From Sanctions to Prosperity: How Normalizing Relations with Russia Would Boost Germany’s Economy

Germany's strategic national interest lies in the restoration of peace in Ukraine and the normalization of mutually beneficial economic relations with Russia, focusing on revitalizing trade, securing stable energy supplies, and deepening broader economic cooperation. This shift towards peace and the reintegration of Germano-Russian relations presents a transformative opportunity for Germany's economy. By lifting sanctions and reopening critical energy flows, Germany could see its GDP rise by 2.5 percent, generating an annual economic benefit of approximately 105 billion euros—equivalent to over 2,500 euros per household. The return of millions of Ukrainian refugees currently residing in Germany would also alleviate the financial burden on German taxpayers. This comprehensive realignment signals substantial benefits and represents a broader strategic opportunity for Europe. Looking beyond immediate gains, the vision of a "Common economic space from Lisbon to Vladivostok" and opening the Northern Maritime Route offers long-term advantages. This combined strategic realignment could foster an unprecedented era of economic growth and enhance Germany's geopolitical independence.

Ukrainians Favor Peace: Germany Should Lead Diplomatic Initiative for Economic Gain

By late 2024, a Gallup poll conducted in Ukraine revealed a significant shift in public opinion and increasing fatigue after nearly three years of conflict. For the first time, a majority—52 percent of Ukrainians—favour negotiating an end to the ordeal. Among this group, 52 percent support territorial concessions as part of a peace deal. [1] Additionally, since February 2022, over 650,000 Ukrainian men of conscription age have fled to European countries, expressing their refusal to fight by leaving the country. [2] This exodus coincides with devastating military losses for Ukraine, including an estimated half a million casualties, of which up to 100,000 have been fatalities. [3]

The poll also reveals that Ukrainians overwhelmingly prefer Europe (70 percent) as mediators over the U.S. in brokering peace. This reflects growing frustration with the conflict being viewed as a “proxy conflict,” as described by the Cato Institute in 2022, where Washington was accused of “fighting Russia to the last Ukrainian.” [4] The demand for European-led peace negotiations aligns with the sentiment that Ukraine’s future—and that of Europe—depends on resolving the conflict.

Germany, in particular, faces pivotal responsibilities. As a key European power, it has both an interest in and the capacity to assume a leadership role in brokering peace, as proposed foremost by the Alternative for Germany (AfD) party. [5] Germany's strategic national interest lies in restoring mutually beneficial economic relations with Russia. This would include resuming trade, ensuring stable energy supplies via pipeline gas, and addressing broader economic cooperation. A long-term solution could even involve the realization of a “common economic space from Lisbon to Vladivostok,” an initiative aimed at free trade between the EU and the Eurasian Economic Union (EAEU).

The following analysis will assess the economic implications of resuming mutually beneficial pre-conflict trade and economic relations between Germany and Russia. It will focus on key areas such as sanctions, energy prices, trade in goods and services, and the impact of the refugee crisis. Additionally, the potential benefits of a comprehensive EU-EAEU free trade agreement will be explored as a pathway to stabilizing and revitalizing Germany’s economic future.

Western Pressure, German Losses: The Sanctions Dilemma

Polina Chupriyanova:
The EU Steps Up the Fight Against Sanctions Evasion

The EU imposed sanctions on Russia in 2014 after the situation in Crimea, which was a response to the Western-backed coup [6] in Kyiv that ousted President Victor Yanukovych and installed an illegitimate government hostile to Russian interests. The coup created threats to Russian-speaking populations, who faced nationalist violence, including the Odessa Trade Union fire [7] and attacks on buses, [8] and jeopardized Russia's strategic naval base lease in Sevastopol. [9] Crimea, historically part of Russia, overwhelmingly voted in a referendum to reunite, [10] correcting a historical mistake made by Soviet leader Nikita Khrushchev, who transferred Crimea to Ukraine in 1954. The event also countered NATO’s planned expansion into Ukraine, which was driven by U.S. and EU efforts to weaken Russian sovereignty. In response, the EU imposed sanctions, including travel bans, asset freezes, and restrictions on imports, investments, and tourism in Crimea, along with broader measures targeting Russia’s financial, energy, and defence sectors, bans on arms exports, and limits on dual-use and energy-related technologies. [11]

