Edward Lucas
Well, hello everyone. Welcome to our CEPA briefing on Russian sanctions, or rather sanctions on Russia. I’m Edward Lucas. I’m the Senior Advisor for CEPA based in London. That’s London, UK, not London, Canada, and I’m delighted to have with me on our panel three of the four authors of our sizzling forthcoming report on sanctions. And they are Aura Sabadus, Ben Schmitt and just gazing around, and I hope Alexander, Alexander Kolyandr as well. Um, though I don’t see him yet on the screen. I think he’s his computer was just restarting when we spoke to him. Um, but this could hardly be more topical, because the EU has just come up with, I think, the 18th package of sanctions on on the Russian Federation, which, of course, poses the question, why didn’t you do all this earlier? And the second question, Will this finally work? We’ve also got a very powerful package of sanctions in the US, US Senate, apparently, with a veto proof majority. So there’s a big question about a, what happens when that lands on the important desk in the White House, and b What effect will it have in practice? And then, of course, this question of what state is the Russian economy in? And we’ve seen both very bombastic announcements from Russia that everything’s in great shape. We’re doing fine, and the sanctions have only made us stronger. We’ve also seen what I fear may be a bit of wishful thinking among some commentators in the West that the Russian economy is on its last legs are the combination of demographic, public health, infrastructure, monetary, fiscal and other structural problems, and with one more push will be done. And of course, the truth is somewhere in between, but our panel will spend a few minutes just introducing their most recent thoughts on this, and then we look forward to your questions. And you can either track my attention by putting your hand up electronically, or you can make put a question in the chat, and I will read it out. It’s a wonderful example of technological progress that we no longer have to explain how zoom calls work. And my aim is that we’ll get through this entire zoom call without having to say to anybody, you’re on mute. Most of all, me, so wonderful. We’re joined by Alex, Alex Kolyandr and Alex, very good. I’m glad your computer restarted in time. And I think I might come to you first, actually, because I was just saying that we’ve got the questions about the efficacy and timing of sanctions. Of course, the key thing is, what state is the Russian economy in? Is it highly vulnerable, and sanctions could make a real difference? Is it a kind of Fort Knox where sanctions will just bounce off, but perhaps, if you could just give us your thoughts on the state of the Russian economy and where what sanctions we could and should be doing. And then I’m going to come to Ben, and then I’m going to come to Aura, whose particular expertise is on the gas and oil and energy side, and then we look forward to the questions. And I should note, I see so much expertise among the journalists here. We can easily flip the panel over, and you could give the we could put the questions and you could give the answers, but this time around, it’s us in the hot seat. So Alex, give us a few minutes on where are we, what’s worked, what hasn’t, and what should we do?
Alexander Kolyandr
Yes, hi Edward, hi everyone. I’m glad to see so many familiar names and bylines. Well, answering your question, you know what? I’ll grab one minute of your attention and just quote Ursula von der Leyen, who yesterday, while announcing the 11th package of the European sanctions, said the following, I’m sorry for the long quote, but I think it’s worth it. “The Russian economy is deeply affected by the sanctions. Russia’s oil and gas revenues have fallen by almost 80% compared to before the war. It’s deficit is skyrocketing. Interest rates are prohibitively high. Inflation is on the rise well above 10% the price of importing technologies and critical goods is six times higher than before the war. In short, Russia’s economy is limited to a war economy and sacrificing future prospects.” Well, I think that when we are talking about the sanctions, especially the European sanctions, what we must have is a very clear picture of what is the real state of the Russian economy, which Ursula, von der Leyen, or whoever was writing this speech for her, doesn’t have. So, in that statement, well more than about two thirds of what she said was not right, and the Russian economy is not as bad as she describes, but also it is not as bad as Putin is trying to persuade us. So basically, we had three stages of the Russian economy. At the beginning it was a complete, well, if not collapse, then complete disarray, which lasted for well, basically, till the late autumn of 2022. Then, thanks to the massive fiscal spending and the changes to the budgetary rules, Russian economy came back to its feet and largely overcame the most punishing effects of the sanctions, and by mid ’23 it moved into overheated stage. It was growth on the budgetary amphetamines, and it resulted in, yes, she she’s right into very high inflation, well above 