Putin ‘destroyed’ most of Russia’s economy to double oil, White House says, just as other experts say his energy power is past its peak

The West’s response to the war has left Russia’s economy in tatters. Imports to Russia halved between the time the war broke out and last summer as Russian companies were unable to source critical items including semiconductor chips and auto and aircraft parts. Most government spending went to the war effort, and the lack of key items crippled the country’s industrial activity. Many foreign businesses, from automakers to restaurant chains, have long since packed their bags, and average Russian incomes have already fallen to their lowest level in two decades.

To support the economy, President Vladimir Putin has relied heavily on Russia’s greatest historical cash cow: energy. With large reserves of oil and natural gas – which accounted for 45% of the country’s federal budget in 2021 – Russian energy companies have for years made massive profits by selling to their neighbours, mainly in Europe. Even this year after the outbreak of war, Russian energy companies were still sending large amounts of oil and gas to Europe.

But Russia’s energy dominance has also undeniably been affected by the war. Natural gas exports to Europe have become more limited than ever, and oil may be the last thing protecting the country’s economy from collapse, at least according to a key White House adviser.

“Oil is the only thing they have left in this economy,” Amos Hochstein, President Biden’s special presidential coordinator, told CNBC. In Monday. “Putin destroyed the rest of the economy.”

But even if Putin bets on oil, it’s not a bet likely to pay off in the long run. Just last week, the IEA, an intergovernmental forum that advises its 31 member countries – mostly Western nations – on energy policy, said Russian fossil fuel exports “would never come back under any of the scenarios. .. to the levels seen in 2021”.

So if Hochstein and the IEA are right, what does this mean for the Russian economy? In short, what will be left?

Russia’s energy power is declining

Putin has spent decades strengthening Russia’s position as the world’s leading supplier of cheap and plentiful energy.

But with the way things are going for the Russian economy, that reputation could be erased in less than a year.

Natural gas flows to Europe — Russia’s historic biggest energy trading partner — have fallen sharply since September, when Russian gas companies halted shipments along the critical Nord Stream pipeline. Russian gas flows to Europe soared after the start of the war and Russian revenues from fossil fuel exports doubled in the first months of the war, but with Nord Stream offline for the foreseeable future , trading volumes are expected to continue to decline next year.

With natural gas to Europe not on the table, Putin may be hoping oil will take its place, Hochstein says.

“All [Putin]’s got left is the stuff that comes out of the ground. He won’t sell his gas to Europe anymore, so all he has is oil, so that’s what’s funding this war,” he said.

But even when it comes to oil, the picture looks bleak for Russia. The United States has already banned Russian oil, while Europe plans to do so from December. And while other buyers, including China and India, have stepped up to fill the void, even renewed interest from Asia has been far from enough to save Russia’s economy.

In September, Russian oil exports by sea fell to just under 3 million barrels a day, according to data from S&P Global, about 300,000 barrels less than in August, and the lowest level since September 2021, after months of steady decline in oil. export volumes.

Declining interest in Russian fuel may mean that its high status in world oil markets “will never return”, as the IEA pointed out last week.

“The breakdown has occurred at a speed few imagined possible,” the IEA wrote in its annual report. World Energy Outlookwhich presents several future energy scenarios.

The IEA predicts annual Russian oil and gas revenues will fall from $75 billion last year to less than $30 billion by 2030 as European buyers increasingly look to the United States , the Middle East and domestic sources to meet their energy needs.

With falling energy revenues, the Russian economy may not stand a chance. The International Monetary Fund recently predicted that the country’s economy will shrink by 3.4% in 2022.

Putin’s order last month to mobilize 300,000 Russian troops – which was reportedly completed last week – also raised alarm bells. In the wake of the order, top Russian economist Vladislav Inozemtsev warned that it would have “truly catastrophic consequences” for Russia’s economy, which he had previously warned could potentially “die by winter” at cause of the war.

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