LONDON — In the five weeks since Russia invaded Ukraine, the United States, the European Union and their allies launched an economic counteroffensive that cut off Russia’s access to hundreds of billions of dollars of its own money and halted much of its international trade. . More than 1,000 companies, organizations and individuals, including members of President Vladimir V. Putin’s inner circle, have been sanctioned and relegated to a financial vacuum.
But Mr Putin reminded the world last week that he has his own economic weapons which he could use to inflict suffering or repel attacks.
Thanks to a series of aggressive measures taken by the Russian government and its central bank, the ruble, which had lost nearly half of its value, has recovered its way back to near where it was before the invasion.
And then there was the threat to stop the flow of gas from Russia to Europe – which was triggered by Mr Putin’s demand that 48 ‘hostile countries’ violate their own sanctions and pay for natural gas in rubles . He sent leaders to the capitals of Germany, Italy and other Allied countries to scramble and showed most visibly since the start of the war how badly they needed the energy Russian to fuel their economies.
It was this reliance that prompted the United States and Europe to exempt fuel purchases from the harsh sanctions they imposed on Russia at the start of the war. The European Union gets 40% of its gas and a quarter of its oil from Russia. An overnight shutdown, German Chancellor Olaf Scholz warned last week, would plunge “our country and the whole of Europe into a recession”.
For now, it seems the prospect of an imminent gas shutdown has been discounted. But Mr Putin’s sudden demand for rubles has prompted Germany and Austria to prepare their citizens for what might come. They took the first official steps towards rationing, with Berlin beginning the “early warning” phase of planning for a natural gas emergency.
Although President Biden announced plans to release 180 million barrels of oil from the US reserve over the next six months and divert more liquefied natural gas to Europe, that still wouldn’t be enough to replace all that Russia supplies. Russian oil exports normally account for more than one in every 10 barrels the world consumes.
Europe’s ongoing energy purchases send up to $850 million into Russia’s coffers every day, according to Bruegel, an economics institute in Brussels. This money helps Russia finance its war efforts and mitigates the impact of sanctions. Due to soaring energy prices, gas export revenues from Russia’s energy giant Gazprom pumped $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global consulting firm.
“The lesson for the West is that the effectiveness of financial sanctions cannot go so far in the absence of trade sanctions,” the firm said in a research briefing.
Mr Putin’s feints and jabs – at one point last week he promised to halt and continue gas deliveries in the same statement – have also unsettled European leaders as they try to figure out his strategy and motivations.
The war prompted democracies to no longer depend on Russian exports. They have proposed cutting natural gas deliveries by two-thirds before next winter and ending them altogether by 2027. These targets may be too ambitious, experts say.
In any case, the transition to other suppliers and possibly to more renewable energy sources will be costly and painful. Overall, Europeans could be poorer and colder for at least a few years due to soaring prices and lower economic activity caused by energy shortages.
And unlike Russia, the governments of these countries must answer to the voters.
“Putin has already demonstrated that he is willing to sacrifice civilians – his own and Ukrainians – to win,” said Meg Jacobs, a historian at Princeton University. For European democracies, lowering thermostats, lowering speed limits and driving less is a choice, she said. “It only works with mass cooperation.”
But leverage, like gas, is a finite resource. And Mr. Putin’s willingness to use it now means he will have less in the future. It will not be an easy transition for Russia either. Most analysts believe that Europe’s aggressive moves to reduce its dependence on Russian energy will have far-reaching consequences.
“They’re done with Russian gas,” said David L. Goldwyn, who served as the State Department’s special envoy on energy in the Obama administration, about Europe. “I think even if this war ended, and even if you had a new government in Russia, I think there’s no turning back.”
European Commission President Ursula von der Leyen said it when she announced the new energy plan last month: “We simply cannot rely on a supplier who explicitly threatens us.”
Security concerns are not the only development that has undermined Russia’s position as a long-term energy supplier. What came as a surprise to economists, lawyers and policymakers about Mr. Putin’s demand to be paid in rubles is that it allegedly violated sacrosanct negotiated contracts and revealed the will of Russia from being an unreliable trading partner.
While trying to wield his energy influence abroad, Mr. Putin has taken steps to shield the Russian economy from the impact of sanctions and to support the rouble. Few things can undermine a country as systemically as a suddenly weakened currency.
The Russian-Ukrainian War and the World Economy
When the allies froze Russian central bank assets and sent the ruble into a downward spiral, the bank raised the interest rate to 20%, while the government demanded that companies convert 80% of dollars, euros and other foreign currency they earn. into rubles to increase demand and drive up prices.
This revived the value of the ruble, but as several analysts have pointed out, the currency’s newfound stability is not due to the market suddenly regaining confidence in the Russian economy, but because of the extraordinary interventions of the government.
Putin’s demand that gas purchases be paid for in rubles sounded like another such intervention. Still, the insistence was disconcerting. Russia might as well take the continued influx of euros and dollars paid by foreign governments and convert them into rubles.
Mr Putin, of course, may delight in putting European governments in an uncomfortable position or flexing his power, but his demands may also reflect difficulties at home.
For example, it might not be able to guarantee compliance with its mandate that companies, including natural gas producer Gazprom, repatriate 80% of the dollars and euros they earn and resell them to Russian banks.
The problem is that “the government cannot enforce this rule,” said Michael S. Bernstam, a research fellow at Stanford University’s Hoover Institution. “Companies cheat”.
“The only people the Russian government can trust are Western companies that buy Russian natural gas and other raw materials,” he added.
In addition to currency problems, Russia is experiencing economic difficulties in other respects.
The country is already facing a deep recession and several analysts estimate that the economy could contract by up to 20% this year. A S&P Global Poll Purchasing managers at Russian manufacturing companies saw sharp declines in output, employment and new orders in March, as well as steep price increases.
Within weeks, Mr. Putin undermined trade relations between Russia and wealthier economies that took decades to build after the demise of the Soviet Union. According to one estimate, some 500 foreign companies withdrew stakes in Russia, reduced operations and investments, or committed to do so.
“Russia lacks the capabilities to replicate domestically the technology it would otherwise acquire abroad,” according to an analysis by Capital Economics, a London-based research group. This is not a good sign for increasing productivity, which even before the war was only 35 to 40% of that of the United States.
The result is that regardless of the end of the war in Ukraine, Russia will be more economically isolated than it has been in decades, reducing its current influence on the global economy as well as on its own economic outlook.