Dragoman Digest

EU struggles to end dependence on Russian gas

Cost effective alternatives are hard to come by

The EU remains reliant on Russian gas two and a half years into the war in Ukraine, despite concerted efforts to find alternatives. The EU’s consumption of Russian gas has risen 20 percent year-to-date, reversing a trend that saw Russia’s share of EU gas imports fall from 45 percent before the war to 15 percent last year. In 2023, Russia was the third largest source of EU gas imports, sending 42.9 billion cubic metres to the bloc. Austria still relies on Russian gas for 80 percent of its imports. France and Belgium have increased their imports of Russian LNG – some of which flows to Germany. Russia’s share of Spain’s LNG imports has increased from near zero to 23 percent. This comes despite efforts by the EU to wean itself off Russian gas in order to reduce capital flows into the Kremlin’s war machine. Officially, it aims to halt all Russian gas imports by 2027.

The EU has few immediate options to replace Moscow’s supplies. Brussels’ agreement with Russia to receive flows through a pipeline in Ukraine is due to expire at the end of the year. Amid uncertainty over whether the deal will be renewed, many in the bloc are looking towards a supplementary agreement with Azerbaijan. Such a deal would likely require Baku – which lacks spare supply – to swap gas with Russia in order to supply Europe. Any benefits from this arrangement would largely be illusory. Reducing reliance on Russian LNG is particularly difficult, as the EU would need to compete for limited supply against Asian importers. Meanwhile, efforts to supplement gas with renewables will take a significant amount of time, illustrated by the EU’s recent difficulties in building out its hydrogen industry. Lowering demand is hardly a palatable option given the EU’s industrial travails. Ultimately, the EU will likely be reliant on material volumes of Russian gas for the foreseeable future.

Indonesia moves to ban Apple and Google phones

Indonesia’s muscular trade practices may have limited applicability across sectors other than nickel

Indonesia’s ban on the sale of Apple’s iPhone 16 and Google’s Pixel reflects a doubling down on the pre-existing strategy of aggressively promoting local content. Less than a month after his inauguration, President Prabowo Subianto banned the US companies’ latest models based on their apparent failure to comply with local content rules. Though it had not always been enforced, Indonesia has a specific requirement for handsets and tablets sold in-country to contain at least a 40 percent share of locally sourced raw materials. While Apple operates four developer academies in Indonesia, its suppliers have a very limited footprint. With 354 million active mobile phones and a substantial middle class, Indonesia represents a lucrative market.

Prabowo’s ban is symptomatic of a broader economic playbook which was used with increasing effect during the latter years of the Jokowi era. In 2020, Indonesia prohibited raw nickel exports. China, which imported 90 percent of Indonesia’s raw nickel at the time of the ban, has since invested over US$30 billion into Indonesian smelters and processing facilities. Indonesia has tried to emulate this strategy with other commodities, a policy that Prabowo has promised to continue. In 2023, Jakarta flagged imposing export bans on copper, iron ore, lead, bauxite and zinc. Indonesia’s share of global reserves for these commodities is typically no more than five percent. For nickel, the figure is over 50 percent.

If the intent of the mobile phone sales ban is to attract local electronics manufacturing, this decision is hardly a portent of a favourable policy environment. Apple has reportedly responded to Prabowo’s policy with a limited offer to invest around US$10 million in parts manufacturing alongside suppliers. With fierce competition for foreign investment from neighbours including Vietnam and Thailand, Indonesia risks losing out. Limited local content rules have allowed both countries to attract investment from 24 and 35 Apple suppliers, respectively.

Taiwanese industry reels from high electricity prices

Energy costs hit by reliance on fossil fuel imports and slow renewables buildout

Companies in Taiwan are experiencing a surge in electricity prices, pushing up operating costs for the energy-intensive industrial sector. One impacted company is semiconductor manufacturer TSMC, which expects next year to pay more for electricity in Taiwan than in any international location where it operates including Japan, the US and Germany. State-owned Taiwan Power Company (TPC), which has a monopoly on electricity distribution, has doubled average electricity prices in recent years. To protect more sensitive parts of the Taiwanese economy and households, TPC has loaded cost increases on to industry. In April, TPC hiked electricity prices for large industrial companies such as TSMC by 25 percent, while average prices around the country went up by 11 percent. Price increases go against the grain of Taiwan’s traditional strategy of using low electricity prices to spur manufacturing growth.

A multitude of factors is causing a surge in Taiwan’s electricity prices. Taiwan imports all of its coal and LNG, which account for over 80 percent of energy supply. This has exposed Taiwan to volatile international coal and LNG markets. Onshore wind and solar are hampered by Taiwan’s low levels of solar radiation and wind speeds. The offshore wind industry shows potential but is facing major delays. Taipei’s strict local content requirements, which demand 60 percent of components be sourced domestically, have driven up the price of government projects to an untenable level. The phaseout of Taiwan’s nuclear industry, which is set to be complete by May next year, has placed additional pressure on supply. For TSMC, the costs are expected to be manageable. The tech titan expects its gross margin to be reduced by only one percentage point next year. Eventually, higher costs and pressure from climate conscious customers may increasingly come to influence TSMC’s overseas expansion strategy.