Transatlantic energy security & Ukraine-crisis: A blessing in disguise

Discussion in 'Europe and Russia' started by Ray, Dec 2, 2014.

  1. Ray

    Ray The Chairman Defence Professionals Moderator

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    This is from the NATO Review magazine.

    Though it is mentioned but it doesn't appear that the EU has prepared any contingencies since EU countries are reeling under the Russian stoppage of gas through Ukraine, which it accuse of stealing the gas enroute to the EU.

    It is extraordinary that NATO feels that Russia's use of oil as a 'weapon' is unethical. Or that Russia is an 'unrealisable' supplier. It is a known fact that the West has whimsically on many occasions used a variety of dubious means to use its clout (blackmail, if you will) as a 'weapon' and have renegaded on supply of goods and services. Of course, they are good on making such action very justifiable and moral.

    In the instant case, the EU and Us has imposed 'sanctions' on Russia and driven it up the wall. Well, the 'sanctions' is a 'weapon'. How is it not unethical? It is as unethical as Russia using oil as a 'weapon'. But conveniently, as is won't, the West's unethical actions are never said to be unethical. Every other country is the black sheep!

    Europe can tap the liquid natural gas market with the ability of bringing in additional supplies from Norway, North Africa and via liquefied natural gas through the numerous regasification terminals with spare capacities, but then the cost will be high and uncompetitive. And that will have a reciprocatory effect on the economy and individual citizen's budget. And that surely is not good news for Europe already reeling with the looming recession.

    And what is more catastrophic for Europe is that Europe cannot completely replace 150–160 billion cubic meters of Russian gas in the coming years.

    On the other hand Russia heavily depend on the oil and gas revenues for its budget and Gazprom exports 55% of its revenue from Europe. Notwithstanding, the dubious justification that Russian strategy to offset the damage by exporting to Asia will fail, it may not be so given the recently concluded deal between Chinese CNPC and Gazprom. Contrary to Western contention that Russia will be taken to be an 'unreliable' supplier to Asia, given what has happened in Europe, Russia would not be so silly as to burning the candle at both ends. It too is in a bind and it has to survive.

    Indeed, China is very sensitive to reliable energy supplies and their economic and national security implications, but then she also has an insatiable thirst for energy to pep up it economy as also to build up her strategic reserve which still is a long way to be accomplished. The point that Asia has many options for oil and gas in the world does not in any way prevent Asia from cashing on on Russia gas and oil too. And Asian countries are hungry for oil and gas.

    Where Russia is losing out is access to modern western technology as also the West using the OPEC to bring down oil prices to a real low to hurt the Russian economy hard and fast. One has to wait and seen the effect in the long run.
     
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  3. Ray

    Ray The Chairman Defence Professionals Moderator

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg



    This is a dated article (September 30, 2013).
     
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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    Transatlantic energy security and the Ukraine-crisis: A blessing in disguise?

    In the wake of the Ukraine-crisis, Europe may face yet another cut-off of gas supplies from Russia. Gazprom still meets more than half of Ukraine’s gas demand and supplies close to a third of Europe’s imports, roughly half of which, 82 billion cubic meters (bcm), went through Ukraine in 2013. In March, Gazprom drastically increased prices for Ukraine and threatened to shut down supplies in case of non-payment in a letter addressed to 18 European leaders, while Ukraine is facing a serious liquidity crisis that cripples its ability to pay its gas bills.

    Ukraine-crises

    Preparations within the European Union (EU) and in the context of the G7 have begun in earnest to get ready for various contingencies especially in the winter of 2014/15 and – by the words of UK energy secretary Ed Davey - to start “a process of disarmament to prevent energy being used as a weapon in the future”.

    Moscow’s annexation of Crimea and its actions in Ukraine question the sustainability and indeed the very concept of mutual energy security - the foundations of which go back to the Cold War. EU member states’ reliance on and exposure to Russia on energy supplies has critical national security implications. The renewed disputes over gas pricing and transit recalled the spectre of the 2006 and 2009 Russo-Ukrainian gas crises, yet again showcasing Russia as an unreliable supplier and as a state that is ready and willing to use energy as a weapon.

    Consequently, there is an increasing realisation among European Union and NATO member states that ‘business as usual’ cannot continue. Moscow’s resort to force implies to consumers that they may be wise to take active steps to further diversify their gas supplies and drastically reduce their exposure to Russia.

    Indeed, at its meeting in late March 2014, the European Council concluded that efforts to reduce Europe's high gas energy dependency rates should be intensified and asked the European Commission to conduct an in-depth study of EU energy security and a comprehensive plan for the reduction of EU energy dependence to be presented by June 2014.

    A short-term shock

    Who stands to lose most if energy again becomes a weapon that is used in the ongoing standoff over Ukraine? In the short-term it is clearly the European Union and especially its vulnerable member states in Central and Southeast Europe and the Baltics. Despite major progress in integrating these countries into the EU’s emerging single energy market and interconnect them with each other, their dependence on Russia on gas supplies is still substantial.

    According to the Regional Centre for Energy Policy Research, in case of a hypothetical complete cut-off to Europe in January 2015 for a month - that includes not only the Ukrainian transit route but also the Yamal pipeline through Belorussia and Nordstream, the direct gas link to Germany - only 77% of the average demand would be served in Central and Eastern European countries and average gas prices will go up by 37%.

