(Online Roundtable on Nov. 28, 2022)
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Toyoda: The Russian military invaded Ukraine on Feb. 24, 2022 without any warning and many Ukrainians have been killed or have sought refuge overseas or are remaining in the country under serious threat of attacks as well as a shortage of electricity and food supplies.
The impact of these shortages is spreading out of Ukraine and world energy and food prices have been rising, threatening the lives of people all over the world, including in developing nations. This is what we call the Ukraine crisis.
This Roundtable of experts on international politics, international economy and energy aims to discuss how to interpret this crisis: what exactly is happening, why is it happening and how can we cope with it.
What Is Happening?
Toyoda: Mr. Terazawa, I would like to ask you how seriously the global energy situation is now under threat, how much energy prices are rising and how the situation is different among nations or regions. To my knowledge, Japan’s imported energy prices are cheaper than many other countries’ thanks to the high proportion of long-term contracts in energy imports, but the situation has been recently changing. On the other hand, it seems that some companies have ceased to conclude such long-term contracts.
I have also another question. Do you think fossil fuels have truly no positive prospects? Or do you think we can continue to use them by turning them into hydrogen or ammonia by decarbonization?
Terazawa: Russian oil’s share of the global market is 12% and its natural gas share is 24%.
Thus, with Russian oil and gas supplies to the West impeded, there must be an enormous impact on the global energy market. After the invasion, the price of crude oil once rose to US$130 per barrel and the natural gas price in terms of crude oil equivalent rose to $600 in the European market, while LNG in Northeast Asia hit $400. Compared with the crude oil price, the price increase of natural gas or LNG was significant. This is because a tanker could transport crude oil anywhere in the world, but natural gas can only be transported by pipelines and LNG can be transported only by LNG tankers after being cooled. Thus, the latter two are short of mobility. With a supply shock, prices of the latter two fluctuate more than crude oil prices and this results in a more serious economic impact overall.
At this moment, since there is concern about a stagnant global economy, energy prices have started to drop; the current crude oil price is around $80, the European natural gas price in crude oil equivalent is below $200 and the Northeast Asian LNG price is less than $150. But we must say those energy prices remain high.
How much each nation pays for its energy is another story. While nations in the West, including Japan, stop imports of Russian oil, nations not participating in the economic sanctions against Russia continue to buy Russian crude oil at discounted prices, cheaper than the world oil price by 20-30%. The notable examples are India, China and Turkey. These countries can continue to buy Russian energy at prices close to those before the crisis, meaning that energy prices are relatively moderate for them. On the other hand, the nations suffering most from energy price hikes caused by the Ukraine crisis are European nations. This is because prior to the crisis 40% of Europe’s gas consumption was from Russia through pipelines and with the Ukraine crisis greatly limiting these imports, they are now facing a supply shortage of natural gas. In addition, as they compensate for this shortage with LNG imports from the rest of the world at high prices, this will result in a serious impact on energy prices in Europe.
As for Japan, we have in general a similar impact from the crude oil price hike to that in the West, as this is the global market price. On the other hand, Japan’s LNG imports are significantly based on long-term contracts and the contracted price is mostly connected with crude oil prices. Since the crude oil price hike has been more moderate than the spot market price of natural gas or LNG, Japan’s imported LNG price rise in long-term contracts has been restricted to a moderate one. Thanks to these contracts, Japan has not faced yet the supply shortage of LNG as in European nations. So I believe the energy crisis impact overall on Japan has been more moderate than in Europe.
However, these long-term contracts were concluded a long time ago, and after 2029 the percentage of the long-term contracts in particular will be declining. Japan had not renewed those contracts before the Ukraine crisis, though there were opportunities for renewal. The background was the growing uncertainty about the future of fossil fuels. LNG users in Japan, electric power companies or gas companies, were hesitating in making long-term commitments. Under such circumstances, the crisis happened.
My concern is that Japanese companies are still hesitant about committing to long-term contracts even after the crisis, while German companies and others are working hard to secure LNG imports and LNG-producing nations are becoming aggressive in refusing to sell LNG to them without their long-term commitments. Chinese national companies are now securing many long-term contracts. So the weight of Japan’s long-term contracts in LNG imports will decline in the future and the weight of spot contracts increase. Japan could suffer from a negative impact as in Europe now. I think this would be a challenge for Japan in the future.
To overcome this, we would need a roadmap to show how natural gas can be utilized in the long run. Otherwise, Japan’s natural gas users cannot step into concluding long-term contracts.
