Does the G7 really have a plan against Russia?
Gathering in the Bavarian Alps, the leaders of Canada, the European Union, France, Germany, Italy, Japan, the United Kingdom and the United States, as well as the leaders of several countries, including India, South Africa and war-torn Ukraine, had their singular focus on Russia.
The United States, unable to strangle Moscow’s energy exports, which now go mainly to China and India, was leading the talks on capping the prices of energy imports from Russia.
For the G7 group, the primary objective was to limit Moscow’s revenues, even if it meant courting Saudi Arabia and Venezuela to increase oil production or risk high inflation even with an imminent threat of an economic slowdown or Europe going through a brutal winter with low energy supplies from Russia and renewed reliance on coal-fired power plants.
Critical unresolved domestic challenges remain for the majority of G7 members. For Joe Biden, American inflation, the highest for forty years, adds to his concerns before the mid-terms of November when his political influence should be eroded in the Senate. For Emmanuel Macron, losing the majority in the National Assembly recently to the benefit of the far right and also of a left-wing alliance, driven by the green agenda, is detrimental to his political ambitions.
In Germany, with Chancellor Olaf Scholz the new leader at the helm, a foreign policy challenge is emerging in the wake of the Russia-Ukraine crisis. Even with the €100 billion defense fund announced to modernize the defense forces days after the invasion, a long winter awaits as the country moves to gas rationing.
For Boris Johnson in England, after the party gate scandal, the backlash is emerging from his own MPs, and while he may have survived to fight another day, the government continues to walk a thin line.
To add to the domestic challenges, there is runaway inflation that is giving central banks a headache, globally. The annual percentage change in the consumer price index, in April 2022, was 6.8% in Canada, 7.4% in the euro zone, 4.8% in France, 7.4% in Germany , 6.5% in Italy, 2.4% in Japan, 8.3% in the United States and 9% in the United Kingdom. The price shock stems mainly from the rise in food and oil prices after February 2022.
In the United States, in April 2022, the annual percentage change in the energy consumer price index was more than 30%, in the United Kingdom it was more than 50%, 19.5% for Japan, 39.43% for Italy, 35.4% for Germany, 26.81% for France and 26.38% for Canada.
For central banks, globally, after the 2008 recession, the decision to make was to cut interest rates and have plenty of liquidity in the economy. This has had an impact on markets where music is starting to slow down.
A better part of 2020, given the pandemic, was spent on interest rate cuts, with May 2020 being the peak. However, the trends reversed in May 2022. However, coupled with the Covid-zero lockdowns in China leading to supply chain disruptions, central banks are facing a catch-22 situation. To curb inflation, or risk a slowdown, again?
As central banks aim for a soft landing, the Eurozone is now eyeing a long winter on the energy front, as Russia begins to flex its crude and gas muscles. Citing maintenance issues, Russia cut Germany’s gas supply by more than 60% earlier this month. Ten EU member states have declared a gas emergency, with the International Energy Agency warning that Europe could be left without Russian power in the second half of the year.
Since the start of the war, Europe has halved its Russian gas imports, but switching to renewables altogether is a pipe dream, and alternative energy sources have been exploited to their full potential.
For countries like Estonia, Hungary and Austria, which depend on Russia for more than 60% of their gas, or Germany, Greece and Italy, which depend on more than 40% of their needs, a compression from Moscow would not only push them towards coal but also have a direct impact on inflation and post-pandemic economic recovery.
Russia, for now, has been able to dodge Western sanctions by diverting its energy exports, mostly crude, to China and India, the latter of which is more than happy to source supplies at a reduced price, and so, the G7 desperation is palpable. While price caps and a ban on gold imports from Russia may offer short-term solutions, ultimately it is the European economy that faces an imminent threat in the coming months. come.
Some commentators argue that in the long run this is the battle to be lost for Russia, and that may be true, but how far is the West willing to go on inflation, slowing economic and political consequences to hurt Russia three or three five years now. Short-term pain is no guarantee of long-term luxury, and yet the West is ready to go that route.
So the question remains: does the G7 really have a plan against Russia?