Gas Flares: Europe Has a Hissy, Flails About as Russia Imposes Gas Payment Countersanctions and Economies Already Feel Blowback Bite

On the whole, European and US leaders are continuing to make a very poor showing of the situation they instigated with Russia. The Biden Administration decided to seize $300 billion of Russian foreign exchange reserves, overconfident that they would crater the Russian economy. Ironically, however, the sanctions greatly reduced the Russian need for foreign exchange for trade, since respectable US and European companies took it upon themselves to stop or limit exports to Russia. And Russian banks don’t fund in dollars or euros (in contrast with the 1990s, when the economy was significantly dollarized). And the world still needs Russian oil, gas, metals, you name it.

So after an initial shock and awe plunge, the rouble is very close to its highs versus the dollar over the last two years…despite the dollar being at its highest level against major currencies in the last 20 years. From XE:

And Russia energy revenues have been fine, thank you very much:

Russia projected a budget surplus before this crisis and its government income will be even higher due to the increase in energy revenues. Prime Minister Mikhail Mishustin told the Duma in early April that all receipts would now be spent into the economy. As you can see from the embedded document below, the government is embarking on more investment, loan discount, and tax relief programs. But Russia spent decades having to be a good budget-balancing-surplus running economy because (per above) it was significantly dollarized and had to look fiscally responsible to support the value of the rouble. Russia will suffer a serious recession, not just due to adaptation to having to produce even more internally, but also due to not being willing to run deficits when it is now able to operate as a fiat currency issuer.

And even though the real economy shock has yet to fully manifest itself, the Russian top team is doing what it can to get in front of those issues, and they’ve also been warning the public that a second phase of difficulties is in the offing, which they expect to be the most acute starting soon and for the following six months.

In other words, Russia managed the initial financial shock vastly better than the US and Europe imagined was possible. That leaves the West with the big problem that Russia can and is pushing back. It is telling that only very mild Russian counter-sanctions are putting Europe on tilt.

The US and even more so Europe look to be hoist on their own sanctions petard. Yet they’ll be damned if they’ll formally walk back, even though there’s a lot of fudging going on.

To recap: Putin announced its so-called “gas for roubles” program late last month, with details to follow. The reasoning was simple: Russia had just had $300 billion of what amounted to payment on past commodities exports stolen. It was not going to have payments on its gas exports to “unfriendly” countries subject to being clawed back again. The only way to assure that was to get payments in rouble, since rouble payment and clearing is under the control of the Russian Central Bank.

As we anticipated, Russia implemented pretty much the only version that would respect Putin’s boundary conditions, which included adhering to the terms of current contracts.1 So all that really changed was that gas buyers would have to set up accounts at Gazprom Bank, which was not sanctioned.2

Russia did not make this requirement effective until the next payments were due, and the earliest were the end of April..

If you take the war out of the picture, this matter would otherwise be a pretty routine commercial dispute: “You stiffed me on some (actually really big) payments. Rather than argue about that, I’m requiring a minor change in payment arrangements to prevent that from happening.”

But the screeching from Europe was astonishing. You’d think they believed they had the right to have Russia send them gas for free.

Amusingly, EU national leaders except of Hungary said no to Russia. Italy and Germany, the two biggest importers, were particularly noisy. The European Commission supported that action by warning that the Russian mechanism would violate sanctions.

Then it appears everyone began to work out that there was no ready or even medium-term substitute for Russian gas, as we’ve discussed long form and won’t belabor now.

On top of that, bad economic news started coming in even before any Russian gas cutoff took place. Per Eurostat, “European Union annual inflation was 7.8% in March 2022, up from 6.2% in February. A year earlier, the rate was 1.7%”

Inflation in Italy hit a 26 year peak in February. Germany’s producer price index rose a stunning 30.9% year to year. Food prices were rising sharply and expected to get worse. From Food Institute:

Aldi Nord in Europe expects increases of 20 to 50 percent in its purchase prices this week, reported WDR (April 4)….

Increases were already in the double digits in February. Bread rolls and semi-hard cheese were up 7 and 4.7 percent respectively, while egg (+16.3), lettuce (+17.1), butter (+20.4), tomato (+27) and cucumber (+30.3) saw more substantial increases, according to the Federal Statistics Office of Germany.

And heating price increases are expected to be grim. Recall that Germany has a high rate of residential rentals due to strong tenant rights. From a Der Spiegel interview with CEO Rolf Buch, head of Volnovia, the largest residential landlord in Germany:

Spiegel: What price increase should gas consumers expect?

Buch: It’s hard to predict. One thing is certain: we all need to address this issue now. Those who don’t increase their utility bills will face high surcharges next year. For some, this can be up to two months’ rent.

A week ago, the European Commission reversed itself. But Poland, Bulgaria, and Finland are still saying no. So Russia is halting shipments to them, which has led to screeches of “blackmail” and promises of yet more sanctions. Russia is also not allowing syphoning off of transiting gas, which it tolerated when Ukraine did it. From CNBC on Wednesday:

Early Wednesday morning, Gazprom released a statement saying it had halted supplies to Poland and Bulgaria — both heavy consumers of Russian gas — due to payments not being made in the Russian currency. It said supplies would resume once these payments were made.

In the statement, Gazprom warned both countries against any “unauthorized withdrawal” of gas supplies flowing through their territories.

“Bulgaria and Poland are transit states. In case of unauthorized withdrawal of Russian gas from transit volumes to third countries, supplies for transit will be reduced by this volume.”

But the real fun comes with Russia refusing to sell gas to the Gazprom subsidiary in Germany that Germany expropriated. That operation wasn’t just an office with a bunch of employees. It had valuable hard assets like storage opeartions. So this sure looks like Russia wants compensation before it turns the spigot back on. From Business Insider:

Russia’s Gazprombank turned down a ruble payment from a trading firm Germany had seized from Moscow, sources told Bloomberg.

The payment for some April and May gas deliveries to Germany and Austria was rejected even though the trading firm — Gazprom Marketing & Trading (GM&T) — offered to pay in rubles, as Russian President Vladimir Putin has demanded.

GM&T previously was controlled by the German subsidiary of Russian state-run Gazprom, but Germany took over the unit in April. Now, the rejected ruble payment suggests Moscow looks to shut out a German-controlled GM&T.

Back to the national hold-outs. Only 6% of Finland’s energy comes from gas, so even though 65% of that is from Russia, Finland has said in early April it expected to be able to replace that by fall. But Poland is in a pickle. 18% of its total energy is gas and half is from Russia, plus 30% is oil, of which 2/3 is Russia-supplied. Poland at least has enough gas reserves to carry it through the winter.

Bulgaria imports 73% of its gas from Russia, which is 10% to 15% of its total energy use but has much lower reserves than Poland.

