Putin Still Holds the Cards When It Comes to Global Energy

The much lauded Transatlantic unity against Russia’s war in Ukraine has failed either to save Ukraine or hobble Russia. Judging by the rhetoric coming out of the Kremlin, however, it has fed Russia’s delusions of persecution and given Putin a gnawing appetite for revenge. To create a worldwide food crisis, this has already taken the form of stifling agriculture exports. But beyond the unlikelihood of his aiming a nuclear weapon at a western capital, energy is the most potent weapon in Putin’s reach. He’s using it.

Common wisdom believed that Russia and Europe had a codependent relationship before it invaded Ukraine on February 24. Russia was unable to export energy from Europe without losing its markets. Russian oil and natural gas imports. Russia depends on Europe to buy its oil, gas, and coal. This accounts for 60% of Russia’s revenues and 14% GDP. The annual $430 billion is a significant amount. E.U. The E.U. is dependent upon Russia for 40 percent of its natural gas and 27% of its crude oil. It also depends on Russia to provide 45% of its coal. You win, but you lose.

This balance had functioned essentially as a suicide pact—mutually assured economic destruction if either side tried to break free. These things have now changed. Europe has finally realized that Russia’s energy dependence is a strategic and real weakness. Now, it wants to end the standoff. More accurately, most of Europe is trying to break free of Russia’s energy dominance, but it got to the duel late and its pistol has jammed. Russia is the one who has fired its first shot.

On June 3, the European Union enacted a hard fought ban on Russian energy imports—sort of. Only oil can be affected, provided it is delivered via sea and the restriction will apply as of December 5, 2022. Seaborne refined petroleum products such as naphtha and diesel will then be prohibited for two months. The European Union does not cover oil and other products that are transported by pipeline from Russia to Europe. Natural gas is not included. Coal is also not covered. This ban does not apply immediately but is intended to be prospective. Some countries are exempted, such as Hungary, Slovakia and the Czech Republic.

A comprehensive E.U. embargo agreement was not possible. So the U.S. decided to retain a sanctions relief until December 5, 2022 which will permit European companies to continue receiving payments for Russian oil. Nonetheless, European Commission President Ursula von der Leyen assured the world that despite the narrow scope of the compromise ban it would be “an important step forward.” She promised 90% of Russian oil imports into the E.U. By 2024, it would be reduced. This is partly because 67% of crude oils imports come from seaborne sources. Getting to 90%, however, requires counting Poland and Germany’s non-binding pledges to voluntarily stop buying Russian pipeline oil by the end of 2022. It is likely a dream.

Because the partial oil ban has meaning, it goes where there was none before. It is also remarkable to get recalcitrant pro-Kremlin Hungary agreeing to do anything. Since the invasion of Ukraine, Europe has spent approximately $63 billion on energy imports to Russia. It is not oil that the Kremlin controls, it’s natural gas. But despite continuing negotiations Europe doesn’t seem able to take the tough steps necessary for Russia to end its dependency on gas.

It may be even too late. While Europe is struggling to get on its feet with sanctions, Putin took a retaliatory step. He cut off natural gas supplies to Bulgaria and Poland in April. Russia has been completely ignoring the Yamal gas pipeline which moves natural gas between Russia and Poland through Poland to Germany since April. Russia is reducing its gas exports to Europe, as it has since June 1. Gazprom, Russia’s largest gas company, announced via TwitterIt was cutting off gas flow to the Nord Stream 1 pipeline at 40%. Gazprom blamed Germany’s Siemens Energy for failing to return pipeline compressor equipment that was sent to Canada for repairs, which Siemens in turn blamed on sanctions. Meanwhile, Austria’s OMV has experienced an unspecified drop, Italy’s ENI a 15% drop, Germany’s Uniper a 25% drop with a total German reduction of 60%. Slovakia claims it receives less than half its normal import volume. A 30% decrease in import volumes has been observed in the Czech Republic. France has not received any payments since June 15.

Putin’s logic may be that although severing energy supplies to Europe will hurt Russia, it will likely hurt Europe more if he can land the first blow. European gas storages have reached 52%, which is below the average level for this period of the year. An analysis shows that European gas reserves will be below 69% with Nord Stream 1 at its current 45%. If the winter gets cold and other fuels are in short supply, this will place the continent in an extremely dangerous situation in 2023.

In the shortest time, Europe’s heatwave has led to higher power consumption. This, along with volatile post-invasion markets, has sent natural gas prices skyrocketing. Prices in Europe further spiked on June 16 from the shock of Gazprom’s export reduction announcement. Italy is considering declaring a state of “alert” that would allow it to ration natural gas distribution. The precedent will be followed by other countries.

A string of disasters and maintenance issues have all contributed to the current situation. This has led to a reduction in supply as well as an increase in consumption. Just a sample: An explosion at Texas’ LNG terminal has resulted in a reduction of capacity for a facility which was responsible for 20% of U.S. exports. Damage was done to the Schwechat refinery in Austria on June 3. The U.K.’s Fawley refinery had a fire on June 6, amid labor strikes. A May 28 fire at France’s Donges refinery has kept it offline. Only recently, the Romanian diesel facility was able to come back online following a prolonged repair. Meanwhile, the Dutch Pernis refinery slowly comes back to life after it’s own repairs. In 2022 and 2023, maintenance is scheduled for all refineries in Europe.

This results in a profound energy insecurity, which keeps Europe from taking a strong stand against Russia. It also gives Russia the opportunity to draw and shoot. Putin might also enjoy watching the European energy crisis that he orchestrates affect the U.S. where inflation has combined with refinery blacklogs to drive gas prices over $5/gallon. Even though petrol prices across Asia and Europe exceed $11/gallon in both Asia, Europe, and the United States, Putin’s economic win may be overshadowed by these problems.

The head of Ukraine’s gas transmission system operator, Serhiy Makagon, joined other European voices in declaring the cut in gas exports an “escalation” by Russia. He described action on the proverbial energy battlefield as “getting hot” and predicted that the Kremlin could completely cut off energy exports to the E.U. Other experts disagree, principally because it would be so economically damaging for Russia—money aside, the physics of natural gas mean that stopping exports to Europe would destroy Russia’s natural gas industry.

The Kremlin’s energy retaliation against Europe amounts to a cut-off-the-nose-to-spite-the-face move, undoubtedly. However, there are growing signs that Putin might be thinking about it and could have already put his guns to the test. Europe should begin to prepare for the worst.

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