What Vladimir Putin has done, in addition to shattering unity, is “undermine and debase Russia’s most important source of economic power”, argues the award-winning author Daniel Yergin in a guest essay for The Economist
once said that he did not like hearing Russia described as an “energy superpower”. It reminded him, he said, too much of the cold war. But he has revelled in what his country’s energy resources have brought him–global political clout and massive revenues. But the consequences of the Ukraine war will turn Russia into a “reduced energy power”.
Unplugging Russia from the world economy with massive sanctions turns out to be a challenge. As an exporter, it is mainly a supplier of commodities and raw materials, none of them easily replaceable in an inflationary time. Oil and gas rank at the top of the list, accounting for half of total export earnings and, in some years, over 40% of Russia’s total budget.
In a normal year, Russian oil exports generate more than three times the revenues of gas. But its oil exports are, so far, much more disrupted. About half of Russia’s 7.5m barrels per day of exports go to Europe. Though those exports were explicitly excluded from formal sanctions , they are being indirectly sanctioned and “self-sanctioned” by buyers, shippers, and insurance providers, as well as by the extreme reluctance of banks to provide trade finance.
This brings us to the question of fungibility, that strange word describing the ease of replacing one good with another. In theory, the oil market will readjust. Russian barrels no longer bound for Europe would go somewhere else, mainly to Asia, and barrels from elsewhere would come to Europe. Buyer countries such as India, which imports 85% of its oil, and China, will be eager to buy heavily-discounted Russian oil.
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