LONDON — In the five weeks since Russia invaded Ukraine, the United States, the European Union and their allies have begun an economic counteroffensive that has cut off Russia’s access to hundreds of billions of dollars of its own money and stopped 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 financial limbo.
But Putin reminded the world last week that he has his own economic weapons that he could use to inflict some pain or defend against attack.
Through a series of aggressive measures taken by the Russian government and its central bank, the ruble, which had lost nearly half its value, clawed its way back to almost where it was before the invasion.
And then there was the threatens 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 the leaders in the capitals of Germany, Italy and other allied nations to fight and showed in the most visible way since the war began how much they need Russian energy to power their economies.
It was that dependency that made the United States and Europe exempt fuel purchases from the strict sanctions they imposed on Russia at the start of the war. The European Union gets 40 percent of its gas and a quarter of its oil from Russia. An overnight cut, Germany’s Chancellor Olaf Scholz warned last week, would plunge “our country and all of Europe into a recession.”
For the time being, the prospect of an imminent gas supply disruption appears to have been averted. But Putin’s sudden demand for rubles helped prompt Germany and Austria to prepare their citizens for what might come. They took the first official steps toward rationing, with Berlin entering the “early warning” phase of planning for a natural gas emergency.
Although President Biden has announced plans to release 180 million barrels of oil from US reserve supply over the next six months and divert more liquefied natural gas to Europe, that still would not be enough to replace everything Russia supplies. . Russian oil exports they typically account for more than one in every 10 barrels consumed around the world.
Europe’s ongoing energy purchases send up to $850 million each day to Russia’s coffers, according to Bruegel, an economics institute in Brussels. That money helps Russia finance its war efforts and cushions the impact of sanctions. Due to rising energy prices, Russian energy giant Gazprom’s gas export revenue pumped $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global advisory firm. .
“The lesson for the West is that the effectiveness of financial sanctions can only go so far in the absence of trade sanctions,” the firm said in a research report.
Putin’s feints and jabs (at one point last week he vowed to stop and continue gas deliveries in the same statement) have also baffled European leaders as they puzzle over his strategy and motivations.
The war has led democracies to stop depending on Russian exports. They have proposed cutting natural gas deliveries by two-thirds before next winter and ending them entirely by 2027. Those goals may be too ambitious, experts say.
In any case, the transition to other providers and eventually to more renewable energy sources will be costly and painful. In general, Europeans may be poorer and colder, at least for a few years, due to spiraling prices and the decline in economic activity caused by energy shortages.
And unlike Russia, the governments of these countries have to answer to the voters.
“Putin has already shown that he is willing to sacrifice civilians — his own and Ukrainians — to achieve a victory,” said Meg Jacobs, a historian at Princeton University. For European democracies, lowering thermostats, lowering speed limits and driving less is an option, she said. “It only works with massive cooperation.”
But leverage, like gas, is a limited resource. And Putin’s willingness to use it now means he will have less in the future. Nor will it be an easy transition for Russia. However, most analysts believe that Europe’s aggressive moves to reduce its reliance on Russian energy will have far-reaching consequences.
“They’re done with Russian gas,” David L. Goldwyn, who served as the State Department’s special envoy on energy in the Obama administration, said of Europe. “I think even if this war were to end, and even if there was a new government in Russia, I think there is no going back.”
The President of the European Commission, Ursula von der LeyenHe said as much when he announced the new energy plan last month: “We simply cannot trust a supplier that explicitly threatens us.”
Security concerns are not the only development that has undermined Russia’s position as a long-term energy provider. What struck economists, lawyers and lawmakers about Putin’s demand to be paid in rubles was that he would have violated sacrosanct negotiated contracts and revealed Russia’s willingness to be an unreliable trading partner.
While he has sought to exert his energy influence externally, Putin has taken steps to insulate Russia’s economy from the impact of sanctions and to prop up the ruble. Few things can undermine a country as systematically as an abruptly weakening currency.
The Russo-Ukrainian War and the Global Economy
When the allies froze the assets of the Russian central bank and sent the ruble into a downward spiral, the bank raised the interest rate to 20 percent, while the government ordered companies to convert 80 percent of dollars, euros and other foreign currencies earning. in rubles to increase demand and drive up the price.
That has revived the ruble’s value, but as several analysts have pointed out, the currency’s newfound stability is not because the market suddenly trusted the Russian economy, but because of extraordinary government interventions.
Putin’s demand that gas purchases be paid for in rubles seemed like another such intervention. Still, the insistence was disconcerting. Russia could easily take the continuing influx of euros and dollars paid by foreign governments and convert them into rubles.
Of course, Putin may enjoy putting European governments in an awkward position or exercising his power, but his demands may also reflect internal difficulties.
For example, he may not be able to guarantee compliance with his mandate that companies, including natural gas producer Gazprom, repatriate 80 percent of the dollars and euros they earn and sell them to Russian banks.
The problem is that “the government can’t enforce this rule,” said Michael S. Bernstam, a researcher at Stanford University’s Hoover Institution. The “companies are cheating”.
“The only people the Russian government can trust are Western companies that buy Russian natural gas and other commodities,” he added.
Aside from currency problems, Russia is struggling economically in other ways.
The country is already facing a deep recession and several analysts estimate that the economy could contract by as much as 20 percent this year. A S&P Global Survey of purchasing managers at Russian manufacturing firms showed severe declines in production, employment and new orders in March, as well as sharp price increases.
In a matter of weeks, Putin undermined trade and commercial ties between Russia and richer economies that took decades to build after the demise of the Soviet Union. According to one estimate, some 500 foreign companies they have withdrawn their holdings in Russia, reduced their operations and investments, or have promised to do so.
“Russia does not have the capacity to replicate technology domestically that it would otherwise have sourced abroad,” according to an analysis by Capital Economics, a London-based research group. That’s not a good sign for increasing productivity, which even before the war was only 35 to 40 percent of that in 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, diminishing whatever influence it now has over the global economy, as well as its own economic prospects.