10% and prohibitively high interest rates. All that was exasperated by the problems on the labor market, by the lack of cheap financing from from abroad and so on. But things did change, I would say, somewhere around February this year, probably March, and the Russian economy moved from the stage of of being overheated into, well, it not, it is not a collapse, it’s just a very strong and severe slow down. Most probably we see GDP decline in the first quarter compared to the last quarter of ’24, the year-to-year growth dropped from 4.3 to 1.4 and all the macro indicators point to even more deeper decline or slow down in the second quarter. Now, whether it’s managed slow down or severe drop, we still don’t know. The government obviously insists that it’s a managed slow down, and that was inevitable after two years of hyper growth, but nevertheless, we see the economy slowing down. We see that demand from military industry is stable. Well, at least it’s not growing, probably it’s even declining a bit. The non-military production is is declining. A real disposable incomes and real wages are slowly declining compared to two years of enormous growth. Consumer demand [unintelligible] and all that are also declining. Inflation is now below 10%, the Central Bank cut its rates last Friday, and economy is returning to a long-term growth as the Central Bank hopes, which is around one or 1.5%. Or, probably it is moving towards an uncontrolled decline, if oil prices will drop, or if the global trade pushes the world into the overall recession, and the technological gap widens, and the sanctions on technological expert are finally tightening. So, Russian economy is not doing well, but it’s not doing terrible. It is not unusual for an economy in the state of war to grow, at least at the beginning, fueled by the expenditure. Several, in my view, serious mistakes were made by the Western governments while implementing sanctions, which resulted into locking in Russian capital inside the country, which led to a massive domestic investment in capital goods and import. And secondly, the sanctions against Russian oil were extremely slow and help and helped Russia to adjust its oil industry and oil expert to the to the new global conditions, first of all, by changing the tax regime, and secondly, by by changing the roots. So, Russian economy is, well, was growing on mortgage future. It’s probably time for it to slow down significantly, and the sanctions failed to stop the war. The sanctions failed to prevent the war, but the sanctions are instrumental, instrumental sorry, in raising the interest on that mortgage. And, in my view, the fact of the sanctions will should be greater in the times of slow growth or decline than it was in the times of budget fueled growth.
Edward Lucas
Well, thanks so much. Alexander, I love that metaphor of feeding the Russian economy amphetamines to keep it going. And I think you also made a very important point, that by besieging the Russian economy, we create a siege economy. And that’s not necessarily what we want. There’s certainly an alternative way of doing this, where we would have tried to let encourage both capital and human flight out of Russia and taken the fuel away from the war-machine that way, but we chose not to, for perfectly good reasons. But the result is what we’ve got at the moment. So, let me come to you next, Ben, and I should say, talking of sanctions, but I believe you actually have personal experience of this, and you are possibly the only person on this call have been sanctioned by the Russian Federation. Am I right?
Benjamin Schmitt
That’s correct. That’s right.
Edward Lucas
But you might, you must have done something very… oh, and you as well. Alexander?
Alexander Kolyandr
Two days ago, yes.
Edward Lucas
Yes. Okay, so shows we’ve done something, right? Then, Ben, go ahead. Give us, give us your thoughts on sanctions, and then I shall come to Aura next.
Benjamin Schmitt
So, first of all, I’ll have to say I have to leave in about 10 minutes or so, but I am happy to give a few thoughts and then take any questions before I have to run. So, I’ve been focused mostly over the years on Russia energy sanctions. I’m a former European energy security advisor from the State Department now at the University of Pennsylvania Climate Center for Energy Policy, working on these issues. And, the bottom line is we are finally, finally, if we had done this call, you know, a week ago, I would have had more complaints than I do now. Although I should say that we’re not over the edge yet on the the EU sanctions, but we’ve seen in this 18th package of sanctions that have been suggested by Ursula von der Leyen and in Kaja Kallas, basically two, I would say, really big items that we have been calling for for, you know, a decade in one case and several years in the other case. So for the decade case, we’re talking about Nord Stream and we’ve actually seen that not only Nord Stream 2, but Nord Stream 1, blocking sanctions have been proposed by the European Commission, which is long overdue and is especially important because we’ve seen more and more chattering from you