Tilak Doshi Contributor
I analyze energy economics and related public policy issues.
We live in “interesting times” as the Chinese curse would have it:
“Russia’s war against Ukraine could spiral into the world’s worst energy crisis since the 1970s, a top economic historian says”, Business Insider, March 4th
“‘Worst crisis since the second world war’: Germany prepares for a Russian gas embargo”, Financial Times, April 21st
“‘Apocalyptic’ food shortage threatens, says Bank of England governor”: Sydney Morning Herald, May 17th
“Forty-Nine Million People in 43 Countries One Step Away from Famine, Secretary-General Warns in Briefing to Security Council on Conflict, Food Security”, United Nations, May 19th
In the aftermath of the Russia invasion of Ukraine on 24th February, the U.S., U.K. and the European Union along with their closest allies imposed the most comprehensive and unprecedented economic attack on a sovereign nation in recent history. The Western alliance expropriated half of the Russian Central Bank’s foreign exchange reserves held offshore – which had totalled some $650 billion — and blocked key Russian banks’ access to the SWIFT international payments system. The all-out economic warfare launched on Russia was meant to devastate the Russian economy, collapse the rouble and possibly lead to regime change with the ouster of President Vladimir Putin. President Joe Biden said “Putin must go” in off-script remarks, and not to be outdone, one U.S. senator even welcomed Putin’s assassination. This was instantly cheer-led by commentators in the media.
The financial sanctions had an immediate effect, and Russia’s rouble fell by almost half of its value, to 136 to the dollar from the pre-invasion levels of around 70. The Moscow stock market got shuttered. It would have seemed that the country’s economy faced ruin in short order. Remarkably, the rouble soon recovered sharply to beyond pre-invasion levels. On Friday, the rouble was trading at 61.5 to the dollar, making the rouble the world’s best performing currency against the dollar in 2022. The value of the rouble is hardly a comprehensive indicator of Russia’s economic performance but other indicators, such as the central bank’s recent cut in its interest rate from 17% to 14% and the continued health of retail spending at cafes, bars, and restaurants, suggest that Russia’s economy is holding up well despite the wide-ranging Western financial sanctions.
Russia is not Cuba, North Korea, Iran or Venezuela. “Experts” often cited in the media point out that Russia’s GDP is comparable to the EU’s economic laggard Spain, as if that explains the limits of Russia’s potential in geopolitical affairs. But Russia is geographically the largest nation on earth with 140 million citizens across 11 contiguous time zones. It has the world’s third most powerful military commanding the largest arsenal of nuclear warheads. Above all, it is a powerhouse for commodity exports. Ambrose Evans-Pritchard of The Daily Telegraph calls Russia “a full-spectrum commodity superpower, less vulnerable to sanctions than Europe itself”.
Russia is a major food producer, being the world’s third largest wheat producer and leading net exporter. It is also the world’s largest fertilizer exporter and ranks number three in aluminium exports and number four or five among the world’s largest iron and steel exporters (depending on whether EU as a whole is ranked in this list). It is also a leading exporter of key industrial metals such as palladium, platinum, nickel and copper which are critical to the West’s ambitions for the “energy transition” to renewables such as wind and solar power and electric vehicles. Most critically, Russia is a heavyweight fossil fuel exporter in world markets. Fossil fuels, it should be noted, still account for some 80% of global energy consumption. It is the world’s largest natural gas exporter, the 2nd largest oil exporter (after Saudi Arabia) and the third largest coal exporter (after Australia and Indonesia).
Russia Raises Its Rouble Defence…
In response to the “shock and awe” financial sanctions launched on Russia, President Putin signed a decree on March 31st requiring all “unfriendly” countries – that is, those countries that launched unilateral financial sanctions on Russia – to pay in roubles for its natural gas. EU leaders protested that the Kremlin’s “roubles for gas” demand was against “contract sanctity”. Presumably, in their view, the Western alliance’s unilateral expropriation of Russia’s sovereign wealth did not count as breach of contract. Nor did the U.S. administration hesitate to weaponize its dollar hegemony to ex-communicate Russia from the international financial system.
Two months after EU leaders rejected the Kremlin’s “roubles for gas” plan, at least twenty European natural gas importers including leading companies such as ENI, Uniper and OMV have opened accounts with Gazprombank to enable payments in roubles, with fourteen more importers requesting similar facilities from the bank. Russia halted gas supply to Poland and Bulgaria in April and to Finland on Friday for failing to pay for their gas supplies in roubles. After weeks of contradictory advice from Brussels, the EU just gave its assent to payment for Russian gas in roubles by its members.
