC, as shown below.

Capacity Utilization, %, Spain, 2006–2024

Industrial Production Growth

The industrial production growth graph for Spain suggests that Europe had some capacity to cope with a shortage of Russian energy, but eventually, every economy started to bite the dust. Industrial production growth has been on a decline since June 2022, when it hit 5.1%, to May 2023 (-2.6%), except for a brief blip in March 2023.

GDP Growth Rate

With such manufacturing, Spain’s GDP growth rate has been gradually decreasing. From Q2/22, when it was at 7.2%, to Q3/23, when it was 2%, the peak drop was -5.2%.

From the long-term picture below, the corresponding values for the GFC and the Covid-19 crisis are -8.2% and -23.2%.

GDP Growth Rate, %, Y-o-Y, Spain, 2006–2024

Imports and Exports

The imports/exports chart of Spain shows the same pattern as the other countries discussed so far, of a sharp rise in both imports and exports before the start of sanctions against Russia, and a sharp declining trend after the start of sanctions. During the GFC, Spain imports fell by -34 points, its exports by -24 points; during the Covid-19 recession, its imports fell by -24 points and its exports by -32 points; in contrast, nearly two years after the impositions of sanctions, its imports are down by -6 points and its exports are down by -16 points. About the only comfort one can draw from these charts is that the downturn caused by the imposition of sanctions on Russia is not as bad as that of either the GFC or Covid-19; but that’s a really bad way to look at it, because if indeed the catastrophe that is underway today reached the levels of those previous crises, people would be in panic today. What is important to realize is that in both those previous cases, an outside agent was responsible for the problems of Europe — in one case, corporate greed caused the GFC; and in another, an unexpected natural calamity (the Covid-19 virus) caused economic catastrophe. But this current economic crisis (it is one, even if Western governments do not like using the term) is entirely made by the rulers of the countries of Europe.

Import and Export Indices (100=2005), Spain, 2005–2024 (Data Source: UNCTAD. Analysis by the Author.)

Unemployment Rate

Spain’s unemployment rate shows that the country was coming out of the Covid-19 pandemic, business was picking up, and unemployment was falling before 2022. But, starting in 2022, this trend is reversed and unemployment goes up again because of the reducing industrial growth in Spain because of high energy prices. Unemployment falls only in Q2 2023 after a year.

Inflation Rate

The inflation rate graph is shown from September 2021, where it can be seen that the inflation rate is rising because of the continuing effects of the end of the Covid-19 pandemic. However, that rise comes to an end in January 2022, as the rate finally drops, from 6.5% in December 2021 to 6.1% in January 2022.

But then, thanks to high energy prices due to the conflict in Ukraine, the inflation rate in Spain, similar to other European countries, starts increasing, going up to 7.6% in February 2022 and reaching values as high as 10.8% in July 2022 (a peak rise of 3.2%), before it starts falling. It takes a whole year (5.7%, December 2022) for the inflation rate to go below its value in January 2022 (6.1%).

Inflation Rate, %, Y-o-Y, Spain, 2022–2024

The long-term picture again shows how high this rate is.

Inflation Rate, %, Y-o-Y, Spain, 2006–2024

Retail Sales Growth

Despite the high inflation rate and high unemployment, retail sales in Spain, as in Italy, do not seem to have been too badly affected by the PSC.

Bankruptcies

Bankruptcies in Spain, too, do not seem to have appreciably increased because of the crisis. They follow an undulating seasonal cycle which has been the same for years.

Business Confidence Index

The composite business confidence index drops for the GFC, Covid-19, and the Post-Sanctions Crisis are -7.5, -4.7, and -2.4 points for Spain. For reference, the EU values are -8.5, -4.5, and -3.6 points, respectively. So Spain’s PSC drop is not as bad as the Covid-19 drop yet; but the crisis is not yet over.

Food Inflation

As in the other countries discussed, the food inflation rate (y-o-y) rose from 5.6% in February 2022 to 16.6% in February 2023 (a peak rise of 11%), and then slowly decreases. It is still high relative to February 2022 — in January 2024, its value was 7.4%.

That these are extremely high food inflation rates that will cause huge human suffering can be seen from the chart below.

Food Inflation Rate, %, Spain, Y-o-Y, 2006–2024

Core Inflation

As in other European countries, core inflation (y-o-y) in Spain has been extremely high, as the chart below shows. From a value of 3% in February 2022 (start of the crisis), the core inflation rate goes to a maximum of 7.6%, giving a peak rise of 4.6%.

Again, the long-term core inflation rate (y-o-y) shows how exceptional these food inflation rates are.

Core Inflation Rate, %, Y-o-Y, Spain, 2006–2024

Consumer Confidence Index

The composite consumer confidence index drops for the GFC, the Covid-19 crisis, and the Post-Sanctions Crisis for Spain are -7.2, -4.7, and -2.8 points. The corresponding values for Europe as a whole are -8.5, -4.5, and -3.6 points, respectively. These will get worse as the conflict drags on, as it seems to be.

THE NETHERLANDS

Next, we come to the Netherlands, a very prosperous European economy.

Manufacturing PMI

It took slightly longer for manufacturing in the Netherlands to enter contraction territory (September 2022), but once it started, it stayed there, with manufacturing now contracting every quarter for a straight 18 months.

From 60.6 in Jan/22, the PMI goes up to 60.6 in February, then steadily declines to 46 in Nov/22, rising again to 49.6 in Jan/23, hitting a minimum of 43.6 in Sep/23, for a peak drop of -17 points.

The long term manufacturing PMI (data available only from 2012 onwards, so no data for the GFC) tells us that the drop in PMI for the Covid-19 pandemic is -12.4 points (40.5–52.9), and thus the Post-Sanctions Crisis drop of -17 points has been worse for Netherlands’ manufacturing than even the Covid pandemic.

Manufacturing PMI, The Netherlands, 2012–2024

Capacity Utilization

Netherlands, too, has seen a significant decline in capacity utilization. The decline in capacity utilization in the Netherlands starts at the same time as the drop in PMI (Q4 2022).

As in Germany and Italy, the last quarter (Q4 2023) showed a more dramatic decline than previous quarters. All these suggest an inflexion point in Europe’s economic fortunes, as bad turns to worse.

Capacity Utilization, %, The Netherlands, 2022–2024 (Source: Trading Economics)

The capacity utilization was 84.2% in Q2/22, and it drops to 78.4% in Q1/24, a drop of -5.8%.

The long-term capacity utilization for The Netherlands shows that the capacity utilization drop during the Covid-19 crisis was -5% and the drop for the GFC was -9.6%. Again, the PSC rivals these crisis in its severity with its drop of -5.8%.

Capacity Utilization, %, The Netherlands, 2006–2024

Industrial Production Growth

Almost the whole of 2023 was spent in negative y-o-y industrial production growth (i.e., industrial production decline).

GDP Growth Rate

Not surprisingly, this has devastated the Netherlands’ economy. Although the Netherlands was able to avoid getting into recession in 2022, it has been in recession almost the whole of 2023, as can be seen below from the quarter-on-quarter GDP growth data shown below.

The annual GDP (y-o-y) growth rate data is quite bleak, too, as shown below. From a growth rate of 7% y-o-y in January 2022 (Q4/21), the rate goes down to -0.8% in Q3/23, and thus the peak drop in GDP growth rate is -7.8% over the two-year period.

GDP Growth Rate, %, Y-o-Y, The Netherlandss, 2022–2024

From the long-term picture (see below), we see that the y-o-y GDP growth rate drops for the GFC and the Covid pandemic were -9.6% and -8.5%, respectively. This is of the same order of magnitude as the ongoing PSC’s -7.8%.

GDP Growth Rate, %, Y-o-Y, The Netherlands, 2006–2024

Imports and Exports

Looking at the imports/exports chart of the Netherlands, we see that during the GFC, the imports index dropped from 123 to 102, a drop of -21 points; whereas the exports index dropped from 125 to 106, a drop of -19 points. During the Covid-19 recession, the imports index dropped from 139 to 130, a drop of -6 points; whereas the exports index dropped from 145 to 130, a drop of -15 points. In the present post-sanctions recession, the imports index dropped from 170 to 155, a drop of -15 points; whereas the exports index dropped from 178 to 167, a drop of -11 points. While the exports index seems to be going back up, the imports index is hurtling straight down and showing no signs of slowing down. Note that the drop in the imports index is worse than what the Netherlands experienced during the Covid-19 pandemic.

Import and Export Indices (100=2005), The Netherlands, 2005–2024 (Data Source: UNCTAD. Analysis by the Author.)

Unemployment Rate

The unemployment figures for the Netherlands show that by 2022, the effects of the Covid-19 recession were being overcome, with unemployment falling rapidly. In April 2022, unemployment reached its lowest level, at 3.2%. But then, the effect of the energy crisis hit, industries started to shut down, and the unemployment rate soared from 3.2% to 3.8% in August 2022. It has still not come back to the April 2022 levels.

Inflation Rate

The Netherlands inflation rate is seen at the beginning of 2022 to plateau after the big post-Covid-19 inflation spike. Without the Ukraine war, the inflation rate would have gone down, as the values for January (6.4%) and February (6.2%) indicate. But then the war started, and there is an immediate spike from 6.2% to 9.7% on the back of skyrocketing energy prices. The inflation rate reaches its peak in September 2022, with a value of 14.5% (y-o-y) — a rise of 8.3% over the pre-war number of 6.2%. It takes until March 2023 for the inflation rate to go below the pre-war rate — a period of more than a year. The long-term y-o-y inflation rate, shown below, illustrates how high an inflation rate of 14.5% is in Netherlands’ context — the previous highs over the past 18 years have barely crossed 3%.

Inflation Rate, %, Y-o-Y, The Netherlands, 2006–2024

Retail Sales Growth

With such high inflation, retail sales have been steadily and drastically dropping. In January 2022, year-on-year sales growth was 18%; two years later, in January 2024, year-on-year sales growth was 2.5%. The retail sector in the Netherlands has been destroyed.

Bankruptcies

Not surprisingly, this has led to a steady increase in the number of monthly bankruptcies in the Netherlands, from 141 companies going belly-up in January 2022 to 474 companies going bankrupt in January 2024 — an annual increase of 83% (CAGR) of bankruptcies over the last two years.

Business Confidence Index

The maximum drops in the composite business confidence indices for the Netherlands for the GFC, the Covid pandemic, and the PSC are -4.8 points, -3.7 points, and -1.7 points, respectively.

Food Inflation

As in other European countries, food inflation has been very high.

From 5% y-o-y in February 2022, the food inflation rate in the Netherlands rose to 17.9% y-o-y in February 2023 (a peak rise of 12.9% y-o-y) before starting to come down. And it takes until December 2023 for the food inflation to go down below its pre-war value. So Netherlands, like all other European countries, went through nearly two years of high inflation. Not only was the period of the high inflation prolonged, the peak is an all-time high. This is something that distinguishes the present crisis from, say, the Covid-19 crisis. If you look at most economic parameters during the Covid-19 crisis, you see that there is a sharp drop from January 2020 to June 2020; but then, there is a quick recovery. But with the PSC, it has been a long and brutal crisis. Systems break down in such prolonged crises. We may see wealth destruction of the kind earlier seen in the Great Depression if this conflict continues for long.

Food Inflation Rate, %, Y-o-Y, The Netherlands, 2006–2024

Core Inflation

As in other European countries, core inflation has also been exceptionally high because of the energy crisis. From 2.5% y-o-y in February 2022, the y-o-y core inflation rate in the Netherlands goes up to 6.9% in May 2023, a peak rise of 4.4%. It is still not back to the low rate that it was in February 2022.

Over the last 18 years, the y-o-y core inflation rate has only touched 3% once — in comparison with the nearly 7% peak it scaled during the PSC.

Core Inflation Rate, %, Y-o-Y, The Netherlands, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence index for the GFC, the Covid Pandemic, and the PSC for the Netherlands are -2.8 points, -1.8 points, and -1.6 points. So the PSC is almost as bad as the Covid pandemic.

SWITZERLAND

Switzerland is one of the world’s strongest economies and one of Europe’s manufacturing powerhouses. It is famous for its precision manufacturing and its watches, among other things. It also has some of the most famous pharmaceutical companies, as well as chemical and defense companies.

Manufacturing PMI

As a result, it took Switzerland a long time to feel the effect of the sanctions, but as Europe started sinking, it was but inevitable that Switzerland, too, would start to feel the effects. It just took longer. Switzerland’s manufacturing started contracting in January 2023, and has been contracting ever since.

From 63.8 in Jan/22 and 62.6 in Feb/22, the PMI gradually comes down as a result of the overall weakness in the European market, finally going below 50 in Jan/23, when it hits 49.3. The manufacturing PMI in Switzerland reaches a minimum value of 38.5 in July 2023, a drop of -24.1 points relative to its value in February 2022.

From the long-term data on manufacturing PMI (shown below), the drop in PMI due to the GFC was -26.6 points, and due to Covid-19 was -8 points.

Manufacturing PMI, Switzerland, 2006–2024

Capacity Utilization

Switzerland is a powerful nation, but even it cannot escape a recession caused by high energy prices. Since Q4 of 2022, there seems to be a linear decline in capacity utilization that seems to be continuing.

The bad news for Europe is that if capacity utilization decreases, it makes manufacturing units unviable. But, at the same time, factories in other parts of the world, like China and the USA, are doing well, because they do not have an energy crisis. That means that, even after the Post-Sanctions Crisis (PSC) ends, the road will be rocky for Europe’s industrial sector.

Capacity Utilization, %, Switzerland, 2022–2024 (Source: Trading Economics)

Capacity utilization in Switzerland’s factories goes from 85.4% in Q2/22 to 79.5% in Q3/23, a peak drop of -5.9%.

From the long-term chart of capacity utilization in Switzerland, we can see that the drop in capacity utilization for the GFC was -11.9%, and that for the Covid-19 crisis was -4.6%. The PSC has proved to be worse than the pandemic for Switzerland’s factories.

Capacity Utilization, %, Switzerland, 2006–2024

Industrial Production Growth

Switzerland is the richest country in Europe, with a very high-tech base, and so it managed to go through 2022 unscathed, but even it experienced negative industrial production growth in 2023, most probably because the rest of Europe (who were essentially most of its customers) were in recession.

Imports and Exports

Looking at the imports/exports data for Switzerland, we see that of all the countries we have so far seen, its exports were the least affected. After the imposition of the sanctions against Russia, its exports underwent a 2 point decline, from 120 to 118 (by December 2022), but after this it quickly recovered. Switzerland’s imports have, likewise, only seen a small impact. Part of the reason for this is likely the fact that many of the items Switzerland manufactures are luxury goods, and its customers are not as affected.

Import and Export Indices (100=2005), Switzerland, 2005–2024 (Data Source: UNCTAD. Analysis by the Author.)

GDP Growth Rate

The consistent decline in manufacturing output in Switzerland over the last two years would be expected to show up in its GDP growth rate, and so the next graph is not surprising in the least.

