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Fuel and Energy – deep freeze of the ideals of “free market”

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The epidemic of oil and gas psychosis in the so-called unfriendly countries keeps heating up as the G7 countries (UK, Germany, Italy, Canada, France, Japan and the US) plan to introduce a price ceiling for Russian oil by December 5.

This move will unbalance even more the global oil and gas flows with unpredictable consequences for all market players. The G7 members have finally put in deep freeze the ideals of “free market” and “free competition,” as well as those of free access to energy resources, including LNG, and processed hydrocarbon products. This will certainly reflect on the prices and other significant factors that will be very much visible in the global energy field.

Do you want to remove Russia, one of the world’s three biggest players, from this market? If so, then you will get a serious deformation of the entire system – oil, gas, price, economic. Yes, this will benefit the United States, but hardly everyone else, including America’s G7 partners, let alone all the other players in the global energy market.

The Americans, as always, lead the way in making repressive declarations, with Republican Senator Marco Rubio having already drafted a bill to sanction oil and LNG shipments from Russia to China. However, a halt in oil supplies from Russia will force Beijing to join in the struggle for hydrocarbons from the Middle East and Africa, which is sure to send prices up.

The West keeps ramping up its sanctions pressure against Russia, justifying this by Moscow’s ongoing special military operation in Ukraine.

The events of the past 12 years have changed the energy and political picture of the world, with the United States turning from the world’s leading consumer of oil and gas to their biggest producer and a major exporter, while China has become the main consumer of these resources.

During the 1990s and early 2000s, the United States and the International Energy Agency believed that in the foreseeable future, America would remain the world’s number one importer of energy resources. Therefore, Washington was actively looking for external partners in the energy sector, while Russia was viewed as one of the main such partners, along with Saudi Arabia. Indeed, after the crisis of the 1970s, the United States relied on the Middle East – above all on the Kingdom of Saudi Arabia – as the main guarantor of its own energy security. During the 1990s, Washington’s hopes were quite naturally pinned on Russia.

Russia needed US technologies, investments, management experience, and the United States needed Russian energy resources, especially oil and gas, and Russian markets for American products.  This cooperation was developing fast and in the 1990s, US companies actively participated in the implementation of major oil and gas investment projects in Russia (Sakhalin-1, Sakhalin-2, etc.), with the US government providing strong political support for and prioritizing these projects.

The Gore-Chernomyrdin Commission, where I worked, was directly involved in the promotion of these projects. One of the outcomes of the May 2001 meeting between the presidents of Russia and the United States, was the idea of an Energy Dialogue between the two countries, designed to promote commercial cooperation in the energy sector by increasing interaction between Russian and US firms engaged in the exploration, production, processing, transportation and marketing of energy resources, as well as in the implementation of joint projects, including in third countries.

Also in 2001, there came out the “Partnership between the US and Russia: New Times, New Opportunities” White Paper, which outlined  the position of the US Congress regarding energy cooperation with Russia. The document explicitly stated that the development of bilateral energy cooperation should become a priority in US foreign policy, since the US could thus “save itself from the risks of uncertainty in energy supplies and unnecessary dependence.”** (American Foreign Policy Council. Washington, D.C.: Franklin’s Printing Company, 2003.)

However, America’s technological progress and new industrial breakthroughs made in a single decade turned the situation all around. With the advent of the shale revolution, the pace of the cooperation between the two countries, including in energy, slowed down. A shift in America’s priorities pushed its the energy partnership with Russia into the background. Moreover, the dramatic reduction of energy ties with Russia has become an additional factor in Washington’s push for an across-the-board escalation of tensions with Moscow. Similar things are happening with our main European partner, Germany. “In addition to the pandemic, sanctions, global trade conflicts and protectionism have become a serious challenge for large German concerns, medium-sized businesses and family businesses operating in Russia,” said Rainer Seele, former head of the Austrian company OMV.

