As the war in Ukraine shows no sign of letting up, the G7 meeting over the last few days has seen leaders come together to deal more decisively with Russia’s continued aggression. The sanctions so far seem to have weakened the country, but not as much as expected. Instead of the near 9 per cent decline in GDP for 2022 that was forecast by the World Bank earlier this month, the true drop may only be in the region of 5-6 per cent. What explains the limited impact and how might a higher price be exacted from the Russian economy?
The country has benefited from higher oil prices that have swelled its coffers—and whatever reduction in sales to Europe may have taken place over the last few months, India, China and others have been prepared to take sharply increased amounts, benefiting from a big discount to the prices paid by the West. Reports suggest that Russia now accounts for some 10 per cent of all India’s imported oil, compared to just 0.2 per cent before the invasion. According to the International Energy Agency, Russian oil revenues in May alone rose by $1.7bn, to reach some $20bn in the month. China took 26 per cent of all its oil exports.
Russia has been able to lower its interest rates from the 20 per cent peak immediately after the invasion, and many of the capital controls that had been put in place to protect the falling rouble have been eased or reversed as the currency has strengthened to above its pre-war value. Reports from the country suggest that despite sanctions hitting the availability of particular western goods, shortages seen early on in the conflict are easing as substitutes are found. And although Russia has technically defaulted on its debt, this is more because the funds it hoped to use have not been cleared for payment due to the banking sanctions in place. Russia has very little external sovereign debt, no more than $40bn or so and easily serviceable, thanks to the way Putin strengthened Russia’s fiscal position (possibly in anticipation of exactly the type of crisis it now finds itself in as a result of his actions).
So sanctions are being strengthened, including the pledge to further restrict Russia’s ability to access key technologies, and this will have an impact on Russia’s growth in the long term. For the short term, the G7’s stated plan is “to reduce Russia’s revenues, including from gold,” but that falls short for the moment of an outright embargo. The details will need to be sorted out over the next few months at EU level and it will be interesting to see how they are implemented. But the intentions are pretty stark.
Reducing the dependence on Russian oil is key, as is the recommendation for a cap on the prices that the EU pays for the stuff. The EU also still has to work out how it can buy gas as a bloc rather than its members competing with each other, a policy which has been pushed hard by Italy. There is still no common consensus on the gas front, but Russia is already cutting supplies directly to a number of neighbouring countries and also reducing the supply of gas through the Nord Stream 1 pipeline. How Russia itself reacts to the new oil and other sanctions announced by the G7, and how viable in practice they actually are, remains unclear. Interestingly—and rather worryingly—the price of oil actually strengthened with the news.
For the future, much will depend on whether other oil producers in the Middle East and Latin America, such as Venezuela, fill the gap. Improving energy efficiency or pivoting to other energy sources will also have to form part of the solution. As the G7 summit unfolded, EU energy ministers, according to reports in the French press, agreed to cut annual oil consumption by 36 per cent by 2030 in comparison to earlier forecasts.
That seems fine on the surface, particularly in view of perceived shortages in supply to come. It is also compatible with climate change plans and with the EU's Fit for 55 programme to reduce emissions by 55 per cent. But given we are in a crisis, geopolitics is full of contradictions in this area. During the summit there was a further push to increase imports of liquified natural gas and Le Monde reported that the French Saint-Avold coal-fired power station was apparently planned to be put into temporary operation again in the winter to cope with any energy shortfall.
Indeed it seems like the whole panoply of environmental measures that the EU has embarked on are under renewed scrutiny, including the Green Climate Fund, which is meant to be raising funds from member states to support developing countries with climate change, and also the operation and the intended extension of the European emissions trading scheme. Expect more retreats from climate actions while the crisis continues and economies slow down under the weight of it all.