From 5.1% at the start of 2022, the y-o-y GDP growth rate of Switzerland declines to 0.4% by Q3/2023, a drop of -4.7%.

From the long term chart of y-o-y GDP growth rate, shown below, the drop in GDP growth rate for the GFC was -8.4%, and the drop for Covid-19 was -8.7%.

GDP Growth Rate, %, Y-o-Y, Switzerland, 2006–2024

Unemployment Rate

The effects of the end of the Covid-19 pandemic take a long time to go away in Switzerland, finally ending in October 2022, with an unemployment rate of 1.9%. Subsequently, the energy crunch in Europe starts to hit even Switzerland, and the unemployment goes up to 2.2% in January 2023, but again falls until it reaches 1.9% in May 2023. It rises again, from 2% in August 2023 to 2.3% in December 2023. Overall, one could say that the unemployment rate in Switzerland was not significantly affected by the war in Ukraine and the subsequent energy sanctions on Russia.

Inflation Rate

As with the other European nations, the inflation rate rise in Switzerland due to the end of the Covid-19 pandemic ends in January 2022, but is quickly replaced by the inflation rise due to the PSC.

From 1.6% in January 2022, the inflation rate goes up to 2.2% in February 2022, and then rapidly rises to 3.5% (a peak rise of 1.3%) in August 2022 due to the energy crisis in Europe. It then takes until July 2023 to come back down to the January 2022 level.

From the long-term data, we can see that in Switzerland’s case, the inflation rate is not extraordinary. This is understandable because Switzerland is an advanced nation, and is a small, prosperous nation which produces high end products, which are less sensitive to macroeconomic trends. However, this rise is still significant by Swiss standards, as such high levels were last seen during the GFC.

Inflation Rate, %, Y-o-Y, Switzerland, 2006–2024

Retail Sales Growth

It should come as no surprise, then, that retail sales in Switzerland have shown mostly negative growth since the start of the war, in February 2022.

It should be pointed out that not only is Switzerland dealing with the economic crisis arising from the Ukraine war, they are also dealing with the collapse of one of the biggest banks in the world, Credit Suisse, which necessitated an approximately $100 billion bailout by the Swiss Government, prior to Credit Suisse’s acquisition by rival UBS. To understand this in context, the GDP of Switzerland is approximately $800 billion. So Switzerland not only has to deal with the aftermaths of the GFC, the Covid-19 crisis, and the PSC, but also the implosion of its banking system — a quadruple whammy.

Business Confidence Index

I have included Switzerland in this comparison of business confidence indices because it is one of the most prosperous countries in Europe as well as the world, and one that is focused on very high technology that is not as dependent on energy shocks. Switzerland is known for its excellence in technology and relies not as much on commodities as it does on niche technologies, such as precision manufacturing. So it is interesting to see how Swiss business managers have seen the crisis. The composite business confidence index drops for Switzerland for the GFC, Covid-19, and the Post-Sanctions Crisis are, respectively, -6.3, -2.0, and -3.8 points. Again, for reference, the values for the whole EU are -8.5, -4.5, and -3.6 points, respectively. This is a stunning result, because what this tells us is that the impact of the Post-Sanctions Crisis in Switzerland is much greater than even the impact of Covid-19 in Switzerland, which involved months of lockdowns and lost work hours. In addition, it tells us that the business confidence drop due to the PSC is worse in Switzerland than in the EU. And the PSC is not over yet, by a long stretch.

Food Inflation

Food inflation (y-o-y) was actually negative in Switzerland at the start of the war, at -1.1%; this gradually increased to peak at 6.5% in February 2023, a peak rise of 7.6%.

The long term data show that this high rate of food inflation is greater than what was seen in Switzerland during the GFC.

Food Inflation, Y-o-Y, Switzerland, 2006–2024

Core Inflation

From 0.8% in January 2022, the core inflation rate (y-o-y) jumps to 1.3% in February 2022, and eventually peaks at 2.4% in February 2023, a peak rise of 1.1%. This is not a high number for other countries, but for stable, prosperous Switzerland, this is a shock.

Again, long term data shows that such high core inflation rates were only seen during the GFC.

Core Inflation Rate, Y-o-Y, Switzerland, 2006–2024

Consumer Confidence Index

Finally, we look at Switzerland again, as we did with the business confidence index, again to see how a highly prosperous and arguably the most advanced nation in Europe, with the highest salaries, sees the present crisis.

The figure is stunning, but it may not be obvious, so let me explain what we are seeing here. The composite consumer confidence index drops for the GFC, the Covid-19 Crisis, and the Post-Sanctions Crisis, for Switzerland, are -3.8, -3.0, and -4.5, respectively. That means that Swiss citizens today think that their lives are more uncertain than they ever were during the Covid-19 pandemic and during the Global Financial Crisis. This is a completely non-intuitive result. One would have thought that such a prosperous nation, with plenty of savings, would feel more confident about the future, but clearly they understand how the Post-Sanctions Crisis is going to devastate their economy and give overseas rivals an advantage. The corresponding figures for the Euro 27-country index are -8.5, -4.5, and -3.6 points, respectively. So already, people in Switzerland feel worse than people in the rest of continental Europe over the same time period.

BELGIUM

Industrial Production Growth

Belgium, another reasonably prosperous European country, has been in industrial production decline for most of the last two years. And the drops are drastic: -17.4% in June 2022, -16% in September 2023, and -15% in November 2023.

Capacity Utilization

This is reflected in the decreasing capacity utilization of factories in Belgium, which decreased from 81.5% in Q2/22 to 74.5% in Q1/23, a peak drop of -7%.

The long-term picture tells us that the corresponding drops in capacity utilization for the GFC and the Covid-19 crisis were -14.2% and -3.8%, respectively. So the PSC has had an impact of severity (-7%) somewhere between these two disasters.

Industrial Manufacturing Capacity Utilization, Belgium, 2006–2024

GDP Growth Rate

Not surprisingly, therefore, Belgium’s GDP growth rate has been anemic for the past two years.

From 6.9% at the beginning of 2022 (Q4/21), the y-o-y GDP growth rate declines to 1.3% in Q2/23, a peak dip of -5.6% for the PSC.

The long-term graph reveals that the drop in y-o-y GDP growth rate for Belgium was -7.5% for the GFC and -15.4% for the Covid-19 pandemic.

GDP Growth Rate, %, Y-o-Y, Belgium, 2006–2024

Imports and Exports

During the GFC, Belgium’s exports index went down from 121 to 92, a drop of -29 points; imports went down from 115 to 94, a -21 point drop. During the Covid-19 crisis, the exports index went from 122 to 104, an -18 point drop; imports went down from 111 to 97, a -14 point drop. In contrast, during the current PSC, exports have gone down so far from 130 to 124, a -6 point drop — and continuing, whereas imports have gone down from 123 to 108, a -15 point drop. So the drop in imports is far worse than the drop in exports, which tells us that what is afflicting Belgium is not the high price of energy but the fact that the entire European economy is down and there are no buyers for its products, which means it needs to import less and manufacture less. This dovetails very well with the figures on industrial production and capacity utilization, shown earlier.

Unemployment Rate

Following the pandemic, high unemployment in Belgium started cooling down, as the data for September 2021 (6.2%) and February 2022 (5.3%) show. But, with demand in Europe dropping, unemployment rates went back up again and have remained there.

Inflation Rate

As the pandemic ended, inflation increased all over Europe, including Belgium, as costs of everything increased in response to increasing demand. As with other countries, this started to flatten out by early 2022, with inflation standing at 8% in February 2022. But after the war and sanctions, inflation in Belgium shot up to 12.3% in October, for a rise of 4.3%.

The long-term graph of the y-o-y inflation rate shows that the highest inflation rate in the last 18 years has only been 6%, whereas the peak inflation rate in the PSC is 12.3%.

Inflation Rate, %, Y-o-Y, Belgium, 2006–2024

Retail Sales Growth

Not surprisingly, retail sales growth has been negative for a straight two years since the onset of war, with the lowest value being -9.2% in December 2022.

Food Inflation

Of particular concern was food inflation, which was at 4% in February 2022, just before the start of the war, and which rose to a high of 18% in March 2023 (a rise of 14%) on the back of high energy prices before eventually coming back to 4.9% in February 2024. After two years, food inflation is still high relative to its value before the war.

The highest value of food inflation prior to this in the last 18 years was just under 8%, during the GFC.

Food Inflation Rate, %, Y-o-Y, Belgium, 2007–2024

Core Inflation

From 3.6% y-o-y in Feb/22, core inflation went up to 6.8% in May/23, a rise of 3.2%.

In the past 18 years, the highest value of the y-o-y core inflation rate before this was less than 3%, during the GFC.

Core Inflation Rate,%, Y-o-Y, Belgium, 2006–2024

AUSTRIA

Manufacturing PMI

Austria was doing very well before the start of sanctions. In Jan/22, its manufacturing PMI was 61.5. In Feb/22, this slightly dropped, to 58.4. Since then, the PMI value started going down steadily, crossing 50 in Aug/22, with a value of 48.8, until finally bottoming at 38.8 in Jul/23, for a peak drop of -19.6 points.

The long-term picture tells us that the peak drop during the pandemic was -18.6 points; no data are available for the GFC.

Capacity Utilization

Capacity utilization in Austria drops from 89% in Q2/22 to 84.6% in Q3/23, a peak drop of -4.4%. Note that I do not always use the value in February of 2022 or Q1 of 2022 as a reference, as often there is a lag of a few months before the effect of sanctions start to kick in.

The long-term data tell us that the GFC drop in capacity utilization was -12.8%, and the Covid drop was -10.9%.

Capacity Utilization, %, Austria, 2006–2024

Industrial Production Growth

Austria is another very prosperous country in Europe. And yet, industrial production growth has been on a continuous, almost linear decline in Austria, until by the summer of 2023, it went into negative territory. What also hurt Austria was what helped Germany — the warm winter of 2022–23. Austria relies heavily on its winter tourism (alpine skiing) for its economy, and the 2022–23 winter was extraordinarily warm all through Europe. This saved Germans from freezing but made sure there was no snow on the slopes of the famed Austrian alps. No tourists means no tourists buying things in Austria. The other problem is that a tourist economy depends very much on the good economic health of its neighbors. With the rest of Europe facing economic distress and high inflation, not that many people would be interested in tourism.

GDP Growth

From 9.6% in Q1/22, the y-o-y GDP growth rate sinks to -2% in Q3/2023, as seen in the figure below, giving a figure of -11.6% for the drop in GDP growth due to the PSC.

The y-o-y GDP growth rate drop for the GFC and the Covid-19 pandemic are -10.4% and -13.4%, respectively; roughly the same order of magnitude as the -11.6% of the PSC. But it must be remembered that the Covid-19 pandemic effect was for a relatively short period.

GDP Growth Rate, Y-o-Y, Austria, 2006–2024. Note the Drop After the Imposition of Sanctions

Imports and Exports

The imports/exports data (from UNCTAD) show that for the GFC, the drop in the exports index for Austria was -28.9 points; for the Covid pandemic, the drop was -21.3 points; and for the PSC, it was -5.8 points. For the GFC, the drop in the imports index was -21.9 points; for the Covid pandemic, it was -16.2 points; and for the PSC, it was -14.7 points.

So the PSC affected imports more than exports. Remember that exports are affected more by product competitiveness in the global market, and energy costs are a big part of that competitiveness; whereas imports are more affected by overall demand — if there is no demand for products, then there is no need to import inputs for products. The reason imports are more affected than exports is that Europe has been in a deep slump. Nobody can afford to buy anything. So companies are not producing, and if they are not producing, they don’t need to import. Exports have been affected — the drop of -5.8 points is evidence of that — because of rising energy costs — but that has been dwarfed by the drop in imports.

Imports and Exports Indices for Austria, 2005–2023. Notice the Huge Dip in Both Imports and Exports after Feb 2022

Inflation Rate

From 5.7% at the start of the war, in February 2022, the y-o-y inflation rate gradually rises to 11.2% in January 2023, for a peak rise of 5.5%.

Prior to the PSC, the highest the y-o-y inflation rate had been in Austria in the last 18 years was 4%.

Inflation Rate, Long Term, Y-o-Y, 2006–2024, Austria. Note the Huge Spike Starting in 2021 and Continuing After the Start of Sanctions

Retail Sales Growth

With so many headwinds, retail sales took a hammering, with negative growth over most of the last two years. The contrast is striking: in January 2022, the y-o-y retail sales growth was 19%; and in September 2023, the rate was -7%.

Business Confidence Index

The peak drops in the composite business index for Austria for the GFC, the Covid pandemic, and the PSC are -8.1 points, -3.5 points, and -5.0 points. So the PSC is already worse than the Covid pandemic in the composite business index.

Food Inflation

The y-o-y food inflation rate increased from 4.3% in Feb/22 to 17% in Jan/23, a rise of 12.7%.

It can be seen how high a food inflation of 17% is by looking at the last 18 years.

Food Inflation Rate, Y-o-Y, Austria, 2012–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Austria for the GFC, the Covid pandemic, and the PSC are, respectively, -3.4 points, -1.9 points, and -2.4 points. So we can see that consumers feel the post-sanctions crisis is worse than even Covid.

PORTUGAL

Capacity Utilization

Changes in Portugal’s capacity utilization percentage due to the PSC are insignificant, as can be seen below.

However, this was not the case in previous crises, as can be seen below.

Capacity Utilization, %, Portugal, 2006–2024

Industrial Production Growth

Portugal had a few good months in 2022, but has been in negative territory for most of 2023. And these are severe shocks — some months have had declines of 6% and 7%.

GDP Growth

The y-o-y GDP growth rate is 12.1% in Q1/22 in Portugal, but it gradually drops to 1.9% in Q3/23 — a drop of -10.2%.

For comparison, the peak annual GDP growth rate drop for the GFC is -7.1%, and that for the Covid-19 pandemic is -20.6%. The PSC drop of -10.2% is right between these two values.

GDP Growth Rate, Y-o-Y, Portugal, 2006–2022

Imports and Exports

The drops in the export indices for the GFC, Covid crisis, and PSC are -29.8, -46.8, and -6.5 points, respectively; whereas the corresponding import indices are -21.0, -38.7, and -4.0, respectively.

This indicates that so far, the PSC has not affected imports and exports too significantly (at least not on the scale of the GFC and Covid disasters) in Portugal.

Imports and Exports Indices for Portugal, 2005–2023

Inflation Rate

The y-o-y inflation rate in Portugal rose from 4.2% in Feb/22 to 10.1% in Oct/22, a rise of 5.9%.

In the past 18 years, the highest inflation rate before the PSC was around 4%.

Inflation Rate, Y-o-Y, Portugal, 2006–2024

Retail Sales Growth

High inflation has destroyed retail sales growth. In February 2022, y-o-y retail sales growth was 20.2%. Even assuming that some of this extraordinarily high rate was due to the opening up of the economy post-pandemic, the subsequent drop to -2.9% by November 2022 is shocking.

