bne IntelliNews – BLOG MOSCOW: Recalibrating for economic warfare with Russia


ED: This article first appeared as a blurb in bne IntelliNews’ EDITOR’S CHOICES, a daily email digest of the top stories from the past 24 hours, delivered free to your inbox. Click here to view back issues and subscribe.

Alright people. It’s time to recalibrate. The war between Moscow and Kiev in Ukraine has just gone global. It is now a veritable economic war between East and West.

As bne IntelliNews argued that the West hit Russia with the most damaging sanctions it could think of, namely a declaration of economic war. Russian President Vladimir Putin has now retaliated with Russian counter-sanctions that will ban commodity exports until the end of this year. They will create chaos in the commodity markets. Brent has already touched $140 this week and opened at $128.3 this morning. Gasoline prices have also risen to double their peak of last year and are currently 16 times higher than usual. And it could get worse: The Kremlin warned against $300 oil following the fight that just started.

We have already had to recalibrate our understanding of Putin, who unexpectedly took extreme measures with each escalation of this crisis, choosing to go for the maximum option at every stage. No one (including me) expected a full-scale invasion of Ukraine after the failed diplomacy of January and February. However, we shouldn’t be surprised at the commodity ban, because it’s more or less the same thing.

Perhaps the West is surprised that Putin is willing to effectively cut off Russia from its own sources of revenue, but given Putin’s recent form, I think that has become entirely predictable. He needs to see this conflict end as soon as possible because popular Russian dissent is a ticking time bomb at home and he cannot sustain a long war in Ukraine and he certainly cannot occupy and hold Ukraine for some time, because it will clearly turn into another Afghanistan. He is using extreme measures to push forward successful peace talks as quickly as possible. And when I say “peace”, I mean that Ukraine yields to all its demands.

On that note, there seems to be some progress. Kiev more or less said it was giving up on NATO aspirations while Ukrainian President Volodymyr Zelenskiy is bitterly disappointed that NATO has refused to come to the aid of Ukraine when needed and close the skies over Ukraine. And in an interview with US media yesterday, he hinted that the status of the Donetsk and Luhansk regions was also being negotiated. Recognition of Russia’s sovereignty over Crimea is going to be very difficult, but I hope they can find an ‘agree to disagree’ formula that allows a compromise on this one. A fourth round of talks is expected any day.

In keeping with my step-by-step model with pauses for talks, it’s important to point out that the counter-sanctions are only supposed to run until the end of December, when there is yet another pause for talks. They have a time frame, unlike Western sanctions which are for an indefinite period. Putin is clearly inflicting massive damage to the global economy (and his own) – this may be the first time major powers have imposed sanctions on a country capable of retaliating in kind – but the timeline also suggests that the Kremlin wants talks to end this so the sanctions are not renewed in January next year. Expect a demand from the West to lift its sanctions against Russia. Putin will continue to play hardball.

And an agreement is possible. As far as I know, the US sanctions were imposed by presidential decree, which means that the power to impose and lift them remains in the personal control of US President Joe Biden. If the sanctions had been imposed by legislation of the House, they would become impossible to untie. This mechanism is the easiest to implement but it also gives Biden a powerful negotiating tool. I’m not sure the intent was to signal that there is a way out of this clash, but the effect is the same.

Details of what is on the list and what type of exemptions will be released in the coming days or weeks when we have a better idea of ​​the damage this will cause. But you can be sure that they will cause a lot of damage.

Here’s another place you need to recalibrate: Russia has emerged as a global commodity and agricultural superpower with significant influence in international markets. Although the economy is relatively small, as it plays such an important role in supplying so many key commodities, it has the power to destroy many industries as well as drive up global inflation dramatically and to cause real problems for everyone’s economy.

As I’ve been saying for years, the last two decades of demonizing Putin has always been based on the assumption that you can do it for free because the West has so little investment in Russia and commodity sales aren’t affected by politics, because that’s how commodity markets work – more or less.

Notably, the only country that has significant business with Russia is Germany – Germany has literally ten times more businesses working in Russian than any other European country – and it was also the country that had been the most reconciling with Russia until the last moment with its support for Nord Stream 2.

