By Alex Callinicos
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Russia’s gas dominance weakens economic war

It’s difficult to meet global gas usage without Russian supplies
Issue 2807

Moscow offices of Russian state owned gas company, Gazprom. (Thawt Hawthje)

After the Russian invasion of Ukraine, the US and its allies imposed sanctions designed to expel Russia from the international financial system. The French economy minister Bruno le Maire boasted about waging “a total economic and financial war”—though he quickly backtracked after Russia rattled its missiles.

The puzzling thing is, three months on, the Russian currency, the rouble, has been soaring on foreign exchanges. After falling to 150 to the US dollar in early March, the rouble rose to 51 to the dollar last week, making it “the best‑performing currency in the world this year”, according to the Financial Times. 

It doesn’t sound like the “total war” is succeeding. Why? Two factors are at work. The first is the Russian government’s response to sanctions. It slapped tight capital controls to stop money leaving the country and raised interest rates to 20 percent. Meanwhile, Russia’s imports collapsed, partly because of sanctions, partly because the rouble’s fall made them expensive.

Thanks to both falling imports and rising energy prices, Russia ran a record balance of payments surplus of £45.9 billion in the first quarter of 2022. The strong rouble has indeed, by discouraging imports, made Russia one of the few countries where inflation is starting to fall.

Polina Kurdyavko, head of emerging markets at BlueBay Asset Management, argues this isn’t necessarily a sign of economic success. She said, “What does rouble strength really mean? Certainly not that the economy is healthy. Growth will be deep in negative territory. “Inflation is double digits. Clearly pain is being felt. On the most basic level, businesses are closing down because they can’t import anything.”

And indeed the Central Bank of Russia is cutting interest rates to counteract the rouble’s rise. But Kurdyavko ignores the second factor underpinning the rouble’s strength. Russia vies with the US and Saudi Arabia as the world’s top energy producer. 

Its invasion of Ukraine has advantaged Vladimir Putin’s regime by pushing up energy prices. The great irony is the European Union continues to depend on Russian gas. In the first two months after the invasion, Russia exported £49.9 billion worth of fossil fuels via ship and pipeline, according to the Centre for Research on Energy and Clean Air (Crea).

The Financial Times reports, “The EU has imported 71 percent of Russian fossil fuel exports since the start of the invasion, Crea said. About a quarter went to just six EU ports, including Rotterdam and Maasvlakte in the Netherlands and Trieste in Italy.

“The researchers found that daily deliveries of oil to the EU fell 20 percent during the first three weeks of April compared with the month from 23 January, while those of coal dropped 40 percent. But deliveries of liquefied natural gas to the EU increased by 20 percent and jumped 80 percent to countries outside the EU.”

The three largest importers of Russian fossil fuels are Germany—£7 billion in the first two months after the invasion—Italy, and China—both a bit less than £5.5 billion. Trade in energy was excluded from the initial package of sanctions. There is of course a tremendous amount of talk in European capitals about banning Russian gas imports. But the EU still has to agree on a less disruptive ban on oil imports.

There are technical obstacles to banning Russian gas. The European energy system is geared to importing gas via pipelines from Russia. Developing the capacity to import liquefied natural gas from the US or the Middle East instead will take time.

But the problem is also one of overall supply, as Helen Thompson of Cambridge University points out, “Energy sanctions against Russia have been so limited because China’s rise has permanently changed energy markets. Quite simply, it is difficult to meet present world demand for oil and gas without Russian supplies.”

Russia’s importance as an energy producer means it’s impossible to expel it from the global economic system. Whatever happens in the military struggle over Ukraine won’t change this.

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