Research & Insights #9

Nord Stream 2. On September 10, Gazprom announced it had completed construction of the Nord Stream 2 pipeline. The $11 billion project, crossing the Baltic Sea, will allow the Russian company to send 55 billion cubic meters of gas directly to Europe each year, bypassing Ukraine.The new pipeline, which was vigorously opposed by the United States and Ukraine, is a testament to the strength of German-Russian relations. Last week, the CEO of Gazprom said they could send gas via the pipeline “by the end of the year and during this heating season”. However, Poland and Ukraine are preparing to challenge the NS2 pipeline’s adherence to European energy market rules. To promote competition, European laws require players such as Gazprom to separate their production, transit and supply activities. A German regional court recently ruled in this direction, which could force Gazprom to give up some control over the pipeline.

Natural Gas. Natural gas prices in Europe have reached new highs ($740 per 1,000 cubic meters), driving up household bills and potentially forcing some industries to ration gas in the event of a harsh winter. Three important factors have driven demand. The first is the long, cold 20/21winter in Europe and Asia, which depleted storage levels. The second is the need for China to consume ever more of this energy. With the rise in liquefied natural gas (LNG), the price of gas is now global and competition for its supply is intensifying. Finally, the demand for gas has increased due to a reduction in electricity production generated by wind power plants. Europe has indeed experienced a hot and dry summer with less wind. On the supply side, there has been a decrease in deliveries from Russia, which can be explained by its need to fill its own stocks and/or its desire to increase prices before the Nord Stream 2 pipeline comes into service. 

Inflation. Food prices are rising rapidly around the world. According to a United Nations index, food costs are near their highest level in a decade. To combat this inflation, Russia stands out from other emerging countries with its hawkish monetary policy. It has just raised its key rate by 0.25 points, for the fifth time in a row, to 6.75%. The increase in prices, particularly of foodstuffs, is a sensitive issue in the run-up to the parliamentary elections to be held from 17 to 19 September. For Elvira Nabiullina, the president of the Central Bank, it should be kept in mind that the country experienced a very long period of high inflation in the 1990s and 2000s. “Our people have only lived under low inflation for very short periods of time”, she said. It is essential to stop this dynamic quickly in order to prevent the public anticipating more inflation, and starting to stockpile goods, causing an exacerbation of the situation.

Russia-Belarus Relationship. Isolated on the international scene, Belarus continues its rapprochement with Russia. From an economic point of view, the two countries plan to introduce common tax and customs measures, coordinate their national payment systems and unify tariff regulations in the railway sector. From a military perspective, Belarus is about to purchase US$ 1 billion worth of military equipment from Russia, while joint military exercises are currently underway. Internal tensions, coupled with Western sanctions, are forcing President Lukashenko to choose between harmony with the EU or with Russia. Moscow remains very cautious on the subject and the adoption of a common currency (the Russian ruble) is not on the table for the moment. Alexander Lukashenko recently stated that Belarus will not engage in a dialogue with the West as long as sanctions are in place.

Research & Insights #8

Economic sanctions. According to a recent study published by the French Institute of International Relations, the West’s economic sanctions against Russia are not effective. Introduced in the wake of the Ukrainian crisis in 2014, the sanctions focused primarily on the defense, energy and financial sectors. The goal was to affect the population’s standard of living and put pressure on Vladimir Putin’s government and its policy toward Crimea. For Russian economist Vladislav Inozemtsev, this did not work for two reasons. First, Russians expect little from their government. They have short-term economic planning, and get used to changes in circumstances quickly, being reliant only on themselves. Second, the Russian economy is stronger than it appears. The government has mitigated the effects of sanctions by “Russifying its economy” and developing a foreign economic policy geared toward non-Western countries.

Climate change. The European Union has drafted its latest long-term budget (2021-27). It prioritizes technological progress and innovation and, in particular, sustainable energy. In July, the European Commission adopted the “Fit for 55” package, an EU initiative to impose a carbon tariff on imports of carbon-intensive products, aiming to achieve carbon neutrality by 2050. For the CEO of oil giant Rosneft, Igor Sechin, this European carbon tax could have a greater impact on the Russian economy than the sanctions currently in place. In Moscow, it is claimed that this law would affect up to 6.5 billion euros of Russian exports such as iron ore, steel, aluminum and pipes. On the European side, the law does not seem to have unanimous support. France fears the socio-political impact, especially on its automotive industry. Recall that the “yellow vests” protests emerged following a law on the increase in fuel prices.

Hydrogen. According to a draft development plan approved in August, Russia is preparing to become a major hydrogen exporter within a few years. The country wants to diversify its gas and oil revenue sources amid the energy transition in Europe and Asia. The idea would be to convert its vast natural gas reserves into low-carbon hydrogen. According to Deputy Prime Minister Alexander Novak, Russia could capture 20% of the global hydrogen market. In July, the government formed a working group of companies, research institutes and federal agencies to develop hydrogen technologies, production and trade. Russia is looking to produce a wide variety of different types of hydrogen but is focusing primarily on blue and turquoise hydrogen, derived from natural gas. The adoption of Germany’s National Hydrogen Strategy in June 2020 has arguably given even greater impetus to Russia’s ambitions to become a hydrogen exporter and preserve its position as an energy supplier.

Russia-Germany relationship. Merkel made her twentieth and last trip to Russia as German chancellor to meet with the Russian president. According to Vladimir Putin, during Merkel’s 16 years in office, the volume of cooperation between Russia and Germany has only increased, despite all the difficulties the countries have faced during this period. Germany remains Russia’s most important trade and economic partner in Europe and second in the world after China. “We have invested $9.5 billion in Germany, while our German partners have invested $18 billion in Russia,” Putin noted. The Russian president hopes that after the upcoming parliamentary elections in Germany and the change of government, the trend towards an improvement in the extent and quality of economic relations between Moscow and Berlin will continue.