Since the war between Russia and Ukraine began, a critical economic conflict has erupted between Russia, Europe, and the United States. While on one side, Russia deployed its forces in Ukraine and began to seize territory. The United States and Europe have imposed severe sanctions on the Russian economy, prohibiting billion-dollar businesses like Magda and Zarak from trading with Russian markets. Russia has been banned from the swift network, its currency has been frozen, and the west has begun pressuring other countries to cease trading with Russia.
With opposition from the world’s most powerful nation and the European Union, it was expected that Putin would withdraw from Ukraine and Russia would accept defeat following the economic turmoil. Although Russia was affected, Putin has played the geopolitical game of thrones so well that Europe is now facing an economic crisis and the annual energy inflation rate has reached a record high of 41.9 percent. Now that food inflation has reached 10.4%, the GDP growth of 27 nations is slowing due to Russia. And what the verse describes is still to come to Europe, as winter is approaching. The question is how Europe got to this point with all of America’s support, despite being a group of 27 countries that are not at war, and what Putin’s war strategy is to choke Europe. And finally, how does this game of thrones impact India’s economy?
To comprehend this, we must first understand the basics of modern warfare. Three weapons are being employed in this conflict: food, finance, and energy. Europe’s trade with Russia and Ukraine demonstrates this in terms of finance. In the past four months, Europe has done its part to suffocate the Russian economy. The United States assigns a value of $300 billion to Russia’s foreign reserves. The EU imposed a 35% tax on vodka and Russian goods. Imports of gold from Russia were made illegal, and as a result, many multinational corporations worth billions of dollars, such as McDonald’s Koch, and Starbucks, began to pull out of the Russian market.
As a result, the Russian economy experienced a massive deficit that began to shake its foundations. As a result, it was anticipated that Russia would be close to bankruptcy and that Putin, fearing a total economic collapse, would withdraw from the war. However, Europe was prevailing in the other two categories.
Europe is getting into some deep trouble. When it comes to food, Russia and Ukraine are responsible for more than 80 percent of the world’s supply of sunflower oil, almost 20 percent of the global wheat exports, and almost 20 percent of the global corn exports, respectively.
As a direct consequence of this, when the supply of these goods was suddenly cut off. Food prices in Europe began to skyrocket, and this is where Russia’s most potent leverage against Europe in terms of energy comes into play.
As you are aware that in 2020, 42% of Europe’s gas will come from Russia, and the key to this is the Nord stream one pipeline. This pipeline is by far one of the most important in the world. It is a 1,224-kilometer underwater gas pipeline that runs from wyborg in northwest Russia to northeastern Germany via the Baltic Sea.
This pipeline was constructed for 7.4 billion euros by the Russian gas company Gazprom and four other western partners in a joint venture. What an engineering marvel this pipeline is! It carries 55 billion cubic meters of gas, the majority of which travels directly to and from Germany. Multiple pipelines connect it to the remainder of Europe.
In 2020, the majority of these nations remained heavily dependent on Russian gas. While more than 70% of Finland, Bulgaria, and Slovakia’s gas supply came from Russia. Even Germany, the largest economy in Europe, received 49% of its gas from Russia. Putin responded to Europe’s imposition of sanctions against Russia in two ways.
- First, he reduced the amount of gas supplied to Europe by 60 percent.
- Second, he stipulated that if Europe and its companies wished to purchase oil and gas from Russia, they would have to purchase oil from rebels.
As a result of the mismatch between supply and demand
- gas prices around the world have skyrocketed since Russia reduced its gas supply by 60 percent. If you understand how supply and demand affect trade prices, you will be able to predict the future.
There are five major suppliers of one hundred billion cubic meters of gas: Russia, Norway, the United States, Qatar, and Australia, each with its market, market share, and average price.
If Russia halts gas exports, other nations will be able to pump more gas at the same price. They will take advantage of the situation and raise gas prices to increase profits while continuing to supply the same quantity of gas.
Therefore, if Norway sells gas at $40 per unit rather than doubling its supply and earning $80 for two units, it will earn $40 more. It will increase the price to $1.60 per unit and generate four times more revenue from the sale of the same quantity of gasoline. Thus, their margins and profits will increase, and fewer natural resources will be depleted.
