Global Economy and Energy Markets Weekly Commentary – 3rd Apr ‘22

Christof Rühl, member of the Advisory Board of Crystol Energy and a Senior Fellow at the Center on Global Energy Policy at Columbia University, discusses the latest global macroeconomic developments and energy markets in this weekly interview to the Gulf Intelligence. 

Sanctions against the Russian Federation are developing so fast that it is hard to keep track of them and even harder to see a consistent narrative as events unfold. But there is one. Russia is the world’s largest exporter of energy and commodities. A persistent balance of payment surplus is the source of its financial strength, in terms of both current income and the financial assets previously accumulated by “fortress Russia.” Oil, gas, and coal exports constitute the most valuable revenue streams and are, therefore, prime targets of sanctions policy.

The problem is that energy sanctions will backfire badly, if they lead to price increases large enough to derail the economic performance of sanctioning countries. The sanctions imposed immediately after the invasion did not even include restrictions on commodity exports. They, nevertheless, affected energy: freezing the assets of Russia’s Central Bank removed credibility from the threat of Russia cutting its own energy exports to inflict economic damage on sanctioning countries.

Over the long term, the country may see its economic prospects reduced to selling raw materials on the cheap. Immediately after the first round of sanctions, spot demand for Russian oil dropped by approximately one-third (2.5 million barrels per day) as uncertainty over the new rules disrupted trade and financial flows. The global price of oil jumped by 30%, while Russian crude, shunned by traders, still sells at a 25% discount. How this dual price effect is managed is the hallmark of the success of energy sanctions.

Markets, however, will adapt to circumstances. Without further disruption, such as direct energy sanctions, both the local discount and the global price increase will be competed away. Workarounds will fix the current state of regulatory flux. Trading will become efficient again. Russia’s income flows would be restored.

And so, energy sanctions have returned to center stage – with a twist, however. The sanctions discussion has moved from a one-size-fits-all approach enforced by secondary sanctions, as in the case of Iran or Venezuela, to “sanction picking,” with individual countries or country groupings imposing restrictions they feel they can afford on selected commodity imports, including oil and gas.