Global energy markets have experienced shocks from the coronavirus pandemic and Russia’s war in Ukraine. Moscow may have thought, upon launching the war, that its energy exports would be a strength that would both restrain Europe’s reaction and serve as a financial lifeline to the rest of the world in the face of economic sanctions imposed by the West. This gamble did not pay off, however, partly because of the pace of change taking place in energy markets. Indeed, it now looks as if energy exports may no longer serve as an engine of growth and vitality for the Russian economy.
By invading Ukraine in February 2022, Russia exposed its energy industry to unprecedented international sanctions while also disrupting global commodity markets. Russian exports of natural gas to Europe, sales of oil abroad and shipments of coal became obvious targets for countries wishing to use sanctions to punish Russia and influence its decisions throughout its war in Ukraine. Russian natural-gas exports to Europe began declining in August 2021 during the tense period before the war began. After February, each Russian statement about the war triggered concern in European capitals that their energy supplies would be completely severed. By May, Russian President Vladimir Putin predicted that Western countries were committing ‘economic suicide’ by upholding extreme financial and trade sanctions. He ended natural-gas exports to major European Union importers completely by early September, when the Ukrainian military was near to liberating Kharkiv, hoping that an energy shock as colder months approached would fracture the Western sanctions coalition.
There was a commodities-price surge in late February triggered by the invasion, which led to an increase in Russian oil revenue. This surge largely ended by May, however, due to weakening demand in China and crude-oil releases by the United States from its Strategic Petroleum Reserve. Russia’s initial devaluation of the ruble, which had been a net positive for domestic-energy revenue, was reversed using strict capital controls to combat sanctions. This was achieved particularly through actions by the Bank of Russia, which forced all exporters to convert 80% of their foreign-currency earnings into rubles to support the exchange-rate value of the currency. Russian oil exports (based on Urals-blend oil pricing) now regularly sell for US$30 less per barrel than Brent Crude, the standard international benchmark, due to political risks. The Russian energy company Gazprom is no longer selling large volumes of gas to Western Europe, though pipelines running through Ukraine and Turkey to the European network remain in operation, and it has missed the opportunity to sell significant amounts of gas at high prices. Meanwhile, the Russian coal industry is regularly selling its coal at discounts of 50% or more against major benchmarks in the Asia-Pacific. There is also no evidence that Europe, the US or their allies in Asia are willing to break with the current sanctions regime. Thus, what began as an attempt by Russia to leverage its energy exports as a political weapon increasingly looks like a recipe for economic disaster in the coming years.
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