Economy

The world economy no longer needs Russia

For most of the past year, and since his invasion of Ukraine last February, Russian President Vladimir Putin has been riding high on his perceived energy omnipotence, holding the global economy hostage to his whims. Since last summer, Putin has choked the natural gas supply to Europe, hope that Europeans, shivering and without heat in winter, would trip on their leaders and make it politically impossible to continue support for Ukraine.

The threat was potent: In 2021, a huge one 83 percent of Russian gas was exported to Europe. Russia’s total global exports of 7 million barrels of oil per day and 200 billion cubic meters (bcm) of piped gas per year accounted for about half of the country’s federal revenues. More importantly, Russia’s commodity exports played a crucial role in global supply chains: Europe depended on Russia for 46 percent of its total gas supply, with comparable levels of dependence on other Russian products, including metals and fertilizers.

Now, as we approach the one-year anniversary of Putin’s invasion, it is clear that Russia has permanently lost its former economic power in the global market.

For most of the past year, and since his invasion of Ukraine last February, Russian President Vladimir Putin has been riding high on his perceived energy omnipotence, holding the global economy hostage to his whims. Since last summer, Putin has choked the natural gas supply to Europe, hope that Europeans, shivering and without heat in winter, would trip on their leaders and make it politically impossible to continue support for Ukraine.

The threat was potent: In 2021, a huge one 83 percent of Russian gas was exported to Europe. Russia’s total global exports of 7 million barrels of oil per day and 200 billion cubic meters (bcm) of piped gas per year accounted for about half of the country’s federal revenues. More importantly, Russia’s commodity exports played a crucial role in global supply chains: Europe depended on Russia for 46 percent of its total gas supply, with comparable levels of dependence on other Russian products, including metals and fertilizers.

Now, as we approach the one-year anniversary of Putin’s invasion, it is clear that Russia has permanently lost its former economic power in the global market.

Thanks to an unseasonably warm winter in Europe, Putin’s moment of maximum leverage has passed without incident, and as we correctly Forecast last October, the biggest victim of Putin’s gas gambit was Russia itself. Putin’s leverage on natural gas is now non-existent as the world – and most importantly, Europe – no longer needs Russian gas.

Far from freezing to death, Europe quickly secured alternative gas supplies by turning to global liquid natural gas (LNG). This included an estimated 55 billion cm from the USA, two and a half times more than pre-war US exports of LNG to Europe. Together with increased supplies from renewables, nuclear and, meanwhile, coal, these alternative supplies have reduced Europe’s dependence on Russian gas to 9 percent of its total gas imports. In fact, Europe now buys more LNG than it has ever bought 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 emptied and can be carried over to next winter. In January, German storage tanks were one record 91 percent fullup from 54 percent last year, meaning Europe will need to buy significantly less gas in 2023 than in 2022.

The consequences are enormous. Europe is now assured of sufficient energy supply well into 2024 at least, allowing enough time for cheaper alternative energy supplies – both renewables and bridge fuels – to be fully on board and operating in Europe. This includes the completion of an additional 200 bcm/year of LNG export capacity by 2024 – enough to fully and permanently replace Russia’s 200 bcm/year of gas exports once and for all.

Furthermore, the days of globally expensive energy in the middle of “Russia-driven supply squeeze” are gone forever. In addition to Europe’s lower forecast demand for LNG is China rotatable away from global LNG in favor of domestic sources. Together with the rapidly increasing LNG supply, it is not surprising that the gas futures market is now pricing gas to be cheaper than the pre-war level in the coming years.

Putin, on the other hand, has no remaining leverage and no way to replace his former primary client; he is finding out the hard way that it is much easier for consumers to replace unreliable raw material suppliers than it is for suppliers to find new markets. Already now, Putin gets practically no profit from gas sales, since his previous sales of 150 billion measly 16 bcm to China and pocket money in global LNG sales, barely enough to cover expenses. There are no markets for Putin to replace anything close to this shortfall of 150 billion cubic meters: China lacks the necessary pipeline capacity to take more for at least a decade and in any case prefers domestic and diversified energy sources, while Russia’s lagging technology makes it impossible to scale LNG exports beyond a slow trickle.

Putin’s oil exploitation is also declining. Gone are the days when fears of Putin cutting off Russian oil supplies sent oil prices skyrocketing 40 percent over two weeks. In fact, when — in response to last month’s rollout of G-7 oil price ceilingwhich we helped develop – Putin announced a ban from 1 February oil exports to countries who accepted the price ceiling, actually oil prices went down.

Why? Because it is now clear that the world is no longer dependent on Putin’s oil. The oil market is turning to favor buyers, not sellers, amid rising supply – more than enough to offset possible declines in Russian crude output. (In December, Russian Deputy Prime Minister Alexander Novak told Russian media that the government was prepared to cut crude oil production by up to 700,000 barrels in 2023.) Oil prices are lower now than before the war, and in the second half of 2022 alone there was a increase of supplies of 4 million barrels per day from producers such as the United States, Venezuela, Canada and Brazil. With myself more new supplies expected this year, any lost Russian crude will be seamlessly and easily replaced within weeks. And this time, Putin cannot force Saudi Arabia comes to the rescue by drastically cutting OPEC+ production quotas, as it did last October. It is because the United States is now take a break crucial Saudi arms and technology transfers amid increased international scrutiny of OPEC+’s significant excess unused capacity.

Putin’s leverage has also evaporated because the G-7 price ceiling 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 ceiling, are taking advantage of it to conduct a tough trade with Russia, with discounts of up to 50 per centso even if India buys 33 times more Russian oil than it was a year ago, Russia is not making much because of its $44 break-even production costs above more expensive transport. But if Putin cuts production even further, as he has threatened to do, he will lose all important oil market share, long a Putin occupationamid an increasingly oversupplied oil market and cuts further into his own income when he is already starved for cash.

Even Putin’s other cards are all used up. His game of weaponizing food collapsed horribly when he himself his nominal allies turned on him. And in certain metals markets where Russia has historically dominated, such as nickel, palladium and titanium, extortion-fearing buyers combined with higher prices have accelerated recycling and revived dormant public and private investment in critical mineral supply chains and mining projects. These are mostly in North and South America and Africa, home to many underutilized mineral reserves. In fact, in several crucial metal markets, such as cobalt and nickelthe total production of new mines due to open in the next two years provides more than enough supplies to replace Russian metals in global supply chains permanent.

Putin has failed financial games is another set of miscalculations to add to an ever-longer list, from his underestimation of Ukraine’s population to his underestimation of the West’s collective unity and willpower.

Of course, Putin’s failed economic and energy warfare has not been without consequences. Spillover effects have affected many lives, transformed supply chains, changed trade flows, and consumers are still feeling the 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 one position to cause such chaos and disruption to the global economy because he has permanently weakened Russia’s most powerful hand—its energy and raw materials perhaps—beyond repair. The war on the battlefield is still being fought, but at least on the economic front, victory is in sight.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button