putin: How the world is paying for Putin’s war in Ukraine

In early March, when the US and its allies launched a wave of sanctions against RussiaOur President Joe Biden stood in the White House and said they wanted to deliver a “severe blow to Putinof the war machine. ”
But as the war in Ukraine approaches its 100th day, that machine is still very much at work. Russia is being fueled by a cash flow that could average $800 million a day this year — and that’s just what the commodity superpower is making from oil and gas.

Money machine

For years, Russia has operated as a vast commodity supermarket selling what an insatiable world needs: Not just energy, but wheat, nickel, aluminum, and palladium as well. The invasion of Ukraine has caused the US and the European Union to rethink this relationship. It took time, though the EU went a step further this week by offering a compromise deal on Russian oil imports.
Russia is far from untouched by sanctions, which have made it a rival across the developed world. Giant companies have fled, many people have left billions of dollars in wealth, and the economy is headed for a deep recession. But Putin can ignore this damage for the moment, because his financial coffers are overflowing with commodity sales, which have become ever more lucrative thanks to soaring global prices in part due to the war. in Ukraine.
Even if some countries stop or eliminate energy purchases, Russia’s oil and gas revenues will reach about $285 billion this year, according to Bloomberg Economics estimates based on forecasts from the Economy Ministry. . That number will exceed the 2021 figure by more than a fifth. Throw in other commodities, and it also makes up for $300 billion in foreign exchange reserves frozen as part of the sanctions.
EU leaders know they should stop buying from Russia and indirectly finance a devastating war on Europe’s doorstep. But for all that ambition, national governments also know that there will be consequences for their own economies.
This week, they agreed to pursue a partial ban on Russian oil, paving the way for a sixth package of sanctions, but only after weeks of haggling and division.
“There are always political constraints to the use of sanctions,” said Jeffrey Schott, a senior fellow at the Peterson Institute in Washington. “You want to minimize pain for the target and minimize pain for voters at home, but unfortunately that is easier said than done.”

In the US, officials are debating how to address the financial pressure, possibly by helping to impose a cap on Russian oil prices or imposing sanctions on countries and companies that still trade. with Russian businesses under the restrictions. But such secondary sanctions are deeply divisive and risk damaging relations with other countries.
The US has banned Russian oil, but Europe is only slowly removing this dependence. That gives Moscow time to look to other markets – such as commodity giants China and India – to limit any damage to the country’s export revenue and financial wars. .
That means money is pouring into Russia’s accounts, and the financial figures are a constant reminder to the West that drastic change is needed. According to the International Energy Agency, revenue from oil exports was up 50% from a year earlier. Russia’s top oil producers posted their highest aggregate profits in nearly a decade in the first quarter, according to estimates by Moscow-based SberCIB Investment Research. And wheat exports continue – at higher prices – as sanctions on Russian agriculture are not even discussed because the world needs its grain.
The current account surplus, the broadest measure of trade in goods and services, more than tripled in the first four months of the year to nearly $96 billion. This figure, the highest since at least 1994, mainly reflects a spike in commodity prices, although a drop in imports under the impact of international sanctions was also a factor.
The ruble has become another symbol used by Putin to show power. Was ridiculed by Biden Like “rubble” when it initially collapsed due to sanctions, it has been backed by Russia to be the world’s best performer against the dollar this year.
Putin has also tried to capitalize on Russia’s status as a commodity superpower. Amid concerns about food shortages, he said he would only allow grain and fertilizer exports if sanctions on his country were lifted.
“If the goal of sanctions is to contain the Russian military, then that is not realistic,” said Janis Kluge, senior associate for Eastern Europe and Eurasia at the German Institute for International and Security in Berlin. . “It can still fund the war effort, it can still make up for some of the damage the sanctions are doing to its people.”

Oil money

One of the big holes in sanctions against Russia is the willingness of other countries to continue buying oil, albeit at a discount in some cases.
Indian refiners have purchased more than 40 million barrels of Russian oil since the start of the invasion of Ukraine in late February and early May. According to Bloomberg calculations based on Commerce Department data, this is 20% more than Russia-India flows for all of 2021. Refiners are looking for private deals rather than tenders. publicly to get Russian barrels cheaper than market price.
China is also strengthening its energy links with the country, securing cheaper prices by buying shunned oil elsewhere. It has ramped up imports and is also in talks to replenish its strategic crude stockpile with Russian oil.
It is a similar story for steelmakers and coke producers. Imports from Russia in the third month of April more than doubled last year’s level, according to official data from the customs office. And some Russian oil and coal sellers have tried to make things easier for Chinese buyers by allowing yuan-denominated transactions.
Wouter Jacobs, founder and director of the Erasmus Commodities & Trade Center at Erasmus University in Rotterdam, said: “Much of the world is not involved in the imposition of sanctions. “Trade will continue, demand for fuel will come,” he said, and buyers in Asia or the Middle East will increase.

Global Heavyweight

When it comes to gas, Russia has fewer options for redirecting supplies, but the countries at the end of the pipeline from Russia – some of which run through Ukraine – are also bound in a relationship of interdependence. together.
About 40% of the EU’s gas needs are met by Russia, and this will be the bloc’s hardest link to break. European deliveries even spiked in February and March as the invasion spiked prices in gas hubs in Europe, making it cheaper to buy from Russia’s Gazprom PJSC for with most customers with long-term contracts.
Since then, production has fallen due to warmer weather and record flows of liquefied natural gas from the US and other countries. There was also disruption because of the military operation and Russia itself stopped supplying Poland, Bulgaria and Finland, which refused Putin’s request to pay in rubles.
Even as the EU reduces its dependence – Germany says it falls from 55% to 35% – there are complications at each step. Some major Russian gas buyers have run out of ways to keep buying the vital fuel, and utility companies like Italy’s Eni SpA and Germany’s Uniper SE expect supplies to continue.

Everything on the table

Although progress is slow, the direction is increasingly limited. Even with an uncertain timetable, the pressure on the Russian economy and Putin’s finances will eventually increase.
The country’s energy sector is also facing a host of factors other than demand, from transportation and insurance restrictions to weak domestic demand. Oil production could fall by more than 9% this year, while gas output could fall by 5.6%, according to the basic scenario outlook of the Russian Economy Ministry.
Tatiana Stanovaya, founder of political consulting firm R.Politik, said: “In the Kremlin there is some optimism and even surprise that the Russian economy did not collapse in the face of the onslaught of orders. punishment. “But looking two to three years ahead, there are a lot of questions about how the energy and manufacturing sectors will survive.”

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