The Russia-Ukraine War: A New Geopolitics of Finance And Energy Trade Emerges

Originally published at Forbes

Tilak Doshi Contributor

I analyze energy economics and related public policy issues.

Lenin observed that “There are decades where nothing happens; and there are weeks where decades happen.” It might be a stretch to describe the decades since, say, the fall of the Berlin Wall (1989) to the invasion of Ukraine by Russia (2022) as “nothing happening”. But it certainly seems like the weeks since the Russian invasion on February 24^th have telescoped decades’ worth of history into an “inflection point”, a term used by President Biden in his speech to US troops in Poland on March 25^th.

The main event is this: the Russians officially notified their gas customers — on March 23th, one day short of a month from its invasion date — that the terms of trade will henceforth be in “roubles for gas” for all “unfriendly” countries (that is, those that launched unilateral financial sanctions on Russia). The EU, dependent on Russia for 40% of its gas supplies (this is higher for Germany, at 60%), has claimed that paying in roubles for gas contracts that have been denominated in euros or dollars is “against contract sanctity”; Germany and France rejected Vladimir Putin’s demand that foreign purchasers of Russian gas pay in roubles as an “unacceptable breach of contract”, adding that the manoeuvre amounted to “blackmail”.

All Out Economic Warfare

From the Russian point of view, the “roubles for Russian gas” move was inevitable. The U.S. Treasury Department announced on February 28th that it would “immobilize” Russian central bank assets that are held in the United States. Sanctions on Russia were widened as the G7 and European Union governments moved on March 2^nd to block key Russian banks’ access to the SWIFT international payment system and froze about half the Russian central bank’s $630 billion worth of foreign currency and gold reserves.

Russia’s ex-president Dmitry Medvedev and now deputy head of the security council said: “They are seizing assets of financial institutions and even of the [Russian] Central Bank, and are even talking about foreclosing these assets, about nationalising them in other words. Well, look, this is a war without rules.” As one Washington lawyer put it, the expropriation of sovereign-owned foreign exchange reserves is “the largest hammer in the toolshed” and represents an all out economic war with no holds barred.

Not only does this take away Moscow’s ability to defend the rouble. This precedent will prompt a reconsideration by finance ministries across the globe – particularly in the majority of countries that have not taken sides with the US and EU in sanctioning Russia and that may face a potential conflict with US or EU governments in the future – over where to bank their foreign exchange reserves.

Despite significant pressure from the U.S., the UAE abstained from a vote at the United Nations Security Council to condemn Russia’s invasion. Mohammed bin Zayed, de facto ruler of the UAE and crown prince of Abu Dhabi chose to keep on side with his fellow oil producer Russia in OPEC+. Key OPEC producers Saudi Arabia, Kuwait and the UAE run some of the world’s largest sovereign wealth funds – will a globalist US or EU foreign policy agenda be a new risk factor in their projections?

The Russian Central Bank announced on 25^th March — two days after Putin’s “no roubles, no gas” plan was reported — that it would set a fixed price of 5,000 roubles per gram of gold. Since physical gold in international markets was at $62/gram, the arbitrage price would be (5,000/62) or approximately 80.5 roubles to the dollar. On the interbank market, the rouble traded at about 83 against the dollar, recovering sharply to pre-invasion levels after sinking to a record low of 150 roubles per dollar on 7^th March. The Kremlin indicated on 30^th March that all of Russia’s energy and commodity exports — crude oil, refined products, metals, timber, wheat and fertilizers — could be priced in roubles.

The ‘Globalists’ vs the ‘Nationalists’

In global commodity markets, it may well be that an “era of regional currencies is coming”, and confidence in the dollar reserve currency is “fading like the morning mist” as Medvedev puts it. At a stroke, the US and EU expropriation of Russian central bank reserves made US dollars and euros worthless to Russia. A new bifurcated financial world order is taking shape, and only tough negotiations or a tit-for-tat escalation will determine the balance between the U.S. and EU-dominated international trade structure that came out of the Bretton Woods system (the “globalists”) and the group of resource-based countries that will have currencies backed by commodity exports (the “nationalists”) and access to payment systems not subject to the whims of international corporations.

Financial sanctions by the globalists on a nationalist Russia led to Putin’s economic “nuclear” counter strike with the “no roubles, no gas” plan. This was a simple message to Germany which has no immediate substitute to piped Russian gas on which it is heavily dependent. In response, Germany’s government on Wednesday activated the first phase of an emergency law to prepare the country for possible gas rationing. Can Russia withstand the loss of rouble or gold-denominated revenues from export shutoffs more easily than Germans without delivered gas molecules for electricity and heat? One can speculate whether Russia will up the ante now by gas supply reductions or shutoffs to Europe if it refuses to pay in roubles (or gold) before winter is fully over or wait for the showdown in winter 2022/23.

