After a year of big surprises, led by the Russian invasion of Ukraine, rising global inflation rates, and the collapse of cryptocurrency companies, what kind of year will 2023 be? This type of short-term question is difficult to answer because the fallout from global events can spread rapidly and unpredictably. But the last 12 months highlighted a major trend that will shape what happens next, in 2023 and beyond: Russia’s decline.
Russian aggression is nothing new. Moscow has been invading other countries since the mid-1990s and has occupied parts of Ukrainian territory since 2014. But the brutality of Russia’s attacks on Ukraine since last February and the most recent phase, the destruction of civilian energy infrastructure, is widely regarded as equivalent to a war crime. It is unlikely to change the course of the war, which Russia is losing.
In the big picture, Russia has again entered a period of secular decline, during which it will have limited access to Western investment, technology or consumer goods. Russia’s empires have collapsed before, in 1917-18 and again when the Soviet Union imploded in 1989-91. In both cases, the collapse took a while to get going, and then it was pretty complete. Historically, of course, Russia has also been able to reassert control over time, and during the 1990s, by getting a lot of help from Western companies.
This time, too, we should expect a long power struggle within Russia, with serious existential risks for the world, including who ends up controlling Russia’s nuclear weapons. But the most direct economic impact will be reflected in the global energy market.
The demand for Russian fossil fuels is very low. Before its invasion of Ukraine in 2022, Russia produced around 10.8 million barrels of oil per day, of which around 8 million were exported either as raw or refined products. The sharp drop in Russian economic activity means more oil is available for export, but the European Union, the United States and their allies are now buying crude from other suppliers, and the same will be the case for refined products from February 2023.
The The International Energy Agency predicts that Russian oil exports will fall to around 6 million barrels per day during 2023-24. In the medium term, India could buy between 1 and 2 million barrels and China could absorb the rest, assuming both countries want to become more dependent on a malevolent and unreliable partner.
Purchases from India, China and a few others can still generate plenty of free cash flow and tax revenue for Russia. Whoever runs Russia will spend much of this revenue building and buying weapons, including missiles with which it can attack a wide range of countries from long distances. NATO member countries are expected to be shielded to some degree from the threat of retaliation, but Russia can be expected to engage in sabotage and other deniable attacks against Western energy infrastructure and similar vulnerable strategic targets.
During the Cold War, the Soviet Union was careful not to attack Western Europe and the United States too directly (and vice versa). Instead, both sides used proxy wars and other forms of pressure. This time, however, we should expect a much more direct confrontation. The Russian elite have locked themselves in a corner, with a strange set of beliefs (right-wing nationalism on steroids) and long-range weapons. Giving ground to these extremists will only encourage them to drink more.
The need to limit over time the amount of money Russia can spend on aggression is the reason the top price on Russia’s oil exports is just as important. The evidence so far is that this is working as intended.
But more measures are needed, including accelerated investments in renewable energy to reduce global demand for oil. If we continue to rely on Russia and its allies in the OPEC+ cartel, the ability to disrupt our economies will remain immense. There is now a pressing national security dimension to the energy transition.
High inflation in the 1970s had multiple causes, beginning with tight economies in the 1960s and the Vietnam War. But the problems were exacerbated by two oil price shocks, in 1973 and 1979. OPEC+ members understand that they have the power to do this again, at a time of their choosing, or the next time Russia asks them for a favor.
Oil supply and demand are not at all responsive to oil prices in the short term, but historically they are quite responsive over five to 10 years. In 2023 and beyond, the West needs to focus more on reducing demand for fossil fuels, particularly oil, and increasing the supply of alternative energy sources outside the control of Russia and OPEC.
Simon Johnson, former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management.
This story originally appeared on Los Angeles Times.