Business Confidence Index

The peak drops in the composite business index for Portugal during the GFC, the Covid pandemic, and the PSC are -10.6 points, -8.0 points, and -2.4 points, respectively.

Food Inflation

The food inflation rate, y-o-y, rises from 4.2% in February 2022 to 21.5% in February 2023, a rise of 16.8%.

It doesn’t take much imagination to believe that this is the highest inflation on record in recent years, but the chart below, which shows data for the last 18 years, provides clear evidence.

Food Inflation, Y-o-Y, Portugal, 2006–2024

Core Inflation

As in other European nations, core inflation also rises, from 4.7% in February 2022 to 7.3% in December 2022, a rise of 4.1%.

In every country, the same picture emerges: these are unprecedented declines in the standard of living. Not even Covid-19 or the GFC was anything like this. And it is not over yet.

Core Inflation, Y-o-Y, Portugal, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Portugal for the GFC, the Covid pandemic, and the PSC are, respectively, -3.5 points, -4.5 points, and -2.0 points.

Let us look now at the Scandinavian countries: Norway, Sweden, Finland, and Denmark. If there is one country that should not have been affected by the loss of Russia’s energy, it is Norway.

NORWAY

Norway has huge offshore oil and gas, and is also blessed with plentiful hydroelectricity. It is thus a net exporter of energy and of oil and gas to the rest of Europe.

Manufacturing PMI

Manufacturing PMI in Norway rises from 57.2 in Jan/22 to 59.3 in Mar/22 and then gradually reduces, going below 50 in Sep/22, reaching a low of 47.6 in Feb/23 (peak drop of -11.7 points).

The GFC drop in manufacturing PMI is -22.2 points, while the drop in the Covid pandemic period is -10.8.

Capacity Utilization

Capacity utilization decreases continuously, from 81.5% in Q1/22 to 78.4 in Q3/23, a drop of -3.1%.

In comparison with the PSC capacity utilization drop of -3.1%, the capacity utilization drop in the GFC was -8.8%, and the capacity utilization drop in the Covid-19 crisis was -3.4%.

Capacity Utilization, %, Norway, 2006–2024

Industrial Production Growth

But because Europe as a whole has had a terrible two years, Norway’s industrial growth, on average, has been flat, with some positive months and some negative months.

GDP Growth

From 6.1% y-o-y in January 2022, the GDP growth rate goes down to -1.9% y-o-y in Q3/23, a drop of -8%.

For comparison, the y-o-y GDP growth rate drop in the GFC was -7.9% and during the Covid-19 crisis was -6%.

GDP Growth Rate, %, Y-o-Y, Norway, 2006–2024

Imports and Exports

The drop in the export index due to the PSC was -5.5 points, whereas the drop in the import index was -15.0 points. For comparison, the drop in the export index due to the GFC was -7.6 points, whereas the drop in the import index was -24.4 points; and the drop in the export index due to Covid was -1.4 points, whereas the drop in the import index was -15.0 points.

So exports are more affected than they were during Covid, and imports are as badly affected as they were during Covid. Both were not as bad as during the GFC. The great impact on exports is a sign that European competitiveness has been hurt by high energy prices (and which continue to remain high.)

Import and Export Indices, Norway, 2005–2023

The Scandinavian countries are interesting to analyze also because they are very big on renewable energy, with heavy investments into wind and solar energy. In fact, they are thought to be the torchbearers for Europe’s green transition. One would think that these four countries would come out blazing with double-digit growth despite the sanctions on Russia. But, as we can see here, that’s not the case, certainly not with Norway.

Inflation Rate

From a rate of 3.7% y-o-y in February 2022, the inflation rate peaks at 7.5% y-o-y in October 2022, a peak rise of 3.8%.

Over the past 18 years, the inflation rate has never been this high.

Inflation Rate, %, Y-o-Y, Norway, 2006–2024

Retail Sales Growth

Retail sales growth has been negative over the entire last two years, with a maximum drop of 10.2% in July 2022.

Food Inflation

From 0.8% in Feb/22, the y-o-y food inflation rate rose to a peak of 13.5% in Jun/23, a peak rise of 12.7%.

The highest the y-o-y food inflation rate has been in the last 18 years has been just below 6%. So this is a dramatic rise.

Food Inflation, Y-o-Y, Norway, 2006–2022

Core Inflation

The y-o-y core inflation rate, which was just 2.1% in February 2022, rose to a peak of 7% in June 2023, a peak rise of 4.9%.

It can be seen from the long-term chart that the y-o-y core inflation rate has not crossed 4% in the last 18 years.

Core Inflation, %, Y-o-Y, Norway, 2006–2024

SWEDEN

Manufacturing PMI

The Swedish manufacturing PMI declines immediately after the start of sanctions, from 57.5 in Feb/22, crossing 50 in August 2022 (49.9), reaching a minimum of 40.9 in May/23, for a peak drop of -16.6 points.

From the long-term trends, we can see that the peak drops during the GFC and during Covid were -29.1 and -16.1 points, respectively. So the PSC drop of -16.6 points is greater than the Covid drop.

Capacity Utilization

Capacity utilization in Sweden decreases slightly, from 91.2% in Q2/22 to 89.7 in Q3/23, for a peak drop of -1.5%.

The long-term data tells us that the peak capacity utilization drop during the GFC was -15.1%, and during Covid was -7.6% — much more significant than the PSC.

Industrial Production Growth

Sweden is the one country that has mostly had a reasonably good two years. But even Sweden has been dragged down by the rest of Europe in the later part of 2023.

GDP Growth

From 7.1% in Q4/21 (ending on Dec 31, 2021) (not shown in chart below), the y-o-y GDP growth rate plummets to -1.1% in Q3/23, a drop of -8.2%.

The long-term data shows that the peak drop in y-o-y GDP growth rate in Sweden during the GFC was -9%, and during Covid was -9.9%. So the -8.2% dip for the PSC tells us that the post-sanctions crisis is a disaster comparable to the other two.

GDP Growth Rate, %, Y-o-Y, Sweden, 2006–2024

Imports and Exports

The peak drop in the exports index during the PSC was -2.6 points, and in the imports index was -9.6 points. To put this in perspective, the peak exports drops during the GFC and during Covid were -29.9 and -11.5 points, respectively; and the peak import drops during the GFC and during Covid were -33.4 and -13.2 points, respectively. So, again, imports are affected more than exports in the PSC, where it is comparable to the Covid pandemic, meaning that this is because of the continent-wide recession and lack of buying power.

Import and Export Indices, Sweden, 2005–2023

Inflation Rate

The y-o-y inflation rate rises from 4.3% in Feb/22 to 12.3% in Dec/22, a rise of 8%.

The long-term chart gives us an idea of just how high this inflation rate is.

Inflation Rate, %, Y-o-Y, Sweden, 2006–2024

Retail Sales Growth

Retail sales in Sweden really took a dive after the imposition of sanctions against Russia, as the graph below shows. From a 2.6% y-o-y growth, retail sales plunged to -10.3% y-o-y in March 2023. And even in January 2024, retail sales growth is still negative, at -1.9%.

Bankruptcies

From 475 bankruptcies in January 2022, bankrupcties in Sweden steadily rise, to 1160 bankruptcies in January 2024, a CAGR of 56%.

Business Confidence Index

The peak drops in the composite business confidence index for Sweden during the GFC, the Covid pandemic, and the PSC are -6.3 points, -3.2 points, and -4.4 points, respectively. So the drop in the composite business confidence index for Sweden during the PSC is worse than that during the Covid-pandemic, and it is also worse than the EU average for the PSC.

Food Inflation Rate

The y-o-y food inflation rate in Sweden rose dramatically from 4% in February 2022 to 21% in February 2023, a peak rise of 17%.

In the last 18 years, food inflation has not crossed 10% even once.

Food Inflation Rate, %, Y-o-Y, Sweden, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Sweden for the GFC, the Covid pandemic, and the PSC are, respectively, -3.8 points, -0.8 points, and -4.7 points, respectively. So Swedes are having a crisis of confidence worse than they had during Covid and during the GFC. This is the worst crisis for them in the last 20 years. The drop of -4.7 points is worse than the European average at -3.1 points.

FINLAND

Capacity Utilization

From 82.2% in Q1/22, the capacity utilization rate in Finland goes down to 77.4% in Q3/23, a peak drop of -5.6% over the past two years.

The long term picture tells us that during the GFC, capacity utlization fell by -22.8%, and during Covid, it fell by -3.2%. The -5.6% in the PSC, therefore, is worse than the drop during Covid.

Capacity Utilization, %, Finland, 2006–2024

Industrial Production Growth

Industrial production growth started declining in the second half of 2022, and during 2023 it has been almost completely negative, crossing -6% in December 2023.

Finland does reasonably well in 2022, but runs out of steam in 2023. The same is true of Denmark. Actually, Finland’s graph is very interesting. It does very well until September 2022, and then everything suddenly goes downhill. One may recall that the end of September 2022 is when the US blew up the Nord Stream pipelines.

GDP Growth

From a high of 3% in Q1/22, the y-o-y GDP growth rate went down to -1.8% in Q4/23: a peak drop of -4.8%.

The long-term picture tells us that the corresponding drops for the GFC and for Covid are -15.1% and -8.4%.

GDP Growth Rate, %, Y-o-Y, Finland, 2006–2024

Imports and Exports

The peak drops in the exports and imports indices during the post-sanctions crisis were -36.1 points and -20.6 points in the last two years. The corresponding peak export drops in the GFC and the Covid crisis were -45.7 points and -11.6 points, respectively. The peak import drops in the GFC and the Covid crisis were -36.1 points and -8.4 points, respectively.

This means that the PSC has been far worse for Finland than the Covid-19 crisis as far as imports and exports are concerned, almost approaching the levels of the GFC. The steep declines suggest that worse is to come.

Import and Export Indices, Finland, 2005–2023

Inflation Rate

The y-o-y inflation rate rises from 4.5% in Feb/22 to 9.1% in Nov/22, a peak rise of 4.6%.

Inflation Rate, %, Y-o-Y, Finland, 2006–2024

Retail Sales Growth

Retail sales growth has been poor in the second half of 2023, dropping to 0.7% y-o-y in November 2023.

Bankruptcies

Bankruptcies has significantly increased in Finland in 2023. From 661 bankruptcies in Q1/22, bankruptcies have risen to 817 in Q3/23, a CAGR of 15%.

Business Confidence Index

The peak drops in the composite business confidence index for Finland during the GFC, the Covid pandemic, and the PSC are -8.7 points, -2.5 points, and -5.5 points, respectively. So it can be seen that the drop during the PSC is worse for Finland than during the Covid pandemic, and has been bad for a longer time frame. The drop in the PSC is worse than it was for Europe as a whole (-3.1 points).

Food Inflation Rate

Food inflation due to the PSC has been very high. From 4.5% y-o-y in Feb/22, the food inflation rate climbed to 16.3% in Feb/23, a rise of 11.8%.

It can be seen that food inflation was quite high during the GFC as well, around 11%.

Food Inflation Rate, %, Y-o-Y, Finland, 2006–2024

Core Inflation Rate

From 2% in Feb/22, the y-o-y core inflation rate went up to 5.2% in May/23, a peak rise of 3.2%.

Core Inflation Rate, %, Y-o-Y, Finland, 2006–2022

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Finland for the GFC, the Covid pandemic, and the PSC are, respectively, -4.7 points, -1.8 points, and -3.7 points. So Finns see the present crisis as worse than the Covid crisis. And the drop in confidence levels are lower than that of Europe as a whole, at -3.1 points.

DENMARK

Manufacturing PMI

From 70.9 in June 2022, the manufacturing PMI in Denmark goes down to a low of 37.2 in February 2023, a drop of -33.7 points.

The PSC drop of 33.7 points compares well with the GFC drop of -42 points and the Covid drop of -18 points.

Capacity Utilization

After a strong showing in the second quarter of 2022, Denmark’s capacity utilization dipped drastically. But it has been recovering and stabilizing in 2023. From 85.9% in Q2/22, the capacity utilization drops to 81.4% in Q4/22, a drop of -4.5%.

The corresponding drops for the GFC and the Covid pandemic are -18% and -4.5%, respectively.

Capacity Utilization, %, Denmark, 2006–2023

Industrial Production Growth

Denmark is the one Scandinavian economy that has performed as one would expect a country that has invested so much in renewables to. It is puzzling why this is the case, though, when you think of how dependent different countries are on Russia: The UK was only around 10% dependent overall on Russian energy, whereas Denmark was around 30% dependent on Russian energy; and yet, Denmark has done much better. Two reasons may be responsible: one, Denmark is a small country, and two, its products are fairly high-tech.

GDP Growth

From 7.9% in Q4/21 to 0.3% in Q4/22, Denmark has seen a -7.6% change in y-o-y GDP growth rate.

The peak drop in the GFC was -8%, and in the Covid crisis was -7.8%, which are quite similar to the -7.6% in the PSC.

GDP Growth Rate, %, Y-o-Y, Denmark, 2006–2023

Imports and Exports

During the PSC, the export index went down by -2.1 points, and the import index went down by -10.7 points. Compare this with the Covid-19 crisis, in which the export index went down by -7 points, and the import index went down by -8.5 points. Clearly, Denmark was more impacted by the overall weakness in Europe during the PSC than by the rising energy prices contributing to high prices for its products. During the GFC, the export index went down by -17.9 points, and the import index went down by -27.8 points.

Import and Export Indices, Denmark, 2005–2023

Inflation Rate

The y-o-y inflation rate in Denmark rose from 4.8% in Feb/22 to 10.1% in Oct/22 before coming down. That is a rise of 5.3%.

Prior to this, the highest inflation rate Denmark had seen in the last 18 years was around 4%.

Inflation Rate, %, Y-o-Y, Denmark, 2006–2024

Retail Sales Growth

Business Confidence Index

The drops in the composite business confidence index for Denmark during the GFC, the Covid pandemic, and the PSC are -6.6 points, -1.9 points, and -2.9 points, respectively. So the PSC seems to have had a worse effect on Denmark than the Covid pandemic.

Food Inflation

Food inflation (y-o-y) rose from 5.5% in February 2022 to 15.9% in August 2022, a rise of 10.4%, before gradually coming down. In February 2024, the food inflation became negative, which is a bad thing, because it means demand is dropping drastically.

Food Inflation Rate, %, Y-o-Y, Denmark, 2006–2024

Core Inflation

Core inflation, y-o-y, rose from 2.7% in February 2022 to 6.7% in February 2023, a rise of 4%.

Core Inflation Rate, %, Y-o-Y, Denmark, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Denmark for the GFC, the Covid pandemic, and the PSC are, respectively, -2.6 points, -1.4 points, and -2.4 points. So Danes are clearly feeling worse about the PSC than they were about Covid, and practically as bad as they were feeling during the GFC.

We now turn to the Baltic nations: Lithuania, Latvia, and Estonia.

LITHUANIA

Lithuania is highly dependent on imports for its energy, and so was very dependent on Russian energy, both directly and indirectly through Poland. Let us see how that affected Lithuania after the sanctions on Russia were imposed.

