The world economy no longer needs Russia

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 living up to his supposed total capacity, holding the global economy hostage to his whims. Since last summer, Putin has cut off natural gas supplies to Europe, hoping that Europeans, shivering and without heat through the winter, will turn on their leaders and make it politically futile to continue subsidizing Ukraine.

The threat was strong: in 2021, 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 of pipeline gas annually accounted for about half of its federal revenue. More importantly, exports of Russian goods played a crucial role in global supply chains: Europe was dependent on Russia for 46% of all gas supplies, with similar levels of dependence on other Russian products including minerals and fertilizers.

Now, as we approach the first 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 living up to his supposed total capacity, holding the global economy hostage to his whims. Since last summer, Putin has cut off natural gas supplies to Europe, hoping that Europeans, shivering and without heat through the winter, will turn on their leaders and make it politically futile to continue subsidizing Ukraine.

The threat was strong: in 2021, 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 of pipeline gas annually accounted for about half of its federal revenue. More importantly, exports of Russian goods played a crucial role in global supply chains: Europe was dependent on Russia for 46% of all gas supplies, with similar levels of dependence on other Russian products including minerals and fertilizers.

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

Thanks to an unusually warm winter in Europe, Putin’s ultimate moment of influence has passed uneventfully, and as we correctly predicted last October, Russia itself has been the biggest victim of Putin’s gas gambit. Putin’s influence over natural gas is now non-existent, because the world – and most importantly, Europe – no longer needs Russian gas.

Far from freezing to death, Europe quickly secured alternative gas supplies by switching to global liquefied natural gas (LNG). This included an estimated 55 billion cubic meters from the United States, two and a half times more than pre-war US exports of LNG to Europe. Combined with increased supplies from renewable sources, nuclear and coal meanwhile, these alternative supplies have reduced Europe’s dependence on Russian gas to 9% of its total gas imports. In fact, Europe now buys more LNG than it ever did from Russia.

Moreover, a warm winter in Europe meant that not only were worst-case scenarios avoided, Europe’s full storage tanks were barely drawn and could move on to the next winter. In January, German storage tanks were full at a record 91 percent, up from 54 percent last year, meaning Europe will need to buy less gas in 2023 than in 2022.

The repercussions are enormous. Europe now has an adequate energy supply well into at least 2024, providing enough time for cheaper alternative energy supplies – whether from renewables or bridge fuels – to be fully operational and operational within Europe. This includes completing an additional 200 bcm of LNG export capacity by 2024 – enough to replace Russia’s 200 bcm/year gas exports once and for all.

Moreover, the days of globally expensive energy amid “Russia-led supply pressures” are gone forever. In addition to expected lower European demand for LNG, China is moving away from global LNG in favor of domestic sources. Coupled with rapidly expanding supplies of LNG, it’s no surprise that the gas futures market is now pricing gas to be cheaper than pre-war levels for years to come.

On the other hand, Putin has no remaining leverage and no way to replace his former primary client; He finds out the hard way that it is easier for consumers to replace unreliable suppliers of goods than it is for suppliers to find new markets. Already, Putin makes practically no profit from gas sales, his previous sales of 150 bcm of gas via pipeline to Europe replaced by 16 bcm to China and pocket change in global LNG sales, barely enough to cover expenses. There are no markets for Putin to replace with anything close to this 150 bcm shortfall: China lacks the pipeline capacity to take more for at least a decade and prefers domestic and diversified energy sources anyway, while sluggish Russian technology makes it impossible to expand. its range. LNG exports exceed a slow trickle.

Likewise, Putin’s oil influence is diminishing. Gone are the days when fear that Putin would take Russian oil supplies off the market sent oil prices up 40 percent over two weeks. In fact, when — in response to last month’s rollout of a G7 oil price cap, which we helped develop — Putin announced a ban, starting February 1, on oil exports to countries that had accepted the price cap, oil prices really fell down.

why? Because it is now clear that the world is no longer dependent on Putin’s oil. The oil market is tending to favor buyers, rather than sellers, amid oversupply – more than enough to offset potential declines in Russian crude production. (In December, Russian Deputy Prime Minister Alexander Novak told Russian media that the government was ready to cut crude production by up to 700,000 barrels in 2023.) Oil prices are lower now than they were before the war, and in the second half of 2022 alone, they have been there lunges; of supply by 4 million barrels per day from producers such as the United States, Venezuela, Canada and Brazil. With more new supplies expected this year, any lost Russian oil will be replaced smoothly and easily within weeks. And this time, Putin cannot force Saudi Arabia to the rescue by drastically cutting OPEC+ production quotas as he did last October. That’s because the United States is now pausing transfers of crucial Saudi arms and technology amid growing international scrutiny of the large, unused OPEC+ spare capacity.

Putin’s financial leverage has also evaporated because the G7’s price cap gives him a choice in which to lose, which undermines Russia’s energy position no matter what he does. China and India, without explicitly participating in the cap, are leveraging it to achieve a hard bargain with Russia, with discounts of up to 50 percent, so even though India buys 33 times more Russian oil than it did a year ago, Russia you buy it. It doesn’t make much profit, given the $44 equivalent production cost plus the more expensive transportation. But if Putin cuts production further, as he has threatened to do, he will lose every significant oil market share, long Putin’s obsession, amid an oversupply of the oil market and further curtailing his own revenue when he’s already hungry for it. Cash.

Even Putin’s other commodity cards are all depleted. His gambit to turn food into a weapon collapsed when even his allies turned on him. And in certain metals markets where Russia has historically dominated, such as nickel, palladium, and titanium, buyers fearful of extortion coupled with higher prices have accelerated resettlement and reinvigorated dormant public and private investment in critical metals supply chains and mining projects. They are found mostly in North and South America and Africa, and are home to many exploited mineral reserves. Indeed, in several important metals markets, such as cobalt and nickel, co-production of new mines to be opened in the next two years adds more than enough supply to permanently replace Russian metals in global supply chains.

Putin’s bungled economic maneuvers are yet another set of miscalculations to add to an increasingly long list, from his underestimation of the people of Ukraine to his underestimation of the collective unity and willpower of the West.

Of course, Putin’s economic war and energy war were not without consequences. The fallout has affected many lives, shifting supply chains, altering trade flows, and consumers continue to feel the pinch of higher prices because newfound low prices take time to work through the economy.

But what matters is that the end is in sight. Putin will never again be in a position to wreak such havoc and upheaval on the global economy, because he has permanently weakened Russia’s strongest hand — its energy and commodities — beyond repair. The war on the battlefield is still going on, but on the economic front at least, victory is looming.

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