Last Tuesday Russia’s Gasprom company announced that it was restricting the flow of natural gas via the Nord Stream 1 pipeline to Germany by 40% from previously planned levels. The restriction was justified on the basis of delays in equipment to affect necessary repairs. Those delays are directly attributable to the restrictions imposed on Gas- prom as part of the general sanctions imposed on Russia and its companies following the Russian invasion of Ukraine in February this year. The immediate effect of the announcement was to cause gas prices in Europe to surge by double digits. The problem in fixing part of the necessary machinery of Nord Stream 1 was the refusal of the Canadian government to allow the return of the necessary machinery to Germany, apparently because of its Russian ownership.
The effect of the reduction of Russian gas was also commented on by Russian President Putin. He said that the “rejection of Russian energy resources means that Europe will become the region with the highest energy costs in the world.” Putin went on to make the point that the Europeans “seem to have forgotten the elementary laws of economics, or simply prefer to ignore them.” It is a bitter lesson the Europeans are now learning.
It appears that finally, Europe is beginning to pay the price for its imposition of restrictions on Russia. It was a simple lesson of basic economics that Europeans have chosen to ignore: the reduction of an essential commodity will inevitably result in that commodity costing more. That there will be unpleasant consequences for European citizens appears not to have entered their calculations. It seems inevitable that there will be a political price to pay for the leader’s stupidity. The citizens of Europe are highly unlikely to face the prospect of being frozen this coming winter with any degree of equanimity. One can expect there to be a political cost to be paid by the European leadership who, not for the first time, placed obeisance to the Americans above the rights and needs of their own citizens.
Perhaps the greatest unforeseen consequence of the sanctions imposed on Russia is one that was totally misjudged by the European political leadership. Far from driving the Russian economy into a downward spiral with the hoped for effect of achieving regime change in Russia, exactly the opposite has happened. The Russian rouble, which sank to more than 100 to the United States dollar three months ago, has roared back to achieve exchange levels in the fifties to the dollar. The rouble is now one of the world’s best forming currencies. Its very strength has become a factor of concern in Russian policy circles.
Rather than driving the Russian economy to destruction, all of its major exports are achieving record levels of earnings in foreign markets.. The Russian trade surplus hit a record high this year and it is selling all the oil and gas it can produce. It is the European economies that have suffered the consequences of their own actions. This includes record prices being demanded for foods. There is now a serious risk that famine will effect large parts of the world, including Europe. It is a consequence that was not foreseen by Europe’s tame political leaders that loyally followed America’s wishes without thinking through the consequences of their actions.
Another consequence of Germany’s slavish adherence to American wishes was the cancellation of the Nord Stream 2 project, after the expenditure of $10 billion. Germany is now discovering the real costs of that decision which is a shortfall in energy supplies. The real tragedy is that none of this was necessary. It was purely a consequence of the Germans slavishly adhering to United States wishes. They are now paying the price for that adherence in more ways than one. The Russians are now forcing the Germans to pay the price. As the old saying goes, you made your bed, you now have to lie in it.
The rapid rise in German energy costs will have a consequence in terms of their export competitiveness. European products were always expensive, but they were able to cope. The huge cost of their energy supplies that is inevitably following the restrictions on supply is putting paid to their international competitiveness. The Wall Street Journal noted that some producers were being forced to shut down in the face of the price competitiveness from factories elsewhere in the world. The Wall Street Journal noted that European natural gas prices were now more than three times higher in Europe than in the United States (itself hardly a low cost economy).
The Wall Street Journal, typically for a United States based news outlet, would like its readers to believe that the breakdown of Europe’s industry is the fault of the Russians. It is a ridiculous argument. The responsibility for the increase in prices is a direct consequence of the sanctions the United States and Europe imposed on Russia. They have only themselves to blame. The inevitable consequence will be that Europe will have to ration the supply of energy this coming winter.
The temptation for the Europeans will be to blame Russia although that is also a ridiculous argument. The shortages that are looming for the Europeans can all be traced back to the political choices made by their political leaders who obviously placed obedience to the Americans ahead of the well-being of their own people. That is hardly the Russian’s fault.
One sane voice in this policy madness has been, somewhat surprisingly, that of former United States secretary of state Henry Kissinger. Speaking at the recent Davos meeting of world economic and political leaders, Kissinger urged a quick end to the Ukraine war that he clearly saw as a consequence of United States intervention. He may have been too late, even if he had been listened to, which was not the case.
The Russians have already started redirecting their energy eastward, to India and China among other places. That also reflects on the Russian part a recognition that the world centre of gravity has steadily moved away from the United States – United Kingdom – European club that have dominated for the past 300 years.
It is a move that cannot come soon enough.
James O’Neill, an Australian-based former Barrister at Law, exclusively for the online magazine “New Eastern Outlook”.