United States government agencies escalated sanctions and tightened rules on exports this month in connection with Russia’s enduring attacks on Ukraine – and at least one of these actions is expected to impact fashion and footwear brands. Implemented on September 15, the Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a Final Rule applying further export-focused restrictions that not only expand the scope of Russian industry sector sanctions to include items that could potentially be useful for “chemical and biological weapons production capabilities” but that refine existing controls on “luxury goods” (namely, apparel and footwear products) to put the U.S. in line with requirements implemented by its allies.

In addition to including “lower-level items potentially useful for Russia’s chemical and biological weapons production capabilities and items needed for advanced production and development capabilities to enable advanced manufacturing across a number of industries,” the new BIS rule revises previously-enacted controls by lowering the dollar value thresholds that trigger legally-mandated license requirements in order for certain “luxury goods” to be exported to Russia and/or Belarus.

(There are two license requirements for “luxury goods” as defined by the BIS-administered Export Administration Regulations (“EAR”) and identified in Supplement No. 5 to Part 746: One for “luxury goods” that are being exported, reexported or transferred to or within Russia or Belarus; and another for “luxury goods” that are being exported, reexported or transferred to “certain Russian or Belarusian oligarchs and malign actors, regardless of their location.”)

While the list of 400 or so “luxury goods” identified in Supplement No. 5 includes everything from nuclear reactors and vehicles to wine and spirits, leather goods, furs, carpets, and artworks, clothing and footwear are primarily affected by BIS’s new threshold revisions. “Tennis, basketball, gym, [and] training shoes” that are “valued at greater than or equal to $1000 per unit wholesale price in the U.S.,” for example, are among the various types of garments and/or footwear that are subject to decreased price thresholds, as are things like “women’s or girls’ swimwear, not knitted or crochet, and valued at greater than or equal to $1000 per unit wholesale price in the U.S.” 

“In reviewing our allies’ value threshold exclusions,” BIS said in a statement on September 15 that it “determined that the $1,000 Per Unit Wholesale Price in the U.S. dollar value exclusion for clothing and shoes was more permissive than those adopted by our allies.” As such, the new rule reduces the dollar value threshold for clothing and shoes from $1,000 to $300 Per Unit Wholesale Price. BIS estimates that these changes will result in a reduction of 10 license applications submitted per year.

While the reduction in dollar thresholds brought about by the new BIS rule – which went into effect on September 15 – serves to extend the licensing requirement for exports to a wider pool of less expensive “luxury goods,” Thompson Hine LLP’s Scott Diamond, Samir Varma, and Francesca Guerrero state that “even with these revisions certain luxury goods entries continue to not warrant a dollar value exclusion and those entries remain unchanged by this rule.” (These include other “luxury goods” like jewelry, leather goods, etc.)

The new BIS rule comes on the heels of earlier rulemaking from the U.S., which first saw BIS impose restrictions on certain “luxury goods” destined for Russia and Belarus and certain “Russian and Belarusian oligarchs and malign actors” in the wake of Executive Orders from President Biden on March 11, including EO 14068, which restricts exports of luxury goods to Russia and Belarus. In accordance with the luxury goods-centric rule that BIS enacted in March, direct – or indirect – exports, reexports, or transfers of such goods from the U.S. or by a “U.S. person” to Russia or Belarus require a BIS export license.

Because requests for licenses are reviewed with a “presumption of denial,” the rule “effectively restricts U.S. retailers and businesses from suppling any luxury items” to Russia and/or Belarus, Morgan Lewis’s Ezra Church, Gregory Parks, Rachelle Dubow, and Emily Kimmelman stated at the time. In other words, the BIS rule established “a high bar to obtaining an authorization, thereby, acting effectively as a ban on licenses.” 