know, either pro-Russian politicians in Germany or or others that are in the the German business community, etc, to try to come back to a return to business as usual Putin’s Kremlin on energy, and one of the ideas here is to bring Nord Stream back. We’ve also seen reports of Stephen Lynch, a US, and I believe, Florida based businessman that has had experience in the buying Russian infrastructure market, trying to convince, first the Biden administration, now the Trump administration, to waive sanctions, to allow for negotiations, to actually allow him to purchase Nord Stream at a depreciated price. Supposedly to quote unquote, “de-Russify” this project, which, of course, makes absolutely zero sense from, you know, from a logical standpoint, the gas is still coming from Russia. It would still be, you know, doing business with Gazprom, etc. But nevertheless, and so I think that the EU has taken a really important step, and it could only do so with at least support from the German chancellor, in this case, Friedrich Merz, who has said on multiple occasions that he would not like to have Nord Stream come back. He said that Nord Stream was a mistake in the Oval Office sitting next to President Trump a few weeks ago when he visited. And so we look at all of this together, having EU sanctions on Nord Stream 1 and Nord Stream 2 is a significant backstop that would be both a market signal and a moral and political signal to the Kremlin that there won’t be this run to having returned to business as usual. Now, those sanctions have to actually be passed. They have to go through co-repair. It has to actually go and be ratified before they go through. And there are significant hurdles, not the least of which are Hungary and Slovakia, who may try to veto at least that part of the the sanctions, if not more and and, you know, we will see there will be politicians from other parts of Europe that will be trying to push back on that as well. So that’s on the Nord Stream front, and on the on the other front, on the oil price cap front. This is something that I’ve been calling for. I wrote an article for Foreign Policy magazine with Ambassador Richard Morningstar back in December of 2022 before the oil price cap was even passed by the G7 EU in Australia on setting a level of $60 per barrel for Russian euros grade euros crude grade oil. And that was at the time, way too high. And the idea that this would then have been revisited on a monthly or at least periodic basis, basically was ignored. That was the original kind of deal that had gone into place. So, the idea that this would now be moved down to $45 per barrel, closer to the 30 or so dollars per barrel, marginal cost of euros production, which is what we’ve been calling for for some time it’s, you know, it’s really, I think, helpful to see this sort of signals going on. But again, these have to pass. These are things that we need to, need to do to make sure that we continue to ratchet up pressure on Putin’s Kremlin. And then the last thing I will say, back on the Nord Stream front, I have been writing a, or basically leading, a large scale research effort for the past two years on subsidy infrastructure protection, including doing a case study in a my most recent report that just came out called Underwater Mayhem, Volume One on the North Stream blast. And we show a significant amount of evidence there that leaves us in our conclusions to, you know, basically conclude that we believe it is probable that the Russian Federation was actually involved in the Nord Stream sabotage, and improbable that a pro-Ukrainian sailboat was to blame for this incident. So, these conclusions are based on facts, satellite data, technical interviews, field research actually going to the blast site, etc. So, I just want to make sure that that’s thrown out there as well, and yet another reason why we can’t return to business as usual with Putin. Because, of course, if Russia was to have been involved in blowing up its own pipelines, that is not a good signal for the European Union’s energy dependence. So thank you. I’ll stop there.
Edward Lucas
Well, thank thanks so much, Ben, and I’m asking my CEPA colleagues to put a link in the chat to your excellent report on subsea sabotage, which is well worth, well worth the read. I know you’ve got to go in a few minutes, so if anyone wants to ask a specific question of Ben, I’ll very happily take that now, whether it’s on the oil price cap and how to lower it, or on any other aspect of the energy sanctions. If you don’t have Wikipedia, Ben is an extremely good substitute, in fact, often better for anything related to this subject. So, do please stick your hand up electronically or put a question in. We do have a question already from Demian Shevko from Free Voice of Ukraine, and he’s asked about the shadow fleet. So I might ping that one to you, as it’s the first of his two questions that when you look at the shadow fleet, do you see any obvious or easy targets that we could we… people talk about it a lot,Are we missing any low hanging fruits here, and our ability to interdict it and what? What effect would it have if we did?
