September 9, 2022: Global News Roundup

Russia calls West’s bluff, European governments face crisis of confidence, US dollar supremacy continues to unravel

What a week for global energy politics. Shortly after I published last week’s post on Friday, Russian President Vladimir Putin announced that the Nordstream 1 pipeline was shut down indefinitely, following a 3-day pause to repair a leak: “Gazprom CEO Alexei Miller indicated that Siemens could not perform repairs on the turbines damaged by the oil leak because of sanctions against the Russian state energy giant”, reported The Guardian. In response, the US and Europe announced, also last Friday, an ill-fated plan to cap Russian oil prices: “Finance ministers from the UK, US, France, Germany, Italy, Japan and Canada have agreed a plan to put a ceiling on Russian oil prices. The proposal would mean importers seeking shipping services and insurance cover from companies based in G7 and EU countries would need to adhere to a price cap to transport Russian oil.” In order for a cap to be effective all major importers would need to be on board, an unlikely scenario, to say the least.

Predictably, domestic support for European policy toward Russia and Ukraine is collapsing as catastrophically high energy prices put growing pressure on households and businesses. On Saturday, 70,000 people gathered in Prague to demonstrate against the government of the Czech Republic, with both far-left and far-right groups protesting together: “Some of the groups represented at the demonstration were the populist anti-migrant Freedom and Direct Democracy Party and the Communist Party…The protesters condemned the government for supporting sanctions against Russia over its war in Ukraine and accused it of being unable to cope with soaring energy prices”, reported Deutsche Welle.

(Far-right and far-left groups take part in an anti-government demonstration in Prague, from Deutsche Welle, here).

The first of many planned demonstrations in Germany was held this past Monday in Leipzig, a symbolic location “where East Germans played a decisive role in toppling the dictatorship in the German Democratic Republic (GDR) with their Monday demonstrations.” Organizers are planning to revive “Cold War Monday” demonstrations: “Parties on both the left and right of the political spectrum in Germany have announced a "hot autumn" with regular Monday demonstrations. The socialist Left Party was the first to announce the new series of protests against Germany's rising prices for gas, energy and food.”

In Antwerp, Belgium, Mayor Bart de Wever publicly criticized European energy and foreign policy this week, expanding the ranks of populist politicians on both the left and right leveraging the economic crisis to undermine more centrist parties and politicians (this has been happening in France, too, among other places): “This is, of course, not a crisis that (Russian President Vladimir) Putin has caused, but that Europe has brought on itself by phasing out its own primary energy production this century”, said De Wever.

By Tuesday, with natural gas prices rising quickly, financial distress unfolded across the continent, including in power derivatives markets. The International Business Times reported that “European energy companies need at least 1.5 trillion euros ($1.5 trillion) to cover the cost of their exposure to soaring gas prices, Norwegian energy group Equinor has estimated, and that does not include firms in Britain.” (Utilities that sell power forward are required to post margins to secure their position as prices move against them). European officials are now also reportedly considering suspending power derivatives trading (recall that German utilities, among others, have already been receiving government bailouts in the wake of rising import costs).

Also on Tuesday, Russia announced, with China, a new arrangement for oil sales between the two countries to be conducted in rubles and yuan, a clear rebuff of the G7 price cap proposal. “Putin said Russia is abandoning the use of the US dollar and British pound, as the US has undermined the foundation of world economic system and the two currencies have thus lost credibility”, reported the CCP-backed Global Times, which further noted that Chinese ally Myanmar will also be purchasing Russian products in rubles moving forward.

On Wednesday, Putin delivered comments at the Eastern Economic Forum meeting in Vladivostok clearly aimed at hastening the ongoing erosion of international support for the US and Europe. “Western nations want to preserve the old world order, which benefits only them, to make everyone follow the ‘rules’ they invented themselves and which they regularly break or change to their benefit,” said Putin. He also responded to the proposed G7 oil price cap on Wednesday with a threat to “cut off energy supplies if price caps are imposed on Russia's oil and gas exports: “We will not supply gas, oil, coal, heating oil — we will not supply anything”, stated Putin. The Hindu explained the predicament the rest of the world faces in deciding whether or not to support the G7’s cap: “Cutting supplies from Russia, the world's second largest oil exporter after Saudi Arabia and the world's top natural gas exporter, would roil global energy markets, leaving the world economy facing even higher energy prices.” India has so far not lent its support for the cap.

On Thursday, the European Central Bank raised interest rates again (by 75 bps), an attempt to stem runaway inflation. By mid-day on Thursday in the US, the euro was still trading below parity, where it has been languishing for the past few weeks. The dollar continued to rise as US Federal Reserve Chairman Jerome Powell signaled yet another rate increase for the US. “A combination of shooting inflation and interest hike hysteria in the US is jerking the world round and about. The weaponization of oil and finance in the geopolitical tussle between the west and Russia is exacerbating inflation and recession worries everywhere and sucking global capital towards the dollar for safety”, wrote C.K. Ranganathan in Business Today.

Things I’m keeping an eye on:

1.     De-dollarization: If you’ve been following my posts for the past few months, you won’t be surprised to hear this suggestion made by a commentator this week: “India can try to revive rupee-based trade in the Indian Ocean region,  where Indian rupee used to be a common currency during the British rule” (see also here and here for more recent support for de-dollarization in India and strengthening the rupee as an alternative international reserve currency). The dollar’s global supremacy has been a gravely serious concern for many, many countries for decades. What’s different these days is that the BRICS have grown strong enough relative to the US to do something about it.

2.     Revelations about outgoing British PM Boris Johnson’s role in undermining a peace agreement between Russia and Ukraine back in April. I’m seeing very little press on this, mostly just local commentaries like this one. If true, and if the issue gets broader attention, it may ignite more protests and unrest across the UK and elsewhere. This issue is even more interesting as Liz Truss takes over as prime minister (one of her very first acts as PM was to speak with Ukrainian President Volodymyr Zelensky).

3.     Japan’s decision this week to move ammunition stores to the Nainsei Islands near the Taiwan Strait. “Moving ammunition to the southwest would improve Japan’s deterrence capabilities”, said the Japanese Defense Minister. This comes as China issued a stern warning to the US for permitting a bipartisan Congressional delegation to visit Taiwan this week.

4. Queen Elizabeth II passed away yesterday. The BBC has some wonderful photos of the tributes made to her in London here.