In other words, on paper the refusniks are better able to weather a loss of supply than the really big dependents like Germany and Italy. But according to Alexander Mercouris (and I have not been able to verify independently), the Polish plan to fill the gap amounts mainly to getting gas from other EU buyers. Ahem, this is gas musical chairs, with the loss of Polish and Bulgarian buys amounting to chairs being removed. Even if Poland can procure some from its neighbors, it’s going to have significant Russian content and come at a higher price than a direct buy. Stubborness is costly.

More data fun:

Russia and Gazprom have remained tight-lipped about who has made gas payments so far (remember payment due dates are spread out) but a Reuters source said several have started, even more than five.

Research firm Algebris argued that Gazprom customers would not have great odds of prevailing in court if they sued:

In case of an interruption in supply, European buyers would likely invoke a breach of contract – suing Gazprom for non-performance. It is however not clear whether such case would be successful. A recent commentary published by the Oxford Institute for Energy Studies suggests that by transferring the ultimate decision to terminate supply away from Gazprom (as a seller exercising its rights under the relevant gas contract) to the customs authority, the Decree strengthens Gazprom’s case to plead force majeure. If the customs authority ordered a stop of delivery to a client due to the payment not meeting the terms of the Decree, Gazprom could seek to be excused from liability for non-performance by arguing the stop had been imposed by an act of government. This gives Russia significant leverage to weaponize the uncertainty of gas supply to Europe.

And from Politico’s morning European newsletter:

RUBLE TROUBLES: If Russian President Vladimir Putin wanted to sow discord within the EU and keep countries guessing with his decision to cut off gas to Poland and Bulgaria, he has succeeded. Confusion continues to reign over how far European buyers can go without breaching EU sanctions, with a special meeting of the bloc’s energy ministers scheduled for Monday.

NOT WORKABLE: Top Bulgarian politicians including Deputy Prime Minister and Finance Minister Asen Vasilev — in Brussels on Thursday to meet the Commission after Russia cut gas to Bulgaria for not paying its bills in rubles — told POLITICO the EU’s suggested workarounds were “probably not really an option.”

Danger zone: In an interview with Paola Tamma and America Hernandez, Vasilev and Energy Minister Alexander Nikolov explained that the state-owned utility Bulgargaz received a contract addendum from Gazprom which required it to forfeit control over its money to a third entity to complete the currency transfer — without reassurance the gas would resume flowing.

Here is the Bulgarian beef from the linked story:

“Putting the money in that account doesn’t complete the purchase,” Bulgaria’s Deputy Prime Minister and Finance Minister Asen Vasilev told POLITICO.

The state-owned utility Bulgargaz received a contract addendum from Gazprom which required it to forfeit control over its money to a third entity to complete the currency transfer, without reassurance it would receive the gas, said Vasilev and Energy Minister Alexander Nikolov.

“We don’t feel comfortable surrendering taxpayers’ money to a third party that we have no control over, especially a third party that is controlled by a country that just puts us on an enemies list,” Vasilev said.

“You’re losing all potential legal claims, arbitrage, court cases, everything,” added Nikolov.

After seeking clarifications from Gazprom but not receiving any, Bulgaria decided to pay $50,000 into its usual account — Gazprom returned the money and cut off the gas.

Without seeing the language, it’s not clear whether the energy ministry is being obtuse or shrewd. Not being clear that the “third entity” is Gazprom Bank, and they would be setting up their own account with that bank, as in subject to a legal agreement with them, is a bit disingenuous. Or put it another way, they admit to expropriation risk of having deposits in excess of a guarantee amount, but they want Russia to take that risk again after it’s been screwed?

The Bulgarians want the European Commission to file an antitrust suit against Gazprom. I will let the lawyers laugh that one out of the room. Do they seriously want to risk Russia halting all gas deliveries?

This destined-to-be-ineffective scrapping over Russia’s new payment conditions illustrates how the West is none too happy about the new economic order they’ve created. And as Michael Hudson stressed, Europe would come out a big loser.


1 The “additions” to the most bare bone implementation was to specify one Russian bank for deposit of payments, as opposed to any Russian bank chartered under XYZ law, and to require the buyer to order or have a standing order for his payment currency to be exchanged for roubles on the Russia Stock Exchange (note that no way, no how are there remotely enough roubles trading outside Russia to pay for gas large gas trades). The latter stipulation is apparently seen as an important precedent that Russia plans to require of other commodity buyers.

2 The UK had sanctioned Gazprom Bank with respect to capital markets activities, then slapped on new sanctions that would have prevented them from buying Russian gas, not that they did much anyhow. They have now partially walked them back, allowing UK companies to make payments to Gazprom Bank through May 31.

Putin Meeting on economic issues • President of Russia
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  1. Marten

    Thank you for the update. I am repeatedly impressed with the competence of Russian leadership. It’s hard to square with the degree of inequality I read about and heavy looting I’ve read from the 90s, which I normally associate with inequality. But it seems Russia got a strongman that can actually lead, instead of just take. Too bad he allows such inequality/suffering still, but it’s almost a relief to see some kind of national leadership *somewhere*.

    1. Brian Beijer

      Too bad he allows such inequality/suffering still

      Putin understands human nature. Most people derive some sense of personal satisfaction in their own lives from social inequality. It’s depressing, but it’s the truth.

    2. digi_owl

      I think one of the recent articles here, or an accompanying comment, had a interview with Lavrov that i listened a bit to. And the guy had the calm confidence of a university professor and spoke a very clear and understandable English. If Putin or the rest of Kremlin was off its rockers, he would likely be the first one to pack up and leave. But instead he was sitting there calmly laying down the arguments for why Russia could go after Ukraine, based on the various conflicts USA et al had been involved in since the 1990s.

  2. DJG, Reality Czar

    Ahhh, Poland, the problem child of Europe. Somehow, the Polish government thought that it was fooling the Russians with regard to arms shipments and such. And as to a commitment to democratic forms and liberties, the Polish government has been having some, errr, problems. Yet they persisted: Believing, as Yves Smith writes, that the Russian gas was going to continue to flow for free.

    Meanwhile, Italy at a certain detached top level (the war-mongering media, the Partito Democratico, Draghi) keeps protesting, although less and less effectively. The consensus in Italy, dominated by the correct-thinking media, is swiftly breaking down. The influential Fatto Quotidiano has broken ranks in a major way, and even Lilli Gruber, not the biggest dissident, is interviewing people who are highly critical of the media/correct-thinking government consensus.

    Giuseppe Conte, of all people, says Italy should not be shipping offensive armaments.

    Draghi went to Algeria. Which doesn’t have enough gas for Italy–a country that like Japan has almost no petroleum or natural gas. Does Draghi expect to wrestle Spain over Algeria? And as Algeria becomes more important to EU energy resources, won’t the banality-of-evil bureaucrats running Washington, DC, find a way to insist on “regime change” in Algeria? Kinduva a Libya-Syria?

