In early March, as the United States and its allies imposed sanctions on Russia, President Joe Biden stood at the White House and said he wanted to “deal a strong blow to Putin’s war machine.”
But as the war in Ukraine nears its 100th day, the machine is still in operation. Russia is being driven by a flood of cash that could reach an average of $ 800 million this year – and this is the product of oil and gas.
Over the years, Russia has acted as a huge product supermarket selling what an unsatisfied world needs: not just energy, but also wheat, nickel, aluminum and palladium. The aggression in Ukraine has prompted the United States and the European Union to reconsider the relationship. It is taking time, though the EU has taken another step this week through a compromise agreement on Russian oil imports.
Russia is far from unharmed by sanctions, which have turned it into a pariah throughout the developed world. Corporate giants have fled, many have drifted away from billions of dollars in assets, and the economy is heading for a deeper recession. But for now, Putin can ignore the damage, as his coffers are overflowing with commodity revenues, which have become more lucrative than ever for partially driven global inflation due to the Ukraine war.
Even if some countries stop purchasing or phasing out energy purchases, Russia’s oil-and-gas revenues will reach about 5 285 billion this year, according to Bloomberg Economics estimates based on estimates from the Ministry of Economy. That would be more than one-fifth of the 2021 figure. Throwing other products, and it is more than the $ 300 billion foreign reserves frozen as part of the embargo.
EU leaders know they should stop buying from Russia and indirectly finance a destructive war on the doorstep of Europe. But for all these ambitions, national governments also know that it will have repercussions for their own economies.
They agreed this week to follow a partial embargo on Russian oil, paving the way for a sixth package of sanctions, but only after weeks of turmoil and divisions.
“There are always political restrictions on the use of sanctions,” said Jeffrey Scott, a senior fellow at the Peterson Institute in Washington. “You want to maximize the pain in your goal and reduce the pain in your constituency at home, but unfortunately, it’s easier said than done.”
Lesson # 3: Only a power embargo really hurts Russia. Two-thirds of C / A surplus growth this year came from energy exports (blue). Only one-third of imports are from compression. The maritime embargo will block oil tankers from Russia. All that is needed is political will … pic.twitter.com/AOnX28i8eB
– Robin Brooks (obRobinBrooksIIF) May 29, 2022
In the United States, officials are debating ways to increase financial pressure, possibly by imposing a cap on Russian oil prices or by imposing sanctions on countries and companies that are still doing business with Russia under restrictions. But such secondary sanctions are deeply divisive and risk damaging relations with other countries.
The United States has already banned Russian oil, but Europe is only slowly escaping this dependence. This is giving Moscow time to explore other markets – such as buzzing commodities China and India – export revenue, and any limitations on the losses in the wake of its financial war.
That means money is flowing into Russia’s accounts, and the financial figures are a constant reminder to the West that dramatic change is needed. According to the International Atomic Energy Agency, oil-export earnings alone are up 50% year-on-year. Russia’s top oil producers posted their highest combined profits in nearly a decade in the first quarter, according to estimates by Moscow-based SberCIB Investment Research. And wheat exports continue – at high prices – because sanctions on Russian agriculture are not being negotiated because the world needs its crops.
The current account surplus, a broad measure of trade in goods and services, tripled in the first four months of the year to about $ 96 billion. This number, at least the highest since 1994, mainly reflects the rise in commodity prices, although the sinking in imports under the weight of international sanctions was also a factor.
The ruble has become another symbol used to project Putin’s power. Russia has become the world’s best-performing currency against the dollar this year, after it was ridiculed by Biden as a “ruin” when it initially collapsed in response to sanctions.
Putin has also sought to exploit Russia’s position as a product superpower. Concerned about food shortages, he said he would only allow the export of grain and fertilizer once the embargo was lifted.
Janice Cluj, a senior associate in Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin, said: “If the sanctions were aimed at stopping the Russian military, it would not be realistic.” “While it could still finance the war effort, it could still compensate for some of the damage caused by sanctions on its population.”
One of the major loopholes in the sanctions against Russia is the desire of other countries to continue buying oil, although in some cases there are concessions.
Between the end of February and the beginning of the invasion of Ukraine in early May, Indian refiners bought more than 40 million barrels of Russian oil. According to Bloomberg calculations based on data from the Ministry of Commerce, this is 20% more than the Russia-India flow for the whole of 2021. Refiners are seeking private contracts instead of public tenders to get the Russian barrel cheaper than the market price.
China is also strengthening its energy ties with the country, buying oil and securing it at cheaper prices that are being avoided elsewhere. It has boosted imports and is negotiating with Russian oil to replenish its strategic crude reserves.
This is the same story for steel makers and coking coal. According to the official customs office, imports from Russia more than doubled in the third month of April compared to the same period last year. And some sellers of Russian oil and coal have tried to make things easier for Chinese buyers by allowing transactions in yuan.
“The vast majority of the world is not involved in the imposition of sanctions,” said Wutter Jacobs, founder and director of the Erasmus Commodity and Trade Center at Rotterdam’s Erasmus University. “Trade will continue, there will be energy needs” and buyers from Asia or the Middle East will increase, he said.
When it comes to gas, Russia has fewer options for moving supplies, but the countries at the end of the pipelines from Russia – some of which run through Ukraine – are also interdependent.
Russia meets about 40% of the EU’s gas demand, and this will be the hardest link in the blockade. European deliveries even increased in February and March as the attack pushed up prices at European gas hubs, with long-term deals from Russia’s Gazprom PJSC making shopping cheaper for most customers.
The volume has since declined due to warmer weather and record flows of liquefied natural gas from the United States and other countries. Military activity has also been disrupted, and Russia itself has cut off supplies to Poland, Bulgaria and Finland, which has rejected Putin’s demand for money in rubles.
Even though the EU has reduced its dependence – Germany says it has dropped from 55% to 35% – there are complications at every step. Several large buyers of Russian gas have gone out of their way to pursue significant energy purchases, and utilities such as Italy’s Eni SpA and Germany’s Uniper SE are expected to continue to supply.
Although the progress is slow, the direction is only towards more limitations. Even in the midst of an uncertain schedule, the pressure on Russia’s economy and Putin’s finances will eventually increase.
The country’s energy sector is facing other factors besides demand, ranging from shipping and insurance constraints to weak domestic demand. According to the base-case outlook of the Russian Ministry of Economy, oil production could fall by more than 9% this year, while gas production could fall by 5.6%.
“There is some optimism in the Kremlin, and even more surprisingly, that the Russian economy has not recovered from the embargo,” said Tatiana Stanovaya, a political consultant and political founder. “But looking back two to three years, there are a lot of questions about how the energy and manufacturing sectors will survive.”
(Except for the title, this story was not edited by NDTV staff and was published from a syndicated feed.)