My first post (we all have to start somewhere):

           

A brief summary and analysis of:

 "Conscious Uncoupling." The Economist. The Economist Newspaper, 05 Apr. 2014. Web. 19 Apr. 2014

        Russia’s recent foray into Ukrainian territory has left democratic Europe in a predicament. Europe, specifically the democratic European Union (EU), has increasingly felt the need to step in on the Russia-Ukrainian conflict regarding Crimea. Crimea was once part of the Ukraine until Russia intervened and effectively absorbed it following political unrest that left the Ukrainian president ousted. Fellow European countries have been at a loss for how to intervene, with most simply condemning the action but not taking any explicit action.

The problems of the Ukraine, however antidemocratic they may be, are not the main concern of the EU. The concerns of the world’s largest monetary union are those regarding Russian energy, specifically their supply of natural gas. Europe receives most of their natural gas supply from Russia via the South Stream pipeline that runs through the Ukraine. Potentially, European countries that are reliant on Russian energy (as many are) could face energy shortfalls in the scenario that Russia shuts down the South Stream Pipeline.  This is where the The Economist article titled ‘Conscience Uncoupling’ begins. It hypothesizes what the different scenarios would be should the rest of Europe decide to put up protectionist policies against Russia. The Economist goes on to highlight how nations are dependent in their current energy use status quo.

In an increasingly interconnected world, it is easy to see how energy security is an issue that affects every country.  In this real world scenario, several European countries are heavily reliant on Russian gas to maintain their day-to-day operations. This affords Russia a certain level of political power and they know it. This delicate balance of European demand for Russia’s gas supply is in fact, a Russian Achilles heel. Should the conflict between the Ukraine and Russia escalate even further with Europe deciding to rally behind the Ukraine, Russia will find themselves cut off from an important and large market, greatly reducing the demand for all Russian exports.

 A simple study of exchange rates (which can also be thought of as an extension of supply and demand) illuminates how problematic the situation can become for either party. For Russia, if things shift out of their favor and Europe decides to put up protectionist policies against them, it will greatly reduce the demand for Russian goods and negatively affect their currency. Currency is a derived demand, meaning that it is not the currency itself that investors seek but what goods it can be exchanged for. Supposing that European investors can no longer purchase Russian gas, they will seek alternative forms of energy elsewhere. All else constant, this will cause a decrease in demand for Russian Rubles. At this point speculators and foreign investors will logically seek to remove themselves from the situation and sell their holdings of Russian Rubles in favor of a more stable commodity. The foreign exchange market will be flooded with Rubles, which will lead to a depreciation of Rubles against the Euro and several other currencies.

The negative impact of a depreciated currency, as well as decreased demand, is that output is inevitably affected. With Europe no longer consuming the same level of Russian gas, this will leave Russia in a pinch as they will have to shrink production until a new equilibrium is met. It is possible that Russia will find a new buyer in the market (in the long run) but the odds are not in their favor that this buyer will be willing to purchase the same amount of gas as Europe nor at the same price.

Countries that are heavily reliant on Russian gas cannot simply stop their demand, however, at least not until alternative methods of energy eliminate the need for Russian gas. This is the dilemma that most European nations find themselves in. Investing in alternative avenues is expensive; building a new pipeline from northern Africa would cost an estimated twenty billion dollars. Then new problems would arise such as who would pay for the construction of the pipeline and which country was to receive primary reserves. Aside from the cost there is also the added pressure of a time constraint. The construction of alternative pipelines will take years, at which point they will be at the mercy of Russian retaliation (i.e. Russia cutting them off from gas reserves).

In truth, the only option is for the EU to begin construction of a new pipeline and to diversify their gas imports as Europe cannot be so reliant on one supplier. It leaves them with far too few options in the event that Russia invades a seemingly sovereign nation. The EU may not have that many options but it seems that they just received the proper shove for them to make the right decision.