    In case of a hypothetical 12 month embargo up to March 2015, during which Russia reduces its supplies by 30%, a 31% price increase would result, with roughly half of the gas demand unmet, with clearly catastrophic economic consequences. Western European countries are much less exposed, at least in terms of physical security of supply, as they have a diversified, liquid natural gas market with the ability of bringing in additional supplies from Norway, North Africa and via liquefied natural gas through the numerous regasification terminals with spare capacities. Still, the price increase would be substantial even in Western Europe, adding to the existing concerns over the yawning gap between gas prices either side of the Atlantic.

    Russian weaknesses

    Despite the EU’s renewed zeal to address its dependency on imported gas from Russia, it is difficult to imagine a scenario where Russia will not remain Europe’s gas supplier for the foreseeable future. Europe cannot completely replace 150–160 billion cubic meters of Russian gas in the coming years. Yet in the medium- to long-term, it is Russia that is more vulnerable.

    Despite Europe’s short-term exigencies described above, it is striking, how Russia’s ability of applying political and commercial pressure has already diminished since the 2009 Russian-Ukrainian gas crisis. Gazprom has to compete with other suppliers on an increasingly liquid and integrated European gas market that applies competition rules vigorously. Some 53% of Russia’s budget revenues come from fossil fuel exports, especially oil. Fossil fuel accounts for 72% of its exports. Gas exports to OECD Europe account for about 5% of the Russian GDP. Gazprom generates around 55% of its revenues from gas sales to the European Union.

    There are three critical vulnerabilities that are particularly worrying from Moscow’s perspective:

    1. The Ukraine crisis could prompt a general re-evaluation of the role of natural gas in Europe’s energy mix in general and will very likely generate a reserved if not outright hostile approach towards Russian natural gas. The combination of these two developments may in the medium-term result in a diminished demand for Russian gas that will deliver a blow to Gazprom’s and the Russian state’s finances, including key figures within President Putin’s inner circle.

    2. As an answer to Europe’s declared intention to diversify away from Russian gas, Moscow is banging the drums on its own diversification strategy towards the rapidly growing Asian markets. Indeed, a long elusive but recently concluded deal between Chinese CNPC and Gazprom proves that point.

    Yet one should not discount the detrimental effects to Russia’s image as a reliable supplier in Asia if there is a third cut-off in supplies to Europe. China in particular is very sensitive to reliable energy supplies and their economic and national security implications, and will certainly limit its gas partnership with Russia should it deem Moscow too unpredictable.Furthermore, despite Russian posturing, Moscow’s increasing focus on Asia is unlikely to become a primary concern for European gas-supply security. Russia will not be in a position to play Asia against Europe.

    Moscow’s pursuit of an ’Eastern export policy’ is hampered by a whole range of factors, including the lack of physical interconnection between the Western Siberian gas fields supplying Europe and the Asian markets, China’s resistance to Russian attempts to utilise these fields instead of under-developed East Siberian fields, and different price levels.

    China also has access to gas from other sources, including Central Asia, Myanmar (Burma), and LNG (liquid natural gas) shipments primarily from the Middle East, and prospectively from Australia, East Africa, Canada and even the United States. Russia is being squeezed between two buyers in improving positions: an increasingly integrated European gas market on one side and a fast-growing Chinese and Asian market on the other, both with multiple supply options, in terms of forms and sources of energy.

    3. While gas is in the spotlight for most of the time, oil plays a much more important role in Russia’s economy and Moscow is vulnerable on that front too. Russia badly needs Western technology to maintain its oil production by tapping into its own conventional and unconventional reserves, tight oil (or shale oil) in particular. As Moscow is actively looking into its own tight oil formations to maintain oil production and control increasing costs in partnership with Western international oil companies (IOCs), a tighter sanctions regime against Russian companies and Rosneft in particular could be a serious blow in the medium-term.

    How this triangular relationship will play out between IOCs with investments in Russia pushing back on sanctions, Western governments contemplating further sanctions and key Russian players (Rosneft in particular) in need of Western know-how is critical to the sustainability of Russia’s petro-economy in the medium- and long-term.

    Transatlantic dilemmas

    The Ukraine-crisis will help Europe confront its energy security challenges and may bring closer the transatlantic alliance on energy security. But there are three strategic dilemmas that the transatlantic partners will need to respond to in the coming years.

    1. It is worth recalling that the Ukraine-crisis occurs at a time when the European Union - similar to other major global consumers with the notable exception of the United States – is struggling with increasing fossil fuel import dependence and huge import bills. Parallel to a push for increased usage of renewables and energy efficiency, Europe will need to consider its own indigenous unconventional gas potential. While it is unlikely that Europe will be able to replicate the American unconventional revolution, unconventional gas production may potentially offset the declining conventional production on the continent.

    2. Diversifying away from Russia is within grasp but will come at a security premium. The EU is in a good position to access external gas supplies, as it is surrounded by major producing regions. At the same time virtually all existing and prospective external gas supply sources and routes are fraught with political and hard security risks the EU and NATO will have to be acutely aware of and grapple with for decades to come. This will require a strategic rethinking of co-operation and burden sharing on issues such as energy intelligence gathering and analysis, critical energy infrastructure protection inside and outside EU and Alliance territory, cybersecurity and strategic energy relations with partner countries.