Beyond the immediate tactics in the face off over the Russo-German roubles/gas issue is the possible dissolution of the unipolar global financial system under a dollar/euro hegemony and a multipolar one taking shape. The “globalist” camp has within its arsenal the world’s leading banks and financial institutions including the Wall Street hedge funds and multilateral agencies such as the International Monetary Fund and the World Bank. Its leading technocratic elites are represented by the likes of the World Economic Forum (the “Davos crowd”), the International Energy Agency (IEA), the UN’s climate change bureaucracy, the Silicon Valley behemoths, and the international mainstream and social media.

The dollar-euro complex is undergirded by the vast US Treasury bills market and under the Biden administration, quantitative easing (QE), modern monetary theory (MMT), trillions of dollars for “build back better” and other debt-financed spending sprees, and the inflationary US Federal Reserve purchases of debt (when others don’t want to lend) seem to be acceptable propositions. The rallying ideas of the globalist camp include the environmental, social and governance (ESG) and “stakeholder capitalism” models but above all is the “fight” against the “climate emergency”.

“Expert advisors” such as the UN Inter-Governmental Panel on Climate Change (IPCC) and the IEA have called for the immediate halting of new investments in fossil fuels in favour of renewable energy technologies. But the current oil and gas price surge and Europe’s energy crisis this winter has led the IEA to reverse its usual green posture and ask Russia in September to “do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season.”

Unlike the US Federal Reserve and its massive credit-creating powers, the Russian Central Bank will not be, nor is it capable of, supporting its currency beyond what is accruable from its trade balance as a commodity exporter. In the “nationalist” camp, a resource-based global currency system will emerge, with rouble, yuan, and rupee convertibility tied to the value of fossil fuels, agriculture, metals and other primary commodities exported by resource-rich countries and increasingly demanded by resource-poor developing countries. China, India and Russia are exploring alternatives to the US-dominated SWIFT inter-bank payments system.

India struck a deal recently for 3 million barrels of crude oil at discounted prices from Russia for delivery in May, and is looking to secure more supplies in the weeks ahead. As one local oil analyst put it, “If Russia is offering oil at a cheaper price and the trade is between rupee and rouble, then looking at the national interest and leaving aside the geopolitical aspect, India should definitely buy the discounted oil”. A move by Saudi Arabia to conduct at least part of its oil sales to China in yuan, for example, could signal the beginning of the end of the petrodollar, one of the pillars that support the status of the US dollar as the reserve currency of the world.

Globalism and Its Critics

There seems little reason for most developing countries to be much engaged with the globalist agenda of the EU’s Green Deal (or Biden’s Green New Deal) or with the “Great Reset” and the “4^th Industrial Revolution” espoused by Klaus Schwab of the WEF. As opposed to the globalists’ futuristic visions, the “nationalists” – which includes the vast majority of countries outside the OECD group — occupy rather prosaic “20^th century” ambitions: promote economic growth to meet rising aspirations of people for a middle class lifestyle or face the consequences of domestic social and political turbulence. This means continued and rapid growth in fossil fuel use and increased access to affordable energy (electricity and clean cooking fuels such as LPG) for energy-poor citizens. “Renewable energy” technologies, as the Germans have now found out, have not been an alternative to dependence on fossil fuel imports.

For the developing countries — accounting for 80% of the global population — climate treaties to “fight climate change” can be negotiated in global forums so long as the UN ensures financial support needed for “climate mitigation and adaptation”. After last year’s COP26 Glasgow conference, India made clear that its climate commitments are conditional on the availability of $1 trillion in climate finance. This is an order of magnitude above the sums talked about in the 2015 Paris Agreement. Since 2015, it has strived unsuccessfully to reach $100 billion annual target for financial transfers from OECD countries to all developing countries put together. For economic planners in China and India, economic growth takes priority over meeting climate targets. This means going up the energy ladder which today’s developed countries already climbed since the 19^th century Industrial Revolution and includes expanded coal mining for power generation.

It would seem that Lenin’s observation that “decades” can happen in “weeks” during particular historical junctures seems apt for events since the Russian invasion of Ukraine. The “rules-based international order” bit the dust after the US and EU financial sanctions on Russia essentially expropriated the country’s foreign exchange reserves. To be sure, rumours of the death of the U.S. dollar as the world’s reserve currency have been exaggerated to date, perhaps out of wishful thinking. But we now only have to wait and see if, in the coming weeks, the rise of a multi-polar world with regional currencies and competing commodity trading blocs mark the beginning of the end of dollar hegemony and the long-lived Bretton Woods system.

Follow me on Twitter. 

Tilak Doshi

I have worked in the oil and gas sector as an economist in both private industry and in think tanks, in Asia, the Middle East and the US over the past 25 years. I focus on global energy developments from the perspective of Asian countries that remain large markets for oil, gas and coal. I have written extensively on the areas of economic development, environment and energy economics. My publications include “Singapore in a Post-Kyoto World: Energy, Environment and the Economy” published by the Institute of Southeast Asian Studies (2015). I won the 1984 Robert S. McNamara Research Fellow award of the World Bank and received my Ph.D. in Economics in 1992.