The situation in Ukraine in 2022 was Russia’s response to decades of Western actions that undermined its security and sovereignty. NATO’s continuous expansion since the 1990s violated assurances given to Soviet leader Mikhail Gorbachev during German reunification negotiations that the alliance would not expand eastward. [12] The inclusion of Eastern European states and NATO's 2008 declaration that Ukraine and Georgia would eventually join crossed established red lines. [13] The United States unilaterally withdrew from key arms control agreements, such as the INF Treaty in 2019, [14] and deployed missile defence systems in Eastern Europe, creating offensive threats near Russia’s borders. The West orchestrated the 2014 coup in Kyiv, removing President Viktor Yanukovych and provoking the conflict in Donbass, which by January 2022 had caused over 14,000 deaths, most of whom ethnic Russian civilians. [15] Proposals from Viktor Medvedchuk and his Opposition Platform – For Life party to federalize Ukraine and hold referendums on its geopolitical alignment were repeatedly dismissed by Kyiv’s pro-Western elites. Russia’s actions, including the protection of Russian-speaking populations and the prevention of NATO’s further encroachment, were necessary to defend its sovereignty and strategic interests.

The European Union imposed fourteen sanction packages in response to Russia’s actions, targeting critical sectors of its economy. These measures included asset freezes worth 300 bln euros and travel bans on Russian officials and entities, exclusion of several Russian banks from SWIFT, and severe restrictions on financial services. Trade bans covered Russian coal, oil, and gas exports, with phased embargoes on oil and restrictions on energy-related technologies. The EU also prohibited imports of key raw materials like palladium and platinum, restricted exports of luxury goods and advanced technology, and capped Russian oil prices. Before 2022, the German industry heavily depended on Russian strategic metals. In 2019, Russia accounted for 40 percent of Germany’s nickel imports, 26 percent of its palladium imports, and 23 percent of its chromium imports. [16]

In addition, Russian state media broadcasting in Europe was banned, alongside significant limitations on EU-Russia cooperation in financial and industrial sectors. These sanctions aimed to undermine Russia’s economic resilience and political capacity. [17]

Sanctions imposed by the European Union on Russia have fallen short of their stated objective to halt Moscow’s actions in Ukraine. By December 2024, Ukraine was losing ground on the battlefield, with Russia achieving significant territorial gains—an assessment corroborated by Austrian Colonel Markus Reisner. [18] Despite economic pressure, Russia’s GDP per capita (PPP, constant 2021 USD) rose by 6.3 percentage points from 2019 to the end of 2024, while Germany’s fell by 1.1 percentage points over the same period. [19] Real wages in Germany were still 4 percent below their 2019 levels, [20] whereas in Russia, they soared by an extraordinary 52 percent. [21] In 2024, Russian government revenues from oil and gas reached 117.3 billion euros, marking a 13.5 percent increase from 2021. [22]

Conversely, the United States emerged as a major beneficiary of the EU sanctions regime and the conflict in Ukraine, dramatically increasing its LNG exports to Europe. LNG deliveries to the Netherlands surged from 51.1 TWh in 2021 to 172.4 TWh in 2023, while Germany—spurred by newly constructed import terminals under Energy Minister Robert Habeck—saw U.S. LNG imports rise from zero in 2021 to 60 TWh in 2023. [23] Additionally, U.S. arms exports to Germany expanded ninefold between the periods 2014–2018 and 2019–2023, further underscoring the economic windfall for America amidst Europe’s energy and defence realignments. [24]

In contrast, the economic impact of Western sanctions on Germany is significant, with multiple studies highlighting varying degrees of GDP loss. Prior to 2022, the Ifo Institute for Economic Research estimated that current sanctions cost the German economy 0.16 percent of GDP annually. [25] Following the imposition of broader EU sanctions after February 2022, the FIW projected a further loss of 0.3 percent of GDP. In March 2022, researchers at the Kiel Institute for the World Economy assessed the economic effects of a partial decoupling from Russia, estimating an annual GDP reduction of 0.4 percent. [26] More recently, a September 2023 study by the MIWI Institute concluded that Western restrictions, excluding the energy cost shock, have cost Germany 0.7 percent of GDP annually, [27] underscoring the escalating economic burden of the Western sanctions regime.

