A globally integrated energy market can adapt to a US ban on Russian oil and gas imports. In an exclusive bne IntelliNews podcast, Christof Rühl, Senior Research Scholar at the Centre on Global Energy Policy, Columbia University, and a former BP chief economist, tells bne IntelliNews’ Ben Aris that while the US ban is no big deal, ‘Fortress Russia’ has no ammunition to respond. Below is a summary of the key points from the podcast.
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Global energy market can accommodate sanctions.
“In the end it’s [a token gesture]… it’s not a big deal for the global market to stomach… As long as you don’t change oil supply in the aggregate, the oil that would have gone to the US will find another market.”
The difference [between the oil and gas markets] is stark. “If you wanted to express today's European gas price as the equivalent of the oil price you are above $600 per barrel… this is to some extent the birth pangs of a market that is changing and globalising.”
Rühl points out that LNG is disrupting the bilateral monopoly of pipeline gas. “In 2020 the share of inter-regional gas imports/exports by tanker was larger than pipelined gas.”
“As long as there is no closed phalanx of countries which all say we sanction Russia’s exports, it’s just a matter of redirecting. It can be very painful but in this case its not.”
Fortress Russia has no ammunition
Rühl says the direction of the attack on ‘Fortress Russia’ took everyone by surprise. “When we talk about sanctions as they actually happened, commodities were not sanctioned at all but the financial sector was targeted, much harsher than anticipated.”
“The single most important point is the freezing of the assets of Russia’s central bank, it’s the key to understanding what happened.”
“The key point that follows for energy markets is that Russia is no longer at a point where they can threaten by limiting the exports of anything… its the opposite: In the long term Russia will be reduced to a raw material exporter who has to export regardless of price because they need the cash.”
Rühl disagrees that while Russia has been cut off from its cash at the same time oil spiked, Moscow could expect a huge current account surplus.
“It took, since 2014, that’s eight years, to accumulate reserves of $600bn… with 2/3rds of that gone the current amount surplus will help but will not be enough to stabilise the ruble at any level.”
“It will greatly restrict the central bank’s core function, to keep the ruble stable, and this will undermine Russia’s ability to go to market because the market knows the money isn’t there”
“It increases their political vulnerability, makes them dependent on the only country that would give them hard currency swaps, which is China.”
Central bank has no easy options
“The Russian economy grew by 2.5% every year, then they started building reserves and the growth rate went down to average 0.5%. This meant Russia, a middle-income country, is growing much less than the EU. In theory poor countries are supposed to grow faster and in practice Russians have seen the difference between them and the EU go up every single year, every single day in fact.”
“Now we are talking about decline rates of 5, 6, 10% - how far are they willing to strangulate the economy to accumulate a relatively modest amount of reserves and how much they fear that this would create some sort of social and political backlash, and how willing they are to go hand to hand in China and ask for support?”
“You should expect the ruble to be where it is now and inflation to go up in the 20 or 30s and the ruble decline analogue to the inflation rate. If the CB is allowed to what they would like, then they would counter that not by fixing the exchange rate but by raising interest rates. That’s what’s going to kill the economy.”
“In the case of oil it would be very irrational for Russia to cut production… but as we have learned the hard way, because something is irrational does not mean it will not be done. In gas markets there is no spare capacity, the only part they could cut would be gas deliveries to Europe. If they cut that the gas would be stranded because there is no pipeline from Siberia to the east. On the European side, if gas were cut they would probably be able to survive this winter… It would require switching on all the coal and nuclear [power stations] Europe has.”
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