The intersection of geopolitics and economics is particularly volatile in the world of oil and gas resources. Recent developments have heightened this tension. Just this week, both the United States and the European Union imposed new economic sanctions on Russia, limiting its access to crucial capital and oil exploration technologies.
According to Reuters, “The measures mark the start of a new phase in the biggest confrontation between Moscow and the West since the Cold War, which intensified dramatically following the downing of Malaysian flight MH17 in rebel-held territory on July 17, reportedly by a missile supplied by Russia.”
At Economic Prism, we’re uncertain how these sanctions will play out. Will Russia concede to the pressure? Will Putin retaliate by severing Europe’s gas supply?
One thing is clear: events rarely unfold as anticipated. What seems like a sound strategy today may easily turn into a disastrous decision tomorrow.
Complex systems, often built up over time, can reach a tipping point where they suddenly spiral out of control. Intention and careful planning can have the opposite effect, exacerbating the situation.
More Complex than Pizza
Humans often struggle to grasp even simple cause-and-effect relationships. Our neighbor remarked last month after suffering a heart attack, “I used to eat a lot of Domino’s Pizza. Now I’m eating Papa John’s.”
This example underscores a larger truth: the ongoing situation in Ukraine is far from straightforward. The complexity is vast. What chance do political leaders with limited insight have of resolving it effectively?
Historical tensions, deep-rooted grievances, energy resources, and financial interests all intertwine. The stakes are incredibly high.
Putin may perceive this as a strategic chess match, while Merkel approaches it like a game of poker, and Obama seems to view himself as an actor in a role. Each attempt to stabilize the situation often leads to further escalation.
What if these sanctions fail? What if Russia persists in supplying weapons to separatists and increasing its military presence along the Ukraine border? Could an invasion of eastern Ukraine be on the horizon?
We sincerely hope we don’t have to find out. Yet, with each passing day, the likelihood of a significant incident grows more tangible.
Heading for Disaster
In the meantime, market reaction suggests investors are not particularly concerned that these sanctions will cripple Russia’s economy. After a noticeable dip on Tuesday—the day the sanctions were announced—the Market Vectors Russia ETF (NYSE: RSX) rebounded on Wednesday. The following day, it faced a sell-off along with many other stocks, although RSX’s decline was milder than that of the DOW.
While these sanctions may not be sufficient to incapacitate Russia’s economy, they could potentially have dire consequences for Europe’s economy. A critical winter in Berlin could become a reality if Russia decides to halt gas exports. In just a matter of time, Europe could find itself in darkness. The International Business Times provides further details:
“Last year, Europe imported about 162 billion cubic meters of gas from the Russian monopoly Gazprom, representing around one-third of the continent’s total gas consumption, at a cost of approximately $53 billion. Nearly half of this gas transits through Ukraine, making it particularly vulnerable amid ongoing conflicts between Moscow and Kiev.”
“Certain countries would be disproportionately affected by a gas cutoff. Twelve out of the 28 EU member states depend on Russia for over half of their gas supplies, while six countries—including Bulgaria and Lithuania—are almost entirely reliant on imports from Gazprom, according to the European Commission.”
As the situation escalates, the world seems to be racing toward a potential disaster.
Sincerely,
MN Gordon
for Economic Prism
