Gerard DiPippo, senior fellow at the CSIS Economics Program, joins Yahoo Finance Live to discuss the energy market and how Russia is faring in the oil space among its ongoing war with Ukraine.
- Major news to start this week. Russia in default of its debt for the first time in over a century. Officials, however, call the report, a quote, "farce." Meanwhile, G7 leaders announcing a ban on Russian gold as a result of its invasion of Ukraine. With some perspective on all this, we're joined by Gerard Dipippo, Senior Fellow of Economics at CSIS.
Gerard, nice to see you. How significant are these reports of a default? And how indicative is that of the state of the Russian economy?
GERARD DIPIPPO: The default on the Russian sovereign bond was widely expected. They essentially ran out of a 30-day grace period. The issue, though, is that, the Russian government was trying to make payment, but the sanctions prohibited them from making the payment. Russian bonds have been trading at a major discount for months. So I don't think anyone's really surprised. It was really just a matter of time.
- So then speaking of sanctions then, in terms of the biggest achievements and some of the surprises that have really emerged as we look back at the impact of sanctions, what stands out to you?
GERARD DIPIPPO: I would say two things. The first was the swiftness and the degree of coordination amongst the allies, particularly with sanctioning the Russian Central Bank, which froze effectively half of their reserves. The second thing, which is more of a slow burn, is the effect of the export controls. They don't get quite as much attention as the discussion about stopping Russian energy exports and reducing the revenues from it. But I think the export controls are where we're seeing some tangible effects on the production of Russian goods, and even military equipment.
- Well, to that end then, Gerard, is there having any effect on Moscow's ability to fight the war in Ukraine?
GERARD DIPIPPO: There's anecdotal evidence of them not being able to service tanks, military tanks, and get spare parts, and running out of high tech munitions. So it's possible. From a financial perspective, Russia's still getting something like a $1 billion per day from energy exports, half of which flows directly into Moscow's coffers, which, if you believe Russian data, more than covers their military expenses.
So the Russian government, actually, is still running a surplus, despite all of this. So they're in the black. It takes a while. It'll take a lot more, actually, to get them to the point where they're running out of money to finance the war.
- Reports suggest the war effort's about $300 million a day, nowhere near that billion they're taking in. Where are Russian oil exports going? And is there any way to stop that?
GERARD DIPIPPO: So most of the Russian oil exports that have been rerouted have been going to India or China. But of course, Europe had been a major purchase of that. The EU already agreed, as part of their sixth sanctions package, they would stop importing seaborne Russian oil by the end of this year.
But now, the big question of what is apparently being debated at the G7 is whether the G7 can impose some type of price caps. So the idea is that some of the Western countries would still be buying Russian oil, but they would only be offering to, basically, buy it at cost, which would then reduce the amount of revenue that Russia earns from those exports.
- Gerard, do you have sense of where we are, in terms of exports versus pre-pandemic, are they at the same levels, or even higher?
GERARD DIPIPPO: The Russian energy exports seem to be fairly steady. They dropped a bit in April. But then they recovered. So far, we haven't seen much impact on overall volumes. But I think over time, particularly with foreign companies and foreign technology leaving, it's going to drain their ability to keep exporting. And in the long run, Russian prospects, particularly, if they remain under sanctions, which are not very good.
- And as you mentioned there, China and India buying Russian energy. You also have the African continent, with grain shortages impacting the food supply, now also calling for sanctions to be lifted. How much does this offset? This pressure that's coming from China, from India, from the African continent, what does that do in terms of the sanctions conversation and the pressure being put there?
GERARD DIPIPPO: It's twofold. I think, first, it contributes to inflation, which is the US administration's top priority right now. And then on the second side, it also adds to pressures and humanitarian issues in developing countries, like in Africa, where, as you say, they rely on grain exports from Ukraine and from Russia. So I think it's basically making the cost of the war feel more tangible to the rest of the world, which is raising questions amongst the US allies about, whether they want to ramp up further, or whether they need to focus on addressing the humanitarian cost of the war.
- Gerard, I imagine what you're saying about the price caps on oil exports. How do you expect Russia to respond? And then, I guess, to that end, will there still be an incentive to supply oil here to some of those countries that are still buying China, India, like you were just saying?
GERARD DIPIPPO: So the math on how this would work is not clear to me. And I haven't seen anyone from the government produce a report explaining it. Basically, as long as India, and China, and other countries cannot make up for the demand that essentially the G7 would, then the G7 has some buying power. Then, in theory, they can compel Russia to take a lower price.
One risk, though, is that, Russia could say, look, if you're only paying us the cost of oil production, we're just going to stop exporting to you. And then you'll watch the price of oil surge. And then the alliance will have difficult inflation problem on their hands. So I think there is a risk of retaliation from the Russians.
- And aside from the sanctions, we're looking at about 1,000 companies from the West, have stopped doing business in Russia, or pulled out altogether. What's been the hit to their GDP? And do you have a sense of how many of those companies-- and this might just be an opinion, will return after a war effort?
GERARD DIPIPPO: So the impact in Russian GDP-- It's a little bit hard to gauge in part, because they haven't-- they stopped publishing some of their statistics. But I think the consensus is something around maybe 10, as much as 15% of Russian GDP declining this year, or maybe other 1% or 2% next year, which is a big deal, a decade plus of growth wiped out.
In terms of those companies that are leaving-- that have left, a lot of it is just self-sanctioning. They're not required to leave. But they just decided to, for reputational reasons. I think, whether they come back, depends on what happens with the war. If there is a settlement that Ukraine can live with, and sanctions lifted, maybe some will come back.
If this drags on and Russia's reputation is just further dragged through the mud, I think it's going to be a hard sell for a lot of those companies to come back. And frankly, while Russia was the 11th largest economy before the war started, it's not a major market for everything. For a lot of things, it's sort of a secondary market. So I think for a lot of companies, are just weighing the risk. Is it worth the reputational costs versus whatever profits they might have been getting before?
- And you mentioned there whether or not businesses may return. What about some of these trade partners that have had to seek alternative routes for things like energy for commodities? Is that something that's going to return? Or is this perhaps a fracturing that may last?
GERARD DIPIPPO: I think in terms of overall trade patterns, the big thing that we're seeing is Russia's having to reorient to the East, particularly with China. So there are geographic issues like how do you ship oil? Can you get it around to the Pacific? There are limits to what Russian pipelines can move.
Most of the Russian economy is, basically, in the West, by Europe, right? So the East is not as settled. But in general, they're trying to reorient their trade with China. And they're trying to, basically, find second best inputs for a lot of the things that are currently facing export controls so that they can keep their manufacturing sector and defense sector continuing to go.
- Gerard Dipippo, thanks so much for joining us today.