[Finance and Business World]How Putin Takes Risk to Ask the EU to Respond | Energy Embargo | Russia | Sanctions

[Epoch Times, March 27, 2022]When EU countries are arguing over whether to embargo Russian energy, Putin suddenly announced that all “unfriendly countries”, including the EU, must buy Russian natural gas. Pay in rubles. This will undoubtedly give the EU an army. If the EU compromises, it will not only help increase the ruble, but also reduce the intensity of the first four rounds of sanctions. If rejected, the EU is likely to exacerbate the energy crisis. For Russia, of course, it is also a risky move, because if the EU refuses, or even is forced to impose the sanctions of the energy embargo, then Russia will lose the largest customer in Europe, then the economy maintained by Russia’s energy exports will also Suffered disaster.

So how will the EU decide? And Russia, if it loses the big customer of the EU, can it afford it? Also, will China and India replace the EU as a lifesaver for Russia? Today we are going to talk about these.

Putin ‘general’ the EU

Since Russia invaded Ukraine, many countries around the world have imposed the most severe international sanctions on Russia in history. At the EU foreign ministers meeting on March 21, participating countries continued to discuss the fifth round of sanctions, including the energy embargo, but EU member states are widely divided on this point, with several energy importers, including Germany, objecting.

Of course, this is not surprising, because Germany has 55% of natural gas, 35% of crude oil, and 45% of coal from Russia. German Chancellor Olaf Scholz also mentioned that Europe will end its energy dependence on Russia, but doing so overnight would endanger hundreds of thousands of jobs and entire industrial sectors.

On the other hand, what is Moscow’s reaction to the sanctions discussed by the EU? A Kremlin spokesman threatened that this would affect Europe’s energy balance very badly, warning that sanctions could prompt Russia to shut down gas pipelines to Europe.

Immediately two days later, Russia made a big move. Putin suddenly announced on March 23 that those “unfriendly countries” would have to pay in rubles to buy Russian natural gas. Putin has asked Russia’s central bank and government officials to work out an operational plan for converting payments into rubles within a week. At the same time, Gazprom must also modify the contract to cooperate.

It seems that Russia has the heart to break the net, and it also has the mentality of a desperate gambler. I believe that Putin also saw the differences between EU countries and deliberately integrated the EU into one army. This can be regarded as killing two birds with one stone. It can not only increase the ruble, but also offset the international financial sanctions against Russia.

How to increase the ruble? Because if European countries use rubles to buy energy, the central banks of those countries need to hold rubles, or buy rubles on the open market, which pushes up the price of the ruble. As we all know, after the Russian-Ukrainian war, the ruble depreciated sharply.

Sure enough, after Putin’s remarks, the indicative price of the ruble against the dollar briefly rose by more than 8%, while the ruble also appreciated 3.5% against the euro.

In addition, if the EU agrees to trade in rubles, it will also lift the SWIFT sanctions. At the same time, the heavy use of the ruble in trade will also weaken the dollar’s role in global trade.

The EU’s Dilemma

Therefore, buying energy with rubles is a difficult problem for the EU. If the EU compromises, the previous four rounds of sanctions will be meaningless, and if it refuses, it may lose both.

However, Lithuania said it refused to buy natural gas from Russia. Poland’s state-run energy company PGNiG also said on March 24 that it would not use rubles to pay for Russian natural gas, because the payment method is specified in the contract and neither party is allowed to change it at will. Similarly, Germany and Austria also believe that Russia’s move has violated previous contracts.

This is indeed the case, because the two parties sign the contract in US dollars or euros. If one party says that they want to pay in other currencies, then the contract is invalid.

So, if the EU really refuses to pay in rubles, will Putin compromise? Or will it unilaterally break the contract? However, if the treaty is broken, the blow to Russia will be fatal.

As we all know, Russia is currently under sanctions from various countries in the fields of finance, trade, technology, and transportation. It can be said that in addition to energy, it is almost cut off from finance and trade in the world.

And Russia’s industrial structure is very single and heavily dependent on energy and resources. In 2019, the export value of energy commodities accounted for 62.1% of Russia’s export trade. Even if it dropped to 49.6% in 2020, it is still the highest among countries. Russia’s oil and gas revenue accounts for 36.7% of its gross national income.

This situation has also caused Russia’s economic growth to be very vulnerable to the shock of energy price fluctuations in the international market, showing obvious vulnerability. That said, if Russia’s energy is sanctioned, its economy will quickly struggle.

According to 2020 data, 53.5% of Russia’s crude oil exports are sold to Europe, while in 2019, natural gas sold to Europe accounted for 81% of Russia’s exports. Europe pays Russia between 200 million and 800 million euros for energy every day.

Solution

It may be seen that energy export is Russia’s economic lifeline. Of course, Europe’s energy dependence on Russia is also a soft underbelly of the EU. Europe imports about a quarter of its oil, and more than a third of its natural gas, from Russia.

So, in this case, will the EU back down? Perhaps, the EU can also look for alternatives. We know that the United States is actually a big oil-producing country. But since Biden took office, the White House has been negative on U.S. crude production due to environmental concerns, making oil production more difficult.

However, after the escalation of the Russian-Ukrainian crisis, the surge in international oil prices has also put the Biden administration under increasing inflationary pressure. On March 22, the Biden administration finally stopped playing the environmental card and began to call on American oil companies to increase production. Several Energy Department officials met with shale oil producers including Exxon Mobil and Shell. However, the oil companies that were hit hard before did not seem to have a positive attitude.

