Putin reminds the world he still wields a powerful economic weapon
Published: 03:04 PM,Apr 04,2022 | EDITED : 07:04 PM,Apr 04,2022
The European Union gets 40 per cent of its natural gas from companies like Gazprom in Russia.
In the five weeks since Russia war in Ukraine, the United States, the European Union and their allies began an economic counteroffensive that has cut off Russia’s access to hundreds of billions of dollars of its own money and halted a large chunk of its international commerce. More than 1,000 companies, organisations and individuals, including members of President Vladimir Putin’s inner circle, have been sanctioned and relegated to a financial limbo.
But Putin reminded the world this past week that he has economic weapons of his own that he could use to inflict some pain or fend off attacks.
Through a series of aggressive measures taken by the Russian government and its central bank, the rouble, which had lost nearly half of its value, clawed its way back to near where it was before the war.
And then there was the threat to stop the flow of gas from Russia to Europe — which was set off by Putin’s demand that 48 “unfriendly countries” violate their own sanctions and pay for natural gas in roubles. It sent leaders in the capitals of Germany, Italy and other allied nations scrambling and showcased in the most visible way since the war began how much they need Russian energy to power their economies.
It was that dependency that caused the United States and Europe to exempt fuel purchases from the stringent sanctions they imposed on Russia at the start of the war. The EU gets 40% of its gas and one-quarter of its oil from Russia. A cutoff from one day to the next, Chancellor Olaf Scholz of Germany warned this past week, would plunge “our country and the whole of Europe into a recession.” For the time being, it appears that the prospect of an imminent stoppage of gas has been averted. But Putin’s sudden demand for roubles helped prompt Germany and Austria to prepare their citizens for what might come. They took the first official steps towards rationing, with Berlin starting the “early warning” phase of planning for a natural gas emergency.
Although President Joe Biden has announced plans to release 180 million barrels of oil from the US reserve supply over the next six months and diverted more liquefied natural gas to Europe, that still would not be enough to replace all of what Russia supplies. Russian oil exports normally represent more than 1 of every 10 barrels the world consumes.
Europe’s ongoing energy purchases send as much as $850 million each day into Russia’s coffers, according to Bruegel, an economics institute in Brussels. That money helps Russia to fund its war efforts and blunts the effect of sanctions. Because of soaring energy prices, gas export revenues from Gazprom, the Russian energy giant, injected $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global advisory firm.
“The lesson for the West is that the effectiveness of financial sanctions can only go so far absent trade sanctions'', the firm said in a research briefing.
Security concerns aren’t the only development that has undermined Russia’s standing as a long-term energy supplier. What seemed surprising to economists, lawyers and policymakers about Putin’s demand to be paid in roubles was that it would have violated sacrosanct negotiated contracts and revealed Russia’s willingness to be an unreliable business partner.
As he has tried to wield his energy clout externally, Putin has taken steps to insulate Russia’s economy from the effect of sanctions and to prop up the rouble. Few things can undermine a country as systemically as an abruptly weakened currency.
When the allies froze the assets of the Russian central bank and sent the rouble into a downward spiral, the bank increased the interest rate to 20%, while the government mandated that companies convert 80% of the dollars, euros and other foreign currencies they earn into roubles to increase demand and drive up the price.
That has revived the value of the rouble, but as several analysts have pointed out, the currency’s newfound stability has come not because the marketplace suddenly found faith in the Russian economy but because of the extraordinary government interventions.
Aside from currency woes, Russia is struggling economically in other ways.
The country is already facing a deep recession, and several analysts estimate that the economy could shrink by as much as 20% this year. An S&P Global survey of purchasing managers at Russian manufacturing companies showed severe declines in production, employment and new orders in March, as well as sharp price increases.
In a matter of weeks, Putin undercut business and trade ties between Russia and more wealthy economies that took decades to build after the demise of the Soviet Union. By one estimate, some 500 foreign companies have pulled up stakes in Russia, scaled back operations and investment, or pledged to do so.