Still yet, it is “important to note,” according to K&L Gates attorneys Jeffrey Orenstein, Steven Hill, Stacy Ettinger, Jerome Zaucha, and Donald Smith, that the BIS export restrictions apply to more than just U.S.-origin luxury goods. “First, the restrictions apply to all goods listed under the final rule that are subject to the EAR,” which includes products that are: (1) U.S.-origin (wherever they are located); (2) Located in the U.S. (whatever their origin); (3) Produced outside the U.S. with more than 25 percent (by value) U.S.-controlled content; and (4) Produced outside the U.S. and covered by the special “foreign direct product rules” for Russia, which was discussed in a prior alert.

Beyond that, they contend that “even with regard to products that are not subject to the EAR, the text of [Biden’s] executive order indicates that U.S. persons, wherever they are located, are barred from the exportation, re-exportation, sale, or supply of covered luxury goods to Russia, Belarus, and designated parties,” which makes for an even broader scope.

“Combined with the broad range of U.S. and multilateral sanctions already issued,” the Morgan Lewis attorneys asserted that such “luxury goods” export bans “further tighten restrictions on commercial activities with Russia and are designed to impact Russia’s wealthiest citizens most directly by ensuring that these luxury products are no longer available to them.” 

Nike is among the highest-rated names on the latest version of a ranking of companies by the “completeness of [their] withdrawal” from the Russian market, while names like Alibaba, Diesel, Tom Ford, and Armani allegedly score poorly. After first compiling and publishing a ranking of companies’ responses to the Russian invasion of Ukraine (and the subsequent levying of sanctions by governments) in February, the Yale Chief Executive Leadership Institute (“CELI”) has released an updated ranking this month of what it claims is the current state of companies’ operations, with over 1,000 companies “voluntarily curtail[ing] operations in Russia to some degree beyond the bare minimum legally required by international sanctions,” but some companies – including fashion/luxury names “continu[ing] to operate in Russia undeterred.” 

A the top of the September 14 ranking are companies that CELI characterizes as “totally halting Russian engagements or completely exiting Russia.” These companies largely consist of “financials,” “materials,” information technology,” and “industrials” firms (the latter of which includes management consultancies, law firms, etc.), but also extends to the likes of Nike (which is “exit[ing] Russia,” per CELI), Etsy (“deactivate[d] all listings from Russian sellers”), Ikea (“fold[ed] up Russian presence”), French cosmetics brand L’Occitane (“exit Russian operations”), off-price retail group TJX Cos. (which “divest[ed] its Familia subsidiary”) and French automaker Renault (“sold Renault Russia; transfer[ed] Moscow factory to city government and partner for local brand production”), among others. 

According to the CELI’s data, a total of 315 companies are included in this category, which carries with it an “A” rating. 

At the other end of the spectrum are companies that CELI labels as “continuing business-as-usual in Russia,” i.e., companies that are “defying demands for exit or reduction of activities.” Included in the 241 companies that are labeled as such: Chinese sportswear company Anta Sports and Chinese e-commerce giants Alibaba and JD.com. A handful of Italian fashion names are assigned an “F” rating, including Benetton, which has allegedly “continue[d] operations in Russia;” Calzedonia, which has “continued sales in Russia;” Diesel, which is “still operating in Russia [but has] not disclosed” that, per CELI; and Giorgio Armani, which is “still operating in Russia.” 

A snapshot of CELI's ranking

French fashion company Lacoste is also “still operating in Russia,” per CELI, as are U.S.-headquartered Quiksilver, which allegedly has “online sales still running,” and Tom Ford, which CELI claims is “still operating in Russia; not disclosed publicly.” (It is noting that Tom Ford’s operations are almost certainly limited to those of its Italian eyewear licensee, Marcolin; the company has not yet responded to a request for comment.)

Armani said in a statement that it “does not operate directly in Russia and the shops operating in the country with the brands of the group are managed by independent franchisees,” which is the norm for most brands when it comes to their presence in the Russian market. The company asserted that it maintains “strict compliance [with] the sanctions regime issued by the EU.” Diesel similarly revealed that it does not maintain brick-and-mortar stores in Russia and that it has ceased its e-commerce sales there. The Italian brand “stressed that … it was respecting the sanctions while noting that they do not apply to products selling for less than €300,” according to The Economist’s Italy correspondent John Hooper. 

