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THE UKRAINE WAR
IMPACT ON RUSSIA The West Just Hit Putin Where It Hurts ... This move could cripple Russia. Original article: https://wlockett.medium.com/the-west-just-hit-putin-where-it-hurts-361e0cac135a Peter Burgess COMMENTARY Peter Burgess | ||
The West Just Hit Putin Where It Hurts ... This move could cripple Russia.
Will Lockett
Dec 9. 2022
The West has struggled to take impactful action against Russia. Sure, we have crippled their economy with sanctions, but that hasn’t stopped the barbaric onslaught in Ukraine. So, why have we not intervened to stop this atrocity? Well, quite simply, NATO couldn’t risk sparking a nuclear war, especially since Putin threatened to use nuclear weapons every other day. However, China (one of Putin’s closest allies) recently publicly condemned the use and threat of nuclear weapons (read more here), taking the sting out of Putin’s intimidation. Now, the West is clear to deliver the coup de grâce, and they have done so by crippling Russia’s oil industry.
So, what exactly is this killer move? Well, the G7 (formally the G8 until Russia left in 2014) will impose a $60 per barrel price cap on Russian crude oil, which will take effect on Monday, the 5th of December. You might be wondering why they didn’t just ban the import of Russian oil. Unfortunately, Russia makes up around 12% of the world’s oil supply, which means that suddenly prohibiting their oil would cause demand to vastly outstrip supply, resulting in a dramatic oil price spike in the West and potentially crippling our economies. As a result, such a move would be a bit of an “own goal.” But that begs the question: Is this price cap enough to stop the Russian war machine?
At face value, it doesn’t seem to be. Before the G7 announced their plans, Russian oil sold for $70 per barrel, which was also the average price over the past five years, meaning that this cap restriction is only equivalent to a 12.5% drop. Furthermore, Russia exports to far more countries than the G7, including China, so will they even notice?
Well, the G7 countries (the US, Canada, the UK, France, Germany, Italy, Japan, and the EU) make up the bulk of Russian oil exports. In fact, the EU is by far Russia’s largest customer!
As a result, it is unsurprising that Russia responded by stating that it would not supply countries that enforce the cap. However, given the state of their country’s economy after nearly a year of harsh sanctions, they are unlikely to see this through because they desperately need the cash. Especially when you consider that a sizeable chunk of the Russian oil industry is state-owned.
So, how hard will this price cap impact Russia?
Well, Russia exports a whopping 8.2 million barrels of oil per day in 2022! As previously stated, the G7 is the one purchasing the majority of this oil, but I can’t find an exact figure (or even a reliable source) for how much the G7 buys, so let’s assume it’s all going to the G7. This would mean that the price cap will result in a daily revenue loss of $82 million, or $29 billion per year.
Now, Russia’s economy is far smaller than the EU or the US, at only $2.1 trillion (the US is $23 trillion), and roughly 20% of it is oil-based. This means that such a loss of revenue could shrink their economy by 1.3%. That may not appear to be a significant change, but it is when it comes to economies. Especially given that this is only from one price cap!
Admittedly, my calculations here are far from accurate, but they give you a sense of scale. And this isn’t the only thing eroding Russia’s economy. Their economy is predicted to shrink by 3.5% to 5.5% as a result of the war and sanctions. Add in the oil price cap, and Russia is looking at a 6.8% drop in GDP this year.
For some comparison, the 2008 recession shrank the US economy by 4.3% over a number of years.
From an economic standpoint, this could be enough to significantly slow Putin’s war machine. There is, however, a much simpler way to look at this.
According to Forbes, Russia has spent $82 billion on the Ukraine war! Russia’s military has been mainly funded by Russia’s oil industry, so this price cap will hurt them deeply. Over the course of a year, the revenue lost due to this price cap is equivalent to 35% of less than a year’s worth of war spending. Let’s also not forget that Russia front-loaded the war, and spending has decreased as time goes on. So the direct impact on the Russian military could be dramatic.
The Russian military is already underfunded. For example, the soldiers are now issued with no socks and rusty old guns, and the Russian state is struggling to provide enough body armour to outfit their soldiers, who are having to buy it themselves. There are even claims that Russia has stopped refuelling its hydrogen bombs, rendering them useless (read more here). If the military is to survive, it cannot afford any reduction in funding.
Only time will tell if this pressure will force a proper Russian retreat. For the sake of the brave Ukrainians, let’s hope it does. But even if it doesn’t, Russia will soon be forced to cannibalise its military budget. So, if Putin continues on this path, there might not be much of Russia left. In any case, it’s nice to see the West sink its teeth into Sad Vlad and make him squirm.
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| The text being discussed is available at | https://wlockett.medium.com/the-west-just-hit-putin-where-it-hurts-361e0cac135a and |