    3. The United States cannot directly help Europe with gas supplies in the short term. First shipments of US LNG will not come online until 2016 with larger quantities to follow only after 2018. But in the medium-term allowing unrestricted US LNG exports to Europe would be a great contribution to overall efforts to increase the energy security of European allies, even if the EU should be conservative about how much actual US gas will end up in Europe. The price points in Asian markets are currently far more attractive and will likely remain the preferred destination for US gas exports. But by increasing liquidity on the global LNG markets, the United States could further improve the negotiating power of European buyers, especially those in Central Europe and the Baltic. And this would also have the symbolic value of promoting open and transparent global energy markets versus resource nationalism and protectionism.

    A new chapter

    The Ukraine-crisis may herald a new chapter in transatlantic energy strategies and prove to be a reverse ‘Arab Oil Embargo’ moment in the energy history of the transatlantic alliance. The 1973 embargo was to a large degree responsible for turning the EU towards Russia as an external energy supplier despite the Cold War and for prompting the United States to promote restrictive energy trade policies.

    There are strong indications that there is a fundamental shift within the European Union and in the United States in terms of their assessment on their energy relationship with Russia going forward, parallel to a rethinking of energy strategies on both sides of the Atlantic as well as energy’s role within the transatlantic relationship. The Allies are in a good position to come out on top of the current crisis, provided that they persist in standing up to Russian belligerence and commit political will and resources to build a reinforced transatlantic energy alliance. The implications will go beyond the Allies and Russia. And they will help to promote an open and transparent global energy governance and trade system.
    http://www.nato.int/docu/review/201...c-energy-security-Ukraine-crisis/EN/index.htm
     
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  5. Ray

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    Germany's Russian energy dilemma

    The international community is isolating Russia for annexing Crimea. But Germany is treading carefully in putting pressure on Moscow. When it comes to energy supplies, Germany is extremely vulnerable to Russia's whims.

    Once again, a passing comment by German Chancellor Angela Merkel has started a debate about Germany's energy dependence on Russia. "There will be a new look at energy policy as a whole," Merkel said on Thursday, March 27, after a meeting with the Canadian Prime Minister Stephen Harper in Berlin.

    Her comments came as a surprise, since the European Union is currently more dependant on Russia for its energy supplies than on any other partner. So, do the chancellor's comments herald a change for European energy policy; a move away from Russian oil and gas supplies?

    Dependent on Russia

    A glance at the facts, however, shows that it will be hard for Europe to turn its back on Russian energy - at least in the short term: 30 percent of the EU's natural gas imports are currently from Russia. When it comes to oil, 35 percent of the European Union's supplies are of Russian origin. And Germany's dependence on Moscow is even higher: the country sources 36 percent of its natural gas imports and 39 percent of its oil imports from Russian energy suppliers. Since the biggest transport route for Europe for Russian gas runs through Ukraine, a halt of exports to there would also have consequences for Western Europe. Half of Russian natural gas exports - around 160 Million cubic meters of gas - reach Europe via Ukraine.

    If Russia were to halt imports to Ukraine, the EU could survive for three months on reserves within its borders. There are also other transport routes. One of these is the Nord Stream gas pipeline, through which 55 billion cubic meters of Russian gas reach Germany. Another is the Yamal-Europe pipeline, which brings about 33 billion cubic meters of gas to Germany, the Baltic states and Poland via Belarus. The Blue Stream pipeline transports 16 billion cubic meters of Russian gas into Turkey and to Southern Europe.

    If the conflict between the West and Russia continues to escalate, an oil and gas embargo could be one of the sanctions that is considered against Russia. Especially when it comes to natural gas, however, it will be hard to find alternatives for Russian imports. The Bruegel Institute, a Brussels-based think tank, did rough calculations that show it would be a huge technical and economic endeavor to find an alternative source for the 130 billion cubic meters of natural gas that reach the EU from Russia. Germany alone uses 90 billion cubic meters of the gas.

    Europe has the possibility to diversify its suppliers for liquefied natural gas (LNG) on the worldwide gas market. Imports of liquefied natural gas from Algeria to Europe could increase. The Netherlands and Norway could also increase their natural gas production. Germany currently gets 24 percent of its natural gas from Norway, 23 percent from the Netherlands and 11 percent from local German sources. Norway could quite quickly produce an additional 20 billion cubic meters. That would mean that LNG imports from there to Germany could be doubled, increasing them to 60 billion cubic meters, according to the numbers that the Bruegel institute provides.

    But the problem is that liquefied natural gas costs almost twice as much on the global market as when sourced from Russian suppliers. And there are long-term LNG export contracts, which means that short-term changes to supplies would be difficult. The European attempt to decrease its dependence on Russian gas imports supplied via the Nabucco pipeline, which was supposed to run through the Caspian Sea, recently failed for economic reasons. Overall, it will be a Herculean task - both logistically and financially - for Europe, and especially for Germany, to free itself from its current dependence on Russian natural gas imports.

    Global market could substitute Russian oil imports

    Russia's oil exports to the EU are a different story, however. There is currently an abundant supply of oil on the global market, which has made prices moderate - especially in comparison to the ones during the global economic crisis in 2008/2009. There would be enough alternative oil suppliers on the market - including Canada, which extracts oil from tar sands.

