bne IntelliNews – BLOG MOSCOW: Economic war phase 2

Russia launched its Phase 2 of its military campaign in Ukraine in April, when it withdrew from northern Ukraine to concentrate its forces on taking Donbass. Now he has launched his phase 2 of his economic war against Europe by completely stopping gas flows via Nord Stream 1 in response to the G7’s threat to impose an oil price cap system.

The closure of NS1 is a significant intensification of Russia’s use of its economic weapons. At the end of last week, gas prices were down after EU members rolled out various relief packages, but soared this morning after the Dutch TTF spot market opened at $2,600 .

Gazprom’s announcement came after G7 finance ministers said they were moving forward with the oil price cap system which is designed to cut off the Kremlin from its export tax revenue by oil, but Russia has already said it will simply stop exporting to anyone trying to implement the regime.

Basically, it is now a game of chicken: the West is betting on the hope that Russia will need the money and will therefore continue to export oil even at reduced prices; and Russia is banking on the hope that if it cuts off European oil exports, it will cause a global shortage and send oil prices into the stratosphere, massively exacerbating the energy crisis already tearing European economies apart. Also, Russia seems pretty convinced that the oil price cap system can’t work because of all the leaks. Who can take the most pain? At this point, my bet is on Russian President Vladimir Putin, because Russians are suffering like no one else. Poignantly, there were two protests over the weekend in Prague and Cologne against the rising cost of living and in the UK the extremely high cost of living is facing full legal action by the press. Street life in Moscow remains fairly normal, while SMEs in the UK are facing electricity bills of £20,000 when they used to pay £2,000 a year.

I think the protests will grow. Albania, one of Europe’s poorest countries, was among the first to cross the ‘we can’t afford it’ line in April with protests. Now it has spread to the heart of Europe. Of course the Czech and German protests were the work of pro-Russian supporters and it is assumed that the Kremlin played a role in these protests, but it is clear that mainstream Europe is now on the line ‘we can’t allow that” too and it will only make it worse.

One aspect of this whole story that is underestimated is just how costly this war is proving to be. German Chancellor Olaf Scholz announced a new €65 billion relief package on Saturday – double the total of the two previous programs – and Italy’s economy minister also said Rome had already spent €54 billion. euros and that this would reach 100 billion euros by the end of this year. The total cost to Europe so far is in the region of EUR 300 billion, but it will clearly reach half a trillion by Christmas and possibly EUR 1 trillion by end of the heating season? The UK is almost certainly in recession and Robin Brooks of the Institute of International Finance (IIF) says it is now inevitable that the rest of Europe will soon follow – with the exception of Hungary which has just buy even more cheap gas from Russia and also enjoys an exemption from the upcoming oil import ban which will come into force in December.

Another factor that people don’t take into account is that the focus is on this winter’s gas crisis. With reservoirs over 80% full if the winter isn’t too cold, Europe can probably make it through this year, albeit at extraordinary cost. But in April, the process of filling the tanks will begin, but without NS1 at all. It cannot be done. Alternative supplies from Azerbaijan, Algeria and Norway are all marginal, and the very big new LNG project in Qatar will not come online until 2025 at the earliest (and only then if the EU agrees to sign long-term contracts, which he does not want to do), so there will be another even more serious gas crisis next year which will cost at least another 1 trillion euros and will doom Europe to another year of recession.

European governments still have to put themselves on a war footing and prepare their populations for two years of deprivation. Scholz’s new relief package is symptomatic of the general approach taken so far: throwing money into the crisis to try to keep life as usual, but the question is whether Europe can afford it and how determined are the people of the EU to actually suffer for the good of Ukraine? Call me cynical, but I don’t think they’re committed enough to destroy their own economy for the good of a country that’s not a member of either NATO or the EU.

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