Meanwhile, the likes of cryptocurrency exchange platform Coinbase (which “block[s] certain illicit Russian accounts but not all”); Fortnite-creator Epic Games (which has “stop[ped] in-game commerce for Russia;” Gap (whose “online sales [are] running; stopped shipments to franchisees in Russia”); Skechers (which has “suspended shipments to Russia but online sales continue”); and Mayhoola-owned Valentino (which has “suspend[ed] online sales; no information about on-site sales”) have been assigned a “C” grade “for scaling back some significant business operations but continuing some others.” (170 companies have been given a “C” rating by CELI.)

The highest number of companies (499) are situated within the “B” tier, which refers to companies that are “temporarily curtailing most or nearly all operations while keeping return options open.” This is the category where most fashion/luxury brands – such as Chanel, Gucci and Balenciaga-owner Kering, Louis Vuitton and Dior parent LVMH, Hermès, Prada, Moncler, Rolex, Ferragamo, Canada Goose, ACNE, Ganni, and Ralph Lauren, among others – are listed. Fast fashion companies H&M (which is “winding down business entirely”), Boohoo Group, and ASOS are included within this camp, as do retailers like Farfetch and Yoox, and mass-market names like adidas, Crocs, Ugg-owner Deckers, Levi Strauss, Puma, Northface and Supreme owner VF Corp., and Victoria’s Secret, the latter of which has “stopped exports to Russia, paused sales in Russia by franchisers, [and] suspended online sales.” 

A snapshot of CELI's ranking

A Balancing Act

The balance between leaving the Russian market entirely and continuing to operate there/opting to provide goods/services that fall within the threshold allowed by sanctions (Italian fashion companies are permitted to export goods whose wholesale price is under 300 euros to Russia) has proven to be a tricky one from companies. Making a clean break for Russia has obvious benefits from a logistical perspective, along with benefits from a public relations perspective, especially given the increasingly ESG-specific stance that younger pools of Western buyers have taken in recent years; it also enables companies to more easily ensure that they are complying with various sanctions – which have, in many cases, been modified over time – thereby, reducing their potential exposure to criminal and civil penalties. 

In the short term, the rush of companies to remove themselves from the Russian market – at least for the time being – “will cost companies,” including fashion brands, “surprisingly little,” Hooper asserts. (For some context, French luxury goods titan LVMH, for instance, has typically generated less than 2 percent of annual revenue from Russia, while Cartier-owner Richemont has derived roughly 3 percent of its annual sales from the country in the past. It is worth noting that such impacts are not limited to sales that occur in Russia, as no shortage of deep-pocketed Russian consumers already do their luxury shopping outside of the country in markets like London and Dubai, along with Milan and Paris.)

Not without drawbacks, attempts by companies to walk away from their operations in Russia have likely proven complicated and costly. Beyond that, such moves could put them at risk of facing legal consequences, including lawsuits waged by consumers and companies, alike. As of April, at least two class action lawsuits had been filed against Western companies in the wake of their moves to halt operations in Russia. Moscow-based firm Chernyshov, Lukoyanov & Partners filed suit on behalf of pools of Russian consumers against Apple and Netflix, accusing the two companies of running afoul of consumer rights laws. (Apple has “suspend[ed] all official site sales; turn[ed] off select apps and services,” per CELI, getting it a “B” rating, while it found that Netflix – which has an “A” rating – has “suspend[ed] service in Russia.”)

In connection with the lawsuits, as first reported by Reuters, the plaintiffs are seeking 60 million rubles ($998,750) in moral damages from Netflix users and 90 million rubles ($1.5 million) from Apple for reducing its devices’ functionality and value. Those figures are likely to increase as more individuals join the pool of plaintiffs, per Reuters. 

At the same time, Moscow-based company Talmer reportedly filed suit against Dell (which CELI says has “suspend[ed] all shipments to Russia”) for allegedly cutting off technical support for VMWare cloud computing services. 