    And no one believes Draghi’s slogan about “we’ll just shut off the air conditioning.” Is this social class not trained in the basics? Gas is used to generate electricity and in manufacturing processes in Italy–and the big users are Italy’s many industries. It’s still a major industrial nation.

    How long can that last as sanctions backfire?

    1. The Rev Kev

      Funny thing about Poland. Russia gave them the chop for non-payment of goods causing them to go off in a huff. They are now saying that any EU country that buys gas off Russia should be penalized for doing so. Anna Moskwa, the Minister of Climate and Environment, was saying ‘Today what is missing is full sanctions on gas, that would solve the problem with Gazprom, the problem with following sanctions 100%. We expect these sanctions.’ Meanwhile, Poland is chugging along fine without Russian gas. How can that be? Why, they are buying their gas from Germany of course. And where is Germany getting that gas from? Go on, take a guess-

    2. Ignacio

      Internal problems in the EU will become apparent sooner rather than later and then, given how idiocy has become to reign in most institutions anything can ensue.

    3. panurge

      Wondering why no one talks about TREASON. European ruling classes are not supposed to make the interests of the european countries they are actually ruling?
      This is actually something I have started to think after reading the analysis of the swiss guy (sorry, forgot the name and cannot find the link atm). It really looks like there is a concerted effort from european elites to crash the continent and remove a competitor for the US.
      Or maybe even worst.

      On a side note, pulling out of my *** here, but could it be possible that the long term game is to bring the entire “west” under compliance, replace various currencies with king dollar to cement the bloc and have the USA morph into US of Western something?
      Finally the “west” would get the necessary scale to tackle China. Maybe after 20+ years of failed attempts in bringing India on west side they are tired or maybe time is running out before China becomes really unstoppable.

      1. Michaelmas

        Panurge: Wondering why no one talks about TREASON. It really looks like there is a concerted effort from european elites to crash the continent and remove a competitor for the US.

        Wonder no more.

        “European governments accommodated Washington’s agenda. The reason was explained to me several decades ago by my Ph.D. dissertation committee chairman who became Assistant Secretary of Defense for International Security Affairs. I had the opportunity to ask him how Washington managed to have foreign governments act in Washington’s interest rather than in the interest of their own countries. He said, “money.” I said, “you mean foreign aid?” He said, “no, we give the politicians bags full of money. They belong to us. They answer to us.”

        – Paul Craig Roberts

        Treason doth never prosper, what’s the reason?
        For if it prosper, none dare call it Treason.

        -John Harington

        1. eg

          I have heard Michael Hudson make a similar claim about the endemic corruption among European politicians.

      2. Susan the other

        I think our hysteria over China being “unstoppable” is chickens coming home to roost. Maybe in a perpetual neoliberal-race-to-the-bottom global economy China could be unstoppable. But that is not reality. China is as dependent on supply and demand (per capita) as any nation. It has come from the depths of poverty to the top manufacturer for the world in such short order that we are all panicked. Because that’s just how silly we all are. But there’s not much left for China to gain now. Every country should be on the same level playing field. Because when that leveling happens it’s difficult for privateers to insinuate themselves into the trading process. Like labor arbitrage, etc. So China has arrived, but it’s not suicidal. Traders who were making excessive profits probably are. And not to even start on sustainability – there are going to be quotas soon enough.

        1. lance ringquist

          you have to remember, you are dealing with free traders. they are racist and bigots that sub categorize people.

          that was clear when the monster albright smeared the serbs, because they are slavic, and could care less about arab peoples.

          this was clear by the crank policy that the likes of robert reich, nafta billy clinton, gene sperling and others who came up with the obvious white supremacists factory of the future that was touted on t.v. all of the time.

          it was obvious that the whites can only do this sort of work in the factory of the future. the obvious white person(clearly superior to everyone), worked at his computer, then sends the information off the the grunts, who were clearly not so white, kinda generic looking to do the sweaty grunt work.

          i watched donna shalala one night on charlie rose say, i am glad they are closing all of those smelly sweaty factories for clean businesses.

          rose said but the lost jobs, she said hopefuly gays can marry and adapt children.

          so should you and i be surprised that what nafta billy clinton did sealed americas fate, i was not. but by the hissy fits the free traders are throwing, the free traders sure are.

          now for china to move on, they need to dump austerity which is a free trade trait also. and develop internal demand, otherwise the world will target them next.

          there is no such thing as a level playing field in any market. there is only free trade, or democratic control of markets.

          lincoln was 100% right: Following Spain, the Netherlands now says they have problems with their test kits and masks from China. Perhaps the lack of a reliable manufacturing base is a world problem

          “As for the “cooperative world” working for the benefit of all, great aspiration. Give me 1 historic example of this. its never happened, and this was pointed out by lincoln,

          lincoln one of americas greatest leaders understood this well,

          “The globe is divided into different communities, each seeking to appropriate to itself all the advantages it can, without reference to the prosperity of others.”

          1. Susan the other

            I agree with your account of all the idiots who got us here. But now that we can see this pretty clearly, we are faced with a certain reality we cannot ignore. Free trade is profitable because it comes at someone else’s expense. That’s why I’m confident that we will all become cooperative. In the end, self-interest will require it. Funny twist on “greed is good” – greed actually gets more dangerous with every passing day. And add to whole fairness concept the fact that we also have to cooperate to cool the planet and live sustainably. We are facing the laws of Nature herself these days. I read somewhere that there is even a species of spider that is now living in colonies. Sounds like socio-biology to me.

            1. lance ringquist

              i saw nafta billy clinton yesterday in a article on yahoo, that he was speaking at a well known collage, taking questions from the students on foreign policy, and policy.

              as long as that type remains free, or free of total disgust, we will get one nafta billy after another.

              as far as bringing back what we lost, we are backtracking from even some of trumps pitifully modest goals.

              these are feverish people who will force the world into drinking the kool aid, and if they see themselves as losing, they will take the world down the jim jones route.

              you can see this playing out now right before our faces in europe.

            2. JTMcPhee

              I guess that sounds like the magical Self-Correcting Market mythology.

              Self-interest does not magically come around to the idea that commensalism works “best.” The direction of the flow of wealth/power has been to the channels that lead to concentration in the hands of fewer and fewer “self-interested humans.” It might be nice if Putin, Xi and others figured out how to cut the legs and grasping hands off the oligarchs who have so quickly (less than 500 years, maybe) figured out how to own everything, and extort deadly rents back from the rest of us mopes. Would not bet on “statesmen” seeming to practice “homeostatic governance” to end the process of extraction of resources and looting of everything. Money can’t buy happiness, but it makes the discomfort so much less so for the Blessed Billionaires and their minions. So there is a constant creation of people who understand “greed is good” not as you propose that humans will ineluctably come around to understand it, and turn instead to cooperative self-interest, except at pretty small scales and in very localized instances. Greed is greed is gluttony, and demonstrably, the appetites of the creatures who are suited to rise to wealth and power are essentially boundless.

