Research & Insights #26

#COVID19 – “Over the last three years, you have been subjected to the most massive harmonized, globally coordinated propaganda campaign in the history of the Western world, full stop.” Robert Malone

For the American molecular biologist, Robert Malone, we have been witnessing for the last 3 years a 5th generation war, or psychological warfare, through the “Covid Crisis”. In a conference held on January 21, 2023 in Sweden, he explained how the issue of this war is to shape, control and capture your thoughts, your emotions and your beliefs. “The basic idea is that in the modern era, wars are not fought by armies or guerillas, but in the minds of common citizens. Your mind is the new battlefield. This is not hyperbole. ” He reminds us that in the US, management of this crisis was not primarily led by social and health services, but by the Department of Defense.

#NordStream – “Nord Stream was destroyed by the US and Norway” Seymour Hersh. 

American investigative journalist Seymour Hersh has just revealed how the Nord Stream gas pipelines were allegedly sabotaged. The man is at the origin of many revelations, such as the acts of torture at Abu Ghraib and the massacre of Mỹ Lai in Vietnam, an investigation for which he obtained a Pulitzer Prize. According to him, US Navy divers placed explosives under the Nord Stream gas pipelines last summer. “On September 26, 2022, a Norwegian Navy P8 surveillance plane made a seemingly routine flight and dropped a sonar buoy. The signal spread underwater, initially to Nord Stream 2 and then on to Nord Stream 1. A few hours later, high-powered C4 explosives were triggered and three of the four pipelines were put out of commission.” 

#EconomicSanctions – Who benefits from Russian oil sanctions? 

Russia’s finance minister announced that the country’s oil export revenues fell 40% year-on-year in January, despite a stable export volume. Western sanctions seem to be working because they are forcing Russia to offer significant discounts to Chinese and Indian buyers. These discounts would be US$15 to US$20 per barrel of crude, according to Reuters. For the head of the International Energy Agency (IEA), the price cap reduced Moscow’s revenues by US$8 billion in January alone. Former Gazprom Neft strategy director Sergey Vakulenko disagrees: “Judging by customs statistics, some of the profit was captured by refiners in India and China, but the main beneficiaries must be Russian oil shippers, intermediaries and oil companies.”

#MonetaryPolicy – Russia’s Central Bank keeps its interest rate at 7.5% and its nationwide ban on crypto-currencies. 

Russia’s central bank kept its key interest rate at 7.5%. It said it may have to raise it this year as a growing budget deficit, labor shortages and a weaker ruble pose inflationary risks. It maintained its year-end inflation forecast at 5-7%, with a return to its 4% inflation target in 2024. The bank expects GDP growth between -1 and +1% in 2023 and +0.5 and +2.5% in 2024. Regarding crypto-currencies, President Elvira Nabiullina said that the institution remains opposed to their use in the domestic market, but is ready to allow them for settlements with foreign countries.

#Journalism – After closing Russian media RT & Sputnik, the French government threatens C8 and CNews. 

Rima Abdul Malak, the French Minister of Culture, speaking on radio France Inter on Thursday, February 9, said she was “worried” about “threats to freedom of expression and creation” of channels CNews and C8. She asked the television regulator Arcom (ex-CSA) to intervene against the channels CNews and C8, accused, among others, of not respecting their obligation of pluralism. The Minister of Culture cites “a number of examples” that have occurred “in recent months and years” within the media group owned by Vincent Bolloré. She said that Arcom could withdraw the radio frequency made available to them if these channels did not meet their obligations.

#EndofDollar – The five factors that threaten the hegemony of the US dollar according to Ray Dalio. 

The founder of the world’s largest hedge fund, Ray Dalio, recently published a note outlining his views on the evolution of the international monetary system from 1945 to the present. In his opinion, there are five trends that weaken the US dollar and the stock of dollar-denominated debt:
1) The supply of dollar-denominated debt issued in the markets is far greater than the demand. To compensate for this shortfall, the US central bank has been buying large amounts of debt with the money it has been printing since 2008 (“quantitative easing”);
2) The growing desire of foreign countries to diversify the assets of their central banks and sovereign wealth funds away from the US dollar. These countries are too concentrated in dollars and are cautiously pursuing diversification;
3) Foreign countries are increasingly doing more trade and financial transactions with China than with the United States. Therefore, it is natural, both from China’s and other countries’ points of view, to denominate more transactions in Chinese RMB;
4) US sanctions are causing some foreign holders of dollar-denominated bonds to fear that their assets will be sanctioned;
5) Political and social conflicts in the US, particularly over debt limit management, are damaging the credibility of the country and its policies.
Ray Dalio considers that “the probability of a major restructuring of debt assets and liabilities denominated in the major reserve currencies (dollar, euro, yen) over the next ten years is about 60%.”