    Though Chancellor Merkel was referring to a long-term move towards such supply options during the visit of Canadian Prime Minister Harper, a government spokesman backpedalled on the issue this Friday. "The debate about alternatives - for example the import of gas from Canada or the US - is charming, but currently remains theoretical, because they don't export any gas."

    Germany's Vice Chancellor, Economics Minister Sigmar Gabriel, made a similar statement on Thursday. Gabriel explained that he doesn't see a reasonable alternative for Russian imports of gas and oil. He warned of "creating panic": "Even in the darkest hours of the Cold War, Russia kept to its contracts," Gabriel said. But just a brief look at the recent past proves that freezes on imports to Europe have taken place, at least indirectly: In 2006 and 2009, disputes between Russia and Ukraine led to short-term supply shortages for the rest of Europe.

    During a G7 meeting this week in The Hague, US President Barack Obama called on the European Union to decrease its energy dependence on Russia. He advised the EU states to follow the US example in thinking about increasing the extraction of shale gas through fracking. In the United States, that has led to a surplus of energy at good prices but the technology associated with fracking has remained controversial in Europe because of the environmental damage it causes.
    Russia doesn't want a 'gas war'

    Russia's ambassador to the European Union, Vladimir Chizhov, has excluded the possibility of a "gas war" between Russia and the West. "Those are horror stories that have their origin in political fantasy," the diplomat told the Russian news agency Interfax on Wednesday. Chizhov emphasized that Russia is and will remain a reliable partner and energy supplier.

    It's clearly in Russia's interest to preserve the energy status quo: According to the German research and consultancy firm Energy Comment, in 2012 natural gas sales earned Russia an estimated 68 billion dollars (50 billion euros), while oil sales brought in 290 billion dollars (211 billion euros). That means that natural gas contributes around 5 percent to the Russian national budget, while the profits from the export of oil make up around half of Russian government revenue. So what would hit Moscow hard financially wouldn't be a "gas war." It would be a freeze on Russian oil exports. Still, for the time being, Russian fossil fuels will remain an important pillar in the EU's energy supply.
    Germany′s Russian energy dilemma | Germany | DW.DE | 29.03.2014
     
    Last edited: Dec 2, 2014
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  6. Ray

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    The West vs. Russia: The Unintended Consequences of Targeted Sanctions

    Editor’s Note: The following is the third of a series of articles from the Center for the National Interest’s new report: Costs of a New Cold War: The U.S.-Russia Confrontation over Ukraine. You can read the full report here.

    Russia’s relations with the West entered a new and less-than-happy chapter earlier this year. U.S. and European economic sanctions are the defining and consistent feature of this new chapter, though Russia’s actual and potential responses are becoming increasingly important.

    So far, Russia’s “internal diseases” have harmed it much more than Western sanctions. Likewise, the sanctions do not undermine the stability of the Russian political regime. On the contrary, the “personal” sanctions contribute to the Putin-driven soft nationalization of the elites, and the state can more than make up for financial losses sustained by certain individuals and companies. For the elements of Russian society already dissatisfied with the Russian government, such sanctions are a “bonus” of sorts that adds to their satisfaction over the Crimea annexation—Russia gets Crimea and despised elites are punished too.

    Nevertheless, new sanctions on Russia’s financial, energy, and defense sectors in July and September will have growing costs for key companies and the overall economy over time. Moscow’s retaliatory ban on certain Western agricultural imports shows that Russia is ready to engage in a tit-for-tat economic conflict—even though Russian officials recognize the economic asymmetries between their country and the West.

    Most importantly, beginning a new chapter is not the same as ending one—and it by no means preordains the final pages of the book. Perhaps ironically, the harder the West tries to isolate Russia, the more Western actions will strengthen forces inside the country that welcome isolation. This will make it increasingly difficult to find necessary cooperative solutions to current differences, and it is likely to increase costs on all sides.

    Russia’s Economy

    To start, it is necessary to understand the nature of the present-day Russian economy. In 2013, Russia posted 1.3% growth, the worst performance over President Vladimir Putin’s fifteen years in power except in 2009, when Russia faced the effects of the global financial crisis. As most are aware, Russia’s economy depends on commodity exports, which account for more than half of the nation’s fiscal revenues. This has created an institutional environment featuring excessive regulations, pervasive corruption, rent-seeking, and exploitation of administrative barriers. The Russian government addresses economic problems through micromanagement; this is known inside Russia as “manual control”—direct personal intervention by the President or other top leaders. Small- and medium-sized enterprises occupy an insignificant and precarious position in the economy, where high administrative barriers limit their growth. Private property rights lack adequate protection.

    Against this background, a tide of social challenges is rising on a national scale. One is the threat of depopulation. Russia’s Ministry of Economic Development expects Russia’s able-bodied population to decline by at least 8-9% by 2020. Labor’s poor geographic mobility exacerbates the labor shortage problem. Most experts comment on the poor quality of and diminished access to health and education; the growth of geographic inequality in terms of development standards and quality of life; and depletion of the nation’s natural capital.

    Despite sustained high oil and gas prices, the Russian economy has effectively been stagnant. GDP growth has consistently declined in recent years, from 4.3% in 2011, to 3.4% in 2012 and to 1.3% in 2013. For quite some time, numerous sources (including Russian officials) have been projecting, with some concern, that the economy could soon experience a recession. In recent years, inflation has fluctuated in the 6.1-6.6% range. Though tight monetary policies pursued by the Ministry of Finance and the Central Bank have admittedly been fairly successful, promoting quality growth requires keeping inflation below 3%.

