Russian oil and gas banned
The economic war goes up a level with the US ban on imports of Russian oil and the EU declaration that it will stop using Russian hydrocarbons by 2030.
These plans are largely symbolic as the US imports relatively little Russian oil, although imports have gone up after similar bans on Venezuelan oil. And thanks to the shale revolution the US is actually a net exporter of oil and imports no gas at all from Russia.
The EU statement is more serious but bottom line is, as bne IntelliNews has been reporting, the EU simply cannot do without Russian oil and gas which account for 40% and 30% of its imports of each respectively.
The danger now is Russia will cut Europe off tomorrow and plunge the EU into a huge energy crisis. I’ve seen a lot of comments that that won’t be so bad as the EU will find other sources to replace the Russian hydrocarbons. A US delegation flew to Kingdom of Saudi Arabia yesterday to ask them to increase production, for example.
Analysts say that while it could be possible to replace Russian oil at short notice as most oil is transported by ship anyway, replacing the gas overnight is simply not possible. Putin has not released the details of his commodities ban, which is due in two weeks not two days as we previously reported, but I’m increasingly certain he will cut off Europe’s gas until December.
Being purely mercenary about it, cutting off Europe’s gas is a nice blow from his perspective. The heating season is due to end in two weeks (the weather is now nice in Berlin) and the European storage tanks are 27% full, which is the lowest level in years, but a lot more than the 12% we were previously expecting. The Armada of ships delivering LNG from the US in the last months has made a big difference.
We also have a piece today from Jenifer DeLay, the editor of AfrOil, the oil and gas title from bne IntelliNews’ sister publication NewsBase, on what this crisis means for the African oil and gas business: it's a boon. And another piece looks at the impact on the negotiations to remove sanctions on Iran: also a boon.
That means if Putin cuts off gas it won’t cause a European energy crisis immediately because nothing will change as there is still enough gas in storage for business as usual. But it also means that it will be impossible to refill the tanks in preparation for next winter. So as this sanctions slugfest continues over the summer the pressure on Brussels to do some sort of deal to turn the gas back on will grow steadily and will reach panic levels pretty quickly. If Russia doesn't start pumping gas into the storage tanks by August then the EU is set for another gas crisis that will make last year’s episode look like child’s play.
So I’m very sure that Putin will at least threaten to do this. It would be a major escalation in the economic war that is now underway. But it is a risky thing to do as it could easily be taken as a straightforward act of war rather than the more limited economic act of war. Still, what worries is our newly recalibrated Putin seems perfectly willing to go to extremes in this showdown. With Russia’s economy on its knees and both a bank crisis and bond defaults now not far away it seems that he has little to lose. As I keep saying, he needs to end this as soon as possible so that is pushing him to apply maximum pressure. And cutting off Europe’s gas (and banning all the other commodities too, especially grain) is maximum pressure.
I have already done a deep dive looking at the gas transit and storage business in Ukraine and we are covering the commodities price shock story closely. All the prices are already spiking, so even if you are not reading much about this in the mainstream coverage, the markets are already definitely very scared of this scenario.
The other way Putin can cause intolerable pain for everyone is to send global inflation soaring – and that is already happening. In the US the cost of petrol at the pump is already over $3, but that is a mild inconvenience. But US inflation is already very high, however, the price shock that is already underway will get a lot worse as those commodity price rises work their way through the system.
We are already seeing what this can do as protests broke out in Tirana yesterday to complain about the soaring cost of living. North Macedonia also just rolled out a €400mn rescue package to deal with the shock from the Ukraine crisis and Hungarian inflation is at a 15-year high. Expect a lot more of this.
Ironically Russia is going to be one of the hardest hit by inflation thanks to the massive devaluation of the ruble. The February numbers just came out and inflation was already at 9.1% – and that was before the war broke out. Russia is on course for 20% inflation this year and the CBR will definitely hike again at its next meeting on March 18, the only question is by how much? Some analysts are speculating about a 300bp hike, but things are getting so extreme I wouldn't be surprised by a 1,000bp increase now.
These are powerful weapons at Putin’s disposal. Ask yourself if he is afraid to use them.