Benjamin Schmitt
Well, look, I think that the biggest thing here is we need to increase our capacity across the transatlantic community to track, monitor and then get together evidentiary packages, put together evidentiary packages that allow us to sanction these individual halls, and possibly also captains and crews, etc, and the ownership of these vessels. This is something that we’ve needed for some time, and I think that this drip, drip of sanctions on shadow fleet vessels sometimes has the effectof having, you know, the the punditry and expert community say, “Well, why are we going so slow?” Well, the reason we’re going so slow isn’t necessarily a political decision. It’s a literal practical matter that the bandwidth of our sanctions enforcement and tracking and monitoring capabilities across, you know, the United States and the EU are limited, right? We only have a few 100 people probably in the United States, working in our government specifically on these sort of issues, and I mean sanctions and technology export controls globally, not just on the Russian Federation. So, we need to increase our capacity there, number one, and then we need to see more, in the case of the Baltic Sea, for example, where a lot of these incidents are taking place, with respect to, you know, the shadow fleet most recently. And of course, we’ve seen a de facto interdiction or stoppage of the Kiwala shadow fleet vessel by the Estonian Navy just a month or so ago, and then two follow on incidents in which the Russians basically pushed back and and had a, you know, had had stopped the interdiction from taking place again. One of the big questions is, why are we leaving this to Estonia, the very last state in line as ships travel from from west to east through the Baltic Sea to take these sort of actions these vessels have under the UN Law of the Sea issues, and these generally have to do with, have to do with flag swapping, or not having a flag state, or one of these other violations. And as a result, you know, we really need to see other states stepping up, whether it be the Latvia, Lithuania, Poland, Sweden, Denmark, and you can go backward for the United Kingdom and the Netherlands and France if you want. They’re going through, these vessels are going through their waters, not necessarily territorial waters of exclusive economic zones, but even in the exclusive economic zones, they are able to interdict these vessels because of violation under the UN Law of the Sea or UNCLOS. And oftentimes, it’s kind of reported that, oh, they pulled over a or a stop or interdicted a shadow fleet vessel for sanctions violation. That is, that is true in the sense that they are, you know, sanctioned properties and entities that are being stopped in an EU jurisdiction where that has, that tension has taken place. However, what the actual interdiction or stopping or or motive, you know, legal motive, to actually stop these vessels are, is under the Law of the Sea. And so I you know, for having the wrong flag state, or having no flag state, etc. And I often compare that to, you know, Al Capone being arrested for tax evasion versus, you know, doing all the other things that he did. These vessels, obviously are our sanctions evaders, but they are getting nailed on specific Law of the Sea and international maritime law statues.
Edward Lucas
Thanks so much, Ben. I know you’ve got to go in a moment, but let’s just have one quick question.
Benjamin Schmitt
Sure.
Edward Lucas
What’s the effect of the Israeli attack on Iran here? And with that, if this is a question from Federico Faubini, echoing an earlier question from Damian, will this affect the US, willingness to have an oil price cap? Just a quick answer on that. Then I get to go to go to Aura for her thoughts on that and other things, but the effect of the Israeli, consequences of the Israeli attack on Iran,
Benjamin Schmitt
I think that the oil price cap needs to come down regardless, right? We can’t allow, you know, for even marginal cost and profit, to go through to the Russian Federation, because they use this even if they’re not making as much revenue from these, from these barrels of euros oil that they’re able to get out into the international market. They’re using that revenue, whatever it is, to fund a wartime economy and one that is fully loaded, not only for, you know, production of military kit to to attack Ukraine and continue its illegal invasion in Ukraine, but possibly also to push forward into other areas in Europe or into NATO, right? So this is something that we can’t have regional, you know, regional disruptions in oil elsewhere in the world basically impact our decision making on Russia sanctions. With that said, we will see in the coming days how much this attack by Israel and Iran and any subsequent back-and-forth between the two nations and see how that actually plays out in terms of disrupting oil traffic, especially through the Straits of Hormuz. It stands to reason that Iran to make a decision to target oil vessels that are transiting the Gulf and Straits of Hormuz, but we haven’t seen that yet. It’s only been 24 hours, or less than 24 hours at this point, since the initial strikes that Israel took against Iran’s nuclear program took place. But we will have to see. But again, I think that there is no reason that the White House or the EU or any other part of the G7 that are supporting the price cap should hesitate in lowering it to $45 per barrel, and frankly, it should be closer to $30 per barrel.
Super, thanks so much Ben. We’ll let you get on to go and give the Kremlin some more headaches on other things.
Okay, sounds good. Thanks everyone. And if anyone has a follow up question you might you can definitely share my email in the chat…
Edward Lucas
Super well. Please, anyone listening who wants to get hold of Ben just ping CEPA and we’ll forward it straight on. Aura, I’m so sorry. I’m so sorry to keep you waiting. But please, first of all, pick up on anything that we have said so far, particularly from the expert CEPA colleagues, and then give us, give us your thoughts on anything we haven’t, haven’t touched on. It’s a pleasure to have you on the call.
