VIEWPOINT: The World Economy No Longer Needs Russia

Russia’s President Vladimir Putin

VIEWPOINT: The World Economy No Longer Needs Russia

With alternative sources in place, Putin’s attempt at blackmailing Europe on energy has failed.

By Jeffrey Sonnenfeld, the Lester Crown professor in management practice and a senior associate dean at the Yale School of Management, and Steven Tian, the director of research at the Yale Chief Executive Leadership Institute. | Foreign Policy

For much of the past year, and since his invasion of Ukraine last February, Russian President Vladimir Putin has been riding high on his supposed energy omnipotence, holding the global economy hostage to his whims. Since last summer, Putin has choked off natural gas supplies to Europe, hoping that Europeans, shivering and without heat during the winter, would turn on their leaders and make it politically infeasible to continue support for Ukraine.              

The threat was potent: In 2021, a whopping 83 percent of Russian gas was exported to Europe. Russia’s total global exports of 7 million barrels of oil a day and 200 billion cubic meters (bcm) of piped gas a year accounted for about half of its federal revenue. Even more importantly, Russia’s commodities exports played a crucial role in global supply chains: Europe was reliant on Russia for 46 percent of its total gas supply, with comparable levels of dependence on other Russian products including metals and fertilizer. 

Now, as we approach the one-year anniversary of Putin’s invasion, it is apparent that Russia has permanently forfeited its erstwhile economic might in the global marketplace.

Thanks to an unseasonably warm winter in Europe, Putin’s moment of maximum leverage has passed uneventfully, and, as we correctly forecast last October, the biggest victim of Putin’s gas gambit was Russia itself. Putin’s natural gas leverage is now nonexistent, as the world — and, most importantly, Europe — no longer needs Russian gas.

Far from freezing to death, Europe quickly secured alternative gas supplies by pivoting to global liquefied natural gas (LNG). This included an estimated 55 bcm from the United States, two-and-a-half times more than prewar U.S. exports of LNG to Europe. Coupled with increases in supply from renewable sources, nuclear, and, in the interim, coal, these alternative supplies have reduced Europe’s dependence on Russian gas to 9 percent of its total gas imports. In fact, Europe now purchases more LNG than it ever purchased Russian gas. 

Furthermore, Europe’s unseasonably warm winter means that not only have the worst-case scenarios been avoided, but Europe’s full storage tanks have barely been drawn down and can carry over into next winter. In January, German storage tanks were a record 91 percent full, up from 54 percent last year, meaning that Europe will need to buy significantly less gas in 2023 than in 2022. 

The implications are tremendous. Europe is now assured sufficient energy supply well into 2024 at a minimum, providing enough time for cheaper alternative energy supplies — both renewables and bridge fuels — to be fully onboarded and operating within Europe. This includes the completion of an additional 200 bcm/year in LNG export capacity by 2024 — enough to fully and permanently replace Russia’s 200 bcm/year gas exports once and for all.

Furthermore, the days of globally expensive energy amid “Russia-driven supply squeezes” are over for good. In addition to Europe’s lower expected demand for LNG, China is pivoting away from global LNG in favor of domestic sources. Coupled with the rapidly increasing LNG supply, it is little surprise that the gas futures market is now pricing gas to be cheaper than prewar levels for years to come. 

Putin, on the other hand, has zero remaining leverage and no way to replace his erstwhile primary customer; he is finding out the hard way that it is much easier for consumers to replace unreliable commodity suppliers than it is for suppliers to find new markets. Already, Putin is drawing practically no profit from gas sales, as his prior 150 bcm sales of piped gas to Europe have been replaced by a measly 16 bcm to China and pocket change in global LNG sales, barely enough to cover expenses. There are no markets for Putin to replace anything close to that 150 bcm shortfall: China lacks the necessary pipeline capacity to take any more for at least a decade and prefers domestic and diversified sources of energy anyhow, while Russia’s laggard technology makes it impossible to scale LNG exports beyond a slow trickle. 

