The physical impact of Russia’s move to halt gas flows to Poland and Bulgaria is “modest.” It’s the political ramifications that matter.
That’s one takeaway from a new note by Goldman’s Samantha Dart and Damien Courvalin, who said Moscow’s decision “raises the stakes” for the EU Commission.
European officials and lawmakers will need to decide “whether the new gas payment system would violate sanctions,” Dart wrote, suggesting the attendant uncertainty “will likely keep market volatility elevated.”
Read more: ‘Unacceptable’ Russia Gas Cuts Force EU Energy Reckoning
On Wednesday morning, I reiterated that ambiguity around Gazprom’s mechanism is untenable, but that’s not the real issue. Rather, the problem is that the back-and-forth between Europe and Moscow feels like a charade.
If either side were truly dedicated to crippling the other economically, there wouldn’t be a discussion. Russia would’ve cut all supplies to Europe in retaliation for sanctions and weapons shipments to Ukraine and Europe would’ve imposed a total embargo in order to deprive Vladimir Putin of revenue. The debate over how to pay for gas that Russia “shouldn’t” be selling and Europe “shouldn’t” be buying is just an example of both sides subjugating principle to expediency. The figure (below) speaks for itself.
“We maintain our view that it is in the interest of both the EU and Russia to work out a solution that brings gas payments in compliance with the EU’s legal requirements, consistent with recent comments from Brussels,” Goldman’s Dart said, suggesting that Tuesday’s events “can work as an added incentive for the EU, and especially Germany, to find a way to work out a RUB payment mechanism given the significant economic toll a halt in gas flows would have in the region, which would be much greater than that of Poland or Bulgaria.”
I’ve lost count of German recession warnings tied to a prospective gas cutoff. Last week, for example, the Bundesbank said the economy would contract 2% this year in the event an embargo on Russian fossil fuels forces power providers and German industry to curtail activity.
Read more: Germany Is Asking Itself The Wrong Questions
Earlier this month, the consortium of economic institutes that advises the German government quantified the same near-term risk while downgrading their 2022 GDP outlook (figure below).
In the “supply freeze” scenario modeled by the Joint Economic Forecast Project, the German economy expands just 1.9% in 2022 and contracts by 2.2% in 2023.
“The cumulative loss of GDP in 2022 and 2023 in the event of a supply freeze is likely to be around €220 billion, equivalent to more than 6.5% of annual economic output,” the report said. Inflation would remain elevated at 5% next year in the event of a supply halt.
Hours after Russia cut flows to Poland and Bulgaria on Tuesday, Goldman called a full interruption of Russian flows to Germany “very unlikely,” but warned that in the event such an escalation were to become a reality, European gas prices could jump to “over 200 EUR/MWh this summer, based on the demand elasticity observed over the past several months, which suggests that on average a 1.8 EUR/MWh move in price is required to shift gas demand in the region by 1 mcm/d.”
Addendum: Each and every one of us subjugates principle to expediency as a matter of course. That tradeoff is so deeply ingrained in our modus operandi that we don’t even notice it. In fact, instances of people putting principle first are often described as examples of temporary insanity on the part of the virtuous.
“Each and every one of us subjugates principle to expediency as a matter of course. That tradeoff is so deeply ingrained in our modus operandi that we don’t even notice it. In fact, instances of people putting principle first are often described as examples of temporary insanity on the part of the virtuous.”
That hit home.
“Rather, the problem is that the back-and-forth between Europe and Moscow feels like a charade.”
More accurately, Germany and Moscow. Germany is leading efforts to bubble wrap future sanctions while undermining existing rounds. They are also foot dragging on military aid to Ukraine. Their commitment to the founding purpose of NATO is what is beginning to feel like charade.
Regardless of who holds ‘leverage’ here, it has become evident that Russia can drive wedges between nato allies. Will sanctions on Gerhard Schroeder come up in the 6th round of sanctions? Seems like a better target than a few teenagers.
Aretha would ask Who’s zoomin’ who? Adam Smith would say good things can result from selfish intentions…..We don’t really control the narrative. Vladimir Putin does, and he is an old spy in a hurry. Nobody has witten about the timing of this war. What is it that made his decision so urgent? When a question like this is not even considered, let alone answered, that means it is a very imporant question, ala Why did the
US overnight lending market go haywire in September 2019?
I would argue that he did not act urgently, i would suggest he acted too late, and should have begun earlier in winter. I suspect his pre Olympics meeting/photo op/deal with Xi was part of that delay. He needed frozen fields for this war style and equipment. He got a lot of mud instead, forcing his columns onto the paved roads, increased maintenance and easier pickens. Arrogant fool.
West coast stoic,
Re:. “Nobody has witten about the timing of this war.”
I just finished a Tom Clancy/mark Greaney novel which I think was 2014. It was about North Korea attempting to to ramp up mining efforts for rare metals and advance evolution of their nuke program. As the story progress, North Korea attempt an assassination of President Ryan, almost succeeding.
Ryan’s first order of business is to send a message the Russia that he’s alive and well, in order to prevent them from invading Ukraine. I think that same theme repeats several times in the book and others.
Point being, Putin was looking for weakness and fractures in a wide range of places as an opportunity. I think it’s obvious in political polling that Biden is thought to be weak, but that contrasts interestingly to most Americans not wanting trump or the current republicans.
The confusion in politics, increased polarization, post pandemic economics, bottlenecks and weak GDP all add to fragility and possible instability.
Putin must see that many of his stars are aligned but as with many astrological horoscopes, I think the global chaos he hoped to give inertia to, is causing him unforseen chaos with his vision.
I think he’s unwilling to back down and is probably examining horoscopes related to testing or firing a nuke example, in order to have the world to take home seriously, versus just thinking he’s insane. He’ll be looking for credibility and expanding his ego at any cost. He’s more than a madman, he’s Hitler with nukes. I don’t believe he’ll have the support of his people and hopefully his military will eventually figure out how to reign him in.
Or take him out.
I think you could also argue that with Trump in office and actively undermining Ukraine and NATO, no invasion was necessary or even a net benefit to Putin. The actual timing is likely a product of not only a deal with Xi, but also overtly weakening Biden (as opposed to taking advantage of any existing perceived weakness), specifically as we head into the midterms. The cherry on top was taking advantage of Europe’s energy dependence and the Western world’s burgeoning inflation problem. All in all, Putin’s expiration date may be farther off than we might imagine — a GOP landslide in the midterms will buy him time, and, by then, the prospect of Trump’s return to office (or an alt-stooge) may be the magic elixir that brings it all back together for him.
Western Europe and US: As patriots, we will reduce our demand for gasoline by 25%. Those who can work from home, will do it, to avoid burning fuel on a needless commute. We will temporarily allow burning of domestic coal for electric power generation. Crush global demand for petroleum and natural gas. Government subsidies of domestic gas and petroleum production, as needed. It doesn’t have to be forever: just long enough to destroy Russia’s economy, remove the frictions between NATO members, and ultimately ensure victory. We talk of a proxy war, but it’s a war that must be won, not Eurovision. In WWII we had three years of gasoline rationing. Not to be overly critical of Biden (for the risk of making it sound as if someone like Trump is even an option)–but what a failure of communication, a failure to clearly communicate to the American people, and our allies, what is at stake, and what tiny sacrifices we can make to ensure that we prevail. We have become one giant Pillsbury dough boy, fat, soft, and squishy.
” As patriots we will reduce our demand for gasoline”
You mean being inconvenienced? Maybe in Europe, but forget about that here in the USA!