In February 2022, a significant event in geopolitics transpired, resulting in a global economic crisis. It had a detrimental influence on the global supply chain and the cost of commodities, resulting in product shortages, global inflation, and severe food shortages throughout the world. Yes, I'm referring to Russia's invasion of Ukraine.
European Sanctions
To put an end to the Russia-Ukraine conflict and mitigate its consequences, Europe and other Western nations imposed various sanctions on Russia in an attempt to damage their economy. Russian goods have been banned, billion-dollar companies such as McDonald's and Zara have exited the Russian market, it has been barred from the Swift network, and its Forex worth around $300 billion USD has been frozen. Furthermore, the West is pressuring other countries, such as India, to follow suit.
When it comes to finances, the West appears to be the clear frontrunner. For the last four months, the United States has frozen 300 billion USD of Russia's foreign reserves, Europe has put a 35% tariff on Russian vodka, Russian gold imports have been restricted, and a number of large corporations, such as Starbucks, have left the country.
Energy Battle
But little did the West realize that Putin would utilize energy as a weapon against them. Russia contributed 42% of Europe's gas in 2020. This supply was made possible by the Nord Stream 1 pipeline, which is by far one of the world's most valuable pipelines. It is a 1224-kilometer-long undersea gas pipeline that connects Russia to northern Germany across the Baltic Sea. This pipeline was built by a joint venture between the Russian gas corporation Gazprom and four additional western partners at a cost of around 7.4 billion euros. This pipeline delivers 55 billion cubic meters of gas, the majority of which is sent to Germany, where it is disseminated to the rest of Europe via numerous other pipelines. This shows how dependent the European Union is on Russia for gas and as a matter of fact, the biggest European economy has 49% of its gas imported from Russia.
Putin's Strategy
Following the imposition of sanctions on Russia, Vladimir Putin made two significant declarations. First, he decreased Europe's gas supplies by 60%. Second, he proposed that European nations purchase Russian oil in Rubles (Russian Currency). The second ruling has three key ramifications for global trade:
1. Due to a shortage in supply, the price of gasoline increased (supply-demand mismatch). Despite the fact that they do not import oil from Russia, prices have risen by 37% since January 2022. When it comes to the European Union, the price of gas has increased by 144%.
2. Since Putin pressed European nations to buy oil in the Ruble, the currency's value has skyrocketed, making it one of the best-performing currencies in the world.
3. In the European Union, energy costs began to climb, causing the cost of production in every industry to rise, finally reaching a 9.6% inflation rate. Industrial costs have climbed by more than 36% in the last year, while power rates for Europeans are smashing records. Furthermore, food price inflation has increased to 7.5% in May 2022, the greatest level in the past 20 years.
Putin's mind-blowing enabled Russia to earn about twice as much as it did before the sanctions were imposed. The European countries were so reliant on Russia that they were ready to pay 60% more for the same amount of gas. The same holds true for the oil market. Oil prices have risen from 65 USD to 100 USD per barrel.
International Support
Second, Russia is backed by two international powers: India and China. Because of their assistance, Russia has been able to compensate for European oil income losses. While Russian crude oil deliveries to Europe fell by 554,000 barrels per day, Asian refiners upped their take by three barrels per day, which proved to be a great substitute. This is why the West has been continually pressuring India to buy Russian oil.
The fact that Europe's winter season is approaching makes the issue considerably worse. Gas consumption in Europe drops from February to August, but begins to rise in September and peaks in December due to strong demand for equipment such as heaters during the exceptionally cold winter season. If Russia's gas supply is shut off, it will be a nightmare for Europe's people and economy.
Why is Europe so dependent on Russia for oil and gas?
Other nations, such as Norway, Qatar, and the United States, contribute gas, while the Middle East supplies oil. Why is Europe not considering other options? This is due to the fact that LNG gas necessitates a large number of terminal facilities where the fuel may be converted from liquid to gaseous forms, as well as a vast network of pipes to carry the gas to various areas of the continents. Despite the fact that Europe has a large number of terminal facilities, the majority of them do not have a pipeline connecting them to the rest of Europe. This is why, given the current level of facilities, Europe will struggle to get gas from the United States. Even if the European facilities function at full potential, the amount of gas delivered is projected to be barely two-thirds of what Russia sends via pipelines. Another alternative for Europe is to invest a billion dollars and develop these pipelines before winter, although this is unlikely given that Nord Stream 1 alone took six years to complete.
When it comes to oil, Saudi Arabia has flatly refused to raise its oil output for the following reasons:
1. They are allies of Russia.
2. Pumping less oil allows them to obtain very high prices and make a large profit. As a result, it is hesitant to pump additional oil because it is now making a fortune from this arrangement.
This demonstrates Putin's mastery of geopolitics and how he flipped the switch by threatening the European economy.
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