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Russian tanks roll during a military exercise at a training ground in Rostov region, Russia, on Jan. 26.The Associated Press

What scares Russian President Vladimir Putin most?

That’s the question European and American leaders are asking as they prepare a sweeping range of sanctions against Russia that would be triggered if it were to invade Ukraine.

While the goal would be maximum economic pain, they may not get what they want – at least not entirely. That’s because Russia has done a credible job of insulating its economy since 2014, when the West sanctioned Moscow for annexing Crimea, and also because some European countries might resist implementing the most punishing sanctions.

Russia has bolstered its foreign exchange reserves through the lavish purchase of gold – about 180 tonnes annually in recent years. Reserves, including gold and foreign currency, reached a record high of US$630-billion in December, according to the Russian central bank, ensuring the country would have a fair amount of staying power against any new sanctions.

The soaring price of oil and gas has also helped fortify Russia’s financial position, handing it a positive trade balance. At the same time, Moscow has kept government debt very low by European and North American standards. At last count, it was the equivalent of 20 per cent of gross domestic product. The equivalent figure in the United States is 133 per cent, up from 108 per cent in 2019, the year before the pandemic hit.

Russia has also built up its domestic capacity in various industries, including food production, medicines and defence since its invasion of Crimea. After the peninsula was seized, Ukraine, with its vast aerospace industry, stopped delivering parts to Russia for military cargo planes and helicopters. Russia overcame the shortfall by making its own parts.

Call to boost Europe’s LNG supplies

The U.S. is in talks with liquefied natural gas-producing

countries to boost exports to Europe if a Russian invasion

of Ukraine leads to gas shortages in Europe

Gas pipelines

Entry stations

RUSSIA

Nord Stream 2

NETH.

Yamal

BRITAIN

Sudzha

Mallnow

GERMANY

BEL.

POLAND

UKRAINE

Sokhranovka

FRANCE

CZECH REP.

Russia exports around

16 billion cubic feet

per day (bcfd) of

natural gas to Europe

ITALY

TURKEY

Russia

pipeline

Australia

LNG

Qatar

LNG

U.S.

LNG

Natural gas

exports (bcfd)

2015

18.8

3.9

10.2

0.1

19.5

5.8

10.2

0.5

2016

21.3

7.4

10.7

1.9

2017

2018

21.5

9.0

10.4

3.0

2019

21.5

9.9

10.2

5.0

19.1

10.2

10.1

6.5

2020

2021*

23.3

10.5

10.1

9.5

18.4

10.7

10.4

11.5

2022*

*Estimates

GRAphic news, Sources: BP Review of world

energy; Reuters

Call to boost Europe’s LNG supplies

The U.S. is in talks with liquefied natural gas-producing

countries to boost exports to Europe if a Russian invasion

of Ukraine leads to gas shortages in Europe

Gas pipelines

Entry stations

RUSSIA

Nord Stream 2

NETH.

Yamal

BRITAIN

Sudzha

Mallnow

GERMANY

BEL.

POLAND

UKRAINE

Sokhranovka

FRANCE

CZECH REP.

Russia exports around

16 billion cubic feet

per day (bcfd) of

natural gas to Europe

ITALY

TURKEY

Russia

pipeline

Australia

LNG

Qatar

LNG

U.S.

LNG

Natural gas

exports (bcfd)

2015

18.8

3.9

10.2

0.1

19.5

5.8

10.2

0.5

2016

21.3

7.4

10.7

1.9

2017

2018

21.5

9.0

10.4

3.0

2019

21.5

9.9

10.2

5.0

19.1

10.2

10.1

6.5

2020

2021*

23.3

10.5

10.1

9.5

18.4

10.7

10.4

11.5

2022*

*Estimates

GRAphic news, Sources: BP Review of world

energy; Reuters

Call to boost Europe’s LNG supplies

The U.S. is in talks with liquefied natural gas-producing countries to boost exports to Europe

if a Russian invasion of Ukraine leads to gas shortages in Europe

Gas pipelines

Entry stations

Nord Stream 2

RUSSIA

NETH.