Assuming that natural gas would be made into hydrogen or ammonia (realizing what we call blue hydrogen or blue ammonia) in the long run, we should prepare a path for such new use of natural gas to achieve less dependency on Russian energy sources while securing long-term demand for natural gas as blue hydrogen or blue ammonia. In that way we can make long-term commitments for stable procurement of LNG. At the same time, we can contribute to resolving global warming through blue hydrogen or blue ammonia.
Takemori: At this moment, gas and oil price rises are coming under control, because global weather in autumn and winter 2022 was historically warm. Without this, European gas storage would be exhausted and planned blackouts or suspension of factory operations would be needed. China’s zero Covid-19 policy by continued lockdown of major cities has also been affecting the supply-demand situation of gas and oil, as the Chinese economy is a fossil-fuel consumption-led economy emitting a quarter of the world’s carbon emissions and its decline in demand for energy sources would ease the global energy situation enormously.
Europe could increase storage of gas in 2022 because it could import Russian gas by pipeline in the first half of the year. However, now that Nord Stream 1 is almost suspended and Nord Stream 2 will not be used hereafter either, it will be difficult for Europe to build up storage in 2023 and thus we presume that the winter in 2023 would be very tough.
I think Japan’s energy situation will be a tough one as well in the winter of 2023. On the question of Japan’s long-term contracts of gas, in December 2021 when the risk of a Russian invasion of Ukraine was globally recognized, the time for renewal of long-term contracts by Japan with Qatar came, but it was not done. I wondered why.
I have a question about the new direction of Russian exports of gas. After Europe ceases importing Russian gas, Russia must redirect it to other countries. There is a plan for a pipeline construction, “Power of Siberia 2”, from the Yamal Peninsula facing the Arctic Sea through Mongolia to big cities in China. This is planned to be completed around 2030. My question is if China will be truly capable to realize this pipeline construction plan to import Russian gas. I am skeptical about China’s capability to achieve this without Western nations’ technological support. When the accident in Nord Stream 2 happened in 2022, we clearly learned that Western technology was needed to maintain the pipeline. The pipeline stopped to operate because Canada, a producer of motor propellers for the pipeline, refused to deliver those under repair to Gazprom due to economic sanctions against Russia. With clarification that Russian pipeline operations would need Western technology, I am skeptical about only Chinese and Russian technologies being able to realize a gigantic pipeline construction plan connecting the Arctic Sea with big Chinese cities.
Terazawa: It is true that the energy situation will be more serious in 2023. In particular, China’s decreased energy demand due to its zero Covid-19 policy has certainly contributed to loosening demand and supply at the end of 2022. If the Chinese economy recovers strongly in 2023, global energy demand will increase strongly as well.
In the case of Europe, in the winter of 2022 it could pile up stocks of Russian oil, but in 2023 it cannot do so. It is true that Europe will face a more severe winter in 2023. It would normally take several years to increase LNG supply capacity, so we will see uncertainty and extreme instability in energy supplies including LNG and natural gas until around 2025.
Certainly, Russia has a project to construct a pipeline to China and is eager to achieve it. China was the largest LNG importing nation in the world in 2021, having overtaken Japan. To meet its tremendous demand, it has to diversify supply sources, so it would also eagerly pursue construction of a pipeline from Russia as one of its diversified supply sources. However, China would be shrewd to avoid depending solely on one source like Europe and pursue a well-balanced regional allocation of supply sources, considering Russian sources as one of them.
How could it achieve this with its heavy dependency upon Western technology? Having perceived a risk of depending on US technology, given the current US-China high-technology conflict, China would try to take maximum advantage of its own technology. It has its own technology that has been used for pipeline construction so far and it will seek to develop it, apart from whether it is the best or not. However, as it will take time to accomplish such a pipeline, no fundamental development will occur in the energy situation soon. The instability of the LNG market will continue for the time being.
Takemori: I have another question for Prof. Endo. Before Russia’s invasion, Germany’s dependence on Russian gas supply was very high, with 55% of its energy consumption depending on Russia. With the addition of Nord Stream 2, its dependency would further increase. When Russia occupied the Crimea in 2014, German Chancellor Angela Merkel must have actively joined in economic sanctions against Russia, but at the same time Germany has been deepening its dependence on Russia since then. Why do you think it has been doing so?
Endo: Germany’s dependence on Russia had been an important part of its economic development model together with a cheap euro and the gigantic Chinese market. With the Ukraine crisis, this model has collapsed. Germany maintained a policy of engagement with Russia, assuming that Moscow would liberalize its economy and eventually politics, too.
However, the Ukraine crisis proved otherwise. Current German President Frank-Walter Steinmeier expressed regret about his permissive treatment of Russia when he was foreign affairs minister.
