Today we’ll discuss the European gas-and-oil embargo.
How will it influence the Russian economy, how Russia is going to live after that and why hasn’t Europe introduced it yet?
In one of the previous videos on the state of the Russian economy we talked about our closest future
and what will we face in a status quo –
import to Russia is restricted severely but as to export, it was affected by sanctions, of course, but not so much.
The situation we described was quite sad. It couldn’t have been different.
The whole modern economy is built on international cooperation. No country can build a competent economy in isolation.
Isolation condemns Russia to degradation, weakness, and poverty, and no “elder brother” like China will help us.
Nevertheless, we said then that import sanctions are bad but not catastrophic.
While a decreased but still substantial flow of dollars comes to Russia thanks to energy products export,
the collapse could be slowed down.
Today I’d like to talk about our long-term future. What will happen to Russia in case of the European embargo for oil and gas purchase.
This topic is being actively discussed, but most people start from the wrong end as, first of all, we need to discuss the scale.
I don’t want to torture you with numbers, so there will not be many of them and just in the beginning.
Overall Russia’s export volume in 2020 was 330 billion dollars.
Nearly 60% of this volume are energy products and half of them go to the EU.
Just to understand the scale – the Netherlands with the population of 17 million people
consume just twice less energy from Russia than 1,5 billion-people China.
Without digging into percent and its tenths we can roughly say that the supply of energy products (oil and gas)
to the EU brings every third dollar to Russia from abroad.
It’s twice as much as China gets from Russia.
All those trains with forest you've seen. All of that is twice less.
Oil-and-gas export to the EU is the main source of foreign currency for Russia.
And we can easily neglect other things we export compared to this.
Other things like supplying forest to China for less than 1 percent of our overall export is just baby talk compared to oil dollars we get
While Europe hasn’t introduced a gas-and-oil embargo, the Russian government has the resources to smooth the economic shock down.
It can pay for the war and support state or state-connected productions suffering from sanctions.
Just because they can pay people their wages or help the factories with those European dollars and euros.
And everybody would be happy because the dollar is a freely convertible currency and you can live just fine using dollars.
They can give dollars to the AvtoVAZ employees, for example, or to the Russian military people who go to war in Ukraine.
It can fulfill its obligations for millions of budget money consumers like retirees, teachers, doctors and federal employees,
and what’s more important – a huge army of security employees who help to suppress protests and silence people with different views.
Now the speed and the scale of Russian economic disaster depend just on Europe which is the main Russian energy consumer
and just in case of oil-and-gas import.
Compared to this all the other restrictions including the isolation from the financial system
are homeopathic only – the scale is completely different.
With the loss of the European currency Russia can’t even dream about a 10% loss in GDP this year.
After losing those contracts Russia will be in a severe crisis –
it won’t be able to fulfill its basic obligations and pay for its budgetary expenses.
It would be a disaster that could be compared just to the crisis of the 1980s.
The continuation of this war would be out of the question.
Like in dominoes branches will die one after another, the investments will decrease, then consumption and workplaces,
and it would hit the consumption ability even harder.
Not only export oil-and-gas income will die, but all other budgetary incomings will stop coming too.
And then the circle will repeat itself.
How to lead the war would be out of the question.
The early 90s agenda would come back – how will the government pay the salaries to budgetary workers and pensions to the retirees.
In this situation all the reserves will instantly evaporate.
And trying to solve this problem by emission, the prices will increase fast and inflation will reach huge numbers.
So the ruble will lose its value every day.
So the Western embargo is a huge problem for the Russian government. It’s what really could stop the war.
Now we’ll discuss why Europe is delaying this expected decision.
Refusing to buy Russian energy products is a very difficult decision for European politicians. It’s difficult for many reasons.
First, for economic reasons.
The European energy system has been built with Russian gas-and-oil import in mind for many years.
For decades Russia invested huge money to build gas pipes which would never be compensated for.
But compensation has never been a significant factor because they tried to achieve other goals.
Those people who built gas pipes – people close to Vladimir Putin himself – got an obscene amount of money from those projects,
and the European countries became dependent on cheap Russian gas.
We’ve already said it, but I’ll repeat –
generally speaking, even for the most dependent from the Russian gas countries like Germany and Austria
no disaster would happen after the approval of embargo.
Europe would not freeze out. Yes, bills for heat and electricity would become higher.
Yes, Germany would lose 1% of GDP.
But Russian gas would be substituted, and no apocalyptic scenes of the Germans trying to warm themselves up near mobile iron stoves would ever happen.
But the Russian gas embargo will hit the production hard. And it means the workplaces.
And here we’ve come to the main point – to political reasons.
At the beginning I told you about imports and that the modern economy is global.
It is built on cooperation between everybody, and any isolated country is bound to fail.
The paradox here is that this effect makes it quite difficult to introduce a strict embargo for Russian export.
