The European Union, the United States and the United Kingdom have so far vowed to punish Vladimir Putin with sanctions that will not do much harm to the Russian economy.
Should the retaliation stop here, it would be a tolerable cost to forever occupy part of eastern Ukraine, save the autocrat’s face in domestic politics (“victory”), and avoid an extensive, expensive, death-defying and financially damaging war. .
It is mere speculation, as who knows what Putin and his generals want to do. However, it could be a bad balance, but in theory acceptable to the parties – apart from Ukraine, which no longer has much say in its destiny. As for the “West”, tougher measures could have a boomerang effect, in addition to burning ammunition in the event of further Russian advance.
The German government has suspended the process to release the Nord Stream 2 gas pipeline, which was completed last September. These are two large gas pipelines that run from Russia to Germany under the Baltic Sea. The company is owned by a Swiss subsidiary of Russian state-owned Gazprom. It cost about US$11 billion, half financed by energy companies such as Engie, France, Wintershall Dea and Uniper, Germany, OMV, Austrian, and Shell, Anglo-Dutch.
The big European and American oil companies have partnerships with Russian companies or exploration fields in Russia. “Western” executives and Gerhard Schroeder, former German prime minister (1998-2005), have posts in Russian state energy companies. Schroeder chairs Nord Stream, Nord Stream 2 and was appointed to the board of Gazprom.
Of the natural gas consumed in the European Union, between 36% and 40% comes from Russia (47% of total EU imports in the first half of 2021), according to Eurostat, the European Union’s statistical service. But gas would continue to flow through Nord Stream 1 and Ukraine, for example.
The European Union is studying making it difficult for the Russian government, banks and state-owned companies to raise money in the capital and financial markets (borrow). I would make a decision later this Tuesday. It also wants to harm those “involved” in the illegal decision to recognize the republics of Donetsk and Lugansk (ie people from the Russian Parliament and government). It will put “in the crosshairs” banks that finance Russian operations in the region and prevent European Union trade with separatists.
The Russian government has little debt, around 20% of GDP (in Brazil, more than 80%). The public deficit is low, controlled and has been “comfortably financed through domestic loans, especially from large local banks”, the IMF said in a 2021 report on the country’s economic situation. Of course, depending on the restrictions, Russian state-owned companies could have capital problems — here, the size and target of the stick count. But China lives next door.
Restricting the lives of deputies and top Russian government officials abroad can hurt. But it is hard to imagine that the Russian political elite was unprepared for restrictions. The United States says it will hit this elite hard, Russian oligarchs in particular, taking money or severely limiting their freedom to move resources and travel. Boris Johnson promised on Tuesday to catch three (3) rich Russians too: three.
However, judging by what analysts and experts who appear in the Western media and in reports from global financial institutions say, no one seems to know very well what Putin’s relationship with his generals, the political elite and the oligarchs are. That is, if the power of the autocrat could be shaken by financial punishments to the people of the Russian leadership.
Russia depends on oil and gas sales to survive. In 2021, about 42% of its exports were energy (and exports amount to almost 27% of GDP), according to data compiled by the IMF. Of the government’s revenue, almost 18% comes from oil and gas revenues, according to statistics from the Ministry of Finance of the Russian Federation (in the 12-month period up to November 2021).
But there is no mention so far that the “West” will strangle Russia’s hard currency and tax revenues by limiting energy trade. If that weren’t the case, the European Union makes 47% of its external gas purchases and 25% of its oil purchases in Russia, it should be noted. In the case of gas, Western Europeans could shop elsewhere, but would pay more.
More importantly, any reduction in the now minimal margin of slack in the world energy market would result in massive turmoil. Will the “West” buy (and pay for) this fight? By the way, not even Ukraine had broken off relations with Russia, until early this Tuesday afternoon in Brazil.
Still on Tuesday, the price of oil retreated from the jump in the morning, to US$ 96 a barrel (Brent type). However, it was $77 a barrel earlier this year, up nearly 25%. A higher price would make Europe’s ugly energy cost crisis worse — the screaming there is as big as it is here or bigger, with measures to subsidize the heating and electricity bills of the poorest.
A market turmoil would further drive up the price of gasoline in the US, a major factor in political unpopularity, and inflation in general. It would further damage the prestige of Joe Biden, who will face elections at the end of the year, when, apart from miracles, he is expected to lose control of the House and Senate.
Biden goes through a “Carter process”. Jimmy Carter, president from 1977 to 1981, ruled under a historic high of inflation (which reached more than 13% in the final year of his term), exploding oil prices and had bad problems in international politics (hostages at the embassy in Iran revolutionary, rescue attempt fiasco).
Biden already counts inflation, expensive gasoline and an external fiasco in Afghanistan. The comparison ends there, in these indicators, however relevant for a ruler, like the American, who is considered mainly as “commander in chief” and general manager of the economy. They don’t explain everything, not by a long shot, of course, but Biden doesn’t need any more bad news.
For now, the money holders have reacted almost coldly to Putin’s latest advance. US and major European stocks rose. After a jump of more than 3%, the price of a barrel of oil rose by less than 1% (at 1 pm in Brazil), interest rates for the governments of the rich world barely moved. In Brazil, money traders didn’t even care about the crisis: the real continued its impressive appreciation and the stock exchange was still rising.
