Reducing dependence on Russia

The European Union is turning its attention towards its heavy dependence on Russian gas, oil and coal. There are, however, few short-term alternatives.

| 4 min read

Russia as feared is increasing its use of missiles, artillery and high explosive to assault the Ukrainian cities that are resisting its advance. The brutality is strengthening European Union (EU) and NATO resolve to counter with economic sanctions that actually bite. There is a big programme of sending weapons and other necessities to the defenders and to accommodate a large exodus of women and children into neighbouring friendly countries.

Now the EU is turning its attention to its heavy dependence on Russian gas, oil and coal. The European gas price is much higher than the US natural gas price, reflecting the absence of plentiful home-contract production available in the domestic-pipe system. In markets kept short of gas, Europe has needed to source spare gas from elsewhere, and has had to continue to pay ever-rising prices for its Russian gas.

Europe’s plan is imminent

The EU plans to launch a new strategy to cut this dependence on the 8 March, but much of this is likely to be a longer-term plan to electrify more and to put in more renewable-power capacity. There are no easy short-term answers. Now, Germany has put on hold approving the use of the new Nord Stream 2 pipeline from Russia it is dependent on existing pipes, including one that transits Ukraine and is vulnerable to the damage of war. EU energy policy is going through several major changes, with the upgrade of gas to the status of a “transition fuel” to be swiftly followed by a faster programme to remove fossil fuels.

The Russian Central Bank will no longer have access to the western system to sell and spend foreign currency reserves.

The sanction packages that have emerged range widely. Japan, Australia, Switzerland and others have joined the US and NATO in limiting Russian access to the Swift banking transactions system. Various rich Russians close to Putin are subject to asset freezes. The Russian Central Bank will no longer have access to the western system to sell and spend foreign currency reserves.

There are bans on exporting technology goods to Russia, especially where they can be used for military applications. These sanctions live up to the warnings made before the invasion. Their impact has been seen rapidly in the currency market where the ruble has fallen heavily. This has forced a big increase in interest rates to 20%, which will damage economic activity and limit new credit. Many western companies are now suspending trading with Russia. Russian consumers face more price inflation and an absence of some western goods from the shelves.

Fortress Russia is not impenetrable

It will be difficult for the Russian regime to keep out all news to allow a very distorted version of events on state media a free run. Putin now admits there are Russian losses and heavy fighting, damaging his bizarre script of a liberating army being welcomed in the cities of Ukraine. It is also impossible for Russia to now have a quick victory with few casualties.

There are talks underway, but progress would need a big change of view by Putin.

The invading army is large but not easily geared to becoming an army of occupation, able to pin down a vast country with many millions of hostile citizens opposing them. There are talks underway, but progress would need a big change of view by Putin and acceptance that his invasion has miscarried. The invading force has supply issues and has been circumspect about its pace of advance, a recognition of the potential of the defending forces to disrupt the armoured columns.

This is all a harrowing and unsettling background for investment. We await statements from the leading central banks who now need to factor in the damage to growth, trade and activity this is causing – as well as the higher prices of energy and wheat it delivers. We also await decisions by Putin on how much more violent his forces will become, and what sanctions retaliation if any he plans against NATO and its allies.

The US State of the Union address earlier this week by US President Joe Biden stressed the need to curb inflation, so it is likely the administration will aid the Federal Reserve with various policy measures to help keep a lid on prices.

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Reducing dependence on Russia

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