Research & Insights #25

#UkraineWar – “If Russia wins, the imperial system of the United States will collapse,” announces Emmanuel Todd

Anthropologist and demographer Emmanuel Todd believes that World War III has begun. “It is obvious that the conflict, by moving from a limited territorial war to a global economic confrontation, between the whole of the West on the one hand and Russia backed by China on the other, has become a world war.” The man who predicted the fall of the Soviet Union in 1976 by observing the rise in infant mortality believes that the United States is in many ways on the decline. “In America, mortality is rising and life expectancy is falling. All the newspapers write: the West is normal and Putin is a mental patient. Russians are bloodthirsty monsters. Demographics say otherwise: Russia is more stable and its society has become more civilized.”

#EconomicSanctions – “The impact of sanctions against Russia is disappearing” – Jacques Sapir

According to the French economist, the sanctions aimed at depriving the Russian economy of its imports of goods and services are no longer effective. The recent study by the American think tank “Silverado” confirms that Russian imports from various countries, including China, have replaced those from Western countries. It remains difficult to estimate the share of imports from friendly countries (e.g. Turkey, Armenia or Kazakhstan) which are, in reality, goods supplied by countries supposedly applying sanctions against Russia. As Jacques Sapir points out, “if imports from EU countries have fallen sharply, they have fallen only slightly in the case of the USA”. The latest IMF forecasts predict a growth of 0.3% of GDP in the Russian economy in 2023.

#UkraineWar – Is it in America’s interest to keep the war in Ukraine going?

A recently released study by the Rand Corporation assesses that a prolonged conflict in Ukraine would not benefit the United States. The think tank that advises the U.S. military reveals that restoring full territorial control of Ukraine is not that important, and imposes costs that far outweigh the benefits. According to the organization, the excessive focus on Ukraine distracts from the second front of the war against a new player: China. “The ability of the United States to focus on its other global priorities – in particular, competition with China – will remain limited as long as the war absorbs senior U.S. policymakers’ time and military resources. A longer war that increases Russia’s dependence on China will give the latter advantages in its competition with the United States.”

#De-dollarization – “Gold is money. Everything else is credit.” J.P. Morgan

In 2022, central banks bought 1,136 tons of gold, the highest level in 55 years, according to the World Gold Council. The organization attributes the spike to geopolitical tensions and high inflation, noting that the majority of these purchases were unreported. Central banks are net buyers of the yellow metal for the 13th consecutive year. One has to go back to 1967 to find such a volume of purchases. This dynamic led a few years later to the end of the Bretton Woods Agreement. On August 15, 1971, U.S. President Richard Nixon announced on television the end of the convertibility of the dollar into gold. In concrete terms, the United States defaulted on its promise to exchange its dollars at a fixed rate for gold ($35 per ounce).

#MultipolarWorld – For Zoltan Pozsar, a multipolar world requires a new international monetary system

The monetary order based on the US dollar since 1945 is threatened by de-dollarization and central bank digital currencies (CBDCs), according to Zoltan Pozsar, economist at Credit Suisse. While de-dollarization is a frequently discussed topic, CBDCs are expected to accelerate this transition. Indeed, he says, the Chinese have realized “that financial sanctions are implemented through the balance sheets of western banks, and that these institutions form the backbone of the correspondent banking system that underpins the dollar.” To internationalize the renminbi without risking Washington’s sanctions, China must develop a new correspondent financial network, “all without referencing the dollar or touching the western banking system”. According to the IMF, more than half of the world’s central banks are exploring or developing digital currencies.

#NordStream – Who sabotaged the Nord Stream 1 and 2 gas pipelines?

Recently heard on the Senate floor, U.S. Undersecretary of State for Political Affairs Victoria Nuland said, “Senator Cruz, like you, I am, and I think the administration is, very gratified to know that Nord Stream 2 is now, as you like to say, a hunk of metal at the bottom of the sea.” In the absence of conclusive evidence, German experts have made no progress in their investigation. Prosecutor General Peter Frank told the newspaper “Welt am Sonntag” that “Russia’s responsibility for the Nord Stream explosions cannot be proven.” Meanwhile, the German export-based economic model is in crisis. According to German economist Holger Zschaepitz: “The country’s export surplus has been more than halved year-on-year in 2022 due to rising energy costs, the lowest figure since 2000 and the fifth consecutive decline.”

#EconomicWar – Europe increases sanctions against Russian oil

Since February 5, the European Union has banned almost all maritime imports of Russian refined oil. This new measure comes two months after the one targeting crude oil. In addition, companies based in the EU, the G7 and Australia are prohibited from providing services allowing the transport of Russian oil by sea (trade, freight, insurance, shipowners, etc.) if the price per barrel exceeds a revisable ceiling. The purpose of these sanctions is to limit Russia’s oil revenues, while maintaining Russian energy supplies to the market. Russia is circumventing these sanctions by developing its own fleet of tankers, which it operates and insures itself, as do its main customers, China and India. According to trading giant Trafigura, the “shadow fleet” of vessels carrying Russian oil around the world totals about 600 tankers.

<strong>How does Russia export its oil? (4)</strong>

The Group of Seven (G7) countries and Australia have agreed to cap the price of Russian marine crude oil at US$60 per barrel. For some, this limit is too high and will not significantly reduce Russia’s revenues. For others, this cap is too low and could have a negative impact on inflation control. In this fourth article, we will focus on how Russia exports its oil by sea to Asia.

