ITV News Business and Economics Editor Joel Hills explains why Europe continues to buy Russia’s greatest asset in abundance
The world needs to wean itself off fossil fuels but, for the moment, oil and gas are the lifeblood of the world economy.When the price of oil rises, the price of most things rises, most obviously petrol and diesel. On Tuesday, the market price of a barrel of oil surged above $100 as fears rose about supply disruption due to the invasion of Ukraine.
This will intensify the painful squeeze on living standards in countries like the UK, which consumes far more oil than it produces, but is rather wonderful news for Russia, which is the world’s second largest oil exporter.
The sanctions which a host of countries have imposed on Russia are demonstrably hurting its economy - the rouble fell in value again today - but those sanctions have also been carefully designed to avoid disrupting the supply of energy.
As a result, and rather oddly, Europe continues to buy Russia’s greatest asset in abundance.
With one hand, European countries are trying to damage Russia’s ability to finance its war effort by preventing it from accessing its vast foreign currency reserves.
With the other, they are handing Russia vast qualities of foreign currency in exchange for its gas and oil.
How has the war already affected UK living standards? Joel Hills explains
On Tuesday, at a meeting of G7 finance ministers, the chancellor urged countries to go “faster and further” with sanctions in support of Ukraine.
Rishi Sunak thinks the EU, in particular, has been slow to boot Russian banks off the SWIFT payments system and to freeze their assets.
But, interestingly, while there was talk of “reducing reliance” on Russian gas, no one at the meeting proposed turning off the taps.
Europe is heavily dependent on Russian gas, Germany and Italy in particular.
“Russian gas supplies account for about 10% of primary energy use in the EU,” Capital Economics calculates, although it notes a “wide range of dependence.”
Hungary relies almost entirely on Russian natural gas but in the UK it accounts for only 1.4% of total energy use.
Capital Economics concludes that Europe would probably cope if supplies of Russian energy were stopped abruptly and completely but that some form of power rationing would be needed, inflation would rise and economic growth would slow, albeit modestly.
For now, this is a price the UK and the EU appear to have decided they are unwilling for their citizens to pay. To Russia’s great benefit.