Putin’s oil leverage is likewise diminishing. Gone are the days when fear of Putin taking Russian oil supplies off the market caused oil prices to skyrocket by 40 percent over two weeks. In fact, when — in response to last month’s rollout of the G-7 oil price cap, which we helped develop — Putin announced a ban, from Feb. 1, on oil exports to countries that accepted the price cap, oil prices actually went down.

Why? Because it is now apparent that the world no longer depends on Putin’s oil. The oil market is turning to favor buyers, not sellers, amid increasing supply — more than enough to compensate for possible drops in Russian crude production. Oil prices are lower now than before the war, and in the second half of 2022 alone, there was a surge of supply by 4 million barrels a day from producers such as the United States, Venezuela, Canada, and Brazil. With even more new supply expected this year, any lost Russian crude will be seamlessly and easily replaced within weeks. And this time, Putin cannot coerce Saudi Arabia to ride to the rescue by drastically cutting OPEC+ production quotas as it did last October. That’s because the United States is now pausing crucial Saudi arms and technology transfers amid heightened international scrutiny of OPEC+’s significant surplus unused capacity.

Putin’s leverage has also evaporated because the G-7 price cap gives him a lose-lose choice, which erodes Russia’s energy position no matter what he does. China and India, without explicitly participating in the cap, are leveraging it to drive a hard bargain with Russia, with discounts of up to 50 percent, so even though India is buying 33 times more Russian oil than it was a year ago, Russia is not making much profit, given its $44 break-even cost of production on top of costlier transportation. But if Putin cuts production even more, as he has threatened to do, he will be forfeiting all-important oil market share, long a Putin obsession, amid an increasingly oversupplied oil market and further cutting into his own revenue when he is already starved for cash.

Even Putin’s other commodities cards are all used up. His gambit to weaponize food abjectly collapsed when even his nominal allies turned on him. And in certain metals markets where Russia historically dominated, such as nickel, palladium, and titanium, blackmail-fearing buyers combined with higher prices have expedited reshoring and reinvigorated dormant public and private investment in critical mineral supply chain and mining projects. These are mostly in North and South America and Africa, home to many under-tapped mineral reserves. In fact, in several crucial metals markets, such as cobalt and nickel, the combined output of new mines to be opened in the next two years adds up to more than enough supply to replace Russian metals within global supply chains permanently.

Putin’s failed economic gambits are yet another set of miscalculations to add to an increasingly long list, from his underestimation of the people of Ukraine to his underestimation of the collective unity and willpower of the West.  

OF COURSE, PUTIN’S FAILED ECONOMIC AND ENERGY WARFARE HAS NOT BEEN WITHOUT CONSEQUENCE. The spillovers have impacted many lives, transformed supply chains, changed trade flows, and consumers still feel the pinch of higher prices as the newfound lower prices take some time to work through the economy.

BUT WHAT MATTERS IS THAT THE END IS IN SIGHT. Never again will Putin be in a position to cause such chaos and disturbance in the global economy, because he has permanently weakened Russia’s most powerful hand — its energy and commodities might — beyond repair. The war on the battlefield is still being fought, but on the economic front at least, victory is in sight.   

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Comments

  • Clyde Duncan  On 01/20/2023 at 4:53 pm

    The World has dealt with a Putin before:

    It is called World War One and World War Two

    If you want to kill people with impunity – Don’t do it in Europe!!

  • Clyde Duncan  On 01/21/2023 at 11:20 am

    High level U.S. officials met with their counterparts in Ukraine in full public view. The targets were Republicans in Congress and Vladimir Putin, which tells you a lot, doesn’t it?

    LUCIAN K. TRUSCOTT IV

    The thing you’ve got to understand about chairmen of the Joint Chiefs of Staff and CIA directors is that they don’t just wake up in the morning and decide to do the kind of stuff they did this week.

    Last Friday, CIA Director William Burns met secretly with Ukrainian President Volodymyr Zelenskyy in Kyiv. While, Austin was at Ramstein Air Base in Germany for a meeting of the Ukraine Defense Contact Group, which consists of NATO defense leaders and meets monthly.