Source: Nakhodka Maritime Services

In the weeks before Russia’s military intervention in Ukraine, less than two-fifths of the crude oil loaded on tankers in Russian ports was destined for Asia. Today, that proportion is two-thirds, with China and India being the two main consumers of this black gold.

In November, Russia pumped an average of 10.9 million barrels per day of crude and a type of light oil called condensate, according to Energy Ministry figures. This is the highest level in eight months.

With the implementation of sanctions, Russia is trying to continue to redirect its crude oil exports to Asia and so limit a possible decrease in its production. Moscow has reaffirmed it will not sell oil below the G7 price cap, as it considers such a restriction unacceptable and contrary to market and World Trade Organization rules.

The country is expected to continue to offer deep discounts to international benchmarks to ensure that its oil finds a buyer. In recent days, discounts for Russian Urals oil have increased significantly, pressured by record freight rates for tankers carrying Russian oil. 

Russian “Ural” grade oil was trading at about US$52 a barrel at the export terminal. This is a discount of US$33.28 vs. Brent. In comparison, the average markdown in 2021 was US$2.85. “We see the price cap is something that benefits China, benefits India, and benefits all purchasers of Russian oil,” U.S. Treasury Secretary Janet Yellen said. 

Indeed, India is not ready to give up its purchases. Its oil minister recently said he had a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy oil everywhere,” he added.

 Source: Bloomberg

To circumvent the sanctions, Moscow has been working in recent months to build a logistics network to ensure that its crude continues to flow to global consumers. According to shipping brokers, Russia has assembled more than 100 tankers and spent US$16 billion expanding its fleet.

Traders have indicated that Russia needs more than 240 tankers to maintain its current export flow. Operators linked to Russia are suspected of having purchased as many as 29 supertankers in 2022. Also called VLCCs for Very Large Crude Carriers, they are capable of carrying more than 2 million barrels.

On the insurance side, Moscow has strengthened its own marine insurance company, the Russian National Reinsurance Company (RNRC). It has been recapitalized and has received a guarantee from the Central Bank of Russia (CBR). This gives it “infinite coverage”.

Uninsured ships cannot enter international ports or shipping lanes and some 95% of all marine insurance is issued by London-based companies. Russia is replacing all London-based policies with Moscow-based insurance to avoid sanction measures.

India and Turkey have said they will recognize Russian insurance as a cover, effectively ignoring Western sanctions. China, on the other hand, fears US retaliation and has been more circumspect. The issue of whether or not to accept Russia’s insurance remains highly politicized.

According to the Russian Minister of Transport, Alexander Poshivay, China does not yet recognize all the protection and indemnity insurance and reinsurance certificates issued to shipowners by Russian insurers.

Russia will, therefore, also have to rely on the public or private fleets of buyer countries such as India and China, whose governments have the means to insure them.

Finally, it is interesting to note that Japan is participating in the sanctions on the cap on Russian crude oil, except for that which is imported from the Sakhalin-2 plant. This decision was made by Tokyo to ensure its energy security. 

Japan already imports about 90% of its oil from the Middle East. Last year, it received about 34 million barrels of oil from Russia, accounting for 3.6% of the country’s total supply.

<strong>How does Russia export its oil? (3)</strong>

In 2014, American politician John McCain said, “Russia is a gas station masquerading as a country.” It turns out that the majority of Russian oil shipped around the world is transported by tanker. In this article, we will look at how the country exports its oil by sea to Europe.

Source: Mitsui O.S.K. Lines

Historically, Russia has been a major supplier of oil to Europe and will remain so in 2022. European refiners are scrambling to make deals before EU restrictions on imports and shipments take effect.

At the beginning of this year, Russia was exporting 11 million tons of crude oil by ship to the EU every month. This represented 60% of all Russian crude oil exports by sea, and 30% of EU crude oil imports by sea. 

In the first half of November, Russian crude oil exports by sea to the EU amounted to 3.7 million tons, or 38% of all Russian crude oil exports by sea, and 20% of European crude oil imports by sea.

The International Energy Agency (IEA) predicts that Russian oil production will fall by nearly 2 million barrels per day in 2023 compared to pre-war production, a reduction of nearly 20% due to sanctions imposed by the G7 countries. 

These estimates should be taken with a pinch of salt, since last March the IEA predicted that Russian production would fall by 25% in the first months of the war.

Europeans are compensating for the loss of Russian crude oil volumes by increasing supplies mainly from the Middle East, but also from Africa, Norway, Brazil and Guyana. 

The task of replacing refined products from Russia is more complicated. There is already a severe shortage of refining capacity in the market.

In October, diesel imports into the EU increased by nearly half from pre-war levels, due to strikes at French refineries and seasonal maintenance. According to the International Energy Agency, EU sanctions on Russian diesel exports will increase competition in an already “exceptionally tight” market.

