“It’s time for Europe to start thinking about winter gas supplies,” Russia’s Alexander Novak said, addressing the State Duma on Wednesday.
Make no mistake, Europe is thinking about gas supplies. Just not the way Novak meant. In remarks to German lawmakers, Olaf Scholz said the country’s dependence on oil, coal and gas from Russia “will end.” As for the time table, Scholz was blunt: “As quickly as possible.”
Germany is in talks with Qatar already, and Scholz on Wednesday said the three parties in Germany’s ruling coalition are set to “significantly top up” assistance to households amid the energy crisis. Heating subsidies will double, for example.
The US and Europe were set to dial up sanctions on Russia during a whirlwind of international summits. The Biden administration is readying measures targeting hundreds of Russian Parliament members. More than 300 lawmakers will be sanctioned, US officials told The Wall Street Journal, which reviewed internal documents ahead of meetings in Brussels, where Biden is coordinating next steps with EU and NATO officials.
“The sanctions are working,” Scholz told the Bundestag, describing the draconian steps adopted by the US, the UK, the EU and their allies as “only the beginning.” “We’re continuously sharpening the sanctions further,” he added.
In Washington, US lawmakers are working with Janet Yellen on a plan to effectively freeze Russia’s gold. If you thought Moscow’s bullion was beyond the reach of the US Treasury, you were wrong. No, the US can’t physically seize it all (well, we could, but that would entail a more “invasive” operation). However, Yellen can make it more difficult for the Kremlin to use it.
Axios, which originally reported the bipartisan effort to “lock down” Russia’s $130 billion in gold reserves (figure above), revealed Yellen’s involvement late Tuesday.
“The legislation would apply secondary sanctions to any American entities knowingly transacting with, or transporting, gold from Russia’s central bank holdings,” Sophia Cal wrote. “They’d also face sanctions if they sell gold physically or electronically in Russia.” In remarks to Axios, Angus King said simply, “gold is a fourth of their reserves, and we don’t want them to be able to monetize the gold.”
Even if Congress doesn’t move ahead on the bill, Biden could implement a version of it himself. Although Russia’s gold is technically already covered in existing sanctions, the new measures would go further by attempting to trace bullion that’s been moved or named to another person or entity. It’s steps like those that’ll make it very difficult for Moscow to work through a non-sanctioned central bank to repo their gold for hard currency. Entering into such a deal with Moscow would effectively make the counterparty directly complicit in a scheme to circumvent US sanctions. No central bank will be excited about taking on that risk, especially considering that unless you’re China and you have the need and financial resources to secure massive amounts of deeply-discounted commodities, there’s no incentive to engage in such activity, and every incentive not to.
Speaking of deeply-discounted commodities, Lukoil’s trading arm offered Urals at a -$31.35 discount to Dated Brent in a pricing window organized by Platts. That was a new wide. S&P said “several” Chinese state-owned refiners are back in the Russian spot market, lured by the unprecedented discounts. “The price is quite low,” one source remarked. Another, from PetroChina, noted that “one of the current problems is fixing a ship to carry Russian barrels as not many shipowners are willing to take the risk.”
As for what else the US and Europe can actually do, short of channeling W. and instructing Putin to leave Ukraine or face “military conflict, commenced at a time of our choosing,” options are theoretically limited.
“NATO has already pushed the limits of economic sanctions imposed by European countries, which are dependent on Russian energy and the alliance has largely exhausted most of its military options,” The New York Times wrote, adding that Biden and his counterparts now have “a relatively short list of announcements they can deliver on Thursday after three back-to-back, closed-door meetings.”
Ultimately, the West can wait Putin out, though, even if beleaguered Ukrainians can’t. The Russian economy is going to collapse, it’s just a matter of whether it happens rapidly or in “slow-motion-train-wreck” fashion. Annual inflation was in excess of 12.5% as of March 11, up more than two full percentage points from the prior week.
Do note: It’s not just the FX pass-through. That’ll probably fade. “The main risk now is the emergence of a shortage of basic imported everyday goods,” one expert in Moscow told Bloomberg, noting that “many are no longer available in stores, and prices in online stores have risen sharply.”
It doesn’t even make sense to track the resumption of trading in Russian securities. Earlier this week, for example, yields on ruble debt jumped 250bps. In one day.
As one Moscow-based PM gently noted, it’d be far worse “if there was still a free market.”
As he put it, speaking to Bloomberg’s Lilian Karunungan and Ruth Carson, “the limits on capital flows and currency operations mean you can come up with any exchange rate, key rate or OFZ yield you like.”