Proceeding the direct weaponisation of economic policy, by Western allies aiming to curb Russian cash flows, circumstances indicate that a weaponisation of energy is next. Although the severe energy-price crunch was driven initially by unforeseen volatility in demand & supply throughout the pandemic, and during the subsequent normalisation, Russia’s war in Ukraine severely exacerbated pricing uncertainty.
Russia has already reduced energy export volumes with the objective of disrupting Western unity—a plausible scenario due to the asymmetrically negative effects for the EU relative to other allies. At present, Putin finds himself in a precarious position by trying to inflict pain on the EU, whilst minimising the consequences of restricting energy exports to the 2nd biggest economy in the world (i.e., the eurozone).
Analogously, the plan presented by the G7 is inconsistent at best. Western allies targeted Russia’s oil & gas exports, but simultaneously want Russian energy flows to continue. Current ideas bounced around, amongst allies, include a potential cap on energy prices from Russia by threatening further sanctions aiming to cripple the country’s energy industry for the long-term.
However, if Russia continues down the path of weaponising energy, there’s massive implications on EU’s ‘naïve’ strategy. In their latest economic report, JPMorgan’s team picked up on the dangers arising from these policies, bluntly stating that Russia could drive “stratospheric” oil price increases reaching “$380 a barrel” via the weaponisation of its energy exports—price estimate based on a 5mn barrel per day output cut. As economic sanctions largely failed to depress energy revenues, Russia now emerges strengthened and emboldened.
“Hence, if the geopolitical situation requires, it now appears more likely that export cuts could be used as leverage/policy tool, in our view,” said Natasha Kaneva, head of global commodities research at JPM.
Additionally, the US bank posits it is viable for Putin to constrain output without long-term impairment, as during the peak of the pandemic output was cut by 2mn b/d without noticeable problems restoring output in the proceeding months.
In summation, the impacts of rising energy costs are already evident. Germany warned of ‘historic challenge’ as trade slides into deficit. The unravelling economic crisis pushed the country into its first monthly trade deficit in goods for the first time in 30years. For May, Germany’s trade deficit reached EUR 1bn, and officials see no end in sight.
Rain Dugler, head of the Confederation of German Employers’ Associations, phrased the current situation for Germany as the “toughest economic and social crisis since reunification.”
Adding that, “difficult years lie ahead of us,” and “we can no longer take for granted the continuous economic growth that we experienced before the Covid-19 pandemic and the Ukraine war.”
(Re-post of my original article written for Hellenic Asset Management)
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