Niels Graham
When the Group of Seven (G7) meets in two weeks in Hiroshima, it will be focused on how to further ratchet up economic pressure on Russia. G7 members still export around $4.7 billion a month to Russia, about 43 percent of what they did prior to the invasion of Ukraine. The US wants to go further and has proposed replacing the existing sector-by-sector sanctions regime with a total export ban (with exemptions for food and medical products). If implemented as proposed, it would prohibit two-thirds of the G7’s current exports to Russia.
It will not be easy. After 15 months of conflict, the G7 have implemented nearly all the economic measures against Russia that garnered consensus within the group. The options they have left will be increasingly contentious and will impose higher costs on the G7 countries’ domestic economies. To understand how the debate over a total export ban will play out, it’s important to start with an analysis of what G7 economies still export to Russia.
The G7’s remaining exports to Russia
Since Russia’s invasion of Ukraine last year, the G7 has implemented the largest sanctions and export controls regime ever imposed on a major economy. Exports from the G7 to Russia have fallen by around $5.7 billion a month from the pre-invasion average, resulting in a 57 percent decline in overall exports. This has led to a substantial slowdown in trade of critical goods such as machinery and mechanical appliances (64.6 percent decline in exports), cars and trucks (77.4 percent decline in exports) and electrical machinery (78.7 percent decline in exports). Aircraft exports have been especially impacted following sweeping sanctions and controls placed on products used by the aviation and space industry with G7 exports declining some 98.6 percent and cutting off an estimated $4.03B in exports.
However, G7 members, led by the EU, continue to export around $4.7 billion a month to Russia. The biggest export categories since March 2022 are pharmaceuticals, machinery, food, and chemicals.
The economic impact of an export ban
From March 2022 to Dec 2022, G7 goods exports totaled around $46.8 billion. US officials hope to change this. Frustrated with the existing regime, which Washington views as too porous and which allows Moscow to continue to import western technology, the US has proposed a total export ban with exemptions primarily for food and medical products. If implemented as proposed, such a restriction could further reduce G7 exports to Russia by roughly 67 percent to just $1.5B a month.
For the US, the trade-offs of an export ban are minimal. The $80 million in monthly goods exports it continues to provide Russia are a rounding error for Washington. However, for the EU and Japan, which respectively account for 89 percent and 7 percent of remaining G7 exports to Russia, such an ask may be a step too far. Both government have already signaled such a proposal “may not be realistic.”
For many countries in the EU, Russia remains a non-trivial export market. Eight of the EU’s 27 member states still send more than 1 percent of their overall exports to Russia with Latvia and Lithuania notably still sending 9.7 percent and 5.7 percent of their respective monthly exports to Russia. While Russia may be a much smaller overall market, large European countries such as Germany, Italy, and the Netherlands export hundreds of millions of dollars worth of goods to the nation. After 10 rounds of sanctions, G7 policy makers have covered all militarily strategic sectors. What remains are more benign and eclectic trade flows such as German chocolate exports or Spanish perfumes.
A ban would still lead to material adjustments in these trading patterns. The rationale justifying them, however, will be more tenuous for the workers and businesses impacted than the initial tranches of controls focused on advanced materials, aircraft, and military technology.
While EU unity around support for Ukraine still remains robust, recent polling suggests European citizens are increasingly worried about the cost of the conflict. For leaders in Brussels, an export ban may be unrealistic with many of its member states demanding carve-outs and exemptions for their affected industries as they have with earlier tranches of sanctions.
For Japan, pushback stems from fears that Moscow may retaliate by cutting it off from energy imports. Despite an initial drop in Russian liquified natural gas (LNG) imports in the immediate aftermath of the invasion, Japanese imports have recovered with Russian LNG making up an average of 7.8 percent of overall imports—only a slight drop from the pre-invasion average of 9.1 percent.
This is not the first time Japan’s reliance on Russian LNG exports have thwarted the full implementation of a G7 policy measure. Towards the end of last year, Tokyo was able to secure an exemption from the G7’s oil price cap to ensure Russia could still transport a small quantity of crude oil which is extracted alongside the natural gas it exports to Japan. Japanese resistance to G7 measures is not without reason. The resource-poor nation has the most vulnerable energy security environment of any G7 nation. Japan’s primary energy self-sufficiency rate is just 11 percent, far lower than the US (106 percent), Canada (179 percent), the UK (75 percent), France (55 percent), and even Germany (35 percent). LNG, which provided around 36 percent of the country’s electricity in 2021, is crucial in ensuring its businesses and consumers have the energy they need. However, Japan’s high external energy reliance cannot fully excuse its continued reliance on Russian LNG. Germany, for example, entered the conflict with a significantly higher reliance on Russian LNG but was able to rapidly scale back its imports, dropping them to zero by September 2022.
How the US can respond to hesitance from the G7
In response to EU and Japanese hesitation, the US may need to scale back its ambitions or offer support that would help minimize the impact of an export ban on the EU and Japanese economies. One option would be to activate the US Export-Import Bank to open access to a line of export credit insurance to impacted European businesses. The insurance line would compensate for the costs European businesses face to find alternative buyers. The US has previously employed similar measures to help Lithuania after it faced sudden export disruptions.
That still may not be enough—especially for Japan, which is more concerned over retaliation. Instead, Tokyo may agree in name to such a ban conditional on Japan receiving broad exemptions, similar to its approach to the G7 oil price cap.
The consideration of an export ban speaks to the broader challenge G7 leaders will face in Hiroshima. Leaders have already implemented nearly all the consensus economic measures designed to reduce the Russian military’s fighting capabilities. There is a reason the options left haven’t been undertaken; they are problematic and will strain the G7’s fragile consensus on Russia.
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