              And just like there is no succor in recourse to “constitutions and laws” that are twisted into tools of looting and repression and immunity and are no more “laws” than there are “laws of nature” that bend toward sustainability let alone justice.

              That’s my take anyway.

      3. hunkerdown

        > European ruling classes are not supposed to make the interests of the european countries they are actually ruling?

        No, that’s just myth. They’re supposed to create the conditions that reproduce the state and its highest values. Satisfying the human needs of the non-elite class is low on the list of a state’s vital interests, and surrounded by caveats and discretionaries besides. Graeber and Wengrow’s The Dawn of Everything has more on this.

        I do agree that bringing the entire West under management/”compliance”, Singapore style, is a prong of the grand project currently in progress.

      4. Procopius

        The word TREASON is used way too often. It rarely means what the user thinks it means, and almost never describes the offense. Even when used of other countries.

        1. Michaelmas

          Dictionary definitions of treason: –

          a violation of allegiance to one’s sovereign or to one’s state.
          the betrayal of a trust or confidence; breach of faith; treachery.
          the offense of acting to overthrow one’s government or to harm or kill its sovereign.

          (the crime of) showing no loyalty to your country, especially by helping its enemies or trying to defeat its government:

      5. podcastkid

        “By 2050, as the seas submerge some of its major cities and heat begins to ravage its agricultural heartland, China will have no choice but to abandon whatever sort of global system it might have constructed. And so, as we peer dimly into the potentially catastrophic decades beyond 2050, the international community will have good reason to forge a new kind of world order unlike any that has come before.” AW McCoy

        I can believe that [IMO they’re not gonna lose out], but I was disappointed by McCoy’s article that was here recently. Couldn’t buy all the stuff about Putin. My impression was that McCoy was TOPS for years and years prior, breaking things down.

    4. Kouros

      “Poland, the problem child of Europe.” I thought all along that Poland was the Hyena of Europe….

    5. digi_owl

      Is this social class not trained in the basics?

      No they are not. They are trained in thinking about economics in the abstract, not in actual logistics. As long as GDP rises under their watch they are happy. to them a unit of diaper and a unit of nails is interchangeable.

  3. Joe Well

    If I am reading this correctly, the US, EU, and Bulgaria had only one (insanely stupid) plan: bring Russia to its knees economically.

    Now without a Plan B, they are just flailing? Only a few behind the scenes efforts by some European officials to quietly buy gas from Russia?

    The takeaway is that the elites of all these countries are acting in a kind of collective idiocy. Maybe my knowledge of history is too limited, but it reminds me of the fire eaters in the South before the Civil War in the US: they had swallowed their own Kool aid that the Union would let them do whatever they wanted because they emotionally could not admit they were the weaker party, and there was heavy censorship of dissenting views.

    1. Skip Intro

      US to EU: Let’s you and Russia have a devastating economic war! We will fight to the last social-democrat government in Europe.

      1. Joe Well

        Thank you, that’s the first explanation that makes sense. I am sure many elites in those countries are also happy to torch their people’s standard of living.

    2. deplorado

      A Bulgarian expert said in interview on Eurocom (BG cable channel) yesterday that the gas has kept on flowing, despite a Gazprom declaration that it had been turned off at 9:30 am local time Apr-28. He asked the govt admin why that is, and said no one had an answer. So that is a twist.

      The expert also discussed the options Bulgaria has in this absurd situation, and bottom line in his words is this: Bulgaria uses ~3 bn. cu. m gas a year, and has a rough idea (far from a plan that has been discussed with potential suppliers, such as Greece, Turkey, Azerbaijan ) of how to cover ~1.7 without Russian gas. For the remaining gap, there simply isn’t extra capacity transiting via the Balkans that Bulgaria could tap into.

      The expert even suggested a desperate scheme where LNG could be shipped to a Greek terminal in the Aegean, then converted to gas and fed into the pipeline into Bulgaria – needless to say a very expensive, technically difficult and only hypothetical exercise at this point.

      Truly the two Harvard grads who are at the top of the BG govt are giving Harvard a worse than bad name.

      Once they are ousted, I doubt they will have a chance again at BG politics.

  4. Milton

    Russia running a budget surplus will hit the domestic economy soon enough (maybe) . What impact will running a positive balance of trade have on the surplus, vis-a-vis the domestic economy? Will it exacerbate the domestic situation or soften it? I’m sure it’s not apples to apples when comparing an economy such as the US–where money continually needs to be pumped into the system since there is nowhere near the amount of heavy manufacturing–as with Russia. But from my untrained eyes, it seems Russia is doing a lot of hoarding now (perhaps needed given the uncertain future) and that can’t be a positive for its domestic outlook. Also, having an IMF-sympathetic CB head. Will this hurt or does it matter?

    1. Yves Smith Post author

      Please read the post more carefully. Before the war, they had budgeted for a surplus and receipts are now coming in even higher.

      The prime ministers said they will now spend all the government receipts back into the economy. But they won’t run a deficit, which would be in order now. They are cognitive hostages to decades of having a crap currency and having to be mindful of how it traded.

      1. Susan the other

        So, question. Doesn’t “spending back into the economy” perform the same balancing function as running a deficit – for the domestic economy?

        1. Dftbs

          Only if they spend back into deficit. Which if I register Yves correctly, they should do. Over in reality, within the constraints of the physical world, the Russians and the Chinese seem to be the only economic sovereigns. I know we fancy ourselves as such, but with our monetized debt, double digit inflation, shrinking economy and import dependency, we’ve reached the point where there is nothing left under the couch cushions. Not even any stinger missiles. Biden said they’re giving Ukraine $33 billion. They may as well make it a trillion, these numbers don’t mean anything anymore if there is no material capacity attached to them.

          1. John k

            For the past few years they’ve been earning a positive trade surplus, but ‘saving’ that surplus in the form of dollar credits, now confiscated. And now the surplus is larger because fossil prices are higher. So spending all the surplus into the economy seems similar to running a domestic deficit would have been previously, certainly seems as if gov spending will increase.
            Granted, it might not be enough given the war and the need to fund industries abandoned by the west, in which case deficit spending by the rouble sovereign would be appropriate. They’ve got an Econ guy advocating that, maybe if current spending proves insufficient they will move in that direction. Leadership is cautious, maybe doesn’t want to introduce something new (that central bank will oppose) before showing they’ve got a good handle on the war, which will boost public confidence.

