Global economy to suffer as Putin quits G20 early

David Cameron may have hailed the G20 meetings in Brisbane over the weekend as a success for the global economy. But in reality, the gathering of the world’s most powerful leaders will be remembered only for the abrupt departure of President Vladimir Putin.
The Russian leader had probably already decided before even arriving in Australia to take an early flight home and dispense with the pleasantries of the end-of-summit dinner. Mr Cameron’s warning that the Kremlin was at a “crossroads” with the West over its alleged intervention in Ukraine, along with Canadian prime minister Stephen Harper’s blunt message for Russia to get out of its neighbouring former client state, will more than likely have stiffened Mr Putin’s resolve to not back down an inch.
In fact, his glib response to these threats and warnings was to complain about a lack of sleep, suggesting that he is preparing to dig in over his support for pro-Russian separatists around Donetsk.
Certainly, if the objective is to make Mr Putin appear isolated on the world stage in order to make him less popular at home, it isn’t working and also shows a profound misunderstanding of the Russian mind-set. A nation that endured the bloodbath of Stalingrad and almost half a century of economic isolation following the end of the Second World War is unlikely to blink first in its current standoff with the West. Indeed, Mr Putin’s popularity ratings at home have never been higher.
The danger for the global economy is that the dispute between the West and Russia, which is now being widely described as a new Cold War, will act as a significant drag on growth for years to come. It is certainly unlikely that the measures agreed on by the G20 to boost global gross domestic product (GDP) by 2pc, or £1.25 trillion, by 2018 will be achievable for as long as a country the size of Russia – the world’s eighth largest economy – is kept out in the cold.Although a cocktail of economic sanctions and falling oil prices has already started to squeeze Russia’s economy hard, the West has also increasingly started to feel the pain of isolating Moscow. The brunt of a prolonged economic war with Russia is being felt by Europe and the UK, not the US. European trade with Russia has almost quadrupled over the past decade to around $335bn and many companies now view the country as one of their fastest growing and most important export markets. Exports to Russia are thought to have accounted for 0.6pc of Europe’s GDP before the current round of sanctions was imposed.
Europe finds itself at the centre of a bitter dispute with Russia at a time when its own economic edifice begins to crumble. Deflation and stagnated growth make European countries, excluding Britain and Germany, stand out as the real sick men of the G20. Arguably, Europe needs Russian petro-dollars more the Russia needs the dysfunctional economic bloc of 27 nations who themselves are squabbling over whether to stay together.
At a time when most European countries should really be focusing on cutting budget deficits and trimming state spending, the threat of Russia means that outlays on defence have to be maintained and in some cases increased. Without the support of the US, Europe’s underfunded and outgunned armed forces are no match for Russia, even if its military machine is a shadow of the jackbooted horde seen parading on Red Square during the Communist era.
Trade sanctions and restrictions on individuals and financial transactions, the main targets of current sanctions, have had only a limited impact on Russia so far. Latest figures show that the Russian economy has grown by 0.7pc in the third quarter year-on-year ahead of the Bank of Russia’s forecast for 0.3pc overall growth. Most of the impact to the economy and the slump in the rouble has been the product of falling oil prices.
Indeed, the West’s most powerful economic weapon to force Mr Putin to the table is largely out of its own control. The curious inaction of the Organisation of Petroleum Exporting Countries (Opec) to not cut production to stem a 28pc slide in oil prices since June will arguably have done more to spook Mr Putin than any other form of reprimand doled out by G20 leaders Down Under. Russia depends on oil and gas receipts for 45pc of its budget revenues and cannot sustain prices below $100 per barrel for long.
Even so, Mr Putin said during the G20 that his country was even prepared to sustain a “catastrophic” fall in the price of crude. His remarks may also explain why Russia has been stockpiling gold in the vaults of its central bank this year, accumulating an estimated 1,150 tonnes of the precious metal. However, even if Saudi Arabia – the only member of the G20 to also be part of Opec – were supporting a general strategy to apply economic pressure on Russia by artificially reducing the price of oil, it would be difficult to maintain this strategy for long.
Given these uncertainties, I doubt Mr Putin will have lost too much sleep over his public defenestration at the G20 on his flight home.
The end of Opec
Saudi Arabia’s Prince Salman bin Abdulaziz al-Saud was seen locked in conversation with Vladimir Putin during the G20. It is thought that both countries support the establishment of a new global energy body that would sit above both Opec and the International Energy Agency.
A report in the Australian press suggested the new body could be set up as part of a wider overhaul of global energy markets to ensure reliable supplies of oil and gas and also more transparency on prices.
For such an organisation to work, it would have to include the power to regulate physical supply of crude oil and natural gas to world markets. At present, only Opec as a collective group wields such power and all of its 12 members may be reluctant to give up their biggest bargaining chip.
However, if the G20 were to form a new overarching energy body, it could help to bridge the interests of Opec’s petrodollar states and the next generation of major producers such as the US who would like to strike a balance between lower average prices and security of supply.