University of Tartu professor of international business, economist Urmas Varblane told Vikerraadio's "Kajalood" program that Russia's energy weapon has gone off, which gives hope that the world market price of gas will start to fall in the second half of winter.
"If the price of gas goes down, it is to be hoped that the price of electricity generated using gas will follow suit, which will affect the market price of power. Once the price of electricity starts to stabilize, food and other prices will follow and the chain will reverse," Varblane suggested.
The professor said that central banks need to abandon recent monetary policy to end the crisis. The U.S. Federal Reserve started it and the ECB followed suit with gradual interest rate hikes, which the latter's President Christine Lagarde promised to hike again if necessary when she visited Tallinn.
Varblane said that the instrument's effects only go so far. "Rising interest rates will not add new power generation. Europe has not invested in energy in recent decades and cheap Russian gas made it possible to forget the fair price of it."
He gave natural gas as a brilliant example of how Europe has managed to react very quickly. Consumption was cut, short-term replacements found in nuclear and other forms of energy and construction of LNG ports launched. "Germany, that until recently did not have the capacity to receive LNG, will complete its first terminal in the near future. The result? The Dutch TTF [gas futures] index has come down from €300 per megawatt-hour in August to around €100/MWh today. It happened in a matter of a few months," Varblane suggested.
Analyzing the causes of the economic crisis, the professor described a phenomenon where people believed certain economic laws were no longer in effect. "It seemed that increasing the money supply was not causing prices to go up. Saving was the most harebrained thing one could do when interest rates dipped into the negative in 2009-2011. Real estate and shares were the only areas where prices grew. The central banks hoped that it would be enough and maintained the interest rate policy for over a decade. Only the Covid supply chains collapsing demonstrated that goods and services still had a price – that started to go up."
Another major crisis was added when energy became a weapon in Russia's hands. "We can also say that Europe has been naive and Estonia allowed a number of necessary decisions to go unmade when the time was right. We failed to erect a single wind farm in ten years and spent them arguing instead of preparing for an energy crisis. These two crises have unleashed the wild inflation we have now," Varblane suggested.
China's position in the war
The professor believes that China is seizing every opportunity to benefit from Russia's war in Ukraine. "China is trying to rise to the top of the global economy, while turning Russia into a maximally dependent vassal. On the other hand, China is testing the West's unity and resolve in Ukraine," Varblane remarked.
He added that the Taiwan matter never leaves the agenda for China. "Xi Jinping said as much in his party congress speech and Europe having remained united may have come as an unpleasant surprise. Probably also for Russia. We can say that Hungary is doing this and Italy that but, generally speaking, the whole of Europe is behind Russia sanctions."
The economist said that it is sometimes suggested sanctions are having a modest effect on the Russian economy, adding that the effects are long-term. "The income of the energy sector has been falling monthly, hitting the lowest level in the last two years in September. Once the EU embargo for Russian oil and the price cap for natural gas enter into force, the effect will be greater still," he assured.
Varblane said that Russia's technological shortages are often overlooked. He gave the example of the auto industry. "New cars do not have any security equipment and buyers need to sign a waiver to signify they agree to drive a car like that. This is going back not ten, but forty years." The professor added that new oil and gas fields are stuck behind similar problems in Russia.
Estonia's contribution to obstructing Chinese hegemony
The electronics industry, technological advancement, green transition and energy storage require growing quantities of rate earth metals, with China in control of 80 percent of mining and production, Varblane said, describing China's position in the value chain as abnormal.
"This is where our Silmet comes in, a subsidiary of Canadian company Neo Performance Materials responsible for 6 percent of total U.S. rare earth metal imports – a single factory! USA, India, Japan and the EU have agreed to develop alternative rare earth metals value chains that do not include China," he said.
Varblane said that Silmet's new production facility in Sillamäe will be crucial. "It will produce magnets from rare earth metals and recycled magnets, with the necessary energy produced by local power plants. If it is built, Estonia will have contributed greatly to weakening the Chinese hegemony," the professor offered.
Editor: Marcus Turovski