Isaac Newton’s third law of motion basically says that for every action, there is an equal and opposite reaction. The same might be said about economic sanctions.
If Russia can’t sell its oil and natural gas to the United States, it will turn east and sell them to China. That market switch is already under way. Beijing probably has already concluded the war in Ukraine might do more good than harm to the Chinese economy. Last week, it hedged its geo-economic bets by declining to condemn Russia’s invasion of Ukraine in a UN General Assembly vote – China abstained.
Russia’s motivation to expand its already enormous economic ties to China increased on Tuesday, when U.S. President Joe Biden announced an embargo on imports on Russian oil and oil products; Britain was quick to follow.
The move was expected as the U.S., Britain and the European Union tighten the economic noose around Russian President Vladimir Putin’s neck, and it propelled already surging oil prices up by 6.5 per cent. In London trading, Brent crude, the international benchmark, went to US$131 a barrel, for a one-year rise of 93 per cent.
Oil prices might have gone far higher if the U.S. and Britain were bigger consumers of Russian oil. The U.S. Energy Information Administration says only about 3 per cent of all the country’s imported crude came from Russia in 2021; the figure rises to 8 per cent when petroleum products are included. Both figures were falling even before the American embargo was announced.
Mr. Biden’s move will still hurt, since a few per cent of the world’s biggest oil market is not nothing, making the announcement, unlike Canada’s, more than symbolic (Canada hasn’t imported any Russian oil since 2019). The big question is whether the EU will also put an oil embargo into place at some point. It might, but not any time soon.
The EU’s mistake was making itself overly dependent on Russian energy exports; it can’t possibly wean itself off them overnight and keep the lights on. That’s why German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi, among other European leaders, lobbied to make Russian energy exempt from European sanctions.
To be sure, they are now motivated as never before to veer away from Russian energy, a process that will take many years. Watch them buy American and Qatari liquefied natural gas (LNG), ramp up their renewable energy efforts, rebuild old nuclear reactors and launch new ones, and perhaps stay the planned executions of their remaining coal burners.
In the meantime, Mr. Putin’s rage will be tempered by China, which, in spite of its economic slowdown in recent years, still has a voracious appetite for hydrocarbons, including coal, and has little incentive to curb its carbon dioxide emissions in the near term.
China and Russia had been expanding their economic ties in recent years and sanctions against Russia, which China does not support, will only bring them closer.
Trade between the two countries leapt 36 per cent last year to almost US$147-billion, according to official Chinese data, and has been steadily rising since 2014, when Russia’s annexation of Crimea landed it in the sanctions doghouse. China is now Russia’s No. 1 export destination; China buys Russian agricultural commodities as well as hydrocarbons.
There is no doubt that any oil Russia cannot sell to the West will be happily bought by China, all the more so since Russia’s benchmark Urals crude is trading at a steep discount – as much as US$30 a barrel less than Brent crude in recent days. Oil is mobile; the tanker ships that were headed west will do a U-turn and go east.
The same cannot be said for gas, which is generally delivered by pipeline. China would like to buy more Russian gas but can’t, at least not right away. Mr. Putin cannot divert the gas he sends to Germany, Italy, Austria, the Netherlands and other EU countries to China because the pipelines that supply Europe are not connected to the ones in the far east of Russia that go to China.
In time, Russia will expand its gas pipeline network to China, but that would take years. In the meantime, it seems likely Russia will keep exporting gas to Europe because Europe has no alternative to Russian gas and is willing pay a fortune for it. It seems unlikely Russia will turn off the gas taps, just as it seems unlikely Europe will slap an embargo on that gas.
You can see where this is going. Not only will Russia sell more oil and gas and other commodities to Europe, but Russia will import more Chinese technology and use Chinese financing to invest in Russian hydrocarbon projects. Already, there are rumours Chinese companies might buy the stakes in Russian energy plays being abandoned by Western companies. One is BP’s 20-per-cent stake in Kremlin-controlled oil giant Rosneft, which the British company wants to sell.
There might be more. China and Russia will be tempted to create their own interbank payments system now that Russian banks are being banned from the SWIFT network. They will also try to boost the profile and acceptance of their national currencies, a process that will not be quick, because the U.S. dollar utterly dominates international trade settlements. Still, Russia and China will push hard to de-dollarize their foreign transactions.
The theory of unintended consequences already seems in fully display. The U.S. and Europe are working hard to isolate and punish Russia for it invasion of Ukraine, as they should. But in doing so, they can only push Russia and China closer together, making China stronger as it feeds off cheap and plentiful Russian commodities. Dealing with a stronger and potentially expansionary China will be the next U.S president’s problem.
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