In Europe, the dreams of a future carbon-free energy are still alive, even though the upcoming winter season has put them on the back burner. The German government fears that the shortage of gas this winter could cause emergency situations in several regions across the country. In France, representatives of the industrial sector are seriously concerned about rising prices for gas and warn that in the worst scenario, this could lead to a complete collapse of production.

By the way, Russia earlier offered its European partners to sign  long-term contracts for the supply of natural gas. However, Brussels considered this proposal unprofitable, preferring to buy gas at  floating spot prices. Therefore, Europe has been forced to reactivate its shuttered coal-fired stations – a move that only recently would  have been condemned by the European Union.

If you think not seasonally, but on a large scale, you need to have a clear picture of what the global consumption of natural gas will look like, at least in the next five years. For example, its leading consumer, China, has been increasing its gas consumption by more than 30 billion cubic meters annually over the past five years, and plans to increase by 2030 the gas share to 15 percent of total energy from 8 percent in 2021. This means that the fast-growing demand for gas in China will continue until the end of this decade. Just where they will get this gas from is another matter, which pertains to Beijing’s energy policy.

So, does the world need more hydrocarbon fuel or not? Do we “forget” coal or use it? Is nuclear energy necessary in the future or is it also classified as an undesirable source of energy? All these issues are a subject of continuous top-level discussions in countries kowtowing to the United States. Total confusion! And for the world energy development, this is absolutely unacceptable and even extremely dangerous! As to the Americans, they feel quite happy about this whole situation with an increase in their export potential and with big LNG shipments being made to Latin America, Europe and Asia.

Meanwhile, with the problems of the pandemic (as an objective factor) and the issue of global warming being blown out of proportion, hydrocarbon producers no longer have 5- to 10-year production guidelines and politicians have practically banned banks from financing hydrocarbon projects and insuring the mining companies’ risks. Therefore, British Petroleum says it will exit the hydrocarbon energy market within the next decade or two. After all, every serious energy project requires billions of dollars in investments with a development perspective of at least twenty-five years.

I am sure that global gas consumption will grow. In the next five or six years, the planet needs an additional 150 billion cubic meters of natural gas. If Russian gas is phased out of the European markets, then by 2027 they will need to find about 300 billion in addition to the 2021 volumes.

We need to act now, without looking back at the contradictory decisions of countries that are enmeshed in the energy policy of Washington and Brussels.

The world of energy needs stability and predictability. If the United States goes astray, then someone must chart the right unifying course. I should say that China, the main consumer of hydrocarbons, is vitally interested in the stability of this world, just as key players from the Middle East and OPEC countries. It is they who, together with Russia, will have to chart the course of the energy development of our planet.

From our partner International Affairs

President of the World Politics and Resources Foundation, Doctor of Economics

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Economy

Baltic reality: High inflation and declining of living standards

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The Baltic States’ economy is in bad condition. The latest estimate from the EU’s statistics body shows that Eurozone inflation is continuing to soar to record highs.

The Baltic countries continue to be the hardest hit. These states in particular are experiencing the highest levels of inflation in the Eurozone. Thus, inflation in Latvia and Lithuania hit 22.4 per cent and 22.5 per cent respectively. Estonia also has seen inflation rise year on year from 6.4 per cent in September 2021 to 24.2 per cent in September 2022. The more so, the Baltic States continue to see soaring energy and food prices which lead to declining standard of living.

The Bank of Lithuania has published its latest economic forecast and revised gross domestic product (GDP) growth projections for 2023 from 3.4% to 0.9%.

Statistics Lithuania also reports that in September 2022, the consumer confidence indicator stood at minus 16 and, compared to August, decreased by 5 percentage points. The decrease in the consumer confidence indicator in September was determined by negative changes in all of its components.

According to SEB bank economist Tadas Povilauskas, the number of poor people in Lithuania will increase. Living standards will be affected by rising food and energy prices. The current price of natural gas is too high and the economy cannot “go” with it. It is evidently that energy prices shocks have far-reaching effects on Lithuanian economy and population.