Capacity Utilization

Capacity utilization dropped from 77.9% in Q1/22 to 67.1% in Q3/23, a drop of -11.7%.

In the GFC, capacity utilization dropped -14%, and during the Covid pandemic, it dropped -7.9%.

Capacity Utilization, %, Lithuania, 2006–2024

Industrial Production Growth

It is, therefore, no surprise that industrial production began to decline immediately after supplies from Russia vanished. Ever since September 2022, Lithuanian industrial production has been on the decline, with just a couple of good months in between. This is a disaster for such a small economy. And the decline has not been small, either — in March 2023, the y-o-y decline was around -15%.

GDP Growth

Year-on-year GDP growth rate drops from 6.7% in Q4/21 to a minimum of -2.4% in Q1/23, for a peak drop of -10.1%.

During the GFC, the drop in y-o-y GDP growth rate was -28%; during the Covid-19 pandemic, the maximum drop was -8.9%.

GDP Growth Rate, %, Y-o-Y, Lithuania, 2006–2024

Imports and Exports

During the PSC, the exports index dropped by -29.6 points, whereas the imports index dropped by -25.6 points. In comparison, during the GFC, exports dropped by -35.7 points, and imports by -49.9 points. And, during the Covid-19 pandemic, exports dropped by -21.9 points, and imports by -24 points. So we see here that the PSC for Lithuania has been worse than the Covid-19 pandemic as far as imports and exports (both of which seem to be equally affected) are concerned.

Import and Export Indices, Lithuania, 2005–2023

Inflation Rate

The y-o-y inflation rate in Lithuania grew from 14.2% in February 2022 to 24.1% in September 2022, a rise of 9.9%, before slowly coming down.

Inflation Rate, %, Y-o-Y, Lithuania, 2006–2024

Retail Sales Growth

Like many other European nations, retail sales slumped in Lithuania after the imposition of sanctions started in March 2023, going as low as -5.5% y-o-y in December 2022.

Business Confidence Index

The peak drops in the composite business confidence index for Lithuania in the GFC, the Covid pandemic, and the PSC are -15.5 points, -4.7 points, and -6.4 points. Again, we see that the drop during the PSC for Lithuania are worse than that for Europe as a whole as well as during the Covid pandemic in Lithuania (as well as the whole of the EU).

Food Inflation

Food inflation due to the sanctions against Russia has been dramatic in Lithuania. In Feb/22, the food inflation rate, y-o-y, was 14.7%, and by November 2022, this increased to 35.6%, a rise of 20.9%.

The months of January and February 2024 are showing negative inflation rates, which is also a matter of grave concern.

Food Inflation Rate, %, Y-o-Y, Lithuania, 2022–2024

The highest inflation rate seen before this was during the GFC. As mentioned earlier, such high inflation rates as are being seen in all European countries are because of the fact that the PSC is not acting alone — it has piggybacked on the previous crisis (Covid-19) which was not yet done. The USA and Europe picked a wrong time to escalate the situation in Ukraine. Because of this, the high inflation rate that started in 2021 did not have time to settle down and kept on rising, as the graph below shows.

Food Inflation Rate, %, Y-o-Y, Lithuania, 2006–2024

Core Inflation

The y-o-y core inflation rate in Lithuania was 8.3% in February 2022, and rose to 12.7% by November 2022 before starting to come down.

As can be seen, such core inflation rates are unprecedented in Lithuania in the last 18 years.

Core Inflation Rate, %, Y-o-Y, Lithuania, 2006–2022

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Lithuania for the GFC, the Covid pandemic, and the PSC are, respectively, -16.6 points, -4.2 points, and -1.7 points.

LATVIA

Capacity Utilization

Capacity utilization drops from 76.7% in Q4/21 to 71.4% in Q1/24, a -5.3% decrease.

During the GFC, the peak dip in capacity utilization was 21.1%; and during the Covid-19 pandemic, the peak dip was -6.4%.

Capacity Utilization, %, Latvia, 2006–2024

Industrial Production Growth

Latvia is another disaster story. In early 2023, industrial growth declined by more than 20%.

GDP Growth

The y-o-y GDP growth rate was 7.5% in Q1/22, and declined to -0.6% in Q3/23, a drop of -8.1%.

During the GFC, the GDP growth rate drop was -30.7%, and during the Covid pandemic, the drop was -8.2%, similar to the PSC’s -8.1%.

GDP Growth Rate, %, Y-o-Y, Latvia, 2006–2024

Imports and Exports

During the PSC, Latvia’s export index dropped by -28.6 points, and its import index dropped by -19.5 points. In comparison, during the Covid-19 pandemic, its export index dropped by -27.6 points, and its import index dropped by -28.7 points. And, in the GFC, Latvia’s export index dropped by -29.4 points, and its import index dropped by -60.7 points.

Import and Export Indices, Latvia, 2005–2023

Inflation Rate

The y-o-y inflation rate in Latvia shoots up from an already high 8.7% in February 2022 to 22.2% in September 2022, a rise of 13.5%, before very gradually coming down.

The long-term plot of the inflation rate again highlights how the PSC simply compounded the high leftover inflation from the end of the Covid-19 pandemic that was never given a chance to settle down by the sanctions against Russia.

Inflation Rate, %, Y-o-Y, Latvia, 2006–2024

Retail Sales Growth

The retail sales growth picture is shocking. From a growth rate of 14.1% y-o-y, retail sales growth declines to -9% in March 2023.

Food Inflation Rate

The food inflation rate rises from an already high 11.8% y-o-y in February 2022 to 29.5% in October 2022, a rise of 17.7%.

Food Inflation Rate, %, Y-o-Y, Latvia, 2006–2024

Core Inflation Rate

Core inflation in Latvia rises from 4.5% y-o-y in February 2022 to 11.1% y-o-y in February 2023, a rise of 6.6%.

Core Inflation Rate, %, Y-o-Y, Latvia, 2006–2022

ESTONIA

Of all the three Baltics, Estonia is the most surprising story. This is because Estonia is almost entirely self-sufficient in energy. Estonia has huge reserves of oil shale, which meet 55% of its energy requirements; it gets another 30% of its energy from wood chips through biomass gasification, a very efficient energy extraction mode. While these are not green sources of energy, they meet most of Estonia’s needs. For the remaining 15% of its energy needs, Estonia has been investing in offshore wind turbines, because the shallow waters of the Baltic sea provide the perfect environment for huge wind farms.

Capacity Utilization

Capacity utilization drops from 85.2% in Q4/21 to 63.5% in Q3/23, a drop of -21.7%.

In the GFC, the drop was -21.2%, and during the Covid pandemic, the drop was -8.7%.

Capacity Utilization, %, Estonia, 2006–2024

Industrial Production Growth

And yet, in spite of Estonia’s own energy sources, one can see how disastrous the sanctions against Russia have been to Estonia’s industrial growth. This is because you cannot make juvenile assumptions about what is needed for industrial growth or for nations to survive as European leaders made in the late months of 2021 and the early months of 2022, not to mention in the immediate aftermath of hostilities between Russia and Ukraine. Business, industry, and trade are highly nonlinear processes, and instead of treating these weighty topics with the respect they deserve, European leaders made amateur mistakes, and their countries are paying for it. Even today, as I was writing this article, I was explaining to a European on social media why his country’s decision to sanction Russia had been catastrophic, and he replied to me that he thought it was a worthwhile sacrifice. Logic is useless when people are brainwashed by ideology.

Industrial production has been continuously negative from the later part of 2022 up to now.

Industrial Production Growth Rate, Year-on-Year, for Estonia

GDP Growth

The y-o-y GDP growth rate drops from 4.8% in Q4/21 to -4.2% in Q4/22 — a drop of -9%.

For the GFC, Estonia’s y-o-y GDP growth rate dropped by -28.7%; and during Covid, it dropped by -9.4%, comparable to the PSC’s -9%.

GDP Growth Rate, %, Y-o-Y, Estonia, 2006–2024

Imports and Exports

During the PSC, Estonia’s exports index dropped by -44.7 points, and its imports index dropped by -22.7 points. During the Covid pandemic, Estonia’s exports index dropped by -18.6 points, and its imports index by -14.3 points. And, during the GFC, Estonia’s exports index dropped by -30.9 points, and its imports index dropped by -54.5 points. This is a very serious crisis. And it is not over yet.

Import and Export Indices, Estonia, 2005–2023

Inflation Rate

From 12% in February 2022, the y-o-y inflation rate increases to 24.8% in August 2022, a rise of 12.8%.

This is double the maximum inflation rate that Estonia saw in the last 18 years.

Inflation Rate, %, Y-o-Y, Estonia, 2006–2024

Retail Sales Growth

At the start of 2022, retail sales growth was robust in Estonia. In January 2022, it was 8.4% y-o-y. However, from the second half of 2022, Estonia’s retail sales growth has been negative (-5.8% in September 2022), even touching -13% in March 2023.

Business Confidence Index

The drops in the composite business confidence index in Estonia for the GFC, the Covid pandemic, and the PSC are -17.4 points, -6 points, and -10.1 points. For reference, the values for the EU as a whole are -8.5 points, -4.5 points, and -3.6 points for the same indices, respectively. Thus, the PSC in Estonia is worse than Covid was in Estonia but not as bad as the GFC was. The drops in all three crises was worse in Estonia than in Europe as a whole.

Food Inflation

From 12.4% in February 2022, the food inflation shoots up to 29.8% in December 2022, a rise of 17.4%, before coming down to 3% in February 2024.

Food Inflation Rate, %, Y-o-Y, Estonia, 2006–2024

Core Inflation

Core inflation in Estonia went from 6.4% in February 2022 to 13% in October 2022, a rise of 6.6%.

Core Inflation Rate, %, Y-o-Y, Estonia, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Estonia for the GFC, the Covid pandemic, and the PSC are, respectively, -10.8 points, -5.2 points, and -6.8 points. So Estonians are finding the future more bleak than they did during the Covid pandemic.

Next, let us look at Eastern Europe. This bunch of countries was very closely tied to Russia for its energy needs because much of its energy infrastructure was connected to that of Russia from the days of the Cold War. It will be no surprise, therefore, that all of them have been very hard hit by sanctioning Russian energy.

POLAND

Let us start with Poland, the country that is the most hostile to Russia in Europe, and which has been the biggest votary of sanctions on Russia, frequently rebuking Germany when Germany appeared to be cautious of imposing more sanctions.

Manufacturing PMI

Since May of 2022, Poland’s manufacturing has steadily been contracting. This is not surprising. Poland was one of the economies heavily tied to Russian energy, and strangely, they were also the country most eager to sanction Russian energy. How have the sanctions affected Poland?

The PMI chart shows that manufacturing has been in decline since May of 2022 and continues to be in decline today. From 55 in February 2022, the PMI reached a minimum of 40.9 in August 2022 — a drop of -14.1 points.

The long-term data show that the drop in the manufacturing PMI during the Covid pandemic was -16.3 points. Data for the GFC are not available.

Capacity Utilization

Capacity utilization declines gradually from 80% in Q2/22 to 76.4% in Q1/24, a drop of -3.6%.

The long-term data show that the drop in the GFC was -11.1% and in the Covid-19 pandemic was -10.5%.

Capacity Utilization, %, Poland, 2006–2024

Industrial Production Growth

As can be seen, industrial production growth has been a disaster for Poland. The whole of 2023 has seen negative growth. The only reason Poland did not see an earlier decline is that they have abundant supplies of coal. Nevertheless, as I mention in my 2022 article, Poland imported (before the war) 30% of its total gas requirement, 70% of its total oil requirement, and around 65% of its total coal requirement from Russia.

GDP Growth

From 8.8% y-o-y in Q1/22, the GDP growth rate in Poland went down to -0.6%, for a peak drop of -9.4% in the PSC.

The peak annual GDP growth rate drop in the GFC was -5.1%; and, during the Covid-19 pandemic, the corresponding drop was -11.5%. That tells us how serious the -9.4% drop in annual GDP growth rate during the PSC is.

GDP Growth Rate, %, Y-o-Y, Poland, 2006–2024

Imports and Exports

The imports/exports chart of Poland shows that both exports and imports were galloping at a steady pace, overcoming the effects of the Covid-19, before Poland imposed restrictions on Russian energy, along with other European countries.

Poland’s Import and Export Indices Since 2005 (100=2005) (Data Source: UNCTAD. Analysis by the Author.)

During the GFC, Poland’s imports went from an index value of 160 to a value of 127 — a dip of -33 points. Poland’s exports dipped from an index value of 156 to 126 — a dip of -33 points. In the Covid-19 crisis, Poland’s imports went from 216 to 175 — a dip of -41 points. And its exports went from 261 to 218 — a dip of -43 points. After the imposition of sanctions on Russia, after a short period where Poland’s economy continued its good run, its imports slumped from 259 to 240 — a dip of -19 points; and its exports dipped from 301 to 290 — a dip of -11 points. And there is no sign of slowing down.

Inflation

From 8.5% y-o-y in February 2022, the inflation rate rises to 18.4% y-o-y in February 2023, a rise of 9.9%.

Inflation Rate, %, Y-o-Y, Poland, 2006–2024

Retail Sales Growth

From 10.6% y-o-y in Jan/22, 8.1% in Feb/22, and 19% in Apr/22, y-o-y retail sales growth has slumped in 2023, with -5% in Feb/23, and -2.3% in Dec/23.

Business Confidence Index

The drops in the composite business confidence indices for Poland for the GFC, the Covid crisis, and the Post-Sanctions Crisis were -6.6 points, -5.6 points, and -1.5 points, respectively.

Food Inflation

The y-o-y food inflation rate rises from 8.5% in Feb/22 to 24% in Feb/23 before coming down, a rise of 15.5%.

Food Inflation Rate, %, Y-o-Y, Poland, 2006–2024

Core Inflation

Core inflation, y-o-y, rose from 6.7% in February 2022 to 12.3% in March 2023, a rise of 5.6%.

Core Inflation Rate, %, Y-o-Y, Poland, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Poland for the GFC, the Covid pandemic, and the PSC are, respectively, -3.9 points, -4.3 points, and -1.4 points.

By the way, Poland was not the only country in Eastern Europe to be extremely hostile to Russia. Most of the other countries in Eastern Europe were almost as fanatic about sanctioning Russia. The reason for this, of course, was their shared history with Communist Russia. They feared (and still fear) that, after Ukraine, Russia would invade them, and seem to have preferred self-destruction to domination by Russia.

CZECHIA

Another Eastern European country that was highly dependent on Russian energy in both gas and oil is Czechia.

Snapshot of the Effects of Anti-Russia Sanctions on The Czech Republic

Manufacturing PMI

From 56.5 points in February 2022, the PMI went down to 34.4 in April 2022, a drop of -22.1 points.

The PMI drop during the Covid-19 crisis was -11.4 points. Data for the GFC are not available.

Manufacturing PMI, Czech Republic, 2012–2024

Industrial Production Growth

Again, most of 2023 has been bad for Czechia’s industrial growth, as it has been for other European countries.

