- Russia has slowed natural-gas exports to Europe amid the war in Ukraine.
- The move is hurting Russia more than it’s hurting Europe, a Yale University analysis found.
- Russia is now pivoting to customers in the east, but countries like China and India bargain hard.
Russia has slowed natural-gas supplies to Europe amid the war in Ukraine — and the commodity giant is under “severe strain” because of it, a Yale University analysis found.
“Contrary to widespread alarmism over the adverse impact of the Russia-Ukraine war on global commodity prices, the importance of commodity exports to Russia far exceeds the importance of Russian commodity exports to the rest of the world,” the experts wrote in the analysis, released July 20.
Europe depends on Russia for 40% of its total natural-gas needs, from cooking in homes to firing power stations. It’s fretting over a winter energy crisis, as Russia has reduced natural-gas flows to the continent, citing sanctions-related challenges.
Even so, it’s the Russian economy that “is hurt the most by shifting natural gas supply chains” in the longer run, wrote the Yale authors. That’s because the EU has already agreed to ban almost all Russian oil imports from end-2022 and said it will cut coal imports from mid-August. Multiple European countries, including Germany and Italy, are also working to wean themselves off Russian gas.
Russia’s total export revenue is overwhelmingly derived from commodities. “These export earnings make up well over half of Russia’s total government budget in most years – and presumably, an even larger proportion now,” the Yale team wrote.
The study, led by Jeffrey Sonnenfeld, a professor at the Yale School of Management, also found that the Russian economy is “reeling” from sweeping international sanctions. Its findings stand in contrast to studies of Russia’s economy that show it’s holding up better than expected, in part due to the robust takings from its massive oil and gas industry.
Putin is pivoting east to sell Russian energy, but buyers are driving hard bargains
To mitigate the impact from lower energy sales to Europe, Russian President Vladimir Putin is hawking Russia’s energy exports to other markets, like Asia — but at a discount.
“Its isolation from the west has devastated Russia’s strategic hand in negotiating with China and India, notoriously price-conscious buyers who retain close ties to other major commodity exporters,” wrote the Yale team.
“These countries have not been shy to exploit sanctioned pariah countries before, with China notoriously driving massively discounted oil deals with countries such as Iran and Venezuela with regularity,” the authors added.
Since the invasion of Ukraine, prices of Russia’s flagship Urals crude oil have fallen significantly. Urals was priced at a $1.50 premium to international Brent crude from January to February, but have since fallen to a discount of $25.80 against Brent, according to a Bloomberg compilation of data from the Russian Ministry of Finance and the Intercontinental Exchange.
“It now deals from a position of weakness with the loss of its erstwhile main markets,” the Yale team wrote, adding that Russia’s strategic position as a commodities exporter has “irrevocably deteriorated.”