This is the reason why, even though other nations can compensate for the deficit. The price of the commodity skyrockets to absurd levels. In this case, if you look at the numbers since January 2022, gas prices in the United States have increased by 37% despite the absence of Russian gas imports. It has increased by 142 percent, and in the European Union by an absurd 144 percent.
- Second, Russia compelled companies to purchase oil and gas in rubles. The ruble’s value began to rise, making it one of the world’s best-performing currencies. However, in Europe, energy prices began to rise, causing every industry’s production costs to increase, and eventually, inflation in the European Union continued to rise.
According to Eurostat, the inflation rate in Europe reached 9.6% in June. In the past year, industrial prices have increased by more than 36 percent, and Europeans’ electricity bills have skyrocketed. In addition, food price inflation accelerated to 7,5% in May 2022, the highest level in the past two decades, and all of these sanctions were intended to stifle Russian trade and prevent Russia from earning money. It turns out, however, that Russia made more money selling gas after the war than before it.
When Russia cut off gas supplies, European companies were forced to pay 50 to 60 percent, and in some cases 100 percent, more for the same quantity of gas. Because without gas, the European economy would have collapsed and oil prices have increased from $65 to over $100 per barrel.
This is the reason why Russia was making more money despite sending less gas to Europe, and if you consider Russia’s oil and gas revenues from Europe.
In normal years, the average revenue from March to July was close to 50 billion dollars. However, in 2022, this revenue has nearly doubled to over 90 billion dollars. Russia’s oil and gas export revenues over the past five months are nearly three times what it would normally earn from gas exports to Europe during the winter.
- According to rice and energy, Russia has also been able to compensate for Europe’s oil revenue losses thanks to India and China’s support. While sales of Russian crude oil to Europe fell by 554,000 barrels per day.
Asian refiners increased their output by three barrels per day, which replaced the losses between March and May in a 1:1 ratio. This is why Europe has exerted constant pressure on India to stop purchasing Russian oil, as it appears that when we purchase oil, we are funding the war. However, when they purchase oil, they are helping their economy.
If you are interested in energy purchases from Russia, it would seem that you should focus on Europe, but a closer look at the numbers reveals that India’s total monthly purchases are probably less than what Europe does in a single afternoon.
Consequently, despite all of these political games, you may wish to consider it. The European Union is struggling to breathe as winter approaches. If you examine Europe’s gas consumption throughout the year, you will notice that consumption decreases from February to August, but then increases after September and peaks in December. This is primarily due to the use of heaters and other devices due to the extreme cold, and Europe is now extremely concerned because if Russia stops supplying gas, it will be a nightmare for the economy and the people of Europe. And gas storage cannot remedy the situation. This graph illustrates how much gas Europe will have if Russia ceases gas exports; if Russia ceases gas exports, the levels will reach dangerous levels in just 90 days. Despite having 90 storage units during October.
Why Europe is so dependent on Russia?
They are not the only suppliers of oil and gas, as you have the United States, Qatar, and Norway for gas and Saudi Arabia for oil, so why not purchase oil and gas from them?
LNG gas requires a large number of terminal facilities where fuel can be converted from a liquid to a gaseous state and then a vast network of pipelines that can move the gas to various locations across the continents. Europe has a large number of terminal facilities, but the majority of them do not have linked pipelines to distribute them throughout the continent. Even if the United States ships more gas to Europe, it may be difficult for the continent to receive it in its current condition. Even if all of Europe’s facilities are fully operational, the amount of gas delivered will likely be only two-thirds of what Russia delivers via pipelines. Therefore, despite being super-wealthy and super-powerful, the United States and Qatar cannot assist Europe unless they spend an additional billion dollars and construct these pipelines before winter, which is virtually impossible given that stream one alone took six years to construct. The North Stream One pipeline is regarded as one of the most significant pipelines in the world for this reason. And in terms of oil, Norway is already operating at maximum capacity, making it difficult to compensate for Russian supply shortages. Saudi Arabia has categorically denied the request to increase oil production for two reasons.
Why, when they are receiving extremely high oil prices, would they pump more oil to lower the price?
Due to the shortage, Saudi Arabia is making a lot of money, and they are ecstatic as usual. Consequently, despite all of the sanctions pressure and propaganda, Europe remains at Russia’s mercy during the winter. Therefore, the winter of 2022 could be the decisive battle in this economic conflict between three of the most powerful entities on the planet.