Russia controls some of the largest refineries in the EU through companies such as Rosneft and Lukoil. To ensure its energy security, Germany recently took control of the Schwedt refinery which supplies about 90% of Berlin’s fuel needs. Italy, for its part, is considering buying the ISAB refinery, owned by Lukoil, located in Sicily.

On the other hand, Bulgaria has agreed with the Lukoil refinery located on its territory that it would continue to be supplied with Russian crude oil.  This would constitute a violation of the EU sanctions regime, as Bulgaria imports Russian oil by ship (Black Sea).

Source: Bruegel

Europe imports Russian oil by sea from three main areas: the Baltic Sea (Primorsk and Ust-Luga) in northwest Europe, the Black Sea (Novorossiysk), and the Arctic (Murmansk). 

Before the conflict broke out in Ukraine, about two-thirds of Russian crude oil delivered by ship to Europe left from the Baltic ports of Primorsk and Ust-Luga. The Netherlands, with the port of Rotterdam, was the largest importer of oil from Russia.

At the moment, negotiations on limiting the price of Russian oil are at an impasse. According to the New York Times, opinions within the European Union are currently “too divided”. 

The price cap is a ban on shipping, insurance and reinsurance companies handling Russian crude oil shipments worldwide, unless they are sold at a price not exceeding that set by the G7 and its allies.

The latest news is that the G7 countries are in talks to cap the price of Russian oil at US$65 and US$70 a barrel. Analysts believe that this measure, even if approved, should not have a significant impact on Moscow’s oil revenues. 

The Kremlin has repeatedly stated that Russia has no intention of supplying oil to countries that support a price cap.

Either the G7 countries try to force the Russians to sell oil below the market price and the Russians will stop exporting, which will cause the price of oil to rise. Or the West agrees to buy Russian oil at the market price and they will get the quantity of oil they want.

Western leaders clearly still do not understand why these sanctions are doomed to fail. They cannot control the amount of oil exported by Russia and its price at the same time. They have to choose one of the two. 

Nearly 300 days after the war began and despite countless diplomatic initiatives to stem the flow of dollars to Russia, the country is producing almost as much oil as it did before the invasion. And regardless of the sanctions, Russian oil will continue to reach Europe.

According to Nikkei Asia’s report, ship-to-ship transfers are one of the ways in which sellers and buyers of Russian oil conceal the origin of supplies. This practice allows sanctioned commodities to continue to be traded.

During the first six months of the conflict in Ukraine, 175 transfers took place off the Greek coast involving Russian tankers compared to only 9 transfers during the same period last year.

The second way to circumvent sanctions is to import Russian oil from a third country that does not impose restrictions. As a reminder, the possible sanctions of the G7 countries will not apply to Russian crude oil, imported by a third country and then resold after refining to a European country.

<strong>How does Russia export its oil products ? (2)</strong>

Russia is a major supplier of oil in the world, exporting about 13% of total oil trade. The recent deterioration of Russia’s relations with the West is forcing Moscow to accelerate its pivot to the East. In this second article, we will examine the pipeline infrastructure that the country has to export its crude oil to Asia.

Only 12 years ago, Russia exported virtually no oil to Asia, as all of it was sold to Western markets. Today, the world’s second largest oil exporter sells as much oil to China as Saudi Arabia.

Russia has developed during the last decade significant crude oil export capacity through pipelines to ship large volumes of crude to Asia. This policy is part of an effort to reduce its dependence on European markets and tap into China’s growing demand for crude oil.

In 2012, Russia launched the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline. With a capacity of 1.6 million bpd, this 4,740 km long pipeline transports crude oil to Asian markets such as China, Japan and South Korea.

 Source: IHS Markit (S&P Global)

The ESPO-1 pipelines connect the West Siberian fields (Taishet) to Skovorodino in the Amur region. At Skovorodino, one section of the pipeline is diverted to the Chinese mainland while the ESPO-2 is directed to the Pacific Ocean terminal at Kozmino, near Vladivostok. From there, the oil can be loaded onto tankers for shipment to the Pacific basin. In 2021, Kozmino loaded about 720,000 bpd

According to Nikolay Tokarev, president of Transneft, Russian oil deliveries to Asia have increased and the ESPO pipeline is operating at maximum capacity.

Russia has a second route to supply oil to mainland China via a pipeline crossing Kazakhstan via the Atasu-Alashankou pipeline.Russia’s Rosneft currently pumps 200,000 bpd via Kazakhstan. According the Kazakh Energy Minister Bolat Akchulakov, the capacity of the line in Kazakhstan is 400,000 bpd.

After the outbreak of war in Ukraine, the Russian government ordered a plan to intensify the redirection of energy infrastructure – pipelines, ports and railroads – to the east of the country, but the task remains complex in the near term.

Russia’s infrastructure remains heavily oriented towards the West. The majority of Russian oil is destined for Europe – about 140 million tons via the Druzhba pipeline, compared to about 40 million tons for China via the ESPO pipeline.

Insufficient pipeline capacity limits the amount of additional oil Russia can send to mainland China. This would require increasing the capacity of ESPO by 50%. Expansion of ESPO-2 and the port of Kozmino is also a possibility, but it would involve additional costs and require years of preparation.

