Putin’s energy blackmail could backfire on Russia’s economy
To say that Vladimir Putin threw a wrench into the global energy market this year is an understatement. Since February’s Russian invasion of Ukraine, energy has been Putin’s tool of choice to undermine support for the country. Russian energy companies have limited natural gas supplies to Europe, one of Russia’s largest energy customers, causing prices to rise and countries scrambling to find replacements before winter sets in.
Meanwhile, Russian oil and gas revenues have skyrocketed as countries around the world are willing to pay a premium for higher 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, this strategy has a weakness: Russia’s economy has stayed afloat because the energy market is so globalized. So Putin’s aggression in 2022 could backfire spectacularly.
Since the collapse of the Soviet Union in the 1990s and the entry of countries like Russia and China into the global economy, energy has become a global commodity, and oil in particular, wrote Daniel Yergin, energy historian and vice chairman of S&P Global a Wall Street Journal Comment posted on Monday. Big suppliers like Russia could rely on countries around the world to buy their oil, providing a stable source of income that has sustained the country’s economy for years.
But the Ukraine war and the West’s growing reluctance to import Russian energy could mean the end of the heyday of the international oil market, which is being replaced by a much more fragmented and regionalized version, in which the borders are defined by politics, argued Yergin.
“The European ban on Russian oil combined with the US-imposed ‘cap’ on Russian oil prices marks the end of the global oil market. It is being replaced by a closed market whose borders are shaped not only by economics and logistics, but also by geopolitical strategies,” he wrote.
Yergin argued that Russia could retaliate against the EU’s new energy measures by cutting oil production and raising prices, further complicating matters for pro-Ukraine nations. But the fragmented and unpredictable nature of the current oil market means the strategy could backfire spectacularly on Putin.
“Moscow will launch a counterattack hoping to cause disruption, panic and a rupture in support for Ukraine. But Russia will have a harder time than expected given the current market conditions,” Yergin wrote.
Undoing Putin’s playbook
Amid a strong demonstration of unity by Europe and the US, Russia has sought to use its status as a major global energy supplier to weaken support for Ukraine. But the western allies have so far managed to stand their ground.
Starting this month, the European Union, Russia’s largest historic energy customer, began phasing out Russian oil imports, while the Group of Seven nations approved an oil price cap on Russian imports. For Putin, the West’s increasing independence from Russian energy and an overall more fragmented global oil market could result in a significant collapse in the energy revenues on which Russia has become dependent, and it could all be his own doing.
The oil price cap, which Yergin called “ingenious,” was set at $60 a barrel to keep Russian oil in the market while reducing the country’s revenues from crude oil and oil products, including gasoline and diesel, for the first six months Limiting the war had resulted in 102 billion euros ($108.6 billion) in revenue for Russia.
Putin has responded by calling the price cap “stupid,” and the Kremlin has threatened to cut Russian oil production by 5% to 7% early next year, pushing global prices higher and further fueling the West energy is starving. Earlier this month, officials even signaled that the country would not sell oil to countries that have agreed to the price cap.
With Western countries no longer reliable customers, Russia appears to have embraced the idea of a more regionalized oil market. In an interview with Saudi news outlet Asharq last week, Russia’s Finance Minister Anton Siluanov said the country was actively “seeking new oil customers” in the wake of the western oil price cap, and Russian oil companies were “moving supplies from the west to China, east, south, other countries.” .”
But the move towards a smaller oil market could hurt Russia’s revenues if it decides to cut production, which analysts have warned Putin could do to raise oil prices and hurt the West.
“The Kremlin could cut exports to try to raise global oil prices despite the cap,” researchers from 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 sign of its willingness to suffer economic pain.”
Revenue backfires
But if Russia decides to cut oil production or exports, it could do more harm than good to Putin, Yergin argued, by raising prices enough to turn away current Russian oil buyers, including China and India.
“Sharp oil cuts and associated price hikes would be felt not only by European countries, but also by countries important to Russia, namely India and China, which together received about 70% of the country’s total sea crude oil exports in December,” he wrote.
At the same time, the West may not feel the sting of high oil prices as much as Putin hopes. Even renewed reliance on strategic oil reserves “may not be necessary,” Yergin said, as the growing odds of a global recession in 2023 threaten to weigh on oil demand.
Yergin said in an interview that oil prices are volatile heading into 2023 CNBC last week but added that a “true recession” could bring prices down. In October, the World Bank also warned that a recession could hurt demand, warning that “the prospect of a global recession could lead to much weaker oil consumption.”
“A production cut could compound the Kremlin’s long history of miscalculations,” Yergin wrote.
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