The West’s Economic War Against Russia Is Imperiling the World

The West’s Economic War Against Russia Is Imperiling the World

The economic war is most unlikely to affect the outcome of the Ukraine War, but it does seem likely to produce outcomes that will prejudice energy security and the climate agenda, while falling hardest on the world’s poor.

On any accounting, one point seems clear: the more Western policy approaches the cutoff of Russian oil exports pushed by the hawks, the more perilous the outcome for most developing countries.

Gas Pains

The way that geopolitics trumps both energy security and the climate agenda is especially on display in the controversy over German imports of natural gas from Russia. Germany faces a choice between a brutal blow to its basic industries and the subsidy of the Russian war machine, estimated at approximately a billion euros per day. The drama of whether Europe will comply with Russian president Vladimir Putin’s terms, requiring payment in rubles, has been brought to a new stage by Russia’s decision on April 27 to stop gas exports to Poland and Bulgaria. The game of chicken is likely to go on. Even if a temporary resolution is reached, a collision disastrous to both Russia and EU will remain a standing possibility. Seldom noted in the discussion is that Russian gas obviously makes the most sense for Europe from the standpoint of both the climate agenda and energy security. All the alternatives are far more costly and, if reductions in consumption are implemented suddenly, pose a mortal threat to German industry.

Russia shut down gas exports to Poland and Bulgaria because both countries did not comply with the payment terms that Putin set down earlier in April. The technical details are complicated, but the basic issue is simple. Does Europe intend to pay for the gas it receives from Russia in a way that actually puts the proceeds into Russian hands? Once the West froze Russia’s central bank assets—which represented, in effect, the money that had been paid to Russia for energy exports in the past decade—there was and remains no prospect that Russia would accept an escrow-like arrangement, as that would subject present and future payments to seizure. While some companies have opened the requisite accounts, the European Commission (EC) announced on April 28 that “complying with [Putin’s] decree is a breach of sanctions.”

The European Union is not taking these steps for the purpose of ensuring energy security. It is sacrificing energy security for the purpose of inflicting harm on the Russian economy and war machine. This is a case not of the producer refusing to sell, but of the consumer unwilling to pay—a strange inversion of the ways in which Germany and Europe’s dependency on Russian gas were previously considered. In the past, the fear was always that the exporter would cut off exports, not that the importer would cut off imports. It strains belief that Germany would actually go forward on a path that would “massively damage” its domestic industry and have grievous effects on the rest of the world (what replaces the fertilizer made from natural gas by German firms?), but the German government faces a lot of pressure to do just that.

There are larger implications brewing for both the climate agenda and U.S. energy security. Russia in the recent past exported 155 billion cubic meters (bcm) a year of gas to the EU, with Germany by far the largest customer. The United States has promised to add 15 bcm this year, but the source of the gas and what counts as a benchmark are unclear. Analysts at Goldman Sachs warn that there’s little ability to increase U.S. LNG exports between now and 2025. Longer term, the EC promised to ensure, “until at least 2030, demand for approximately 50 bcm/year of additional U.S. LNG.” Such a commitment would require massive investments in new LNG facilities, floating and fixed, and would tie America’s domestic gas market to Europe, at the expense of U.S. consumers. That could be a very big deal—a hidden cost totally obscured in the sanctions debate—as Europe’s natural gas prices today (at $30 per mcf, or 1,000 cubic feet) are four times higher than average U.S. prices (at $7.50 mcf). However, the European promise to ensure demand of 50 bcm/year only until 2030 calls into question the economic rationality of such huge investments, which require long-term contracts of at least twenty years to be viable.

Germany’s stark dependency on Russian gas, at 55 percent of gas imports in 2021, is partly owing to the premature closure of its nuclear plants—also an unwise decision from a climate perspective—but mostly to geographical propinquity and the need for base power. Natural gas works better than coal or nuclear power to solve the intermittency problem posed by wind and solar, but the less gas there is, the more coal will be burned, especially if the energy transition is forced by supply shocks of the sort now impending. Because Russia’s gas infrastructure is leaky, substituting LNG from the United States may be a wash from an emissions standpoint, but addressing the former problem while diminishing dependency on Russia over time would be far less expensive and more climate-friendly than building a new LNG infrastructure in Europe. That’s what EU leaders thought back in 2018 when the Trump administration hounded them to buy more U.S. gas; apparently, they’re now all-in.

From a planetary perspective, the idea that fog-ridden Germany should cover itself with solar panels, and that equatorial regions should burn coal, does not compute, but the effect of the U.S-EC plan would be to encourage precisely that outcome. If Europe enters the LNG market in a big way, it would price developing countries out of that market; their logical alternative is to burn more coal in the long run, as Europe is doing in the short run. Notice, too, that in order to build solar at anything other than ruinous prices, Germany would have to rely on suppliers from China, which makes more than 60 percent of the world’s solar panels.

In the real world, neither energy security nor climate goals can be achieved unless regimes that are considered despotic or odious in certain respects are part of the solution. That is an unwelcome reality, but it is the reality. For the last decade, the main focus of the U.S. national security state has been Iran, Russia, and China; each, as it were, successively became for a time the biggest threat or was subject to the largest moral panic. For Iran, it was the threat its putative nuclear weapons program posed to Israel, Saudi Arabia, and the United States; for China, because of slave-labor camps in Xinjiang; for Russia, because of its aggression against Ukraine. Along the way was the moral revulsion felt toward Saudi Arabia after the murder of Jamal Khashoggi (its activities in Yemen generally arousing far less attention). Each of these episodes produced a demand for outcasting, a form of geopolitical shunning via sanctions. But it turns out that outcasting everybody is impracticable because it leads to self-harm, so the moral indignation that was on the front burner in years past has to be placed on the backburner now. In effect, the new hard-line against enemy number one means in practice a soft line toward enemies two, three, and four. What tangled webs we weave in seeking to reorder the world economy via comprehensive economic sanctions.

Dead Ends

The TEWAR looks toward a large-scale reorientation of the global trade in energy in order to punish Russia. It appears increasingly evident that it holds peril to a range of other global goods. The economic war is most unlikely to affect the outcome of the Ukraine War, but it does seem likely to produce outcomes that will prejudice energy security and the climate agenda, while falling hardest on the world’s poor. In pursuit of weakening the Russian economy, it in effect imposes a stagflationary tax on the entire world. Unlike normal taxes, the West doesn’t collect any cash from its suborned subjects, but, unlike taxes in the West, these are regressive, not progressive. The more successful Western policy is in restricting Russian supply, the more the tax will mount.

Advocates of harsh sanctions against Russia model their proposals on the U.S. sanctions imposed on Iran. But those sanctions played out in the 2010s against the backdrop of prolonged weakness in oil markets, a situation that produced the sharp cutbacks in investment that have contributed to today’s shortages. To apply the same methods against one of the top three oil producers in the world, when energy markets overall are extremely tight, is a dangerous gambit. What worked in the bust is unlikely to work in the boom.

Much of the disruption in food supplies is directly attributable to the Russian invasion of Ukraine, responsibility for which falls on Putin. But the blockade imposed by the West in response promises to aggravate these effects, increasing the dangers posed by badly elevated and unaffordable prices for food and energy, with potential for serious unemployment arising from the further disruption of supply chains. The longer the standoff runs, the larger these consequences will be, yet the prospect of a peace settlement in Ukraine that leads to the lifting of the sanctions appears utterly remote at this time. The Biden administration dislikes these consequences and wants to steer away from them, but it can only do so by reconsidering its total economic war against Russia. And there is little sign that it is willing to do so.