It has been a difficult few years for those in business. Lockdowns shut down whole industrial sectors worldwide, turning profitable businesses into loss-making ones, while a lot of smaller businesses went under entirely. Many companies have been hoping for a return to some type of normality after the enduring impacts of the COVID-19 crisis. However, there are strong signals that a resumption of how things were is not on the cards any time soon, as the world appears to have entered into an age of accelerating grand crises.

Even before the pandemic hit in early 2020, the climate crisis was increasingly disrupting the world (and the companies operating it in) through extreme weather events. Then, just as some countries had declared their war against COVID to be won, the invasion of Ukraine has not only reshuffled global geopolitics, but also led to a dramatic increase in energy and food prices, having big knock-on effects on a whole host of other sectors. And still yet, as of this summer, brands, including those in the robust luxury space, were cutting down their expectations for the all-important Chinese market in light of the latest wave of COVID lockdowns. (“Forecasted growth for luxury and premium consumer brands was cut by 15 percentage points, and down nearly 25 percentage points for luxury brands alone,” CNBC reported in June, citing the results of an Oliver Wyman survey.)

One day there may be a time after COVID, after the Ukraine war, and even after the climate crisis, but there is unlikely to be a point of general stability any time soon. Humanity is pushing environmental limits to breaking point, risking further crises – whether in terms of disease, conflict, or natural disasters. Businesses, therefore, need to shift how they operate. The most drastic example of such action to date comes by way of Patagonia’s recent restructuring, which saw founder Yvon Chouinard and his family donate their $3 billion ownership stake in the privately-held outerwear-maker in order to “preserve the company’s independence and ensure that all of its profits are used to combat climate change and protect undeveloped land around the globe.”

Short of engaging in an unprecedented shift in ownership, there are things that companies and their leaders can do to respond to current crises, become better prepared for future crises, and address their own role in generating these crises in the first place. Here are three types of business models companies should start adopting now …

1. Respond to Crises

What is needed are reactive business models that can respond to crises at hand. Such adaptability will naturally have a survival element, in which organizations do whatever is necessary to mitigate negative effects on themselves. This means aligning companies’ management practices with the “new normal” after the crisis, instead of holding on to the old normal from before. Where appropriate, such models should also have a crisis-mitigation element, addressing the wider negative effects of the crisis at hand where they can.

It appears fossil fuel behemoths such as Shell and BP might be starting to do just that. Having long been under attack for knowingly contributing to the climate crisis and counteracting shifts to more sustainable energy systems, they appear to now be adapting to crisis forces. These forces include, most notably, the global trend towards phasing out fossil-fuel vehicles. As such, these companies have begun to transform key aspects of their business. A first move, for example, seems to be repurposing their petrol station operations into an electric vehicle charging infrastructure. As they ride the waves of the climate crisis, we can expect to see them make many disruptive greening changes like this.

2. Be Ready for Future Difficulty

Businesses also need to move from stability-based business models to accepting that the business reality is now one characterized by volatility, uncertainty, complexity and ambiguity. Value propositions encompass the benefits a business offers, for example to its customers, employees, and the community. Building business models for this new world means establishing value propositions for companies that are fit for the long run, that can morph into all kinds of crisis scenarios. It also means being agile and quick to adjust. 

One form this could take, for instance, is for a business to offer products and services that address timeless and fundamental needs like health, food, or security, rather than short-lived superficial wants like those related to fast fashion or the latest technological fads. A good example of such a business model is that of Chinese electronic goods corporation Haier, which has  explicitly tuned in to an ever-changing world, aiming to deliver “products that respond to the constantly changing needs of the modern home.” For instance, Haier responded to Asia’s air pollution crisis by developing an integrated air conditioner and air purifier.

