Putin Knew the World Would Fund His Ukraine War

Since Russia’s invasion, they have earned a multiyear record $33 Billion a month from fossil fuel exports. The European Union has accounted for 71% of Russian fossil fuels, worth $46 billion in March and April. Despite Europe’s moderate success in reducing the volume of Russian energy imports by 20%, they are paying for Putin’s war at almost double the $12.3 billion a month average from 2021. Russia knew that any loss of energy export volume would be more than compensated for with higher prices, especially with the post Covid global consumption surge. Sanctions have yet to inflict the desired pain targeted by the West. Positive developments are appearing lately with Germany now prepared to stop buying Russian oil later this year and scheduled shipments out of the Baltic Sea port expected to be down 30% month over month –  the lowest volume of any May in three years.  Yet the Financial Times reported that Germany, Austria, Hungary, and Slovakia have agreed to help Russia evade energy sanctions for now by submitting to Putin’s demand for payment of Diesel imports in Russian Rubles. Putin has already terminated fuel exports to Poland and Bulgaria for refusing to pay in Rubles and Germany knows it would quickly enter a major Recession if Russia cut them off today. Unfortunately, Russia is selling more oil and gas to the world today than it did before the war began and more than they had forecast. This is in large part due to India and some heavily discounted pricing. According to Bloomberg, Russia is projected to garner $321 billion from energy exports in 2022 or over 30% above 2021. Most reports we read indicate that export volumes should decline on a more protracted basis going forward now that allied nations and their supply chains have had time to significantly source from elsewhere.

Russia had a year head start planning its invasion and countering expected sanctions. The US and European allies are playing catchup after years of allowing themselves to be extremely vulnerable to hostile countries for their economic lifeline. Amazingly, Germany has no liquified natural gas (LNG) ports and President Biden’s approval to build two new terminals in the US are more of a long-term fix that will have no impact upon the war effort. US Oil and Gas production will be much slower to ramp up during this cycle of record profits due to the continued Federal and environmental (ESG) restrictions along with major labor shortages. The quickest way for Biden to increase fossil fuel supplies to Europe would be to repair our friendship with OPEC allies that he severed when he ignored attacks on their Oil Fields and by his support of a Nuclear Iran.

However, Euro pipelines are being rerouted and LNG tankers are being used as floating LNG ports. Once Russia’s pipelines to Europe constrict significantly, Russia will begin to have major problems servicing their energy network to the West, especially without the technical expertise of Western Oil companies that have exited for the long haul. Oil and Natural Gas prices rose 37% and 75% to their current peak since the invasion of Ukraine began. Prices have fallen back in recent weeks as one of the world’s main economic drivers, China, began locking down major cities. Our Partnership operation in Shanghai has its been locked down with its employees for the past several weeks as the zero tolerance policy is applying more pressure to China’s economic brakes. This costly endeavor has depressed Copper, energy and industrial materials lately. Perhaps the good news will be lower inflation expectations. While China’s ego has forced its populace to forcibly endure the totally ineffective Sinovac to cure Covid, history indicates that this wave of Covid could allow staggered reopening’s by the end of May or June. Chinese stimulus and unrestricted movement along with a steady reduction of Russian energy exports should keep fossil fuel prices elevated longer term. Until then, growing fears of Recession and falling demand from China may keep prices in a trading range. Global energy inflation is not yet as vulnerable from the Russia – Ukraine conflict as agriculture, but they both remain healthy sectors for stock investors to keep parking money until fears of ever higher interest rates and the war subside. 

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