The Russia-Ukraine war has plunged the world into a critical economic crisis. While Russia is seizing the Ukrainian territories, the US and Europe have plagued the country with severe sanctions to devastate its economy.
Multibillion-dollar companies like Magda and Zarak have pulled out of the Russian market. Russia was banned from the Swift network. The forex of the country has been blocked. The West has even started pressuring other countries to halt trade with Russia.
But even though Russia got affected, President Putin has played the game of thrones of geopolitics so well that Europe is now facing an economic crisis.
The annual inflation rate of energy has touched a record high of 4.9% while food inflation has touched 0.4% and the GDP growth of 27 European countries is slowing down. And, the worst is yet to come to Europe as winter approaches.
Now the question is, how did Europe, a cluster of 27 countries that didn't actually wage a war, that has absolute US support, end up in such a terrible state?
To understand that, first of all, we have to understand the basics of modern warfare.
This war is being fought with three instruments: food, finance, and energy.
Now, if we look at Europe's trade with Russia and Ukraine, we will see that as far as finance is concerned, Europe has done its part to choke the Russian economy.
In the past four months, the US froze $300 billion of Russian foreign reserves. The EU imposed a 35% tax on Russian vodka, gold imports were banned and billion-dollar businesses like McDonald's, Coca-Cola, Pepsi, and Starbucks lined up to exit the Russian markets.
As a result of such an economic war, the foundation of the Russian economy was shaken.
The West expected that Russia would go bankrupt and in fear of a complete economic collapse, Putin would withdraw from the war. Europe was indeed winning on the financial front. But in the process, it was getting into some deep trouble with the other two aspects.
If we look at the food sector, Russia and Ukraine account for almost 30% of the global wheat exports, 20% of corn exports and more than 80% of the world's supply of sunflower oil. When the supply of these commodities stopped, the food prices in Europe started to skyrocket.
Russia's most powerful leverage against Europe, however, is energy. In 2020 alone, 42% of Europe's gas came from Russia through the Nord Stream 1 pipeline. This pipeline is by far one of the most important pipelines in the world as it transports 55 billion cubic meters of gas per year.
This line takes the gas directly to Germany and then from Germany, several other pipelines take it to the rest of the European countries. Most of these countries are still heavily dependent on Russian gas.
In the face of the European sanctions on Russia, President Putin did two important things.
Firstly, he cut the gas supplied to Europe by 60%. And secondly, he conditioned Europe and other companies who want to buy oil and gas from Russia that they will have to buy in Ruble.
This move had three major implications for world trade.
Firstly, since Russia had cut 60% of gas supplies, gas prices all across the world skyrocketed due to the supply-demand mismatch.
Secondly, Russia forced the companies to buy oil and gas in the Ruble, for which the value of the Ruble started shooting up, making the Ruble one of the best-performing currencies in the world.
As far as Europe is concerned, energy prices started to increase, escalating every industry's cost of production. As a result, inflation too increased all across the European Union.
According to Eurostat, inflation had reached 9.6% in June. Industrial prices, on the other hand, have risen more than 36% from last year, and electricity bills are skyrocketing.
On top of that, food price inflation accelerated to 7.5% in May, which is the highest in the last 20 years.
The most interesting fact is that the sanctions were meant to weaken Russian trade and prevent the country from making money. But in reality, Russia made more money by selling gas during this timeframe than it did before the war. Before that, when Russia cut the supply of gas, European companies were desperate to pay 50-100% more money for the same amount of gas, because the European economy would have collapsed without gas.
In the meantime, oil prices spiked from $65 to more than $100 per barrel. This is why Russia was making more money, despite sending less gas to Europe. It has doubled the country's revenues to more than $90 billion.
Russia's oil and gas export revenues, only in the last five months, are almost three times what it would typically make from exporting gas to Europe over an entire winter.
Another key factor is India and China's support for Russia. It helped Russia to make up for the oil revenue losses from Europe.
When Russian crude oil sales to Europe dropped by 554k barrels/day, Asian refiners increased their take by 503k barrels/day, which became a one-on-one replacement for the losses between March to May. This is the reason why Europe has been constantly pressuring India to stop buying Russian oil.
Despite playing all the political cards, the European Union is choking, because winter is coming for Europe. If we look at gas consumption in Europe throughout the year, we will see that from February to August, gas consumption in Europe actually decreases.
But from September onwards, this consumption starts shooting up and reaches its peak in December.
This is mainly because of the use of heaters and other devices due to extreme cold weather. Now Europe is extremely worried because if Russia stops supplying gas, it will be a nightmare both for the economy and for the people of Europe.
This winter may eventually decide the fate of Europe, and the fate of war.
Dipendronath Das, a dedicated and passionate individual, is making waves in the field of sociology as a student at East West University. With a profound interest in understanding the dynamics of politics and societal structures.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.