On the more fungible oil trading front, the US, UK, Canada and Australia have banned crude oil and refined products from Russia. The EU, however, has yet to act given Europe’s much heavier dependence on Russian oil imports. About 27% of EU’s oil imports are sourced from Russia. On May 4, the EU proposed a ban on Russian oil imports by the end of the year but failed to get a consensus as Hungary vetoed the move. And while EU ports are effectively closed to Russian oil tankers, Greek shipowners tripled their share in transporting Russian oil in April compared to the 2021 average. The powerful Greek shipowners lobby pushed the EU to drop their sanctions on Russian oil exported to third countries.
Russia has so far deflected much of the impact of sanctions on its oil trade. India, and to a lesser degree China, have been snapping up cheap Russian crude oil cargoes shunned by the Western alliance. India now accounts for about 10% of Russian oil exports, from close to zero in early 2022. By the first week of April, Russian oil exports climbed back to their pre-invasion levels. As commodity prices for fuels, food and fertilizers have surged since the Russia sanctions, Russia’s current account surplus more than tripled in the first four months of the year to $95.8 billion.
…And Europe Goes For Economic Suicide
The EU depends on Russia for over 40% of its natural gas supply, while German dependence on Russia is even higher, at around 50 – 60%. In early March, on a proposal intended to undermine Russia’s financial ability to wage the Ukraine offensive by placing constraints on its key energy and primary commodity exports, the European Commission published plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel “well before 2030”. This is a tall order by any measure. Like the EU’s aspirational German-driven Green Deal goal of “net zero by 2050”, it has little chance of coming anywhere close to being achieved if the laws of economics and physics have anything to do with it.
Europe has no alternative to spending billions of Euros every month on Russia’s piped natural gas in the short run (i.e. up to 3 to 5 years out). Supply side solutions will take years for the requisite LNG infrastructure and alternative suppliers with additional capacity to achieve EU’s diversification efforts. In the meantime, German leaders have only “demand side measures” to resort to. In normal parlance, this means “tighten your belts”. Sure enough, draft proposals from the European Commission seen by the Financial Times state that “[t]he EU will also have to cut energy consumption more than previously thought to meet ambitious net zero carbon emissions targets by 2050.” Not to be outdone in the energy-hairshirt stakes, the climate alarmist IEA – now known more for its unhinged advocacy for all things Green than as a credible energy research organization — duly came out with a 10-point plan to reduce fossil fuel use in Europe to “help Ukraine” on the back of European consumers.
Germany’s Bundesbank stated in late April that in a “severe crisis scenario, real GDP in the current year would fall by almost 2% compared to 2021,” and the “inflation rate would be significantly higher for a longer period of time” following an embargo. A more recent study of the impact of an immediate embargo on Russian gas exports to Germany estimated that it could reduce its 2022 GDP by up to 12%. Manfred Knof, CEO of Commerzbank – Germany’s second largest private bank – warned that a “tsunami of bankruptcies” could batter Europe’s largest manufacturing hub as stagflation risks mount due to Western sanctions on Russian energy exports.
The “global campaign” against Russia covered breathlessly by the mainstream media is nothing of the sort: the vast majority of nations outside of the transatlantic alliance of the US, EU and their closest allies, accounting for over 80% of the world’s population, have not participated in the anti-Russia sanctions. The “striking unity of purpose” in the US and Europe over the Russia sanctions has meant little for most governments in the Middle East, Asia, Africa and Latin America intent on navigating what looks like a rapidly bifurcating world economy. Nor is it very evident in the EU’s failed attempts to get consensus on plans for an embargo on Russia’s energy exports.
Dmitry Medvedev, the former President of Russia and current Deputy Chairman of the Security Council of the Russian Federation, wrote on Telegram: “Only a few weeks after the imposition of the ‘hellish’ sanctions against Russia, it turns out, as expected, that they will boomerang back on the West.” For leading developing countries such as Brazil, India, China and South Africa, protecting their freedom to trade with a commodity superpower such as Russia is as important as ensuring that they do not become the next victims of a globalizing West wielding its dominance in international financial institutions. While bureaucrats in Brussels and Washington DC push their wishful renewable energy dreams, the rest of the world has to get on with the ordinary business of making ends meet.
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