Despite the rapprochement between Russia and China, it is not clear that China wants to increase its purchases of Russian oil. Beijing’s energy policy emphasizes diversification and therefore does not want to create too much oil dependence on Russia.

<strong>How does Russia export its oil? (1)</strong>

Russia exports seven million barrels of crude oil and refined products a day. As price cap sanctions are about to take effect, it is time to consider how Russia can continue to export this commodity, crucial for the Kremlin’s finances and for the global economy. In this first article, we will focus on how the country exports its oil by pipeline to Europe.

Since the beginning of the conflict, Russia has often been associated with gas issues. But as far as its finances are concerned, it is oil that generates the most money. In 2021, oil and petroleum products being sold on the global market earned Russia three times more money than gas.

Crude oil is considered the world’s most important commodity as it is the main source for global energy production. After extraction, crude oil is refined and processed into various forms, such as gasoline, kerosene and asphalt, for onward sale to consumers.

As of December 5, the G7 countries will not allow shipping and insurance companies to provide services to tankers carrying Russian crude oil, unless the oil has been sold at a specific price or lower. On February 5, 2023, the ban will also extend to oil products exported from Russia.

Russia is anticipating these restrictions by redirecting its exports to buyers not involved in the sanctions, mainly in Asia. This represents a real challenge for the Russian oil industry. If it is not able to ensure deliveries, it will be forced to close oil fields because the country does not have strategic oil reserve options. This will hurt its production capacity and may drive up the world price of oil.

Today, Russian crude oil is delivered to European consumers by pipeline, via the Druzhba pipeline (which means “friendship” in Russian). Operated by Russia’s state-controlled giant Transneft, it is one of the largest pipelines in the world, with a length of 5,000 km. It has the capacity to transport 2 million barrels per day and was built in 1958 during the time of the Soviet Union to supply the allies of the communist bloc.

Source: Kpler / FT research

The pipeline connects the oil fields of Western Siberia to major refineries in Europe, where the fuel is transformed into diesel, naphtha, gasoline, lubricants and other commodities that are sold both within and outside of the EU.

In Belarus, the pipeline is divided into a northern and a southern branch. The northern branch, which accounts for about two-thirds of the total flow, supplies refineries in Poland and Germany. Even if pipeline shipments from Russia have been excluded from the EU’s recent sixth package of sanctions both countries have pledged to stop purchasing through this channel by the end of the year.

On the other hand, the southern branch, which crosses Ukraine and supplies refineries in Hungary, Slovakia and the Czech Republic, should continue to be used for years to come. As landlocked countries, they have negotiated with the EU for permission to import Russian oil to ensure their energy security.

Hungary and Serbia (which is not part of the EU) recently announced the construction of a branch to the Druzhba pipeline so that Belgrade could receive Russian crude. Currently, Serbia obtains its oil supplies mainly through Croatia and the Adriatic Sea. This link is likely to be severed as soon as the EU implements its sanctions on Russian crude oil deliveries by sea from December.

The European Union will ensure that countries that buy Russian oil cannot resell it with or without processing. Therefore, analysts do not expect an increase in pipeline deliveries via the southern part of Druzhba.

Why capping Russian oil prices is a bad idea?

The G7 countries want to cap the price of oil sold by Russia. The aim is to reduce Moscow’s revenues and lower the world price of black gold. This strategy is risky and will probably have the opposite effect.

Russia is one of the world’s largest oil exporters. Before the conflict in Ukraine began, the country exported more than 10 million barrels of oil per day, or about 9% of global crude exports. Despite Western sanctions, these figures have remained virtually unchanged.

During the first six months of the war, Moscow has earned 158 billion EUR from the sale of oil and gas, according to the think-tank Centre for Energy and Clean Air Research (CREA). Two-thirds of this revenue comes from the export of crude oil and refined products.

The United States and the European Union want to reduce Moscow’s oil revenues by capping the price of its oil. From 5 December, G7 countries will ban banks from financing the purchase and sale of Russian oil, insurance companies from insuring shipments and ports from unloading oil transported by tanker if it is traded above a ceiling price yet to be determined.

The question of the level of the price cap is tricky. If it is too low, it could trigger Russian retaliation by shutting down large swathes of oil production, which would drive up world crude prices and deepen the global energy crisis. If the price is too high, Russia will continue to make large profits and finance its war effort.

According to CREA, 60% of the tankers carrying Russian oil are owned by European companies and nearly three out of four ships are insured or reinsured in Britain, notably by Lloyd’s of London, or Norway. “The proposal seeks to leverage Western dominance in shipping, banking and marine insurance. It amounts to forcing the world into a cartel of buyers,” the Bruegel Institute points out. The embargo on all services related to oil exports is intended to make shipping almost impossible

The US, UK, Canada, Germany, France, Italy and Japan are betting that Russia will need US dollars so badly that it will agree to sell its oil despite the price cap. But the reality could be very much different.