Yamal

BRITAIN

Sudzha

Mallnow

GERMANY

BEL.

POLAND

UKRAINE

Sokhranovka

CZECH REP.

FRANCE

ITALY

Russia exports around 16 billion

cubic feet per day (bcfd) of

natural gas to Europe

TURKEY

Natural gas

exports (bcfd)

Russia

pipeline

Australia

LNG

Qatar

LNG

U.S.

LNG

2015

18.8

3.9

10.2

0.1

19.5

5.8

10.2

0.5

2016

21.3

7.4

10.7

1.9

2017

2018

21.5

9.0

10.4

3.0

2019

21.5

9.9

10.2

5.0

19.1

10.2

10.1

6.5

2020

2021*

23.3

10.5

10.1

9.5

18.4

10.7

10.4

11.5

2022*

*Estimates

GRAphic news, Sources: BP Review of world energy; Reuters

Timothy Ash, senior emerging markets sovereign strategist at London’s BlueBay Asset Management, said in a note this week that Mr. Putin’s “Fortress Russia” may not be enough to shield it from the economic hell that U.S. President Joe Biden and some other Western leaders vow to inflict if all or parts of Ukraine are overrun by Russian troops. “The U.S. officials are saying to Putin ‘bring it on, you go into Ukraine, we are going to sanction you to hell, and try retaliation by cutting gas supplies to Europe. We are planning for that – we will get Europe thru the winter and you will end up the loser,’ ” he wrote.

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The West apparently assumes that, hit by tough new sanctions, Russia would retaliate by reducing or stopping natural gas shipments to Europe. To help protect Europe from that scenario, the U.S. has asked Qatar, one of the world’s biggest producers of liquefied natural gas (LNG), and American LNG producers to boost shipments to European gas-import terminals.

They have, a bit, but it is unlikely that enough LNG shipments could be diverted from world markets to keep the lights on in Europe if Russia were to turn off the gas taps (it supplies about 40 per cent of Europe’s gas imports). LNG everywhere is in high demand, and LNG plants are running at full capacity, or close to it, meaning there might not be a lot left over for Europe. Most LNG is sold on long-term contracts – not the spot market – that cannot be broken.

For political reasons alone, Qatar may be unwilling to fully meet Mr. Biden’s demands. The Persian Gulf state, through the Qatar Investment Authority, owns about 19 per cent of Rosneft, Russia’s biggest oil producer. Rosneft has close ties to the Kremlin, so the Americans and Europeans might be wrong to assume that Qatar’s true loyalties lie with them.

And it’s a big assumption that Mr. Putin would stop all gas exports to Europe even if Russia were hit with tough sanctions. Russia needs the hefty export income from gas sales and doesn’t want to give Europe another excuse to downgrade it as a long-term supplier. It also wants German regulators to approve the newly constructed Nord Stream 2 pipeline from Russia to Germany. Eliminating gas exports to Europe would almost certainly ensure the pipeline remains empty.

There is the “nuclear” sanction. It would see Russia eliminated from the SWIFT international payments system. SWIFT is the messaging network that sends 40 million payment orders to 11,000 banks, including Russian banks, and other financial institutions around the world every day. It has been around since the 1970s and is based in Belgium.

Disconnecting Russian banks from SWIFT would stop payments for Russian oil and gas exports (almost all commodities are priced in U.S. dollars). Doing so would wreck Russia’s prime foreign income stream, a scenario Mr. Putin is thought to dread. But it would also mean that Europe could not pay for Russian imports, leaving Europe desperately short of gas for heating and electricity generation. Some European countries – particularly Germany, Russia’s biggest foreign gas buyer – might for that reason resist cutting Russia out of SWIFT.

There is no doubt sanctions would hurt Russia, and the prospect has pushed down the value of the ruble, Russian bonds and Moscow’s benchmark Moex index in recent weeks. But there should be ample doubt that Europe and the U.S. are united in launching the very toughest sanctions against Russia – or that the Russian economy would politely collapse if they were.

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