GDP Growth

The y-o-y GDP growth rate went from 4.7% in Q1/22 to -0.6% in Q3/23, a drop of -5.3%.

The maximum y-o-y GDP growth rate drop during the GFC was -10.8%, and during the Covid pandemic was -13.6%.

GDP Growth Rate, %, Y-o-Y, Czech Republic, 2006–2024

Imports and Exports

The exports index for Czechia went down by a maximum of -15.5 points during the post-sanctions crisis; in the same period, the imports index went down by a maximum of -10.5 points. During the Covid crisis, the drops were much more severe: the exports index went down by -52.5 points, and the imports index went down by -35.6 points. During the GFC, too, the drops are quite large: the exports index went down by -30.2 points, and the imports index went down by -33.4 points.

Import and Export Indices, Czech Republic, 2005–2023

Inflation Rate

The y-o-y inflation rate rises from 11.1% in Feb/22 to 18% in Sep/22, for a rise of 6.9%.

Inflation Rate, %, Y-o-Y, Czech Republic, 2006–2024

Retail Sales Growth

Retail sales have been devastated since the start of sanctions against Russia, as the graph below shows. Retail sales growth (y-o-y) was -10.4% in October 2022.

Food Inflation

Food inflation, y-o-y, went up from 6.9% in February 2022 to 26% in November 2022, a rise of 19.1%.

Food Inflation Rate, %, Y-o-Y, Czech Republic, 2006–2024

Core Inflation

Core inflation, y-o-y, went up from 10.4% in February 2022 to 14.7% in July 2022, a rise of 4.3%.

Core Inflation Rate, %, Y-o-Y, Czech Republic, 2006–2022

SLOVAKIA

Industrial Production Growth

Slovakia had the reverse picture compared to most of Europe, with a terrible 2022, but with 2023 picking up. I need to investigate further why this is the case, and will update this article once I understand this.

GDP Growth

The y-o-y GDP growth rate goes down from 3.1% in Q1/22 to 0.5% in Q1/23, a peak drop of -2.6%.

For the GFC, the GDP y-o-y growth rate drop is -19.9%, and for Covid, it is -11.8%. So the PSC has not been as severe for Slovakia.

GDP Growth Rate, %, Y-o-Y, Slovakia, 2006–2024

Imports and Exports

The exports index for Slovakia drops by a maximum of -7.0 points, whereas the imports index drops by a maximum of -5.1 points. For the GFC, these numbers are -39.9 (exports index drop) and -37.4 (import index drop); for Covid, the numbers are -74.5 (exports index drop) and -58.5 (imports index drop). So, in the case of imports and exports, too, as in the case of the GDP growth rate, the effect of the post-sanctions crisis have been mild in Slovakia.

Import and Export Indices, Slovakia, 2005–2023

Inflation Rate

The y-o-y inflation rate was 9% in Feb/22; it rose to 15.4% in Nov/22. This is a rise of 6.4%.

Inflation Rate, %, Y-o-Y, Slovakia, 2006–2024

Retail Sales Growth

From a robust 19% y-o-y growth rate in January 2022, retail sales plummeted to a low of -11% y-o-y in April 2023.

Business Confidence Index

The peak drops in the composite business confidence indices for Slovakia for the GFC, the Covid pandemic, and the Post-Sanctions Crisis were -12.5 points, -7.6 points, and -3.8 points, respectively.

Food Inflation

Food inflation in Slovakia has been severe. From 9.6% y-o-y in Feb/22, food inflation soars to 28.2% y-o-y in Mar/23, a rise of 18.6%.

Prior to this, the maximum food inflation rate, y-o-y, in the last 18 years has been around 10%.

Food Inflation Rate, %, Y-o-Y, Slovakia, 2006–2024

Core Inflation

From 7.9% y-o-y in February 2022, core inflation in Slovakia has soared to 16.6% in February 2023, a meteoric rise of 8.7%.

Core Inflation Rate, %, Y-o-Y, Slovakia, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Slovakia for the GFC, the Covid pandemic, and the PSC are, respectively, -7.9 points, -4.2 points, and -1.3 points.

HUNGARY

Hungary was not a willing sponsor of sanctions against Russia, but after a lot of arm-twisting by the rest of Europe, agreed to sanctions against Russia.

Manufacturing PMI

It can be seen that not only did Hungary’s manufacturing (PMI) not suffer, it was in continuous expansion mode even as its European neighbors were contracting. It would seem that Hungary made the right choice. Hungary’s manufacturing slumped in mid-2023 for four months, but this may have been because of the general weakness of its European neighbors in 2023, and it rebounded, starting in October 2023, and is back in expansion mode.

So there was no real sustained decline in the manufacturing PMI.

During the GFC, Hungary’s manufacturing PMI suffered a decline of -21 points; and during Covid, -22.4 points.

Capacity Utilization

From 82.3% in Q1/22, capacity utilization in Hungary goes to a minimum of 75% in Q4/22, a drop of -7.3%.

During the GFC, the peak capacity utilization drop was 20.1%; and during Covid, the peak drop was -9%.

Capacity Utilization, %, Hungary, 2006–2024

Industrial Production Growth

Hungary has had negative industrial growth all through 2023, which suggests that the sudden drop in PMI seen in June 2023 had an underlying cause which deserves investigation.

GDP Growth

The y-o-y GDP growth rate was 7.9% in Q1/22, and dropped to -2.4% by Q2/23, a peak drop of -12.3% in the PSC.

From the long-term data, we see that the peak drop during the GFC was -10.5%; and during the Covid pandemic was -17.2%.

GDP Growth Rate, %, Y-o-Y, Hungary, 2006–2024

Imports and Exports

The exports index of Hungary drops by -5.8 points during the PSC, and the imports index drops by -23.9 points. In comparison, the export index drop during the GFC was -42.5 points, and the import index drop was 41.0 points. During the GFC, the export index drop was -41.9 points, and the import index drop was -31.3 points.

Import and Export Indices, Hungary, 2005–2023

Inflation Rate

From 8.3 % y-o-y in February 2022, the inflation rate in Hungary rises to 25.7% y-o-y in January 2023, a rise of 17.4%.

This is an unprecedented rate of inflation.

Inflation Rate, %, Y-o-Y, Hungary, 2006–2024

Retail Sales Growth

From 9.9% y-o-y in February 2022 and 17% in March 2022, retail sales growth plummeted to -13.1% in March 2023.

Business Confidence Index

The drops in the composite business confidence indices for the GFC, the Covid crisis, and the PSC for Hungary, respectively, are -8.2 points, -5.8 points, and -3.4 points, respectively.

Food Inflation

From 11.4% y-o-y in February 2022, the food inflation rate grew to an astonishing 47.8% y-o-y in December 2022, a rise of 36.4%.

Food Inflation Rate, %, Y-o-Y, Hungary, 2006–2024

Core Inflation

Core inflation grew from 8.1% y-o-y in Feb/22 to 25.7% y-o-y in Mar/23, a rise of 17.6%.

Core Inflation Rate, %, Y-o-Y, Hungary, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Hungary for the GFC, the Covid pandemic, and the PSC are, respectively, -2.3 points, -3.1 points, and -3.5 points. So the current crisis is worse for Hungarians than both the Covid and GFC crises. It is also worse than the European average of -3.1 points.

ROMANIA

Before the war, Romania imported all its gas from Russia, about 40% of its oil from Russia, and 55% of its coal from Russia. Let us see how being deprived of those resources has impacted Romania.

Capacity Utilization

From 74.3% in Q3/22, capacity utilization dropped to 66.5% in Q4/23, a drop of -7.8%. But this is just a single quarter drop and the next quarter, capacity utulization comes back to above 71%.

During the GFC, capacity utilization fell by -15.4%; and during Covid, by -7.3%.

Capacity Utilization, %, Romania, 2006–2024

Industrial Production Growth

It should come as no surprise that industrial growth has been negative almost all through the last two years.

GDP Growth

From 5.6% in Q1/22, the y-o-y GDP growth rate falls to 1.1% in Q1/23, a drop of -4.4%.

In contrast, during the GFC, the GDP drop was -18.1%; and during Covid, the drop was -13.9%.

GDP Growth Rate, %, Y-o-Y, Romania, 2006–2024

Imports and Exports

The exports index did not appreciably change due to the PSC; but the import index fell by -15.5 points due to the PSC. In the GFC, the exports index fell by -26.5 points, while the imports index fell by -56.0 points; during Covid, the exports index fell by -75.9 points, while the imports index fell by -54.5 points. So, compared to those two economic catastrophe, Romania fared better during the PSC.

Import and Export Indices, Romania, 2005–2023

Inflation Rate

From 8.5% in February 2022, the y-o-y inflation rate goes up to 16.8%, a rise of 8.3%.

As before, note how the inflation rate was rising even before 2022, and was being pushed up further by the sanctions on Russia.

Inflation Rate, %, Y-o-Y, Romania, 2006–2024

Retail Sales Growth

Retail sales growth has steadily gone down, from 9.7% in January 2022 to 1.4% in December 2023.

Food Inflation

From 8.4% in February 2022, the y-o-y food inflation rate goes up to a staggering 22.5% in January 2023, a rise of 14.1%.

Food Inflation Rate, %, Y-o-Y, Romania, 2006–2024

Core Inflation

From 4.2% y-o-y, the core inflation rate in Romania goes up to 11.6% in September 2023, a rise of 7.4%.

Core Inflation Rate, %, Y-o-Y, Romania, 2006–2024

BULGARIA

Bulgaria depended on Russia for 75% of its gas and 85% of its coal.

Industrial Production Growth

The impact of the sanctions on Russian energy on its economy have been severe, resulting in declines in industrial production up to 10–12% for most of 2023.

GDP Growth

The y-o-y GDP growth rate in Bulgaria has gone down steadily, from 7.8% in Q4/21 (i.e., Jan 2022) to 1.6% in Q4/23 (Dec 2023), a drop of -6.2%.

During the GFC, the drop was -13.7%, and during Covid, it was -11%.

GDP Growth Rate, %, Y-o-Y, Bulgaria, 2006–2024

Imports and Exports

The drop in the exports index for Bulgaria during the PSC was -55.3 points, and the drop in the imports index during the PSC was -34.9 points. During the GFC, the exports index dropped by -29.4 points and the imports index dropped by -81.0 points; during Covid, the exports index dropped by -32.7 points and the imports index dropped by -44 points. So the impact of the PSC on imports and exports was comparable to the impacts during the GFC and Covid.

Inflation Rate

The y-o-y inflation rate in Bulgaria rose from 10% in February 2022 to 18.7% in September 2022, a rise of 8.7%.

Retail Sales Growth

Retail sales growth shows a steady decline, from 11% y-o-y in January 2022 to 0.7% y-o-y in December 2023.

Food Inflation

Food inflation rises from 13.6% in February 2022 to 26.6% in November 2022, a rise of 13%.

Food Inflation Rate, %, Y-o-Y, Bulgaria, 2006–2024

Core Inflation

Core inflation rises from 4.1% y-o-y in February 2022 to 11.1% y-o-y in December 2022, a rise of 7%.

Core Inflation Rate, %, Y-o-Y, Bulgaria, 2006–2024

GREECE

Greece was moderately dependent on Russia for its energy; however, what has been a mitigating factor for Greece is probably the fact that it sits between Asia and Europe, much like Turkey, and so it was somewhat saved by contact with its better-off Asian partners. As we have already seen, relative energy independence is not the only necessary condition to surviving sanctions — having economically healthy neighbors is also necessary. Just as one cannot remain healthy when everyone around one is sick — as the world discovered during the Covid-19 pandemic — a country is only as economically healthy as its neighbors. Europe made the mistake, and is still making the mistake, of thinking that energy self-sufficiency, perhaps through building more LNG terminals, as Germany is doing, is the solution, without realizing that overall economic health is the key. Europe had that key before February 2022. As doctors know, once a patient enters a terminal stage, no amount of medication will help.

Manufacturing PMI

Greece is affected by the sanctions on Russia, but not for too long. The manufacturing PMI drops from 57.8 points in February 2022 to 47.2 in December 2022 (a drop of -10.6 points), after going below 50 in July 2022; however, it quickly comes back to positive territory by February 2024.

The PMI drop during the GFC was -17.8 points; and during Covid was -26.7 points. Greece has, by and large, done reasonably well.

Capacity Utilization

The capacity utilization data also does not show a big effect, except for a very short time — a very short dip in September 2022.

But capacity utilization was severely affected, both in the GFC (-16.3%) and Covid (-6.4%).

Capacity Utilization, %, Greece, 2006–2024

Industrial Production Growth

It is hard to get a clear trend from the industrial production data; some months are good and others bad.

GDP Growth Rate

There is a drop in Greece’s y-o-y GDP growth rate because of the PSC: From 9.1% in Q4/21, the GDP growth rate drops to 1.2% in Q4/23, a drop of -7.9%.

But Greece’s drops during the GFC (-12%) and Covid (-16.6%) were worse.

GDP Growth Rate, %, Y-o-Y, Greece, 2006–2024

Imports and Exports

Greece’s imports and exports indices do not seem to have been affected by any of the crises considered: the GFC, Covid, or the PSC.

Inflation Rate

From 7.2% in February 2022, the y-o-y inflation rate increases to 12.1% in June 2022, a rise of 4.9%.

Inflation Rate, %, Y-o-Y, Greece, 2006–2024

Retail Sales Growth

Retail sales growth in Greece seems to have been badly affected by the sanctions on Russia, probably because of the Eurozone’s recession. From 10.8% in February 2022 and 12.3% in March 2022, the retail sales growth (y-o-y) plummets to -8.7% in March 2023.

Business Confidence Index

The peak drops in the business confidence indices for the GFC, the Covid crisis, and the PSC, for Greece, are -12.1 points, -6.7 points, and -3.8 points, respectively.

Food Inflation

From 7.1% in February 2022, the y-o-y food inflation rate in Greece goes up to 15.5%, a rise of 8.4%.

Food Inflation Rate, %, Y-o-Y, Greece, 2006–2024

Core Inflation

The core inflation rate goes up from 1.2% in February 2023 to 6.7% in March 2023, a 5.5% rise.

Core Inflation, %, Y-o-Y, Greece, 2010–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Greece for the GFC, the Covid pandemic, and the PSC are, respectively, -3.4 points, -4.4 points, and -0.8 points. Grecians have seen so much misery over the last 20 years, but clearly are not so worried about the current crisis.

Finally, we move to the Balkans, to some of Europe’s smallest countries: Croatia and Slovenia.

CROATIA

Industrial Production Growth

Croatia has not done too badly, except for a stretch between November 2022-April 2023.

GDP Growth

The y-o-y GDP growth rate declines from 11.6% in Q4/21 to 1.6% in Q1/23 — a drop of -10%.

The drop during the GFC was -15.3%; and -18.2% during the Covid-19 pandemic.

