Although it is understandable whose interest it is to make European citizens doubt the value of EU sanctions against Russia, which attacked Ukraine, both high-ranking officials and journalists often succumb to the narrative imposed by Russian propaganda.
“How will the sanctions affect your country’s economy?” I have been asked this question many times. And the answer is one – it is not the sanctions that affect the economy, but Putin’s war. The same holds for Lithuania, and the EU as a whole.
The impact of the implementation of the sanctions themselves would be quite limited. In the Lithuanian case, most affected would be national railway and seaport companies as well as companies belonging to sanctioned oligarchs. However, the global impact of the war on economies comes primarily through chaos in the energy sector and the collapse of established policy order, aimed at maximising economic benefits.
Record inflation is observed throughout the EU, which has particularly sharply affected the countries of our region: Estonia, Latvia, Poland and Lithuania. Many countries are preparing inflation mitigation packages in an effort to protect the welfare of citizens. Lithuania is no exception. In response to rapidly rising prices, we introduced a EUR 2.26 billion package for mitigating the consequences of inflation and strengthening energy independence, which in its relative scope (as share of GDP) is the largest in the entire EU.
However, such a sharp increase in prices did not happen by itself. The most prominent element in the inflation composition is energy prices. Utilising Europe’s energy dependence on Russia, Putin turned gas into the most powerful economic weapon. So far, Russia’s Gazprom has already reduced or stopped gas supplies to 12 countries.
This supply curtailment was carried out even before the invasion of Ukraine, apparently in preparation for the war in advance. As a result of such Russian actions, the price of next-day gas transactions at the Dutch TTF trading point in December 2021 reached, it seemed, a record EUR 180 per MWh, when it was only about EUR 19 per MWh about a year earlier. Currently the prices have been rising again and are around EUR 200 per MWh. Such a jump in gas prices inevitably ripples through all product groups, as companies transfer the increased costs to the prices of goods and services.
Although the EU has ambitions to refuse or at least strongly limit the purchase of gas and oil from the aggressor, thus reducing the income of the Russian budget and making it harder for the regime to wage war against Ukraine, at least for now this tactical move is being won by Putin. According to the International Energy Agency (IEA), in the period since the invasion, Moscow has increased its regular income from gas and oil sales to the extent that the increase is three times higher than the income from gas sales to Europe during the heating season. This allows the regime to continue restriction of supplies to Europe that leads to social tensions in the West – tensions that Putin hopes will change the policy direction of elected officials.
Therefore, the only right strategy – to cut the energy links between the EU and Russia, securing alternative energy sources and suppliers – seems like a difficult obstacle to overcome. On the way to the continent’s energy independence, a long cold winter awaits, accompanied by extremely high prices of goods and services and the threat of stagflation – combination of economic downturn and persistently high prices.
If Putin decided to press European politicians with maximum power, he would turn off the gas completely. In this case, the problem of distribution of limited gas resources would arise. The European Commission is doing its homework – a plan on how to reduce gas consumption by at least 15% in the months of August 2022 – March 2023 was proposed and agreed upon. The available gas storages are also being actively replenished. However, once Moscow fully turns off the faucet, these solutions may not be enough. If gas were to be restricted to the industry of Western Europe, especially Germany, there would be a secondary effect on countries that do not have direct energy purchases from Russia. The International Monetary Fund projects that the economies of more dependent countries (such as Hungary, Slovakia, and the Czech Republic) would be more affected, but the negative impact on gross domestic product would be felt across the board.
However, any concessions to Russia by dropping sanctions or reducing aid to Ukraine would be very short-sighted. Despite the complex economic challenges, the concessions would legitimise Russia’s energy blackmail policy and return us to the Cold War zones of influence, where in “its” backyard, Russia manages as it likes, and the freedom of self-determination of nations is just an illusion.
By serving as an example, Lithuania has thus far demonstrated that it is feasible to break free from Russian energy blackmail if one takes deliberate action. It was made possible on 22 May to become the first EU country to stop importing Russian gas, oil, and electricity thanks to the Independence liquefied natural gas terminal, constructed gas and electricity connections with neighbouring countries and the oil supply ceasing to pass through the Druzhba oil pipeline, which Russia has been “under-repair” since 2006.
Russia has perpetuated the inaccurate notion that Lithuania is insecure without Russian energy since the start of the war in Ukraine. Recent energy cut-off choices demonstrate that the Russian message has been completely false and is just a part of the broader fake news narrative that the Russian regime spreads in the context of its war of aggression against Ukraine.
However, Lithuania will achieve complete energy independence only when it successfully and fully implements synchronisation with the Western European energy grids, secures its electricity needs through local green energy production and becomes an electricity exporting country. Therefore, the next steps in our plan include steps to enable generating over 90% electricity from renewable energy resources by 2030. This would allow us to stop importing electricity and be less dependent on international market fluctuations. The achievement of these goals is partly enabled by EU-level priorities, such as the green agreement, and allocated resources, which must be purposefully and efficiently invested. The green way is the only sustainable way forward to enhance the EU’s energy resilience.
Europe needs to realise the damage of the current dependence and undertake the rapid implementation of ambitious energy independence projects. Without betraying the people of Ukraine and the values of the entire democratic world, after surviving the cold Russian winter, a more peaceful and safer spring of the European continent will await.
This war will inevitably affect the broader international trade framework, and there will be a reorientation towards supply chains based in more predictable, democratic countries. I believe that new opportunities will open up for Lithuania by participating in such trust-based supply chains. Being on the right side of the world and history, together with Ukraine, is vital for us. And it should be vital for Europe as a whole – despite the short-term challenges that we are now facing.