Aura Sabadus
Thank you, Edward. I feel sort of left out because I haven’t been sanctioned by Russia yet, but there’s still hope. I would add to what Ben just said that there is absolutely a need to lower the price cap right now. It’s true that the price of oil has gone up by about 15% compared to the beginning of June. But fundamentally, speaking, the market is still quite bearish because of many different factors, including OPEC+ deciding to lift production quotas, also because of the tariff war, the economy, there is a real risk for weaker economy, a global weaker economy, which means obviously low, lower oil prices. So, even if there was a even if the European Union and the US were to continue to press with this low price, with this lower cap, I don’t think that overall, the global market, the oil market, would suffer simply because, as I said, I it also depends on how much this conflict in the Middle East will continue. But fundamentally, speaking, as I said, I think the market is pretty much still bearish, and we do not see any upside risk, longer trend upside risk. So this would be on oil. I would now like to comment a little bit on gas. And I think initially, when we were discussing this, you, you were going to ask whether I was, whether there should be a soft, whether we expect a softening, perhaps of sanctions from the US or from the EU on Russia, I would say that there is indeed, in contrast, there is a need to increase these sanctions, and we’re hearing that the European Union will be putting out the legislation for the implementation of proposals to phase out Russian gas. We’re expecting it on the 17th of June, so on Tuesday. I had a word with a few people close to the commission, and they were telling me that the the regulations, the requirements, particularly on transparency, are going to be extremely tough. So, that’s encouraging, if indeed they are going to be very tough. I’d like to see how exactly they are proposing to monitor, particularly gas pipeline gas coming from countries such as Turkey, where we’ve seen a lot of whitewashing of Russian gas and oil products. And I’d also say that it’s really very important to step up these sanctions rather than soften them. Because if we look at the figures, and I’d say that there are two trackers here that are critical in the whole discussion. One is the track, the tracker from the Center for Research on Energy and Clean Air, which has been tracking the revenue that fossil fuel sales have generated for Russia. And since the beginning of the war, Russia has earned close to 900 billion euros. 210 billion euros were purchased by the EU. And the other important tracker is from the Kiel Institute, which looks at how much aid was donated, was given to Ukraine, in military aid, in humanitarian aid from Western partners, and that’s 225, so just slightly higher than the money that was paid for Russian oil, oil products, gas and coal. So really, going forward, there is a strong need to increase the sanctions. And this whole discussion about Russian gas being very cheap and being needed in the market is is not cannot be sustained. And I’d like to show two, two slides here, if possible, just to show you how wrong this whole discussion about Russian gas is and it’s not backed up by figures. Sarah, if we could please show the two slides. So one is a slide showing the prices paid by different countries. It’s true that it’s 2012 and the reason why I had this data is a because it’s incredibly difficult to get data, contractual, data being confidential. But this was leaked and republished in a report by the Atlantic Council in 2012 but 2012 was also, I would say, peak moment when most companies in Europe were really rushing to buy a lot of gas. And as you can see, the only country that was paying below the hub price. Below hub prices was the UK, and that’s the reason why it was cheaper in the UK, and I’m talking here wholesale prices. It’s because the UK was buying from many other different sources, and was buying very limited volumes from Russia all other countries, including Germany, was buying at at or slightly above hub levels, which means that at least on the contractual side hub, Russian prices were not cheap. It’s true that later on, Russia introduces a new platform called ESP where they were selling gas on a spot basis, and it was perhaps cheaper at some sometimes than than the hub price. But overall, the contractual prices were not cheap. And then the other slide that I would like to show you, relates to retail prices. And you will see here the prices paid by household consumers and non-household consumers in Europe. And what is interesting, especially in the map, is that Slovakia, for example, so that the only two countries remaining that still get Russian pipeline gas is Slovakia and Hungary. And as you can see, Slovakia has been paying almost the same price. So Slovak households have been paying almost the same price as Lithuania, which really stopped purchasing any Russian gas since the start of the war. The other slide is relates to non-households, so industrial consumers. And as you can see, Slovakia is the third most expensive country in terms of gas prices for industrial consumers, even though the argument that we keep hearing from Mr. Fitzo is that. A they need really cheap Russian gas in order to sustain their economic performance. And also, Hungary is pretty much slightly above average, so certainly not the cheapest country in Europe. So, this is really just to show you that this whole idea of cheap Russian gas being needed to sustain economic growth in Europe is not really backed up by figures. And what we also forget in this discussion is that there are buyers not just in Hungary and in Slovakia, who are obviously pipeline buyers of pipeline gas. But we also have big buyers in Spain, and we don’t hear that that much talk about Spanish buyers being very keen to continue LNG Russian LNG imports. We have total energies, for example. We have Repsol in Spain. We have shell we have gone for with long-term supply contracts running until 2041. So really, the we should be focusing a lot more on on these LNG buyers as well. So I’d stop here showing the slides and also with my comments. But of course, if there are any questions, happy to answer them.
