Against the background of sanctions, Putin reminds the world of his own economic weapons

LONDON – Five weeks after Russia’s invasion of Ukraine, the United States, the European Union and their allies launched an economic counteroffensive that blocked Russia’s access to hundreds of billions of dollars of its own money and halted much of its international trade. More than 1,000 companies, organizations and individuals, including members of President Vladimir Putin’s inner circle, have come under sanctions and found themselves in a financial deadlock.

But last week, Mr Putin reminded the world that he had his own economic weapons that he could use to inflict some pain or repel attacks.

Thanks to a series of aggressive measures taken by the Russian government and its central bank, the ruble, which has lost almost half of its value, has made its way to where it was before the invasion.

And then there was the threat to stop the flow of gas from Russia to Europe, which was caused by Putin’s demand that 48 “unfriendly countries” violate their own sanctions and pay for natural gas in rubles. This has sent leaders in the capitals of Germany, Italy and other allied countries forward and demonstrated in the most visible way since the start of the war how much they need Russian energy to ensure austerity.

It was this dependence that forced the United States and Europe to free fuel purchases from the harsh sanctions they imposed on Russia at the start of the war. The European Union gets 40 percent of its gas and a quarter of its oil from Russia. German Chancellor Olaf Scholz warned last week that a break from one day to the next would plunge “our country and the whole of Europe into recession.”

At the moment, it seems that the prospect of a rapid cessation of gas supplies is prevented. But Mr Putin’s sudden demand for rubles has pushed Germany and Austria to prepare their citizens for what may come. They took the first official steps towards rationing, and Berlin began an “early warning” phase to plan for a natural gas emergency.

Although President Biden has announced plans to release 180 million barrels of oil from U.S. reserves over the next six months and redirect more liquefied natural gas to Europe, this will still not be enough to replace everything Russia supplies. Russian oil exports typically account for more than one in every 10 barrels consumed in the world.

According to Bruegel, an economic institute in Brussels, up to $ 850 million is sent to the Russian treasury every day due to current energy purchases. This money helps Russia fund its military efforts and dulls the effects of sanctions. Due to rising energy prices, gas revenues from Russian energy giant Gazprom contributed $ 9.3 billion to the country’s economy in March alone, according to Oxford Economics, a global consulting firm.

“The lesson of the West is that the effectiveness of financial sanctions can only come without trade sanctions,” the company said at a briefing.

Mr Putin’s feints and stings – at some point last week he promised to cut off and resume gas supplies in the same statement – have also upset European leaders when they try to anticipate his strategy and motivation.

The war forced democracies to move away from relying on Russian exports. They proposed to cut natural gas supplies by two-thirds by next winter and complete them by 2027. These goals may be too ambitious, experts say.

Either way, switching to other suppliers and eventually to more renewables will be costly and painful. In general, Europeans may be poorer and colder for at least a few years due to rising prices and declining economic activity caused by energy shortages.

And unlike Russia, the governments of these countries must answer to the voters.

“Putin has already shown that he is ready to sacrifice civilians – his own and the Ukrainians – for victory,” said Meg Jacobs, a historian at Princeton University. For European democracies, turning off thermostats, slowing down and driving less is a choice, she said. “It only works in mass collaboration.”

But levers, like gas, are a limited resource. And Mr. Putin’s willingness to use it now means there will be less of it in the future. It will also be a difficult transition for Russia. However, most analysts believe that Europe’s aggressive steps to reduce its dependence on Russian energy will have far-reaching consequences.

“They’re done with Russian gas,” said David L. Goldwin, the State Department’s special envoy to the Obama administration. “I think that even if this war is over, and even if you have a new government in Russia, I think there is no going back.”

European Commission President Ursula von der Leyen said this when she announced a new energy plan last month: “We just can’t count on a supplier who is clearly threatening us.”

Security concerns are not the only developments that have undermined Russia’s reputation as a long-term energy supplier. What seemed strange to economists, lawyers, and politicians was that Mr. Putin’s demand to pay him in rubles was that it would violate sacred contracts negotiated and reveal Russia’s willingness to be an unreliable business partner.

Trying to use his energy influence from outside, Mr Putin has taken steps to isolate Russia’s economy from sanctions and support the ruble. Few can undermine a country as systemically as a sharply weakened currency.

When the Allies froze Russia’s central bank assets and sent the ruble into decline, the bank raised interest rates to 20 percent and the government ordered companies to convert 80 percent of the dollars, euros and other foreign currencies they earn. in rubles to increase demand and raise prices.

This revived the value of the ruble, but according to several analysts, the new stability of the currency came not because the market suddenly believed in the Russian economy, but because of emergency government intervention.

Putin’s demand to pay for gas purchases in rubles looked like another such intervention. However, the persistence was surprising. Russia could just as easily accept a steady influx of euros and dollars paid by foreign governments and convert them into rubles.

Mr Putin may, of course, enjoy putting European governments in an awkward position or weakening his power, but his demands may also reflect the country’s difficulties.

For example, it may be unable to enforce its mandate to allow companies, including natural gas producer Gazprom, to repatriate 80 percent of the dollars and euros they earn and sell them to Russian banks.

The problem is that “the government can’t enforce this rule,” said Michael C. Burstham, a researcher at the Hoover Institution at Stanford University. “Companies are cheating.”

“The only people the Russian government can trust are Western companies that buy Russian natural gas and other goods,” he added.

In addition to currency problems, Russia is experiencing economic problems in other ways.

The country is already facing a deep recession, and some analysts believe the economy could shrink to 20 percent this year. A S&P Global survey of purchasing managers of Russian manufacturing companies in March showed a sharp decline in production, employment and new orders, as well as a sharp rise in prices.

In a matter of weeks, Mr Putin has severed business and trade ties between Russia and richer economies, which took decades after the collapse of the Soviet Union. It is estimated that about 500 foreign companies bought stakes in Russia, cut back on operations and investments or promised to do so.

“Russia does not have the ability to replicate domestically the technologies it would otherwise have received from abroad,” said an analysis by Capital Economics, a London-based research group. This is not a very good sign for productivity, which even before the war was only 35-40 percent of the American.

The result is that no matter what the war in Ukraine ends, Russia will be economically more isolated than it has been for decades, reducing the leverage it now has on the world economy as well as on its own economic prospects.

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