Prof. ST Hsieh
Director, US-China Energy Industry Forum
May 2, 2022
War is idiotic, but sanctions against energy is also idiotic. Both actions are initiated by highly qualified leaders, or politicians. But, instead of ending the war, almost everyone seems to “overkill” with a victory. Even though, no one can explain specifically what is “victory.”
Russian energy supply dominated EU, Ukraine war supposedly united EU against Russia. It is shocking to learn that “EU is divided” on “how to step away from Russian energy,” 68 days after the war began and EU is reading the 6th round of sanctions against Russia.
It is an idiosyncrasy “how to pay for Russian energy in a way which doesn’t breach or undermine EU sanctions!”
The reality check: “Form Here to Eternity!”
- Germany’s economic minister said the country would be able to weather a Russian oil ban by the end of 2022.
- US agreeing to ship an additional 15 billion cubic metres LNG to Europe by the end of the year.
- the UK plans to phase them out by the end of the year.
Now it is May 2, 2022, so “end of the year” is more than six months away. Should EU be united to end Ukraine war long before the end of the year?
EU divided over how to step away from Russian energy
By Michael Race Business reporter, BBC News
Energy costs have risen since Russia’s invasion of Ukraine
European Union countries are split on how soon they wind down dependence on Russian energy supplies.
While sanctions have been applied to other areas of business, the EU remains heavily reliant on Russian oil and gas.
Germany’s economic minister said the country would be able to weather a Russian oil ban by the end of 2022, as he appeared to back tougher sanctions.
However, Hungary has said it opposes such a move, stating it would not back measures that could endanger supplies.
There are two main challenges faced by members states – how to pay for Russian energy in a way which doesn’t breach or undermine EU sanctions, and also how to source and develop alternative supplies to move away from reliance on Russia.
Europe’s reliance on Russian energy
At a press conference on Monday, the EU’s energy policy chief Kadri Simson said Russia halting gas supplies to Poland and Bulgaria had strengthened the bloc’s will to become independent of Russian fossil fuels.
But according to the Centre of Research on Energy and Clean Air (CREA), the EU has imported about £37bn worth of fossil fuels since the conflict began. The two largest importers worldwide were Germany followed by Italy.
Germany’s economic minister Robert Habeck said his country had “managed to reach a situation where Germany is able to bear an oil embargo” and was “on course to do the same for gas”.
Roubles row causing confusion
The company said last week it would pay in euros which will be converted into roubles, meeting the Kremlin’s demand for all transactions to be made in the Russian currency.
“We consider a payment conversion compliant with sanctions law and the Russian decree to be possible,” a spokesman told the BBC.
Under the decree, European importers must pay euros or dollars into an account at Gazprombank, the Swiss-based trading arm of Gazprom, and then convert this into roubles in a second account in Russia.
Some countries are looking to turn to liquified natural gas (LNG), with the US agreeing to ship an additional 15 billion cubic metres to Europe by the end of the year.
The US has already banned Russian oil imports and the UK plans to phase them out by the end of the year.
The EU has previously laid out a strategy to make it independent of Russian fossil fuels by 2030, which includes greater use of greener sources of power.
An embargo on Russian oil would trigger a recession in Europe and investors are underpricing disruptions to energy supplies, Barclays says
Sun, May 1, 2022, 5:30 AM
- An EU embargo on Russian energy products puts Europe at risk of recession, Barclays said this week.
- A deep recession sending GDP down 5 percentage points would occur if an embargo comes with gas rationing.
- A widespread disruption to Russian gas flows is a credible risk that appears under-priced in the credit market.
Germany earlier this month activated an emergency plan to cope with natural-gas disruptions after Russian President Vladimir Putin demanded payment in rubles. Households and businesses have been asked to reduce consumption and conserve energy.
If the situation worsens, the country — home to auto giants BMW, Mercedes-Benz and chemical maker BASF — may start gas rationing, a move that would involve shutting down work at factories.