Toyoda: I would like to ask Prof. Takemori about the global economic outlook. Needless to say, the Ukraine crisis has a big impact on the global economy which is still reeling from the lingering impact of the pandemic crisis. In the next few years, what do you think the global economy will look like?
Takemori: In 2023, with the more severe energy outlook, international organizations like the IMF or OECD have presented a pessimistic outlook for the global economy. The short-term challenge is inflation. To cope with it, the United States rapidly raised interest rates and inflation fell to around 7%. Developing countries must be relieved to see it. With high energy prices and food prices, their economies have been slowing down. A continued climb in US interest rates would exacerbate their foreign debt problems as they have a large amount of debt in dollars, and many of them would have to seek help from the IMF.
Meanwhile, in Europe, core price indexes except for energy items have not been rising much, unlike in the US. This is why the European Union’s interest rate rise is more moderate than the US. Another reason is that in the EU there is one central bank and each member nation has its own public finances, which means a significant rise in interest rates would put the public finances of the weaker economies such as Italy, Spain and Greece into a critical situation. So I think inflation in the EU will continue longer. Whenever high inflation occurs, Germany makes noises to the ECB, but today it is exceptionally quiet. This is probably because it regrets its excessive energy dependency on Russia. With a worsening economic situation hereafter, the EU may decide its own fiscal expenditure again to support the member nations, such as with the “Restoration Fund for Recovery from the Pandemic”. But in the long run, its energy policy must pursue blue energy, renewable energy and small nuclear power as its core energy supply by around the 2030s. Meanwhile, the global decarbonization drive exerts downward pressure on fossil fuel investments so that we see global fossil fuel supply failing to meet global demand.
Until around 2025, the global energy situation will be at a critical stage if all nations try to mitigate their energy dependency on Russia. Even after 2025, I have concerns that the energy crisis may continue until 2030.
On developing nations, their food crisis was focused on the discussions at the international meetings in November 2022. At this moment, the issue is not only about the war preventing Ukraine from exporting its food items but also the high rise of prices of chemical fertilizers overshadowing affected economies. There is even a concern about whether it would be feasible to maintain a world population of 8 billion people without chemical fertilizers using ammonia. Anyhow, how we deal with this mid-term energy crisis will be an extremely critical issue.
Terazawa: We argue on the impact of energy prices in dollar terms in the world market, but in Japan the issue is yen-based. In the case of Japan, the impact of energy price hikes is duplicated with the yen’s depreciation. I have two questions for Prof. Takemori. My first question is how we should manage monetary policy in Japan, seemingly today inviting yen depreciation. And my second question is about energy subsidies.
Daniel Yergin, a distinguished energy policy expert, mentioned that this crisis would be interpreted as the first crisis of an energy transition which started in autumn 2021 even before the Russian invasion.
The background of this crisis is underinvestment in fossil fuel domains and rising prices triggered by it, and Russian President Vladimir Putin’s Ukraine invasion having tried to take advantage of this situation. These serial events pushed energy prices even higher.
Under such circumstances, Germany has never thought about changing its energy policy. Its policy is in general to accelerate the use of renewable energy, though it provisionally prolonged use of nuclear power but only until spring 2023, and also prolonged use of coal in the short run.
Investment in fossil fuels has continued to decline reflecting this policy adopted not only by Germany but also by other European nations and the US. In this light, if demand for fossil fuels hereafter remains higher than the level which people promoting policies for mitigating global warming have ever thought, its supply would not meet demand. Such underinvestment in fossil fuels in the long run would result in an energy market structure extremely vulnerable to external shocks. A big crisis like the current Ukraine crisis would cause a seriously negative impact upon the world economy and I have a concern that such a crisis could be repeated in this vulnerable energy market structure.
I would like all nations including Germany to take note of this and adopt a well-balanced energy policy to encourage necessary investment in fossil fuels to meet rather continuous demand in the long run as well as promoting renewable energy, since renewable energy cannot meet all the energy demand quickly.
Takemori: Exchange rate fluctuations are generally caused by the interest rate differential between the US and Japan. And in the US, the high interest rate now is due to an extremely high inflation rate in the US. Meanwhile, Japan’s inflation rate is not so high. It is now around 3% and thus Japan does not have an urgent need to raise interest rates. I think low wage increases must be the reason for the low inflation rate. To maintain full-life employment in Japan, there tend to be so many workers in unnecessary sections of unnecessary industries. To keep such inefficient employment, Japanese business continues to go through any economic situation without raising wages. This must be a cause of low productivity as well as low wages and low prices. To work on reforming this fundamental weakness of the Japanese economy, we should introduce “layoffs” in Japan, though it would cause a serious economic challenge in the short run. With its introduction, labor mobility will be enhanced. Competition in the job market would be encouraged, and more competent workers would get jobs with higher salaries. In other words, employers would need to pay more to get competent employees and thus wages would rise and the inflation rate could also rise. There would be more room for raising interest rates, which is supposed to be normal.