On 7 September, Russian President Vladimir Putin said at the economic forum in Vladivostok that such a move “would be an absolutely stupid decision”. “We will not supply anything at all if it is contrary to our interests, in this case economic (interests),” he said. “No gas, no oil, no coal, no fuel oil, nothing.”

More recently, at an OPEC+ meeting in Vienna, Russian Deputy Prime Minister Alexander Novak reiterated the warning that his country will not sell oil to countries that adopt such a cap. “We believe that this tool is in breach of all the market mechanisms. It could be very pernicious for the global oil industry… We will be ready to cut production (deliberately)”. 

It turns out that other oil producers do not look favourably on the G7 decision to cap Russian oil prices either. According to Bloomberg energy expert Javier Blas, they see the decision as a terrible precedent for consumers trying to dictate oil prices to producers.

This is probably one of the reasons why OPEC+ decided last week to collectively cut oil production by 2 million barrels per day, or about 2% of global oil consumption. Officially, the UAE energy minister said it was a “technical decision, not a political decision”. Saudi Arabia added that the production cut was justified by market conditions amid fears of a global recession.

In fact, this OPEC+ decision could mark the beginning of the US losing control of the global oil market. As a reminder, US President Joe Biden visited Saudi Arabia in June to ask for an increase in oil production, but without real success. “There’s going to be some consequences for what they’ve done with Russia,” Mr. Biden told CNN’s Jake Tapper in an interview broadcast on Tuesday night.

Finally, the success of a Russian oil price cap would require a united front from all global buyers. It is unlikely that China and India, and even Turkey, will agree to submit to these sanctions. Since the start of the war, India and China have made up for most of the decline in Russian shipments to Europe.

Russia would then send more barrels to these countries using mainly Russian, Chinese and Turkish flagged vessels. Russia would continue to offer discounts, but not up to the ceiling set by the G7.

On 5 October, Patrick Pouyanné, CEO of TotalEnergies, told at the Energy Intelligence Forum that a cap on Russian oil prices would benefit Russian President Vladimir Putin.

“I think it’s a bad idea because it’s a way to give the leadership back to Vladimir Putin and I would never do that.”

“What I am sure is that if we do that (cap), then Putin will say that ‘we don’t sell my oil’ – and the price will not be at $95, it will be at $150.” Pouyanné said.

Japan is facing an energy security crisis

The supply of liquefied natural gas to the world’s third largest economy is in jeopardy. While Japan is participating in Western sanctions against Russia following its military intervention in Ukraine, Moscow has made it clear to Tokyo that its participation in the Sakhalin II project is not a given.

Japan is the fourth largest exporting country in the world after China, the United States and Germany. Its economy is heavily dependent on its access to abundant and cheap energy to manufacture vehicles, machinery and electronic equipment.

Like all developed nations, Japan’s energy policy attempts to balance access to cheap energy, security of supply and the reduction of GHG emissions. 

Japan’s energy security is fundamental because as an island, the country has limited natural resources and lacks international pipelines and electrical connections.

According to the International Energy Agency, the country produced 30% of its electricity from nuclear power until 2011. The Fukushima nuclear disaster led to a total suspension of the nuclear fleet. The latter has only partially restarted and now produces less than 10% of the country’s electricity, making Japan more dependent on fossil fuels.

Dependence on imported fossil fuels reached 94% of energy supply in 2014. Several factors such as the restart of nuclear power, the expansion of renewable energy and the decrease in energy demand have reduced this share to 88% in 2019. This is still the worst self-sufficiency rate among IEA member countries after Luxembourg.

Natural gas plays a critical role in energy supply in Japan, representing the largest energy source in electricity generation. With domestic production being limited, Japan imports nearly all of its natural gas in the form of liquefied natural gas (LNG). 

Japan is the world’s largest LNG importer, accounting for 22% of global trade in 2019. About 10% of LNG imports come from Russia, specifically from Sakhalin 2.

Japan’s total primary energy supply by source

The Sakhalin-2 project

The Sakhalin-2 project, located on the Sakhalin Island is one of the biggest integrated oil and LNG projects in the world. It also represents the first offshore gas project and the first LNG plant in Russia. 

Before the military operation in Ukraine, the project was operated by Sakhalin Energy Investment Company Ltd, a joint venture between the Russian state-owned Gazprom (50%), the British company Shell (27.5%), and the Japanese companies Mitsui (12.5%) and Mitsubishi (10%). 

The project infrastructure includes three offshore platforms, an onshore processing facility, 300 kilometres of offshore pipelines and 1,600 kilometres of onshore pipelines, an oil export terminal and a liquefied natural gas plant.

The LNG plant was officially inaugurated on February 18, 2009 and the first cargo began its journey to Japan in March 2009. The project produces 10 million tons of LNG per year, or 4% of the current global liquefied natural gas market, of which six million tons are shipped to Japan.

The Sakhalin-2 project is of great importance to Tokyo, particularly because of its geographical proximity. While LNG tankers can take more than two weeks from Qatar and three weeks from the United States to reach East Asia, Sakhalin LNG tankers can arrive in a few days.

