Russia threatens to cut gas to Europe and talks about a barrel at US$ 300; prices skyrocket

Russia has threatened to cut off the flow of natural gas to Europe and predicted “catastrophic consequences” if the United States and its allies stop buying oil from Vladimir Putin’s country.

The possibility of using the “sanctions atomic bomb” to punish the Kremlin for invading Ukraine has been openly discussed by Western leaders. On Monday, the White House said the measure was being studied, and British Prime Minister Boris Johnson said it “remained on the table”.

“It is absolutely clear that the rejection of Russian oil will lead to catastrophic consequences for the global market,” Alexander Novak, one of Putin’s deputy premiers, said on Monday. “The rise in prices will be unpredictable. It will be $300 a barrel, if not more,” he added.

The Brent barrel, an international benchmark, rose from US$ 95 on the day of the beginning of the war to US$ 127 in this morning’s trading sessions on Tuesday (8). With the largest reserves (24%) in the market, Moscow is the largest exporter of natural gas in the world. It has the eighth largest oil reserves (4.8%), but is the second largest exporter, after Saudi Arabia.

Obviously, a shock of this magnitude would destabilize the world in a similar way to the great crises of the 1970s. The inflationary impact in Brazil has already led the government to study measures to try to hold down domestic prices, which is much criticized.

Novak said the most obvious candidate for retaliation is Nord Stream 1, a pipeline that carries up to 55 billion cubic meters of the product every year directly from Russia to Germany.

The second branch of the project was completed in September, but its operation never got started under bureaucratic allegations that became a political decision when war broke out. Gazprom, the Russian state gas giant, controls the $11 billion project, which is owned by German, French, Austrian and British companies.

Nord Stream 2 doubles the gas delivery capacity, thus reducing dependence on the two Soviet-era gas pipelines that carry the bulk of the product to Europe via Ukraine. Even with the war, they are still in business, and Kiev receives up to $2 billion a year in transit fees from Moscow.

The US has criticized Europeans for their energy ties to Putin for years, and Nord Stream member companies have already been sanctioned by Washington. Some see opportunism from the Joe Biden government in the Ukrainian tragedy, as there is an opportunity for US companies to expand oil supplies to Europe.

There are a myriad of other projects, such as the gas liquefaction plants jointly run by France and Russia in the Arctic. China, oblivious to criticism, has also established partnerships with its ally Russia.

Since beginning his aggression against Ukraine, Putin has suffered a wide range of economic sanctions. The country’s main banks were disconnected from the international payments system, around 250 foreign companies left Russia and even the Central Bank’s access to US$640 billion of foreign exchange reserves was degraded.

But, apart from some measures to make production more difficult, such as a technological embargo and the suspension of Russian oil refining in Nordic countries, the energy sector was relatively spared. The reason is obvious: 40% of the natural gas and about 33% of the oil consumed in Europe comes from Russia, and this cannot be replaced overnight.

Not that there are no impacts. European banks have started to refuse to finance Russian exports, and the most produced oil in the country, the Urals, is being left at a low price in the market.

Yet, despite being acute in the short term and perhaps manageable in the longer term, the sanctions have not deterred the Kremlin’s war effort. Hence the Americans and their Western allies are working on the idea.

On Thursday (10), the 27 members of the European Union will meet to discuss a plan to reduce Russia’s energy dependence and also increase defense investments. The goal of NATO, the Western military alliance, is for everyone to spend at least 2% of GDP on the sector, which only 10 of its 30 members do.