19 - Limiting Russia's Ability to Wage War
During the Cold War, President Reagan urged Germany and other European nations not to become dependent on relatively inexpensive and readily accessible natural gas from the Soviet Union. His successors also worried that Russia would hold Europe hostage to its supplies of such energy, as it did for a period in 2009. Now those ancient prophesies have become true. If it were not for income from gas and petroleum exports to Europe, Putin’s war effort would have collapsed by now, instead of just faltering. Ukrainian President Volodymyr Zelensky pleaded again yesterday for the world to stop buying Russian fossil fuels.
Russia’s natural gas sales to Europe now amount to about $270 million a day, or about $8.4 billion a month. Europe as a whole relies on that gas, delivered through four pipelines, for about 40 percent of its energy, but 55 percent for Germany. Thus, Putin could make life much harder, even at the end of winter, for Europeans by closing the gas taps. But he would also deprive the Russian war effort of one of its main sources of cash. (Europeans are still paying for their gas in dollars.) If the pipelines remain open, Europeans ought to make it through the warm months without too much difficulty. By the start of the next winter season, moreover, storage facilities should be much fuller than they are now and abundant shipments of liquefied natural gas (LNG) should have traversed the high seas to ports in Germany and the Netherlands. At least that is the plan.
President Biden earlier this week promised 12 trillion feet of liquefied natural gas to Europe, to relieve its dependence on Russia. The U. S. has ample supplies of gas, and could develop surpluses, but freezing the gas into a liquid is necessary before gas is shipped in special tankers. Such vessels are in short supply, and so is capacity in existing expensive liquefying facilities along the Gulf of Mexico. At the other end of the chain, Germany is constructing additional new receiving terminals to convert the liquid back into a gas, but there are shortages of such receiving and transforming plants throughout the continent. Filling Europe’s energy requirements in the near term is going to a difficult stretch, but doing so is the only way to cause Russia serious financial pain.
Germany says that it will attempt to wean itself off the Russian gas habit by July, much earlier than analysts anticipated. (Poland says that it will follow by the end of the year.) If sufficient LNG arrives from the U. S, per President Biden, and from Qatar, Canada, and Azerbaijan by one means or another, Russia’s economy will weaken, whether or not the Ukrainian war still rages. Putin can still sell oil to Europe for much needed cash, but there ought to be sufficient available petroleum in the world by mid-summer to cope with the necessary requirements of Italy and other European nations that are now particularly dependent on Russian crude oil. (Perhaps Putin’s yacht still sits unencumbered in an Italian dry dock because of that dependence?) Ramped up production in the U.S. and Africa may help, even if Saudi Arabia is not clamoring to assist. Soon, too, Guyana will be extracting large supplies of sweet crude for the first time, and will seek markets.
Given the likely increasingly successful boycott of Russian gas and oil, Putin’s only big income earners, he will attempt to sell as much oil as possible to China and India. But those countries will demand hefty discounts, diminishing Putin’s returns. Now, too, he and his acolytes are reaching as far afield as possible to find new buyers of Russian resources.
Putin’s oilfields may soon also have to manage without Western equipment and expertise. Seemingly a model of corporate responsibility in an industrial space that rarely knows principled firms, Halliburton, a major oilfield supplier, said last week that it was ceasing all activities in Russia forthwith. It no longer provides drilling products and parts for Russian machinery or projects. Its American rivals Schlumberger, Baker Hughes, and Weatherford, however, the other big international operatives that ensure the smooth functioning of drilling and the extraction of petroleum and natural gas throughout the globe, are less explicit. Although suspending new investment and the introduction of new technologies, they appear to be honoring “existing contracts” – whatever that means. Investors must urge them to join Halliburton in withdrawing fully from Russia. It is time that Washington put determined pressure on the three temporizers.
Doing so will not prevent Russia from expanding the capacity of an existing pipeline across Kazakhstan to sell more petroleum to China. Nor will it necessarily inhibit Russia’s diversification of oil destinations away from Europe. But anything American businesses can do to inhibit Russian revenue streams is bound to focus the minds of Putin and his oligarchs. And it may slow deliveries of fuel to the Ukrainian war zone.
Total has joined the petroleum multinationals that are ceasing to invest in Russia. However, Total does not expect to be completely out of Putin’s oilfields until later in the year. Possibly the French government can quicken Total’s pace.
South Africa is a country distant from Europe with persistent problems keeping its lights on. It has one smallish nuclear reactor that generates electricity and several large coal-powered facilities. Now, to add to or possibly explain South Africa’s reluctance to vote against Russia in the UN or come out strongly in support of NATO and Europe over Ukraine, it seems that South Africa is seeking natural gas investments from Russia. Moscow’s Gazprombank is offering to supply South Africa’s needs with roughly $4 billion worth of liquefied natural gas a year and to build a facility near Port Elizabeth. Investigators believe that large kickbacks may be embedded in the proposed contract, so persuading the South African ministers involved to desist could be difficult. The company of an oligarch close to Putin is also trying to mine manganese on the South African edge of the Kalahari Desert. In South Africa’s northern Limpopo Province, another oligarch’s firm is planning an innovative iron ore processing enterprise. Big pay offs to local officials are likely involved in the metals deals as well as the natural gas caper. Secretary of State Antony Blinken might well want to have an urgent word with South Africa’s Prime Minister Cyril Ramaphosa despite Ramaphosa’s strange refusal to oppose the invasion of Ukraine.
Corporate Responsibility
This newsletter reported last week on those multinational concerns that had promised to abandon their profitable operations in Russia in solidarity with Ukraine, and about a few recalcitrant enterprises that are “suspending” some holdings and operations but leaving only tentatively. The New York Times wrote Monday about 400 firms who had pulled out of Russia, and highlighted sixteen (including Coca-Cola, DHL, and Ferrari) in a photo essay. Johnson & Johnson has since said that it will stop selling personal care products in Russia. Heineken and Carlsberg, the brewers, are stopping supplying beer to Russians, too.
But there is much more to the story, and an abundance of nuance.
This newsletter reported last week that Nestlé was staying the Russian course. But now it has listened to the deeper voices of its Western consumers. It is starting to withdraw some of its brands, while continuing to sell “essential items.” Nestlé needs to be encouraged to do more, and sell less to Russians.
Among the banks, BNP Paribas and Crédit Agricole, two French ones, are pulling out.
Renault, the French car maker, suspended operations at its Russian plant and talked about exiting its cooperation with AutoVaz, a big Russian auto manufacturing concern.
Overall, the economic noose dangled around Russia and Putin by Washington and its allies needs to be pulled as tightly as possible. So there is more for Western diplomats and industrialists to do to hinder Russia’s war effort. Each incremental tug of the noose helps to prevent bombs from falling on beleaguered Ukrainian cities such as Mariupol and missiles being launched from the Black Sea or Belarus toward western towns like Lviv.
As consumers and investors, we can make our wishes known.