GDP Growth Rate, %, Y-o-Y, Croatia, 2006–2024

Imports and Exports

Croatia shows no impact of the PSC on imports and exports. For the GFC, the export index went down by -27.6 points, and the import index by -38.6 points. During the Covid-19 pandemic, the export index went down by -25.2 points, and the import index went down by -19.3 points.

Inflation Rate

From 6.3%, the y-o-y inflation rate in Croatia went up to 13.5%, a rise of 7.2%.

Inflation Rate, %, Y-o-Y, Croatia, 2006–2024

Retail Sales Growth

Retails sales growth seems to have been a little affected in late 2022 and early 2023, but by and large has fared much better than in most of Europe.

Food Inflation

Food inflation rose from 10% y-o-y in February 2022 to 19.8% y-o-y in October 2022, a rise of 9.8%.

Food Inflation Rate, %, Y-o-Y, Croatia, 2006–2022

Core Inflation

Core inflation rose from 5.5% y-o-y in February 2022 to 12.5% y-o-y in December 2022, a rise of 7%.

Core Inflation Rate, %, Y-o-Y, Croatia, 2006–2022

SLOVENIA

Capacity Utilization

Capacity utilization declined from 86.6% in Q1/22 to 80.6% in Q1/24 — a decline of -6%.

During the GFC, capacity utilization declined by -17.2%, and during Covid, it declined by -12.7%, so this is somewhat milder.

Capacity Utilization, %, Slovenia, 2006–2024

Industrial Production Growth

Slovenia has not been as fortunate as Croatia, despite similar geography (both are former Yugoslav republics), with an extended period of negative industrial growth from October 2022 until now.

GDP Growth

The y-o-y GDP growth declined from 10% in Q4/21 to -0.2% in Q4/22, a peak drop of -10.2%.

The peak drop in y-o-y GDP growth rate during the GFC was -17.5%; and during the Covid pandemic, -14.3%.

GDP Growth Rate, %, Y-o-Y, Slovenia, 2006–2024

Imports and Exports

The sanctions on Russia seem to have little impact on either the export index or the import index of Slovenia, just as it had no impact on these indices for Croatia.

In the GFC, the export index went down by -33.2 points, and the import index went down by -39.6 points; during the Covid pandemic, the export index went down by -33.2 points, and the import index went down by -34.3 points.

Imports and Exports Indices, Slovenia, 2005–2023

Inflation Rate

From 6.9% in February 2022, the y-o-y inflation rate in Slovenia rises to 11%, a rise of 4.1%.

Inflation Rate, %, Y-o-Y, Slovenia, 2006–2024

Retail Sales Growth

The impact of sanctions on Russia on retail sales growth has been catastrophic. From 12.8% in January 2022, the y-o-y retail sales growth went down to -12.3% in March 2023, and even in January 2024, it is -2.4%.

Business Confidence Index

The peak drops in the business confidence indices for Slovenia for the GFC, the Covid crisis, and the PSC, respectively, are -12.5 points, -6.0 points, and -4.1 points.

Food Inflation

From 6.3% in February 2022, the y-o-y food inflation rate went up to 19.3% in January 2023, a rise of 13%.

Food Inflation Rate, %, Y-o-Y, Slovenia, 2006–2024

Core Inflation

From 5% in February 2022, the y-o-y core inflation rate goes up to 10.1% in January 2023, a rise of 5.1%.

Core Inflation Rate, %, Y-o-Y, Slovenia, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Slovenia for the GFC, the Covid pandemic, and the PSC are, respectively, -6.3 points, -5.5 points, and -2.4 points.

IRELAND

I conclude this appendix of European countries with Ireland, which is not on the continent of Europe, and yet can neither be thought of as continental Europe nor as the UK.

Manufacturing PMI

Manufacturing PMI drops from 59.4 in March 2022 to 47 in July 2023, a drop of -12.4 points.

The long-term data show that the corresponding drop in manufacturing PMI for Ireland during the Covid pandemic was -15.4 points. Data was not available for the GFC.

Industrial Production Growth

Ireland has a reasonably robust economy, but its economy, too, was weighed down in 2023 by its proximity to continental Europe.

GDP Growth

From 14.3%, the y-o-y GDP growth rate for Ireland drops to -8.7% in Q4/23, a drop of -23%.

This can be compared with the drops during the GFC (-18.3%) and Covid (-4.2%). The PSC seems to have hit Ireland hard.

GDP Growth Rate, %, Y-o-Y, Ireland, 2006–2024

Imports and Exports

The exports index for Ireland fell by -11.6 points due to the sanctions against Russia, and the imports index fell by a staggering -55.8 points. In contrast, during the GFC, the exports index fell by -11.3 points, and the imports index fell by -31.7 points; and during Covid, the exports index fell by -15.1 points, and the imports index fell by -29.2 points.

The sanctions against Russia have been a catastrophe for Ireland.

Imports and Exports Indices, Ireland, 2005–2023

Inflation Rate

From 5.6% in February 2022, the y-o-y inflation rate goes up to 9.2% in October 2022, a rise of 3.6%.

Compared to some of the numbers we have seen in the eastern European countries, this does not seem large, but when compared with the historically low inflation values in Ireland, this is shockingly high.

Inflation Rate, %, Y-o-Y, Ireland, 2006–2024

Retail Sales Growth

Retail sales, too, have taken a beating. From 17% in January, the y-o-y retail sales growth rate in Ireland went down as low -8.9% in June 2022, though it must be mentioned that they have recovered and were at a healthy 5% in January 2024.

Business Confidence Index

The peak drops in the business confidence indices for Ireland for the GFC, the Covid crisis, and the PSC, respectively, are -12 points, -7.7 points, and -1.9 points.

Food Inflation

From 3% in February 2022, food inflation in Ireland rose to a historic 13.1% y-o-y, a rise of 10.1%, in February 2023, before coming down.

Food Inflation Rate, %, Y-o-Y, Ireland, 2006–2024

Core Inflation

From 3.7% in February 2022, y-o-y core inflation rose to 7% in June 2023, a rise of 4.3%.

Core Inflation Rate, %, Y-o-Y, Ireland, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for Ireland for the GFC, the Covid pandemic, and the PSC are, respectively, -4.6 points, -3.2 points, and -1.9 points.

Appendix II: Detailed Country-Wise Discussion of Impact of Western Anti-Russia Sanctions on Non-European Western Allies

SOUTH KOREA

Manufacturing PMI

Manufacturing in South Korea starting contracting in July 2022, very much like several European countries, and stayed in contraction territory for all of 2023, moving above 50 only in January 2024.

Industrial Production Growth

This is consistent with the industrial production growth chart, which starts falling in May 2022, finally going negative in October 2022, becoming positive only in September 2023.

GDP Growth

From a value of 4.3% in January 2022, the annual GDP growth rate in South Korea goes down to 0.9% in Q1/23 (March 31, 2023), a drop of -3.4%.

Inflation Rate

The annual inflation rate in South Korea went up from 3.7% in February 2022 to a high of 6.3% in July 2022, a rise of 2.6%, before gradually coming down. Currently it is at 3.1%.

Retail Sales Growth

With such high inflation, it is no surprise that retail sales in South Korea have been spectacularly devastated. From 5.3% (y-o-y) growth in January 2022, retail sales growth went down to as low as -4.7% in August 2023, a -10% drop. And retail sales continue to be in negative territory. The growth was -3.3% y-o-y in January 2023.

Imports and Exports

During the PSC, South Korea’s exports index dropped by -7.3 points, and its imports index dropped by -28.4 points. In comparison, during the GFC, its exports index dropped by -15.9 points, and its imports index dropped by -20.3 points. During the Covid crisis, South Korea’s exports index dropped by -33.8 points, and its imports index dropped by -2.4 points.

Let us look at the imports picture for South Korea in detail, whose economy took a hit after the imposition of sanctions on Russia, to understand why this has happened.

Total Imports of South Korea in 2022, by Category (Source: OEC)

Of South Korea’s $666 billion worth of imports in 2022, $212 billion was for fuels and minerals, as can be seen below. That’s 32% of all imports.

Break-up of South Korea’s Fuels and Minerals Imports in 2022 (Source: OEC)

Let us look where the crude oil and natural gas imports of South Korea come from.

Origins of South Korea’s Crude Oil Imports (Source: OEC)

Clearly, Russia is a minor supplier of crude oil for South Korea, at a mere 2.25% of the import total. Similarly, let us look at the natural gas imports.

Origins of South Korea’s Natural Gas Imports, 2022 (Source: OEC)

Again, Russia is a minor supplier, with only 2.75% of the total natural gas imports.

So, if Russia is a minor supplier of fossil fuels to South Korea, why should the South Korean economy take such a hit after the imposition of sanctions on Russia? The reason has to do mainly with the fact that prices of fossil fuels went up drastically in the world, creating unexpected financial burdens on South Korea’s economy — so that even the fuels it was buying from non-Russian sources became more expensive.

Core Inflation

This is evidenced by a rise in the annual core inflation rate. Prices of oil and gas affect not only the prices of diesel and gasoline (petrol) and aviation fuel, but also the prices of most goods, because these are also basic chemical feedstocks. The figure below shows the annual core inflation rate in South Korea over the past two years.

It can be seen that the core inflation rate went up from 3.3% in February 2022 to 4.8% in January 2023, a rise of 1.5%.

Food Inflation

Adding to the misery of the population are high food inflation rates. Being far away from Europe does not save South Korea from high food inflation rates. These affect the poor disproportionately.

JAPAN

Manufacturing PMI

Japan has a similar story as South Korea, although its manufacturing took a little longer to start contracting. Manufacturing started contracting in Japan in November 2022, and has stayed down, except for one month in between (May 2023).

Industrial Production Growth

This graph is not entirely consistent with Japan’s industrial production growth chart, which is far more gloomy.

This chart shows that industrial production has seen negative growth for most of the last two years, with just a few months of positive growth.

Imports and Exports

During the PSC, Japan’s exports index dropped by a maximum of -5.2 points, whereas its imports index dropped by -8.7 points. In contrast, during the GFC, its exports index dropped by -54.4 points, and its import index dropped by -18.5 points; and during the Covid disaster, its exports index dropped by -25.5 points, and its imports index dropped by -9.5 points.

Again, we can understand Japan’s dependency on Russia, by looking at the imports for Japan in 2022 from the Observatory of Economic Complexity at MIT:

Total Imports for Japan by Category (Source: OEC)

As can be seen, fossil fuels and minerals, of which Russia is an important global supplier, form a very important piece, because Japan is very deficient in them. This can be seen from the figure below.

Fossil Fuel and Mineral Imports for Japan, 2022 (Source: OEC)

So fossil fuels and minerals form 32% of Japan’s total imports, for a total of $258 billion. But Japan is not importing these from Russia, at least not in any significant quantities. To see this, look at the map of crude oil imports for Japan.

Origins of Japan’s Crude Oil Imports, 2022 (Source: OEC)

Clearly, Russia is nowhere in the picture. Let us also look at natural gas.

Origins of Japan’s Natural Gas Imports (Source: OEC)

Russia just supplies 7% of Japan’s total natural gas imports. Clearly, this cannot be the cause of Japan’s economic decline after the imposition of sanctions.

As in the case of South Korea, the reason for the sanctions on Russian energy is that the sanctions on Russian energy removed Russian goods from the markets of those countries that imposed the sanctions.

Inflation Rate

As in the case of South Korea, inflation has been high since the imposition of sanctions on Russia. The next chart shows the annual inflation rate over the last two years.

The annual inflation rate went up from 0.9% in February 2022 to a high of 4.3% in January 2023 and has remained high since. In February 2024, the inflation rate in Japan was 2.8%.

Even the core inflation rate has gone up, as in the case of Korea.

Core Inflation, %, Y-o-Y, Japan, 2022–2024

From 0.6% in February 2022, the core inflation rate rose to 4.2% in January 2023, and it is still high at 2.8%.

Food inflation, as in the case of South Korea, has been very high.

Food Inflation, %, Y-o-Y, Japan, 2022–2024

From 2.8% in February 2022, the annual food inflation rate in Japan rises to 9% in September 2023, and is still high at 4.8% in February 2024.

These are historically high food inflation rates in Japan, traditionally a low inflation country, as can be seen in the figure below.

Food Inflation, %, Y-o-Y, Japan, 2006–2024

These factors have affected all the countries that imposed sanctions on Russia — including Japan and South Korea. Let us move to Canada and see the effects of the sanctions on Canada.

CANADA

Manufacturing PMI

Canada’s manufacturing (PMI) started contracting in August 2022, and has steadily contracted, except for three months at the start of 2023 (Jan, Feb, and Apr 2023).

Industrial Production Growth

A similar trend is seen in Canada’s industrial production growth rate, which has been steadily reducing since the start of sanctions against Russia, and which in August 2023, became negative.

Capacity Utilization

The capacity utilization in Canada has also been dropping since the start of sanctions, dropping from 82.5% in Q2 2022 to 78.8% in Q3 2023.

GDP Growth

From 4.4% y-o-y on January 1, 2022, the annual GDP growth rate has dropped to 0.5% by September 30, 2023 — a drop of -3.9%.

Inflation Rate

The inflation rate in Canada increases from 5.7% in February 2022 to 8.1% in June 2022, and took until February 2023 to go back to the level of February 2023. This is similar to the experience of most European countries.

Even food inflation has hit high levels, as the next chart shows.

Food Inflation Rate, %, Y-o-Y, Canada, 2022–2024

From 6.7% in February 2022, the food inflation rises to 10.3% y-o-y in September 2022, and stays there for a long time before coming down. These are the highest food inflation rates seen in Canada in the last 18 years, as the chart below shows.

Food Inflation Rate, %, Y-o-Y, Canada, 2006–2024

Retail Sales Growth

From 14.2% y-o-y in January 2022 and 8% y-o-y in February 2022, retail sales growth shrunk to -0.7% in June 2023 before recovering to 2.9% in December 2023. In January 2024, growth was again flat at 0.2%. This should not surprise anyone, given the high inflation rates mentioned above.

Imports and Exports

Canada’s imports index dropped by -5.1 points after the imposition of sanctions, but its exports index was not appreciably affected by the PSC. In contrast, during the GFC, Canada’s exports index dropped by -24.1 points, and its imports dropped by -26.1 points. And, during the Covid pandemic, the exports index dropped by -20.8 points, and the imports index dropped by -31.4 points.

Let us now go to the countries of Oceania — Australia and New Zealand — which, though they are thousands of kilometers away from both Europe and the United States, felt compelled to ruin their economies to please them.

AUSTRALIA

Manufacturing PMI

Australia’s industry seems to have been booming at the start of the war. The manufacturing PMI is 55.1 in January 2022, and rises to 58.8 by April 2022 before starting to go down because of the inflation brought on by sanctions. From that high level in April 2022, it slowly decreases, until it breaches the 50 mark in March 2023, and has remained in contraction territory ever since, except for one month (January 2024, where it barely breached 50).

Industrial Production Growth

Australia’s industrial production growth rate does not seem to agree with its PMI trend — it shows that industrial production growth was negative for the first three quarters of 2022, and then becomes positive in 2023. The reason for this divergence is not clear.

