The Rubicon Crossed: The Energy World Turned Upside Down After the Ukraine War

Reposted from Forbes.

Tilak Doshi Contributor

I analyze energy economics and related public policy issues.

49 BCE Julius Caesar crossed the Rubicon river with the 13th Legion, a defiant act that signalled the start of the Roman Civil War.

The International Criminal Court (ICC) issued an arrest warrant on 17^th March against Vladimir Putin, leader of the world’s largest energy exporter (Russia), accusing him of the war crime of illegally deporting hundreds of children from Ukraine. Five days later, China’s President Xi Jinping – recently confirmed for an unprecedented third term — said he was ready to ‘stand guard over a world order based on international law’ as he met President Putin in Moscow. “International law” seems to have different interpretations, and the ICC evidently does not have a monopoly on what passes as international law in the concert of nations.

According to Wikipedia, the ICC is an international tribunal seated in The Hague, Netherlands with over 100 countries having ratified the Rome Statute, meaning that they are willing to use the ICC in their States. Among the countries that do not recognize its jurisdiction are Russia, China and the US. While the ICC matters little in the daily life of the world’s billions of ordinary mortals, it aims to exhibit a global consensus on criminality including genocide, crimes against humanity, war crimes and the crime of aggression.

While opinions differ on criminality, the war in Ukraine has upset the daily life of people around the world. Food, fuels and fertilizers have become more expensive for everyone, and the world energy order has turned for the worse. To be sure, the covid pandemic lockdowns and prior “green” anti-fossil fuel policies had already set the stage for inflation and shortages of essential foodstuffs and industrial commodities even before the outbreak of the Ukraine war. The war itself merely accentuated the inflation and fraying of supply chains that was already apparent across the global economy.

Phone calls and diplomacy

President Xi, we learn, is slated to have a call with President Volodymyr Zelensky of Ukraine after the former’s visit to Moscow. According to CNN, a “senior Ukrainian official” said that “discussions are underway with China to organize a call between the Chinese leader Xi Jinping and Ukrainian President Volodymyr Zelensky to discuss Beijing’s proposal for a peace plan for Ukraine”.

Meanwhile, we are also told by the Biden White House spokesman John Kirby that “President Xi has been kind of busy of late. I mean, he had the People’s Congress, which just ended; now he’s in Moscow. So, look, when it’s the right time and — for both leaders, we’ll get them on the phone.” The last time President Biden’s request for a phone call was not answered immediately was about a year ago, when it was reported that the White House was “unable to arrange calls between President Biden and the de facto leaders of Saudi Arabia and the United Arab Emirates” as US officials tried to garner international support for Ukraine and tame a surge in global oil prices.

While global leaders meet (or not) and when they have phone conversations (or not), life goes on. And whether any of the global leaders are alleged “criminals” (or not), they seem to meet and talk (or not) when it is convenient to them. What is clear now, one year into the Ukraine war, is that peace is not around the corner. During their meeting in Moscow this week, Presidents Putin and Xi referred to each other as “dear friend”, promised economic cooperation, condemned the West and described their mutual relations as the best they have ever been.

While Presidents Xi and Putin were confabulating in Moscow, European Union countries agreed in Brussels on Monday for “a 2 billion euro plan to send 1 million artillery rounds to Ukraine over the next year by digging into their own stockpiles and teaming up to buy more shells.” On the same day, US Secretary of State Antony Blinken announced $350 million in new US military aid to Ukraine (in addition to an estimated $196 billion provided to Ukraine from January to November 2022) and expressed renewed support for the stance of Ukrainian President Volodymyr Zelensky who has demanded a complete Russian withdrawal from Ukraine including Crimea.

The Energy World Cleaved

As President Xi departed Moscow at the conclusion of his trip, he told President Putin: “Now there are changes that haven’t happened in 100 years. When we are together, we drive these changes.” In response, Putin replied, “I agree.” President Xi’s parting words seek first to demonstrate what both countries publicly advocate: the transition to a multipolar world beyond the American-dominated Bretton Woods system based on the US dollar as the international reserve currency. Second, they accentuate the growing Russia-China strategic partnership.

After Russia invaded Ukraine, the U.S., U.K., EU and allies imposed the most comprehensive and harshest 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 $630 billion — and blocked key Russian banks’ access to the SWIFT international payments system. Since February 2022, multiple sanctions have been applied on Russian individuals and institutions, with a focus on the country’s main export sectors, in particular oil and gas. The all-out economic warfare launched on Russia was meant to devastate the Russian economy, collapse the ruble and possibly lead to regime change with the ouster of President Putin.

In the event, the ruble rapidly fell to half its value after the invasion in February. But by June the ruble was at its strongest in more than seven years — earning it the distinction of being the best-performing currency in the world. In January this year, Reuters reported that Russia posted a record current account surplus of $227 billion in 2022, up 86% from 2021. Russian output will expand 0.3% this year (and 2.1% next year), defying earlier predictions according to the IMF which upgraded its January 30th forecast from the previous October forecast of a 2.3% contraction. Russia, according to the IMF, will perform better than Germany or the United Kingdom this year.