“[Any] restrictions of flows would put further pressure on energy prices and could even result in rationing. Therefore, we think gas disruption could dent euro area growth in at least three ways,” said Silvia Ardagna, chief European economist at Barclays, in a research note published April 29.
“First, since a large share of energy is imported, rising natural gas prices would be a negative [in] terms of trade shock. Second, physical shortages could limit production from the input side. Third, gas flow disruption would increase uncertainty,” she said.
In a “middle” scenario, euro-area GDP could take a 4% hit, with a deeper recession in Germany and Italy.
“The longer that gas rationing persists, the wider and more severe these disruptions would become: as such, we would expect to see an underperformance of European issuers versus non-European issuers, and an underperformance of €-IG,” versus dollar-denominated investment-grade credit, said Zoso Davies, a European credit strategist at Barclays.
Cost of living crisis exacerbates Europe’s quest for consensus over Russian oil embargo
Mon, May 2, 2022, 6:28 AM
Nearly a month has passed since the European Union imposed its fifth package of economic sanctions on Russia, and political pressure is growing to finally move forward with the next round.
Yet a small minority of countries including Germany, Slovakia, Austria and Hungary are having second thoughts and questioning whether another round of sanctions targeted at the energy sector might ultimately prove counterproductive as the war exacerbates a cost of living crisis for Europeans.
“Energy is signifcantly more expensive than it was a year ago and our governments…are very worried how to help households and businesses,” conceded EU energy commissioner Kadri Simson last Thursday.
Thanks to a 38% surge in the cost of energy, Europe may be facing its own bout of stagflation. Overall economic output for countries sharing the euro currency expanded at a sequential rate of 0.2% during the first quarter, while inflation is running at a blistering pace of 7.5% last month, far above the 2% target set by the European Central Bank.
Some leading indicators like the purchasing manager index are already flashing yellow. On Monday, economists at market research firm IHS Markit reported April activity in the eurozone’s manufacturing sector expanded at its slowest rate in 15 months, putting further pressure on the euro.
This means Europe’s leaders are facing a dilemma if they impose an embargo on Russian oil. Global energy prices will likely climb further, resulting in the Kremlin earning more money per barrel, while EU member states suffer a further setback to their post-COVID recovery.
It won’t likely stop at Europe’s borders, either. An embargo could also mean higher prices at the pump for Americans as the U.S. approaches its key midterm elections in November, with inflation among the biggest headaches facing the Biden administration. Its economy even shrank in the first quarter.
“In this early phase of sanctions and embargoes, Russia will benefit as higher prices mean tax revenues are significantly higher than in recent years,” said Rystad Energy senior analyst Daria Melnik in a research note on Monday.
Another danger is that Putin might be willing to offer discounts to countries in exchange for political backing on the international stage. Russia has already enticed India by shaving roughly $30 off the price of a barrel.
In effect, it would backfire — at least in the short term for European countries.
“Naturally that would be idiocy,” German economy minister Robert Habeck told domestic TV viewers on Thursday.
In recent weeks, Berlin has attempted to reduce its dependence on Russian crude. It now claims only about 12% of its oil imports still come from Putin’s regime, down from 35% previously. Lowering the remainder is proving problematic however, as it is imported and processed in Germany at a refinery operated by Russian state-owned energy group Rosneft. Nevertheless, he said Germany would not stand in the way of an all out ban.
“No one should be under any illusion: We will see enormous price spikes, the pain will really be felt,” Habeck warned. “But it will no longer lead to a national catastrophe.”
Putin ally in EU midst
To prevent the Putin confidante from vetoing its efforts as a bloc, Brussels is reportedly open to the idea of exemptions for Hungary as well as Slovakia, which imports virtually all of its oil from Russia.
Moscow has responded in the meantime by turning off the gas to Poland and Bulgaria, the first two EU member states that owed Gazprom a payment in rubles.
When asked why the EU didn’t immediately retailiate with another round of economic measures targeting Russia, EU Commission President Ursula von der Leyen asked for patience.
“The sixth package of sanctions will come in due time. We are working intensively on it,” she told reporters on Wednesday.