According to a preliminary estimate released Tuesday, by the EU’s statistics agency, Eurostat, in May, the business climate index in the Eurozone dropped to the lowest level seen in two years,

The data showed that for May, the indicator, which is designed to use monthly survey data to assess the state of the business environment within the Euro area, fell from 0.5 points in April to 0.19 points in May. Currently it is at its lowest reading since the beginning of 2021, when the economy of the Eurozone was in the depths of the economic effects from the Covid 19 pandemic.

Eurostat reports the conditions are the most severe in the industry sector in the region. Within that sector, the level of business activity has fallen for 11 straight months. For the third straight month. in May, the euro area industrial sentiment indicator was negative, tying its two-year low by falling from -2.8 in April to -5.2 points in May. The service, retail, and construction sectors all also saw sentiment deteriorate.

Analysts believe the defining variable responsible for the dynamic is the severing of economic ties between the EU and Russia. EU manufacturers were harmed by the bans implemented as part of Ukraine-related sanctions, on the delivery of equipment and machinery to Russia.

Meanwhile the removal of cheap Russian energy from the EU market produced a massive spike in inflation in the region. As a result of the inflation produced by the sanctions placed on the Russian energy industry, local authorities have been forced to hike interest rates to combat rising prices. This has driven up costs and reduced borrowing, as energy prices remained elevated, all making operation even more difficult for local businesses.

Natalia Milchakova, lead analyst at Freedom Finance Global, said in an interview, “More than half of Russia’s imports from the EU were machine tools and industrial equipment. Against the background of the imposed restrictions, many exporters were forced to stop supplying their products to Russian customers. Therefore, the decline in the European capital goods industry is a direct consequence of the sanctions against Moscow.”

EU countries have experienced disagreements over any potential new sanctions to be levied against Russia due to potential effects they could have on the region’s economy and business sectors. Reportedly however, Brussels is continuing to develop a new sanctions package, which reportedly may include a halt to all of the remaining Russian oil flows heading to EU countries.

Artem Deyev, head of the analytical department at AMarkets, said, “The bottom line is that the actions of some EU states are starting to hit the economy of others. Add to this Germany and Italy, whose industry was very dependent on cheap Russian gas, the ban on grain exports from Ukraine to a number of EU countries, and a record increase in interest rates. So we are seeing a deterioration of the business climate, because under such circumstances any development and growth is out of the question. Business is now more concerned with survival.”