EU sanctions against Russia strangle European economy slowly but surely

The German economy, for the first time since 2012, dropped by 0.2 percent in the second quarter, resulting in the absence of GDP growth in the eurozone. The Ukrainian crisis and the trade war with Russia have played a significant role in the setback, which casts doubts on the plans to restore the growth in the second six months of the current year.

Last year, the German economy rescued the eurozone from the longest recession. In the first quarter of this year, German GDP grew by 0.7% (revised from 0.8%). German statistical office Destatis said that one of the reasons for the decline in economy in the second quarter was the previous period, which was a positive one due to warm winter. Another factor was the rapid growth of imports.

Previously, Deutsche Bank analysts noted that the geopolitical crisis in Ukraine and strained relations with Russia would have a knock-on effect on the German economy as well. German exports are particularly sensitive to the weakness of the Russian economy. The decline of Russia's GDP by one percentage point was historically reflected in the reduction of exports from Germany to Russia by 3.5 percentage points, economists of the bank said.

Unpleasant economic news came from France on Thursday. The economy of the country has not grown vs. the previous quarter; the growth did not even reach even the modest forecast of 0.1 percent.

The third largest economy in the eurozone - Italy - went back to recession at the beginning of August. Italian GDP for the second quarter of 2014 decreased by 0.2 percent and for the first quarter - by 0.1 percent.

All this could not but affect the dynamics of the growth of the eurozone economy on the whole. Eurostat data released today show that GDP of the currency bloc in the second quarter has not grown compared to the first quarter. In terms of annual growth, this is an increase of 0.2% compared with the rate of 0.8% in the first quarter. At the same time, the rise in consumer prices in the eurozone over the past three months reached the lowest rate in the past five years. The inflation rate in 18 countries of the currency bloc was only 0.4 percent, which marked the lowest level since October 2005. This again poses the question for the European Central Bank about the need to stimulate the European economy to avoid the threat of deflation.

The recovery of the eurozone was too fragile to withstand external shocks, economist at ING, Peter Vanden Hut, told The Wall Street Journal. Today, it is unlikely that the economic growth will reach 1% this year. According to the economist, high growth rates could be expected in the second half of the year, if it was not for geopolitical tensions. Vanden Hut believes that this factor continues to have a negative impact on business sentiment and undermines domestic economy in the eurozone.

The confrontation with Russia affected the countries of Eastern Europe most, particularly Poland.

Poland's GDP in the second quarter increased by only 0.6% compared with the previous quarter, which was almost twice lower than in January-March (1.1%).

The economy of the Czech Republic has not grown despite forecasts of 0.2% GDP growth, slowing from 0.4% in the previous quarter. In Hungary, the growth declined to 0.8% from 1.1. However, in the case of Hungary, the growth surpassed the consensus forecast of 0.7%.

Meanwhile, under the conditions of confrontation with the West, Russia will reorient its oil supplies. Russian oil exports to Asian countries have reached historic highs and will continue to grow, The Wall Street Journal wrote.

According to the publication, Asia accounted for about 30 percent of all oil supplies from Russia this year, or the average of 1.2 million barrels a day, which was a record indicator, ITAR-TASS reported.

In 2012, Russian oil exports to Asia amounted to only about 20 percent of the total volume of shipments.

Deliveries to Europe declined. In May 2012, daily oil exports amounted to about 3.72 million barrels. By July of this year, it dropped below 3 million barrels.

Most of Russia's oil exports to Asia goes to China. This happens at a time when Russia, because of strained relations with Europe, is trying to strengthen ties with the Asian region, that has a strong need for energy. Although this crude oil is more expensive than from Dubai, an advantage for Asian buyers is the fact that the supplier is closer. They also have an opportunity to diversify exports and not to rely entirely on the conflict-ridden Middle East at this point.

From the perspective of The Wall Street Journal, Asian companies will also benefit from the US and EU sanctions for the delivery of Western technologies and equipment for the oil and gas industry to Russia. Chinese Honghua Group - one of the world's largest manufacturers of drilling equipment - can get the maximum profit from this.

Honghua can provide the drilling equipment of the same quality as produced by Western companies, but with a 20 percent discount. In addition, its delivery will be cheaper and more reliable, as it could be carried by train rather than by sea, an expert of Nomura investment company, Gordon Kwan said.


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Author`s name Dmitry Sudakov