Alongside this, Haier employs its unique “RenDanHeYi” (or 人单合一), which freely translates to “one single person in unity,” way of working, making it a collective of smaller, semi-autonomous companies that gives both individual freedom and collective responsibility to self-organized micro-entrepreneurs. This makes Haier a fluid, agile and resilient organization. By operating as a network of micro-enterprises, each of which works closely with customers to respond to their changing needs and situations, the business can evolve more easily as each new crisis plays out. Because of these features in their business model, Haier has done exceptionally well during and after the COVID crisis.

3. Help Prevent Crises of Tomorrow

Finally, businesses can better set themselves up for the future by adopting models that specifically mitigate or even prevent future crises. While COVID, the Ukraine crisis, and climate change are still ongoing problems, many business models have been geared towards keeping other things from becoming the next grand crisis. Some companies, for example, are adopting business models that promote reconciliation and peace, with view to preventing disruptive future armed conflict. Examples range from former Colombian guerrilla group members building adventure travel businesses that show the previously hidden side of the conflict, to coffee cooperatives in Rwanda designed for Hutus and Tutsis to reconcile through collaboration.

Managing businesses in an age of accelerating crises is challenging. However, transforming business models and managerial practices can go a long way in both making current and future crises manageable, and possibly even mitigating future crises.

Oliver Laasch is a Senior Lecturer in Entrepreneurship and Innovation at the University of Manchester. (This article was initially published by The Conversation.)

Ongoing tensions between the United States and China have affected many companies around the world. At the same time, the COVID-19 pandemic has also made it very clear that when it comes to a company’s supply chain, reliance on China can have disastrous consequences in the event that these supply chains are interrupted. During this consistently challenging and uncertain time, many companies across various industries have been trying to reorganize their supply chains and reduce dependencies that are vulnerable to political tensions and rising costs

While the pandemic has already compelled many companies to become more agile – for example by increasing their number of suppliers – business leaders must now start thinking about the long-term implications of increased uncertainty in the markets since volatility is likely here to stay. Ongoing research suggests two factors are most important when making decisions on how to respond to the U.S.-China trade war: location and supply chain dependence, and technology. 

Ending dependence on two fronts

The first factor deals with how much dependence companies have on Chinese suppliers and customers. China offers a uniquely complete combination of supply chains and a growing middle class that fuels high demand for almost any good; luxury goods (and the robustness of Chinese demand for them) are among the most headline-making. According to a United Nations report, China is home to almost every industry and its companies offer almost the full range of products and services in each of these industries. 

The second factor is technology dependence. In some industries, blazing a trail on the technology frontier is key to success. North America is still the leading region for many of these technologies (including biotechnologycultured meat, and artificial intelligence) and it is increasingly concerned about its intellectual property falling into Chinese hands. Recent restrictions on Chinese researchers in Canadian universities are one example of protectionist actions spurred by these concerns.

In the future, companies that deal with North American technologies in cutting-edge areas will probably have to avoid delivering to China or using this technology in collaborations with any Chinese companies.

Low vs. high Chinese dependence

Companies with different degrees of dependence on Chinese supply chains and North American technologies are likely to behave very differently. There are four scenarios. First there are companies with low reliance on both North American technology and Chinese supply chains that tend to relocate their manufacturing facilities to a third, low-wage country, such as Vietnam and India, because it is easy to find alternative production sites and to access technology. 

In addition to big names in the mass-market fashion and retail space, Samsung’s display business, which offers digital signage and hospitality displays, is an example. The tech company’s reliance on supply chains in China is low because it owns a relatively complete supply chain ranging from upstream activities (inputs to products, such as chip design) to downstream activities (outputs such as products, like smartphones). In short, Samsung designs, manufactures, and markets its own products. Its reliance on North American technology is also low because the technology required to produce display devices is not limited to North America. As a result, Samsung has shifted its manufacturing of IT and mobile displays from China to India, avoiding tariffs and higher wages in China.