    1. Polar Socialist

      I’m wondering, since there was an article in Asia Times a week ago about this being completely unconstitutional, has there been any discussion at all about the legality of this?

      I know the EU threw to the gutter all principles it had about providing weapons to a war zone, but haven’t really followed the situation in USA.

      1. Kouros

        Doesn’t matter. SCOTUS didn’t say anything against the second Iraq War, despite UN axing it and US being signatory to the UN Charter, etc…

        At least Russians paid lip service the the UN Charter and fabricated a situation that made the invocation of Article 51 of UN Charter plausible. Never mind of years of patience with Minsk 2 not being implemented by Ukraine and the West…

    2. Susan the other

      This is as unnerving as it is telling. The entire reason (imo) we are causing this war in Ukraine is for access to Russia’s oil/gas fields and to have land access beyond that to the Caspian, etc. If all we can get is some DMZ created in western Ukraine, then so be it. We will have and maintain that outpost for its proximity to those oil resources. The analysis that we Westerners are threatened by a coming Eurasian powerhouse is probably true insofar as it pertains to who gets the oil. And who gets throttled. And Ukraine was simply in the way. Strange just how easy rabid Nazis are to control.

      1. Science Officer Smirnoff

        The entire reason (imo) we are causing this war in Ukraine is for access to Russia’s oil/gas fields and to have land access beyond that to the Caspian, etc. If all we can get is some DMZ created in western Ukraine, then so be it.

        Seems it’s 2003 again. (Bush-Cheney)’s acolyte is spreading the true religion.

    3. tindrum

      What about sending them those Littoral things that seem to float much like the F35 flies? Sail them to the Black Sea and have the Russians sink them.

      1. Yves Smith Post author

        Turkey is not letting any military vessels into the Black Sea. But otherwise, yes, this is exactly the sort of thing we’d be doing.

  5. tom67

    Here the background to the Polish gas story that I gathered last year from the Russian press: Poland used to have long term contracts with Gazprom like Germany. That means contracts decoupled from the spot market. But roughly ten years ago when spot market prices were consistently lower that the contract prices, Poland sued Gazprom to switch over to spot market prices. They finally managed to partially get out of their contract. Unfortunately that was in 2018 if I remember correctly. Anyhow, suddenly Poland had a problem as the spot market price was significantly higher than the Gazprom price which Poland had paid before. The EU in their neoliberal furor hat always disliked these long term contracts and in the mean time had completely opened “competition” in the European gas market. Poland was of course a poster child and the naughty boy for once was the teachers pet.
    As a result of free trade in gas within the EU the German importers with their long term contracts began to sell their Russian gas to the Poles and made huge money. That is why German gas storage was at its emptiest ever in march of this year. Of course neither the EU nor Poland nor Germany are advertising these facts.
    Concerning the current stance of the Polish government I posit that we don´t see self defeating stubbornness but a high degree of cleverness. As the spot market price of gas is through the roof the Polish goverment simply doesn´t have the funds or else doesn´t want to subsidise the gas of Polish consumers. And subsidise it would need to as the spot price is over the moon and no way any but the richest of Poles could afford to pay. So Poland takes a “principled” stance although it probably couldn´t pay anyhow. An added benefit is shaming Germany to let Poland have some of the gas it gets from Russia. Here one needs to know that Germany last month passed a law forcing importers of gas to first fill up the huge salt caverns used as storage before selling any on the market. Anyhow that is my reading of this murky situation.

    1. Yves Smith Post author

      No, you are missing that the Polish gas is now removed from the market. Before Poland was still getting shipments = to roughly 9% of its total energy supply. Russia will cut its shipments by that amount. So Poland will need a lot more from Germany and Germany will not be able to get any more shipped from Russia.

      Russian tolerated contract violations like Ukraine stealing transiting gas that it will no longer allow.

      1. Tom67

        I believe your numbers are dated. Already in the second half of last year Poland was taking much less Gas from Russia. Instead they got gas from German storage. The only reason why there was not an earlier crisis was the mild winter in Poland and Germany. To prevent that happening again Germany decreed that from this year gas could only be sold out of storage once a certain level had been reached.
        To my knowledge Poland is the only country in the EU not getting Russian gas under a fixed price long term contract. That is after Poland had won a case against Gazprom which allowed Poland to get out of her old contract and negotiate a new one with pricing based on spot prices. The Poles had erroneously thought that they´d be better off that way as the spot prices had been lower than contract prices when they started their law suit
        Now Poland anyhow couldn´t pay for Russian gas. It is priced to the spot market and therefore way to expensive and Poland is the last country in the world that Russia would give a discount. Therefore the big show refusing Russian gas. It costs Poland nothing but puts pressure on Germany to part with some of the huge amount of gas Germany is getting from Russia. Remember that Russian gas is delivered to Germany with fixed prices. At the moment Russian gas costs only a fraction of the price on the spot market.
        As it is at the moment Germany is again sending gas to Poland through the Yamal pipeline. The gas flow is “reversed” as they say. But also remember that Nord Stream 1 is still sending gas to Germany. And according to the press a more than usual amount. Nord Stream 1 is directly between Germany and Russia on the bottom of the Baltic Sea and nobody can siphon of gas.
        Sure enough Russia will not tolerate Poland taking gas from the Yamal pipeline which runs thru Poland. If that happens Germany gets less. But once the Nord Stream 1 gas is in Germany it is entirely up to Gazproms German partners whether they send some gas to Poland or not. The Russians have many times said that they will fulfill their contract with their German partners and I believe they will keep their word.

        1. Tom67

          Here please what the Polish negotiator wrote, after having won the case against Gazprom in 2020: “The judgment of the Stockholm Arbitral Tribunal to a considerable extent tied the new price to the market quotations for natural gas on the European energy market. This means that the new price will follow gas prices to a much greater extent, rather than oil prices that are completely detached from them and subject to different conditions.”

          A pyrrhic victory if there ever was one. The oil price has risen about 100% since 2020. Gas though on the European spot market is 10 times higher than in 2020. 10 times or 1000%. Even if it wanted, Poland couldn´t afford to buy Gazprom gas. To my mind that is the reason for Polish grandstanding. It puts moral pressure on Germany to deliver some more Russian gas through Yamal.

          1. OIFVet

            In these here parts people think that Poland made an incredibly principled stand cutting off Russian gas. When I tell them they get Russian gas from Germany through Yamal, they get blank look on their face and repeat what the MSM told them: “No, Poland replaced Russian gas with German gas.” These are the “intelligent” people with advanced degrees who pride themselves informed because they read newspapers in both Bulgarian and English every day. Truly, the Euro upper classes are hopeless.