The Sakhalin-2 project supplies LNG to the Asia-Pacific region

  Source: Sakhalin Energy

Tensions are rising between Moscow and Tokyo

In late February, Shell announced its intention to withdraw from the project following the Russian military intervention in Ukraine.

For their part, Japanese companies Mitsui and Mitsubishi have maintained their stakes in the gas project while Japan participates in Western sanctions against Russia by banning the export of goods that could support the development of Russian industry.

Recently, the country also openly discussed with the G7 to cap the price of Russian oil exports at half the current rate, which of course irritated Moscow.

On June 30, Russian President Vladimir Putin signed a decree to transfer all assets and rights of the Sakhalin project from foreign to Russian jurisdiction. A Russian limited liability company will be formed to control all assets of the project. The foreign shareholders have one month to decide whether they will remain in the project. If so, they will join the capital of the new company with the same shareholdings. Otherwise, they will lose their assets.

Putin’s decision caused shares of Japanese companies Mitsubishi and Mitsui to fall 6% immediately after the news broke earlier this month. The Japanese government has openly asked Japanese companies to make the transfer. 

Currently, it is very difficult to replace this gas. Neither Qatar, Australia nor the United States currently have significant volumes of LNG available. Liquefied natural gas is a scarce commodity and finding consumers is not a problem.

Reuters reports on July 19 that Japan’s Nippon Steel Corp, the world’s second largest steelmaker, has purchased a cargo of LNG at the highest price ever paid in the country.

The signal sent by Moscow seems clear: Tokyo must stop imposing ever more sanctions on Russia if it wishes to maintain its energy security.

Vladimir Putin signs the decree to create the new company

Source: Kremlin

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Winter is coming to Europe

In the midst of an energy crisis, the gas issue has become one of the main topics of tension between Russia and Europe. On July 11, the Nord Stream 1 pipeline commenced a ten-day maintenance program, completely interrupting gas deliveries to Europe. Many commentators already see this as the end of Russian gas deliveries. If this is the case, it would be a disaster for the Old Continent. 

“Everyone should know that by and large we haven’t started anything yet in earnest. At the same time, we don’t reject peace talks. But those who reject them should know that the further it goes, the harder it will be for them to negotiate with us.” These are the words spoken by Vladimir Putin on July 7 at a meeting with parliamentary leaders.

The Russian president has remained ambiguous in his threats against the West, but everyone is guessing that gas is now at the heart of the economic war.

France’s Minister of Economy recently warned that Russia is likely to totally shut off its sale of natural gas to Europe. “Let’s get ready for a total shutdown of the Russian gas supply,” he said. “This is the most likely event”.

Nord Stream 1 is the main route for Russian gas to Germany, providing 55 billion cubic meters (bcm) per year. Since Russia reduced the capacity of Nord Stream 1, the European benchmark price of gas (Dutch TTF) has doubled to 170 EUR per megawatt hour, an increase of 145% since the beginning of the year.

Gas is already eight times more expensive in EU than in the US

Europe’s heart is under attack

Energy is vital to an economy, and Russian gas is crucial to Europe’s largest economy, Germany. It is used to heat the majority of households and to power the country’s industrial export machine.

In recent months, gas volumes from Russia have fallen to about 40% of their usual level. Moscow attributes this drop in throughput to the sanctions it faces, claiming that these have hampered its access to spare parts.

Economy Minister Habeck fears a social breakdown in the event of an energy shortage. “Companies would have to stop production, lay off their workers, supply chains would collapse, people would go into debt to pay their heating bills,” he said.

Germany is already suffering from rising energy prices. For the first time since 1991, the country recorded a negative trade balance of less than one billion EUR in May.

The economic research institute Prognos published a study in June explaining that, in the event of a complete shutdown of Russian gas, Germany’s gas reserves would run out after four weeks.

While households and social services would continue to be supplied with gas, the shutdown would particularly affect the steel, chemical and glass industries. Forecasts indicate a 50% drop in their production volume.

Europe’s leading economic power is crumbling

The Eurozone is in Crisis

The single currency recently fell to parity with the US$ for the first time in nearly 20 years.

The decline of the EUR against the US$ is mainly due to the restrictive monetary policy of the U.S. Federal Reserve, which combines interest rate increases and quantitative tightening. Rising energy prices and the collapse of German industry are adding to this dynamic.

The weakness of the EUR is driving up the price of imports, especially energy, at a time when policymakers are already struggling with record inflation.

The European Central Bank is in a very difficult position. If it does not raise interest rates, the EUR is likely to continue to plummet against the US$, which will continue to fuel a rise in inflation driven by higher energy prices. 

But if it raises interest rates, it risks causing a recession that will be very hard on southern Europe and could cause fragmentation within the Eurozone.

A country like Italy, with a debt of about 150% of its GDP, could quickly be strangled by the need to refinance its excessive debt burden. 

Recently, the spread between Italian and German 10-year bonds has widened. This indicates that investors are beginning to doubt the ability of the Italians to meet their payments relative to the Germans. It reached 2.52 percentage points on June 14. 

