Sadly, charging Western leaders with incompetence has become a “dog bites man” story. Nevertheless, the consequences of all these screw-ups is so high that we feel compelled to chronicle them.
We’ll put the military mess in Ukraine to one side for now. Suffice it to say that Russia is beating a military trained and equipped to NATO standards over eight year, which had the additional advantage of building extensive, layered bunkers in Donbass. Russia is wearing it down with a peacetime expeditionary force, battle-hardened local militias, the Chechens, the Wagner Group (somewhere between volunteers and mercs) and most importantly lots of ammo and missiles. Russia has depleted Ukraine’s armored vehicles, heavy weapons, and seasoned fighters, as well as draining NATO caches, while reportedly manufacturing ammo and weapons at a rate so high that Russia is keeping up with the usage in the Special Military Operation. Russia has also demonstrated superiority to the West in missiles, missile defenses, and signal jamming. Yet somehow our strategists had convinced themselves that Russia was a military paper tiger, when that is increasingly looking like projection.
Apparently, the latest state of play is that Ukraine keeps shelling some bridges and a dam in Kherson. Bridges and dams are very sturdy, so realistically the worst Ukraine is likely to do is take a roadway or railway out of commission for a bit (one of the bridges under attack may be damaged to that degree). It appears the Ukraine forces there aren’t large or cohesive enough to launch the much-bruited August offensive, at least not big enough to do more than make some short-term gains. The most credible interpretation is that this effort is yet more PR: by going (not effectively) against visible targets, Ukraine is trying to persuade the locals that they still could return.
Things look even less good for Ukraine in Donbass. Military Summary reports that Russia has broken though in the southern part of the former zero line on the front that is ultimately defending Slaviansk and Kramatorsk, the final areas to be cleared in the Donestsk oblast. Military Summary also reports that there are many video of large-scale evacuation of Slaviansk and Kramatorsk. The Russian forces also started an aggressive assault on the very-well-bunkered defenses just to the west of Donetsk city, and are reported to have broken through part of that defense line. It’s been an embarrassment to Russia that Ukraine has continued to shell civilians in Donetsk. Minister of Defense Sergey Shoigu promised a few weeks back that Russia would Do Something.
EU’s Gas Insanity
The EU and US both still appear unable to accept that having failed to kill Russia with their shock and awe sanctions, they are now caught in their own booby trap by reducing access to Russia commodities, particularly ones on which they depend like gas, oil, fertilizers, neon, titanium, aluminum, platinum, palladium….
And then they get pissy when Russia is less than fully cooperative in continuing to supply them, even as they also threaten to stop/reduce buying from Russia (admittedly on largely imaginary timelines).
Gas in the UK and Europe is already entering crisis mode, in the summer, yet all the officials seem able to do is announce unrealistic schemes. In the meantime, the shortages train is bearing down on the EU economy and its citizens. And Russia is not only winning the gas war but also the large PR war around it outside the collective West.
Recall that Germany, with Italy is one of the two EU countries most dependent on Russian gas. Recall also that the European Commission announced the EU would reduce its Russian gas buys by 2/3 by year end. DW triumphally reported, Russian gas edging toward extinction in Europe.
It now seems churlish for Europe to be mad at Russia for helping them to achieve that end. Prices of over 2200 Euros per 1000 cubic meters, the peak over the last few days, will most assuredly cut demand. That contrasts with 100 Euros per 1000 cubic meters in early 2020 and 250 Euros per 1000 cubic meters in early 2021.
Admittedly Europe did take some key moves on its own.
First, at least Germany and perhaps some other countries too were cheating on how one counted the “reduce gas purchases by 2/3 by year end” by increasing their deliveries in March and April and acknowledging they were stockpiling.
Germany stole Gazprom Germania assets, which led to Russian counter-sanctions. I have yet to see any data on how much impact that had.
Poland and Bulgaria stopped buying gas directly from Russia, allegedly because they didn’t want to play gas for roubles. Instead of buying gas from Russia at spot prices, they instead shifted to buying it from Germany at a markup over Germany’s price under long-term contract, which was lower than the old “direct from Russia” price. So it’s hard to take Poland’s sanctimoniousness about “We are not violating sanctions” seriously.
Now let us turn to the Nord Stream 1 row. Nord Stream 1 supplied roughly 55 billion cubic meters annually to Europe (I have seen varying estimates of total buys from Russia, ranging from 140 billion cubic meters to 155 billion). Russia cut the supply (first reported as “by 40%” then as “to 40%” and I still not sure which is correct) on that pipeline due its famous part taking a jaunt to a spa in Canada and then being detained there. Siemens confirmed the part was being fixed. Europeans grumble that Russia didn’t need to cut the gas so much but no one (importantly not Siemens) has said otherwise.