    Finally, efforts to open up the country for adequate investment have failed. Russia has seen pre-crisis capital inflows ebb away as capital instead fled. In 2010, capital outflows stood at $33.6 billion, with $80.5 billion in 2011, $56.8 billion in 2012, $59.7 billion in 2013, and $75 billion in the first half of 2014.

    Western Economic Sanctions

    Currently, the IMF expects Russia to grow at 0.2% in 2014, while the OECD expects a growth rate of 0.5%. The European Bank for Reconstruction and Development (EBRD) assumes zero growth, while the Russian Ministry of Economic Development offers a number of scenarios: 0.5% growth if the Ukrainian situation turns out favorably, or a decline of 0.2% to 0.3% in the worst-case scenario.

    As for the sanctions, the Economic Development Ministry believes that Russia has sufficient reserves to make up for the resulting losses in the short term. Top Russian officials believe this too. Still, over the longer term, economic officials recognize and acknowledge that strong sanctions could destabilize the fiscal system and constrain technological modernization, due to restrictions on technology imports, investment, and application of best practices.

    In March, Moody's, Standard & Poor's, and Fitch revised Russia’s ratings because “elevated geopolitical risks and prospective sanctions … might reduce potential investments, increase capital flight, and further weaken the already declining economic performance.” Moody's put the long-term ratings of Russia’s public debt on a downgrade watch list. Standard & Poor's revised its outlook for Russia’s sovereign ratings from stable to negative, and Fitch similarly revised its outlook for long-term default ratings of Russia’s debt in foreign exchange and domestic currency while also downgrading major Russian banks.

    In late April, Standard & Poor's downgraded Russia from BBB to BBB-, the lowest investment grade, with a negative outlook. Next, Standard & Poor's similarly revised the investment ratings of Moscow, St. Petersburg[1], a number of major Russian companies (including Gazprom, Rosneft, LUKOIL, and Russian Railways), and banks (VEB and VTB). In the cases of Alfa-Bank and Promsvyazbank, Standard and Poor’s only revised the outlook downward. The agency justified its decision by stating, “these companies would be unlikely to withstand a sovereign default, considering their significant dependence on Russia from the operational and financial perspective.”[2] During the summer, the three ratings agencies reaffirmed their negative outlooks for Russia.

    Some politicians and experts have suggested that the ratings downgrade was itself a sanction. However, most believe that the sanctions simply hastened rating agency decisions that would have happened anyway, as the grounds for such actions arose prior to this spring. While “somewhat politically motivated,” the downgrades represented a “response to actual deterioration of our macro situation” according to Alexey Ulyukaev, Russia’s Minister for Economic Development.

    Experts believe that a perceptibly higher cost of any external funding for Russia represents a major negative effect of even the “softest” sanctions regime. Foreign loans have been very popular among major Russian businesses to date, given their lower rates and “debt service costs.” According to Bank of Russia statistics, such facilities have accounted for almost nine-tenths of Russia’s aggregate external debt (i.e., $653 billion out of $732 billion).

    Likewise, there has been a marked deterioration of the environment for new initial public offerings and Eurobond placements against a generally livelier IPO scene in Europe and Asia. In early March, London Stock Exchange flotation of Lenta, a major Russian retailer, precipitated a dramatic drop in its share price. Promsvyazbank, TKS Bank, Bashneft, and Detsky Mir postponed scheduled offerings.

    As president of the All-Russian Insurers’ Union, I continuously monitor this sector of the domestic financial market. So far, the sanctions have yet to become the primary concern for Russian companies. Ruble depreciation, declining capitalization, and reduced corporate budgets (leading to cuts in insurance costs) have clearly damaged market players in the insurance sector. However, I believe we would still be tallying losses in this area even if Crimea had not happened.

    Nonetheless, potential downgrades of Russian insurers' international ratings and, going forward, new limits on assumption of Russian reinsurance risks do pose a serious challenge for us. The relatively shallow Russian insurance market is heavily dependent on international reinsurers. So far, corporate insurance remains the only consistently profitable market segment. Difficulties in obtaining reinsurance indemnity from Western partners and resultant bankruptcies of Russian insurers would deal a very heavy blow to the domestic market.

    The “sanctions regime” is also suspending various processes and postponing decisions crucial for promoting Russia's economic interests. As early as March, the European Commission de facto froze a decision that would have exempted the OPAL gas distribution system in eastern Germany—it transports imported Russian gas southward from the Baltic Sea—from some regulations in the EU’s Third Energy Package. The South Stream project is running into ever-greater obstacles, and Bulgaria has announced the project’s suspension, pending approval by the European Commission.

    Despite some differences in their approaches to sanctions, the United States and Europe have both imposed tight restrictions on any business operations involving Crimea. Although the annexation of Crimea creates mainly local economic challenges for Russia, those challenges are nevertheless exceedingly difficult. Baseline conditions in Crimea, which used to be at least as good as they were across Russia, dramatically worsened in March 2014. Nowadays, Crimea means worn-out infrastructure, a lack of natural resources, dependence on Ukraine for both, inability to raise Western investment, plus vulnerable and tenuous summer tourism that serves as the key pillar of the regional economy and of the livelihoods of a majority of local residents. At the same time, major Russian companies cannot enter the Peninsula directly without risking a Western response.