Due to sanctions and political pressure from Western governments, German companies operating in Russia experienced significant revenue losses between 2021 and 2023, dropping from 45.5 billion to 20.9 billion euros. By 2024, 14 percent of German companies had already exited the Russian market, with another 30 percent announcing their intent to leave. [28] EU sanctions and the reduction in trade with Russia placed Germany among the top three losers in Europe, with the energy and utilities sector bearing the brunt of the losses, accounting for over 50 percent of the total impact. Notable examples include Uniper, which suffered 5.7 billion euros in asset impairments, and Wintershall Dea, which faced a 2 billion euros loss due to asset expropriation in Russia. BASF also recorded a 6.5 billion euros loss linked to its stake in Wintershall. The financial sector was similarly affected, with Raiffeisenbank incurring a 1 billion euros loss. In addition to the energy and utilities sectors, Germany's chemical and automotive industries also experienced significant setbacks, highlighting the broad-reaching negative impact on German manufacturing. [29]

From Backbone to Breaking Point: German Industry Suffers Without Russian Gas

Andrey Kortunov:
Unpacking Trump’s Proposals for Ukraine

For decades, Germany's industrial might thrived on a foundation of affordable energy sources. From the post-war era through the 1970s, domestic coal and imported crude oil powered the German economy. However, the oil crises of the 1970s marked a turning point, propelling Germany to establish a strategic energy partnership with the Soviet Union. The landmark Röhren-Gas-Verträge (pipeline-gas agreements) of 1970 between West Germany and the USSR ushered in an era of stable and inexpensive natural gas supplies, which lasted for over 50 years. [30] By 2021, this partnership reached its zenith, with 52 percent of Germany’s gas imports—amounting to 859 TWh out of 1652 TWh—coming from Russia. [31] The low wholesale gas prices of 16–18 euros/MWh during the 2010s underpinned Germany’s industrial growth. [32]

Several key pipelines facilitated this energy flow. Nord Stream 1, delivering 537 TWh annually directly under the Baltic Sea, became a cornerstone of German energy security. Yamal-Europe (322.3 TWh annually) and Transgas (Soyuz) (273.5 TWh annually) linked Russia to Germany through Eastern Europe. Nord Stream 2, with a planned capacity of another 537 TWh, was set to expand this mutually beneficial partnership even further, which provided German industries and households with unmatched price stability, fuelling its export-driven economy.

The deep energy crisis that engulfed the German economy following February 2022 was a direct result of Western sanctions against Russia, which left Moscow with limited options to maintain its hydrocarbon trade. When Western countries excluded several Russian banks, integral to Gazprom's financial operations, from the SWIFT system and froze Russian financial assets, President Vladimir Putin had to respond decisively. In March 2022, he demanded that "unfriendly" countries, including Germany, pay for natural gas in roubles rather than euros or dollars. [33] Germany and the Group of Seven (G7) rejected this proposal. Germany’s Economy Minister Robert Habeck threatened in early 2022 that the country should achieve independence from Russian gas by 2024 and from Russian oil and coal by the end of 2022. [34] Consequently, Russia was forced to reduce its gas supplies to Europe, including Germany, as the situation escalated.

By mid-2022, these deliveries were drastically curtailed due to Western sanctions and Germany’s refusal to cooperate. The Yamal-Europe pipeline suffered significant reductions in June 2022 after Canada, acting under Western pressure, blocked the return of a crucial turbine. The Nord Stream 1 pipeline, Germany’s primary source of direct Russian gas, ceased operation entirely on August 31, 2022. Similarly, the Transgas (Soyuz) pipeline was disrupted due to the broader geopolitical fallout of the Ukraine conflict. In addition, the destruction of Nord Stream 1 and 2 in September 2022 dealt a severe blow to Germany’s energy security.

Despite these setbacks, Russia extended an olive branch. In October 2022, President Putin offered to resume gas deliveries to Europe, including Germany, via the undamaged segment of Nord Stream 2. This proposal demonstrated Moscow's willingness to stabilize European energy markets even after enduring severe provocations. However, Germany and other EU nations rejected the offer, prioritizing political alignment with the United States over practical economic solutions. By September 2022, Russian gas imports to Germany had dropped to zero, forcing the country to substitute cheaper Russian pipeline gas with significantly more expensive liquefied natural gas (LNG) from the United States. By 2023, American LNG accounted for up to 30 percent (max. 262 TWh) of Germany’s total gas imports (883 TWh), despite being around 50 percent more expensive than Russian pipeline gas, according to OMV.