Europe will probably again face a systemic risk related to the sovereign debt of its member states.

Confidence in the Eurozone is eroding

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Sanctions against Russia – a fiasco?

Responding to Russia’s military intervention in Ukraine, the West introduced major sanctions against Moscow. The objective was to inflict maximum pain on the Russian economy to encourage a change in Moscow’s policy. Now, with the conflict more than four months old, it is time to make a first assessment on the effectiveness of Western sanctions.

“One of the great mistakes is to judge policies and programs by their intentions rather than their results”. Following Milton Friedman’s philosophy, we will try to put aside moral considerations to focus on the impact of sanctions, and, for the sake of simplicity, we will group the main sanctions into four categories according to their objective.

1. Generate a crisis of confidence in the Russian economy

As revealed by the French Minister of Economy Bruno Le Maire, the initial purpose of the sanctions was to “cause the collapse of the Russian economy.” The most important measure in this regard was the freezing of the assets of the Russian central bank. The idea was to prevent the country from being able to use its foreign currencies in US$ and EUR to support a potential massive depreciation of the ruble. 

Despite a sharp decline at the beginning of the war, the Russian ruble has now recovered much of its value against other world currencies, made possible by government capital controls and a steady flow of payments for the country’s oil and gas exports. As a result, Russian confidence in their economy has actually increased, while the IMF believes that the freezing of Russian assets has weakened the position of the US$ as an international currency. Russia has now set up ruble payment systems that the West has no choice but to follow.

2. Cut Russia’s income stream

On May 31, Europe’s leaders agreed to boycott 90% of imports of crude oil and refined petroleum products from Russia by the end of the year. Presented as a powerful demonstration of solidarity with the Ukrainian people, this decision is probably the most counterproductive one ever taken by the Europeans. 

Oil and gas are inelastic commodities, so their price can vary considerably without affecting the quantity demanded. By trying to reduce the volumes of Russian oil sold on the markets, the West is driving up the price per barrel. To lower its price and resulting revenues generated by the Russian state, they should be doing exactly the opposite and increase their oil supplies as much as possible 

“With higher crude oil and product prices globally, Russian oil export revenues are estimated to have increased by US$1.7 billion in May to about US$20 billion,” the International Energy Agency said in its monthly oil report.

3. Isolate Russia from the rest of the world

On March 2, 2022, less than a week after the Russian invasion began, the United Nations General Assembly passed a resolution demanding that Russia immediately end its military operations in Ukraine. Of the 193 UN states, 141 states voted in favour of the motion, 35 countries abstained and 5 states voted against. 

On April 7, 2022, a new motion was proposed to exclude Russia from the UN Human Rights Council. Still symbolic, this measure was more restrictive than the earlier one and provoked quite different reactions. 93 states voted in favour, 58 countries abstained and 24 countries voted against. 

Barely a month after the beginning of the conflict in Ukraine, the world was already divided into two camps. On one side, developed countries including the United States, Europe, Japan, Australia and New Zealand were seeking to maximize sanctions and the isolation of Russia for geopolitical reasons, and, on the other, emerging countries such as China, India, Mexico, Brazil, South Africa, the Middle East and a good part of Africa were wanting to abstain or refuse the isolation of Russia for geo-economic reasons

The West’s inability to mobilize more states to isolate Russia is a major contributor to the failure of sanctions.

4. Limit Russia’s imports

The measures most successful at affecting the Russian economy are those that are limiting its imports of high-tech manufactured goods and its access to high-tech services. As soon as the war began, Moscow stopped publishing monthly data on exports and imports. To estimate Russian imports, we would need to calculate exports to Russia from its major partners.

We find that exports to Russia from so-called “unfriendly countries” have fallen by 60%, compared to average levels from the second half of 2021. Interestingly, exports from “friendly countries” have also fallen by 40%. But Russian imports still remain significant and the West may introduce tougher secondary sanctions to ensure that their technologies and goods are not re-exported to Russia by “friendly countries”. 

China is the country to watch – it is able to replace a large part of Russian imports which were coming from Western countries before the war. According to the Peterson Institute for International Economics (PIIE), since the invasion, Chinese exports to Russia have dropped by 38%. This suggests that Chinese companies may be afraid of retaliatory measures that the Americans might impose if they support Russia too openly.

It is still too early to measure the full impact the collapse of imports will have on the Russian economy, but, given the experience the country has accumulated since 2014, it is highly likely that it will be able to circumvent them.

According to the European Union: By aiming to undermine the Kremlin’s ability to pursue the invasion, sanctions are contributing to restoring peace in Ukraine and the region. Together with other EU policies, sanctions are a concrete means to uphold the EU values of human dignity, freedom, democracy, the rule of law and human rights.” 

If Western sanctions against Russia are based on noble intentions, in terms of effectiveness, after four months of conflict, they are a fiasco. And this fiasco could have fatal consequences for the rest of the world. Historian Nicolas Mulder recently published a history of sanctions in which he convincingly demonstrates that sanctions often precipitate the wars they are supposed to prevent.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.