Anyway, on the fiscal policy side, we would need to pursue a wise spending policy, namely more budgets for necessary policies such as accommodating electric power systems to introduce solar or wind power while cutting budgets for unnecessary policies. This will be extremely important.
Many economists today would say that fiscal policy and monetary policy should work together in the same direction, namely both of them should work expansively on deflation and both should be tightening on inflation. This means there would be fewer boundaries between both. Both of them should work together in collaboration as an integrated policy to control total effective demand. With inflationary concerns modified, fiscal policy as such should focus on what is to be truly needed selectively.
Toyoda: A question for Prof. Endo. In terms of international politics, world nations seem to be divided into three groups: the US, Japan and Europe; Russia and China; and lastly third countries. Meanwhile, the Ukraine crisis was apparently and unanimously considered to be caused by violation of international law. In spite of all this, the UN, G7 or G20 are not working well in dealing with this violation. What do you think is happening exactly?
Endo: I think this war is to be defined as an unlawful invasion reversing a century-long effort by human beings to define wars as unlawful actions and contain war crimes, or more specifically contradicting the Anti-War Pact of Paris in 1928 or the Geneva Protocol in 1924 defining a war of invasion as a crime.
However shocking it may look, this is a large-scale limited war, since the combative nations and the means of combat are limited, while in terms of the scale of human casualties and firepower involved it is equivalent to what Russia experienced in the first phase of German-Soviet conflict during World War II.
The United Nations Charter provides veto power for the permanent members of the Security Council and therefore as is predicted, the UN does not function if one of those members commits an unlawful action.
In a different perspective, the implication of veto power given to permanent members of the Security Council is that they are not to engage in a war against each other. Without this veto system, other members might have had to fight a war with the Russians, under the mandate of a Security Council resolution. In this regard, the UN Charter, as devised, could even be seen as preventing them from starting a war.
It is true that nations are divided into three groups on this Russian invasion: Russia and China and a few others supporting it, Japan, the US and Europe opposing it, and developing nations murmuring. I think there must be strong antipathy among the nations in the third group, called the Global South, against the Western nations’ monopolizing of political correctness despite historical events such as colonization, racial discrimination and the Iraq War. Each nation in this group also has been pursuing its own national interest with priority placed on a free and independent attitude. For example, India has been importing cheap oil from Russia, loyal to its long history of a nonalignment policy.
However, it is also true that there was extensive support for the UN General Assembly’s initial decision that Russia should get out of Ukraine and stop its invasion: 141 agreed and only five opposed, with 35 abstentions. This implies that concerns, criticism and condemnation of Russia’s invasion were widespread. Criticism of the war is shared by many national leaders including Indian Prime Minister Narendra Modi or Turkish President Recep Erdogan. In particular, after having had to face the risk of a nuclear attack or incident, more nations are becoming expressly concerned about the war. The three group members are thus not necessarily fixed and with widespread criticism against the war there have been changes among group members little by little, reflecting it.
Why Has This Happened?
Toyoda: Can we interpret this war as being provoked by Putin’s nostalgia for the Soviet Union and a sense of being under threat of from a NATO invasion of Russia, as well as the Russian authoritarian political regime? Some people say that China is also under an authoritarian regime like in Russia. The latest appointment of the key officials in the Communist Party and the administration in 2022, to the majority’s view, showed that power is getting concentrated on President Xi Jinping’s aides and people with views different from his are eliminated.
What do you think will happen to China hereafter, Prof. Endo? Japan is most concerned about China-Taiwan relations. What do you think about the possibility of Chinese military action pursuing the integration of Taiwan into One China?
Endo: In International Relations studies, we are inclined to think about war from three perspectives: international, national and individual. In international dimensions, it is certainly true that the Russians are concerned about NATO expansion reaching Ukraine and accommodating facilities and equipment to defend missiles in Poland, demonstrating power close to Russia’s border. In this light, there is some international criticism that the West has threatened Russia too much with NATO expansion. However, at the same time, there is another view that the West has threatened Russia too little. The administration of President Joe Biden, following the trend of US withdrawal from overseas conflicts, stated that it would not send soldiers to Ukraine. Within this perspective, it could be seen as a failure in deterring Russia, but whether a US threat could make Putin give up his invasion would remain a big question.
Lastly on international dimensions, we should not forget about the impact of the collapse of empires that has not been much talked about. A collapse of a big empire could have a durable impact that lasts more than one generation. Empires of the past tell the same story: the Russian Empire, German Empire, Austro-Hungarian Empire and Empire of Japan. Some Russians still have traumatic feelings about the collapse of the Soviet Union in 1991 without a gunshot having been fired.
