For much of the past year, and since his invasion of Ukraine last February, Russian President Vladimir Putin has sat on his perceived energy omnipotence, holding the global economy hostage to his whims. Since last summer, Putin has cut back natural gas supplies to Europe in hopes that Europeans, shivering in winter and without heat, would attack their leaders and make it politically impossible to continue supporting Ukraine.
The threat was great: in 2021, a whopping 83 percent of Russian gas was exported to Europe. Russia’s total global exports of 7 million barrels of oil per day and 200 billion cubic meters (bcm) of pipeline gas per year accounted for about half of its federal revenues. More importantly, Russia’s commodity exports played a crucial role in global supply chains: Europe depended on Russia for 46 percent of its total gas supply, with comparable dependence on other Russian products, including metals and fertilizers.
Now, as we approach the one-year anniversary of Putin’s invasion, it is evident that Russia has permanently lost its once economic clout on the world market.
For much of the past year, and since his invasion of Ukraine last February, Russian President Vladimir Putin has sat on his perceived energy omnipotence, holding the global economy hostage to his whims. Since last summer, Putin has cut back natural gas supplies to Europe in hopes that Europeans, shivering in winter and without heat, would attack their leaders and make it politically impossible to continue supporting Ukraine.
The threat was great: in 2021, a whopping 83 percent of Russian gas was exported to Europe. Russia’s total global exports of 7 million barrels of oil per day and 200 billion cubic meters (bcm) of pipeline gas per year accounted for about half of its federal revenues. More importantly, Russia’s commodity exports played a crucial role in global supply chains: Europe depended on Russia for 46 percent of its total gas supply, with comparable dependence on other Russian products, including metals and fertilizers.
Now, as we approach the one-year anniversary of Putin’s invasion, it is evident that Russia has permanently lost its once economic clout on the world market.
Thanks to an unseasonably warm European winter, Putin’s moment of maximum leverage passed uneventfully, and as we correctly predicted last October, Russia itself was the biggest casualty of Putin’s gas gambit. Putin’s grip on natural gas is gone now that the world – and especially Europe – no longer needs Russian gas.
Far from freezing to death, Europe quickly secured alternative gas supplies by switching to global liquefied natural gas (LNG). This included an estimated 55 billion cubic meters from the United States, two and a half times more than pre-war US exports of LNG to Europe. Coupled with increased supply from renewable sources, nuclear power and, meanwhile, coal, these alternative supplies have reduced Europe’s dependence on Russian gas to 9 percent of its total gas imports. In fact, Europe is now buying more LNG than ever before Russian gas.
Additionally, Europe’s unseasonably warm winter means that not only have the worst case scenarios been avoided, but Europe’s full storage tanks have barely been withdrawn and can be carried over into the next winter. In January, Germany’s storage facilities were a record 91 percent full, up from 54 percent a year earlier, meaning Europe will need to buy significantly less gas in 2023 than it did in 2022.
The impact is enormous. Europe now has sufficient energy security well into 2024, giving ample time for cheaper alternative energy supplies – both renewable and bridge fuels – to become fully integrated and operational in Europe. This includes the completion of an additional LNG export capacity of EUR 200 billion.
Furthermore, the days of globally expensive energy amid “Russia-induced supply shortages” are finally over. In addition to Europe’s lower expected demand for LNG, China is turning away from global LNG towards domestic sources. Coupled with the rapidly increasing supply of LNG, it is unsurprising that the gas futures market is now setting cheaper gas prices than before the war for years to come.
Putin, on the other hand, has no remaining leverage and no way to replace his one-time main client; He finds out the hard way that it’s much easier for consumers to replace unreliable raw material suppliers than it is for suppliers to find new markets. Already, Putin is deriving virtually no profit from gas sales, as his previous 150 billion cubic meters of pipeline gas sales to Europe have been replaced by a meager 16 billion cubic meters to China and loose change in global LNG sales, barely enough to cover expenses. There are no markets for Putin to even come close to replacing that 150 billion cubic meter deficit: China lacks the necessary pipeline capacity to absorb more for at least a decade and prefers domestic and diversified energy sources anyway, while Russia’s laggard technology is struggling to scale impossible makes LNG exports beyond a slow trickle.
Putin’s oil leverage is also declining. Gone are the days when fears that Putin might take Russian oil supplies off the market sent oil prices skyrocketing by 40 percent in two weeks. When Putin announced a ban on oil exports to countries that accepted the price cap on February 1, in response to last month’s introduction of the G-7 oil price cap, which we helped develop, oil prices actually went down.
Why? Because now it shows that the world is no longer dependent on Putin’s oil. The oil market is turning in favor of buyers rather than sellers as supply increases — more than enough to offset any potential declines in Russian crude oil production. (In December, Russian Deputy Prime Minister Alexander Novak told Russian media that the government is ready to cut crude oil production by up to 700,000 barrels in 2023.) Oil prices are now lower than before the war, and only in the second half Of the year 2022, there was a 4 million barrels per day increase in supply from producers such as the United States, Venezuela, Canada and Brazil. With even more new shipments expected this year, any lost Russian crude will be seamlessly and easily replaced within weeks. And this time, Putin cannot force Saudi Arabia to come to the rescue by slashing OPEC+ production quotas, as was the case last October. That’s because the United States is now cutting off key Saudi arms and technology transfers as OPEC+’s significant underutilized excess capacity comes under increased international scrutiny.
Putin’s influence has also evaporated because the G-7’s price cap gives him a lose-lose choice, undermining Russia’s energy position no matter what he does. China and India, without expressly participating in the upper limit, use it to conduct tough negotiations with Russia with discounts of up to 50 percent. So even though India is buying 33 times more Russian oil than it was a year ago, Russia isn’t making much profit given its $44 breakeven production cost on top of more costly transportation costs. But if Putin cuts production even further, as he has threatened to do, amid an increasingly oversupplied oil market, he will forfeit key oil market shares that Putin has long obsessed over, further eroding his own revenues if he is already starved of cash.
Putin’s other goods cards have also all been used up. His gambit to weaponize food collapsed miserably when even his nominal allies turned against him. And in certain metals markets where Russia has historically dominated, such as nickel, palladium and titanium, blackmail-shy buyers coupled with higher prices have accelerated rebalancing and revived dormant public and private investment in critical mineral supply chains and mining projects. These are primarily located in North and South America and Africa where many undeveloped mineral reserves are located. Indeed, in several key metals markets such as cobalt and nickel, the combined production of new mines opening over the next two years adds up to more than enough supply to permanently replace Russian metals within global supply chains.
Putin’s failed economic moves are another set of miscalculations to add to a growing list, from his underestimation of the Ukrainian people to his underestimation of the West’s collective unity and willpower.
Of course, Putin’s failed economic and energy war was not without consequences. The spillovers have impacted many lives, altered supply chains, altered trade flows, and consumers are still feeling the pinch of higher prices as the newfound lower prices take some time to work their way through the economy.
But what matters is that the end is in sight. Never again will Putin be able to cause such chaos and disruption in the global economy because he has permanently and irreparably weakened Russia’s most powerful hand – its energy and resource power. War on the battlefield is still being fought, but at least on the economic front, victory is in sight.
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