But companies with high dependence on Chinese supply chains could have a hard time leaving China. Take Google’s Pixel phone as an example. In 2019, Google decided to relocate the manufacturing of the Pixel phone from China to Bac Ninh in northern Vietnam to avoid tariffs into the U.S., an important market for its phones. Two years later, Google reversed the decision and started producing the new smartphone in China due to supply chain problems amid increasing uncertainty from pandemic-related restrictions

Relocations to North America

Companies with a high reliance on North American technology and a relatively low reliance on Chinese supply chains, on the other hand, are likely to relocate manufacturing to North America. For instance, TSMC, one of the world’s leading semiconductor foundries, uses substantial American technologies and equipment, including advanced equipment for ultraviolet lithography. Therefore, the Taiwanese company decided to build a new advanced chip factory in Arizona, a decision closely connected to its dependence on both U.S. technology and customers. 

Companies with high reliance on both North American technology and the Chinese supply chain face the biggest challenges. They have no choice but to keep operating in both countries while navigating political risks and market turbulence. 

Tesla is a prime example of this. While dependent on its research and development in the U.S. to enhance its leading technology position, China’s supply chain benefits Tesla with manufacturing speed, cost, and proximity to the Chinese market. That leaves companies like Tesla with no choice but to navigate political tensions and stay present in both markets. As a result, Tesla has built and expanded a factory in Shanghai. Additionally, it has promised to conduct more research and development activities in China and to recruit local talent for local design.

The COVID-19 pandemic has been another wake-up call for business leaders – including in their retail space – that should have prompted them to consider the importance of technological progress and supply chain security. While we do not know how long the pandemic and its restrictions will endure, successful companies think ahead and build resilience and flexibility into their operations.

Felix Arndt is the John F. Wood Chair in Entrepreneurship at the University of Guelph. 

Abby Jingzi Zhou is an Associate Professor in International Business at the University of Nottingham. 

Christiaan Röell is a Lecturer in International Business at the University of Sheffield. 

Steven Shijin Zhou is an Associate Professor in International Business at the University of Nottingham. 

Xiaomeng Liu is a PhD Student in International Business at the University of Nottingham. (This article was initially published by The Conversation.)

On February 23, the eve of Russia’s invasion of Ukraine, the Council of the European Union adopted the first package of sanctions in response to Moscow’s recognition of the self-proclaimed autonomous republics of Donetsk and Lugansk. Five more packages followed, the last of which was adopted on 3 June. From the second package onwards, the EU targeted Russia by way of sanctions on trade in goods – from luxury goods (like handbags, watches, and apparel) to imports of types of steel and aluminum products. 

The following is a timeline of the sanctions to better assess their effects … 

On February 25, the Council banned exports of so-called “dual-use goods” – designed for civilian use but likely to be repurposed for military ends. Their list is long, covering chemicals, special metal alloys, protection against chemical and biological agents … but also spare parts for aeronautics and goods for use by Russian refineries.

On March 9, exports of certain maritime navigation and radio communication equipment were banned.

On March 15, the list went on to incorporate luxury goods exports. The fourth package was also the first to introduce bans on imports of specific goods. Imports of types of steel and aluminum products, which were already targeted by safeguard measures (i.e., limitations on the quantities imported), were halted altogether.

Adopted on April 8, the fifth package begins to set the tone for the ban on Russian imports, covering coal, cement, rubber products, wood, selected alcoholic beverages and fishery products.

The sixth package, which is set to ban 90 percent of oil imports from Russia by the end of 2022, was adopted on June 3. From that point onwards, trade sanctions will become massive: by the end of the year, 65 percent of EU imports from Russia will be banned, compared to only 10 percent after the fifth package in April 2022.

65 Percent of Imports from Russia Are Banned

As CEPII’s Matthieu Crozet and Julian Hinz point out, “Trade embargo is the weapon of the powerful.” Clearly, the larger the sanctioning country, the higher the costs it inflicts on the sanctioned country, which loses both a key supplier and important markets. Conversely, for the country imposing the embargo, the costs will be all the higher the larger the targeted country. In 2021, Russia was the EU’s fifth largest trading partner, accounting for almost 6 percent of European trade with the world. The amounts involved are considerable: 258 billion euros, of which 159 billion euros are EU imports.

