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Russia's Reduction In Natural Gas Supplies Has Impacted Europe, But Russia Is In Far Worse Shape

As Russia turns away from Europe, President Vladimir Putin will have to cope with bargain hunters in the east for the country's oil exports.

  • Since occupying Ukraine, Russia has reduced its natural gas shipments to Europe.
  • According to Yale University research, the decision hurts Russia more than it does Europe.
  • Russia is shifting its focus to clients in the east, but nations like China and India are tough to deal with.

Since invading Ukraine, Russia has reduced the amount of natural gas it exports to Europe, placing the commodities superpower under "serious pressure," according to a Yale University report.

The report, which was published on July 20, said that, "contrary to popular alarmism about the unfavorable effect of the Russia-Ukraine conflict on global commodity prices, the significance of commodity exports to Russia considerably outweighs the importance of Russian commodity exports to the rest of the world."

40% of the natural gas that Europe needs for things like home heating and power plant ignition comes from Russia.

As a result of Russia reducing natural gas deliveries to the continent and claiming difficulties caused by sanctions, it is worried about an energy catastrophe this winter.

However, the Yale authors stated that in the long term, changing the natural gas supply networks would "harm the most" the Russian economy.

This is because the European Union has already committed to reducing its imports of coal beginning in mid-August and to stopping practically all of its oil imports from Russia by the end of this year.

Germany and Italy are just two of the European nations attempting to wean themselves from Russian gas.

The majority of Russia's export earnings come from raw materials. In most years, and perhaps much more so currently, "these export revenues account up considerably over half of Russia's overall government budget," the Yale researchers noted.

The research, which was directed by Yale School of Management professor Jeffrey Sonnenfeld, also found that broad international sanctions were having an adverse effect on the Russian economy.

Its conclusions are at odds with economic analyses of Russia, which indicate that the country's economy is doing better than projected thanks in part to strong profits from its enormous oil and gas sector.

Economic Impact

We evaluate effects in two ways. One is an integrated-market strategy, which makes the assumption that gas can travel to where it is required and that prices may change.

Another is a fragmented market strategy, which works best when gas cannot be transported where it is required regardless of price increases.

However, since the damage to the European economy is already occurring, estimate is made more difficult.

Using the integrated-market approach as the market is still integrated to assess the direct effect to date, it is possible that it resulted in a 0.2 percent decline in economic activity for the European Union in the first half of 2022.

The effect of a complete Russian gas shutdown starting in mid-July is what we concentrate on when comparing it to the baseline of no supply interruption this year.

As a result, the estimate is made easier to understand and comparable to other economic studies.

We provide a wide range of effect predictions for the next 12 months. The appropriate modeling assumptions are very unclear and differ amongst nations, reflecting the unique nature of a complete shut-off of Russian gas.

Our integrated-market model predicts that the global LNG market would help soften the effects of economic changes if EU markets continue to be connected both within the EU and with the rest of the world.

This is so that lower consumption is spread out among all nations that are linked to the global economy.

The effect is amplified at the extreme, assuming no LNG support: skyrocketing gas prices would have to work by reducing use exclusively in the EU.

According to the fragmented market approach, if physical barriers to gas flows exist, the negative effects on economic output could reach as high as 6% for some countries in Central and Eastern Europe, particularly Hungary, the Slovak Republic, and the Czech Republic, where the intensity of Russian gas use is high and substitute supplies are few.

Due to its heavy dependence on gas for energy generation, Italy would likewise see substantial effects.

Depending on the availability of other sources and the capacity to reduce domestic gas usage, the consequences on Austria and Germany would be less severe but yet considerable.

For other nations with adequate access to global LNG markets, the economic effects would be modest, maybe around 1%.

Germany’s Exposure

To better comprehend the German mindset and available legislative alternatives in the case of a complete shutdown, we went further.

We extended the assessment through 2027 and added additional demand-side impacts that result from the uncertainty that households and businesses must deal with, which lower overall consumption and investment.

We started with the baseline outlook in our Article IV Consultation, which already incorporates the existing partial shutoff.

According to our calculations, uncertainty channels would significantly increase the economic effects of a complete shutdown.

The effects would be at their height the next year before waning as substitute gas sources became accessible.

According to our research on Germany, the increase in wholesale gas prices may potentially considerably raise inflation.

A well-designed rationing strategy, which, for instance, allows downstream consumers and gas-intensive businesses endure more of the shortages, might cut economic losses by up to three-fifths.

Simulations also show that voluntary consumer conservation could reduce economic losses by one-third.

Easing Consumption

Italy is one of the nations that actively promotes energy conservation in homes and workplaces, requiring minimum and maximum temperatures for heating and cooling.

The European Commission's REPowerEU plan also includes energy-saving strategies and steps to lessen reliance on Russian fuels.

However, there is still a disconnect between aspiration and actuality. According to upcoming IMF study, several nations have regulations that severely restrict how wholesale costs are passed through to consumers.

A preferable option would be to permit more passthrough to encourage conservation while giving those who can't afford higher costs tailored compensation.

Addressing Challenges

The financial effects of a Russian gas cutoff may be somewhat reduced. Additional activity should concentrate on risk reduction and crisis preparation in addition to the steps previously implemented.

Governments must step up their efforts to secure supplies from alternative and global LNG markets, continue to remove infrastructure bottlenecks that prevent the import and distribution of gas, prepare to share supplies across the EU in an emergency, take decisive action to promote energy conservation while safeguarding vulnerable households, and create intelligent gas rationing plans.

In order to overcome the difficult situation it faces now, Europe must draw on the resolve and unity shown during the epidemic.

Putin Is Reorienting His Strategy To The East To Sell Russian Energy, But The Buyers Are Driving Hard Bargains

Russian President Vladimir Putin is promoting Russia's energy exports to other markets, such as Asia, albeit at a discount, in an effort to lessen the effect of decreasing energy sales to Europe.

The Yale team concluded that Russia's isolation from the west has severely weakened its negotiation position with China and India, two countries known for being price-conscious consumers with strong linkages to other significant commodity exporters.

The writers said, "These countries have not been afraid to abuse sanctioned pariah regimes in the past, with China notably pushing heavily discounted oil deals with nations like Iran and Venezuela on a regular basis.

Prices of Russia's prized Urals crude oil have dropped dramatically since the invasion of Ukraine. According to a Bloomberg compilation of information from the Russian Ministry of Finance and the Intercontinental Exchange, Urals was valued at a $1.50 premium to international Brent oil from January through February but has subsequently dropped to a discount of $25.80 versus Brent.

Conclusion

Russia's strategic position as a commodities exporter had "irrevocably worsened," the Yale team concluded, adding that it now dealt with the loss of its once-important markets from a position of weakness.

Due to trade, investment, and financial ties between the combatant nations, the invasion of Ukraine by Russia has significantly dimmed the prospects for global economic development.

Currently, Europe is seeing a temporary interruption in the shipment of natural gas from Russia, its main energy provider.

About The Authors

Kenzo Norman

Kenzo Norman - Kenzo is a journalist-turned-marketer who is fascinated by how storytelling and targeted marketing can result in content that changes businesses. He is responsible for implementing inbound marketing strategies that help his clients raise brand awareness, generate leads, and gain new customers as an Account Executive. Jason enjoys reading on the beach, tracking down mono records, and playing guitar when he is not working.

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