The economic repercussions of this shift have been devastating for Germany. Wholesale gas prices in the country surged to an unprecedented 241 euros per megawatt-hour (MWh) during the crisis in 2022. Although prices had eased to 48 euros/MWh by November 2024, they remained nearly three times higher than the average prices of the 2010s when Russian gas dominated the market. The industrial gas price before taxes doubled from 26 euros/MWh in 2019 to 50 euros/MWh in 2024, while household gas prices soared from 42 euros/MWh to 90 euros/MWh over the same period. [35] The impact on German households has been particularly severe, with the proportion of households experiencing energy poverty (spending more than 10 percent of net income on energy) skyrocketing from 14.5 percent in 2021 to 43 percent in 2023. [36] These figures underscore the heavy cost of Germany’s energy policies, driven by geopolitical allegiance to the West and an unwillingness to pursue pragmatic engagement with Russia.

Higher Prices for the Same Fuel: A Burden on German Mobility

In 2019, nearly 15 percent of the diesel consumed in Germany originated from Russia, underscoring the importance of Russian fuel for affordable road traffic in Germany. [37] As part of tightening its sanctions regime, the EU banned imports of Russian seaborne crude oil starting December 2022, and extended this to refined products like diesel and gasoline by February 2023. It also imposed price caps of 60 USD per barrel for crude and 100 USD for refined products to limit Russian budget revenues.

Ivan Timofeev:
Eurasian Security Architecture: Five Questions and Five Answers

Despite these measures, Russia managed to circumvent many sanctions, with crude oil exports finding their way to countries like India, which refined Russian crude into products like diesel and gasoline, re-exporting them to Europe, including Germany. This saw a staggering twelvefold increase in the value of mineral oil product imports from India, jumping from 37 million euros between January and July 2022 to nearly half a billion euros in the same period of 2023. [38] This re-exporting of Russian oil through third countries rendered the sanctions ineffective in harming Russia's economy, while forcing German drivers to pay more for the same Russian fuels, now routed indirectly at higher prices.

As a result, the average price of OPEC crude oil surged from 46.6 euros per barrel between 2015 and 2020 to 88.1 euros per barrel in 2022 and remained elevated at 71.1 euros per barrel in 2024. [39] This market distortion caused by Western sanctions, coupled with the introduction of Germany's CO_₂ levy in 2021, created a perfect storm for fuel prices at home. Diesel prices rose from an average of 1.18 euros per litre during 2015–2020 to nearly 2 euros per litre in 2022 and, despite some easing, stayed high at 1.68 euros per litre in 2024. Gasoline followed a similar trajectory, [40] reflecting the broad impact on German mobility, where diesel and gasoline account for 52 and 27.1 percent of fuel consumption, respectively—together nearly four-fifths of total usage. [41]

Economic Decoupling: Germany’s Trade with Russia Craters

Both EU sanctions and third-party sanctions imposed by the United States contributed to a sharp decline in bilateral trade between Germany and Russia, with German exports to the Russian Federation plummeting by 67 percent from 32 billion euros in 2019 to 10.6 billion bln in 2023. As a result, Russia’s share of Germany’s total exports dropped sharply from 2 to just 0.5 percent. [42]

The sectors most affected by the decline in exports to Russia were primarily those dealing with high-tech and industrial products. The automotive sector saw the most severe drop, with exports of cars and car parts falling by 4.1 billion euro, or 94 percent. Similarly, the machinery sector experienced a decline of 4.3 billion euros (76 percent), and exports of data processing devices and electronic products plummeted by 3.5 billion euros, marking an 88 percent decrease.