Edward Lucas
Well, thanks so much for that Aura and for highlighting this. I feel we could rename this session Mythbusters, really, but I’m I want to come back now to Alexander and ask you if you want to add something on the effect of the Israeli Iran attack. And also, there’s a further question from Damian has just come in asking about the effect of the proposed US Senate sanctions. The idea there of a 500% tariff on countries importing Russian oil and gas, and obviously, the main buyers for Russian oil and gas now China and India and countries like that. So, how practical do you think these Senate sanctions are? Alexander and um what effect might they have? And you’ll need to unmute.
Alexander Kolyandr
Yes, well, starting with the sanctions and 500% tariff, I think that if we don’t see any easing of the trade war, then these sanctions would have very little practical effects, simply because the difference between 500% and 160% tariff is academical. Both will hit Chinese export to the United States, and that would be equally painful. So I think that, from that point of view, those sanctions are would be, in a certain sense, a little bit pointless. However, if the reason is of the trade war, then the threat of 500 tariff might be effective. However, I very much doubt that this law would be signed into a law by by Trump, because if the reason is, in the trade war, such a law would would derail any kind of a deal. So, I think that in the current form, this law has very little chances of, you know, seeing the day of light. But, with some adjustments, like tariffs on certain goods, it might be pretty effective. Not only because it would kill all the export of Russian oil to China, it is still possible to, you know, reload tankers and all that, but because China it would, it would enable China to squeeze more or a wider discount from Russia. Because at the end of the day, the task of the sanctions is not to deprive the global market of Russian oil, but To deprive Russian government of oil revenue and oil profit. So, if by hook or by crook, you enable China or you arm China with extended ability of squeezing wider discounts, than that would hurt Russia without hurting the global markets. Does it answer the question?
Edward Lucas
Yes. Thank you very much. That’s very useful. And then any thoughts on Iran, Israel?
Alexander Kolyandr
Oh, god. Uh, honestly, yeah, if I were able to predict a swings in oil prices, I wouldn’t be wasting my time here. As you would imagine. So I don’t know. It just [unintelligible] to remember that Russian budget was based on $60 per barrel, cut off price. In other words, everything above that would go to the National Wellbeing Fund. Everything below that would need to be financed from the National Wellbeing Fund. So, prior to the strike on Iran, Russian government has already said that the deficit this year will not be 0.5% of the GDP, by 1.7 mostly due to the lower oil prices. Not that it is something, you know, killing or unbearable for the Russian economy, but but still, it dance into its progress. So, I think that if oil prices grow as a result of the Israeli strike, that would definitely throw a helpline to the to the Russian government, because every $10 drop in oil price per barrel and for the whole year results in $25 billion less for the federal budget.
Edward Lucas
That’s such a handy thing to bear in mind. I when I first was covering Russia in the 1990s I think the oil price was $7 a barrel, and one could see the effects of that. And in there was a time when it was heading towards 200 and we saw the effects of that too. And thank you all say for rebuke, your very well placed rebuke. When I asked you to predict the price, I used to be energy editor of The Economist, and people were always asking me, what’s the oil price going to do? And I would reply, if I knew the answer to that, I’d be sitting on a yacht reading, The Economist, rather than sitting at a desk trying to write it. So, thank you for that. Now I’m very keen to take some more questions. I see we’ve got no fewer than three I think Reuters journalists, yeah, which is a great honor. So, Tim Yann or Alex, please feel free to either stick an electronic, electronic hand up and jump in with a question, or put one, put one in the chat. Federico, you’re welcome to come back for second helpings if you’d like, or if anybody else wants to pitch in as well, they’d be very welcome. And, there’s a reminder just coming from the in the chat from SaraJane on that, but I have another question, which is to you, Alexander. Do we see any effect on the Russian economy of the Ukrainian strikes on Russian infrastructure, we’ve seen some quite dramatic hits on transport infrastructure and some energy installations or refineries and so on. Um, are these really just pinpricks in a country the size of Russia? Are they having any, come on, say they’re having any significant economic effect?
Alexander Kolyandr
Short answer is no. We don’t see any economic effect of the attacks on refineries, and my understanding is that those attacks have stopped, at least for the time being, that there was some kind of a shadow agreement. But, even at the peak of those attacks, we saw no indications of declining production of Russia’s higher refined oil products.