Capacity Utilization

The capacity utilization seems to agree with the PMI, because it shows aggressive growth, from 82% in January 2022 to 86% in July 2022, before unsteadily decreasing to 84% in January 2024.

GDP Growth

From 5.4% in January 2022, the annual GDP growth rate slumps to 2.1% by Q2/23, a drop of -3.3%.

Unemployment Rate

The next graph shows the unemployment rate in Australia.

What we see from this figure is consistent with what we saw with the PMI and capacity utilization rates, because in the first part of 2022, both those were increasing. That would suggest that manufacturing was on the upswing until 2023, which would therefore reduce unemployment. The unemployment figure shows a similar trend, with unemployment decreasing from 4.2% in January 2022 to 3.5% in December 2023, after which it starts increasing, going back to 4.1% in January 2024.

Inflation Rate

Australia’s inflation rate shows an increase, caused by the rise in energy prices — from 3.5% in Q4 2021 (Jan 1, 2022) to 7.8% in Q4 2022 (Dec 31, 2022) — a rise of 4.3% — before starting to decrease, and has finally reached 5.4% in Q3 2024 — a period of high inflation for almost 2 years. Despite their distance from Europe, Australia seems to have endured most of the pains of Europe.

This is the highest inflation rate in Australia in the last two decades.

Inflation Rate, %, Y-o-Y, Australia, 2006–2024

As with other countries, core inflation in Australia grew as well.

Core Inflation Rate, %, Y-o-Y, Australia, 2022–2024

From 2.7% in Q4/21, core inflation in Australia grew to 6.8% by Q4/22, a peak rise of 4.1%. This is the highest core inflation seen in Australia in the last 18 years, as the next graph shows.

Core Inflation, %, Y-o-Y, Australia, 2006–2024

Food inflation also grew dramatically in the past two years.

Food Inflation Rate, %, Y-o-Y, Australia, 2022–2024

From 1.9% at the beginning of 2022, the food inflation zooms to 9.2% by December 31, 2022, a rise of 7.3%.

Retail Sales Growth

Not surprisingly, such high inflation rates did not leave much real income in people’s hands, and the result was that retail sales, which initially grew from 9.1% in February 2022 to 19.3% in August 2022, thereafter declined dramatically, to a low of 0.9% in December 2023 — a drop of -18.4%.

Bankruptcies

If there is very little retail sales growth, firms must go bankrupt, and that is exactly what happened in Australia, as the chart below shows.

In January 2022, 263 companies went bankrupt. The number has been rising steadily over the past two years: in February 2024, 968 companies went bankrupt — roughly a CAGR of 92%.

Imports and Exports

Australia’s exports index dropped by -9.5 points, and its imports index dropped by -7.4 points during the Covid pandemic. During the GFC, its exports index dropped by -10.2 points, and its imports index dropped by -23.6 points; and during Covid. In contrast, the PSC does not seem to have affected imports and exports at all.

NEW ZEALAND

The last country among the “West” (and the one that is geographically the furthest to the “East” and the farthest from Europe) that needs to be looked at is New Zealand, which too has tied itself to the fortunes of Europe. The first figure, as always, that we will look at is the PMI.

Manufacturing PMI

Like Australia, New Zealand maintains its PMI above 50 until September 2022, and then it begins to fall below 50, except for two months — January and February 2023. Perhaps because of its greater distance from Europe, it takes the sanctions on Russia longer to hit it.

Industrial Production Growth

New Zealand’s Industrial Production Growth Rate is not as optimistic. It is a picture of utter devastation. It has almost been continuously in negative territory since Q1/22, save for one quarter with 0.9% y-o-y growth and another with 0.1% y-o-y growth. On the negative side, its worst performance was in Q4 2022, with -7.2% growth.

Capacity Utilization

New Zealand’s capacity utilization has declined from 97.1% in Q1 2022 to 87.3% in Q3 2023, a drop of -9.8%.

GDP Growth

Like the PMI, the GDP growth in New Zealand also takes some time before the effects of the sanctionsgd on Russia catch up with it.

From 2.6% on January 1, 2022, the GDP growth rate drops to 0.6% by the end of Q1/22, then goes down further to 0.4% by the end of Q2/22, then rises dramatically to 6.4% by the end of Q3/22 (September 30, 2022), before starting to decline and finally reach a value of -0.6% in Q3/23, a drop of -7%.

Unemployment

New Zealand’s unemployment has been continuously increasing since the start of the sanctions. From 3.2% at the start of the war, it has gone up to 3.6% now, which is consistent with shrinking manufacturing and capacity utilization rate.

Inflation Rate

New Zealand’s inflation rate went up from 5.9% at the beginning of 2022 to 7.3% in Q2 2022 — a rise of 1.4% — and has remained stubbornly high through all of 2022 and 2023, declining to 5.6% in Q3 2023.

This is the highest inflation rate in the last 18 years, including the GFC and Covid periods.

Inflation Rate, %, Y-o-Y, New Zealand, 2006–2022

As with the other countries considered, one of the key reasons why inflation is so high is that core inflation, which excludes food and fuel items (but not the effect of fuels when used as chemical feedstocks or when the cost of transportation has to be accounted for in the end product) has also been stubbornly high:

Core Inflation Rate, %, Y-o-Y, New Zealand, 2022–2024

The core inflation rate in New Zealand rises from 5% at the beginning of 2022 to 7.4% at the end of 2022 — a peak rise of 2.4%, which is very significant, because the highest level of the core inflation rate in the last 18 years before this high level of 7.4% was in Q2/2011, during the GFC, when core inflation went up to 4.6%.

Core Inflation Rate, %, Y-o-Y, New Zealand, 2006–2024

Food inflation has also been high, adding to the woes of poor people.

Food Inflation Rate, %, Y-o-Y, New Zealand, 2022–2024

The food inflation rate in New Zealand rises from 6.8% in February 2022 to 12.5% in April 2023, a peak rise of 5.7%. There has been a period of high food inflation for nearly two years. The last time inflation was close to being this high was in September 2008, when food inflation touched 10.8%.

Food Inflation Rate, %, Y-o-Y, New Zealand, 2006–2024

Retail Sales Growth

Not surprisingly, with such high rates of inflation, retail sales growth has taken a hit.

From 4.4% on January 1, 2022, retail sales growth plummeted to -4.1% in Q1/23 (March 31, 2023) — a drop of -8.5% — and has remained at that level ever since.

Imports and Exports

During the PSC, exports in New Zealand did not seem to be significantly affected; but imports went down by -13.9 points. In contrast, during the GFC, exports went down by -21.6 points, and imports went down by -29.6 points; and during the Covid pandemic, exports went down by -2.6 points, and imports went down by -18.2 points.

THE UNITED STATES OF AMERICA

Finally, one should ask what the effect of the sanctions on Russia has been on the mastermind behind all the sanctions, the USA.

Manufacturing PMI

Manufacturing in the USA started contracting in November 2022 and stayed low, going up slightly above 50 only once in April 2023 before recovering in 2024. From 57.3 points in February 2022, the PMI initially rises to 59.2 by April 2022, before starting to drastically drop to 46.2 in December 2022, a peak drop of -13 points. Since then, it has been mostly below 50, recovering only in 2024.

It is also illustrative to look at the long-term PMI in the US to understand the maximum drops in manufacturing PMI in past crises.

Manufacturing PMI for the USA, 2012–2024

Data for the GFC period are not available,but it can be seen that the maximum drop during the Covid-19 pandemic is -16.5 points.

Capacity Utilization

Capacity utilization in the US was not initially affected by the war and the sanctions on Russia. From 80% in Feb/22, capacity utilization rises to 80.7% in April, and stays high until September, when it is 80.8%. Since then, though, there has been a steady drop, reaching a minimum in January 2024, of 77.9% — a maximum drop of -2.9%.

The long-term plot of the capacity utilization in the US reveals that, during the GFC, there was a drop of -14.5%; and during the Covid Pandemic, there was a drop of -13.2%.

Industrial Production Growth

Industrial production growth has greatly declined in the US since the start of sanctions against Russia. In February 2022, it was 6.6% y-o-y. From there on, there has been a steady decline to -0.8% y-o-y in October 2023 — a drop of -7.4% in just a year and half. Industrial production in the US is still declining — in January 2024, it was -0.7% y-o-y, and in February 2024, it was -0.3% y-o-y. When you consider that in January 2023, the growth was 1.5% y-o-y, and in February 2023, it was barely short of 1% y-o-y, this tells you that American industrial production is in dire straits.

GDP Growth

US y-o-y GDP growth rate has also gone down, correspondingly. From 5.4% y-o-y before the start of the war (and the sanctions) on January 1, 2022 (Q4/2021), US annual GDP growth rate plummeted to 0.7% in Q4/2022 (December 31, 2022), before coming back up to 3% in Q4/2023 (January 1, 2024). So the peak drop due to the sanctions is -4.7%.

We can compare see the long-term trend below.

GDP Growth Rate, %, Y-o-Y, USA, 2006–2024

During the GFC, the y-o-y GDP growth rate drops from 2.4% in Q3/07 to -4% in Q2/09, a drop of -6.4%. During the Covid-19 pandemic, the GDP growth rate drops from 3.2% in Q4/19 to -7.5% in Q2/20, a drop of -10.7%. So the PSC GDP growth rate drop of -4.7% is in the ballpark.

Imports and Exports

The import index falls by -7.6 points during the PSC, whereas the export index does not seem to be affected much by the sanctions. This makes logical sense, because by sanctioning Russia, Europe needed another source to import products from, and that source became the US, especially for petroleum products.

In comparison, during the GFC, the maximum export index dip was -27.6 points, while the maximum import index dip was -27.8 points; and during the Covid-19 pandemic, the maximum export index dip was -41 points, while the maximum import index dip was -15.9 points.

Imports and Exports Indices, USA, 2005–2023

Inflation Rate

From 7.9% in February 2022, the y-o-y inflation rate went up to 9.1% in June 2022, a rise of 1.2%.

The long-term picture shows that this inflation rate (9.1%) is higher than has been seen any time in the last 18 years. The highest it went up was during the GFC, when the inflation rate comes close to 6%.

Inflation Rate, %, Y-o-Y, USA, 2006–2024

Retail Sales Growth

Not surprisingly, such a high inflation rate has adversely affected retail sales. From 17.8% y-o-y retail sales growth in February 2022, retail sales growth have dropped to 0.2% in January 2024, a drop of 17.6%.

Bankruptcies

With such headwinds, it is not surprising that quarterly bankruptcies have gone up from 13,200 bankruptcies per quarter in Q1/22 (March 31, 2022) to 15,700 bankruptcies in Q2/23 (June 30, 2023), a CAGR growth of 14.9%.

Business Confidence Index

The peak drops in the composite business confidence indices for the USA for the GFC, the Covid pandemic, and the PSC are, respectively, -3.6 points, -1.0 point, and -2.3 points, respectively. So the PSC has had a greater impact on business confidence than even the pandemic.

Food Inflation

Food inflation is extremely important because of the outsized and disproportionate impact it has on the poor. The price of natural gas and crude oil have a direct relation to food inflation, because natural gas is needed for fertilizer, and food needs to be transported using diesel and petrol (gasoline). From a y-o-y rate of 7.9% in February 2022, the food inflation rate went up to 11.4%, a rise of 3.5%.

These are unprecedented levels, as the long-term chart below shows.

Food Inflation Rate, %, Y-o-Y, USA, 2006–2024

Core Inflation

When one looks at the core inflation rate between 2022–2024, it is easy to conclude that, perhaps, the core inflation rate was not at all affected by the pandemic: from 6.4% y-o-y, the core inflation rate goes up to 6.6% by September 2022, before gradually reducing.

But when you see the long-term core inflation rate from 2006 onwards, as the chart below shows, what we see is that the sanctions against Russia sustain the already high core inflation rate resulting from the post-Covid period.

Core Inflation Rate, %, Y-o-Y, USA, 2006–2024

Consumer Confidence Index

The peak drops in the composite consumer confidence indices for the USA for the GFC, the Covid pandemic, and the PSC are, respectively, -4.2 points, -3.0 points, and -1.0 points.

US Treasury Bonds Holdings and Yields

Treasury bonds, as mentioned earlier, indicate how safe the rest of the world feels in parking its wealth in a country’s assets. The idea of investing surpluses in treasury bonds is not to make a lot of money on capital appreciation, but to keep wealth safe. Thus, a low interest rate means that the country is seen as a safe place to park surplus money; a high rate means that countries are skittish about keeping their money in the treasury funds, and so the country offering treasury funds needs to offer higher interest rates to offset the risks.

The US had long been seen as a safe place to store other countries wealth. This provides the US with a lot of extra funds and allows it to get away with expenses on wars and the like. What unquestionably helps the US in this process is that the US dollar is the main medium of trade exchange in the world. So other countries know that, if they want to withdraw their money and get dollars from the US on surrendering their bonds, they can pay their bills with it. So the strength of the US dollar as the world’s reserve currency has a lot to do with the US being able to attract trillions of dollars of investment in the US’ Treasury’s bonds — and vice versa. People invest surplus funds in US Treasury bonds because they feel this is an economy which will never collapse and which will always be liquid, so that they can withdraw their funds at a time of need and be able to sell the bonds. The next figure shows how the world has parked more and more money in the US over the years because of the perceived safety of the US Treasury. From $12.4 billion in 1970 to $130 billion in 1980 to $487 billion in 1990 to $1 trillion in 2000 to $4.4 trillion in 2010 to $7 trillion in 2020, the total foreign debt currently stands at almost $8 trillion at the time of writing. These figures are unadjusted for inflation, but still they give one an idea of the importance of foreign deposits in the US.

Total Foreign Debt Held by the US Treasury, 1970–2024

We need to understand how much $8 trillion is, because it is such a large number. Two numbers help us understand this — the Gross Domestic Product (GDP) of the US, and the total National Debt of the US. The National Debt of the US includes the foreign debt as well as the debt that the US government incurs by borrowing from its own people. Much as the US government issues bonds to foreign governments, it also issues bonds and notes to US financial institutions and borrows money for its own needs — to do the business of government. In an ideal world, the government would receive a large amount of money in taxes and use that to build roads and highways as well as provide welfare schemes such as social security and Medicare, without needing to borrow money. But, as the following chart shows, the US has not run a balanced budget in decades. It has run the government for decades on deficits. Essentially, it has borrowed from the people to pay for the things it does for the people — whether that be social security or Medicare or a welfare program for inner city kids or even a tax cut for industries to act as a stimulant to the economy or a handout for tough times like the Covid pandemic or federal aid for disasters like Hurricane Katrina.

Federal Deficits of the US Government. Note that Values in Recent Years Have Mostly Been Negative

Every monthly and quarterly deficit gets added to, and surpluses get subtracted from, the national debt. It is estimated that President Trump’s tax cuts added $2 trillion to the National Debt. The total cost of federal relief efforts to address the Covid pandemic was nearly $4 trillion. This included the CARES Act, the Response and Relief Act, and other assistance. All this added to the national debt.

