Life in Ukraine. Live, @ first hand.

A Russian gambit for the EU

There is a move in chess called the gambit, which is when a player deliberately goes for an acceptable loss in return for a greater gain. This is the tactic Europe needs right now, in order to stop Russia’s aggression in Ukraine, now that it is becoming a clear threat for the European Union as well. The EU needs to dare to sacrifice its consumption of Russian energy. In this way, not only will it stop Russia, but in another five years, it could completely rid itself of its addiction to the Russian oil and gas needle.  Given that EU countries are among the largest consumers of Russian gas and oil—oil and gas constitute 93% of all Russian exports to the EU— they can gradually turn away from these hydrocarbons by looking at alternate sources.

One alternative to Russian oil is oil from Saudi Arabia in the nearest 2-5 years, or from Iraq, Libya and the US in the nearest 5 years or more. If the West arranges for oil deliveries from Saudi Arabia, it could drop the price on world markets to USD 80, which will cause a major decline in Russia’s economy, whose growth projections for 2014 were based on an oil price of USD100-110.

As to Russian natural gas, the only competitor in the short term is shale gas from the US, although even if we could assume that deliveries to Europe would start tomorrow—realistically we’re looking at 2015—they will still only cover about 32% of European demand: the EU consumes 135 billion cubic meters of Russian gas annually, while the US will be able to start delivering only 44 billion cubic meters in 2015. According to our calculations, it will cost no more than USD 400 per 1,000 cubic meters. In some EU countries, this will make it cheaper than the Russian gas. From 2016 on, American deliveries of gas could double. By 2030, deliveries of American shale gas on global markets could be up to 150 billion cubic meters and completely cover the necessary volumes currently coming from Russia. The two alternatives described here are completely realistic, although they will only have a real impact over the next five years.

What can Europe do today? If EU countries make the political decision to cut back on their consumption of Russian oil and gas, taking advantage of accumulated reserves, they could cut down the need for deliveries by 20-50%, but not more. With petroleum, the US could do this by using its strategic reserves and causing an artificial temporary increase in the supply of oil on world markets or by increasing deliveries from certain OPEC countries, like Saudi Arabia or Iran. The EU gas market can increase supplies of liquid gas from the US and the Persian Gulf countries—primarily Qatar—, and refuse to sign any more long-term contracts with Gazprom, the price of its gas being tied in to the price of oil.

The impact on the Russian economy of partial reductions in the consumption of oil and gas. According to our calculations, the most realistic option today is to reduce the consumption of Russian energy by 20%, while also reducing its price by 20%. Given that 28% of Russia’s budget is based on taxes received from export profits on the sale of energy, a partial reduction in its consumption will reduce the Russian budget’s revenues by 8% or USD 126 billion. Who will be hit hardest by this “smallish” reduction in revenues? Based on the breakdown of expenditures in the Consolidated Budget of the Russian Federation—federal budget+local/regional budgets—the social sphere will suffer the most, as it took 33.7% of the budget in 2013, and programs in support of individual branches of the economy, 13.2%, and education, 11.6%. Healthcare would be slightly less affected, taking as it does only 8.7% of the Consolidated Budget.

The EU has already finished drawing up the third package of sanctions against Russia. We hope that the EU will be ready to take the risk of a temporary cut in the consumption of Russian energy, all the more so when there are real options that would allow this on the part of OPEC countries.

By Liubov Akulenko, Dmytro Naumenko

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