Explained: Russia¡¯s Energy In Global Economy And What It Means For The Indian Economy

Global crude oil prices have risen 29 per cent so far in 2022 owing to the Ukraine-Russia conflict, rising global demand, and limited supplies. Russia is a key crude oil exporter, and traders are concerned that sanctions on the country could severely limit its exports, further constricting an already tight crude oil market.

President Biden of the United States has stated that the US will soon impose heavy sanctions on Russia.

The US and its European allies are on high alert as a result of Russia's large-scale invasion of Ukraine, which has the potential to cause severe disruptions in the European energy market, which is still heavily reliant on Russian oil and gas.

AP

The Nord Stream 2 (NS2) pipeline to Germany has already been put on hold as a result of Russia's acknowledgment of Ukrainian rebel regions in Donetsk and Luhansk, and Russian President Vladimir Putin has vowed to restrict energy exports.

The White House is leading efforts to shift energy supplies to Europe in an effort to mitigate such a crisis, but experts believe any solution will come at a hefty price.

What is Russia¡¯s energy situation?

Russia is a global energy powerhouse, producing the third-largest amount of oil and the second-largest amount of natural gas. According to estimates, fossil fuels account for 14% of the country's GDP. Revenue from the industry accounts for more than 40% of the federal budget.

Energy revenues have helped Russia amass $630 billion in foreign exchange reserves in recent years. As economic historian Adam Tooze points out, Putin's conservative fiscal strategy has allowed him to largely shield his administration from the effects of economic sanctions imposed following Russia's 2014 annexation of Crimea.

Much of Russia's energy output is used to meet European demand, particularly natural gas, which is transported through Ukraine and other Eastern European countries through a network of Soviet-era pipelines. Moscow has sought to bypass existing networks by building new pipelines, including the contentious Nord Stream 2. It has also approved a new gas pipeline to China, though sales there will be a small fraction of those in Europe.

Why have crude prices jumped?

The rise has been fueled by fears of supply side disruptions, which followed Russia's invasion of Ukraine and Putin's deployment of forces to separatist areas Donetsk and Luhansk in Ukraine.

AFP/Representational image

The Russian invasion of Ukraine might not only affect global crude supply, but possibly lead to US and European sanctions.

Following tensions between Russia and Ukraine, oil prices have been soaring in recent months due to supply concerns.

There is also concern about the developing demand-supply imbalance that has resulted from the global economy's opening up and normalisation after the Omicron wave has passed.

The price of dated Brent or the price of physical North Sea crude oil shipments scheduled to arrive on specified dates, has already surpassed $100 per barrel. S&P Global Platts' dated Brent benchmark surpassed $100.8 per barrel on February 16, the highest level since September 2014.

How much does Europe rely on Russian energy?

There is a mutual reliance: the Kremlin (Government of the Russian Federation) relies on European income, while Europe relies on Russian energy. However, many analysts believe that Europe's reliance on Russia means that imposing tighter sanctions on Russia risks threatening its energy supplies.

Overall, Russia provides nearly a third of Europe's natural gas usage, which is utilised for winter heating, electricity generation, and industrial output. Russia also provides more than a quarter of the EU's crude oil imports, making it the bloc's largest single energy source.

What impact might Nord Stream 2 (NS2) have on this relationship?

The NS2 pipeline is an extension of the original Nord Stream pipeline, which was completed in 2011 and transports natural gas from northwest Russia to Germany via the Baltic Sea. The German government approved NS2 in 2018, and construction was completed in September 2021.

Reuters

However, due to escalating Western-Russian tensions, its rollout has been hampered by regulatory delays and renewed political scrutiny.

More of Russia's natural gas exports to Germany would be able to bypass Ukraine and other current transit countries due to NS2. Since its initiation, this has been controversial. Critics, including the US, have warned that it will give Moscow more power over European countries and will deepen political differences over how to respond to Russian aggression.

For many observers, the threats were heightened again in late 2021, when Russia withheld more gas supplies in the face of rising energy demand. As a result, prices in Europe have tripled, with shortages looming.

A war over energy resources?

Russia's use of its gas supplies as a weapon to achieve political goals is well-founded. According to Fatih Birol, executive director of the International Energy Agency, ¡°Russia's decision to cut gas supplies to Europe by a quarter came as it was heightening tension towards Ukraine.¡±

Energy resources, according to experts, are not the focus of this looming conflict. Vladimir Putin has a long history of territorial ambitions in former Soviet republics, as well as attempts to establish political control over Ukraine, which he made clear this week. Putin allies claim that he is only to be concerned over the possibility of Nato expansion, although many analysts believe this is a pretext.

What does it mean for the Indian economy?

The spike in crude oil prices may lead to another round of fuel price hikes in India in the short term. Domestic natural gas costs may potentially rise, as the price is set in April based on international pricing for the period of January to December 2021.

AFP

Natural gas prices are projected to increase in the following days as a result of the Nord Stream 2 disruption. India imports 45.3 percent of its natural gas, and the price hike is projected to have a significant impact on the country.

After the global economy recovered far faster than projected, India already faced a significant jump in fuel costs due to a demand shock. However, after two years of recovery from the COVID-19 pandemic, India's growth and recovery may be hampered, complicating matters for the Reserve Bank of India.

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