An uncertain and worrying future

Russian oil and gas

Unlike animals, which live in the present, we humans are concerned about the future and since ancient times we have tried to unravel it with such picturesque methods as delving into the entrails of some animals or following the flight of birds. Or with a crystal ball. If it worked, it was purely by chance because Stephen Hawkins has explained to us that the arrow of time moves in only one direction, always forward. And the difficulty of predicting the future remains as long as we do not abandon our efforts to unravel it, even though we know that reality may end up surprising us once again.

That is why we must be very humble when faced with the nevertheless necessary exercise of trying to unravel the possibilities of evolution offered by the current global situation characterised by a United States in a domestic crisis resulting from the resurgence of new strains of the pandemic, unprecedented political polarisation, rising inflation and falling stock markets, and unable to focus its attention on China as it would wish because of Russia's invasion of Ukraine. All of which casts a dark cloud over the Democratic Party's expectations for the November elections. For its part, China has slowed its growth and is also suffering from COVID, which it is fighting with draconian and costly measures, as shown by the prolonged closure of Shanghai (5% of Chinese GDP), while it has embarked on an unprecedented process of rearmament, riding a wave of nationalism that is threatening Taiwan more and more explicitly every day in view of the 20th Congress of the Chinese Communist Party to be held in November. And Europe, which after Brexit has taken important steps in its integration process during the pandemic and the current invasion of Ukraine, fears that the prolongation of the war and the asymmetric economic effect that sanctions on Russia have on the 27 EU countries will eventually break the internal cohesion shown to date, a process that Moscow will understandably try to encourage. In Russia's case, its future will depend on the progress of the war in Ukraine and the effect of sanctions on its economy, which according to Elvira Nabiullina, Central Bank governor, will start to really hurt it from next autumn, whatever Putin says.

If we try to systematise as much as possible, I can think of three possible scenarios for the future:

The first is a doomsday scenario in which everything goes wrong: Russia ends up crushing Ukraine's bravado, which is dismembered and neutralised, and becomes more overbearing and aggressive as the isolation to which it is subjected and the sanctions produce dangerous frustration. In the US, the economic situation returns Trump or someone equally unpredictable to the presidency, creating a scenario in which anything can happen, from introspection to aggressive leadership. Europe is deprived of gas and oil from Russia while inflation rises and all of this leads to a winter without heating, a recession and the breakdown of our internal cohesion, while China tries to take advantage of the perceived weakness in the West to launch an attack on Taiwan. The perfect storm.

The second scenario is also quite bad, though not as bad and perhaps the most likely: the war in Ukraine bogs down, Russian pride suffers and its prolongation inflicts economic damage on all, while the risk of an extension of the conflict grows, even for a mistake that no one wants. A humiliated and revanchist Russia is not an ideal neighbour. In the US there is a sensible president who manages to avoid recession, Europe also manages to buy the energy it has stopped buying from Russia (and which Russia sells in other markets such as China or India), and China sees the high cost for Russia of invading Ukraine in military, economic and international reputational terms and decides not to invade Taiwan for now... The economy avoids recession, although it is not rocket science either.

The third scenario would be the desirable one, although that does not make it the most likely: Russia and Ukraine sign a ceasefire that would probably impose on the latter the definitive loss of Crimea and the Donbas region. Russia presents this as a triumph (though only it knows what it has cost it), but fails to be accepted as a normal neighbour in Europe, causing it to continue to gravitate towards China. Fossil fuels flow again and avoid economic recession in Europe and the US, which regain their international leadership and offer China areas of cooperation (disarmament, climate, pandemics, poverty, Arctic, space...) in exchange for Beijing putting its claim in the freezer for another season without giving up Taiwan. The world begins the difficult negotiation that should lead to the adoption of new rules to govern us all and the remodelling of the international organisations inherited from the Second World War that have become obsolete, thus avoiding the feared geopolitical "decoupling".

What happens is that energy may end up being decisive before all this happens because if the war continues and Europe talks of cutting off oil and gas purchases in Russia, Moscow may not wait so long (because, although it exports less, prices are higher) and cut off our gas next winter, creating a very difficult situation for us because we will lack fossil fuels. There is no need to talk about gas because Russian gas is impossible to replace in the short term, and as for oil, if we take three million Russian barrels a day off the market (11% of the total) there is no human way of finding them elsewhere: Biden is going to Saudi Arabia to ask Mohammed bin Salman (the alleged murderer of Kashoggi) to increase production, but even if he wanted to (and it is not clear that he does) his capacity is not much. And neither is Venezuela's after Chávez and Maduro have plundered PDVSA. That leaves Iran, subject to sanctions that prevent it from exporting. Thus, a short-term scenario without gas and oil or at $150/barrel is not unimaginable. And that would be very bad for us because it would also make Europe more dependent on the United States... unless the US also panics and bans oil exports in order to contain gas station prices and try not to lose Congress and the Senate in the Midterm elections. It is not an unimaginable scenario either. I am very sorry.

Jorge Dezcallar

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