    On Monday, Gen. Mark Milley was in Germany to observe the training of a new Ukrainian mechanized infantry battalion that is destined for the front lines in the conflict with Russia. While, John Finer, the deputy national security adviser, Wendy Sherman, the deputy secretary of state, and Colin Kahl, the undersecretary of defense for policy, met with President Zelenskyy and his top advisers in Ukraine to discuss the status of the war and U.S. support for Ukraine.

    On Tuesday, Milley traveled to a secret location in eastern Poland to meet with his Ukrainian counterpart, Gen. Valerii Zaluzhny, the highest-ranking officer in Ukraine’s armed forces.

    The whole week was a full-court press by the U.S. defense establishment on Ukraine’s behalf. Under normal circumstances, weeks of preparation go into arranging these kinds of meetings and the travel involved. In this case, the planning probably took days, rather than weeks. The meetings that took place over the last week had three targets, the first of these being the war itself. Contacts between high-level officials last week involved war-planning and intelligence sharing, crucial to gains on the battlefield.

    The second target was Vladimir Putin. No attempt was made to conceal these very high-level contacts, so the whole week can be understood as a message to Putin and the Russian military that the U.S. government and its military and intelligence and diplomatic leaders stand foursquare behind Ukraine in its war against Russian aggression.

    The third target of the meetings was the U.S. Congress. It will be much more difficult for Speaker Kevin McCarthy and his unruly right wing to continue their threats to reduce support in the Congress with such high-level meetings between American and Ukrainian officials taking place.

    The most important signals were sent by Milley and Burns. General officers like Milley don’t make personal visits and put their imprimatur on events they expect to end in loss and disaster, and thereby have negative impacts on their careers and legacy. Milley doesn’t have boots on the ground in Ukraine, but he’s got everything else invested in a Ukrainian victory over Russia. As the war closes in on its first anniversary, I think Milley and Burns and Secretary of Defense Lloyd Austin have concluded that Ukraine can win its war against Russia and win it in this calendar year.

    This month’s meeting of the Ukraine Defense Contact Group, which consists of NATO defense leaders and meets monthly, was primarily about pressuring Germany to allow the shipment of its Leopard II tanks from Poland to Ukraine for use against the Russian military.

    Several NATO nations have the German Leopards in their militaries, but Germany won’t allow the export of its key weapons system to other nations without its consent. Zelenskyy made an impassioned plea for the Leopard II tanks by video to the gathering of defense officials at Ramstein. German officials have not yet agreed to shipping these tanks to Ukraine, although in statements to the press after the meeting, Austin seemed to indicate the decision was imminent.

    Britain has already agreed to send its Challenger II tanks to Ukraine. Austin reminded reporters in Germany that American Bradley Fighting Vehicles and Stryker Combat Vehicles are already scheduled for shipment to Ukraine in support of the war. Gen. Milley was in Germany to observe the training of a Ukrainian mechanized battalion that will be equipped with Bradleys.

    During his visit to the training site in Grafenwoehr, Germany, Milley pointed out that the Ukrainian battalion was being trained in using its Bradleys in combined operations, a tactic that integrates armored and infantry units with artillery and air defenses in attacks on the enemy.

    Combined operations are baked into U.S. tactics and are basic to the training of all soldiers, from privates in the foxholes to colonels and generals who command thousands of combat troops.

    Ukrainian soldiers are currently at Fort Sill, Oklahoma, learning to use the Patriot air defense missile system that will soon be deployed in Ukraine. Now hundreds of them are undergoing American military training at U.S. Army facilities in Germany, learning to deploy multiple combat units and equipment all at once against the Russians.

    The U.S. does not literally have boots on the ground in Ukraine, but it’s got pretty much everything else on the ground there, from MRAP mine-resistant armored personnel carriers to 155mm howitzers to Avenger radar-controlled air defense systems to Javelin anti-tank weapons to Stinger shoulder-fired anti-aircraft missiles to HIMARS rocket systems to Humvees and personal-protection equipment such as helmets, bulletproof vests, boots and winter uniforms. And now there are reports that U.S. officials are contemplating giving Ukraine weapons capable of striking deep into Crimea, the peninsula seized by Russia in 2014. That can only mean longer-range American truck-mounted precision rockets, which can strike targets between 250 and 350 miles away.