Edward Lucas
Right?
Alexander Kolyandr
Whether it was because of the Russian ability to restore production. Or because Russia had enough stocks of refined products to fill the gap while the refineries are being refitted, that I don’t know, but we see no swings in supply and no significant swings in the prices.
Edward Lucas
I’m glad to see that Ben has rejoined us, having finished your other obligations early. So thank you for that. And we’ve got another question from Federico and another question from from Damian, and I’ll take Federico’s first. I might give this to you, Ara, are there any more details on the forthcoming EU sanctions proposed on Russian gas? Any mechanism to stop shadow sales of Russian LNG or other gas to EU countries?
Aura Sabadus
As I said, I’m hearing that there will be very strict requirements on transparency, and I think this is exactly what’s needed, because the gas that is coming in Europe via Turkey, which is the only remaining corridor, could be of many different origins. I mean, we already know the TurkStream gas, but there is also another pipeline that can bring gas from different other sources that Turkey uses, Azerbaijan, Iran or LNG. And the biggest question that I had when I saw the roadmap was, how on earth is the European Union going to enforce this? Because unless you have a very strict monitoring of the molecule, you will not be able to actually pinpoint it to know exactly where it’s coming from. So I’ll be very curious to see how they’re going to enforce it, because obviously, the gas is coming from Turkey, a non-EU country, that doesn’t apply any of the EU transparency rules. It crosses Bulgaria, which, again, doesn’t have such a great track record in transparency. And then, on the other hand, we also see LNG coming from Spain, imported by these companies that I just mentioned. And there were different suspicions that some of this gas ends up in Germany, in fact sold perhaps as French or Spanish gas, but in fact, it’s Russian, LNG. So, I will be very, very curious to see how these enforcement mechanisms will apply, what sort of requirements we know that the companies that still have these contracts will have to report all the gas that comes in under the road map. Any spot contracts, any spot purchases, have to end by the end of this year, and companies will not be allowed to sign more contracts. And then the long-term contracts will have to end by 2027, but again we’ll have to see how they’re going to work around contractual obligations, particularly on the LNG contracts, which I just mentioned, that have an end date around 2041 most of them.
Edward Lucas
Thanks very much, Aura. I should have said that Federico is from Corriere della Sera, and author of some excellent books as well, in his own right, as well as writing, writing for me, for the media. Alexander, there’s another question coming from the indefatigable Damian Shevko, which is about the ruble exchange rate. And this was something that was very confidently predicted at the start of the war, that the ruble would crash, both the result of the shocks and as a result of confidence effects. And it hasn’t really happened. The ruble exchange rates really, quite, quite, quite strong recent months, particularly. So, any thoughts, any thoughts on on that? And perhaps as a supplementary, is it conceivable United States might try and get Russia back into SWIFT as a way of annoying the American Trump administration, wanting to get some daylight between them and the Europeans, and somehow, perhaps to reward Russia if any putative ceasefire. Is that something that would be, would be, would be practical. Is it in the Americans gift to do that? So exchange rate in SWIFT
Alexander Kolyandr
Yeah, okay, I’ll start with the second one. Well, the US is a powerful country, but not everything is in its power and SWIFT is not managed by the United States. It is managed by the central banks of with dozen largest economies, the Europeans and the European Central Bank, and by European to a lesser extent, by European finance ministries, but mostly by the central banks of of the largest Western countries in Japan. So, the United States, in a sense, it is kind of a [untintelligible], a collective farm of banks which enables banks to communicate. So the United States alone are unable to do that. And I still wonder where the Russian request to the US at the negotiations to bring back, to bring Rossiya Bank back to SWIFT was was coming from the Russian misunderstanding of the SWIFT or a deliberate request of something that the United States are unable to deliver, or a general believe that whatever the United States want it can get. So short answer, no, the US alone would not be able to do that. However, for trade, SWIFT is important, but it is still possible to trade without SWIFT, because at the end of the day, SWIFT is only needed to send messages between the banks in in a swift and secure manner. So if you have one bank and the you know, pretty low volume of trades, you can still do it by other means. And what is more important is to leave the sanctions, or at least to have an exemption for for a Russian bank from the United States, to allow this bank to open a corresponding account in the US. That would open the window for the said bank to be used as a conduit for cross-border trade for Russia. So, lifting sanctions or an or an exemption, which allows Rossiya Bank, VTBs, Baro, any other Russian state control bank, to open a corresponding account in the US is way more important than a SWIFT. SWIFT is important for much smaller, but more often more numerous operations. Secondly, on the exchange rate. I mean, what we saw with the exchange rate at the beginning, when the ruble collapsed, is was totally predictable. And then, with all the capitals locked in, mostly by the Western sanctions, but partly by the by the decrease of the Russian Central Bank, the the demand for dollars declined, and now, with a Russian economy slowing down, demand for import is also declining. So, I think that for for the time being, the exchange rate is where it should be, unless we see some swings in oil prices and this, this is not something, you know, extremely damaging for for the Russian economy. But, with all the limits, the Russian economy is not a Soviet one. It is still in the market economy, where the exchange rate is defined by the by supply and demand, with the very limited intervention from the central bank.
