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Saturday, December 4, 2021

The contours of Russia’s energy exports are defensible | View

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OPEC and Russia held the line last week against the Biden Administration’s efforts to wrestle increased oil production from the world’s largest producers, in the face of rising global energy prices.

Russian hawks cried foul, drawing parallels with Russia’s gas exports, where it is argued the Kremlin is withholding supply to the European market as leverage for the approval of its massive new pipeline, Nord Stream 2.

In both instances, the hawks are wrong, and the facts say otherwise.

Price hikes should have been expected

First, structural challenges in the energy marketplace, not Russia or OPEC, have led to price run-ups since last summer as economies rebound from the pandemic.

Foremost among these challenges is the ever-growing number of sovereign consumers who eschew long-term, stable energy contracts in favour of real-time pricing.

This is a strategy that works fine when prices are low, as they have been, but can be disastrous as prices rise.

Indeed, the smart money is seldom on spot markets over the long term, especially in commodities, and especially when production levers are pulled by consortiums or swing producers, as is the case with energy.

Indeed, Russia is the largest swing supplier into the European energy market. In that capacity, it has been a rational and balanced market maker throughout the pandemic.

For example, when COVID-19 first took hold, Russia conducted methodical supply cuts that allowed the more rapidly-deteriorating Asian energy producers a market into which they could sell their over-supply, thus providing some stability in the broader industry.

It is also almost certainly the case that Russia could have taken advantage of those chaotic early COVID days when demand was cratering to execute market growth plans through price war strategies and the like; options it clearly did not pursue.

Energy manoeuvring is wholly reasonable

Moreover, and ultimately of most importance, Russia’s energy manoeuvring is in line with international trade norms.

Specifically, Gazprom, the state-owned behemoth responsible for Russia’s pipeline gas exports, has met and continues to meet its contractual obligations with Western European countries, and indeed has increased its net exports by nearly 20 per cent year-on-year.

This is no small feat against the backdrop of the pandemic-fuelled collapse in demand last year, which was worsened by an unusually warm winter. That forced Gazprom into negative margin positions and led to a reduction in production of almost 10 per cent for the year.

As Russia enters what appears to be a much darker winter than last, with broad inflationary pressures leading to rapidly rising interest rates, and the pandemic pummelling Russian urban and industrial centres, it seems simplistic if not outright false to frame the actions of Russia’s energy sector, a core contributor to its GDP, as anything other than those of a reasonable actor operating in a dynamic, challenging environment.

Tom Robertson is the CEO of Continental Currency Exchange, Canada’s largest foreign exchange retailer, and a partner at IDF, a strategic risk consultancy.

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