Putin said at least twice, starting >3 weeks ago, that there was another sick part. One can argue that Gazprom was remiss in not getting its parts serviced sooner, given that that was permitted under its contract with Siemens. But given what happened to the world-touring turbine, once can’t say definitively that Gazprom was acting in bad faith in waiting after the fate of its stranded part was in doubt.
So Gazprom has further cut its supply to 33 million cubic meters a day (yes, a different time frame) versus pipeline capacity of 160 million cubic meters a day. So a bit over 20%.
So let’s go back to the annual math. 55 billion cubic meters x an 80% reduction is 44 billion cubic meters. OMG how awful! Some of that might come back if Gazprom gets its fixes made, but the EU top brass appears to have written that off.1
The part that EU leaders and the press conveniently omit is that the EU has lost 34 billion cubic meters of thanks to no fault of Russia. That’s the annual supply that went formerly through Yamal-Europe. Bet hardly any of you recall hearing that name.
Yamal-Europe has two trunks. One goes through Lugansk Republic, then Ukraine. Even though the Special Military Operation started at the end of February, and a junction at issue was then in separatist hands, Ukraine one day got the bright idea of cutting supply to Europe because those untrustworthy separatists. Mind you, Ukraine steals gas from the Gazprom pipeline to the degree that Gazprom shut it off for a while to try to teach Ukraine a lesson. But Ukraine made it sound as if the pipeline assets were imperiled, not that Lugansk might steal gas for its own nefarious purposes. Even though that was nasty to Europe, not a critical word was spoken.
Oh, and remember our discussion of Poland pretending not to buy gas from Russia but instead buying gas out of Germany’s supply? They were the big buyer on the other Yamal-Europe trunk. So when they told Russia they weren’t paying for gas, Russia cut off that supply.
And also remember that Putin has repeatedly offered to open up Nord Stream 2. Its capacity is double that of Nord Stream 1. Nord Stream 2 was good to go except for a final certification which was delayed due to US pressure (the US took other moves to interfere earlier, like trying to prevent financing, so if I recall correctly, Russia took care of that). Scholz gave Putin a non-answer about two months ago. Putin mentioned his offer again, last week, but said Russia was using half the capacity now and would take up more if Europe waited too long. Even half of Nord Stream 2 would be more than the shortfall on Nord Stream 1.
Even though German national leaders, above all the Greens, reject the idea of resorting to Nord Stream 2 with extreme hostility, seven mayors from the island of Reugen wrote a letter asking for Nord Stream 2 to be put to use. Expect to see more of this sort of noise.
Now even if you can say that Russia is being nefarious and trying to screw Europe over its sanctions, they should hardly be surprised if Russia were retaliating. The US has admitted Ukraine is a proxy war. American and other national leaders act as if they can get Russians to rise up and turf out Putin, as if that would be so good for the West. All of his conceivable replacements are more hawkish. The West has also shown blatant, multi-faceted Russia hatred, and expressed a desire to break up Russia, presumably so as to better loot it, like in the good old Yeltsin days. Even if Russia is playing gas games, it has still been comparatively measured in its responses.
And the non-collective-West observers will not be too sympathetic with Europe. Europe cut off Yamal-Europe. They are refusing the not-at-all-required Russian offer of Nord Stream 2 (which Russia can service itself, no need for parts to go on international treks). It’s pretty likely that most will conclude Europe could get the gas if it wanted to but is cutting off its nose to spite its face.
Europe is trying to pretend that it can manage a winter of energy starvation. Alexander Mercouris discussed the Financial Times report on the EU’s plan, where they were all chuffed because everyone ex Hungary agreed so quickly.
They could agree so quickly because the “plan” is a napkin doodle.
First, it’s effective in the event of a complete shutoff of Russian gas. Russia is still providing 12 billion cubic meters a year to Europe though TurkStream, and apparently also another 14 billion cubic meters of LNG (note all the sources I have identified so far are at least 26 billion cubic meters short, so there appear to be other gas routes missing…). Na ga happen unless the EU makes it happen.
Second, the EU “vowed” to lower gas consumption by 15% from August 1 to the end of March, or 45 billion cubic meters.
Did you miss the elephant in the room? To lower gas consumption starting August 1, as in next Monday, the EU would have had to have started on detailed planning and implementation, particularly legal and regulatory, at least six months ago! This plan is a con.
Third, the math also does not appear to work. problem is they’ve already lost Yamal-Europe, and it will be nearly a full year of supply by the end of March next year, so 34 billion cubic meters from that alone. The problems with Gazprom will be less than a full year, so assume 3/4 of a year of 60% loss. That’s another 25 billion cubic meter shortfall. So they plan to cut 45 billion cubic meters when they look likely to be nearly 60 billion cubic meters short. There were optimistic projection that the US could provide 15 billion cubic meters of LNG but production facility outages and other issues make that look outdated.