Everybody is interconnected, and production chains come through the whole world.
Switching one country off from the global economy will always hit those who have never even been engaged in trade with it.
Maybe it’s not such a disaster that some German productions would have to stop working.
The German government definitely has resources to support those who had to stop, while the energetic system is adapting.
But this German plant doesn’t exist in vacuum, it doesn’t produce things just for the sake of production.
Its rolled steel goes to the French car-making factory, its turbines go to the American power plant,
and its dump trucks are necessary in the Australian open pits.
The EU’s decision to stop buying Russian energy products won’t just influence every country in the EU.
This decision will crush production chains from the EU, from the biggest economy in the world.
It will make the prices go up, and lead to the reduction of the workplaces and production for everyone – from Anchorage to Sidney.
In this situation the management of the leading countries in the EU will face not only their internal problems
like unhappiness with high prices and unemployment and not only with the opposition inside the Union
like with Hungary which is not as dependent on Russian gas as Orban himself is dependent on Putin.
In addition to all the shock inherited after the pandemic,
to all the damaged product chains and product crisis created by Putin,
the EU can create one more problem for global trade – this time the energetic one.
And it’s not what developed Western countries like to do.
From the political point of view nobody would be happy after the oil and/or gas embargo of the EU.
Voters would be unhappy, the EU partners would be unhappy, and the outside world would be extremely unhappy.
But again, it would have a short-time effect.
New product chains would be built, this time independent from the unpredictable Russian autocrat.
But from the political point of view, it doesn’t help
because certain actions of certain politicians will make people unhappy here and now.
And certain politicians could lose their posts.
Therefore, the EU leaders are now discussing two transitional variants.
On the one hand, they will hit Putin's income hard and the opportunities for his regime to go on with this war,
and on the other hand, they will slow down negative effects and will give time to adapt.
The first variant is forcing Russia to make a discount.
The share of the EU in Russian exports is so high that in fact it’s a monopsonic market with the buyer’s monopoly.
Putin has no other option to sell this amount of energy products to someone else.
The EU can afford dictating the Russian government the purchasing prices for oil and gas
making it low enough to avoid giving extra money for the war.
The second variant is energy tax.
Part of the money which should come to Russia in return for oil and gas will be sent to a special account.
And after the war ends, reparations for Ukraine will be paid from this account.
Those variants sound very unfriendly, and it doesn’t look like Putin will accept them.
But in fact, if Europe will be tough enough, he might not have a choice.
The Russian gas export (even technically) is designed for Europe.
If Europe refuses to take gas on the acceptable terms, nobody will take it.
Why am I telling you this?
Because it’s not a point for discussion in the EU if they should restrict and then stop buying Russian oil and gas.
The European leaders understand perfectly well how they’ve put themselves into a situation like this.
For the last 20 years they’ve indulged Putin and let him build this energetic monopoly in Europe.
Their citizens and their factories are literally paying for a big European war,
paying salaries to the army which is bombing the Ukrainian cities.
The question is not if it ends or not. The question is how and when it will end.
Faster or slower, in the form of embargo from the whole Union or from separate countries, in the form of price agreement or tax –
but it will surely happen. And the Russian government will be in a severe crisis.
If Russia acted adequately, the decrease of tax income from export would not have been such a disaster.
The budget deficit would be covered by the means of state debt which is not huge for Russia.
But Russia can’t draw external finances – nobody would lend money to Russia.
This budget deficit wouldn’t be a problem for any developed country,
but for Russia without external loans and with blocked reserves it would mean large cuts and the inability to fulfill its obligations.
The whole world understands that there are just two ways to stop this war,
which is killing people every day, destroying homes, and making the whole planet poorer.
The first option – military and financial help for Ukraine.
Ukraine should work as a state and fulfill its obligations to its citizens.
To do that Ukraine needs billions of dollars every month and it gets it.
They need more equipment, machinery, and ammunition than the war consumes.
And Ukraine, though not without problems, still receives equipment, weapons and ammunition for amounts
many times greater than its defense budget before war.
The second option is to bankrupt Putin. Leading war is expensive.
You need plenty of money every day.
Every new day you need more and more money to compensate for the damage to the economy.
Every day you need money to bribe the elites suffering from sanctions.
This money comes from the EU.
This war and Putin’s regime literally stand on the bills for oil and gas from the European buyers.
The EU can stop this, and stop this war too.
Yes, the West will have losses, and there would be a lot of indirect damage from breaking the production chains.
But the war itself is inflicting a lot of harm to everyone.
War means billions of dollars of help for Ukraine, refugees and expenses for them, blocked food supply channels.
And this damage will last while the war continues. It will make the whole world poorer until it ends.
No matter how difficult and unprofitable this embargo decision is, the EU would have to make it.
Just because Putin left them no choice.
And this decision will be made, and of course it’s no good for Russia.
Till tomorrow!