“Contrary to widespread alarmism about the negative impact of the Russia-Ukraine war on global commodity prices, the importance of commodity exports to Russia far exceeds the importance of Russian commodity exports to the rest of the world,” Yale researchers wrote in the analysis. , writes Business Insider.
Europe depends on Russia for 40% of its natural gas needs, such as cooking in homes and lighting power plants. It is worried about a winter energy crisis as Russia has cut natural gas flows to the continent, citing sanctions challenges.
Even so, the Yale authors argued that the Russian economy would be “most hurt” in the long term by changing natural gas supply chains. That’s because the European Union has already agreed to end almost all oil imports from Russia by the end of this year and has said it will reduce coal imports starting in mid-August. European countries, including Germany and Italy, are also working to cut off Russian gas.
Russia’s export earnings come largely from commodities. “These export revenues account for well over half of Russia’s total government budget in most years—and probably an even larger proportion now,” the Yale team wrote.
The study, led by Jeffrey Sonnenfeld, a professor at the Yale School of Management, also found that Russia’s economy was “shaking” due to extensive international sanctions. His findings contrast with studies of Russia’s economy that show it is holding up better than expected, in part because of robust earnings from its massive oil and gas industry.
Putin is moving east to sell Russian energy, but he’s selling at a discount
To soften the impact of lower energy sales to Europe, Russian President Vladimir Putin is hunting Russia’s energy exports to other markets, such as Asia, but at a discount.
“Its isolation from the West has devastated Russia’s strategic hand in negotiations with China and India, notoriously price-conscious buyers who retain close ties to other major commodity exporters,” the Yale team wrote.
“These countries have not been shy about exploiting previously sanctioned pariah countries, with China regularly driving massively discounted oil deals with countries such as Iran and Venezuela,” the authors added.
Since the invasion of Ukraine, the prices of Urals crude oil, emblematic of Russia, have fallen significantly. Urals was priced at $1.50 to international Brent crude from January to February, but has since fallen to a discount of $25.80 to Brent, according to a Bloomberg compilation of data from the Russian Ministry of Finance and Intercontinental Exchange.
“It now faces from a position of weakness the loss of its former core markets,” the Yale team wrote, adding that Russia’s strategic position as a commodity exporter has been “irrevocably damaged.”
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