Energy Economies

In his Washington Post column Fareed Zakaria expresses concern that the West’s strategy in Russia’s war against Ukraine is in danger of flagging:

The core of the West’s strategy has been two-pronged: to provide Ukraine with arms, training and money, as well as imposing massive sanctions on Russia. That basic idea still makes sense, but the balance needs to change. It is now clear that the economic war against Russia is not working nearly as well as people thought it would. President Vladimir Putin cares less about what these sanctions do to the Russian people than he does about what they do to the Russian state. And thanks to rising energy prices, Bloomberg News projects the Russian government will make considerably more revenue from oil and gas than it did before the war, around $285 billion this year compared with $236 billion in 2021.

Meanwhile, Europe is facing its worst energy crisis in 50 years.

What’s the snag?

The basic problem with the economic war against Russia, as I have argued before, is that it is toothless because it exempts energy. The Russian economy is fundamentally an energy economy. Revenue from oil and gas alone make up almost half of the Russian government’s budget. And unfortunately, the solution would not be for the West to stop buying Russian energy altogether because, with less supply in the world’s markets, that would only drive prices even higher. Having developed a dangerous dependence on Russian energy over the past two decades, Europe cannot quickly change that without plunging into a deep and protracted recession.

Here are some key observations:

Western countries are still not treating this challenge as a paramount priority. The Netherlands has a huge gas field, but it’s actually slowing production. Germany still will not reverse its self-defeating phaseout of nuclear energy. The Biden administration is still making it harder to finance long-term investments in natural gas and oil. It also cannot seem to find a way to restore the Iran nuclear deal — a move that would bring an enormous influx of new oil supplies onto the world market and almost certainly stabilize the price. I understand that there are valid objections and concerns with all these policies — but the priority has to be to defeat Putin.

What does he propose?

Western leaders should recognize that economic sanctions simply will not work in a time frame that makes any sense. They should increase as much of the supply of energy worldwide as they can but also dial back those sanctions that clearly are causing more pain to the West than Russia. Meanwhile, they should amp up military support to Ukraine, erring on the side of taking more risks. Freeing up the blockade around Odessa would be a huge economic win for Ukraine, and a shattering symbolic defeat for Russia.

I had to laugh out loud when I read Mr. Zakaria’s characterization of the Russian economy as an “energy economy”. All major economies are energy economies. Ours is. China’s is. The approach we have been using to reduce carbon emissions has been self-destructive and fantastical. It has been self-destructive in its emphasis on reducing basic industries in the U. S. because they’re energy-intensive. It has been fantastical because that imagines that carbon emitted in China is different from carbon emitted in the U. S.

As to the predicament in which our NATO allies find themselves, they have just been following their individual national interests as they perceive them. They’ll keep doing so with single-minded intensity.

I’m skeptical that we can win the sort of war of attrition we’re waging against Russia. “The West” is not the only game in town and I fail to see how driving Russia and China or Russia and India closer together is in our national interest.

With respect to allowing grain-bearing ships to leave the port of Odessa, I think he should consider the claim that the Russians have made that it is not their blockade that is the impediment but Ukrainian mines. I have no way of evaluating the truth of the claim. I think he should consider that “freeing up” the blockade might be neither the economic win nor the symbolic defeat that he imagines.

What do I think we should do? I think we need to adopt an “all of the above” energy strategy. I think we need to reindustrialize. If we actually want the Ukrainians to win against Russia, we need to be able to produce more war materiel domestically more quickly. We can’t be dependent on Chinese semiconductors or steel. And, for goodness sake, we shouldn’t be selling oil to the Chinese.