This was aided by robust oil and gas exports at high prices despite Western efforts to isolate the Russian economy. Russia replaced revenues lost from its reduced oil and gas exports to Europe with a pivot to China, India and other countries which did not participate in the sanctions. India and China quickly became major customers of Russia’s displaced energy exports at discounted prices.

The global energy order has been cleaved into two blocs – those supporting the Western sanctions on Russia and those that don’t. The latter constitutes most of the countries outside the narrow Western alliance of the US, EU, UK and their closest allies such as Canada, Australia, Japan and South Korea. Brazil, China, India, and South Africa (members of the BRICS bloc) share a compelling interest with all developing countries to access fuels, food and fertilizers – of which Russia is a “full-spectrum commodity superpower” – at lowest prices.

For sovereign nations, being told to “take sides” is an affront. This was well illustrated during Antony Blinken’s tour of some African countries in August when he went on “a charm offensive in Africa to regain the US popularity which was lost ostensibly during the Trump administration, and to counter the attempts from Russia to get more African countries on their side.” In pointed remarks to the press with Mr. Blinken sitting at her side, South African Foreign Minister Naledi Pandor said that she objected to “patronizing bullying” coming from the West: “Because when we believe in freedom – as I’m saying, it’s freedom for everybody – you can’t say because Africa is doing this, you will then be punished by the United States…. One thing I definitely dislike is being told ‘either you choose this or else.’”

For leading developing countries such as Brazil, India, China and South Africa, ensuring that they do not become the next victims of a globalizing West wielding its dominance in international financial institutions is as important as protecting their freedom to trade with a commodity superpower such as Russia. China’s Global Times, the daily tabloid published under the auspices of the the Chinese Communist Party, put it this way: “The thought the US may move to grab anybody’s assets who refuses to obey Washington’s dictates is truly unnerving, which is now inducing more countries to diversify their reserve assets away from US dollars.” Gita Gopinath, the IMF’s Economic Counsellor stated much the same thing by noting that “sanctions on Russia could erode the dollar’s dominance by encouraging smaller trading blocs using other currencies.”

While the US dollar’s role as international reserve currency will not be replaced anytime soon, a process of bifurcation of the global economy has already begun. We are now witnessing the emergence of parallel commodity-based financial blocs in trade, investment, finance and development loans. This will be facilitated by new financial institutions such as the BRICS’ New Development Bank and China’s Asian Infrastructure Investment Bank and the increased use of currencies other than the US dollar in regional energy trade. Moscow and Beijing are working on the creation of an international reserve currency and an integrated inter-bank payments system based on a commodity-linked basket of BRICS currencies to counter Western financial sanctions.

The global energy system: A glimpse into the future

For Europe, the loss of cheap Russian gas — the basis of Germany’s Wirtschaftswunder (post-war economic miracle) — is irreversible even if the sabotaged Nordstream pipelines can be repaired. The damage to the mutual trust necessary for long-term trade between Russia and its European neighbors will not be so easily mended. Europe will undergo continued energy demand destruction, leading to de-industrialization, steep falls in living standards and social strife.

The US, well-endowed with energy and other natural resources, will gain comparative advantage in manufacturing over a vassalized Europe. The US under the Biden administration is beset by an incoherent energy policy that simultaneously wages a regulatory war on its domestic oil and gas producers to “fight climate change” while berating it for not producing enough to bring down domestic gasoline prices at the pump (an important consideration in presidential popularity). Yet, as a federal system, the US boasts many constituent states that fiercely guard their domestic industries that include coal, oil and gas. In January, twenty-one state attorneys-general released a letter that objected to the use of so-called environmental, social and governance (ESG) criteria by investment advisory companies and suggested that this possibly constituted an illegal violation of fiduciary duty.

Developing countries in Asia, Africa and Latin America that are not themselves net fossil fuel exporters will face more expensive energy supplies and slower economic growth. They will weigh their own national interests and make their own energy choices. Their choices will not necessarily be cynical and transactional but likely reflect their own attempts to climb the energy ladder that led the West to its current high living standards. For these developing countries, the Russia – China axis is a major geopolitical determinant while India’s “non-aligned” role remains important in its own right.

The Ukraine war is a watershed moment in history and the world has changed forever. The future global financial and energy order, bifurcated if not balkanized, will be less efficient with more expensive fuels and greater inequalities of access. When Julius Caesar crossed the Rubicon in 49 B.C., passing “a point of no return” as understood in English idiom, he uttered (according to some authors) the phrase alea iacta est (“the die is cast”) before crossing the river. It is doubtful whether any such self-aware thought crossed the minds of policy makers in the Biden administration when they decided to sanction Russia.

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Tilak Doshi

I have worked in the oil and gas sector as an economist in both private industry and in think tanks, in Asia, the Middle East and the US over the past 25 years. I focus on global energy developments from the perspective of Asian countries that remain large markets for oil, gas and coal. I have written extensively on the areas of economic development, environment and energy economics. My publications include “Singapore in a Post-Kyoto World: Energy, Environment and the Economy” published by the Institute of Southeast Asian Studies (2015). I won the 1984 Robert S. McNamara Research Fellow award of the World Bank and received my Ph.D. in Economics in 1992.