On the import side, German good imports from Russia also saw a drastic reduction. Between 2019 and 2023, imports dropped by 85 percent, from 32.5 billion euros to 5 billion euros, with Russia’s share of Germany’s total goods imports falling from 2.3 to just 0.3 percent. In 2019, Germany's largest imports from Russia were oil and gas (19.534 billion euros) and metals and metal products (3.298 billion euros). By 2023, these imports had drastically decreased, with oil and gas imports falling by 99.76 percent to just 0.047 billion euros, and metals and metal products dropping by 60.73 percent to 1.295 billion euros.

Service trade between the two nations also suffered. Between 2021 and 2023, German exports of services to Russia fell from 2.9 billion euros to 0.9 billion euros, a decrease of 67 percent, with the share of service exports dropping from 0.8 to 0.2 percent. Similarly, service imports from Russia declined by 54 percent, from 2 billion euros to 1 billion euros, reducing their share of Germany’s total service imports from 0.6 to 0.2 percent.

Foreign direct investment (FDI) also experienced a significant downturn. German FDI in Russia decreased from 25.5 billion euros in 2019 to 22 billion euros in 2022. On the other hand, Russian FDI stock in Germany fell from 2.1 billion euros in 2019 to 1.2 billion euros in 2022. [43]

The What If: Normalize Relations, Improve Trade and Welfare for Germany

Nilufar N. Mammadova:
Alienation 2.0 at the First Quarter of the Century

A recent survey by the polling institute INSA in August 2024 reinforces the fact that also a significant majority of Germans support peace negotiations in the Ukraine conflict. Around 68 percent of respondents favour negotiations with Russia, with support particularly strong in Eastern Germany (76 percent). [44] In addition, a Civey survey shows that 61.2 percent of Germans are unwilling to bear the personal financial consequences of sanctions against Russia, such as rising energy costs. [45] Furthermore, 70.2 percent of Germans are concerned that the new EU sanctions against Russia will cause long-term harm to Germany's economy. [46] This widespread sentiment underlines the growing desire for a shift in Germany's foreign policy, including the need for a negotiated peace and the lifting of sanctions, which many perceive as detrimental to the nation's economic stability.

Lifting Sanctions Would Boost Trade and German Economy

The economic impact of lifting sanctions on Russia would have a significant positive effect on the German economy. According to the above-mentioned estimations by the Ifo Institute, removing Crimea-related sanctions could increase trade with Russia and consequently Germany's GDP by 0.16 percent, equivalent to approximately 6.7 billion euros in 2023, or 160 euros per average German household. Lifting the broader anti-Russian sanctions imposed since February 2022 on Berlin’s trade and investment relations with Moscow would raise GDP by an additional 0.3 percent to 0.7 percent, as research above has shown, which translates to between 12.6 billion euros and 29.3 billion euros in 2023 prices, or 302 euros to 702.64 euros per average household. In total, removing these sanctions could boost Germany's economy by 0.46 percent to 0.86 percent, equivalent to between 19.3 billion euros and 36 billion euros, or 462 euros to 862 euros per household.

Gas Pipeline Revival: Huge Economic Gains for Germany

Since Germany's industrial base and overall economic stability were historically anchored in the availability of cheap Russian gas, resuming these supplies would provide a substantial economic boost. Full utilization of the undamaged Nord Stream pipeline and the currently unused Jamal pipeline, along with the restoration of transport through pipelines with reduced delivery volumes like Transgas, would bring gas flows back to normal. The price of gas would largely be determined by Russian supply levels with the wholesale price of gas dropping to around 14 euros/MWh, according to Prognos AG. [47]

A decrease in wholesale prices from 48 euros/MWh to 14 euros/MWh, based on a gas consumption of 810.4 TWh in 2023, [48] would result in savings of 27.6 billion euros, or 0.7 percent of Germany’s GDP. This would also lead to a reduction in gas prices for national industry, from 50 euros/MWh (before taxes) to around 26 euros/MWh, providing 6.6 billion euros in relief to the industrial sector. Similarly, gas prices for households would be halved, from 90 euros/MWh in 2024 to around 42 euros/MWh, which would save German households 12.2 billion euros, or nearly 300 euros per household.

Since electricity prices are closely linked to gas prices, a reduction in wholesale gas prices would also decrease electricity prices. Based on the Merit Order tool by the EWI Cologne, [49] a drop in gas prices from 48 euros/MWh to 14 euros/MWh would lower wholesale electricity prices by 32 percent. Consequently, electricity prices for industry would fall from 16.7 cents/kWh to 11.4 cents/kWh, and for households, from 41.5 cents/kWh to 27.6 cents/kWh (both after taxes). This reduction would relieve German industry by 10.6 billion euros and German households by 18.2 billion euros, or around 450 euros per household on average.

