LONDON — In the five weeks since Russia invaded Ukraine, the United States, the European Union and their allies have launched an economic counter-offensive that has cut off Russia’s access to hundreds of billions of dollars of its own money and much of its international trade. has discontinued . More than 1,000 companies, organizations and individuals, including members of President Vladimir V. Putin’s inner circle, have been sanctioned and relegated to financial limbo.
But Mr Putin last week reminded the world that he has his own economic weapons that he could use to inflict some pain or repel attacks.
Through a series of aggressive measures by the Russian government and its central bank, the ruble, which had lost nearly half of its value, scrambled its way back to pre-invasion levels.
And then there was the threat of stopping the flow of gas from Russia to Europe – which was triggered by Mr Putin’s demand that 48 “unfriendly countries” violate their own sanctions and pay for natural gas in rubles. It shuffled leaders in the capitals of Germany, Italy and other allied nations, demonstrating in the most visible way since the start of the war how much they need Russian energy to power their economies.
It was that reliance that prompted the United States and Europe to exempt fuel purchases from the severe sanctions they imposed on Russia at the start of the war. The European Union gets 40 percent of its gas and a quarter of its oil from Russia. Chancellor Olaf Scholz of Germany warned last week that an overnight hiatus would “plung our country and all of Europe into recession”.
For the time being, the prospect of an impending gas stop seems to have passed. But Putin’s sudden demand for rubles helped Germany and Austria prepare their citizens for what might come. They took the first official steps towards rationing, with Berlin beginning the “early warning” phase for planning a natural gas emergency.
Although President Biden has announced plans to pull 180 million barrels of oil from US reserves over the next six months and divert more liquefied natural gas to Europe, that still wouldn’t be enough to replace everything Russia supplies. Russian oil exports normally represent more than one in every 10 barrels the world consumes.
According to Bruegel, an economic institute in Brussels, Europe’s ongoing energy purchases send up to $850 million a day to the Russian treasury. That money helps Russia fund its war effort and mitigates the impact of sanctions. Due to rising energy prices, gas export revenues from Gazprom, the Russian energy giant, injected $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global consultancy.
“The lesson for the West is that the effectiveness of financial sanctions can only go so far if there are no trade sanctions,” the company said in a research briefing.
Mr Putin’s feints and jabs — at one point this past week he pledged in the same statement to stop and continue gas deliveries — have also thrown European leaders off balance as they try to figure out his strategy and motivations.
The war has prompted democracies to no longer depend on Russian exports. They have proposed cutting natural gas supplies by two-thirds before next winter and ending it altogether by 2027. Those goals may be too ambitious, experts say.
In any case, switching to other suppliers and ultimately to more renewables will be expensive and painful. Overall, Europeans could live poorer and colder for at least a few years due to rising prices and dampened economic activity due to energy shortages.
And unlike in Russia, governments in these countries are accountable to voters.
“Putin has already shown that he is willing to sacrifice civilians – his and the Ukrainians – to achieve a victory,” said Meg Jacobs, a historian at Princeton University. For European democracies, turning down the thermostats, lowering the speed limits and driving less is a choice. “It only works with massive collaboration.”
But leverage, like gas, is a limited resource. And Mr Putin’s willingness to use it now means he will have less of it in the future. It will not be an easy transition for Russia either. However, most analysts believe that Europe’s aggressive moves to reduce its reliance on Russian energy will have far-reaching consequences.
“They’re done with Russian gas,” David L. Goldwyn, who served as the State Department’s special envoy for energy in the Obama administration, said of Europe. “I think even if this war ended, and even if you had a new government in Russia, I think there’s no going back.”
European Commission President Ursula von der Leyen said the same when she announced the new energy plan last month: “We simply cannot rely on a supplier who explicitly threatens us.”
Security concerns are not the only development that has undermined Russia’s long-term reputation as an energy supplier. What seemed surprising to economists, lawyers and policymakers about Mr Putin’s demand to be paid in rubles was that it would have violated sacredly negotiated contracts and exposed Russia’s willingness to be an untrustworthy business partner. .
While he has tried to exert his power outwardly, Mr Putin has taken steps to protect the Russian economy from the effects of sanctions and to support the ruble. Few things can undermine a country as systematically as an abruptly weakened currency.
The war between Russia and Ukraine and the world economy
When the allies froze the assets of the Russian central bank and sent the ruble into a tailspin, the bank raised interest rates to 20 percent, while the government forced companies to use 80 percent of the dollars, euros and other foreign currencies they earn. to exchange. in rubles to increase demand and drive up the price.
That has revived the ruble’s value, but as several analysts have pointed out, the currency’s newfound stability came not because the market suddenly gained confidence in the Russian economy, but because of extraordinary government interventions.
Mr Putin’s demand that gas purchases be paid in rubles seemed like another intervention. Still, the insistence was puzzling. Russia could just as easily take over the ongoing influx of euros and dollars paid by foreign governments and convert them into rubles.
Mr Putin may, of course, love to put European governments in an awkward position or expand his power, but his demands may also reflect problems at home.
For example, he cannot ensure that he keeps to his mandate that companies, including natural gas producer Gazprom, repatriate and sell 80 percent of the dollars and euros they earn to Russian banks.
The problem is, “the government can’t enforce this rule,” said Michael S. Bernstam, a researcher at the Hoover Institution at Stanford University. The “companies cheat”.
“The only people the Russian government can trust are Western companies that buy Russian natural gas and other commodities,” he added.
Aside from currency issues, Russia is struggling economically in other ways.
The country is already in a deep recession and several analysts estimate that the economy could contract by as much as 20 percent this year. An S&P Global survey of purchasing managers at Russian manufacturing companies in March showed severe declines in production, employment and new orders, as well as sharp price increases.
Within weeks, Mr. Putin undermined the business and trade ties between Russia and wealthier economies that took decades to build after the demise of the Soviet Union. According to one estimate, some 500 foreign companies have withdrawn their stake in Russia, scaled back their activities and investments, or promised to do so.
“Russia does not have the capabilities to replicate domestically the technology it would otherwise have obtained from abroad,” according to an analysis by Capital Economics, a research group based in London. That’s not a good sign for increasing productivity, which was only 35 to 40 percent of the United States even before the war.
As a result, however the war in Ukraine ends, Russia will be more economically isolated than it has been in decades, diminishing the influence it now has on the global economy and on its own economic prospects.