    Russia’s development plan for the new Crimean Federal District keeps getting costlier with every successive iteration. At this point, the Russian government has fixed spending at about $20 billion through 2020, but the actual amount of spending will doubtless keep growing. For instance, the estimated cost of the bridge across the Kerch Strait has risen from $3 billion to $4.3 billion to nearly $6 billion. During the design and engineering phase, and during potential construction, the cost will probably escalate again more than once.

    Economic losses from Russia’s damaged relationship with Ukraine have further tilted the balance. Kiev’s “European choice” made some losses unavoidable, but Moscow has done its best to maximize such losses. Clearly, Ukraine’s own losses will be much more serious, given the different scale of the two economies and the nature of their relationship. However, Russia will also lose a lot—e.g., a major source of raw materials, rolled steel, and machinery components, including defense items.

    Russian assets in Ukraine, worth at least $30 billion, are now at risk. In late April, a court seized an Odessa refinery that the Russian bank VTB had obtained by way of loan recovery from Sergiy Kurchenko, a fledgling Ukrainian oligarch and ally of former President Viktor Yanukovych who is now a fugitive. Mass-scale asset divestment will probably not happen, but many businesses will find it harder to operate. Ukraine’s role as an interim transportation link between Russia and Europe (and, via the Black Sea ports, other global regions) will probably weaken as well.

    Since the tragic crash of Malaysian Airlines Flight 17, European leaders have substantially reconsidered their attitudes toward sanctions against Russia. The dominant viewpoint in the United States and the EU is that while separatists are directly to blame for the downing of MH17, the Kremlin is the main culprit. The EU’s subsequent adoption of limited, so-called sectoral sanctions, the third and most painful round of sanctions, signals that the conflict between the West and Russia has gained considerable momentum.

    As a result, Russia faces U.S. and EU economic machines comprising 800 million people on both sides of the Atlantic who together produce half of the world’s wealth. Accounting for just 2% of global GDP, Russia can hardly win such a boxing match—particularly since more than 50% of Russia’s trade turnover is with the European Union. Taxes on the EU’s energy imports make up almost half of Russia’s federal budget.

    Now, Russian state banks, energy monopolies, and defense companies could be seriously hurt. Refinancing state companies’ $200 billion in debt will already create a serious problem; according to estimates from former Vice Prime Minister Kudrin’s think tank, underinvestment and capital flight caused by the sanctions scare will deprive the Russian economy of another $200 billion. Russian economic experts believe we risk losing up to one-third of our annual budget next year due to international sanctions, in the worst-case scenario.

    Still, Russia can live with sanctions for the short term. Oil exports still guarantee us a relatively steady flow of income, and hard currency and gold reserves remain at around $500 billion. But the sanctions will eventually hit hard. Both domestic forecasts and estimates from the International Monetary Fund and the World Bank put Russia’s GDP growth at 0.2%, with a probable recession looming. Restrictions on much needed Western investments and technology is a serious impediment.

    Meanwhile, the sanctions have also solidified Russia’s new and unfavorable position in the system of Western-dominated international, political, and economic relations. Though Russia is not yet considered a rogue nation, many in the West clearly see it as a problem country and an unhelpful actor. Such positioning contributes to worsening conditions on the domestic economic front.

    Russia’s Responses

    Notwithstanding the increasing impact of sanctions, President Putin is not likely to change his policy approach under pressure. As Russia’s officials see it, the Iran sanctions and Cuba embargo demonstrate that such a situation can persist for quite some time, especially since Russia is a relatively large and wealthy country. With this in mind, the Putin government will not give in to Western sanctions, but will instead look for ways to minimize their impact on Russia and to ensure the survival of the current political and economic system in Russia.

    Domestically, Putin will try to rally the Russian elite and population around his idea that “Russia is a besieged fortress.” Although it may seem strange to Americans and Europeans, this may actually become an easier sell for Putin as sanctions become more severe, for two reasons.

    First, tough sanctions will do real damage to Western-oriented internationalists inside Russia. Although there is a new generation of Russian business leaders and so-called global Russians who find Western values to be highly compatible with their mode of life, this group was relatively weak even before the Ukraine crisis. Sanctions have further reduced their voice in debates over Russia’s internal affairs. To stage a comeback, they will have to have some breathing space—something impossible under sanctions that reduce economic opportunities and distort Russia’s political climate. Under harsh and continuing sanctions, this new generation will become weaker and weaker. Russia’s Western-oriented economic elite cannot thrive in isolation from the rest of the world, and Western officials should take note of this.

    Second, the isolationists around Putin who do not see their future in the wider world are already numerically and emotionally stronger than are modernizers and progressives—and this problem will get worse the longer the sanctions last. That is why the actions already taken by the West have caused a surge of enthusiasm among Russian isolationists. Kremlin efforts to mobilize their support in order to strengthen the political order will further empower them.

    Neo-conservative Russian isolationists are already influential around President Putin. In the absence of any visible carrots from the West, using the stick endlessly will only strengthen the neo-conservative segment of the Russian elite and population. Russia today is far from the Iranian situation, where the supreme leader decided to avoid selecting a belligerent president to make negotiations possible. In Russia, the current situation can persist for a relatively long time, although the country already feels a strain on its budget and public expenditures.

