The West is too locked in to Russia to cause it pain. But it inflicts a lot of pain on itself

No one wants to be dependent on Russia. This is not sanctions.  It is common sense

Share

The trick with economic sanctions is to put pressure on a country by damaging its economy, but without doing more damage to your own. That is not easy in our interconnected global economy. But fortunately, in the case of Russia, the target country is busy imposing sanctions on itself. In the short run we should not expect too much from sanctions, but in the long run any uncertainty in Russia’s economic relations with the developed world undermines an already difficult position.

The central point to grasp is that the Russian economy is a one-trick pony. More than 80 per cent of its foreign exchange earnings come from pumping or digging stuff out of the ground. Oil and gas account for two-thirds of its exports, with minerals a further 15 per cent. It is even more dependent on these primary products that it was in the Soviet era, when it had substantial machinery, armaments and other manufactured exports too.

It is a sizable economy, with about the same GDP as Italy – around No 9 in the world. But no other large economy is so dependent on a single source of revenue. It has 142 million people whose future prosperity depends on the price of oil and gas.

The entire supply/demand equation is now being changed by the boom in US production of both oil and gas, thanks to fracking. The US this year passes Russia as the largest producer of oil and gas combined, and price of gas in particular looks vulnerable as the US starts to crank up exports of gas in its liquefied form – Liquefied Natural Gas (LNG).

If that seems scary, it gets worse. The principal market for Russia’s oil and gas is Europe, and Europe can buy its oil from anywhere. It just has to pay the world price. Gas is more complicated to transport, for it needs either pipelines or expensive LNG terminals to import it. At the moment Germany in particular does need Russian gas, and until now thought it had a stable supplier. When the Nord Stream pipeline down the Baltic from Russia to Germany was inaugurated in 2011 it was greeted by Angela Merkel as “the biggest energy infrastructure project of our time”. Until then, most of Russian gas exports to Germany came through Ukraine.

In the short run nothing changes. Germany will not stop importing Russian gas. But in the medium term western Europe will gradually seek to diversify away from relying on Russia. We are already doing it: the South Hook terminal in Wales can take the largest LNG tankers. It has not yet shown through in our gas bills, but wholesale prices have fallen by a quarter since April, and the UK is buying cheap gas from Qatar. No one wants to be dependent on Russia. This is not sanctions. It is common sense.

There is a further twist. Russia needs the West as a market, for though it will always be able to sell its oil and gas to someone, it will have to cut the price – it has just done a gas deal with China on what for Russia looks like poor terms. It also needs Western technology to get the stuff out. One of the reasons why BP is a partner in Rosneft, Russia’s largest oil producer (BP has a 20 per cent share stake), is that BP knows more about getting oil out of difficult places.

So there you have it. European sanctions, like the US ones announced last week, will not undermine core trading relations with Russia. Germany will go on buying the gas; BP will continue its participation in Rosneft; and rich Russians will go on buying their BMWs and blowing money in Monte Carlo. A handful of individuals known to be close to the Russian leadership have had their foreign bank accounts frozen, and some will find it impossible to get visas to travel to the West.

But the combination of rising perception of the risks of investing in Russia and the threat of further restrictions is already pushing up the price at which Russia can borrow on the financial markets. At the beginning of the year the government could borrow for 10 years at 7.7 per cent; on Tuesday night the rate was over 9 per cent. Unsurprisingly, capital is flowing out, some $70bn in the first half of this year. Share prices have fallen; the rouble has weakened. The economy is almost certainly back in recession.

But all this is short-term. What really matters to Russia is the long-term progress of its economy. It can choose to be poor, or at least poorer than it need be. Or it can choose to become a normal, successful, diversified market economy, rather than the odd skewed entity that it has become. The path to prosperity lies in cooperation with the West, using the resource of the human capital of its people, plus Western know-how, to create goods and services the rest of the developed world wants to buy.

There is nothing wrong with being a primary producer, but the trick is to use the natural resources to build a wider economic base, as Canada has done. Russia could be to the EU what Canada is to the US.

But how do you deal with a leadership of a country that is determined to act against that country’s long-term self-interest? Maybe sanctions will give a nudge.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Telesales & Customer Service Executives - Outbound & Inbound

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Recruitment Genius: National Account Manager / Key Account Sales

£30000 - £35000 per annum: Recruitment Genius: An opportunity has arisen for a...

Recruitment Genius: Operations Manager

£30000 - £35000 per annum: Recruitment Genius: An exciting opportunity to join...

Recruitment Genius: Recruitment Consultant

£30000 - £35000 per annum: Recruitment Genius: We have an excellent role for a...

Day In a Page

Read Next
 

Letter from the Political Editor: Mr. Cameron is beginning to earn small victories in Europe

Andrew Grice
Pakistani volunteers carry a student injured in the shootout at a school under attack by Taliban gunmen, at a local hospital in Peshawar  

The Only Way is Ethics: The paper’s readers and users of our website want different things

Will Gore
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'