“Russia does not have the capabilities to replicate domestically the technology that it would otherwise have gained from overseas'', according to an analysis by Capital Economics, a research group based in London. That is not a good sign for increasing productivity, which even before the war, was only 35% to 40% of the United States’.
The result is that however the war in Ukraine ends, Russia will be more economically isolated than it has been in decades, diminishing whatever leverage it now has over the global economy as well as its own economic prospects.
But Putin reminded the world this past week that he has economic weapons of his own that he could use to inflict some pain or fend off attacks.
Through a series of aggressive measures taken by the Russian government and its central bank, the rouble, which had lost nearly half of its value, clawed its way back to near where it was before the war.
And then there was the threat to stop the flow of gas from Russia to Europe — which was set off by Putin’s demand that 48 “unfriendly countries” violate their own sanctions and pay for natural gas in roubles. It sent leaders in the capitals of Germany, Italy and other allied nations scrambling and showcased in the most visible way since the war began how much they need Russian energy to power their economies.
It was that dependency that caused the United States and Europe to exempt fuel purchases from the stringent sanctions they imposed on Russia at the start of the war. The EU gets 40% of its gas and one-quarter of its oil from Russia. A cutoff from one day to the next, Chancellor Olaf Scholz of Germany warned this past week, would plunge “our country and the whole of Europe into a recession.” For the time being, it appears that the prospect of an imminent stoppage of gas has been averted. But Putin’s sudden demand for roubles helped prompt Germany and Austria to prepare their citizens for what might come. They took the first official steps towards rationing, with Berlin starting the “early warning” phase of planning for a natural gas emergency.
Although President Joe Biden has announced plans to release 180 million barrels of oil from the US reserve supply over the next six months and diverted more liquefied natural gas to Europe, that still would not be enough to replace all of what Russia supplies. Russian oil exports normally represent more than 1 of every 10 barrels the world consumes.
Europe’s ongoing energy purchases send as much as $850 million each day into Russia’s coffers, according to Bruegel, an economics institute in Brussels. That money helps Russia to fund its war efforts and blunts the effect of sanctions. Because of soaring energy prices, gas export revenues from Gazprom, the Russian energy giant, injected $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global advisory firm.
“The lesson for the West is that the effectiveness of financial sanctions can only go so far absent trade sanctions'', the firm said in a research briefing.
Security concerns aren’t the only development that has undermined Russia’s standing as a long-term energy supplier. What seemed surprising to economists, lawyers and policymakers about Putin’s demand to be paid in roubles was that it would have violated sacrosanct negotiated contracts and revealed Russia’s willingness to be an unreliable business partner.
As he has tried to wield his energy clout externally, Putin has taken steps to insulate Russia’s economy from the effect of sanctions and to prop up the rouble. Few things can undermine a country as systemically as an abruptly weakened currency.
When the allies froze the assets of the Russian central bank and sent the rouble into a downward spiral, the bank increased the interest rate to 20%, while the government mandated that companies convert 80% of the dollars, euros and other foreign currencies they earn into roubles to increase demand and drive up the price.
That has revived the value of the rouble, but as several analysts have pointed out, the currency’s newfound stability has come not because the marketplace suddenly found faith in the Russian economy but because of the extraordinary government interventions.
Aside from currency woes, Russia is struggling economically in other ways.
The country is already facing a deep recession, and several analysts estimate that the economy could shrink by as much as 20% this year. An S&P Global survey of purchasing managers at Russian manufacturing companies showed severe declines in production, employment and new orders in March, as well as sharp price increases.
In a matter of weeks, Putin undercut business and trade ties between Russia and more wealthy economies that took decades to build after the demise of the Soviet Union. By one estimate, some 500 foreign companies have pulled up stakes in Russia, scaled back operations and investment, or pledged to do so.
“Russia does not have the capabilities to replicate domestically the technology that it would otherwise have gained from overseas'', according to an analysis by Capital Economics, a research group based in London. That is not a good sign for increasing productivity, which even before the war, was only 35% to 40% of the United States’.
The result is that however the war in Ukraine ends, Russia will be more economically isolated than it has been in decades, diminishing whatever leverage it now has over the global economy as well as its own economic prospects.