    And then there was the meeting between CIA Director Burns and Zelenskyy last week, which may have been as important as all the military hardware combined. The CIA and NSA can see everything Russia does in Ukraine from satellites. They know where every Russian battalion group is located, what its unit designation is and most likely the name of the Russian battalion commander.

    They can see every movement of every Russian tank, armored personnel carrier, and resupply truck, and see what is loaded on every flatbed railroad car headed from Russia into eastern Ukraine. It was probably CIA intelligence that led to the recent Ukrainian rocket strike on the Russian weapons stockpile and barracks in Makiivka, a suburb of Donetsk, which killed more than 60 Russian soldiers.

    All of this — the training of Ukrainian troops, the shipments of heavy weapons, the visits by Milley and Burns — is being done in an in-your-face manner, in full view of Putin and his military commanders.

    That’s just as important as the weapons and training and intelligence. The U.S. and NATO are sending a specific message to Putin: We’re in this fight with Ukraine in a serious way. Milley told reporters traveling with him in Germany that the goal of training and equipping the Ukrainian combined-forces mechanized battalion was so it could be used “sometime before the spring rains show up. That would be ideal.”

    That could be a statement of fact, or it could be a feint, intended to get Putin to prepare for an offensive that might come before the spring, as Milley said, or in the summer or even next fall, like last year’s offensive that recaptured the entire Kharkiv region. You don’t get to be chairman of the Joint Chiefs of Staff because you’re a kiss-ass or a game-player, and Putin knows this. Milley and Zelenskyy are going to keep Putin guessing until he wakes up one morning and finds his troops once again on the run toward the Russian border.

    That’s what this week was about. Putin just doesn’t know when Zelenskyy will pull the trigger that Milley and Burns and the U.S. trainers in Germany are giving him.

  • wally  On 01/21/2023 at 1:18 pm

    Jumping the gun??

  • derrycksgriffith  On 01/21/2023 at 5:53 pm

    Attention.

    This is utter nonsense for sure.

    Have you been reading real and true news lately?

    Because if you haven’t, here is some enlightenment for you.

    Russia’s economy is booming ever since all of those 8 or 10 EU collective sanctions against Russia and Russians have been implemented.

    And some of the same EU contrues that have sided with the USA, are still buying Russian gas and oil via Turkey, or some other middle contractor too.

    And the majority of the Southern countries on this planet, have not sanctioned Russia at all.

    These also include South Africa, India, China, Brasil, and many more in Africa and the Middle East.

    The Russian Ruble currently is more valuable, than the US Petro and useless dollar too.

    So here you have it in a nutshell for you.

    Some of us can still read and think for ourselves.

    Derryck Griffith.

    • Chris  On 01/22/2023 at 6:13 am

      Questions:

      1: Can you explain how you came to the conclusion that the Russian rouble is more valuable than the USD?

      2: Can you provide evidence that the Russian economy is booming since the invasion?

      According to several sources, including the IMF and the World Bank, the Russian economy has shrunk by 3.4 % in 2022 and that number is expected to rise to 4.5% in 2023.

      The price cap of $60 a barrel on Russian oil has negatively impacted the Russian economy so far and Putin’s threat to cut off energy supply to Europe has failed as Europe turns to other countries for its energy needs.

      Moreover, a relatively mild winter has worked against Putin’s expectations to put a squeeze on Europe and holding it to ransom.

      The main objectives of the imposition of the price cap and sanctions on Russia is to cut off Putin’s funds for the war and to bring it to a conclusion.

      Will it work? We shall see.

      • derrycksgriffith  On 01/22/2023 at 11:13 am

        Attention.

        You obviously is just another mouth piece, for the western collective propaganda narrative.

        And is unable to say or do otherwise, less you too be sanctioned.

        What is pity!

        Derryck Griffith.

      • Chris  On 01/22/2023 at 12:20 pm

        And you are just a dabbling mouthpiece spewing nonsense without the ability to answer simple questions to back up your fairy tale.

  • Clyde Duncan  On 01/21/2023 at 7:50 pm

    The Russian Ruble currently is more valuable, than the US Petro and useless dollar too.

