Joe Biden has once again announced “unprecedented” sanctions against Russia. He blocked deals from the biggest Russian banks and companies in US banks, including Gazprom, the state-owned oil and gas giant. But the US government made exceptions. These large companies banned from American finance are allowed, for example, to do business related to energy (from fuel exploration to production, transportation, etc.).
There are also exceptions for agricultural products (Russia is a major exporter), fertilizers (Brazil is of great interest), medicines, medical equipment, international organizations and certain types of debt, among other “licenses”.
The financial markets of the rich world spent the morning in moderate panic. A barrel of oil came close to $103 in midday. After Biden’s “energy peace” speech, it fell and closed at $95, up almost none from the day before. US stocks, which had plummeted, closed higher, as did US government debt.
“I understand the pain that Americans are feeling at the gas station,” Biden said both times he announced retaliation against Russia, on Tuesday (23) and this Thursday (25). He also spoke of “maximizing” the damage to the Russians and “minimizing” the damage to the Americans and allies.
Biden and the “West” want to prevent Russia’s oil and gas from flowing to the rest of the world, which would cause energy prices to rise even further, which would have serious economic and political consequences.
The President of the United States, therefore, is saying that, in addition to not intervening with American troops, he does not want to use the weapon of mass destruction in his hands. As should be evident to everyone by now, maintaining the energy trade for the time being is in the interests of both Russia and the “West”.
Taking Russian oil and gas off the market is a “MAD” (Mutual Assured Destruction) scenario. The “MAD” scenario, very badly compared, was the one mounted with nuclear weapons: they cannot be used, as general ruin would be certain, with no winners.
Of course, oil and gas is nowhere near a nuclear bomb, needless to say. Ultimately, the United States can withstand higher inflation, higher interest rates, the almost certain defeat of Biden’s Democratic Party in the year-end election. Damage like this is small, compared to real war, even conventional.
In the case of retaliation in energy, Russia would have very serious and immediate financial and economic problems. The risk here is the “lost by ten, lost by a thousand”: with the economy in shambles, Putin can be more aggressive, unless the power scheme that sustains him revolts and overthrows him, a hypothesis that the West does not do. idea.
The sanctions announced on Thursday will harm Russia’s biggest financial institutions and companies. In short, American financial institutions cannot open or maintain accounts for Russian banks to make payments and transactions.
The measure hits the two largest Russian banks, Sberbank and VTB, which have 50% of the country’s banking assets, Otkritie, the seventh largest, Sovcombank (private, 9th largest). Companies cannot take out debt longer than 15 days or raise capital (such as money for a stake in the company or a new venture) in the US.
The measure also affects Sberbank, two Gazprom banks, Gazprom itself, Transneft (pipeline), Rostelecom, RusHydro (hydroelectric), Alrosa (diamond mining), Sovcomflot (maritime transport) and Ferrovias da Russia.
How much economic retaliation can the “West” and Russia take? That is, how much pain can the United States, the European Union and allies cause the Russians without having to pay a heavy price? This has been the most important issue on the table for a few weeks now, in economic terms; hours after the invasion, it was still the biggest question.
Basically, it’s a question of whether the “West” will tolerate an energy price shock in order to (try to) contain Vladimir Putin and whether Putin will forgo record revenues from the sale of more expensive oil and gas.
The Russian economy is heavily dependent on energy, oil and gas, about 47.5% of what it exported in 2021. Nearly 18% of the Russian Federation’s government revenue comes from oil and gas. The government started to have a surplus in its accounts (it collects more than it spends) at the end of 2021 (in the 12-month period up to November, the most recent data from the Ministry of Finance.
This year alone, the price of oil had risen by about 20% even before the start of the war. The country had a surplus in external accounts (current account balance) of 2.8% of GDP in 2021 (according to IMF data), basically because it exports much more than it imports, thanks to energy sales. If you can keep these recipes, Russians can get by for a long time.
Russia has about 10% of the world’s oil exports; about 20% of wheat. Almost 40% of the gas that the European Union consumes comes from Russia.
Gasoline prices and general inflation have helped to bring down the popularity of Biden and his Democratic Party, which have a very bad outlook for the year-end election, in which they are expected to lose control of the House and Senate. Greater inflation and impotence in the face of Putin’s sausage will not improve the situation. In the European Union, energy inflation causes as much outcry as here in Brazil — now there are more subsidies to mitigate the impact of the energy bill, among other measures.
Sanctions that harm imports of high-tech products from the “West” can indeed harm Russian development and industry, although this harm is difficult to quantify. For the rest, China can help a little with that.
The most harmful sanctions would be those that actually prevent Russian financial institutions from transacting, even mere payments, with the rest of the world. However, it is possible that Russia will be able to create alternative channels to receive its money, if only through China.
