It is the great fear of the West: that the new sanctions against Russia will lead to a further, total disruption of the energy markets, and that instead of hitting Russia, it will hurt the West in particular. Aleksandr Novak, the Russian deputy prime minister and former energy minister, threatened on Monday when the sanctions were introduced that anyone who cooperated would not receive a drop of oil. Some Western analysts saw the ignition of that ‘the Russian energy bomb’ in: Europe’s attempts to get Putin to end his violence against Ukraine will end in a European drama with great scarcity and exploding oil prices.
But ask the Russian energy analyst Mikhail Krutichin, and he mainly sees “empty threats” from Russia. He doesn’t see a price shock happening anytime soon. And the idea that countries such as China, India and Turkey will want to buy up all Russian oil, so that Russia will not suffer a penny in the end, is nonsense, according to him.
From his office in Oslo, he argues that the sanctions will hit Russia particularly hard. Yes, undoubtedly Putin will pass the impact on to his people. And it most likely will not bring him to abandon his doomed war in Ukraine. But the consequences for the Russian energy sector, and therefore for the Russian budget, will be painful, he says. “This is the heaviest blow so far.”
The 75-year-old Kroetichin is regarded as an authoritative energy expert and appears frequently in the (independent) Russian-language media – which is one reason why he does not live in Russia, but resides alternately in the United States and Norway. He has excellent contacts within the Russian oil and gas world.
Krutichin sees the sanctions as “one game changer”, which can make things extremely difficult for Russia and will further erode its ailing economy. That economy was already doomed to failure because of its heavy reliance on ‘fossil’, but that process is now being accelerated considerably. “The decisions of Putin and his entourage have nothing to do with common sense. With his military adventures, Putin is killing the very industry that could have kept the Russian economy afloat for a few more years.”
What makes these sanctions a game changer?
“The threats from Moscow should not be taken seriously. Countries that cooperate with the sanctions hardly buy Russian oil anymore, because of that import ban. It is mainly the Russian energy sector and the suppliers that will suffer as a result. And thus the Russian state. If you add it all up, 60 percent of the Kremlin’s revenue comes from the energy sector. Oil production may shrink by half due to the sanctions, causing the total government budget to shrink by tens of percent.”
In the West, it is said that Russia can easily sell its oil to other countries, such as China and India. They have also bought a lot recently.
“Let’s take a closer look at that claim. Everyone is always talking about China. But China has no need at all to buy more and more oil. In recent months it has always imported the same amount of oil, the demand has not increased. Because China does not want to depend on anyone and has many more suppliers than just Russia. In addition, there is only one pipeline to China, and it is already being used to the maximum.
“India bought more, but Russia faces competition from other suppliers. Iraq, India’s traditional purveyor, is now promising higher oil price discounts than Russia. Moreover, there is great international pressure on India not to buy more. Some Indian refineries are therefore already refusing Russian offers. Companies that still want to buy more are demanding even higher discounts.”
If China reopens after corona, it will need more oil, right?
“I rather think that demand may sometimes fall. The corona virus is reviving again, and although China is now easing its policy slightly, it remains very strict and the lockdowns may continue for a long time. The Chinese semi-dictator Xi Jinping has also created financial bubbles with his economic policy, including among mortgage providers. If they burst, the economy will be in trouble. I would not count too much on a revival of the Chinese economy.”
Read more about the sanctions that came into effect on Monday: European price ceiling for Russian oil takes effect on Monday: economic war against Russia in explosive phase
So the West doesn’t have to worry about extreme oil prices?
“When the embargo came into effect on Monday, traders were watching oil prices all day. It eventually rose 2 percent. I wouldn’t call that sensational. Some OPEC countries are in the stomach with one too many of oil on the market. As a result, according to them, the prices are too low. They are only happy if some Russian oil disappears. The story that the oil price can rise to $ 250 a barrel is really Russian propaganda.”
You seem to foresee the end of the mighty Russian energy sector.
“The Russian oil industry was already in decline. The government expected a sharp drop in production in the coming years, because oil is becoming increasingly difficult to extract from the ground. Russia is not Saudi Arabia, where it comes up like this and oil can be brought everywhere via easily accessible ports. The Russian oil is in extremely remote places, where it is freezing cold. Some of the largest fields of yesteryear hardly produce any oil. 96 percent of what is pumped up there is water.
“The decline will now go even faster. The Russian oil industry is primitive. They sometimes work with technology that dates back to the Soviet era. Foreign companies that can help with more modern technology, leave Russia because of the war. Companies like Schlumberger, Halliburton don’t want to do business there anymore. Russia can no longer import technology due to the sanctions.
“It can only go backwards from here. Putin is destroying an industry that could have supported the economy for at least a few more years. While others anticipated the global end of the fossil fuel industry under the pressure of climate change, Putin stubbornly clung to fossil fuels as the foundation of the Russian economy. And, in the – hypothetical – event that Russia will become a civilized country again in a few decades, it will have missed the international trend towards more sustainable energy production.”
What options does Putin have to maintain his war chest?
“The Russian government has said that the ‘military operation’ in Ukraine must not be jeopardized. That leaves one option: further increase taxes for citizens and businesses. The Kremlin has hardly any other income. Recently, all kinds of additional taxes have been introduced. Next year the VAT on fuel will be increased. The gas price for households and industry has risen by 9.5 percent this year and new rate increases await next year.”
Read also: Europe is feverishly searching for a way to combat the energy crisis. Six questions and answers
Will many more Russians end up in poverty as a result?
“Yes, but don’t expect a revolution right away. There is no civil society in Russia and many Russians are willing to accept worse living conditions simply for fear of changes that could be even worse. The income of two-thirds of the population depends in one way or another on government spending. They don’t want to mess with it too much.”
Military spending will not be cut?
“That too will happen. We are already seeing that the Russian population is being called upon to give old socks to the army and to buy bulletproof vests for soldiers. Insane. It was already a mess during my time in Russia, but the Russian army is now in an unimaginably worse shape.”
But it won’t get Putin to stop his war?
“I am an analyst and in that capacity I advise all kinds of companies and institutions. We try to make a reasonable estimate of which scenarios could potentially unfold. But there is nothing rational about Putin’s decisions, there is no logic behind them. Some people say he’s gone mad. But there are plenty of people around him who think they can personally benefit from those crazy ideas.”
What now? Should Europe wait and see?
“Europe cannot exert much more pressure. I dare not predict whether social unrest will break out or whether a protest movement will arise, for example in the provinces. The economic situation there is very bad. There are few schools, you can hardly get medical help, in case of a calamity you have to go to Moscow. I do think it will be very exciting. Especially in the middle of next year.
“It is surprising that it has taken so long. Europe has known for years that Russia cannot be trusted when it comes to energy. I sometimes ask my German acquaintances: what possessed you to remain dependent on Russia despite all the signals? Was it corruption? Stupidity? “We were short-sighted,” they say. That era is now over. Europe is breaking faster than anyone could have imagined with Russian energy. It still has work to do when it comes to securing its own energy supply. But the blow it is now dealing to Russia is hard. The West has done what it could.”