Sri Lanka, Russia energy halts point to global ‘perfect storm’

Demonstrators surround Sri Lankan Prime Minister Ranil Wickremasinghe's desk after entering his office during a protest demanding for his resignation, after President Gotabaya Rajapaksa fled

As protesters stormed Sri Lanka's presidential and prime ministerial residences on July 9 over shortages and economic crisis, social media users across the Middle East speculated whether their governments would be next – while markets braced for a shutdown in Russian gas to Europe and blocked crude oil exports from Kazakhstan.

Almost five months into Russia's invasion of Ukraine, fighting on the ground looks set to keep raging through the summer, with Russian troops gradually advancing in the Donbas under enormous artillery support while Ukraine reportedly strikes the Kremlin's fuel and ammunition dumps with Western long-range weapons.

Last month, the Global Crisis Response Group set up by United Nations Secretary General Antonio Guterres in March warned the war had supercharged pre-existing crises caused by the pandemic, regional climate shifts and rising national debt to create the worst cost of living crisis in recent history, throwing some countries into a "perfect storm".

Sri Lanka is now showing what that can mean, the price shock of the Ukraine war coming after a pandemic slump in tourism foreign currency earnings, a depreciating currency and now a debt default. Power cuts are frequent, there is too little fuel for many to get to work or school and the local United Nations humanitarian adviser estimates that almost a quarter of the population will now need international food assistance.

This week's unrest appears to have swept from power an entire generation of Sri Lanka's political establishment. Local media report President Gothabaya Rajapaksa pledging to resign alongside former opposition leader Ranil Wickremesinghe, with whom he recently formed a power-sharing executive that proved unable to stop things getting worse.

More may be to come, and well beyond Sri Lanka. On Monday, the Ukrainian navy reported the first eight civilian grain ships since the war entered the Danube River after Russia's withdrawal from Snake Island in the Black Sea, a key step in unlocking blocked exports that have sent global food prices up more than 20% since last year.

But shipments from the much larger Black Sea port of Odesa remain blocked, with many silos within Ukraine either bombed by Russia or still full of last year's crop as Ukraine begins taking in the globally vital summer harvest. Farmers say they are struggling to secure sales and finance, find places to store their crops and suffering other disruption from the conflict.

RUSSIAN PIPELINES NEXT?

Energy disruptions may be next. On Monday, Russian gas to Germany through the Nordstream 1 pipeline fell to zero for 10 days of what operator Gazprom called "scheduled maintenance". European authorities, however, worry the shutdown may be permanent – on Sunday, French finance minister Bruno La Maire said he believed this was the most likely option, and Europe should ""put ourselves in order of battle as of now."

Russia has also been shutting down another major oil pipeline across its territory, that delivering crude oil from landlocked Kazakhstan, again citing technical issues.

A prolonged stoppage of the pipeline owned by the Caspian Pipeline Consortium (CPC) of Russian and Kazakh firms alongside Exxon MobilXOM.N , Chevron CVX.N, Shell RDSa.L and Italy's ENIENI.MI, could knock out 1% percent of global oil supply, analysts at JP Morgan say. That could potentially send prices towards new records above $190 a barrel, further deepening a worsening global economic crisis.

Sri Lanka's current troubles have been a long time coming, its rising foreign debt particularly to China rendered a much greater burden by the collapse of mid-pandemic tourist income and an ill-judged ban on fertiliser imports even before the Ukraine war delivered its double blow of soaring food and fuel prices.

But a host of other countries are in not dissimilar positions. In Afghanistan, Pakistan, Lebanon, Egypt, Turkey, Iraq, Argentina, Myanmar and Zimbabwe, those same global pressures plus a host of local issues are also driving mounting hardships. As seen during the 2011 "Arab spring", that can bring dramatic and unexpected political consequences.

Throughout July 10, the Arabic and English language hashtags for search terms "the presidential palace", "Sri Lanka" and "Sri Lanka crisis" were amongst the most shared across the Middle East. Many users showed sympathy with the protesters, expressing hope that their own "despots and corrupt" governments and leaders might be next.

COMPLEX GEOPOLITICS

In many respects, the current febrile global markets, politics and economics suit the Kremlin well. Despite the difficulties of knowing for certain whether the current disruptions are deliberate or merely part of the standard summer shutdown and maintenance cycle, many in the oil market suspect what they are now seeing is part of a very deliberate strategy.

Since the start of the war, Western and particularly mainland European nations talked openly about looking to wean themselves off Russian oil and gas for good, investing in renewables and other sources. But little of that activity has happened yet, and the giant underground caverns in Germany used as a strategic gas reserve to get that country through the winter remain only partially filled.

Disrupting the oil pipeline from Kazakhstan might also be an easy win for Moscow. On June 17, Kazakh President Kassym-Jomart Tokayev openly disagreed with Putin in front of other leaders at the St Petersburg International Economic Forum to argue that former Soviet states should not take Russia's advice to recognise the separatist republics of Donbas and Luhansk.

In February, Russia sent troops to Kazakhstan to support Tokayev following unrest, and blocking much of its ability to export appears a classic Kremlin tactic in response.

But such geopolitical games are complex and unpredictable. Last week, Putin spoke by phone to Sri Lanka's Gothabaya Rajapaksa while pro-Kremlin social media feeds have been pushing the line that the current unrest has been fomented by the United States.

But while Sri Lanka has been receiving shipments of cheap Russian oil through India, it has not been enough. The forces unleashed by the Ukraine invasion are global and unpredictable, and no one yet knows whether they will end.