Moscow Further Turns the Energy Screws on Eastern Europe

Russia has halted oil flow through the Druzhba pipeline, which takes Russian oil across Ukraine to refineries in Slovakia, the Czech Republic, and Hungary. They cut the flow five days ago.  

This is a significant move by Moscow, putting Central Europe - the rest of the EU - in an increasingly tense energy security scenario. Meteorologists are still finalizing most long-range weather assessments for 2022-2023, but early indications suggest the EU will see colder than average conditions and above-average snowfall this winter.

Notably, Hungary is a victim of the cut-off. Hungary’s Prime Minister, Victor Orbán, has long been friendly with Russian President Vladimir Putin. Putin likely sees Hungary as a weak point to be exploited in the EU’s opposition to the war and is applying greater pressure on the country to exacerbate internal EU tensions over support for the war.  

In the coming three months, markets should anticipate an escalation of Russian-influenced risk on both the energy security and food security front - particularly on the food front as Moscow is seeking to cause crises across the Middle East and Africa. We will be reporting more on this in the coming weeks.

It didn’t even last 24 hours… Putin breaks newly signed grain deal with missile attack on Odessa

Yesterday afternoon brought news of a deal brokered by the United Nations and Turkey enabling grain shipments to resume from Ukraine. The deal was seen as going a long way to helping to ease the growing food security crisis. Less than 24 hours later, Russian President Putin broke the deal when four Russian “Kalibr” cruise missiles rained down on the port city of Odessa. Two directly hit Odessa’s port and the other two were shot down by Ukrainian defense forces.

Less than 24 hours had passed since Putin agreed to the deal. Why Russia would break the deal so quickly is still unknown - especially since Moscow’s approval of the deal was something of a small PR win. Now, by so aggressively and wantonly disrespecting the UN (not to mention Turkey), Russia further demonized itself internationally.

But we do see one reason we see for the violation: Russia is making money a lot of money on selling bootleg grains. The attack has set off wild swings in prices and probably will continue to do so for some time. We note wheat prices fell more than 6 percent on the announced deal. Now, they are spiking up again. The benefit to Russia is significant. Since seizing Crimea in 2014 and now significant portions of the Donbas - including Sevastopol — in the last four months, the flow of sanctioned Russian wheat (including wheat stolen in mass quantities from Ukraine by Russian forces) has gone up more than 50 percent.

The UN estimates there are currently 828 million people around the world going hungry of whom an estimated 40-50 million are on the brink of starvation. For Putin, keeping the wheat/grain markets off balance serves two purposes: 1) it helps further fund Putin’s war efforts, and, 2) it puts increased pressure on Western governments to step up to help those countries at most risk for food shortages.

Moreover, considering many of these countries are found in North and Central Africa, the risk of mass migration north across the Mediterranean Sea and into the EU is growing by the day. With the growing list of economic challenges, the EU is already facing due to Russia’s aggression in Ukraine, dealing with a mass-migratory crisis would be a significant political and social destabilizing issue.