Decoupling from Russia

This paper analyses the economic implications for the European Union (EU) of the Russian invasion of Ukraine, and of the following developments. It illustrates the challenges faced by the European economy at the moment of the invasion and the massive, on-going adjustment since then. The paper starts with a comprehensive description of the structural exposures and dependencies of the EU, first at macroeconomic and then at product level. It then uses high-frequency customs data to track how such exposures and dependencies developed in recent months and how the economy is trying to adjust. At the moment of the invasion, the EU was highly exposed to the import of Russian commodities, notably fossil fuels and critical raw materials, but it has gradually managed to reduce this exposure in the course of 2022. We document a sizeable reduction of EU exports to Russia, due to export restrictions, but at the same time, since imports of energy fossil fuels and critical raw materials were less elastic to prices, and prices for these goods have increased, the value of EU imports from Russia has increased. This has led to the EU accumulating an additional bilateral trade deficit vis-à- vis Russia of roughly €67bn in 2022, compared with the same period in 2021. Such additional trade surplus for Russia corresponds to roughly 3.7% of its GDP and is likely to be one of the driving factors of the strengthening of its currency, the rouble. Nevertheless, in the most recent months, the EU has managed to stop the accumulation of this trade deficit, by reducing imports. The EU was dependent on Russia for a number of critical commodities, including energy products. For the majority of these key industrial inputs, imports from Russia have been falling significantly in the course of the year, signalling a reconfiguration of supply chains in favour of alternative sources.