Some groups in Russia have been eager to restore the Soviet Union, but with independent states, new national borders and new ethnic allocations. This war was provoked by such historical developments from the impact of the collapse of the empire. The wars that Russia started after the Cold War took place in “post-Soviet space”, i.e. the former Soviet Union’s territory. All of them were initiated with little regard to the West’s intentions and actions.
In the national state dimensions, there have been contradictory political developments: democracy versus authoritarianism or dictatorship in the post-Cold War period. Putin had the impression that waves of democratization were reaching Russia, as even Ukraine was democratized after the waves of democratization in Eastern Europe and Arabic nations. He would most likely consider these waves as US-inspired anti-Russia movements. Some experts on Russia refer to the Rose Revolution in Georgia and the Orange Revolution in Ukraine around from 2003 to 2004 as decisive incidents which made Putin convinced of an American conspiracy behind the events.
Meanwhile, Russia itself has been becoming a more dictatorial state and there are fewer obstacles to conducting an invasion within its national politics. This is certainly Putin’s war. He always desired to restore the former Soviet Union’s prestige and spheres of interest and has attempted to take advantage of every weakness of the West, such as with the energy dependence. He thought Biden would not be able to produce any counter reaction against Russia since the whole West itself has seemed weaker, exemplified by the withdrawal from Afghanistan, and there is also the business of the US-China confrontation. What is interesting about Putin is that he is not simply trying to restore the former Soviet Union’s spheres of interest but also trying to get revenge on the US by imitating the American logic used for justification of its resort to use of forces, which the Bulgarian philosopher Ivan Krastev referred to as “emulation as revenge”.
To be more specific, Russia invaded Ukraine, saying that it has been developing weapons of mass destruction and had also committed genocide, like the Nazis, and that Russia would have to make a humanistic intervention and change the regime. Showing off the American logic itself used by the US government to start a war against Iraq and others, it revealed the Americans’ ruthlessness. This is such a malicious way to start a war.
Takemori: I think the long-term energy issue affected Putin’s actions as well. He became Russian prime minister in 1999 and president in 2000. In the era of Mikhail Gorbachev as president, energy prices had been low, but after 2000, in particular after China’s entry into the WTO in 2001, with its economic growth accelerating, energy prices have been rising with China’s high growth rate. This was, I believe, the tailwind enabling Putin to win domestic elections continuously.
American shale oil production has increased since around 2012. The primary reason was rising oil prices. The background was that China’s 4 trillion yuan macropolicy package to stimulate the economy after the Lehman Shock pushed up energy demand. The second reason was the US zero interest rate monetary policy that made high-cost investment in shale oil profitable. Shale oil production was generally unable to meet the cost without low interest rates and high oil prices and those two conditions were met then and encouraged US shale oil production to jump up.
However, OPEC tried to inflict damage on the US shale oil industry by its decision to refrain from oil production cuts, and that resulted in lowering crude oil prices to $30 in 2016. In 2014 when Russia’s Crimea invasion took place, crude oil prices had already started to fall. Putin may have thought that unless he took steps to stir up patriotism among the Russians, his popularity would fall with the fall of oil prices.
Takemori: He must have thought it would be the last chance to consolidate his power, as the global energy shifts toward renewables would one day wipe out demand for fossil fuels.
Terazawa: I think President Putin decided to invade Ukraine at the best opportunity to take advantage of the weakness of the West in the energy domain. It was a moment when the West was faced with the biggest vulnerability in energy supplies with prices rising, underinvestment in fossil fuels and lack of excess supply capacity. Also from a long-term perspective, Russian gas leverage is foreseen to decline under the progress of decarbonization. With this background, he thought it would be a vital moment for him to restore the glory of the Russian empire while he is still alive and mark his name in history.
Even with the sanctions of the West, Russia can continue the war because its revenue from energy is unchanged as non-Western nations continue to buy its energy, and even at discounted prices Russian energy revenue has remained unchanged. This is the reason why the West must continue investment to achieve less dependency on Russian energy. However, under pressure from global warming, how much it can do so is uncertain. That is our concern.
Endo: Putin would think so far this war has been to a certain extent successful in destabilizing the energy situation in the West.
Terazawa: It may be successful in the short run, but without the technologies of the West it would be difficult in the long run to develop oil and gas fields. I think this demerit would be bigger than the short-term merits. So this war will never have been a good decision for Russia as a country. It can be rationalized only in terms of what Putin could do to restore national glory in his lifetime.
