April 27, 2022 - 2:15pm
Russia has announced the suspension of gas exports to Poland and Bulgaria after the two countries refused to make payments in roubles. In response, the EU has stated that they will offer support even though Russia has said that any attempts to channel Russian gas through other countries to Poland and Bulgaria will be met with further embargoes. Following the announcement, European gas prices rose 20% and the euro fell further against the dollar.
It is unclear what the EU expected to happen. The Russians stated clearly that they would not make deliveries if payments were not made in roubles. Failure to do so will hurt Europe more than Russia; recent price action suggests that the price increases of gas will more than make up for the lost deliveries — confirming modelling I ran at the start of March. So, why did the Europeans think that Russia would back down?
This brinkmanship is particularly damaging to the countries that are on the frontline of the economic war. Bulgaria and Poland both have their own currencies — the lev and the zloty respectively. Neither country is particularly rich. If their internal energy markets collapse, they will face energy price hikes and rolling blackouts, which is a recipe for very high inflation. There is then a risk that this inflation leads to their currencies collapsing — a situation that, in the worst-case scenario, could lead to hyperinflation.
The motivations behind the European energy war appear chaotic. From a game theory perspective, risk aversion on the part of the Europeans seems remarkably low. One way to explain that is to assume that the Europeans are not aware of the risks that they are taking. Certainly, it is quite possible that the Poles and the Bulgarians are unaware of the magnitudes of risk involved here.
Both countries have energy grids dominated by coal. Coal provides 45% of Poland’s energy and 37% of Bulgaria’s. Meanwhile, gas provides 17% of Poland’s energy and only 6% of Bulgaria’s. There is a possibility that Bulgaria could live without Russian gas, but if almost a fifth of Poland’s energy market is impacted it will have a knock-on effect on the economy.
Still, if the countries continue to refuse to pay in roubles, Russia will presumably then choke off other energy sources. Even in the case of Bulgaria, which does not rely much on oil and gas for energy production, they still need access to petroleum for their vehicles. There is simply no way around it: if Russia provides the fuel, they hold all the cards.
Perhaps they have convinced themselves that allying with more powerful countries will ensure that these countries will (and can) come to the rescue. That is an unfortunate foreign policy mistake that many small countries have made in history.
If Poland and Bulgaria dig in and more energy sanctions come down the pipeline, their economies will likely collapse. At that point, the more powerful European countries will have to look at the resulting mess and see if they want a part of it. There are already indications that Europe is getting ready to make the rouble payments to Russia. In truth, it is difficult to see this playing out any other way. Which leads one to ask: what was the point of all this? All we got was volatility in the energy markets and yet more inflation.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeThe author’s argument makes sense but I don’t know enough about the oil and gas market to assess the cost to Russia of reducing its energy sales to Poland and Bulgaria. The author says that the resulting rise in oil and gas prices will offset the loss of revenue to Russia from Poland and Bulgaria. But how long can Russia play that economic game before its loss of revenue bites?
I first read about Russia cutting energy supplies to Poland and Bulgaria in Politico yesterday. Their author argued it would have little effect on these countries which were already diversifying their energy sources. Who to believe if you’re not an expert?
I’d like to read an Unherd article that discusses these issues at greater length. Have China and India been scared off buying Russian gas and oil by the Americans? How easy is it for Russia to switch distribution of its oil and energy to China and India and away from the West?
Certainly Poland is attempting to diversify its sources.
Google “Baltic Pipe” a project that will bring Norwegian and Danish gas to Poland . The most troublesome and delayed part is not the subsea pipe, but where it crosses Jutland.
It doesn’t take too much imagination to think that Putin’s people might be encouraging protestors, as they were known to have done with the anti-frackers. It’s certainly in his interest to.
Poland has been preparing for this. They will be free of the need for Russian gas by year end. The Poles will be fine.
Europe is simply stupid and is being played by the US. Instead of having a stable and mutually beneficial trading relationship with Russia we have behaved in a aggressive and confrontational way by encouraging Ukraine to expect NATO and EU membership. When it came to it we are actually not prepared to go to war to protect Ukraine (thank God). Now Russia reacts and Europe destroys it own economy, buys loads of US weapons and imports expensive US gas – who exactly is benefiting from this? Certainly not Ukraine or Europe.
Vote Putin!
So no argument or refutation merely an insult.
“Reacts”!!
If nothing else, yours is a masterpiece of propagandist language – Lenin or Hitler would be proud! So, it is the United States that the problem! I for one am rather glad that the hegemonic power has been up until now the US and not some of the obvious competitors: Nazi Germany (killed millions), the Soviet Union (killed many more millions) or Maoist China (killed even more millions)!
This kind of analysis might have seemed half plausible until Putin decided to launch the largest invasion since the 1930s and attempted to utterly destroy a neighbouring country, with which it had signed a treaty recognising mutual borders only in 1991. I’ve yet to hear any half convincing argument as to why this aggression – of course not Putin’s first – differs in any meaningful way from Hitler’s modus operandi in the 1930s. It has a similar set of bogus, contrived grievances, and a desire to collect all the Russian / German speakers in his empire, whether they like it or not.
Ukrainians would like to live in a free nation, and certainly not form a part or a puppet of the kleptocratic tyranny which very sadly is being steadily consolidated in Russia without any help from us. Ukraine poses no threat to Russia at all, except of course as an increasingly free nation. To avoid ‘provoking’ Putin then, why don’t we save ourselves the bother and let him decide how to run our own societies?
Didn’t the invasion of Iraq and Syria – both sovereign nations create a precedent?.
But that was okay, as was Libya, Afghanistan and the countless other sovereign nations that the USA (with a little help from the UK) has invaded and often completely trashed with shock and awe tactics so that American contractors then had to go in and rebuild them (making huge profits), and thankfully the kind folks at the US arms dealers had lots of weapons to sell countries (making huge profits). It is a good job America are the good guys 😉
I think you only see crimes committed by (semi-)official state enemies but are blind to the ones committed by us and our allies. That’s very loyal.
You are right in everything you say! It seems to me that decisions were made by the leaders of European countries (and especially the UK) without thinking the situation through, There was an assumption that the Russian people would turn against their leader and, if not that, then Putin would crumple under pressure. There was no indication that that was likely..
The UN Secretary General has shown himself to be wise in all his utterances this week. It should be left to him to negotiate between the two sides (with only Ukraine and Russia present) restoring peace in that region and hastening the return of prosperity for ALL his members wherever they live. Every countries is now affected by this conflict..
Putin toady.
What are these indications?
Wishful thinking for a pro Russian joinsliy
Depends if you believe BBC/Financial Times reports today that Hungary, Slovakia, Germany, Austria are ready to pay for gas in roubles via conversion through a Swiss gazprombank.
These are U.S. inspired sanctions. Naturally, they select goods that will only have a minimal impact on them. It has a bigger impact on their competitors.
Further to my comments below, check this article on Baltic Pipe delays (due to concerns of disturbing Danish bats and mice) from July 2021:
Prescient, or just stating the bleeding obvious?:
https://www.dw.com/en/baltic-pipe-delay-to-push-poland-back-into-russias-arms/a-58318657
Who wrote the headline? What Russia is doing is not an embargo, but suspension of supplies due to contractual non-compliance.
Agree on the “embargo” point, but I have not read the contract(s). Was payment currency stipulated? If Russia accepted payment in USD, as they apparently had for a long time, did the contract give Russia the right to limit the payment currency? If not, might not Russia also be in non-compliance?