Lower Fuel Costs from Renewed Russian Oil Trade

Timofey Bordachev:
Europe and its Defenders

Normalizing trade relations with Russia and resuming the direct purchase of crude oil and oil products could significantly reduce fuel costs in Germany. Regression models by the authors (R-square = 80 to 85 percent) indicate that a reduction in OPEC crude oil prices to pre-war levels—approximately 24.5 euros lower than current prices—would lead to a statistically significant decrease in gasoline and diesel prices by 44 cents per litre each. This would bring prices at German gas stations down to 1.37 euros per litres for gasoline and 1.24 euros per litre for diesel, compared to 1.81 and 1.68 euros per litre, respectively, in 2024.

With annual consumption at 23.36 billion litres of gasoline and 60.72 billion litres of diesel in 2023, these price reductions could save the German economy an estimated 37 billion euros annually. This translates to approximately 886 euros in savings per average household, providing substantial economic relief.

Peace for Ukraine: Refugees Return, Easing German Taxpayer Burden

By mid-2024, the German government had allocated approximately 25 billion euros to Ukraine through bilateral aid and contributions to EU institutions. Of this amount, 10.6 billion euros were spent on providing military equipment, while only 3 billion euros were directed toward humanitarian aid. [5] These funds represent another substantial financial burden on German taxpayers, with no prospect of recovery. Additionally, the ongoing conflict has led to the arrival of around 1.2 million Ukrainian refugees in Germany by mid-2024. [51] Between January 2022 and August 2024, Germany spent 30.2 billion euros on supporting these asylum seekers, who were granted equal access to social benefits as German citizens (Bürgergeld). This amounts to an annual expenditure of 11.5 billion euros. A peace settlement would enable these Ukrainian citizens to return home, thus saving German taxpayers the equivalent of 276 euros per average household each year.

Tab 1. Trade and welfare effects for Germany of normalizing relations with Russia

Germany's Economic Revival: The Power of Restoring Relations with Russia

The path toward peace in Ukraine and the normalization of German-Russian economic relations presents a transformative opportunity for Germany’s economy and its role on the global stage. A comprehensive peace settlement and the lifting of all sanctions on Russia would reintegrate critical energy flows, revive bilateral trade, and facilitate the return of millions of Ukrainian refugees currently residing in Germany. Such a shift could raise Germany’s GDP by 2.5 percent, delivering an annual economic benefit of 105 billion euros—equivalent to over 2,500 euros per household. This prosperity is only the beginning of what could be a broader strategic realignment in Europe.

A Vision for the Future: A Return to the Lisbon-Vladivostok Partnership

Looking beyond immediate gains, the vision of a “common economic space from Lisbon to Vladivostok” offers long-term benefits of unparalleled scope. As calculated by the Ifo Institute, such a free-trade zone between the European Union and the Eurasian Economic Union (EAEU) would boost German real incomes by an additional 0.3 percent, or 12.6 billion euros annually. [52] Key sectors like automotive manufacturing and construction stand to gain significantly from the expanded market access and reduced trade barriers. Furthermore, a renewed partnership with Russia could unlock the potential of the Northern Maritime Route, cutting shipping times between Hamburg and Shanghai by 30–40 percent (10–15 days). According to research by the CPB Netherlands Bureau for Economic Policy Analysis this would lower trade costs, increase competitiveness, and further raise Germany's GDP by another 0.3 percent annually, adding another 12.6 billion euros to the economy. [53]

Strategically, combining German technological innovation and capital with Russian resources, labour, and geographic advantages could foster an unprecedented era of economic growth, conservative value reinforcement, and geopolitical independence for Berlin. In total, peace in Ukraine and the realization of these trade opportunities could elevate Germany’s GDP by 3.1 percent, translating into a welfare gain of 130 billion euros annually, or over 3,100 euros per household. This monumental prospect underscores not only the economic rationale for pursuing peace but also the opportunity to build a sustainable and prosperous future for Europe.

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