        2. Yves Smith Post author

          The data you are using is based on Poland gaming and not its actual consumption. Russian gas laundered through Germany is still Russian gas. Germany is going to run down its stored gas by sometime in the fall. It won’t want to share much/at all going forward due to the need to extend the useful life of what it has.

          So my figure are more representative of the true need.

    2. Kouros

      From what I understand, Poland sued Gasprom again so that it can move from spot prices to long contracts, and get a compensation for the extra money they paid for the spot prices. It seems to me the Poles think God owes them something… With such an attitude, we might see another partition of Poland…

  6. super extra

    Thanks for this update, Yves. I am still in awe of the stunning displays of short-sighted arrogance and frank stupidity from the western ruling classes. For many years I’ve been operating on what was initially a mean joke theory as to why everything was so bad: the west is suffering from a massive pandemic of narcissism. Our media, our cultural output, our worship of business returns: all of it was the result of maybe 7:10 americans being fully afflicted with the belief that while others may be bad, their own actions were just fine, and there was no need to consider empathy or other positions. Over time I realized this was not a mean joke, but a truthful observation of the society around me. The last few months have been very eye-opening.

    1. Keith Newman

      @super extra, 8:46
      I too am astonished at the arrogance and stupidity of the European elites. Michael Hudson has argued that they are paid by the US to sell out the interests of their peoples. I suppose that would account for it. But is it possible that virtually ALL political parties and their respective leaderships are corrupt?
      I see it here in Canada where the New Democratic Party has voted in Parliament that Russia is engaging in genocide in Ukraine. Words no longer have meaning I guess. I know a couple of the MPs. I can’t believe they are corrupt. Is it mass hypnosis, delusion, fear of not supporting the dominant discourse combined with lack of courage?

        1. John Zelnicker

          Rev – Perhaps it’s because of a descendant of Ukrainian Nazi sympathizers being in the highest levels of the Canadian government: Chrystia Freeland, Deputy Prime Minister.

          I see the article you link to claims that there’s a lot of concern about training the Azov Nazis in some departments, but will that concern translate into some kind of action to change the situation? IMO, not likely.

          1. The Rev Kev

            I was surprised to learn that a lot of the veterans of the 14th Waffen Grenadier Division of the SS (1st Galician) were allowed to emigrate to Canada after the war was over to prevent the Soviets getting their hands on them. I guess that the idea was to use them as a cadre of anti-Soviet agents/fighters that could be sent back into the Ukraine. Nobody at the time must have thought of the possibility of them working their way through Canadian society to spread their, ahem, values like Freeland has.

            1. John Zelnicker

              That is surprising.

              Kinda like Operation Paperclip in the US, although that brought mostly scientists and engineers to the US so the Soviets wouldn’t get their expertise.

              I think once Hitler’s military was defeated, there was a concerted effort to deny the Soviets any gains from having won the war. They were Communists (Oh, the horror!) and a threat to the Western capitalist *democracies*.

              The MIC, as Eisenhower knew, was already too powerful and needed an enemy to justify their continued high level of weapons production.

              1. The Rev Kev

                But wait, there’s more. Would you believe that there were two nefarious organizations that helped thousands of Nazis escape from justice and get away free to South America. And the name of those organizations? Why the Red Cross and the Vatican of course-


                Personally I believe that all those Nazis should have been loaded aboard a convoy and when halfway across the Atlantic, sunk, but I always was a bit of a barbarian at heart.

                1. John Zelnicker

                  That made me laugh out loud, I’m just as much of a barbarian as you are. But then, a lot of my people were exterminated.

                  I knew of the escapes to South America, Eichmann was captured there, I believe, and thee were reports of Josef Mengele living there. I don’t remember if he was ever caught.

                  I did not know it was the Red Cross and the Vatican that enabled it. But, it fits with what I said about the West denying the Soviets any advantages after the war. If the USSR had been able to take high level Nazis that avoided Nuremberg and put them on trial separately, that would have been a propaganda victory, at the least.

                  1. square coats

                    To the best of my knowledge, Mengele was indeed never caught. IIRC at some point years ago some remains were found in I forget which country in South America that showed enough likelihood of being Mengele’s that they were reported as probably being such. I’m pretty sure I was still a tween when I heard about this so I can’t remember much of any details but for whatever reason distinctly remember my dad telling me about it.

                    1. John Zelnicker

                      square coats – I seem to remember the same thing, but I was far older than a tween. I believe it was Argentina which was a major destination of the Nazis.

        2. jrkrideau

          Such as why was it that the Canadian government was calling protesting truckers Nazis and punishing them

          I do not remember that the gov’t called anyone Nazi but there were clearly people advocating some bizarre overthrow of the government. BTW most of the demonstrators were not “truckers” I think there were more crazy right-wing preachers than real truckers.

          As a Canadian citizen, I think the stupid bastards got off easy.

          On the other hand, our PM, who is reasonably capable on internal affairs, is a total idiot internationally and seems to let the Deputy PM run international affairs. She has been photographed at a Bandera parade or something similar.

      1. Michaelmas

        Keith Newman: But is it possible that virtually ALL political parties and their respective leaderships are corrupt?


        Seriously. They wouldn’t be where they are if they weren’t.

    2. dftbs

      I think the events of the last few months have shifted my view on our elites from evil, or evil and stupid, to just plain stupid. Even if the US establishes a firmer suzerainty over the collective West after the conclusion of this war, there is no scenario where it or its elites are materially better off.

      Thinking it over it’s hard to even see American and western leaders as being puppets of their respective capitalists elites. Because, while the rich will weather this storm better than the poor, their wealth as reflected by their purchasing power is also being greatly diminished.

      It all reeks of cosmic stupidity. That is unless you think our elites are evil to the point of demonic. That’s not my personal opinion, but I wouldn’t blame anyone from becoming Father Karras in light of recent events.

  7. orlbucfan

    I’m no expert on finance nor banking, but I have a question. What’s with all the so-called howling and screeching over paying the Russians in rubles? That’s their currency; they have the desired product for sale so they can dictate terms. There are no winners in this conflict, and the arrogant stupidity is beyond nauseating.

    1. NotTimothyGeithner

      It’s not banking issues. It’s about dealing with the Mongol hordes. Even in places like Berlin and Paris, they expect it to be the Poles problem. They were serfs 150 years ago after all. The Poles want to be in the club, so they will scream the loudest.

      It’s no different than the formerly multi-cultural Roman empire not being able to make deals to assimilate Gothic tribes with Attila out there.

      I forget who said it, but one of the UK elites said, “the so called Minsk Accords”. I stress so called. Deals made with “sub-humans” aren’t real deals. It’s like inviting the Chinese to Alaska and insulting them.

      1. XXYY

        Deals made with “sub-humans” aren’t real deals.