The main cause of such state of affairs is deteriorated relations with Russia. Russia has lately been the EU’s top supplier of oil, natural gas, and coal, accounting for around a quarter of its energy.

The conflict in Ukraine and political confrontation between Russia and the West has exacerbated the energy crisis by fuelling global worries it may lead to an interruption of oil or natural gas supplies from Russia. Moscow said in September it would not fully resume its gas supplies to Europe until the West lifts its sanctions.

It is obviously that the conflict in Ukraine dramatically worsened the situation on the markets, as Russia and Ukraine account for nearly a third of global wheat and barley, and two-thirds of the world’s exports of sunflower oil used for cooking. Ukraine is also the world’s fourth-biggest exporter of corn.

According to Euronews, the prices of many commodities – crucially including food – strained global supply chains, leaving crops to rot, caused panic in many European countries, including the Baltic States.

High inflation has become the direct consequence of sanctions imposed on Russia. As for the Baltic States, the lack of wisdom to find compromises and blindly following the European Union’s decisions have lead to declining standards of living. The desire to punish such huge state as Russia played a cruel joke on the Baltic States. It will be difficult to explain the population why they should turn down the heating in homes, schools and hospitals over the winter.

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Policy mistakes could trigger worse recession than 2007 crisis

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The world is headed towards a global recession and prolonged stagnation unless fiscal and monetary policies holding sway in some advanced economies are quickly changed, according to a new report released on Monday by the UN Conference on Trade and Development (UNCTAD).“There is still time to step back from the edge of recession,” said UNCTAD chief Rebeca Grynspan.

‘Political will’

“This is a matter of policy choices and political will,” she added, noting that the current course of action is hurting the most vulnerable.

UNCTAD is warning that the policy-induced global recession could be worse than the global financial crisis of 2007 to 2009.

Excessive monetary tightening and inadequate financial support could expose developing world economies further to cascading crises, the agency said.

The Development prospects in a fractured world report points out that supply-side shocks, waning consumer and investor confidence, and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.

And while all regions will be affected, alarm bells are ringing most for developing countries, many of which are edging closer to debt default.

As climate stress intensifies, so do losses and damage inside vulnerable economies that lack the fiscal space to deal with disasters.

Grim outlook

The report projects that world economic growth will slow to 2.5 per cent in 2022 and drop to 2.2 per cent in 2023 – a global slowdown that would leave GDP below its pre-COVID pandemic trend and cost the world more than $17 trillion in lost productivity.

Despite this, leading central banks are sharply raising interest rates, threatening to cut off growth and making life much harder for the heavily indebted.

The global slowdown will further expose developing countries to a cascade of debt, health, and climate crises.

Middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year, according to the report.

Debt crisis

With 60 per cent of low-income countries and 30 per cent of emerging market economies in or near debt distress, UNCTAD warns of a possible global debt crisis.

Countries that were showing signs of debt distress before the pandemic are being hit especially hard by the global slowdown.

And climate shocks are heightening the risk of economic instability in indebted developing countries, seemingly under-appreciated by the G20 major economies and other international financial bodies.

“Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year,” almost double the amount of the International Monetary Fund’s (IMF) recently allocated Special Drawing Rights to supplement their official reserves. 

The UN body is requesting that international financial institutions urgently provide increased liquidity and extend debt relief for developing countries. It’s calling on the IMF to allow fairer use of Special Drawing Rights; and for countries to prioritize a multilateral legal framework on debt restructuring.

Hiking interest rates

Meanwhile, interest rate hikes in advanced economies are hitting the most vulnerable hardest

Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10 per cent.

And as the prices of necessities like food and energy have soared in the wake of the Ukraine war, a stronger dollar worsens the situation by raising import prices in developing countries.

Moving forward, UNCTAD is calling for advanced economies to avoid austerity measures and international organizations to reform the multilateral architecture to give developing countries a fairer say.

Calm markets, dampen speculation

For much of the last two years, rising commodity prices – particularly food and energy – have posed significant challenges for households everywhere.