Edward Lucas
Well, thanks so much for for that. And I think we’ve come to the end. I’ve got one final question from Jan Strupczewski from Reuters in, I believe, in Brussels. And, which is about China and brackets, India, but the big non western countries and their role in the success or failure of Western sanctions in Russia. And he finishes up by saying, “is it possible, and under what circumstances that the EU could make China exert real, effective pressure on Moscow to end the war in Ukraine?”. So I’ll ask you each just in a minute, to give any thoughts on the role of China in blunting the effects of sanctions, and whether there’s anything we could do to get China to help with sanctions. And I’ll start with Ben, then Aura, then Alex, and I’m going to hand over to Sarah Krajewski for a final word from CEPA. Ben, you go first,” China.
Benjamin Schmitt
I think it’d be difficult to get China to actually actively help us be, you know, whether it be the US or the EU with sanctions on Russia. I think that, you know, China has demonstrated that it has this “No Limits” approach to its partnership with Russia. It definitely is increasing its cooperation in a lot of practical and security areas, including in maritime, you know, in the maritime environment. And so, I think that the only thing that we can hope for is that there are more, packages of sanctions, whether it be from EU or the US, and it could also obviously be as a part of whatever the reworked Graham bill is in the US Senate to make sure that there are secondary sanctions on offtakers of Russian oil and gas, whether it be China or India in will at least deter some, maybe not all, but some of these companies and entities from doing what they have done so far. Whether or not the broader threats of, you know, 500% tariffs on countries that have entities that are off taking Russian oil, whether that actually goes through or not, I have, you know, I’m somewhat suspect of whether that is a tool that is is useful here, but, you know, we will see. But, I think that it’s going to be more of a an offensive approach, rather than a, you know, diplomatic approach, because there’s, I think, very little chance, especially in the case of China, of getting proactive cooperation to enhance or enforce Russia sanctions,
Aura feel free to agree briefly or disagree less briefly.
Aura Sabadus
I’d say that secondary sanctions are important. We saw that impact on India earlier this year, when oil imports dropped as a result of secondary sanctions. In an ideal scenario, there should be coordinated sanctions by the US and EU against against bias in China, India and the the Global South. But in general, I agree with Ben that it’s very difficult to implement this and including to get the US and the EU to coordinate on this.
Edward Lucas
Good…
Alexander Kolyandr
I have nothing to add. I agree with both Ben and Aura. And just one thing more, secondary sanctions China, if possible, would help a lot.
Edward Lucas
Well. Thank you so much to our distinguished contributors. I didn’t introduce the beginning, but Alexander is senior fellow for Democratic Resilience, former Chief Correspondent for The Wall Street Journal in Moscow, among other many distinguished things, born in Khárkiv, Ukraine. Aura is a journalist, specializing in European energy markets for ICIS. That’s not the terrorist group. It’s International in the Independent Commodity Intelligence Services. And is also, I should have called you Dr.Sabadus really, PhD from King’s College, and then Ben is our senior fellow for Democratic Resilience and also affiliated with the University of Pennsylvania, and I’ve already plugged his excellent report on Subsea Mayhem. So that’s it. Thank you so much for your questions. Sarah Krajewski, over to you for a final housekeeping remark from CEPA.
Sarah Krajewski
Thank you, Edward. Thanks always to all of our experts and to you guys for the questions that you provided this morning. I will be sending out a recording and a rough auto generated transcript later today to all that will be followed by a full transcript on our website in the coming weeks. So, stay tuned for that. If you have any other questions or want to get in touch with any of our experts from today’s panel, just reach out at press@cepa.org, and I will happily get back to you. Thanks guys. Enjoy your day wherever it takes you.