        This is a good formulation of what seems to be a pervasive dynamic. The Russians now refer to Westerners, particularly the US, as “non-agreement-capable”, with good reason. Once people flip the bit on you like this, fundamental changes must necessarily ensue and it’s very difficult to revert to the earlier arrangements.

  8. OIFVet

    Without seeing the language, it’s not clear whether the energy ministry is being obtuse or shrewd. Not being clear that the “third entity” is Gazprom Bank, and they would be setting up their own account with that bank, as in subject to a legal agreement with them, is a bit disingenuous.

    Vasilev is a Harvard grad, so there it is. The tactic is effective in fooling only those who were already invested in the ‘Russia bad’ line. The obfuscation by Nehamer of Austria (‘We are paying in euros!’) is trotted out to help create heroic mythologizing: brave little Bulgaria is being punished for standing up to the letter of its contract with Gazprom. The government has been getting hammered for weeks about not sending weapons to Ukraine, so this is no doubt part of the strategy to appear heroic. The problem is, the mostly russophile population is paying the tab for this theater, so it ain’t being received very well outside of some limited circles. Then again, these are the circles necessary to temporarily extend the shelf life of what has turned out to be a mind-bogglingly incompetent government led by two Harvard grads. The two got into a dik-swinging contest with the president, a contest they are bound to lose, so all in all their play I not likely to work out well and for long. All major players are busy positioning themselves for yet another early election.

    Besides the internal political factors that led to this, there are obviously external factors as well. One, there is little doubt that Russia took a good opportunity to swipe at a barking chihuahua that has been annoying it mildly in order to send a message to its handlers. Two, EU and the US were definitely pulling some of the strings backstage. Three, the opportunity for neighbors like Greece and Turkey to become the new middleman and take their cuts, no doubt facilitated by board seats post-government service.

    All in all, it’s terrible to know the price that will be paid by the people of the poorest EU state for the vanity of its Harvard grads. Nevertheless, it is kind of amusing to me to watch them pretend to be manly and independent. The memes that Bulgarians are coming up with are brutal.

    1. deplorado

      Mind-boggling disconnect with reality as well. The Bulgarian PM suggested a few days ago that each Bulgarian donate a one month’s wage – to purchase weapons for Ukraine! This while he is waiting for the parliament to authorize weapons shipment officially. And while unofficially, his partner in crime (literally), deputy-PM and finance minister, admitted that Bulgaria IS already shipping weapons.

      This, in a country where the median monthly income is lowest in EU at something like $600, and cost of everything except rent, is about EU average … it defies imagination how out of touch you have to be.. SMH

      Imagine Biden or Boris Johnson saying the same thing – what do you think will happen…

      1. OIFVet

        Well, when that young Comsomol-like MP said on the first Parliament session, “I know him as simply Kiro,” I never imagined that it was a prelude to reveal that Petkov is simple in the head. I never imagined that we will witness a government that would make Borissov and GERB seem competent and statesman-like, yet they are on the verge of pulling-off that improbable feat. It’s terrible bind Bulgaria is in, I don’t see a single viable and competent political entity.

        So, Deplorado, are you a Bulgarian or an expat in residence?

        1. deplorado

          Native Bulgarian, long time non-resident but following closely.

          I’m detecting a BG native’s knowledge of Bulgarian affairs in your posts too, am I right? :)

          1. OIFVet

            You are right :) Same as you, except recently repatriated after living in the US for a long time. Nice to run into another Bulgarian on NC :)

            1. srvkfg

              As far as I know, there are at least three other Bulgarians on NC.
              Speaking about our current epic prime minister, his legal wife is the favourite pâtissier of the American embassy in Sofia (the capital of Bufgairia). You can’t make this shit up…

              1. OIFVet

                Hah, I like how delicately you put it, “his legal wife” :) Good to know there are at least a few of us on NC, the more the better.

  9. Dave in Austin

    All of the shoving and elbowing in the EU seems to me to be an effort to avoid the longterm issue. If the US is planning on a long war- Afghanistan, then the US, which is self-sufficient in energy will benefit and the costs will be borne by the EU and Japan and through them the local electorates.

    The Yen is down 10%, the Euro is also down, while the energy exporters- the US and Russia- have seen their currencies grow stronger. How long will Europe participate in this “long war”? LNG from the US will cost at least twice as much as pipeline gas from Russia. What will happen to the German chemical industry? The car industry? Will chemical plants in Turkey and Hungary- maybe owned by the Chinese- outcompete German plants? I simply don’t see how the US and the present EU leadership can find a way out of this problem in a protracted war.

    Two other possibilities. First, Russia will keep transferring captured US arm to the breakaway regions who will begin to allow them to be used in Poland, creating an unofficial mirror image of the US “We are just sending weapons via Poland to the Ukraine, which has the right to use them against Russian targets” doctrine. Second, what if Russia simply said “We have changed our minds. We will take payment in Euros… delivered in cash at the Russian border”

    1. JTMcPhee

      have to ask, in what sense is the US “self-sufficient in energy?” At what cost in externalities, and for how long?

      Obviously not that it matters in the Great Game, and we mopes don’t make a damn, not even pawns in the game…

  10. Oh

    I wonder what the mechanics of the transaction for payment are?
    The EU country deposits payment in euros into an account in an authorized russian bank. The bank then exchanges the deposit into rubles and pays Gazprom for gas supplied. What happens to the euros? If deposited into Russia’s Central Bank does the Central Bank buy gold with it? Sell the euros in the international market? Or just keep them?? If they keep them it will not benefit the Russian economy. The money has to go back into the economy as rubles.
    Can someone explain all steps involved?

    1. dftbs

      The Euros are priced to Rouble on the Moscow exchange (very different from otc fx transactions in West). With this step in mind, it seems that the Russian bank(s) facilitating these transactions would be laying off their Euros and their risk simultaneously at the Moscow market price. It doesn’t make sense for RU banks to retain Euros (or USD/yen/cad/gilt/aud) balances or assets. That regulatory risk will be borne out and priced by the “market”. I would imagine a significant FX arbitrage to manifest itself for the Russian subsidiaries of “neutral” countries financial institutions. Get cheap as dirt Euros (and other non-friendly currencies) in Moscow, go wild in Paris, Londongrad, or NY.

      Peering into the cristal ball and seeing Western central banks fighting a disorganized retreat against the onslaught of countless would be Eurasian, African, Latin and subcontinental Soroses.

      1. Yves Smith Post author

        I don’t know what you are talking about. I don’t see an arbitrage opportunity here.

        The reason for doing FX OTC in the West is that the buys and sells in currencies are so widely distributed that no central market ever existed and it’s pretty hard to create one once that situation has been established. Central markets alway allow for better pricing.

