High commodity prices, inflated by Russia’s invasion of Ukraine, are a boon for Russia, according to U.K. based consultancy group Wood Mackenzie. Higher export revenues will boost an existing fiscal surplus and swell buoyant financial reserves.
According to Simon Flowers, WoodMac’s Chairman, Chief Analyst & author of The Edge, the world may be witnessing “the beginning of the end of Europe’s umbilical relationship with Russian gas.”
Europe didn’t get cold feet after the 2014 Crimea invasion, Flowers pointed out. In fact, Russia subsequently proved itself a reliable supplier and imports have actually increased as European domestic production dwindled. Even during this winter, when exports have been lower than market requirements, Russia has still met its contractual obligations.
“We expect that to continue through this crisis,” said Flowers.
The events of the last 24 hours, though, also make the main alternative scenario increasingly plausible – a full-scale Russian invasion of Ukraine.
“At this point, de-escalation via diplomacy looks little more than a faint hope,” Flowers stated.
He said Russia has timed its move from a position of strength.
“With the global economy surging, the world needs all the commodities it can get its hands on, not least Russia’s exports of gas, oil, coal metals, petrochemicals and fertiliser. Sanctions on exports of these essential commodities are unthinkable – there are no quick fixes should Russia’s supplies be cut off,” Flowers said.
He pointed out that OPEC has already signalled it won’t ramp up production to lower prices.
“But in the unlikely event Russian oil supply is cut, we’d expect the organisation to consider supplying extra oil to offset the loss to avoid a global economic crisis,” Flowers stated.
The Ukraine invasion appears to be the last straw for the EU – the suspension of certification of Nord Stream 2 is a clear indicator of the future direction of travel. The debate about diversifying gas supply away from Russia will only intensify. New supplies, though, can’t be secured overnight and could lead to higher prices in the medium term.
“It is a super-bullish signal to LNG developers in the US, Qatar and beyond; as well as pipe options such as Azerbaijan, the East Mediterranean and Norway,” Flowers stated.
