Russia’s gas blackmail: Putin is bringing a knife to a gun fight | Business and Economy

On Wednesday, Russian President Vladimir Putin escalated the geo-economic conflict between his nation and the West by suspending gasoline deliveries to Poland and Bulgaria, citing the 2 international locations’ refusal to pay in Russian roubles.

The transfer, decried by the West as “blackmail”, but once more demonstrated Putin’s perception that Russia’s standing as a commodities exporter will allow it to face up to and counter the crippling sanctions imposed on its economic system since its invasion of Ukraine.

In actuality, nevertheless, Putin’s transfer is akin to brining a knife to a gunfight.

The choice to droop gasoline deliveries to 2 European nations won’t solely fail to strengthen the Russian economic system, however it’s going to considerably enhance the Kremlin’s long-term financial losses.

However to grasp why Putin’s transfer won’t ship the specified end result, we first want to have a look at his motivations for making it.

Sanctions have reduce Russia off from international change reserves value lots of of billions of {dollars}, Russian imports are cratering amid restrictions on twin use and pc applied sciences, and Western companies are pulling out from Russia or “self-sanctioning” by refusing to promote items there.

Putin, nevertheless, nonetheless seems to be underneath the impression that he can win the financial conflict being waged over his invasion of Ukraine. On the floor, it looks like there’s some cause for the boldness the Russian state shows: the rouble has greater than recovered its worth from earlier than sanctions have been launched, hitting a two-year excessive towards the Euro on April 27, and Russia is as soon as once more rising its international foreign money holdings on the again of sky-high hydrocarbon costs.

All this, in fact, belies the true state of the Russian economic system. Initially, the interruptions to provide chains brought on by sanctions are crippling Russia’s manufacturing capacities. In March, for instance, there was a whopping 72 p.c drop in passenger automotive manufacturing within the nation. The Kremlin can also be all however sure to formally default on its international money owed within the coming days, which can make financing a future rebuilding of the economic system extraordinarily tough. Furthermore, Russian wealth overseas is more and more underneath risk and the a lot celebrated change charge restoration has solely been achieved because of excessive capital controls.

The Central Financial institution of Russia and Putin’s advisers within the finance and economic system ministries know that the rouble sustaining its worth is overwhelmingly depending on hydrocarbon costs and continued Russian state management over buying and selling. They’re additionally cautious of how a lot rouble liquidity has already decreased in mild of the prevailing sanctions on Russia’s banking system. As Putin’s brutal conflict on Ukraine continues, sanctions are anticipated to broaden. Washington has warned that it could nonetheless reduce off rouble convertibility completely and there’s no vital Western demand for roubles.

That is exactly why Putin has ordered European gasoline companies to pay for the pure gasoline they purchase from Russia in roubles. Funds for gasoline within the native foreign money would depart the window open for rouble convertibility – one thing the Kremlin desperately wants given oil costs are unlikely to stay so elevated completely.

In the intervening time, the worldwide monetary system runs on the US greenback, and the Kremlin is conscious of this. However as Russia’s Safety Council Secretary Nikolai Patrushev mentioned in an April 26 interview with state media, Russia is now working to create a “twin loop financial and monetary system” wherein the rouble can be backed by each gold and commodities “to place the rouble change charge according to actual buying energy parity”. Russia forcing Europe to pay for gasoline in roubles is only one a part of this main plan.

However there’s little cause to imagine this plan with work – with or with out rouble funds for gasoline from Europe.

The Soviet Union already tried to do that –  together with a quick “gold rouble” interval within the early Nineteen Twenties – and, regardless of all their ideological fervour, they may not make it work. The try is far much less seemingly to reach Putin’s ideologically bereft state.

Putin is weaponising his nation’s gasoline provides, and foregoing the earnings that may very well be earned by promoting at spot to Poland and Bulgaria – which have refused to resume contracts – to display the seriousness of his rouble demand.

Some European gasoline firms have already capitulated –  4 European gasoline firms have reportedly already made funds in roubles and others are making ready to take action, together with Italy’s ENI, regardless of European Union warnings.

This may very well be seen as a Russian victory. However even when EU unity does collapse over the problem and gasoline funds be sure that the rouble’s convertibility stays in place for now, Putin is overplaying his hand.

Moscow had been receiving accolades for performing much less overtly political in European provide and pricing markets earlier than its invasion of Ukraine. It was seeing helpful EU reforms, arbitration courtroom rulings and market liberalisation. The Nord Stream 2 Baltic Sea gasoline pipeline undertaking, designed to double the stream of Russian gasoline direct to Germany, was underneath manner.

Nevertheless, Russia’s aggression in Ukraine modified all this and Berlin cancelled the pipeline undertaking in response to Russia’s recognition of its proxies in Donetsk and Luhansk on the eve of the invasion.

In fact, Europe will stay depending on Russian gasoline for at the very least one to 2 years. However Putin’s actions have already spurred a seek for alternate options – together with the Baltic Pipeline linking Norway and Poland that’s anticipated to be competed later this 12 months. All this can solely speed up in mild of his transfer to droop gasoline deliveries to Poland and Bulgaria, which completely put to relaxation the concept Russia won’t weaponise its gasoline exports.

The EU may enhance LNG imports from sources aside from Russia by practically 70 billion cubic metres this 12 months – reaching greater than 40 p.c of what it acquired from Russia. Maximising manufacturing on the Dutch Groningen gasoline fields and dealing with Azerbaijan and Algeria (in addition to Turkey and Morocco, by way of which key pipelines run) may additional assist tackle the shortfall.

Earlier than the Ukraine conflict, Europe had little motivation to swiftly cut back its dependence on Russian gasoline. However Putin’s personal actions – first the unlawful invasion of Ukraine after which the overt weaponisation of gasoline exports –  created the political will to handle the problem.

Putin is instructing Europeans that interdependence between Russia and the West has failed as a method. However his economic system stays a one-trick pony, depending on commodities and caught responding to sanctions relatively than placing its personal critical blows.

A lesson for Putin might be present in what is called “Healey’s Legislation” (named after Denis Healey, the British chancellor who himself skilled the problem of resetting a rustic’s funds when he negotiated an IMF Bailout in 1976): “Observe the rule of holes; if you’re in a single, cease digging.”

As for Europe, Healey’s regulation incorporates a corollary that applies: “When your opponent is in a gap, why would you need to take away his shovel?”

Putin might have scored a short-term victory, however he’s digging the grave of Russia’s economic system.

The views expressed on this article are the creator’s personal and don’t essentially replicate Al Jazeera’s editorial stance.

Leave a Reply