June 6, 2022

The EU’s decision to impose a sixth sanction package on Russia calling to ban 90 percent of Russian crude oil imports by the end of 1922 reflects a questionable wager. The EU has decided to bet that the economic pain inflicted upon Russia by cutting off Putin’s lucrative oil exports to the EU will deny Putin the revenue he needs to continue the Russian invasion of Ukraine.

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What the available evidence demonstrates, however, is that Putin has found ample alternative markets for Russian oil and gas in Asia. In particular, both India and China are not infected with “green new deal ideology” demonizing hydrocarbon fuels. Realizing the cost-efficiency of coal, oil, and natural gas, India and China represent a large and growing export opportunity for Russian hydrocarbon fuels. At the same time, Putin has quietly placed the ruble back on the gold standard, positioning the ruble to rise to the top against the diminished purchasing power of the overprinted dollar and euro fiat currencies.

The United States, the United Kingdom, and the EU stood by and watched as China took over Hong Kong, clearly violating previous international agreements China made to respect Hong Kong’s sovereignty. Putin has correctly calculated that the U.S. and the EU will not respond with direct military action as Putin takes military control of Ukraine step by step. The U.S. and EU sanctions against Russian hydrocarbons appear to be backfiring by propelling the West into another round of crippling stagflation not seen since Jimmy Carter’s failed presidency in 1979.

Putin appears to understand that, without ample supplies of relatively inexpensive Russian oil and gas, the EU nations are committing economic suicide. Despite the EU’s and the Biden administration’s ideological preference for green energy, wind and solar power are insufficiently powerful to sustain or stimulate economic growth while cooling their populations in the summer and warming them in the winter. Truthfully, the major impact of the EU’s sixth sanction package will be to create hyperinflation and stagnant economic growth in the West, with politicians currently in power risking their political futures in upcoming national elections.

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The EU and Russia are playing “a game of chicken,” said James Nixey, who directs the Russia and Eurasia program at London’s Chatham House think tank. “It is hard to sway who will swerve/blink first. The Russians for fear of running out of money. Or Europe for fear of the lights going out.”

In a game of chicken with the EU, Putin is the likely winner. The KGB-trained Putin has nerves of steel and is a ruthless political operative willing to use violence to destroy his domestic and foreign opponents. He has gained the economic and military edge over a weak and divided EU that can no longer rely upon the Biden administration to assume the role the U.S. has played since the end of World War II; namely, as the traditionally reliable military strong-arm of NATO.

Certainly, the facts on the ground show that Putin is in control of the situation as the various European countries face drastic shortages.

According to Eurostat, the EU imports approximately 25 percent of its crude oil from Russia, in contrast to the EU importing nearly 40 percent of its natural gas from Russia. In a concession to landlocked Hungary, the EU’s sixth sanction package cut off only Russian crude oil delivered by ships, not crude oil delivered by pipelines.

In March, the EU developed a strategy to cut reliance on Russian natural gas by two-thirds, but since then, the EU has struggled to get agreement on specific measures, lacking the resolve to impose an outright ban on natural gas similar to the sixth sanction’s promise of banning Russian crude oil imports by end-2020. Realistically the EU has admitted it cannot wholly break energy dependence on Russia before 2027.

Russia delivers some 70 to 85 percent of the crude oil exports to the EU using tankers and ports. By contrast, almost all of Russia’s natural gas is delivered to the EU via pipeline. But anticipating the EU’s ban on crude oil, Russia has dramatically altered the nature of its global oil flows since invading Ukraine. The amount of Russian oil on the water has more than doubled since the beginning of 2022, with an increasing percentage of Russia’s oil now flowing to Asia, but at a substantial discount.

Image: View of the GTP-N facilities at the Nydinsky site of the Medvezhye field by DMyshkin. CC BY-SA 3.0.