The biggest issue is that Russia supplies the energy that powers much of Europe. If this crises gets bad enough so that energy shipments are disrupted, that $5 Billion will soon seem like a rounding error. Worse, because the energy markets are global, everyone will be hurt. As anyone in the Producer Classes can tell you, there is simply no better way to crash the global economy than to raise the price of energy.
Sober people are beginning to tote up the potential costs associated with this utterly stupid neocon meddling in the Ukraine. One can only hope that cooler heads will soon prevail.$200 per barrel oil if Russia sanctions escalate- Oxford Economics
Reuters/Todd Korol July 23, 2014
If the standoff with Russia and the West reaches a point where the EU has to completely cut trade with Russia, oil prices could soar above $200 per barrel, sparking a global economic crisis, says Adam Slater, senior economist at Oxford Economics.
Cutting off trade with Russia, the world’s second largest oil exporter, would create a shortage in global energy supplies, which would have spillover effects into Europe, Slater told the Guardian.
"In such a scenario, world oil prices could soar above $200 per barrel and gas prices would also rise steeply,” Slater told the Guardian.
If Russian energy is banned from Western markets, Slater estimates that Russia would lose 80 percent of its energy exports. OPEC producing countries would fill in the market gap. Major economic downturns are associated with high energy prices.
“Stage three” sanctions- similar to those Iran experienced during the last decade- would bar the West from all Russia-related business, including exports.
The EU buys 84 percent of Russian oil exports, and 76 percent of natural gas exports. About a quarter of European countries completely rely on Russia for gas or oil supplies.
As of yet, Russia hasn’t halted European gas supplied through politically unstable Ukraine, but this event itself could trigger “stage three”, or trade-specific sanctions.
"These would further damage Russia's economy. Russia's next moves remain uncertain but an escalation of the conflict is still a significant risk which would have potentially negative global spillovers in particular via the impact on global energy markets,” Slater said.
The EU hopes that Ukraine and Russia will settle their gas row by autumn.
The puzzle that still surrounds the shooting down of flight MH17 has unleashed a new wave of accusations against Russia.
Sanctions against Russia have been driven by the US, but Europe has been more reluctant to follow suit, since its economy is still fragile, and disruption with a close trading partner could further destabilizerecovery. Russia is the EU’s third largest trading partner, and the largest economies, Germany, France, and Italy have some of the strongest ties.
The US just implemented a new round of sanctions, targeting Russia’s energy, finance, and defense sectors. On Thursday, the EU will broaden its industry-specific sanctions on Russia, EU foreign policy chief Catherine Ashton said on Tuesday.
The US sanctions block certain Russian companies from long-term dollar loans. more
Economic meltdown scenario piles pressure on Russia and the west
Policymakers dread slump in Russia – from further sanctions by the west – would trigger another global economic meltdown
Larry Elliott economics editor The Guardian, 22 July 2014
The meltdown scenario can be easily sketched out. Every global downturn since 1973 has been associated with a sharp rise in the price of energy. Russia is one of the world's biggest energy suppliers and is responsible for about one-third of Europe's gas. America's economic recovery from the deep recession of 2008-09 has been weak by historic standards, while the European Union's has barely got going. From the car plants of Germany to the finance houses of the City of London and French defence firms, there has been pressure on politicians to be wary of provoking Vladimir Putin into retaliation that might rebound on the west.
"The possible involvement of Russian-backed separatists in the airliner's destruction has raised the risk of further sanctions against Russia by the international community," says Adam Slater, senior economist at Oxford Economics. "These would further damage Russia's economy. Russia's next moves remain uncertain but an escalation of the conflict is still a significant risk which would have potentially negative global spillovers in particular via the impact on global energy markets."
The extent of that economic damage depends on two factors: how tough the west gets and how Russia responds.
Given the public outrage at the loss of life on MH17 some increase in the severity of the sanctions looks inevitable. In Brussels on Tuesday, there was talk of imposing restrictions on capital movements from Russia and of curbs on exports of defence and energy technology. These measures would certainly increase the pain for Russia, and would run the risk that Putin would retaliate by choking off oil and gas exports to the west, looking instead to energy-hungry China as an alternative market. Slater estimates that UK growth next year would be 1% lower than expected were Russia to halt gas supplies through Ukraine, with the impact felt through higher energy prices, higher inflation, falling share prices and weaker consumer confidence. Closing the gas taps could then trigger the "phase three sanctions" being resisted by many EU countries, including Germany, France and Italy. These would target entire sectors of the Russian economy, blocking their exports to the west and preventing them doing business with companies in the European Union and North America.
It is this prospect that has prompted fears of rapidly rising oil prices. Slater calculates that Russian energy exports to the rest of the world could be cut by as much as 80%, with less than half the shortfall made up by the Opec oil cartel. "In such a scenario, world oil prices could soar above $200 per barrel and gas prices would also rise steeply."
