Explaining Guy Verhofstadt’s misinformed tweet

So, the liberal MEP Guy Verhofstadt has tweeted a very misinformed tweet about a chart from an article in Politico about the effect of EU sanctions on Russia.

What’s being quoted in the tweet reflects mostly the nominal price increase of natural gas from Russia and these purchases were significantly reduced by the end of summer. Additionally, Europe seems to have successfully won the gas price war against Russia by ensuring a constant flow supply flow – no thanks to the imbecile Emmanuel Macron. There are still some Russian apologists like Clint Flores who are still pandering to the Russian myth that Europe will collapse without Russian gas: gas prices have in fact crashed below war levels while the price of oil is still higher. And I still need to read a convincing case saying that gas prices will go to war levels again if inflation goes up again due to a Fed pivot in interest rates. In a recessionary environment where China is facing a renewed Covid pandemic, I hardly see demand levels pushing the gas price to exorbitant levels. Nothing is impossible, of course.

The full extent of European sanctions is yet to be felt on Russia although already Venezuela 2.0 is loading and in process. As previously stated, without European gas sales, Russia will basically miss one of its biggest sources of income, and Gazprom, is in fact already in trouble as it lacks clients to sell its gas. Indeed, Gazprom’s volume of gas sold last year was even below the 2021 level. For 2023 it is forecasted to be much lower as China will not be offsetting European sales and even if it will, the price is most probably going to remain on the downside with Gazprom failing to offset revenues. Russia is basically another Venezuela 2.0 as what was once the nation’s most important money-maker: its energy giant begins to decay.

Here are some key points on the effects of EU and US sanctions on Russia  as published by the US Congress:

Russia’s financial sector faces losses of hundreds of
billions of dollars;
 the Russian military is having difficulties procuring key
components for its war effort;
 many Russian factories have suspended production
because they cannot access foreign-made parts;
 many affected companies are placing employees on
part-time schedules or furlough;
 hundreds of U.S. and international companies have
exited the Russian market; and
 Russian oil is selling below market prices.

[…]There is some evidence that economic conditions in Russia
are starting to deteriorate at a faster rate. In November, the
Russian central bank estimated a faster economic
contraction in Q4 2022 (7.1%) relative to previous quarters
in 2022 (around 4%). Sanctions may be a contributing
factor—it often takes time for the full effect of sanctions to
materialize—but other factors are likely contributing as
well. Most notably, the war effort itself—including the
mobilization of civilian production for military purposes,
workers drafted to military service, and deferred domestic
infrastructure projects—has created economic disruptions.

However, and most importantly Russia’s economy’s faces the typical rogue-regime-economic-armageddon scenario due to its shortage of US Dollars. The economic impacts arising out of Dollar and/or Euro shortages for the Russian economy can be back-breaking as they would help cause inflation in Russia to rise exponentially as its currency debases fast. So far, the Rouble has stayed afloat with tight internal capital controls (you can’t sell Roubles in the Russian market and you can’t send Dollars and Euros out of Russia) and with the backing of the last of Europe’s gas purchases from Russia last year. The Rouble faces serious structural risks and so does Russia’s whole banking and monetary system. The nominal inflation rate in Venezuela in 2018 after it was cut off from the Dollar system and its revenues from oil faded away was more than %13,000. I expect similar turbulence in Russia given that its challenges are very similar to Venezuela at that time. Overall, experts may also be too optimistic about Russia’s future as they predict that Russia’s economy will shrink gradually. Russia’s manufacturing industry has been decimated and the rot will spread to its energy sector as it faces increasing problems to import high-tech parts for many kinds of different machinery. Practically, this is a nightmare scenario for a procurement manager – a shortage of Dollars to buy parts and a shortage of places to buy them from.

Be the first to comment

Leave a Reply