War Update: How is Russia choking the EU? Russia’s master plan
Ever since the war began the economic tensions between Russia, the USA, and Europe has erupted. Europe and America came up with multiple sanctions to cripple Russia’s economy. American brands like Zara, McD, Starbucks, and many others quit the Russian market. These sanctions have frozen around $300 Billion in Russian reserves and the West started to force other nations to cease their trade ties with Russia. Although Russia was adversely affected by the sanctions of the West and EU, Putin played the Game of Thrones of geopolitics so well that Europe is facing an economic crisis now.
The annual rate of inflation of energy has touched a record high of 41.9%, food inflation shoots up to 10.4%, and is accompanied by the slowing GDP of 27 countries. Things are yet to become messy because “Winter is Coming”. How is Russia choking the EU? To understand this current scenario let's dive in and see how modern warfare works.
The major weapons of this war are food, finance, and energy. Europe thought that they won over Russia by imposing sanctions that prohibited the import of coal, imports from Russia of oil, with limited exceptions, and the prohibition on imports from Russia to the EU of iron, steel, wood, cement, seafood, liquor, and gold. They expected Russia would go into bankruptcy and with the fear of economic crisis Russia will eventually withdraw from the war. Russia is fighting back with the other two weapons: Energy and food. Russia and Ukraine contribute almost 30% of global wheat, 20% to corn, and 60% to sunflower oil exports. Now food prices across the EU skyrocketed.
The real deal for Russia is energy. In the year 2020, 42% of Europe’s gas came from Russia through the Nord Stream 1 pipeline. This Nord Stream 1, which is majority-owned by Gazprom, is the single biggest pipeline runs across the Baltic Sea bringing crucial supplies of Russian natural gas to Europe via Germany. In 2020, countries like Finland, Bulgaria, and Slovakia had more than 70% of their gas supply from Russia. In spite of having one of the large economies, Germany gets its 50% of gas from Russia.
This favored Russia in 2 ways: Putin said he would cut down 60% supply of gas to Europe and if EU companies wanted to continue to buy oil, they’ll have to pay in Rubles.
Generally agreed, but European gas prices started to rise last autumn before there was any shortage, because the market speculated that depleted storage reserves would hit Europe if there was another harsh winter, which there wasn’t, but prices stayed high anyway. No countries had their supplies cut until they refused to pay in Rubles, or more recently reduced Nord Stream 1 flow. Spain and Italy have pipelines from Algeria supplying some of their gas, Spain & Portugal are barely connected to the European grid with only a small 7bcm/pa pipeline to France, otherwise, Spain could supply more transit gas to central Europe as they actually have spare capacity at their LNG terminals, unlike most other countries. There is also a pipeline from Azerbaijan to Turkey, which supplies some gas to Greece and Bulgaria, but like Norway, they’re running at capacity. It can’t be overlooked that the BRICS partnership was prepared for the economic solidarity that we’ve seen. It’s my belief that the USA was well aware of the problems that Europe might face, but as they see this to their advantage have encouraged the conflict in Ukraine to continue anyway.
Under pressure from the USA, the Germans had to give up the North Stream 2 pipeline that was completed last September. The USA wants the EU to buy their very expensive shale gas though it requires different infrastructures than hydrocarbon gas liquids to be transported and transformed. A few banks went bankrupt in the Netherlands, Austria, and Germany because many factories had to end up their business with Russia. EU is under recession, and € currency crashing down. On the other side, the market of the BRICS countries is expanding and will be enriched by 3 new countries. (Turkey, Saudi Arabia, Egypt), in terms of population, production of gas, and agricultural products.
I think whether Europe has to loosen sanctions or not, in the long run, this situation is a heavy setback for the Russian economy. Firstly because Europe now has definite reasons to change its strategy for energy supply, and become more independent from Russia. North Stream 2 was practically ready to be brought online for even more gas exports from Russia, now it will probably become the most expensive piece of unused infrastructure. I don’t think that this pipeline was just a fun-to-have gadget in Russia's economic plans. And secondly, Russia proved itself unreliable and unpredictable to foreign investors. It can take a long time until Western investors will have enough confidence in Russian politics again to make great investments there. Considering Europe's situation: the need was always the best condition for innovation. Maybe a situation like this was exactly what was needed to push toward new solutions for a low-carbon economy.
Cheaper where? since can consumer can dictate the price to the supplier. I don’t think people in the EU understand the fact that the reason why the German economy (or the EU economy as a whole, since Germany is the only manufacturing powerhouse left in Europe, and don’t mention services, these are over-appreciated) can still hold its competitiveness is due to cheap Russian gas. Imagine instead of paying 100 dollars for Russian Gas, you have to pay 300 dollars for the same amount of gas in LNG shipped from anywhere. And LNG needs to be shipped, they depend on weather conditions and time, which can be unpredictable, while Russian Pipeline is much more secure and fast. And if you hope that American Companies will sell LNG at a cheaper price for European allies because the Government says so, better threw that hope outside of the window and start chopping firewood. American suppliers already said they will dictate the price or sell their LNG to the highest bidders. It’s a free market, my friend.