Julian Jessop at Capital Economics notes that the biggest losers from this would be Russia, already in recession. Other suppliers would have an incentive to keep prices low in order to grab Russia's energy customers. The west could draw down on strategic oil supplies to limit the impact of the loss of Russian supply.
It is the potential for Russia to damage the west and for the west to cause even more damage to Russia that explains the belief that the crisis will not escalate into a full-scale economic war. The European Union will talk tough but fall shy of imposing wide-ranging financial and trade sanctions as punishment for the Kremlin's alleged role in the attack on the Malaysia Airlines jet. Meanwhile, hopes that Putin is putting pressure on the separatists in Ukraine boosted share prices.
But events of a century ago show that the optimism of markets is not always to be trusted. It was only in the last week of July 1914 – once Austria-Hungary had delivered its ultimatum to Serbia – that bourses woke up to the fact that the assassination in Sarajevo had the potential to lead to a war involving all the great European powers. Up until then, the death of Archduke Franz Ferdinand was seen as merely a local affair and nothing to worry about. Similarly, the expectation now is that Europe will huff and puff but be wary of provoking Putin. For his part, the Russian president will be aware of the economic damage that even limited sanctions are doing and so be inclined to put quiet pressure on the rebels in the Ukraine to co-operate with the international investigation at the crash site. Russia's economy was already contracting before the west imposed its most recent set of sanctions in the spring. The fear now is that things could unravel quickly – just as they did in 1914.
Germany
Imports from Russia €38bn (£30bn) Exports to Russia €36bn
Germany is by far Russia's largest trading partner in Europe, while 6,000 German firms have set up shop in the country. Business lobby groups anxious to protect the country's lucrative exports of machine tools, cars and chemicals have claimed Germany would suffer "irreparable damage", losing its dominant economic position to China if sanctions escalate. The Committee on Eastern European Relations estimates that German exports to Russia and Ukraine are on course to shrink by €6bn in 2014 and claims 25,000 people will lose their jobs if these companies do not find alternative export markets.
France
Imports €10.3bn Exports € 7.7bn
In 2008 the French president, Nicolas Sarkozy, thrust himself into the centre of attempts to broker a peace between Russia and Georgia after a short war that saw Georgia crushed. Less than three years later, Sarkozy signed a contract to sell Russia two Mistral warships, below, that could have been used to defeat Georgia "in 40 minutes", according to a Russian naval commander. The €1.2bn deal – the Russian military's first major foreign arms purchase in modern history – supports 1,000 jobs in the French shipbuilding and defence industries, but France is now under heavy pressure not to deliver the second ship. French banks are also heavily exposed to Russia and could be vulnerable if Russian companies are unable to repay debts in the wake of tighter financial sanctions.
UK
Imports €8bn Exports €4.6bn
Russian billionaires' love of London houses and English football clubs is well known, but the UK may be less affected by a freeze in economic relations with Russia than generally thought. Just 1% of the UK's £118bn exports in financial services – lawyers' and bankers' bills – go to Russia, although this figure understates the money cycled back through UK offshore centres, such as the British Virgin Islands. UK banks have also lent generously to Russian companies, with $19bn flowing to Russia in 2013. More than 50 Russian companies are listed the main London stock exchange, but the number of companies seeking a listing has dropped sharply since the 2008 financial crisis.
Netherlands
Imports €29bn Exports €8bn
The economically liberal Dutch are one of Russia's most important trading partners. Out of all the EU countries, the Netherlands has the largest trade deficit with Russia, although the effect may be overstated by goods arriving at Dutch ports. The Dutch conglomerates Unilever, Heineken and Shell are heavily involved in Russia. After a meeting with President Vladimir Putin in May, just weeks after the annexation of Crimea, Shell's chief executive, Ben van Beurden, declared that he was keen to expand oil and gas projects in Russia's far eastern territory.
Central Europe and the Baltics
Poland: Imports €18.6bn Exports €8.1bn
Energy dependency is the achilles heel of countries in central and eastern Europe, which are among the Kremlin's most vocal critics. Poland gets more than 80% of its gas from Russia, while the Baltic States and Finland are 100% dependent. These countries are most vulnerable if Russia retaliates against tougher sanctions by turning off its gas supplies. Hungary, which is 80% dependent on Russian gas, could find a controversial deal it signed with Russia in February to build two nuclear reactors coming under the spotlight.
Southern Europe
Italy: Imports €20bn Exports €10.8bn
Italy's economy minister, Pier Carlo Padoan, said on Tuesday that Europe's economy was weaker than expected and sanctions could be a problem for all sides. Italy's energy giant Eni is building the €17bn South Stream pipeline with Gazprom, a controversial project to send gas from the Black Sea to Austria and Italy. In May Italian company Pirelli sold a 13% stake to Gazprom, underscoring the economic ties between the two countries. Italy's luxury handbag makers are also expected to be hit, as Russia's super-rich close their wallets in response to a weaker Russian economy: luxury good sales to Russia are forecast to fall by up to 6% this year. more
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