    1.00 US Dollar = 69.124066 Russian Rubles

    1 RUB = 0.0144667 USD

  • Clyde Duncan  On 01/22/2023 at 12:50 am

    141 Countries Vote to Condemn Russia at UN

    141 countries voted in favor of a UN General Assembly Resolution “deploring” Russia’s aggression against Ukraine and demanding the immediate and complete withdrawal of all Russian forces from Ukrainian territory.

    Why it matters: The resolution is non-binding, but reflects Russia’s historic isolation on the world stage just one week into its unprovoked invasion of Ukraine.

    • The full UN General Assembly vote came after Russia vetoed a similar resolution in the 15-member UN Security Council.

    • Four countries joined Russia in voting against the resolution — Belarus, North Korea, Eritrea and Syria — while 35 abstained.

    Between the lines: Serbia, which has close historical ties with Russia, surprised many observers by voting in favor of the resolution.

    • The United Arab Emirates and Israel, two U.S. security partners that have been criticized for voting for the resolution, declined to speak out against Russia’s aggression.

    • India, however, abstained. The world’s largest democracy has longstanding military ties with Russia from the Soviet era, causing headaches for the U.S. as it seeks to integrate India into an alliance to counter China in the Indo-Pacific.

    What they’re saying: Ukrainian President Volodymyr Zelensky praised the outcome of the vote, tweeting, “I’m grateful to everyone & every state that voted in favor. You have chosen the right side of history.”

    • The results “convincingly show that a global anti-Putin coalition has been formed and is functioning. The world is with us. The truth is on our side,” he added.

    AXIOS Editor’s note: This post has been updated with additional details throughout.

  • Clyde Duncan  On 01/22/2023 at 1:02 am

    • The UN General Assembly overwhelmingly voted to condemn Russia’s annexations in Ukraine.

    • Of the 193-member body, 143 countries supported Ukraine, while 35 abstained from the vote.

    • Only five countries, one of which was Russia itself, voted against the measure.

    The UN General Assembly issued a sweeping condemnation of Russia’s attempt to annex four territories in Ukraine in a resolute display of global disapproval.

    The vote was sparked by Russia’s annexation of partially-occupied territories in Ukraine, including the Kherson, Luhansk, Donetsk, and Zaporizhzhia regions. The UN General Assembly in its measure demanded that Russia reverse the land grab.

    The 193-member body issued its most staunch support for Ukraine yet during the vote, which saw 143 nations condemn Russia’s actions and 35 countries abstain from voting.

    Only FIVE countries voted against the resolution, one of which was Russia itself. North Korea, Belarus, Syria, and Nicaragua — all led by dictator-like regimes — joined the increasingly isolated nation.

    The remaining 10 countries did not vote — A SLIGHT, TECHNICAL DISTINCTION FROM THE ABSTENTION OPTION.

    After the vote, the German Foreign Office tweeted a photo of the results, saying:

    “THAT IS WHAT BEING ON THE WRONG SIDE OF HISTORY LOOKS LIKE.”

    Business Insider

  • Clyde Duncan  On 01/22/2023 at 1:21 am

    This time most of Central Asia voted against expelling Russia from the UNHRC, with only Mongolia abstaining. Likewise, several counties in the Middle East such as Iran voted against the motion, as did a few in Africa, including Algeria, Central Africa Republic, Republic of Congo and Zimbabwe among others. In South America Bolivia voted against the motion.

    What these voting patterns show is where the sanction leaks will be.

    Being on Russia’s “unfriendly list” could cause some countries serious problems. Russia’s exports of wheat, metal and hydrocarbons gives it some real clout with many countries around the world.

    Combining the votes and it is clear there is a much more muted reaction to Russia’s aggression in Ukraine that runs across Asia, the Middle East and into most of Africa, where the only EIGHT countries to fully condemn Russia in both votes were Democratic Republic of Congo (DRC), Malawi, Ivory Coast, Liberia, Sierra Leone, Mauritania, Libya and Chad out of the 54 countries that make up Africa.

    BNE Intellinews

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