For most of the past two decades, Putin has tolerated this setup, where on the one hand he expanded Russia’s commercial ties with the rest of the world, and on the other hand continued his political agenda of poisoning spies. and arrest of Navalnys. The West has also been happy to play this double game; in the meetings of Putin and German Chancellor Angela Merkel, they always talked about international issues like Syria, but at the same time removed obstacles to things like the construction of a new BMW factory in Kaliningrad or a Siemens investment.

It stopped in 2020 when top European Union diplomat Josep Borrell visited Moscow right after anti-corruption activist and opposition politician Alexei Navalny was arrested and personally humiliated by the minister. Russian Foreign Minister Sergei Lavrov.

At the start of the active phase of the confrontation which has now reached its climax, Lavrov made it very clear that the Kremlin would no longer tolerate this dual policy of doing business with one hand but imposing sanctions from the other in his new rules of the game February speech.

By my calculations, Putin had been preparing for this clash for a dozen years because I think he believed this clash was inevitable, as I recently wrote in an op-ed”Has Putin gone madLavrov set the bar to zero and implicitly tied Russia’s affairs to the sanctions policy, which has now been unleashed. political objectives, which is quite new.

It has long been said that Russia uses gas as a political weapon and bne IntelliNews has long argued that while the gas trade is a foreign policy tool, the Kremlin being most interested in establishing long-term gas supply contracts, it never uses it as a weapon. Well, that just changed. Now, one of the possible bans is the nuclear option of cutting off the gas supply to Europe, which would have catastrophic consequences.

In a related article, I dove deep into how the war in Ukraine could affect Europe’s gas supply. I imposed a map of the currently occupied territories on a map of the distribution of pipelines and gas storage tanks of Ukraine. It shows that the Russian army does not occupy the territory where the gas pipelines pass and that the storage tanks in the east of the country, half of the total capacity, are also still in government-controlled territory.

Cutting off the 40 billion m3 per year of gas that passes through Ukraine would in itself cause an energy crisis in Europe, but if Russia also takes over half of Ukraine’s storage capacity, given that these reservoirs are close to the occupying forces, then there would be crisis after crisis.

Russia sent about 180 billion m3 to Europe last year, which has a total storage capacity of 161 billion m3. Ukraine’s storage is the largest on the continent with 33.6 billion cubic meters of capacity, or around 20% of the total. But that means Europe doesn’t have enough storage capacity on its own to get through the winter, even if it could fill it with LNG (which it can’t). In an emergency, Europe would have to restart its coal and nuclear power plants. But Europe is as dependent on imports of Russian coal as it is on gas, and decertified nuclear power plants apparently need at least a year to restart.

So it looks like Putin may be in a position to cause a major energy and economic crisis in Europe if he follows through with the most extreme version of the commodity ban, although he may do little damage in the United States. other than indirectly by driving up oil prices. and fueling international inflation, which will be bad enough on its own.

Like I said, it’s time to recalibrate, because this could all get a whole lot worse than it is right now.


And I highlight one more piece on our site: following the war Russia’s best and brightest tech workers have fled the country en masse. The problem with these workers is that they are extremely mobile. Since there are world-class technology companies in Russia, the reputation of Russian software engineers is very good and they can easily get jobs anywhere in the world.

Russia has already taken the path taken by Belarusian President Alexander Lukashenko, who destroyed the thriving tech sector in Belarus where thousands of engineers and tech companies just left the country when the protests began two years ago. .

This will cost Russia dearly as it hampers its long-term development. And that’s what Putin has done: his fiscal fortress may be strong enough to withstand the current sanctions onslaught and he may be able to reorient the Russian economy from Europe to Asia and other emerging markets, but by cutting Russia off from high tech and losing its most active and enterprising workers – and not just from the tech sector – it condemned the Russian economy to underperform. Russia’s growth potential was only 2% a year before the start of the current crisis, which is the real cost of the previous sanctions. Now it must have been wiped out and that means Russia is probably doomed to stagnation for the rest of Putin’s life.

This week, my Russian staff is telling his children that they must leave the country and find a career abroad, because Russia has no future.

There’s a lot more coverage of the war in Ukraine on our premium service and now’s the perfect time to sign up for the free two weeks test at PRO here.


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