Streetwise Professor

March 25, 2014

The Wages of Being a Petrostate: Using the Energy Weapon is Economic Suicide

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:07 pm

Although the Euros wring their hands at the costs they would bear if serious economic sanctions were imposed on Russia, as I’ve said, there is a huge asymmetry in vulnerability: Russia is substantially more vulnerable to a cutoff in trade, especially the energy trade.  Take gas.  Germany imports about 12b Euros of gas annually.  Its GDP is about 2.5t Euros.  So natural gas expenditures are about .5 percent of GDP, and even a substantial price increase would represent a relatively small burden on German expenditures.  In contrast, Russian energy exports (63 percent of which are to Europe) account for 50 percent of the country’s budget.  So trade restrictions would be an inconvenience for Europe, and pose an existential challenge for Russia.

Such are the wages of being a petrostate.  Using the energy weapon is national economic suicide.

FT Alphaville has a nice overview of this and other asymmetries.

One quibble, related to this:

In response to Iran-style sanctions, Russia could muster one unprecedented measure. It and its allies could stop buying euros, dollars, and Western government debt. However, Western governments should be able to brush this manoeuvre aside.

If it comes to a trade and finance showdown, it won’t have the money to be buying anything.  So a cutoff of purchases of dollars, euros, etc., is not something that Russia could threaten: it would be an inevitable consequence of a trade and finance war.  And Russia is not such a big buyer that it would make all that much of a difference anyways.

The FTA piece also dispatches the fantasy Russians and their fellow travelers are peddling: that China will assist Russia by waging economic combat against the West.  China is a huge dollar and UST long, so it would be an incredible act of economic masochism to dump dollars or Treasuries.  And Russian fantasies aside, China is not that into them.

The asymmetry of power, especially economic power, couldn’t be more obvious.  But that is counterbalanced by an asymmetry in will, and heretofore that has proved the decisive difference.  Putin has wagered that Europe is unwilling to suffer any discomfort to counterattack against Putin’s anschluss.  So far, he has been right.

 

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6 Comments »

  1. Craig: These responses may very well be strongly asymmetric. But, IMO, the short-run effect on the German economy of a cutoff of Russian energy supplies would likely be greater than suggested by the natural-gas-imports-to-GDP ratio for Germany. For example, while most of us don’t spend all that much on water, negative water supply shocks can be extremely disruptive, e.g., the toxic spill in the Charleston, WV, water supply this past January. Put another way, there are a lot of short-run ‘knock on’ effects that this ratio may miss.

    Comment by Phil Rothman — March 25, 2014 @ 3:32 pm

  2. Meanwhile Maidan heros are being dispatched by their own. At first they said he was assasinated by Moscal agents. Then they said he shot himself (twice while handcuffed). Third theory: shot by the cops while resisting arrest. If Russian is Snow Nigeria, Ukraine is Snow Somalia.

    http://www.theguardian.com/world/2014/mar/25/shooting-far-right-leader-tensions-ukraine
    http://www.washingtonpost.com/news/morning-mix/wp/2014/03/26/ultranationalists-killing-underscores-ukraines-ugly-divisions/?tid=hp_mm

    Comment by So? — March 26, 2014 @ 3:24 am

  3. There is a new joke going around

    “I’ve stopped speaking Russian – because I don’t want Russians to come and “protect” me”

    SWP – capital flight out of the Rasha, which you probably have already seen

    notice the massive amount of comments under the article – as someone says, the Maskva or Leningrad troll control centre is in full operation – as you have experienced on this blog

    http://www.telegraph.co.uk/finance/economics/10720226/Capital-controls-feared-in-Russia-after-70bn-flight.html

    Capital flight from Russia has spiked dramatically since President Vladimir Putin first sent troops into Crimea and may reach $70bn (£42bn) over the first quarter of the year, prompting fears that the country may soon have to impose capital controls to stem the loss.

    Andrei Klepach, the deputy economy minister, admitted in Moscow that the outflows are likely to reach $65-70bn, far higher than originally expected and a clear sign that investors are extremely nervous of escalating sanctions.

    Lars Christensen from Danske Bank said the authorities may resort to some form of financial coercion to lock down funds in Russia. “Capital controls are a serious risk, and should not be discounted. Whatever now happens, there has been permanent damage to the Russian economy because investors are not going to forget this lightly.”

    Comment by elmer — March 26, 2014 @ 7:31 am

  4. Elmer, I have read similar statements in the Financial Times. While publicly Russians mock the sanctions, and what may come in the future, in private, they tell a very different story.

    Craig, Phil Rothman is obviously correct. Losing 30% of its gas supplies will have a significant impact on Germany. On the Alphaville post you cite, one of the commenters states that discussions of gas cutoffs from Europe, coupled with total petroleum exports from Russia are apples and oranges. You have to compare gas imports to gas exports, not to the total petroleum exports. In addition, he notes, oil is fungible. Russia will be able to sell elsewhere on the market. Indeed, prices could rise, and Russia could make more money. If you have thoughts on these problems it would be nice to hear them.

    Also, a pro-Russian blogger notes that the Iranian Bank Mallet case has implications for sanctions. I am all for sanctions, but they may not be the slam-dunk you represent. (Perceived slam dunks in American foreign policy have not always gone in our favor, as you no doubt recall.)

    Comment by Guest — March 26, 2014 @ 9:31 am

  5. An appropriate response to Russia has to be strategic, not tactical. Russia controls Occupied Crimea and nothing is going to change that in the short term. The priority now is to make sure Ukraine is able to prevent Russia from occupying additional Ukrainian territory. The next priority is to implement a variety of policies that reduce European dependence on Russian energy to improve their ability to respond to Russian actions. The third priority is to wage economic warfare to reduce Russia’s ability to conduct hostile actions against its neighbors and return its behaviors to acceptable international standards. Normalization of Crimea under democratic standards in a way acceptable to both Ukraine and Russia (which is the only way to resolve the issue) is at least ten years away.

    The real issue at this time is that Russia has gone from a country that sought to expand its power and influence within the framework of the established international order to a country that now seeks to overturn it and replace it with a new order of international norms. This is an incredibly dangerous situation. The current international system is still basically a modified postwar 1945 settlement. It’s been slowly creaking and fragmenting for twenty years now, but still managed to hold. But too many things have changed since then. The previous hope was that the system could be slowly and peacefully reformed to accomodate the new rising powers, and challenges of globalization, international terrorism, and failed states. The return to outright predatory aggression by a major power threatens the entire system, as it could easily meltdown and lead to a greater war which is how international systems usually change.

    Tactical responses are insufficient to the real problem.

    Comment by Chris — March 26, 2014 @ 1:10 pm

  6. What about “energy surrender” rather than “energy warfare”. 7% of the Ukraine GDP was a insane subsidy for natural gas. And now the IMF is going to bail out the Ukraine ridiculous debts of subsidizing gas (petro surrender not warfare) What is wrong with letting a country (or company or person) suffer the consequences of their actions- and not get bailed out by prudent, frugal citizens. In the end, Forcing consumers to pay only 20% of the WHOLESALE cost of natural gas is more soviet than russia itself. The Ukraine should consider themselves lucky to have russia annex them without bloodshed. Maybe next time the Unrainians will spend their money on an army, rather than giving away gas to get elected.

    Comment by scott — March 27, 2014 @ 4:52 pm

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