Increase of the National Debt Under President Trump

The figure below, obtained from the Federal Reserve Bank of St. Louis, shows the National Debt from 1970 to today.

Total National Debt of the US, 1970–2024 (Source: Federal Reserve Bank of St. Louis)

It is important to understand that the US treasury acts like a bank, and that a bond or a treasury note is a promise to pay back. The national debt must be paid back eventually. The treasury gives investors who buy bonds a fixed interest rate for their deposits. In return, the US now is able to use this money in whatever way they see fit, as long as they regularly pay their interest payments to the creditors.

Some comparisons might help in understanding how much the current foreign debt of $8 trillion really is.

In Q1/1970, the total foreign holdings of US debt amounted to $12.7 billion, and the total national debt was $371 billion, so the foreign debt held by the US was 3.4% of the total. Fast forward to Q1/1990, and the numbers are: foreign debt was $445 billion, whereas the total national debt was $3 trillion (these are all in current dollars, so accounting for inflation is not necessary for percentages) — nearly 15% of the total. In Q1/2000, the foreign debt was $1.08 trillion, whereas the national debt was $5.8 trillion — 18.6% of the total. In Q1/2010, the foreign debt was $3.88 trillion, whereas the total national debt was $12.8 trillion — 30.3% of the total. And today, in 2024, the foreign debt is $8.06 trillion, whereas the national debt is $34 trillion — 23.7% of the total. So the foreign debt today is roughly a fourth of the national debt.

The other way of understanding debt is by normalizing it with the GDP. Since both are obtained in the same year, no inflation-normalization is necessary. This is done by using a metric known as the debt-to-GDP ratio. The following chart shows the US debt-to-GDP ratio from 2001–2024.

The debt-to-GDP ratio has risen alarmingly in the USA — from 54.8% in 2001 to 90.9% in 2010 to 107.2% in 2019. Then, in 2020, Covid hit, and the government had to spend huge amounts of money, which took the debt-to-GDP ratio to 128.4% of GDP. The US Congress has had a debt ceiling for a long time in order to prevent the debt from becoming too high. But in June 2023, the US Government and Congress approved a deal to raise the debt ceiling in order to provide funding to Ukraine. As a result, the national debt has now increased from the ceiling value of $31.4 trillion to $34 trillion. That gives a debt-to-GDP ratio of 131.5%.

This is bad economics. The World Bank had done a study of the effects of high debt on an economy. They concluded that once the debt had crossed a “tipping point” of 77% of GDP, the GDP growth rate takes a hit of 0.017% for each percentage point that the debt-to-GDP ratio is above 77%. Therefore, for a debt-to-GDP ratio of 131.5, the US is taking a hit of 0.9% on its GDP growth rate, every year.

Currently the US GDP is growing at 3% y-o-y. This means that the real rate of growth is only 2.1%, not 3%, because of the US’s huge debt.

If you take on debt, you have to pay interest on it. How much interest is the US paying on its huge debt?

The Congressional Budget Office projects that the US will be paying $870 billion in interest on the accumulated national debt in 2024 (and about a fourth of that — $206 billion — to foreign creditors.) They project that this will rise to $951 billion in 2025 and to $1.6 trillion in 2034. The US will be paying a cumulative $12.4 trillion in interest over the next decade.

Projected Debt Service Costs (Interest Costs) To Be Paid by the US in the Next Decade

In a regular bank, the money that depositors put in is used in loans to businesses which can then hopefully multiply the money several-fold, so that the bank, which charges a higher rate of interest on the loans it gives to businesses than it pays to the depositors, makes a tidy profit. This is the basis of banking.

But what has the US been using the money for over the last 30 years, since the world hit a unipolar moment, with the vanishing of the second “pole” of power, the Soviet Union? The US has been waging war around the globe with a never-before seen intensity, now that there was nobody to challenge it. In September 2001, the Twin Towers in New York City were attacked by Islamic terrorists. In response, the US government under President George W. Bush launched a never-ending “war on terror” — in Afghanistan, Iraq, Somalia, and various other places. The “Costs of War” project at Brown University in the US has calculated how much the “War on Terror” cost the US between 2001 and 2022, and came to a figure of $8 trillion. Now, when you think about it, that is the same number which is the total foreign debt held by the US. In effect, foreign countries have paid for the “American War on Terror.”

Brown University Estimate of US Cost of the “War on Terror”

Currently, the US is engaged in a proxy war with Russia in Ukraine; it is involved in a war in Palestine by actively arming Israel; and it is preparing for a war with Iran as well as a war with China in the South China Sea. The US just passed a bill giving $61 billion towards war efforts in Ukraine, $16 billion towards war efforts in Gaza, $9 billion towards war efforts in the South China Sea and Taiwan; and this comes after it has already spent more than $100 billion in military assistance to Ukraine. It is spending huge amounts on a submarine deal with the UK and Australia. Where does it get the money for all this? By borrowing. Both from its own people and from foreigners.

So the US is increasingly making its foreign creditors uneasy about its perceived ability to manage money. Given that the US GDP is $26.6 trillion, the fact that it is paying nearly a trillion dollars each year in debt service, and is going to pay $12 trillion in interest costs, makes one wonder if the US is eventually going to resort to borrow more money from its citizens just to pay the interest — what is called a debt trap. If that happens, how will the US repay its foreign creditors the debt it owes them in the form of Treasury bonds and notes?

As if the perceived mismanagement of money by the US government was not bad enough, the perceived “safety” of other countries’ funds in US Treasury bonds has taken a huge hit after the US slapped sanctions on Russia, froze its treasury bonds, and banned it from using SWIFT (essentially rendering $300 billion of Russia’s wealth worthless.) This has made other countries wary of using US Treasury bonds, because now they know that if they anger the US, the US might weaponize the bonds and deprive them of their wealth.

Treasury bond yields measure the perceived desirability of a nation as a storehouse of other countries’ wealth. A low yield (interest rate) implies that the recipient country is highly trustworthy as an investment destination; a high yield implies that the recipient country is a risky destination. With that understood, let us see how the US 10-year T-bonds have fared recently.

From a yield of 2% just before the start of the Ukraine war, the yield went up to 4% by September 2022. A lot of this would have doubtless been because of the way in which the US froze Russian assets, which would have caused a loss of confidence among other countries in the USA. American actions after the invasion of Ukraine would have convinced many countries that their assets are not safe in the US. This will have long-lasting ramifications for the US long after the conflict in Ukraine is over.

What happened here? What happened is that the whole world got spooked by the US action of seizing Russian funds. To encourage them to continue buying US treasury bonds, the US Federal Reserve Bank raised the “yield,” that is, the interest that the US would give foreign governments for parking their funds in the US from 2% to 4%.

Is this theory correct? Let us look, first, at the total holdings of US treasury funds, in the graph below.

Total Foreign Holdings of US Treasury Bonds, 2022–2024

It can be seen that the theory appears to be correct: the world lost confidence in US Treasury bonds after the sanctions on Russia. So, by August-September 2022, the US Federal Reserve Bank raised the interest rate on US T-Bonds to double its value at the start of the year, and in response, countries started buying bonds again.

Let us look closely at some major holders of US T-Bonds. We start with Japan, the biggest holder of US T-Bonds.

Holdings of US Treasury Bonds by Japan, 2022–2024

It can be seen that Japan was selling off its T-Bonds until the rate increase in August 2022, and then it started buying again, but it has been more cautious now — its overall holdings are still lower than what it had before the war. Since the start of the sanctions, Japan has reduced its holdings of US treasuries by around 10%, or $132 billion.

The US has been in a very contentious relationship with China since the Obama administration. Things got much worse under Trump when a full-blown trade war actually occurred. So the Chinese have been worried about the US weaponizing T-Bonds. So they started selling after the start of the war in Ukraine. After the August rate increase, there was a slight change in direction in January 2023, but Washington’s consistent hostility towards China has ensured a net reduction in holdings.

Holdings of US Treasuries by China, 2022–2024

China has been wary about being too connected with the US for quite some time now, and has been divesting its holdings in US Treasuries and instead buying gold. This can be seen from the long-term chart of China’s US Treasuries holdings:

China’s Long-Term Holdings of US Treasuries

It can be seen that, from $1.3 trillion in 2014, China’s holdings have nearly halved to today’s $775 billion. This is the direct result of the US’ hostile policy towards China. It can be seen that the accelerated sell-off started when Trump took office in 2016, when he raised the pitch of his anti-China rhetoric, and the pace has further quickened since the Ukraine war.

Since the start of the sanctions against Russia in 2022, China has divested 25% of its holdings, or $259 billion.

These are significant outflows, because the US would find these funds very useful to prosecute more war. Giving those tens of billions of dollars to Israel and Ukraine and Taiwan becomes that much easier when foreign countries deposit hundreds of billions of dollars with the US.

However, to counter the major outflows of mainland China (just discussed) and Hong Kong, among others, the US appears to have successfully arm-twisted its vassals, the European nations, into buying more US Treasuries.

Here’ s the UK, whose holdings grew by $90.1 billion, for a 14.8% increase.

Holdings of US Treasury Bonds, The UK, 2022–2024

Here’s France, which grew by $51.1 billion, or 21.9%.

Holdings of US Treasury Bonds by France, 2022–2024

The same pattern of holdings initially going down in 2022 and then increasing after the US increased the yield by August 2022 to attract more investment is seen here. Note that while the US is succeeding here in getting money in the short term, it is going to end up paying more in interest in the long term, because it has had to increase the yield to keep the countries from divesting their bonds. So, in the long term, this is going to end up being very costly for Americans.

Here’s Canada, which added $136.2 billion (an increase of 62.6% in its holdings relative to the start of 2022).

Holdings of US Treasury Bonds by Canada, 2022–2024

Here’s Belgium, which added %77 billion (an increase of 31.7%).

Holding of US Treasuries by Belgium, 2022–2024

Clearly, Belgium took a little longer to be spooked by the American theft of Russian holdings, and it took the US a little longer to convince them to start buying again.

Here’s Germany, which added $6.5 billion (an increase of 7.7% over the pre-war levels).

Holdings of US Treasuries by Germany, 2022–2024

Norway registered an increase of $22.8 billion (19.7%):

Holdings of US Treasuries by Norway, 2022–2024

Among the BRICS countries, Brazil registers a decrease of $10.5 billion, or 4.4% of their holdings:

Holdings of US Treasuries by Brazil, 2022–2024

But India registers an increase of $36.1 billion (an 18.2% increase):

Holdings of US Treasury Bonds, India, 2022–2024

One can see a dynamic choropleth map of the major holders of US foreign debt, below.

The Global North/Global South divide is quite clear. As the US continues to polarize the world, more countries will join China and Brazil in pulling out their funds from the US banks, because in effect, they become the funders for the US to prosecute more war. And war is not a good investment.

One of the oft-talked about topics in connection with foreign Treasury holdings is de-dollarization. There is a popular perception that because the dollar is the world’s reserve currency, the US need not worry about debt. This is simply not true, because if it were true, the US would simply have paid off all its foreign and domestic debt by printing more money. After all, as already shown, the US is annually paying close to $1 trillion in interest for the debt it owes. Why not print the money and solve the problem? The reality is that if the US prints that much money, the excess supply of dollars in the world would lead to hyperinflation and make the dollar worthless.

This is not to say that the reserve currency status of the US dollar is not useful to America. It is this status that has resulted in foreign governments depositing $8 trillion of their savings in America for safekeeping. That is a huge fund corpus for the US government to draw upon. It can rebuild homes, highways, power plants, bridges, water treatment plants, schools, inner city neighborhoods, and the like with this money. But it chooses to use that money for war. That in itself is a worrisome consideration if you are a foreign government looking to park their surplus funds — after all, if we select a mutual fund to deposit our surplus money, we check what it invests in with our money. But worse still is the idea that if you somehow offend the US, it can seize your money, as it did with Russia. Imagine if a mutual fund house decided that it would consfiscate your deposits because you voiced opinions or did something that they did not approve of. That is precisely what the US did with Russia, and they have paid a price for it, by increasing the interest they must pay for that greater risk. That extra outflow will mean Americans will not get some of their spending priorities from the government. Many Americans do not realize that it may be optional for a government to spend on after-school basketball programs, but it is not optional to repay debt or pay interest on debt — if you fail to do that, you are a defaulter, and that has serious ramifications.

So increasing national debt (and increasing foreign debt) reduces the funds available to Americans. And once foreigners start pulling their money out of the US Treasury, the US will not have that surplus money available — both for war as well as for domestic growth. And, after what the US did to Russia, the rest of the world (excepting close American vassals, as shown above) will pull their funds out of America, and choose a different medium of exchange — the phenomenon known as de-dollarization.

How Europe Invited Its Economic Apocalypse By Sanctioning Russia

Abstract

Table of Contents

INTRODUCTION

EUROPE’S COPING STRATEGIES

WHY THERE IS A CRISIS TODAY

CHARTING THE PROGRESS OF THE ECONOMIC CRISIS

Purchasing Managers Index (PMI)

Capacity Utilization

Industrial Production

GDP Growth Rate

Imports and Exports

Unemployment

Inflation

Composite Business Confidence Index

Composite Consumer Confidence Index

THE EFFECT OF ANTI-RUSSIA SANCTIONS ON EUROPE

Manufacturing PMI

Industrial Production Capacity Utilization

GDP Growth Rate

Imports and Exports

Inflation

Retail Sales Growth

Housing Sector

Food Inflation

Core Inflation

The Impact on Industry: Chemicals, Construction, Metals

Business Confidence Index

Bankruptcies

Treasury Bonds Yield

Consumer Confidence Index

THE IMPACT OF THE SANCTIONS ON RUSSIA

ANALYSIS OF SANCTIONS IMPOSED BY EUROPE ON RUSSIA

European Nations’ Interdependence

WHY DID THE SANCTIONS FAIL TO HURT RUSSIA AS EXPECTED?

Exports to Germany

Exports to France

Exports to the United Kingdom

Exports to Italy

Exports to China

Exports to India

Exports to Turkey

Exports to Egypt

Russian Imports from Germany

Russian Imports from France

Russian Imports from the United Kingdom

Russian Imports from Italy

Russian Imports from China

CONCLUDING THOUGHTS

Appendix I: Detailed Country-Wise Discussion of Impact of Western Anti-Russia Sanctions on European Nations

GERMANY

Manufacturing PMI

Capacity Utilization

Industrial Production Growth

GDP Growth Rate

Unemployment Rate

Imports and Exports

Inflation

The Housing Sector

Retail Sales Growth

Bankruptcies

Business Confidence Index

Food Inflation

Core Inflation Rate

Consumer Confidence Index

FRANCE

Manufacturing PMI

Capacity Utilization

Industrial Production Growth

GDP Growth Rate

Imports and Exports

Unemployment

Inflation

Retail Sales Growth

Bankruptcies

Business Confidence Index

Food Inflation

Core Inflation Rate

Consumer Confidence Index

THE UNITED KINGDOM