Toyoda: Prof. Takemori, do you think the economic sanctions on Russia work well or not?
Takemori: Economic sanctions target Russian banks to stop their international settlements, in other words they aim to make it impossible for Russia to buy products made by the West with its dollar income from energy exports. But at the request of European nations heavily dependent on Russian energy sources, energy-related payments were eliminated from the coverage of sanctions on export payments to Russia. This made sanctions as a whole ineffective, as Russia does not export manufacturing products and its dollar income consists mainly of energy exports. In addition, Russia can conduct transactions in currencies other than US dollars with China or India. So the sanctions had little effect on its earning income in foreign currencies.
On the other hand, it works well on the purchases of goods from the West. If Russia tries to buy massive amounts of weapons or machines, once these transactions are revealed they can be stopped. At this moment, the Russian army’s weapons are becoming obsolete and fewer spares are available. This is certainly the result of sanctions and the shrinking Russian economy.
The US is applying this lesson in its policy toward China. It has already promulgated acts to stop providing China with new technologies in order to make Chinese semiconductor products obsolete. Russia’s current economic power or military power is gradually deteriorating by failing to receive new products or technologies from the West. Likewise, the US is promoting a policy to prevent China from buying advanced technologies and goods from the West. This will be the core strategy of the West toward China in the era of the “New Cold War”.
Terazawa: In addition to its inability to get new technologies, the sanctions are working well in creating a tremendous outflow of the best and brightest in Russia overseas. Investment flows into Russia could be discouraged as well. These could have a strong negative effect on the Russian economy in the long run, though sanctions on the energy industry do not seem to be working well in the short term.
This could apply to China as well. It is not only about rejecting technology transfers to China but also whether China’s best and brightest studying abroad will come back to China or stay abroad to escape its authoritarianism. This will be a key to China’s long-term development. For the US to contain China, it will be important to attract those best and brightest to the West.
Toyoda: Coming back to the issue of energy, I would like to ask Mr. Terazawa if we could truly give up upstream investment in fossil fuels.
Terazawa: I do not think we can stop upstream investment abruptly. Thinking about newly developing countries and also many “Hard-to-Abate Sectors” where decarbonization would be difficult to be achieved, there will still be stable demand for fossil fuels. As we still have a long way to go before 2050, without investment to sustain robust demand for fossil fuels during this period, our energy market would become very unstable and with some external shocks, energy price hikes would occur easily.
In addition, in the light of the global environment, what needs to be mitigated is not fossil fuels but CO2. Thus, decarbonization of fossil fuels such as by creating blue hydrogen or blue ammonia from fossil fuel gas or elimination of CO2 emissions from fossil fuels by CCS (Carbon dioxide Capture and Storage) would make it possible for fossil fuels and decarbonization to co-exist consistently.
From the perspective of promoting less dependency on Russian energy as well, I think the need for investment will increase, as elimination of energy imports from Russia will need equivalent investment even with the unchanged global energy balance. Underinvestment in fossil fuels has been concentrated on certain regions or energy companies. For example, European and American companies have been particularly underinvesting with pressure from their shareholders. In contrast, Middle East countries or state enterprises have been investing more. Thus, contrary to the common view on the Middle East, its influence has been rising rather than declining.
In total, I think we will need to maintain investment in fossil fuels not only from the need for upstream investment in them to achieve a stable energy market but also from the need to achieve less dependency upon Russian energy as well as less dependency upon the Middle East or state enterprises for fossil fuels.
What Is to Be Done Hereafter?
Toyoda: Lastly, shall we discuss about what to do hereafter? On the global economy, the economic outlook for 2023 by the IMF is very pessimistic. National government expenditures have been increasing, as well as fiscal deficits. Prof. Takemori, what do you think is to be done to achieve both goals consistently, getting the economy back on a robust growth track and budget sustainability?
Takemori: I think the main concern in predicting the economy is how this war will come to an end. On April 29, 2022, Jurgen Habermas, a 93-year-old German philosopher, wrote an article in the German paper Suddeutsche Zeitung in which he said: “It was the lesson our generation learned that no one would be a winner in a nuclear war.” This means that we cannot force a country which has nuclear arsenals to surrender; the only possibility is to seek a compromise with the country. Of course, the key issue of the current war is whether Ukraine can regain its territory deprived by Russia, but at the same time this war matters in terms of global security. There needs to be a compromise in this regard. A compromise might emerge in 2023 when the West may try to mitigate its energy constraints, though there would be an enormous cost with Putin’s victory in the war of energy. Without an end of the Ukraine war, I think the global economy will not be stable. After the end of this war, we will face another challenge provoked by China. China cannot hereafter update its high-technology goods or enhance the quality of those goods, as the high-tech industries in the West will stop providing China with their new semiconductor technologies from 2024. This will push up the price of electronics products in general. It is true that China has been providing cheap and high-quality goods so far, but this will not be possible anymore. Production in South Korea and Taiwan would not make up for China’s production decline. It would have a negative impact on the global economy. With these two uncertain factors of Russia and China, short-term economic predictions are extremely difficult.