According to Reuters, on the 24th, when he attended the EU leaders summit in Brussels, Biden promised that the liquefied natural gas (LNG) provided by the United States to Europe this year will be at least 15 billion cubic meters more than the previous plan.

According to 2021 data, Russia has delivered a total of 155 billion cubic meters of natural gas to the EU, most of which is through pipelines, and 15 billion cubic meters of liquefied natural gas.

In addition, the Biden administration has also tried to obtain oil from countries such as Saudi Arabia, Venezuela, and Iran. However, some economists believe Venezuela is unlikely to meet the U.S. demands because the country’s president, Nicolas Maduro, is Putin’s closest ally in the Americas, and the U.S. has not officially recognized Maduro. Luo is the President of Venezuela.

And Saudi Arabia is reluctant to help. That’s partly because of tensions between the United States and Saudi Arabia, which, before Biden became president, called Saudi Arabia an “outcast of the international community” because members of the Saudi royal family were implicated in the murder of a Saudi news worker and dissident , who is also a columnist for The Washington Post.

The one most likely to cooperate with the U.S. proposal is Iran. At present, the Iran nuclear deal has returned to the negotiating table, and if the sanctions against Iran are lifted, the millions of barrels of oil stored offshore by Iran may flood into Europe and Asia.

On March 23, U.S. National Security Adviser Jake Sullivan said the U.S. and its allies had made progress in Iran nuclear talks, but problems remained and it was unclear whether they would be resolved.

It is reported that Iran is already preparing for an increase in exports. The state-owned refiner, the National Iranian Oil Company (NIOC), has already started reaching out to major customers in India and South Korea.

However, because of the contradiction between Saudi Arabia and Iran, it is against the Biden administration to lift sanctions on Iran, because if there is any change in the Iran nuclear agreement, Saudi Arabia will first feel threatened. Although Saudi Arabia is unwilling, under this pressure, Saudi Arabia may slowly increase production, which can be seen from the announcement by Saudi Aramco to increase production. Therefore, we have seen that a Russian-Ukrainian war has affected the sensitive nerves of most countries in the world. The situation is quite delicate and complicated. Each country is weighing the pros and cons of protecting their own interests.

On March 20, Saudi Aramco announced that it would increase capital spending by more than 50% this year to expand crude oil production capacity. And it plans to increase the “maximum sustainable production capacity” of crude oil to 13 million barrels per day in 2027, and increase natural gas production by more than 50% in 2030.

Saudi Aramco CEO Nasser said that the current global crude oil spare capacity is only about 2 million barrels per day, which is not enough to cope with the impact of the Russian-Ukrainian war on the oil market.

At present, the Organization of Petroleum Exporting Countries and its partners (OPEC+) still maintain the progress of increasing daily production by 400,000 barrels per month.

As for whether Saudi Arabia will expand production now, Nasser said it is up to the Saudi energy ministry to decide, adding that other oil-producing countries should also increase investment to expand production capacity.

China helping Russia?

So, if the EU joins forces with the US to impose an energy embargo on Russia, will Russia turn to Asia and sell energy to China and India?

Indeed, it was recently revealed by the media that when the Western world was mulling an embargo on Russian oil, Indian companies took the opportunity to buy discounted Russian crude oil. In March, Russia exported 360,000 barrels of oil per day to India, almost four times the 2021 average.

The White House says India is on the wrong side of history by buying Russian oil. However, as India’s oil minister said, while India’s purchases of Russian crude oil have increased, it is less than 1% of the country’s total imports. Until now, all the oil purchase contracts signed by Indian buyers and Russia have only been equivalent to supplying the whole country of India in less than 3 days.

In Asia, the real biggest buyer of Russian oil is actually China. According to data from Nikkei, 27.1% of Russia’s crude oil exports in 2020 were sold to China, Russia’s largest customer outside Europe.

Now, Russia is also expanding its exports to China. According to TASS news agency, Transneft plans to supply 2.48 million tons of oil to China in March, compared with 2.22 million tons in February.

As we all know, the Biden administration has been putting pressure on the Chinese government recently, warning that if the Chinese Communist Party wants to help Russia, it will be sanctioned. Still, even if the U.S. and Europe eventually impose sanctions on Russia’s energy embargo, China can still buy oil from Russia, just as it buys oil from Iran.

In December 2021, Beijing circumvented U.S. sanctions by buying nearly 290,000 tons of Iranian crude, according to China’s General Administration of Customs. To evade sanctions, the oil was labeled as originating from Oman, the United Arab Emirates and Malaysia. At the time, Iranian oil was about $6 to $7 a barrel cheaper than other Middle Eastern suppliers. In January, China imported more than 700,000 barrels a day of oil from Iran, up from a peak of 623,000 barrels in 2017.

According to Reuters, Iran’s monthly oil shipments are now worth $1.3 billion, most of which go to China, accounting for 6% of Chinese imports, and this revenue is crucial for sanctioned Tehran .

In 2018, former U.S. President Trump reimposed severe oil sanctions on Iran, and at present, these transactions between China and Iran are only possible because the Biden administration has turned a blind eye.

On the 25th, US Treasury Secretary Yellen said that sanctions against China are currently unnecessary and inappropriate. So, if the CCP ignores the warning and insists on assisting Russia this time, will the U.S. government make a real move?

Institute of Financial and Commercial Economics
Planning: Yu Wenming
Written by: Chen Siyu
Editor: Wei Ran, Yu Wenming
Edit: Song
Producer: Wen Jing
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