One year after the outbreak, the European Union was also hit hard by the impact of the war in Ukraine. Energy prices have soared again, driving inflation to record levels. This was due to the fact that Ukraine and Russia produce almost a third of the world’s wheat and barley and are major exporters of metals. Disruptions in supply chains and rising costs of many raw materials have driven up the price of food and other basic goods and services. This is putting a strain on companies and this has had a huge impact on the European economy. Brussels had therefore cut its economic growth forecast from 4 to 2.7 % for 2022 and from 2.8 to 2.3 for 2023. The region’s economy, on the other hand, grew by 3.5% in 2022 compared to the previous year, so slightly better than forecast. The fourth-quarter reading beat economists’ forecasts, which expected a contraction of 0.1% quarter-on-quarter. The war in Ukraine also intensified a trend that had already been in place since mid-2021, namely that of a generalized increase in prices. Thus, we heard again about inflation, which is the parameter that measures price increases of a set of products and services representative of the average cost of living.

In fact, the annual inflation rate for the euro area was 8.6% in January 2023, down from 9.2% in December 2022. One year earlier, the rate was 5.1%. European Union’s annual inflation was 10.0% in January 2023, down from the rate of 10.4% of December. A year earlier, the rate was 5.6%.

The US sanctions against Russia have meant more to Europe than to other countries such as China or India, which have instead been able to take advantage of them to buy Russian oil at low prices and favorable conditions.

Europe, on the other hand, suffered disastrous consequences, with the downfall of many industries, such as transport and agriculture, which, when not forced out of business, nevertheless came to the brink of bankruptcy. Those industries that continued to rely on expensive imported energy had to adjust the prices of their products as a consequence, contributing to inflation and mass poverty.

The contraction of food imports led to a rapid and dramatic increase in their prices across the continent. In fact, as mentioned at the beginning, Russia and Ukraine are the main exporters of agricultural products to Europe.

To give a concrete example before the outbreak of the war, Ukraine supplied 73% of rapeseed oil imports, 52% of maize imports, and 23% of EU vegetable oil imports. With the outbreak of war, this was severely hampered and agricultural exports were practically blocked. This disrupted the entire food supply chain and caused food prices to rise rapidly. The price of food rose across the board after the start of the war because it was affected by the significant increases in the price of energy, which is used to produce and also to transport the food itself (as in the case of milk and sugar).

The other crucial issue inherent in the Ukrainian question is that of energy.

Europe has in fact been dependent on Russian gas imports for decades. Initiatives to break free from this dependence have been attempted for twenty years now, but the Azerbaijan-Georgia-Turkey gas pipeline of 2008 has increasingly tightened the knots.

The European Union was therefore forced to plan and think about how to replace the huge supply of Russian gas and oil both in the short and in the long term and to figure out how to make itself as energy independent as possible, or at least not blackmailable.

Russia in fact played a very important role as a gas exporting country to all EU member states. Since the autumn of 2021 and with the start of the war in Ukraine, the price of gas had risen dramatically due to fears that in response to sanctions Russia would stop supplying it: quotations had reached all-time highs last August, exceeding EUR 300 per megawatt hour (in normal times they were around EUR 20).

Today, the price has dropped considerably compared to the peak of the crisis, because there is no longer any fear of running out of gas. During this year, the European Union has worked hard to limit dependence on Russian gas, but although European countries still import it, Russia is now a residual supplier.

Suffice it to say that before the war it supplied the EU with 40% of its gas imports, whereas today it is limited to 7.5%. Russian gas has been replaced by enhanced agreements with Norway and Algeria, and also by more imports of liquid gas arriving by sea from the United States and other countries.

The economic and social cost was very high for both households and companies, which sometimes reduced their production and actually rationed gas because it had become too expensive to produce with such a high energy price.

The same thing happened with Russian oil, as the European Union needed time to organise itself to stop importing it. The European Union needed time to find alternative suppliers and the embargo on Russian oil finally came into effect on 5 December.

Today no more than 600,000 barrels per day are imported, a quarter of what it was before the war, and a ban on the import of oil products from Russia, such as diesel, also came into effect on 5 February.

This decision was taken on 30 and 31 May 2022 by the European Council, which agreed to ban almost 90% of all Russian oil imports by the end of 2022, with a temporary exception for crude oil supplied by pipeline.

Furthermore, taking into account the different energy mixes and the different conditions and circumstances of the Member States, EU leaders called for

• diversify energy sources and supply routes
• accelerate the deployment of renewable energies
• improving energy efficiency further
• improving gas and electricity network interconnections

Certainly, the energy transition is a first step towards greater independence, but it will still take time for green energy to provide the volumes and regularity that industries need to plan production.

By Michelle Brunori