At the start of Russia’s invasion of Ukraine a week ago, almost every analyst agreed that Russian oil and gas would keep flowing westwards. The state of mutual energy dependence seemed too entrenched. On one side, the EU could not decouple itself easily from the source of 38% of its natural gas imports. On the other, Russia under financial sanctions would need cash. Old hands reflected that, even in the long decades of the cold war, the Soviet Union and Europe maintained commercial relationships in energy.
A week later, such thinking looks naive. The “shock and awe” financial sanctions, especially those aimed at Russia’s central bank, exceed anything previously seen, but the shortcoming is obvious: if you really want to hit the Russian economy hard, the place to aim is its energy export sector, a part that has been spared sanctions so far and generates hundreds of millions of dollars daily. The point is made repeatedly by Ukrainian officials in their appeals for the trade to cease, and its moral force is hammered home with every fresh Russian atrocity.
The White House said on Wednesday it is “very open” to the idea of energy sanctions on Russia. One might say cynically that it is easier to air such sentiments from Washington than Europe, but even German ministers are publicly taking about what would happen if Russia halted gas supplies suddenly. “We are prepared for that. I can give the all-clear for the current winter and summer,” said Robert Habeck, economy minister. Nuclear power stations, currently set for imminent closure, could be kept switched on and coal-fired stations could be used as back-up, he argued.
If that’s really the case, the obvious question is why the west shouldn’t just get on with imposing a few energy sanctions – even if only caps on imports initially – and accept the financial pain. There is a foretaste already amid the various “self-sanctioning” measures taken by European refineries to avoid buying Russian oil and by European gas suppliers (including Centrica) to disentangle themselves from Gazprom. The price of a barrel of Brent hit $113 on Wednesday, the highest for seven years. UK natural gas prices returned to last autumn’s sky-high levels and pump prices are setting records.
Prices would probably go even higher if full-blown energy sanctions were imposed, but what about security of supply? Here’s Brussels thinktank Bruegel: “If the EU is forced or willing to bear the cost, it should be possible to replace Russian gas already for next winter without economic activity being devastated, people freezing, or electricity supply being disrupted.”
It also, it should be said, described the challenge as “momentous”, said rules would have to be rewritten and concluded “exceptional measures” may be needed to reduce demand. But the shorthand version seems to be: yes, if you are prepared to accept the costs, it’s doable. That, one suspects, is where the sanctions debate is rapidly heading. It should probably have been there from the off.
Lack of faith in Aviva
Aviva’s plan to return £4.75bn to shareholders didn’t quite reach the target of £5bn set by activist investor Cevian Capital, but the sum should be enough. The £250m gap can be mentally covered by Aviva’s accompanying £385m purchase of UK financial adviser firm Succession Wealth. Even activists tend not to object to conventional bolt-on acquisitions.
The missing bit in the script is a higher share price. At 410p, Aviva stands roughly where it was three years ago, before chief executive Amanda Blanc got to work with a series of major overseas disposals and a heavy cost-cutting programme.
It’s a slightly odd position. The fresh element of the return of capital represents a quarter of Aviva’s stock market value and Blanc’s dividend promise of 33p for 2023 represents a fat yield in the offing, which ought to get the attention of income investors.
Put it down to a lack of faith in the idea that Aviva can really emerge as a reliable generator of cash. That’s hardly the fault of Blanc, who has done everything she promised and has now set a few financial targets to be judged on. But, yes, after 20 years of disappointments for shareholders, the idea that Aviva might be fixed may take a while to become truly believable.