Russia invaded Ukraine in February, sparking global condemnation.
The war in Ukraine has had a wide-ranging impact on food and energy supplies.
Western countries are being forced to reckon with their reliance on Russian imports.
Experts say the disruption won’t end soon and the West will need to seek long-term alternatives.
In the months since Russia ordered troops into Ukraine, a flurry of sanctions issued by Western countries has failed to curb the military assault.
With a drawn-out conflict appearing more likely, the political determination to punish President Vladimir Putin’s nation suggests a prolonged period of sanctions lies ahead. Some experts say that the prospect of continued disruption to food and energy supplies as a result of the war will trigger a search for long-term alternatives to Russian imports.
While the price shock of the conflict is felt globally, the disruption to energy supplies is most keenly felt in the European Union (EU), which sources a quarter of its oil imports and 40% of its natural gas from Russia (the US, by comparison, got about 3% of its crude oil from Russia in 2021).
In its sixth round of sanctions against Moscow, the EU announced plans for a total ban on Russian oil and refined product imports by the end of the year.
“Let us be clear: it will not be easy,” European Union President Ursula von der Leyen said in a speech outlining the proposals. “Some member states are strongly dependent on Russian oil. But we simply have to work on it.”
While shifting away from Russian oil may prove difficult, Europe’s reliance on Russian natural gas provides policymakers and central bankers with a much bigger headache. In a recent round of sanctions, theEU continued to exclude any embargo on natural gas, although it has aired proposals to cut demand for Russian imports by two-thirds by the end of 2022.
Weaning itself off Russian imports is going to have profoundly negative implications on energy prices, according to David Claridge, CEO of security intelligence firm Dragonfly.
The EU has invested billions of euros in pipeline projects to service its demand, and seeking alternatives will be time-consuming and costly. If European countries follow through with diversification away from Russian fossil fuels – be it through finding an alternative supply or adopting new means of energy such as renewables – they won’t return, he said.
Claridge added: “If and when European nations can move away from Russian fossil fuels, they will look toward a more sustainable energy mix in order to meet simultaneous climate change objectives. So in that respect, they won’t return to buy Russian oil and gas – that is long term.”
Europe is mulling Africa as a potential future source of gas, but lacks the infrastructure to pipe it between the continents. Meanwhile, liquefied natural gas imports from other nations are limited in their potential to help to make up the current shortfall.
Benjamin Maltby, a partner at Keystone Law and an expert in yacht and luxury asset law, said: “In practical terms, switching to a new source of gas supply is neither overly difficult nor complex, given that gas can be carried by liquefied natural gas ships. But the supply of such vessels is limited, as are alternative sources of gas.”
That leaves the bloc without a quick fix and, while it might sponsor a more rapid shift to cleaner, more sustainable energy sources, it suggests that countries will have to absorb a higher price environment for some time to come.
According to Economics Observatory, Ukraine is the world’s largest producer of sunflower oil, and combined with Russia, it is responsible for more than half of global exports of sunflower oil. Russia, however, is the world’s largest exporter of wheat with 36% of exports.
A UN official warned in early May that millions of tons of grain are stuck in Ukraine as the ongoing conflict with Russia prevents safe transit from the country’s ports.
Martin Frick, the Germany director of the UN World Food Programme told German news agency DPA: “Ukraine’s food is urgently needed in the world,” adding that Ukrainian shipments were critical to help tackle a “global food crisis.”
While the heavy investment required to source new supplies suggests that any development of new supply channels could ensure a long-term shift away from Russian natural gas, trade in oil, refined products, and agricultural goods could be more fluid. But any reversion to previous trade routes would almost certainly depend on peace in Ukraine and personnel in the Kremlin.
“The second and more short- to medium-term consideration is tied to the conclusion of the war and the fate of Putin,” Claridge said.
“I cannot see it being politically acceptable, or strategically sensible, to move in the direction of resumption of the same imbalanced energy relationship,” he added, but also noted that trade choices may not be determined solely by Western governments.
“In any case, as we can see from current developments with Bulgaria and others, Russia may also refuse to supply, either because of currency issues arising from its financial isolation or to weaponize European dependence on its energy,” he said.
Red paint appears on the wall of the Russian embassy in London, UK.
Maltby stressed that one unintended consequence could be a curtailment of globalization and a possible consolidation of the Russo-Chinese axis of autocracy. Russia and China are now closer than before: they reject the postwar economic and political order that the US and allies created, they want to regain territories they believe were separated unjustly from their homelands, and they see democracy as a threat, both inside and outside their borders.
He added: “All other things being equal, this will limit the scope for economies within and without such axis from specializing in what their constituent businesses excel in. On a micro scale, now more than ever, businesses have to plan for the possibility and consequences of the imposition of sanctions, and the impact of the same on supply chains and their ability to fulfil their contractual obligations.”
This means that both businesses and governments would need to plan ahead – adapt plans and policies according to sanctions. Maltby added: “It is imperative that manufacturers not only look for alternative sources of raw materials and components but manage their customer’s expectations and ensure that their sales contracts allow for non or late delivery of goods.”
Energy, Politics, Weekend BI UK, Russia, Ukraine, Oligarchs, Roman Abramovich, Sanctions, European Union, Silovarchs, global supply chain, Food supply, economic activity, Money transfer
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