Putin’s energy blackmail could backfire on the Russian economyThank you for reading this post, don't forget to subscribe!
To say that Vladimir Putin has thrown a wrench into the global energy market this year is an understatement. Since Russia’s invasion of Ukraine in February, Putin’s favorite tool for eroding support for the country has been energy. Russian energy companies have limited natural gas flows to Europe, one of Russia’s biggest energy customers, sending prices soaring and countries scrambling to find replacements before winter sets in.
Meanwhile, Russia’s oil and gas revenues are jump, as countries around the world are willing to pay a premium for larger volumes of Russian oil and gas. Putin has been threatening Europe with this kind of energy blackmail for years, but in 2022 it became clear.
However, there is a weakness in this strategy: the Russian economy is holding back because the energy market is so globalized. Here’s how Putin’s aggression in 2022 could backfire spectacularly.
Since the fall of the Soviet Union in the 1990s and countries including Russia and China entered the global economy, energy has become a global commodity, and most notably oil, writes Daniel Yergin, energy historian and vice president at S&P Global, in a Wall Street Journal op-ed published on Monday. Major suppliers such as Russia could count on countries around the world to buy their oil, providing a steady source of revenue that support the country’s economy for years.
But the war in Ukraine and the West’s growing distaste for Russian energy imports could spell the end of the heyday of the international oil market, replaced by a vastly more fragmented and regionalized version where borders are determined by politics, Yergin argued.
“Europe’s ban on Russian oil, coupled with the US-generated ‘ceiling’ on Russian oil prices, marks the end of the global oil market. In its place is a fragmented market whose boundaries are shaped not only by economics and logistics but also by geopolitical strategy,” he writes.
Yergin argued that Russia could retaliate against the EU’s new energy measures by cutting oil production and raising prices, further complicating matters for nations supporting Ukraine. But the fragmented and unpredictable nature of the current oil market means the strategy could backfire spectacularly on Putin.
“Moscow will counterattack, hoping to cause turmoil, panic and cut off support for Ukraine.” But Russia will have a tougher time than expected given current market conditions,” Ergin wrote.
Ruining Putin’s book
In the face of a a strong show of unity from Europe and the US, Russia seeks to leverage its status as an important global energy supplier chip away in support of Ukraine. But the Western allies have so far managed to hold their own.
From this month, the European Union, Russia the largest historical energy customerstarted phase out Russian oil imports, while the Group of Seven countries approved an oil price ceiling for Russian imports. For Putin, the West’s growing independence from Russian energy and a more fragmented global oil market in general could be a significant blow to the energy revenues Russia relies on, and it could all be his doing.
The oil price ceiling, which Ergin called “genius,” is set at $60 a barrel, designed to keep Russian oil on the market while limiting the country’s revenue from crude oil and petroleum products, including gasoline and diesel, which in the first six months of war has led to 102 billion euros ($108.6 billion) revenue for Russia.
Putin responded by calling the price ceiling “stupid” and the Kremlin threatened reduced Russian oil production by 5% to 7% early next year, raising global prices and further depriving the West of energy. Earlier this month, officials even alerted the country would not sell oil for countries that have agreed to the price ceiling.
With countries in the West no longer reliable customers, Russia seems to have stuck to the idea of a more regional oil market. In an an interview with Saudi news channel Asharq last week, Russian Finance Minister Anton Siluanov said the country was actively “looking for new oil customers” as a result of the Western oil price cap and Russian oil companies “redirecting their supplies from the West to the East, South, other countries.
But turning to a smaller oil market could be a blow to Russia’s revenues if it decides to cut output, something analysts have warned Putin could do in an attempt to boost oil prices and hurt the West.
“The Kremlin may cut exports despite the cap to try to boost global oil prices,” researchers at Bruegel, a Brussels-based think tank, wrote in a recent report. “Even if cutting exports hurts Russia, the Kremlin may decide to do so as a signal of its willingness to take economic pain.”
Reversed revenue effect
But if Russia decides to cut oil production or exports, it could hurt Putin more than help, Yergin argued, raising prices enough to drive away current Russian oil buyers, including China and India.
“Sharp oil cuts and the resulting price increases will be felt not only by European countries, but also by those that are important to Russia, namely India and China, which together received about 70% of total crude oil exports in sea in December,” he wrote.
At the same time, the West may not feel the impact of high oil prices as much as Putin hopes. Even drawing again from strategic oil reserves may “not be necessary,” Yergin said, as the growing chance of a global recession in 2023 threatens to reduce oil demand.
Yergin said oil prices are volatile heading into 2023 an interview with CNBC last week, but added that a “real recession” could bring down prices. In October and the World Bank warned recession could have an adverse effect on demand, warning that “the prospect of a global recession could lead to much weaker oil consumption.”
“Cutting production may end up adding to a long line of Kremlin miscalculations,” Ergin wrote.
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