Endo: How this war ends will be determined by two factors: the current cost of the war and future risks. Some suggest finishing the war to minimize the current cost, but others insist on continuing it to get rid of the seed of a possible war in the future. There is a fight between the two. Ukraine is now in the second category. I agree with Prof. Takemori in saying a compromise might be necessary, if eagerness to continue the war among the West proves limited.
The biggest risk in thinking about how the war may end would be the US. If former President Donald Trump had won a second term, as some speculate, the US may have left NATO. If the Russian invasion had happened after the US left NATO, NATO would have been powerless and Ukraine could not have continued to resist. Russia, in reality, has not won many wars by its aggression and it has succeeded only in pushing out Napoleon and Hitler. It has been tough in trench warfare to protect its acquired pieces of land. In this war as well, it will try to protect what it has already taken by trench warfare. In such circumstances, how long the West can continue to supply weapons to Ukraine or support it wholly will be a key question. Though Ukraine is now still in high spirits, if the West’s support declines I guess there could be a moment in the future when it will have to think about a ceasefire, which might mean stopping short of regaining its entire territory.
This is an unlawful invasion. There will be an impact on China-Taiwan relations, though Taiwan is in some ways different from Ukraine, in particular as China considers the issue of Taiwan as a domestic political question. The important lesson of the Ukraine war is first of all that nations with the intention and power to change the status quo and with greater authoritarianism could take extremely risky political actions. In spite of the long history of attempts to make wars of invasion unlawful, we cannot exclude the possibility of wars under such circumstances. This posture could be applied to China under Xi, with its intention to change the status quo, referring to the possibility of resorting to weapons, and with its deepening authoritarianism.
However, it seems to be quite a challenge for China to invade Taiwan in terms of its military capacity. The Chinese army cannot easily pass over the 100-kilometer long Taiwan Strait with its strong oceanic current. The Russian army has struggled to pass over only a river. Missile attacks would be possible, but they would result in increasing Taiwanese readiness to resist. The Ukraine crisis must have also given Beijing a simulation opportunity in examining the West’s reaction to unlawful war or invasion, namely their restored unity, though in reduced size, economic sanctions against Russia and continuous support for Ukraine. Judging from these observations, I think China’s invasion of Taiwan is most unlikely in the near future. We must be well prepared for it, though, since China has never given up its intention to regain Taiwan, and with its greater power and deeper authoritarianism, this risk cannot be excluded.
Toyoda: Assuming that economic sanctions against China are possible in the future, will Japanese companies start thinking about the need for decoupling. Can you comment on this point?
Endo: There have already been developments in businesses invested or settled in China escaping to third nations following the deepened conflict between the US and China. It is understandable to see an increasing number of Japanese companies engaged in such risk assessment with the start of the Ukraine war.
For the time being, a Taiwan invasion will not happen, I suppose. But there is a possibility that the US, through thoughtless action, might trigger a crisis. The US has occasionally given wrong signs to its enemies. A long time ago, on the occasion of the Korean War, State Secretary Dean Acheson drew what we call the Acheson line between the Korean Peninsula and the Tsushima Strait, defining the region inside the line as definitely defended by the US army. This sign helped to make Kim Il-sung, then the leader of North Korea, decide to start the war in the Korean Peninsula.
On the Gulf War as well, the US ambassador to Kuwait did not say clearly “No” to Iraqi President Saddam Hussain and Saddam thought he could invade Kuwait. With such confusing signs from the US or no clear sign from the US president, China may think this would be an opportunity for invasion. A Taiwan crisis would be dependent upon three factors: Taiwan’s willingness to resist, the US willingness and capacity to intervene, and also China’s willingness and capacity to change the current situation.
Takemori: Russia has been considering “time as their enemy” over the long term as its economy, depending on only fossil fuels with the progress of decarbonization, is gradually shrinking. In contrast, China has been thinking that “time would support China”, since as time goes by the situation becomes more favorable for it as it could keep competitiveness in its manufacturing sectors with its technology catching up with the West as well as maintaining cheap wages.
