Russia is ready to cut trade with the EU even more

RUSSIA ECONOMICS - In Brief 27 Apr 2022 by Alexander Kudrin

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As Russia announced that the supply of gas to Poland and Bulgaria stopped, it looks as though the Russian authorities are ready to cut foreign trade with the EU even more as the country no longer needs that much euro liquidity. The euro is seen as a second-tier currency in Russia, given that the EU banned exports of many products to Russia, and Russians are no longer able to travel to Europe as they used to in the past. The euro is also seen as a risky currency as savings in euros can be easily blocked and even confiscated. Hence Russia’s preference is getting payments in rubles instead of largely useless euros.Leaving aside the political debate on the combined mechanism that the Russian authorities suggested for the clearance of the euro-ruble payments for gas, it should be noted that Russia has a huge trade surplus with the EU. In 2021 its exports reached $188.1bn while imports accounted for $93.9bn, i.e., about a half of exports to the region. Even in 2020, when the energy prices were low, Russia’s trade surplus with the EU was impressive – around $35.0 bn. It looks as though Russia will be happy to face legal disputes with ”unfriendly” customers and even pay compensation if it loses in courts but these costs probably look lower than risking that savings in euros could be confiscated.The most negative short-term effect of such a policy is the recent appreciation of the ruble which needs to be lower to keep Russia’s non-energy exports to “friendly” countries competitive, especially as amid Russia’s accelerated inflation the ruble's real effective exchange rate depreciated only slightly in 1Q22 (by 2.4%) as it was strongly up in January and February but shortly fell i...