In other words, there looks to be a gap using reasonable extrapolations from the current situation, let alone the “full cutoff” it pretends to address.
Fourth, the 15% reduction has lots of carveouts, so even on paper, it probably won’t get to a 45 billion cubic meter cut. From the pink paper:
Depending on the exemptions that would be ultimately invoked, the overall reduction would be between 38bn and 43bn cubic metres, one official said, citing internal estimates.
Fifth, the scheme is VOLUNTARY! This is all empty talk! Each country has to act on its own. Do you think that countries that are better positioned will make their citizens suffer more than they need to and share with others? I wouldn’t bet on it. Again from the Financial Times:
The compromise includes clauses that put the power to make the targets binding in the hands of EU capitals and reducing the length of time that the gas reduction plan would be in place from two years to one.
Sixth, this problem is going to be significantly solved by Mr. Market, and not in a very nice way. I haven’t seen current gas prices, but I believe they are still over 1700 Euros per 1000 cubic meters. If that level is sustained or worsens, we’ll see all sorts of pain and dislocations, starting with business cutbacks and failures. That then rolls into rises in unemployment, collapses in tax revenues, loan defaults, and banking system stress. There will be mounting economic costs by the start of October, if not sooner.
Oil Lunacy
Because we had so much fun with gas, I will be much more terse on the remaining topics.
The G-7 is refusing to drop its widely-ridiculed oil price cap scheme. From Reuters:
The Group of Seven richest economies aim to have a price-capping mechanism on Russian oil exports in place by Dec. 5, when European Union sanctions banning seaborne imports of Russian crude come into force, a senior G7 official said on Wednesday.
Given the high odds of Europe being in a major economic crisis by October-November if it refused to relent and agrees to open up Nord Stream 2, the odds favor this dopey plan being quietly shelved. If it does go ahead, it will simply add to damage in Europe, since Russia has said it won’t sell oil at a capped price.
If this idea still goes ahead, Russia by then will have worked out how to have the Russian government insure tankers, so it could presumably still supply oil to friendlies…who still would launder it back to the EU. So it is possible that less will change than it appears now. But Russia probably would cut output to send a message.
As an aside, this entire idea is based on the notion that reducing Russian oil revenues will severely damage Russia’s ability to wage war. The oil and gas sectors together account for 15% to a bit over 20% of GDP, depending on prices. So oil alone is lower.
Russia chooses to rely heavily on oil for taxes, not out of necessity, but out of the old principle, “Taxation is the art of plucking the most feathers with minimum hissing.” Russia could tax other commodities or other exports or even more purely domestic sources. For instance, it imposed a windfall profits tax on Gazprom. So this perception of “dependence” is another misunderstanding of Russia. Yes, it might be a nuisance to shift taxation somewhat away from oil in the unlikely event that were to look prudent, but it would not be catastrophic.
Oh, and on top of this oil cap scheme expected to goose oil prices instead, analysts are already expecting more demand for oil in 2023, since the US will have to replace the oil it removed from the Strategic Petroleum Reserve.
American Scheduling Bumbles
This topic is tertiary, but it indicates a lack of competence in basic staff work. Quite a few Chinese media outlets were saying as of yesterday that China had not confirmed that the Biden-Xi call for Thursday was on, and the articles strongly implied that that was unusual. The fact and timing of the call was confirmed by the White House only as of this morning, barely an hour before the call time (8:30 AM EDT). This looks messy. Our readers who know official protocol please weigh in.
I personally think if China is as serious as it seems to be about making an aggressive military response if Pelosi and now others were to visit Taiwan, the best way for Xi to have conveyed the message would have been to refused the call as premature. Xi is not the type to stoop to being blunt enough to penetrate Biden’s hubris and stubbornness.
The reason for taking note of the Chinese side apparently digging in its heels over some hidden process issue (I assume there was a procedure issue in addition to substantive; as again indicated, the strongest way to signal Chinese displeasure would be to put off the chat) is if my surmise is correct, it is not an isolated case. Kevin W noticed another gaffe in AntiWar:
Secretary of State Antony Blinken said Wednesday that he will speak with Russian Foreign Minister Sergey Lavrov for the first time since Russia invaded Ukraine on February 24, although Blinken said the conversation “will not be a negotiation about Ukraine.”
Later in the day, the Russian Foreign Ministry said that there have not yet received requests for a Blinken-Lavrov call. “There have been no requests, only media reports,” a Foreign Ministry spokesman said.
More evidence, as if it were really needed, that the crowd in charge in the US lacks manners as well as common sense.
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1 The odds favor Gazprom turning the taps back up at some point, for the fun of literally gaslighting Europe and to play to China, India, and the Global South: “See, we gave them more gas when we could.”
