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Are Russia and the West Divorced?

The US and its allies’ expansive sanctions on Russia may be the start of a new era in geopolitics.

 

President Vladimir Putin’s bloody invasion of Ukraine has prompted the most severe sanctions regime the West has ever imposed on a major economy. The US, UK, EU, Switzerland, Japan and Canada have all adopted sanctions against key Russian individuals and institutions, including Russia’s Central Bank. Major firms are also self-sanctioning. This week McDonald’s announced the closure of the 850 Russian restaurants that became a visceral symbol of the post-Cold War era. Finally, in recent days, the Biden administration announced a US ban on Russian oil and gas imports and the EU, which is far more dependent on Russian energy than the US, introduced a plan to cut Russian gas imports by two-thirds this year.

Washington’s move to sanction Russia’s energy industry represents a sea change in the West’s approach to managing Russia’s revisionist challenge. Even after Russia illegally annexed Crimea in 2014, Washington, Brussels, and primarily Berlin, were loath to launch expansive sanctions against the Russian energy sector in part because of Europe’s deep energy interdependence with Russia. Although Europe has not yet announced an embargo against Russian imports, Moscow’s recent actions in Ukraine have dealt what may be a fatal blow to a relationship that survived dark periods of the Cold War, the collapse of the Soviet Union, and Russia’s turbulent and lawless 1990s.

Although the Biden administration’s ban on Russian energy may be more signal than substantive — Russian oil accounts for only 3% of US consumption — that signal is already affecting commodity markets, the global economy, and the American public. Russia is the world’s largest oil exporter, and is a market maker in all major energy sources: oil, gas, electricity, and thermal coal, as well as nuclear and metals. The West’s desire to punish Moscow by forcefully wrestling Russia, the 11th largest economy, from an interdependent globalized economy is already wreaking havoc on global markets. Americans should be prepared to pay — literally — for what is tantamount to a Western economic war against Russia.

RUSSIA’S WAR IN UKRAINE HITS AMERICAN WALLETS

Even before Russia invaded Ukraine in late February, energy markets were already in considerable turmoil. Oil demand was already heading into an all-time high in 2022, and natural gas and coal consumption were already at record high levels. Europe in particular was in the midst of a severe energy crisis. For example, in November 2022, Moldova declared a state of emergency after it could not source enough natural gas to meet its energy demand. With the Biden administration’s announcement of the Russian energy ban, commodity markets began pricing in a wider, full-scale disruption of Russian supplies to the market, resulting in one of the wildest weeks on the markets… ever.

The ripple effect of Russia’s invasion of Ukraine is global. Soaring energy prices are problematic in rich countries, but devastating in developing economies.

Although the US can make up for Russia’s missing volumes with alternative imports, the seismic shifts in energy relationships and markets are already having a major effect on the American economy. Gas prices have reached record highs, and it is only March, the lowest point of refinery crude intake. From now until August 2022, refinery demand surges are sending prices higher. Consumer pain at the pump has a ripple effect on the US economy, increasing the chance of a “chain of recession,” which means that consumers have less money to spend on goods and services, driving down demand and making production of goods more expensive, ultimately hurting businesses.

In an attempt to keep American energy prices stable, the Biden administration desires to bring additional volumes of oil to the market, by encouraging US shale producers to drill baby drill, and negotiating with former pariahs Iran and Venezuela. Unfortunately, these attempts are not yet bearing fruit. Facing scarcity and the surging costs of the raw materials required for new production infrastructure, US shale producers are not yet answering Biden’s call. The Organization of the Petroleum Exporting Countries Plus (OPEC+), which is a group of the 13 OPEC members and 10 non-OPEC members who are also oil exporters, is furious with the Biden administration for opening talks with Saudi Arabia’s enemy Iran. Combined with their eagerness to reap the profits of sky-high oil prices, OPEC+ has so far refused to increase production.

RIP OSTPOLITIK

Russia’s instigation of a major war on the European continent has forced Europe to radically reevaluate its energy interdependence with Russia. The saga of the now-defunct Nord Stream 2 (NS2) natural gas pipeline linking Russia directly to the profitable German market exemplifies this change. Even as Russian troops were amassing along Ukraine’s border, German leadership was reluctant to cancel the project, not daring to believe that Russia would risk undoing decades of Ostpolitik. After Putin ordered troops into Ukrainian territory, German Chancellor Olaf Scholz froze the German certification process for the pipeline, and subsequently announced a fundamental transformation in German foreign policy.

Although the cancellation NS2 itself does not reduce Russian gas imports to Europe (its construction was part of the Kremlin’s plan to cut Ukraine out of the gas transit regime), Europe’s desire to finally move away from its dependence on Russian gas is causing major upheaval. Europe relies on Russia for on average 40% of its daily consumption of natural gas, and this dependence is not distributed evenly across the continent. As a result, Europe is much more economically exposed to Russia than the US. EU wholesale gas markets have swung wildly over the past two weeks, leading to an increased financial burden on European citizens, who are now paying much more to heat their homes, and for gas-fired electricity. The European economy will suffer: This week the European Central Bank announced that the war would have a “significant negative impact on the euro-area economy” and cut its 2022 growth forecast.

THE COSTS OF ECONOMIC WAR

This week the Kremlin accused the US of declaring an economic war on Russia, and warned Washington that it was thinking carefully about how to respond to the energy embargo. One such measure is the new Russian export ban on telecom, medical, agricultural and electrical equipment, and some forestry products. The impact of this ban is limited, but the specter of escalation is concerning. Even though Russia has not banned the export of critical rare minerals like palladium, crucial in the production of catalytic converters, restrictions on flights out of Russia have caused shipping and massive supply disruptions. As a result, palladium prices reached an all-time high last week.

Faced with the hideous images of Putin’s brutality in Ukraine, Americans have thus far been willing to bear the initial costs of punishing Russia. But the ripple effect of Russia’s invasion of Ukraine is global. Soaring energy prices are problematic in rich countries, but devastating in developing economies. Governments that subsidize electricity prices, like Lebanon, Tunisia, and Algeria, will have trouble affording rising costs, which could lead to social unrest. Inflation is at its highest level in decades throughout the global economy. Over the past 30 years, Russia has become an integral part of the global economy. Forcefully removing it will be painful for everyone, and sadly, may not be enough to save Ukraine from a devastating fate.

Emily Holland is an assistant professor in the Russian Maritime Studies Institute at the United States Naval War College.

Source: Inkstick media

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