The United Nations 2021 Climate Conference known as COP26 ends on Friday in Scotland, but its climate change problems for 2021-22 might be just beginning. The leaders are calling on Russia and OPEC to turn up the dial on oil and gas to save them from themselves.
It’s quite the bind for the West’s climate concerns. But unless manna from heaven can power Madrid hospital rooms and Frankfurt e-bikes, a ramp up in solar and wind won’t do. So, call the Kremlin and see what Gazprom and Rosneft can offer. Europe is increasingly worried that they won’t pick up the phone, Reuters reported on November 8.
At COP26 last Tuesday, President Joe Biden blamed the Russians for your gas bill.
He said that rising gasoline prices in the U.S. and Europe were “a consequence” of “the refusal of Russia or the OPEC nations to pump more oil.” This while making banning new oil permits on federal land and stopping the extension of the Keystone XL Pipeline from Alberta to the Midwest and the Gulf of Mexico into his first orders of business in January. Some Democrats want the Enbridge pipeline project connecting Wisconsin to Alberta, Canada gas fields to be stopped, as well.
Blaming suppliers, like Russia and the Middle East, is a poor policy during a shortage. “Our view is that the global recovery should not be imperiled by a mismatch between supply and demand. OPEC+ seems unwilling to use the capacity and power it has now at this critical moment of global recovery for countries around the world,” a spokesperson for the National Security Council said in a widely reported statement. The statement did not mention Russia by name but said major oil and gas producers need to ‘drill baby drill’ and ‘pump baby pump’ because if the global recovery stalls out (thanks to their lockdowns to fight Covid-19), it’s the fault of oil and gas states like Russia.
Biden could not make such a plea to Vladimir Putin as he decided to stay home in Moscow.
Germany would love for Russia to send them more natural gas, though. Nord Stream II is almost complete. That is the gas line that the U.S. sanctioned under Trump and then the White House later lifted under Biden as a gift to Angela Merkel.
Europe’s oil and gas industry has been deemed an “evil” against the planet. No one is looking for new fields, if there are any left to explore. Europe is also running out of coal, and have abandoned nuclear energy in most states, led by Germany, since the Fukushima Daiichi nuclear reactor accident in 2011 caused by an earthquake off the coast of Japan.
The Europeans need the Russians way more than we do. U.S. relations with Russia, if improved, would also serve to help Europe.
EU’s Russian Dependence Laid Bare
European policies towards fossil fuels have been designed to build the post-fossil fuel economy. Part of this may be because their supplies of fossil fuels are wearing thin.
The Dutch gas field in Groningen is in the process of shutting down.
Another reason may be because politically powerful voter blocks in Europe and policy makers in Brussels prefer all things green. Politicians wanted it because of supply constraints and real concerns over climate change. They’ve worked hand and glove with large NGOs, the media, and the scientific community to make climate change Europe’s number one priority. And this has led to conviction among the populace that coal and oil have got to go, or humanity’s time is up. That they must grovel to the Russians (and the Saudis and the Qataris) is somewhat humiliating.
Now the European Commission is asking member states to pay people and businesses to make up for the spike in fuel costs.
Existing sanctions against Russia don’t help much. Both Washington and Brussels imposed sanctions as punishment for Russia’s actions in Ukraine. American companies face fines if they help Russia develop its offshore oil and gas fields. Exxon has had to shut down a $720 million joint venture it had with Rosneft.
In other words, why would Russia be in any hurry to help U.S. oil and gas markets? They might be more interested in helping Europe, but help is already on the way with Nord Stream II, as far as Russia is concerned. The finishing touches were put on the Russia to Germany pipeline in September, according to the company.
Gazprom, like Rosneft and Lukoil, are all subject to American sanctions. Those sanctions make it harder for U.S. companies to work with them and invest in further supply as the world continues recovering from the pandemic.
Will the U.S. Lift More Russia Sanctions?
The winter months will mean a lot. Gazprom and Rosneft shares are still underperforming oil, but are clobbering the FTSE Europe.
One thing for Washington to consider if they did opt to bury the hatchet with Russia is its increasing ties to China. In order to confront and compete with China, the U.S. needs to peel Russia off Beijing, just as the U.S. under Richard Nixon peeled China away from the Soviet Union in the 1970s.
But after being vilified for four years by both parties in power in Washington, it is highly unlikely that Moscow does the Biden Administration any favors.