    Internationally, the sanctions regime has forced Moscow to look more intensely for new markets and new lenders. The Russian President's recent visit to China is evidence of this. Deeper cooperation with China will have costs for Russia—energy experts quickly discovered the secret price per cubic meter of Russian gas deliveries to China, and it was not what Moscow hoped for in the past. The political price for Russia of current and future Russian-Chinese agreements is anyone's guess.

    The incumbent Russian leadership is unlikely to have any immediate interest in becoming too dependent upon China. However, it may perceive it as the lesser of two evils, as traditional sources of “stability,” the highest value of social life in present-day Russia, are gradually drying up. This forces the government to look for new sources of stability. Russians are already debating the scenario of “Russia as a Chinese political satellite and economic periphery” in earnest, even if most are not yet prepared to accept it.

    Russia’s recent restrictions on agricultural imports from countries that have imposed sanctions show that Moscow is ready to retaliate economically against the West; beyond this, Prime Minister Dmitry Medvedev has now threatened to restrict access to Russia’s airspace. What are the Russian options if the confrontation over Ukraine continues to worsen?

    One of the most visible proposals is the Glazyev plan, prepared by Sergey Glazyev, a Russian presidential advisor on economic matters who has been responsible for Russia’s integration plans vis-à-vis Ukraine. Mr. Glazyev has proposed a series of steps to increase Russia’s independence from Western economies and to attempt to damage these economies in the process. His proposed measures included the following:

    · move government assets and accounts denominated in U.S. dollars and Euros from NATO countries to neutral nations;

    · sell NATO nations’ bonds;

    · return state-owned property to Russia;

    · stop exports of precious metals, rare earths, and other strategic metals and minerals;

    · execute currency and credit swaps with China to finance critical imports;

    · build a SWIFT-like domestic system for interbank information-sharing within the Commonwealth of Independent States, along with a domestic payment system;

    · work to introduce a capital flight tax;

    · gradually transition to domestic currency settlements vis-à-vis trade partners;

    · radically reduce the share of U.S. dollar instruments and debt of other pro-sanctions nations as a percentage of Russia’s foreign currency reserves;

    · replace U.S. dollar and Euro-denominated loans of state-owned corporations and state-owned banks with ruble-denominated loans; and,

    · transfer offshore-registered titles to strategic enterprises, and transfer mineral rights, real estate, and other property back to domestic jurisdiction.

    Russia’s neo-conservative isolationists generally support these measures, which would seek to move Russia’s assets and transactions away from dollars and Euros toward other currencies, develop a parallel international financial system, force Russian businesses and their assets and investment to return to Russia, and keep “strategic minerals” in the country.

    Sophisticated Russian economic experts, such as former Deputy Prime Minister Alexei Kudrin, have opposing views. They argue that retaliatory measures like these would immediately cause greater losses to the Russian economy and to Russian consumers. However, they say, the best “retaliation” is a “pivot to Asia” and to other emerging economies. The goal of this pivot would be to increase Russia’s finance and trade ties with sovereign funds and public companies from Asian, Latin American, and Arab countries willing to expand their exposure to Russia. Work in this direction has already begun, though it will be difficult to replace the 80% of foreign direct investment in Russia that comes from countries imposing sanctions.

    Russia also has some other options. First among them is economic retaliation against Ukraine, which Moscow is already doing as part of a wider effort to destabilize that country. Russia has halted trade of more than one-hundred agricultural commodities and industrial products. Moscow has also frozen oil and gas deals and started to look for substitutes for military equipment imported from Ukraine in the past. Russia could still do much more.

    Ukraine is highly vulnerable because its financial outlook is tragic. Its budget deficit and external debt service require nearly $30 billion. Covering development and recapitalization and addressing structural imbalances in the economy will take almost $200 billion through 2018 due to long-term underinvestment, according to some expert views.[3] These gigantic amounts are simply unavailable to the European Union, Russia, and Ukraine, even if the United States had the political will to assist. But if nothing is done, the “black hole” of Ukraine’s economy in the center of Europe will drag down the country’s westward and eastward integration and will constitute a long-term economic threat to all. In order to overcome the crisis and the fractures in Europe, it is necessary to create a new platform for cooperation. Both the EU’s Eastern Partnership and Russia’s Eurasian economic integration require serious correction.

    This may sound unrealistic in the current political environment, but there is no alternative. Moreover, saving Ukraine could actually be the best project to transform the “sanctions regime” back into a “cooperation regime,” something much healthier for the European and global economy. Of course, this will not be possible until governments on all sides—not only Russia—are prepared to adjust their policies.

    Russia’s most serious economic weapon—restricting oil and gas deliveries to Europe—is a double-edged sword. There is no easily available buyer of this product in Asia because new pipelines or railway deliveries will take years to build. Likewise, export facilities for liquefied natural gas are also pretty scarce. At this point, nobody in his senses openly speaks in favor of cutting off gas supplies to Ukraine, which might take away up to one-quarter of Russia’s federal budget revenues directly or as collateral damage. Nevertheless, Russia could still do this if the conflict deteriorates enough to make the Kremlin’s alternatives look even worse. From this perspective, it can be very dangerous to put too much pressure on Russia.

