The Economic War with Russia that the West, Especially Europe, Cannot Win
The economic war that the West has unleashed upon Russia, through such things as sanctions, the theft of Russian Central Bank assets, and the disconnection of a number of Russian banks from the US$-based payments system SWIFT, is the centre piece of the Western actions designed to punish Russia for its invasion of Ukraine. They will fail to dissuade Russia from what it considers are actions required to remove an existential threat to the nation – a hostile Ukraine allied with NATO only 500km from Moscow. The failure of such sanctions to change the policies and/or political regimes of Cuba, Venezuela, North Korea, Iran and others seems not to have provided any learnings for Western policy makers. Russia is in a much stronger position than those other nations to withstand such sanctions.
Firstly, Russia is a major exporter of energy and commodities that the world cannot do without, especially Europe. It is by far the largest exporter of natural gas in the world, exporting 60% more than the second placed United States, and accounts for 45% of European natural gas imports (40% of European consumption). With the Dutch Groningen natural gas field closing due to subsidence and German production nearing depletion, Europe will become completely dependent upon natural gas imports. The plans to close the remaining German nuclear and coal electrical generating plants, together with other moves across Europe to reduce carbon dioxide emissions, will serve to increase European natural gas demand. This was the rational around the building of the Nordstream 2 pipeline from Russia to Germany, approval of which has now been shelved by the German state. As an exporter of oil and natural gas, North America is not dependent upon Russia for their energy needs.
With natural gas demand increasing substantially within Asia, and North American and Norwegian export capacity already fully utilized, there is little or no global spare capacity available to allow Europe to reduce its dependence upon Russian natural gas. This situation has been exacerbated by many European nations’ decisions not to sign fixed price long-term gas contracts with Russia and allowing their gas reserves to fall significantly. The result has been extremely large increases in the spot price of gas in Europe, as Russia continues to fulfil its long-term contracts (including through Ukrainian pipelines) while not supplying enough gas to limit the price increases. The replacement of any pipeline-based imports with Liquefied Natural Gas (LNG) imports will also raise prices, as the latter is inherently more expensive; and this option is limited by the LNG terminal capacity within Europe. The overall outcome will be a Europe paying high prices relative to other nations for natural gas from Russia for many years to come, with the threat of Russian supplies being diverted to quench increasing Asian demand through new pipelines and LNG capacity. The high prices will place European industry, especially German heavy industry and car manufacturing, at a significant cost disadvantage to other nations.
Russia is also responsible for over 10% of global oil exports and is benefitting greatly from the current high oil prices as nations re-open after COVID-related closures and Asian demand continues to climb. Even if the US rejoins the JCPOA agreement with Iran, only a relatively small amount of supply may be added to the global market given the scale of sanctions-dodging that Iran has been able to achieve. The same goes for a Venezuela which would need significant time to ramp up its relatively small export capacity. In addition, Saudi Arabia and other oil exporters have refused to increase their own exports. Russia will continue to earn significant oil export revenues, including from Europe. It was notable that the Russian banks through which Western nations pay for oil and gas imports were not cut off from SWIFT. Given that oil is priced on a global basis, even countries that do not import Russian oil will still be impacted by higher oil prices. The recent announcement by the Russian government that oil and gas exports to “hostile nations” may have to be paid for in rubles, given the possibility of the theft of US$ and Euro balances, will only complicate matters for the European nations. Together with deals done in local currencies with nations such as India and China, this will create an underlying demand for the ruble, helping to negate the depreciation of the ruble that has already been significantly reversed.
To add to the fossil fuel revenues, the combination of Russia and Ukraine is responsible for over one quarter of global wheat exports. With recent bad harvests in China and North America, together with the probable reduction in Ukrainian production this year, Russia will once again benefit from high prices. If it also requires payment in Rubles, an agro-Ruble to add to a petro-Ruble, the Russian currency would gain even more price support. In a whole host of commodities, such a potassium, titanium, aluminum, palladium and neon gases, the combination of Russia and Ukraine holds substantial shares of global exports. With Russia running a significant trade surplus of, which a share will be paid for in rubles, together with the previous Russian actions to reduce the effectiveness of sanctions, the impacts upon the exchange rate and the domestic economy will be limited.
The impact of the removal of Mastercard and Visa payment systems from Russia has also been greatly reduced through the expansion of the domestic Mir payments system and linkages to the Chinese UnionPay system. The exit of Western companies from Russia may only serve to open up space for domestic competitors, especially if the intellectual property rights of such companies are deemed to be void. Russia will also be able to work with the non-Western world, which represents the majority of global GDP, to replace products and services that the West refuses to provide.
Those that expect an imminent collapse of the Russian currency, economy and financial system will be severely disappointed. Instead, they will witness significantly increased levels of inflation; especially in a Europe hit with escalating energy prices. The same disappointment is starting to show among Western analysts who viewed the Russian military as failing in their mission as Ukrainian defeat is becoming more and more evident. Russia will emerge stronger from this conflict, with the West weakened by its obvious impotence in the face of Russian actions, and a Europe struggling with uncompetitive energy and prices and generally higher levels of inflation. There have been statements made in the West about even greater sanctions, or sanctions placed upon those that continue to trade with Russia. Given the weak nature of the economic recovery in the West, and the extremely high levels of debt and increasing inflation, any such actions would threaten a new recession for which there seems little appetite.
A final blowback from the extreme sanctions and outright acts of theft that the West has perpetrated against Russia, together with widespread acts of anti-Russian propaganda and acts toward individual Russians, is that the liberal West-leaning parts of the Russian polity and media have been completely discredited. This is a significant turning point within Russia, which would seem not to be reversible; with the West seen as hostile to Russian interests and the East seen as either allies or neutral. In this way, sanctions have actually made it harder for the West to influence Russian policies, the opposite of what seems to have been intended.