        Because the rouble has been a currency nobody much wanted to own, and more important, Russia has been running pretty persistent trade surpluses, there aren’t a lot of rouble floating around outside Russia. Russia is taking the interesting step of (I presume further) promoting centralized rouble trading.

        Now you will see “overnight” trading outside Russia but the Moscow Stock Exchange closing price would be the reference rate.

        1. Dftbs

          So this is speculation(pun), but from some experience, in that nearly all arbitrage is regulatory in origin.

          I would imagine the arbitrage opportunity would develop around the regulatory constraints on rouble holdings in nations not friendly to Russia and the constraints of non-friendly currencies within Russia. For instance if you are purchasing Euros on Moscow exchange (as a rouble liquidity provider for a European concern or their agent who needs these to purchase Russian goods) you need to be a party that can take these Euros out of Russia and “monetize” them. You run a risk that your Euros won’t be good/legal currency in Europe.

          The non-sanctioned Russian banks (just 2 I think) are exchanging these Euros at the Moscow market rate because they don’t want to own this risk, otherwise they would just book the fx swap themselves. Other than those non-sanctioned Russian banks, no domestic Rouble holding Russian concern could monetize those Euros without fear of seizure in Europe. You would need the Russian branch of a neutral country bank or financial concern, from a country strong enough to have minimal fear of seizure.

          These sort of transactions would demand a high risk premium and I imagine that initially supply and demand for this activity would be skewed towards those needing roubles. This would drive the Moscow price for Euro lower. Within the context of Western inflation, and keeping Euro as our example, the ECB may find itself needing to defend the strength and purchasing power of the Euro, more than they already plan in the here and now.

          The arbitrage would then be present for the institutions that could purchase cheap “off-shore” Moscow Euro and sell expensive “domestic” Euro. Although that “domestic”Euro may not be so “domestic” as the nations whose institutions could likely pull this off are in Asia and North America (paging Jaime Dimon).

          Again, this is speculative on my part. But the near totality in the structure of Western sanctions, not to mention piracy, and the Russian Rouble middle finger response, creates the sort of risks which typically carry massive premiums. And in my opinion the mediation of this risk doesn’t eventually flatten out the arbitrage because this isn’t a probabilistic scenario. Getting your assets seized by Uncle Sam or the equivalent European cut-out is division by zero.

          1. dftbs

            Also apologies for my lack of editing. You caught me with newborn baby duty tonight and I typed that on a phone with a deep sleeper (praise the lord!) across the chest.

          2. Yves Smith Post author

            The only way you get a price difference between the Russia market and Europe is if there are capital controls. There aren’t. There are still EU companies, particularly French, doing business in Russia, for instance.

            Unicredit, one of the biggest Western banks in Russia, is foot-dragging on leaving:

            And non-European banks, particularly Chinese, can trade euros with Russian banks and European banks, preventing any but trivial price differentials. So could Turkish and Middle Eastern banks.

            1. Dftbs

              Yes. I would characterize seizure and forfeit as the ultimate capital control.

              I would think taking a billion dollar write down is bad medicine for an Italian bank to swallow. And with a sliver of daylight in Italian political posture towards Russia (as opposed to other more aggressive European nations) waiting seems like a good strategy.

              Yes exactly, non-European banks, particularly Chinese banks, but other Asian banks would be ideally positioned to exploit this. But they would (as they do) run the risk of western sanctions regimes penalizing them. I did add US banks as possible arbitrageurs because America’s up to now position on sanctions with Russia, good for thee but not for me, indicates a high level of opportunism.

              At the moment the Rouble payment methodology is only applicable to gas. It’s anyones guess, but I’d venture the list of goods will grow over time. The imbalance between roubles and non-friendly currencies within Russia would grow. Keeping with Euros, the amount needed to buy Russian goods would increase. The regulatory risk of seizure (unless the EU gives up the sanctions regime) would persist. The bid/ask would widen out from trivial to “we have a problem”. I think this would create the sort of dislocations in value that western central banks would do battle with, they are hammers looking for nails. But these banks would find their jurisdictional reach blocked in one very large market. I think we are well ahead of the dust settling stage of all this.

    2. John k

      If I’ve got this wrong I hope I’m corrected.
      I think this is an open market operation. The euros are offered to locals with roubles, whether oligarchs or tourists wanting a Turkish holiday. As and if more euros are on offer and the locals’ need for euros declines, they will offer less and less for euros, thus the roubles exchange rate continues to increase. Not clear where this stops so long as commodity exports remain strong… and apparently all such will eventually be included in this scheme.
      Russia then spends back into the economy roubles provided by locals, no change in money supply.
      Seems to me not allowing Russia to buy sanctioned stuff increases their surplus and promotes a strong rouble… and maybe progressive higher prices for their commodities.
      And higher inflation for commodity importers, falling inflation for Russian importers?

  11. Altandmain

    Basically the European nations have screwed themselves over.

    The only question is how long the electorate will tolerate this in Europe and if the new governments they elect will still be an American poodle or if they will make real changes.

    Between the high energy prices, high prices for food, and high prices of transportation, Europe’s economy will be in a serious economic stagflation situation. Large industrial sectors will lay many people off and at the same time, prices will rise.

    European exports will become less competitive on the world market, especially those that are energy intensive to manufacture. About the only thing reversing this is that the Euro will be badly weakened.

    One thing that I don’t think that the Establishment in the West doesn’t understand is that the energy suppliers and those with manufacturing expertise get to make the rules. Sanctions never did truly work and only were used against smaller nations. Large nations with more resources are more able to become an autarkey.

    I expect that in the long run, the US Dollar will also decline, as will the Swift system. In theory, this could help to build up American manufacturers, but the ruling class clearly lacks the competence to implement an effective industrial policy.

    If the Russians really wanted to, they could flat out cut the flow of gas for a time until concessions were made and get a much more generous deal. It would send energy costs in Europe skyrocketing and lead to serious political instability.

    Another option for Russia that I think they should consider is to run a deficit for now and spend the money on domestic investment. The Russian manufacturing sector and high tech sector could use a lot of investment. It would make them even more independent from the Western world. Russia is literally one of the best nations to try out an MMT experiment on the economy. They are rich in natural resources and energy supplies. It could easily build Russia into a major power.

    1. JTMcPhee

      Don’t know one way or the other, but does the Russian government run on tax receipts, or does the Duma spend rubles into existence to cover government expenditures like our own MMT fiat currency, which is as I see it based on the “full faith and credit” of the United States? Which everyone presumes is worth something since the US is so big and has so many untapped resources and such a giant exploitable labor pool? Ha ha.

      So maybe with its sovereign resources and sovereign wealth based on actual commodities of an actual non-outsourced, non-FIRE economy, short of a nuclear war, Russia is pretty well well positioned to “short” the Zone A nations.

      Any useful insights in this dated article?

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