Research & Insights #30

#Aviation – The war in Ukraine is redrawing the map of the skies

From the very first days of the conflict in Ukraine, Westerners and Russians have been closing off each other’s airspace. This ongoing blockade is beginning to cause problems for Western airlines as China re-establishes its air links after three years of confinement. Chinese (and Middle Eastern) airlines have the right to fly over Russian territory, unlike their European or American counterparts, giving them a significant competitive advantage. Indeed, the latter are forced to fly longer routes to Asia, increasing their fuel and labour costs. Finnish airline Finnair is particularly hard hit by these restrictions. Over the past two decades, the airline has developed Helsinki into a hub, taking advantage of its position close to efficient air routes (the Great Circle route) between Europe and Asia. Flights between Helsinki and Tokyo now take over 13 hours, compared with 9.5 hours before the closure of Russian airspace. Russian airspace restrictions are also hampering the resumption of direct flights between the USA and China. US airlines are pressuring the Biden administration to prevent Chinese competitors from using Russian airspace. According to Bloomberg, in 2019, before the pandemic, direct flights between the US and China operated by carriers from both countries averaged 340 per week. Today, there are just two dozen a week.

#Gas – Erdogan confirms his intention to turn his country into a “gas hub”

Turkish President Recep Tayyip Erdogan has just reaffirmed his intention to develop a “gas hub” in Turkey, enabling Russian natural gas to be transported to Europe. The project aims to strengthen Turkey’s position as a key player in energy distribution and allow Russia to continue delivering gas to Europe. With its gas, Moscow wants to reproduce the sales pattern of its crude oil, currently sold to India and then re-exported to Europe after refining. Indeed, it’s a safe bet that once Russian gas reaches the Turkish pipeline network, it will be difficult to distinguish it from Azeri or Iranian gas transported by the Tanap pipeline, LNG gas imported by ship or gas from Turkish offshore fields. Faced with the EU’s desire to do without Russian gas, Moscow has few options to enable it to continue selling its energy to the EU. Gas no longer flows through Nord Stream 1, and there are no plans to repair the Nord Stream 2 pipelines. Economic sanctions between Russia and Poland are blocking the flow of Russian gas to Central Europe via the Yamal-Europe axis. The war in Ukraine continues to pose a permanent risk of transit interruption via the Brotherhood and Soyuz pipelines. This leaves the TurkStream and Blue Stream pipelines, with capacities of 31.5 and 16 billion m3 per year respectively, which run under the Black Sea to Turkey. It should be noted that half of the transmission capacity between Russia and Turkey is used to transport gas to Europe, with the remainder destined for the Turkish market.

#War – “The Russians will win the war”, John Mearsheimer

On May 22, the American citizens’ organization “Committee for the Republic” welcomed John Mearsheimer for a lecture on the war in Ukraine. The American international relations specialist, who belongs to the realist school of thought, didn’t talk about the origins of the conflict, but about the current situation and his predictions. In his view, we are in a war in which Ukraine (and the West) on the one hand, and Russia on the other, see each other as an existential threat. It is therefore impossible to reach a viable peace agreement. The least likely outcome, but one that cannot be ruled out, is nuclear war. The second and more likely possibility is that Russia will win the war, without decisively defeating Ukraine. He believes, however, that Moscow will eventually conquer a large part of Ukrainian territory (the Russian-speaking part) and integrate it into Russia, while turning Ukraine into a “dysfunctional rump state”. He argues for a Russian victory on the grounds that, in a war of attrition, the most important factors are balance of resolve, demography and artillery quantity.

#Insurance – Marine insurers’ pressure on Russian oil is ineffective

A symbol of the City, Lloyd’s of London is the company that manages the world’s specialist insurance and reinsurance market. Founded in 1688, it is one of London’s oldest financial institutions, and has been active in the marine insurance sector since its inception. As early as March 2022, Lloyd’s of London declared that it would cooperate with governments and regulators to impose sanctions on the Russian state, claiming that “sanctions are the best weapon at our disposal”. While measures to cap Russian oil began around six months ago, the rhetoric is changing. Neil Roberts, a senior Lloyd’s marine insurance executive, recently published a note on LinkedIn which was highly critical of the effectiveness of the sanctions. He points out that the measures taken on shipping have had the effect of redirecting Russia’s energy flows towards Asia, resulting in “a loss of political control”. In his view, the sanctions have failed to change Moscow’s policy, and their intensification risks only the continued destabilisation of global maritime trade. For its part, the New York Times has just published an investigation detailing the techniques used by the “phantom fleet” transporting Russian oil allowing them to be insured by American companies, in defiance of Western sanctions.

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