Since the fifth package, trade sanctions on Russian imports have covered 10 percent of Russian goods crossing the EU border, equivalent to 14-17 billion euros of trade (these figures are calculated based on 2019 trade data, in a bid to avoid incorporating the effects from the Covid-19 crisis). Once the sixth package has become fully effective at the end of the year, that figure will have risen to 65 percent. Such shares are significant, as are their expected negative impacts. 

Nevertheless, the EU enjoys two advantages over Russia: its significant trade integration and its economic clout. Indeed, while European sanctions (including the sixth package) cover 25 percent of total Russian exports, they represent only 5 percent of EU imports. The asymmetry is large. In other words, Russian trade is more dependent on European buyers than European trade is on Russian suppliers.

Yet, the aggregate figures hide strong disparities between sectors. For example, in the wood sector, the sanctions already in place apply to all European imports from Russia; in the energy sector (mineral fuels and oils), 78 percent of imports from Russia will be banned by the end of the year, an increase of over 71 percent compared to the fifth package. In contrast, the share of banned aluminum imports is ten times lower, at around 8 percent.

The high impact on some sectors can weaken European production chains. European importers are most dependent on Russian products in the energy and fertilizer sectors. More than 40 percent of coal and fertilizers are covered by sanctions, while 30 percent of oil is imported from Russia. These goods have the common characteristic of entering production chains at an early stage. Thus, a disruption in their supply could result in production drops in European sectors exploiting these goods, potentially inflicting higher costs than the initial sanctions. The magnitude of such a “snowball effect” lies at the core of the current debate over the potential impact of oil and natural gas sanctions. 

The estimated repercussion depends, on the one hand, on the ease of identifying alternative suppliers of banned goods and, on the other hand, on the possibility of substituting them with similar products.

The import bans will, therefore, force companies across the board to adapt, either by seeking alternative sources to banned products, or by replacing them with other comparable goods. Although such coping mechanisms might ensure production in affected sectors does not come to a complete halt, they will generate additional costs. Some of them will be absorbed by profit margins and some will be passed onto consumers through higher prices. The question remains of how easily firms can find alternative suppliers. This issue can be very technical.

Replacing Russian Imports in Europe

To take the example of fertilizers, EU sanctions cover potassium chloride, but also fertilizers that include all three key chemical elements in agronomy, namely potassium, nitrogen and phosphates. Russia supplies a large share (44 percent) of EU imports of these products. Canada is the world’s largest producer and exporter of potassium fertilizers, far ahead of Russia, but it produces almost no phosphate fertilizers and exports little nitrogen fertilizer. Thus, Canada could replace Russia mainly for the supply of potassium-based fertilizers. However, production cannot increase instantly – the market will be tight in 2022.

The same logic applies to import restrictions on mineral fuels. Almost a third of the EU’s coal and oil imports come from Russia. For oil, Russia is the EU’s largest supplier, followed by a large margin by Norway, Kazakhstan and the United States, each respectively accounting for 8 percent of market share. Reconsidering its initial stance, the Organization of Petroleum Exporting Countries and Russia (OPEC+) announced on June 2 they would increase supply by about 1.5 percent starting next July. This increase represents only around 25 percent of the oil that the EU will no longer import from Russia. Hence, a game of “musical chairs” on the oil market is likely to take place: Russian production would go to Asian countries, thus freeing up some OPEC+ exports, which would be redirected to the EU.

Moreover, European imports may also be limited by Russian retaliation measures targeting products in which Russia has a dominant position. This is what happened with the interruption of gas supplies to some EU countries. As a result of the sixth package of EU sanctions, other countries and products could now also be targeted. But, as underlined by the French President, faced with Russia’s choice to continue its war in Ukraine, it is difficult not to react “as Europeans, united and in solidarity with the Ukrainian people.”

Cecilia Bellora is economist at the CEPII, in charge of the trade policies research program. Kevin Lefebvre and Malte Thie are economists at the CEPII. (This article was initially published by The Conversation.)