What exactly was the outcome of these sanction policies? They were designed to punish Russia for its incursion into the Donbas, the industrial hub of eastern Ukraine, and the annexation of the Crimean peninsula. What did Ukraine get? Nord Stream 2 as an end-around Ukraine for Russian gas transit into southern Europe. A negative.
To punish Russia for electing Trump. None of that was true, we now know, so sanctions for that purpose were wrong.
It was President Obama who started the sanction regime in 2015 because of Ukraine.
“Today, it is America that stands strong and united with our allies, while Russia is isolated, with its economy in tatters,” Obama said. “That’s how America leads — not with bluster, but with persistent, steady resolve.”
Five short years later, America’s most important allies in Europe, are all but begging the Russians to pump gas through Nord Stream 2 and lower prices as fast as possible.
Sanctions Have Had Little Effect on Russia
After the fall of the USSR, the Russian governments of Mikhail Gorbachev, Boris Yeltsin, and even early Putin believed that the West and Russia were on the mend from the Cold War days. Now we are in Cold War 2.0 with China and Russia.
So, what’s the track record of the sanctions policy?
In 2015, the initial IMF forecast of the sanctions effect on Russia’s economy was around a 9% decline in GDP.
The experts had spoken. Russia was kaput.
That did not happen. Counter sanctions against European imports, Russia’s biggest trading partner, meant new growth in agriculture and manufacturing at home and losses for the French cheese makers, Polish apple growers, and Finnish dairy farmers. The goal of the sanctions was to change Russian “malign behavior”, but it has not worked. Some of these companies lost market share that will be hard to recover.
The screws of sanctions tightened under Trump.
In 2018, the U.S. Treasury Department warned Congress that expanding sanctions on Russia to include new sovereign bond issues would have “negative spillover effects” on global financial markets and businesses. While not making pronouncements about the effect on Russian economy and Putin’s behavior, the Treasury report noted a capital market squeeze would be troubling.
That report can be chalked up as Treasury – then run by Stephen Mnuchin — placating Wall Street emerging market bond fund managers.
But that good will fell by the wayside in April 2021, when Treasury banned buying new Russian government bond issues due to the hacking of SolarWinds
The main impact on all of this has been on future investment in Russian oil and gas. American companies have been locked out, especially on anything related to fracking or offshore drilling in the Arctic.
The IMF’s annual country report in 2019 admitted that “sanctions have had a less severe impact on Russia’s GDP growth than low oil prices. Between 2014 and 2018, sanctions slowed the growth of the Russian economy by an average of 0.2 percentage points per year, or one trillion rubles ($15 billion) in monetary terms. Yet the fall in global oil prices weakened the country’s GDP growth rate by an average of 0.65 percentage points ($48.75 billion) per year over the same period.”
Sanctions also hurt European business into Russia.
“Finland was notably hit by Russian counter-sanctions, with the biggest impact on Finnish dairy products, which have a strong presence in the Russian market,” the Atlantic Council said in a report last year.
Russia loves high oil and gas prices anyway. After the pandemic hit, energy inflation is a blessing in disguise to the bad boys of Europe.
Prior to pandemic in 2020, the Financial Times reported that economic sanctions on Russia which, coupled with a steep decline in the price of oil, could have brought the Kremlin to its knees – but it didn’t.
“Yet by many metrics, Russia’s $1.7 trillion economy looks to be in better shape today than it has done for some time. Growth is slower but more stable, a $124 billion sovereign fund has been created, exporters have found new markets and importers have found domestic alternatives,” the FT article said.
After Western leaders at COP26 bemoan climate change by wondering how they can afford their energy bills and what they’re going to burn to keep the lights on, the Russian sanctions story is looking like a “he who laughs last” tale every day.
We are at fork at the road. Russia has no interest in saving Europe as the earlier Reuters report showed this week.
The Biden Administration and Congress, which is the locus of much of the anti-Russian opposition, need to re-examine sanctions – allowing, perhaps, U.S. companies to partner with Russia again. Such a move would protect U.S. allies energy supplies, and Russia would be more inclined to listen to Washington. The other option is to push Russia further away towards China.
As a whole, the U.S. can continue disliking Russia (especially if the hacking stories are true) and prefer to avoid doing business with them (though China is far worse and we rush to do business with them).
If that is to be the thought process, then let’s not blame Moscow for higher energy costs on one hand, while quietly asking them to save us on the other.