LONDON — In the five weeks since Russia invaded Ukraine, the United States, the European Union and their allies have launched an economic counteroffensive that has cut off Russia’s access to hundreds of billions of dollars of its own money and much of its international trade has stopped . More than 1,000 companies, organizations and individuals, including members of President Vladimir V Putin’s inner circle, have been sanctioned and placed in financial limbo.
But Mr Putin reminded the world last week that he has economic weapons of his own that he could use to inflict pain or ward off attack.
Through a series of aggressive measures by the Russian government and its central bank, the ruble, which had lost nearly half its value, has found its way back to near where it was before the invasion.
And then there was the threat to stop the flow of gas from Russia to Europe – prompted by Putin’s demand that 48 “unfriendly countries” break their own sanctions and pay for gas in rubles. It roiled leaders in the capitals of Germany, Italy and other allied nations, showing in the most visible way since the war began how much they need Russian energy to power their economies.
It was this dependency that led the United States and Europe to exempt fuel purchases from the severe sanctions they imposed on Russia early in the war. The European Union gets 40 percent of its gas and a quarter of its oil from Russia. Chancellor Olaf Scholz warned last week that a shutdown overnight would “plunge our country and all of Europe into a recession”.
For the time being, the prospect of an imminent stop on gas seems to have been banned. But Mr. Putin’s sudden demand for rubles helped Germany and Austria prepare their citizens for what might be to come. They took the first official steps towards rationing, and Berlin began 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 reserves over the next six months and to divert more liquefied natural gas to Europe, it still wouldn’t be enough to replace all of Russia’s supplies. Russian oil exports typically account for more than one in ten barrels the world consumes.
According to Bruegel, a Brussels-based economics institute, Europe’s ongoing energy purchases bring up to $850 million into Russia’s coffers every day. This money helps Russia fund its war effort and cushions the impact of sanctions. Fueled by rising energy prices, Russian energy giant Gazprom’s gas export earnings pumped $9.3 billion into the country’s economy in March alone, according to an estimate by Oxford Economics, a global consultancy.
“The lesson for the West is that without trade sanctions, the effectiveness of financial sanctions can only go so far,” the company said in a research briefing.
Mr Putin’s feints and jabs – at one point last week he vowed to halt and resume gas supplies in the same statement – have also thrown European leaders off balance as they try to guess his strategy and motivations.
The war has caused democracies to stop relying on Russian exports. They have proposed cutting natural gas supplies by two-thirds before next winter and stopping them altogether by 2027. Those goals may be overly ambitious, say experts.
Either way, the transition to alternative suppliers and eventually more renewable energy sources will be expensive and painful. Overall, Europeans could be poorer and colder for at least a few years due to rising prices and subdued economic activity due to energy shortages.
And unlike in Russia, the governments in these countries have to answer to the voters.
“Putin has already demonstrated that he is willing to sacrifice civilians — his and Ukrainians — to achieve victory,” said Meg Jacobs, a historian at Princeton University. It is a choice for European democracies to turn down thermostats, reduce speed limits and drive less, she said. “That’s only possible with mass cooperation.”
But leverage, like gas, is a finite resource. And Mr Putin’s willingness to use it now means he will have less of it going forward. The transition will not be easy for Russia either. Most analysts, however, believe that Europe’s aggressive moves to reduce its dependence on Russian energy will have far-reaching consequences.
“They’re done with Russian gas,” said David L. Goldwyn, who served as the State Department’s special envoy on energy in the Obama administration, of Europe. “I think even if this war ended and even if you had a new government in Russia, I think there’s no turning back.”
That’s what European Commission President Ursula von der Leyen said when she announced the new energy plan last month: “We simply cannot rely on a supplier who explicitly threatens us.”
Security concerns are not the only development that has undermined Russia’s standing as a long-term energy supplier. What surprised economists, lawyers and policymakers about Putin’s demand to be paid in rubles was that it would have violated sacrosanctly negotiated treaties and revealed Russia’s willingness to be an unreliable business partner.
While trying to exert his energy influence externally, Mr Putin has taken steps to insulate the Russian economy from the effects of sanctions and prop up the ruble. Few things can systemically undermine a country like an abruptly weakened currency.
The Russia-Ukraine War and the World Economy
When the Allies froze the assets of Russia’s central bank and sent the ruble on a downward spiral, the bank raised the interest rate to 20 percent, while the government required companies to exchange 80 percent of the dollars, euros, and other foreign currencies they earn in rubles to increase demand and drive up the price.
This has revived the ruble’s value, but as several analysts have pointed out, the currency’s newfound stability is not due to the market’s sudden confidence in the Russian economy, but rather to the government’s extraordinary interventions.
Mr Putin’s demand to pay for gas purchases in rubles looked like another such intervention. Still, the insistence was bewildering. Russia might as well take the ongoing inflow of euros and dollars paid by foreign governments and convert them into rubles.
Of course, Mr Putin may enjoy putting European governments in an awkward position or showing off his power, but his demands can also reflect difficulties at home.
For example, he may not be able to ensure that companies, including natural gas producer Gazprom, repatriate and sell to Russian banks 80 percent of the dollars and euros they make.
The problem is that “the government can’t enforce that rule,” said Michael S. Bernstam, a research associate at the Hoover Institution at Stanford University. The “companies cheat”.
“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 the economy could contract by as much as 20 percent this year. A S&P Global survey of the purchasing managers of Russian manufacturing companies showed sharp declines in production, employment and incoming orders as well as sharp price increases in March.
Within weeks, Mr Putin undermined business and trade ties between Russia and wealthier economies that had taken decades to establish after the fall of the Soviet Union. After an estimate some 500 foreign companies have withdrawn investments in Russia, scaled back operations and investments or promised to do so.
“Russia does not have the capabilities to replicate domestically the technology it would otherwise have gained overseas,” according to an analysis by Capital Economics, a London-based research group. This does not bode well for an increase in productivity, which even before the war was only 35 to 40 percent that of the United States.
The result is that however the war in Ukraine ends, Russia will be more economically isolated than it has been in decades, diminishing any influence it now has on the world economy as well as its own economic prospects.