Oil And Gas - Putin's False Friends

Oil and gas fund up to 50% of the Russian annual budget income ...

To New Friends ....

 .... and so losing that income, should be a disaster for Putin;s government.

So the increasingly severe sanctions by the West on that sector should really bite .... the EU's near total (Hungary has rejected the idea), decision to end its dependency on Russian oil - with purchases banned by the end of 2022, now means Russia must find a new set of replacement customers. Not only does this represent a massive loss of income, but also a huge waste of infrastructure built at a cost of billions to supply Europe. 

Russia's Gas And Oil Pipe Networks

The candidates seem to be China, Belarus ... and possibly, the increasingly EU detached Hungary, broke Pakistan, and of course India. But they all (Belarus excepted), carry risks. Hungary may toe the EU line after its objections. Pakistan is a country with economic and security instability concerns, and with budget problems  .. so may not be able to pay in hard currency. India can afford it (but would probably only want it at heavily discounted rates), but are also under increasing Western pressure over its relations with Putin's Russia.

Finally, turning to China as a new partner/customer will not only strengthen China (at Russia's long term strategic cost), but take some time, as even doubling the existing Russian gas pipeline network to China (or south Asia), would take 8-10 years, at a cost of billions, and even then my make up less than half the lost sales to Europe by volume and earnings. 

Russia launched gas deliveries to China via the Power of Siberia pipeline in 2019, which is set to ship 5 Bcm in 2020, and gradually ramp up supplies to 38 Bcm in 2025, making it one of the top 3 gas suppliers to Asia by then .... By 2023, nearly 40% of Chinese gas demand growth will be met through Russian gas from Siberia ... that may have to be ramped up considerably.

Russia cutting off gas supplies to Poland and Bulgaria, and threatening the rest of Europe's supplies, has obviously got the potential to ensure that any potential customers, even China (and even puppet state Belarus), may not wish to become solely reliant on Russia as a supplier, or be tied to long and exclusive contracts .... It takes considerable trust, time and money, to invest in and build the infrastructure for gas supply. 

It’s a massive investment and with long-term contracts the norm .... even the long-term contracts to supply crude oil and oil products worth around $200 billion a year, may be impacted if Russia is seen as an unreliable partner, willing to cut off supplies, or even as a risky partner if Western sanctions spread.

So far, the impacts of sanctions on the Russian economy are predicted as being approximately $1.4 trillion (that’s about *$8,000 per head for the Russian population). Europe was the most important trading partner for Russia, and so sanctions have caused export difficulties, shortages of parts and supplies, with a predicted 7 - 15% plunge in Russia’s gross domestic product this year. 

The impacts of sanctions on Russian unemployment rates, especially in better paid high end jobs could be significant, as over 700 multinational companies are pulling out of Russia over the next few months (probably for good, as Putin's media brands them 'Nazis, traitors or foreign agents' etc, and makes it difficult for them to try to return when the hostilities end), and so the jobs lost as they go, may never return ... this could result in a brain drain of the brightest and best, who having got used to 30 years of Western access, chase better lifestyles and opportunities elsewhere.

Even the costs of maintaining/repairing the occupied/integrated parts of the Donbas (Eastern Ukraine), may be too much for the Russian economy to sustain. For example Russia spends as much as US$3.8 billion (£2.9 billion) a year just hanging on to Chechnya (and trying to rebuild Grozny, after its total destruction in Putin's first 'foreign' war).

The human costs on Russia are equally hard to define, but during the Soviet invasion of Afghanistan, around 15,000 soldiers died, while during the first and second Chechen wars approx 17,000 died, and its believed that Russia (even with its use of foreign mercenaries to cut Russian death tolls), has lost at least as many soldiers as in either of those wars so far, and rising (possibly to around 100,000). The economic toll for such death rates is calculated as being US $3 billion for every 10,000 soldiers killed, that corresponds to an annual economic cost of more than US $4 billion for just the deaths acknowledged by Russia.

Long term, Russia could simply become entirely dependent on China for keeping it economically afloat ... a strange reversal from Mao's days, when the USSR propped up Communist China ... now Russia's GDP is $1.5tn (2020), while China's is $14.72tn (2020) (USA $20.94tn 2020). A further decline in Russia's GDP, especially in relation to China's, may just make it similar to North Korea (a nuclear armed pauper), in China's eyes.

Russian military an economic planners expected the war to last less than a week, and budgeted accordingly ..... they thought that it would be over before any Western sanctions were even proposed, let alone imposed .... but now that this expectation has failed, the long-term economic and political impacts are not something that Russian economic planners expected.

Even plundering the Ukraine (deforesting its vast tree supply), wouldn't recoup the economic damage done to Russia ... in many regards Putin's government has already lost the war, even if he eventually achieves his military objectives (**at huge material costs), which is actually looking less and less likely to be the case. 

Its hard to see how Russia has gained anything from its attack on the Ukraine.

* Taking into account the halving of the Russian stock market’s value, the freezing of foreign assets controlled by the central bank, and the Russian oligarchs, and the impact of Western sanctions on economic activity.

**  A battalion of Iskander missiles and their launchers costs $200-300m ... Their cost has been estimated at around $10m per missile fired. In 2015, the Moscow Times calculated that each hour of a Russian warplane flying a mission over Syria cost $12,000 (more than the average annual salary of a Russian doctor). While the cruise missiles being fired from battleships on the Black Sea, Kalibers, are thought to cost around $1.5m each. A single Russian Amarta tank reportedly costs $8m. A Kamov Ka-52M helicopter costs about $15m.

As of 17 March, the US Department of Defence estimated that 980 missiles had been fired, so by mid November 2022, Russia has used possibly 1305 missiles (70% of its initial stocks) out of the 1,844 it had on February 24, 2022 ... the losses so far from all the weapons fired or destroyed or captured must be in the billions. The Russians had expected weak or little resistance and didn't budget for this scale of loss.