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Russianomics: attacking the war machine funding!

“The strategy of an economic blitzkrieg has failed.”

Vladimir Putin.

 

It seems that the western countries are desperate with the Russian advancement on Ukraine’s territory and the lack of effectiveness of their sanctions on Putin’s country.

The Ukrainian army cannot stand the Russian offensive and the morale of its soldiers are low (click here).  The victory in Kyiv seems already faded, and after a range of setbacks, the superiority of Russia’s military might is clear and recognized by Ukraine (click here).

The development on the ground has put pressure on the western countries that are struggling with the outcome of the economic warfare.

As was argued by Rasmus (click here) the proposals stemmed from G70’s meeting about attacking Russia’s war-machine funding (exports) are silly and ineffective: the Russian export revenue has hiked since the beginning of Russia’s war –or Special Operation; call it as you please – on Ukraine.

However, the issue of the West’s strategy against Russia’s war-machine funding falls behind by principle because Western politicians and advisers appear to think that the world economy is this:

World economy= G7

 

Just a reminder, the G7 is made up of The US, England, Canada, Germany, France, Italy, Japan and the European Union. Besides, here the term «western countries» is institutional rather than geographical (for instance, Japan and South Korea are part of the west).

But the truly global economy is something like this:

World economy= G7 + BRICS + rest of countries

 

Where BRICS encompasses Brazil, Russia, India, China, and South Africa. So Russia has big and trustworthy partners such as India and China to draw upon, two countries that are importing its energy goods and funding its army.

 

Today, demand does not determine the global prices of energy

So, keeping in mind the number of players, the world economy trade of oil and gas is closer to the traditional supply and demand scheme where there is no economy big enough to set world energy prices (click here). That is to say, in reality, China and India may offset the reduction in the West’s imports. Not to mention that Saudi Arabia does not seem to cooperate with the West in oil price reduction, according to Routers’ article (click here).

To avoid the energy price hikes that favor Russia’s revenues, The World Economic Forum shared on social media Hausmann’s proposal: «not to stop buying Russian oil but to tax Russian oil«. Russia has to compete, the argument goes, with other oil producers so it will be forced to reduce the price of its oil after tax in order to equal the price of its competitors’ oil without tax; the outcome of this policy would be the reduction of Russia’s revenue (click here).

However, Hausmann’s proposal still has the West’s demand as a key; a tax on Russian oil will reduce the demand in the countries that set up the tariff, and they are expecting Russia to lower its prices to compete with oil producers.

First of all, as can be read in a Forbes article, the international price spike is due to expectations of oil supply disruptions involving one of the biggest world producers: Russia (click here). Furthermore, what if Putin decides to export to his allies that are willing to step up their stockpiles instead of relying on the West’s demand?

The approach based on the idea that the global price of energy can be lower at the West’s will or that Russia would rather sell its output to its enemies at a discounted price seems to be wrong.

Jack Rasmus’ argument shed light on this matter:

No amount of G7 wishful thinking can make demand determine supply in today’s global energy markets, where broken and restructuring supply chains, sanctions, and war are the main determinants of price… Both the proposal to ban Russian gold exports to Europe and the proposal to manipulate oil demand to reduce its global market price—and thereby deprive Russia of revenues—are ideas that reflect more the desperation of the US and G7.

 

Theoretically, Hausmann’s tax idea which leads Russian producers to compete with oil from elsewhere in the West’s market works as a «price cap». What Rasmus argues is very illustrative:

Russia would have to be pretty dumb to agree to sell oil to Europe at the latter’s ‘price cap’ level which would be well below Russia’s already 30% discount oil price sales to India? It knows the likely knock on effect that would follow. India as a long term oil customer is far more important to Russia than Europe which says it’s ending as a customer in just six months.

 

The ruble, the Russian currency, has overcome the West’s sanctions and now has more value than before 24 February 2022, when the war in Ukraine started.

This does not seem like Russia is losing the economic warfare, not at least up to date:

Source: the chart is taken from TradingView
The second part of this article encompasses the supply of components and equipment. Russianomics: economic shelling on Russia’s supply chains!
* I am indebted to my friend Mr. James Barry for assistance in editing.
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Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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