The American strategy to contain China is to stop this catching-up process by ceasing to provide advanced technology and aiming to reduce its military capacity and eliminate the threat of all the high-tech industries in the world being monopolized by China. To achieve this, semiconductors are under export control and chip technology as well as human resources and services related to supercomputers and AI are subject to export bans now. For example, ASML, a Dutch company with lithography technology vital for producing nano-semiconductors, is not going to be involved in business with China. In the domain of supercomputers, China cannot be the recipient of NVIDIA, chips necessary for AI, and thus its technology would stop improving.
Japan now considers China as an important part of the global supply chain. But Japan will have to think about withdrawal from business in China or relocation of its supply chains, as semiconductors built in components provided by China would become more expensive and less high-quality. This may not happen immediately but in five years Japanese companies will be faced with a question of whether they can maintain Chinese components as a core part of their supply chain.
Toyoda: To pursue both climate change mitigation and energy security in a balanced way, the global commitment to restrict the global average temperature rise to 1.5 C in comparison to the pre-Industrial Revolution age may be difficult to achieve. Mr. Terazawa, what do you think about this?
Terazawa: This 1.5 C goal does look difficult to achieve. Furthermore, in responding to the Ukraine crisis, coal-fired power has been increasing, which will make it even more difficult to achieve. Meanwhile, in terms of the energy flow argument, European nations are now ready to promote decarbonization further in dealing with the Ukraine crisis to consolidate energy security. The emerging economies and developing economies are also ready to promote renewable energy. Therefore, though it is extremely difficult to achieve carbon neutrality in 2050, it is also true that expansive use of renewable energy and decarbonization will proceed across the world.
Taiwan committed to stop utilizing nuclear power in 2025 and also to reduce coal-fired power. It would increase use of renewable energy. But due to its constraints in using renewable energy, it will have to use more natural gas and increase use of gas-fired power. The Taiwan example shows us that we will need fossil fuels in pursuing the option of no use of nuclear power while pursuing decarbonization. We will need to continue necessary investment in fossil fuels. Without nuclear power, the goal to achieve carbon neutrality in 2050 will be still more difficult to achieve. We need a national debate on nuclear power if Japan truly seeks for carbon neutrality. Carbon neutrality and abandoning nuclear power cannot be consistent for Japan.
Building Japan’s Future
Toyoda: Finally, could all of you give your brief recommendations on what Japan should do from now on?
Endo: We are seeing the emerging reality that the UN, the only critical public assistance system, does not work well in the domain of international security. On the possible conflict with China, including territorial issues like the Senkaku Islands, the UN system will not function well either, as it is a permanent member of its Security Council. If it does not work, we should seek mutual assistance. To the extent that the US remains a reliable partner, this mutual assistance system should be strengthened. However, this mutual assistance system may occasionally not work well either depending upon US domestic politics. We will need self-help in this case to some extent including increased defense expenditure.
We will need to examine seriously how limited resources, financial or human, are to be wisely allocated, according to well-defined purposes. We should pursue well-focused and functional self-help. I believe we should put greater emphasis on defense capabilities, instead of a deterrence strategy with middle-range missiles equipped with conventional warheads which may not function, and strengthen our defense of the Southwest Islands.
Takemori: Most Favored Nation and National Treatment, two basic concepts of the WTO, are dead. Russia and China are now differentiated. We are seeing friend-shoring, a concept well accepted. Instead of the WTO rules, we see more discussion on geopolitics. I am glad to see in Japan discussion on fiscal sources of increased defense expenditure finally emerging after a long time. I do not think it is a bad idea for Japanese industries to consider corporate taxes as fiscal sources for increased defense expenditure, because we can take advantage of increased defense expenditure for industrial policy to raise the potential of Japanese science technology and military technology.
Hereafter, the Japanese government must think about what industrial sectors could contribute to enhancing national security and raising international competitiveness. Wasting budgets cannot be allowed. We have to transform our fiscal expenditure to maximize its benefits.
Terazawa: It is extremely difficult to achieve both goals of mitigating global warming and strengthening energy security. It is so in particular for Japan. We Japanese seem to have spent so much time and energy discussing each advocate’s preference or dogmatic arguments such as “Which is better, nuclear power or renewable energy?” But we will need to face reality and seek realistic solutions at this stage to engage with these two big issues. There are no exceptions to this among the government, industries and the people. So whether you like it or not, we will need to utilize all energy sources, renewable energy, energy saving, investment in fossil fuels, nuclear power, etc. Otherwise, we cannot achieve both goals.
Taking advantage of the Ukraine crisis as a wakeup call, the government, industries and people of Japan, under strict economic and natural resources constraints, will need arguments focused on reality to produce solutions rather than dogmas.
Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with the assistance of TapeRewrite Corporation.
This article first appeared on the Junuary / February 2023 issue of Japan SPOTLIGHT published by Japan Economic Foundation. Reproduced with permission.