    So far, most Russian experts have expressed concern that the Russian Federation cannot respond to Western sanctions without exacerbating the economic damage caused by them. Any actions taken by Moscow to curtail economic and technological cooperation, and any restrictions imposed on Western businesses in Russia would entail immediate losses to the nation's citizens, domestic businesses, and government. Nevertheless, if Russia’s isolationists gain sufficient political influence, these experts may no longer have significant input into policy formulation.

    Russia has not yet reached this point. In late May, President Putin used the St. Petersburg Economic Forum as a platform for direct dialogue with Western businesses. He clearly intimated that, so far, the Kremlin does not view an isolationist program as a serious option. Putin insisted that, even in the new environment, Russia intends to follow the motto of “partnership for global development.” Speaking of sanctions, he lamented that “inability to find compromises, unwillingness to take into account partners’ lawful interests, and blunt use of pressure only add to chaos and instability and create new risks for the international community’s continued development.”

    As he spoke to established Western investors in Russia, Putin asked rhetorical questions. Why do “successful businesses have to suffer losses and relinquish to competitors this huge market and the positions they had built up?” Further, “Does anyone gain from disruptions to regular cooperation between Russia and the European Union? Does anyone gain from seeing our joint work come to a standstill on what are important issues for everyone such as nuclear safety, fighting terrorism, trans-border crime, and drug trafficking, and other priority issues? Is this supposed to make the world any more stable and predictable? Surely it is clear that in today’s interdependent world, economic sanctions used as an instrument of political pressure have a boomerang effect that ultimately has consequences for business and the economy of the countries that impose them.” These pronouncements were completely devoid of any pro-isolationist enthusiasm.

    The primary effect of international sanctions is partial or complete isolation of the sanctioned nation. Russia is too big to isolate completely, however, and partial isolation is likely to have unintended consequences that contradict U.S. and European intent in imposing sanctions. Should the West strengthen isolationist forces in Russia and provide incentives for Russia's “pivot” away from the West toward China, Latin America, and Africa? This is up to Washington and Brussels.

    Igor Yurgens is President of the Institute of Contemporary Development, President of the All-Russian Insurance Association, and Vice President of the Russian Union of Industrialists and Entrepreneurs, one of Russia’s largest trade associations. In addition, he serves on a Russian presidential council on human rights and as a professor at Moscow’s respected Higher School of Economics. He is a leading authority on Russia’s economy and its international economic relationships. He holds a doctorate in economics.

    [1] In June, the Russian regions' movement on the Fitch scale was mixed.

    [2] In June, S&P slammed lesser players in the Russian financial market; more than half of them (18 out of 32) saw a downward outlook revision.

    [3]Kulik S., Spartak A., Vinokurov E., and Igor Yurgens, “Two Integration Projects in Europe: Dead End of Struggle,” INSOR, a summary of a report commissioned by the Civic Initiatives Committee, Moscow, June 2014

    The West vs. Russia: The Unintended Consequences of Targeted Sanctions | The National Interest
     
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  7. asianobserve

    asianobserve Elite Member Elite Member

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    Russia and China are not completely seeing eye-to-eye on a lot of issues despite the media parade between Putin and Xi. Russia in particular is at the disadvantage since China is more or less on a transactional approach to Russia and it has alternative energy sources at very competitive prices (mostly from Central Asia). Coupled to that is China's growing power in Central Asia itself, Russia's own backyard. I think at the moment China has already bigger trade volume with Kazakhstan compared to Russia and this is set to grow even more. And there is a very real danger in the future that the growing clout of China in Central Asia will rouse Russia and cause a major rift (it is the only surviving part of Putin's Custom's Union). Note that China is developing its own Silk Route where Central Asia plays a major role. I doubt Russia will agree to play second fiddle to China in its last remaining dominion. Sparks are bound to fly in this part of the World and that prospect is not lost to China.

    So instead of seeing the latest gas deal with China as a way out, better observers should see it as it is, the shrinking strategic leverage of Russia. At least with the EU, Russia was assured of a higher paying market and a very strong leverage to China (Asian market), a real counterbalance to China. Now with the leverage in serious doubt, Russia has no choice but to stick to China and practically give in to every demand of China (principally on price). Russia, by its (Putin) own folly has really shot itself in the foot in what it is doing in Ukraine.
     
    Last edited: Dec 2, 2014
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  8. Ray

    Ray The Chairman Defence Professionals Moderator

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    China is very sensitive to its requirement of oil and gas owing to the threat perception to its 'gateways' for oil, and so is on the way to build a very substantial strategic petroleum reserve. Therefore, it is not averse to having oil from any source it can.

    Russia, on the other hand, is equally concerned about its rapidly losing clout over world affairs and its strategic vulnerabilities and is aware that without a strong financial backing, it can go nowhere. Therefore, it will continue finding markets anywhere for its exportable products and Oil is a commodity that is readily available.
     
  9. asianobserve

    asianobserve Elite Member Elite Member

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    Central Asia's Great Game | The Japan Times

     
  10. Ray

    Ray The Chairman Defence Professionals Moderator

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    Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

    Every issue that deals with another country is a marriage of convenience.

    There are no friends or enemy. There is only permanent interest.

    To believe that there is a finality to equations would be living in a Fool's Paradise.
     

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