And while upward pressure on fertilizer prices threatens lasting damage to many small farmers around the world, commodity markets have been in a turbulent state for a decade.

Although the UN-brokered Black Sea Grain Initiative has significantly helped to lower global food prices, insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds (ETFs) the report said.

Also, large multinational corporations with considerable market power appear to have taken undue advantage of the current context to boost profits on the backs of some of the world’s poorest.

UNCTAD has asked governments to increase public spending and use price controls on energy, food and other vital areas; investors to channel more money into renewables; and called on the international community to extend more support to the UN-brokered Grain Initiative.

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‘Sanctions Storm’: Recovery After the Disaster

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After the start of the special operation in Ukraine, a “sanctions storm” hit Russia; more sanctions were imposed against Russia in a few months than against Iran in decades. But a catastrophe did not take place, and the stage of stabilization came.

Indeed, almost all the weapons in the sanctions arsenal were used one after another: commodities exchange was suspended in some sectors, export and import controls were put in place, restrictions on air and sea transportation were introduced. The sanctions have spread to the investment and financial sectors, paralyzing many transactions with the West and complicating them with the East. An image impact came from the mass withdrawal of foreign business from the Russian market—not directly caused by the sanctions, but demonstrating “over-compliance,” excessive submission to them.

In the public mind, the destabilizing wave created the impression of the end of the story of the market economy in Russia, an impending catastrophe. But the catastrophe did not happen. The stage of stabilization has come, and it is important to use it correctly.

What to do?

In the near future, the Russian authorities and business will have to solve three groups of interrelated tasks. First, they must provide the domestic market with necessary goods, and restore value chains by the use of alternative partners. Second, they need to establish reliable financial mechanisms for working with these partners. Third, it is necessary to look for new growth points for the future, industries in which dependence on the West was critical. It is important to work out the possibilities: for new partners entering the markets and for attracting investors from friendly countries, as well as trying to integrate into new value chains.

Partners, first of all, include China and India. The southern direction is also not unpromising—to begin with, this includes Iran and Turkey, as well as a search for investors in the Arab world and the development of logistics routes through the Middle East. Nevertheless, in all areas, the key obstacle is the threat of secondary sanctions by the United States and the EU—which means that the second task becomes the main one: building a safe infrastructure for financial cooperation.

China remains Russia’s first trading partner—but despite the strategic partnership on the political level, large Chinese companies and banks that are active in the international market are suspending cooperation with Russia, fearing secondary US sanctions. In these conditions, it is important to work on explaining the nuances of the sanctions policy for Chinese business, creating secure payment channels that do not depend on foreign banks or on the dollar and the euro, and developing profitable package offers. Beijing seeks to use the opportunities opening up in the Russian market to occupy the vacant niches and strengthen the yuan in international payments, which means that its interest in finding a common solution is high.

A similar situation is developing in the Indian market, with the difference that Indian business is more connected than Chinese business with America, and its awareness of doing business in Russia is lower. As a consequence, Indian companies and banks integrated into the global economy will comply even more closely with sanctions restrictions, despite their interest in developing ties with Russia. Accordingly, even more active informational work is needed to establish Russian-Indian business ties, as well as the creation of a secure settlement mechanism. India already has similar experience, from doing business with Iran. In particular, UCOBank was formed to trade with it in rupees. Similar structures can be created in the Russian direction.

If the necessary channels are laid, both China and India can not only replace some Western goods in Russian markets, and ensure purchases from the Russian energy, agricultural, and military-industrial sectors—preserving their prospects for business—but also become zones of qualitative economic growth. Chinese partners can become a support in the development of bilateral cooperation in the fields of electronics and digital technologies (including 5G), and Indian, in pharmacology and high-tech agriculture. It also makes sense for business to look at these countries from the point of view of the development of green technologies in energy and agriculture, and the introduction of ESG practices, since these countries are also interested in this.

From our partner RIAC

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