Apr 18, 2022
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Russia is pumping gas, Europe is right

Russia is pumping gas, Europe is right

Photo: AR/TASS

The European Union plans to set a price “ceiling” for Russian energy resources in order to increase sanctions pressure on Moscow. This was stated by the Prime Minister of Italy in an interview with Corriere della Sera. Mario Draghinoting that such a possibility would be discussed at the next meeting of the European Council.

Earlier, official Rome proposed to dictate terms to Russia with the establishment of a ceiling price for gas exported to Europe. And, according to Draghi, this initiative enjoys increasing support in the EU.

The prime minister believes that the European Union has “market power” over Moscow, since its purchases account for more than half of Russian gas exports. He called it a “weapon” that can be used to influence Russia, since it allegedly sets “unmotivated” prices for its energy resources that have nothing to do with “historical values ​​and production costs.”

Limiting the upper price, according to Draghi, will reduce the financing of Russia through the purchase of its oil and gas. It will also “strengthen sanctions and at the same time minimize the costs” for the EU from their introduction. At the same time, he stressed that Europe’s primary task is to depend as little as possible on Russia’s energy resources. To do this, you need to diversify energy sources and find new suppliers.

74-year-old Mario Draghi is a famous person. In the past, he headed the European Central Bank and even gained a reputation as a savior of the European economy for organizing emergency programs during debt crises. But what he offers now does not fit into the laws of the market at all.

Can the buyer dictate prices to the seller?

To comment on the situation, “SP” asked leading expert of the National Energy Security Fund and the Financial University under the Government of Russia Stanislav Mitrakhovich:

– Now a new package of sanctions is being discussed, which can be introduced against Russia. The last package was the fifth, which included coal. But, however, restrictions on coal will come into force only in August. Now the sixth package of sanctions is being discussed, which, in theory, should include oil with oil products. Well, in the seventh – gas.

The problem is that raising the stakes in the game to such a level that oil and gas supplies could be cut off is still a very stressful scenario for the European Union itself. Therefore, they are trying to find some options that would be less painful for Europe.

“SP”: – And what are the options here?

– For example, a partial embargo. Embargo carried forward in time. Embargo with exceptions. Or, in general, some kind of reduction in trade, in which Russia receives less money, but as if trade does not completely stop. In fact, there are no working schemes of this type.

For example, they offer to pay Russia to special escrow accounts, from where it will be possible to receive money only to certain companies that will be able to spend it only on certain imports. It’s kind of like the oil-for-food program that Iraq had.

But Russia is not Iraq. She did not lose the war so that such a thing could be forced on her. Therefore, Russia will not play according to the escrow account scheme. Rather, she will stop deliveries.

That is, wanting to avoid a trade embargo and coming up with an alternative to the embargo, Europe still runs into the scenario of a trade embargo early on. From what we started, we came to that – in the analytical sense.

“SP”: – But the price formula is fixed in the contracts, as you know. Can it be reviewed unilaterally?

– When Russia offered to change the currency of the payment, the EU said that the contacts could not be reviewed. They considered it to be bad.

In fact, contracts can, of course, be reviewed. Recall, for example, the story about the revision of the price formula. And not only with Poland. There were some contracts, then changes were made to them – for example, there used to be oil indexation, and then it became spot indexation. But here you need either the consent of the parties, or the decision of the court, which is recognized, again, by both parties. And so it is recognized, so that trade does not completely stop.

Now they are proposing not just to revise the price formula, they want to fix in the contract that gas should not cost more than a certain level. Let’s say the price on the stock exchange is minus 50%, or something like that.

That’s what Draghi is talking about.

But, as with escrow accounts, this story will immediately lead to, in fact, a form of trade embargo. That is, without the risk of imposing a trade embargo, they will still come to the same embargo. Because Russia will not agree to pay a duty that will reduce the cost of the product itself.

And by the way, no other supplier countries will agree either. If, relatively speaking, they hear that some buyer has unilaterally decided to amend the contract, according to which the price formula will now give the price half as much, they will not like it. Neither Algeria, nor Saudi Arabia, nor anyone else will like this. And this will be a serious blow to the reputation of Europe as a buyer.

So I don’t think these things will work. If the EU wants to impose a trade embargo, it simply has to do so in the end. But all these attempts to dance around and pretend that this is not a trade embargo, but, nevertheless, close to it, they will eventually lead to the fact that it will be exactly a trade embargo.

“SP”: – How can the buyer dictate the price to the seller?

“This is similar to an additional tax that was planned to be introduced from 2026 on Russian goods made using the energy of hydrocarbons. Then they also said that Europe is stronger than Russia in terms of the fact that Russia depends on exports to Europe. And that, they say, it will not go anywhere, and will pay additional money when exporting its metals or fertilizers.

It was assumed that European buyers would pay them directly, but they would immediately pass it on to Russian counterparties. Therefore, conditionally, Russian cement will have to cost less.

But the carbon tax is the future. And Europe depends on oil and gas here and now. Therefore, such proposals, let’s make it so that you will supply your gas, but it will cost 30% less, this will very likely lead to the same scenario of a trade embargo.

And then negotiations will begin on the subject of conditions under which to resume these deliveries. And in what terms. Here you can already bargain on the subject of what the duties will be. Only to avoid the shock of the cessation of trade will not work here.

“SP”: – Who will have a stronger shock – the seller or the buyer?

“The shock will be on both sides. Russia, for example, depends on the receipt of currency. On the other hand, our imports have now fallen so much that it is difficult for us to even spend this money, to be honest. Therefore, Russia will be able to live without these revenues for some time.

And a lot of money comes. According to Bloomberg, this year, if there is no trade embargo, our foreign economic counterparties will have to pay us $320 billion. Of these, about 200 billion are Europe.

But if supplies stop, she will have a very serious shock.

Europe is a comfort society. People are used to living in a relaxed state when they feel good. They are not ready to tighten their belts, suffer and so on. Even economically, I’m not talking about the military aspects. Therefore, it is possible that they will live for several months in conditions of restrictions, and public opinion there may change.

The British newspaper The Daily Telegraph, for example, recently published the results of an opinion poll – it turns out that in the United Kingdom the number of people who are ready to endure any economic restrictions in order to help Ukraine has already fallen from 50% to 36%.

“SP”: – How, in your opinion, will the issue of gas supplies to those unfriendly countries that refused to pay for it in rubles be resolved after May 1?

– Apparently, deliveries to some companies will be stopped. Some will agree. In principle, companies speak little on this topic. Mostly politicians speak out. But they are often expressed, including at the level of, as it were, recommendations. At the level of national law, so far the ban has been announced only in the Netherlands.

The European Commission, as far as I understand, cannot ban these things at all. Or, then, it is necessary to introduce changes into the legislation of the European Union and give it powers, to prohibit payment in rubles.

But if the national authorities decide to ban certain operations, then companies will be forced to comply. We will find out all this in the coming weeks.

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