In a speech delivered to the representatives of the European Union, the President of the European Commission, Ursula von der Leyen, called on the countries to reduce the consumption of Russian gas by 15% and to stock up for the winter. This is in view of the extreme moves of the Kremlin, which ordered Gazprom, the Russian gas monopoly, to stop the flow of gas to the continent.
Even earlier, Brussels accused Moscow of using the energy supply as a political weapon and in revenge for the economic sanctions imposed on it by the West, but Vladimir Putin continues to claim that the sanctions are the ones causing problems with the gas supply. Over the past few months, Russia has occasionally frozen the transfer of gas to some of the EU countries, and has even clarified that it will not renew it due to “pipeline malfunctions”. This week, after the attacks on the gas pipelines in the Baltic Sea, tensions rose and the exchange of mutual accusations between Washington and Moscow increased.
It is too early to draw conclusions, but beyond the damage to the critical infrastructures and the ecological damage caused by a huge leak of gas into the sea, it is already clear that this is the most serious energy crisis since 1945, which has long-term economic and geopolitical implications and consequences.
Energy dependence
In recent years, the discussion in the European Union regarding increasing energy security and reducing dependence on the import of energy sources from Russia, mainly oil, coal and natural gas, as a main source of supply for the continent, has increased. The reliance of many of the 27 EU countries on the Russian gas supply and the lack of a common, uniform and coherent policy regarding the diversification of gas import sources (for example, from Qatar and Turkey, as well as liquid gas from the USA and Australia) have turned the natural gas resource into a key strategic factor in the war in Ukraine, despite The huge energy gaps between them.
For example, while the Czech Republic, Hungary and Bulgaria consume about 60% of their gas from Russia – Germany and Italy import about 45% of their consumption from Russia, while countries such as Sweden, France and Spain make do with about 20% or even less. Poland, for example, relies on coal as a major source of energy, Spain depends mainly on gas supplies from Algeria, while France has been relying on its own nuclear energy for years. However, despite the differences between the countries, looking at the relations with Russia from an overall perspective shows that it is mutual dependence with Russian dominance.
While Moscow is financially dependent on Europe and needs gas revenues (estimated at 40% of the budget), European governments depend on it energetically and cannot live and function without gas.
Against this background, many in the West refused to believe that Putin would damage supplies following the struggle in Ukraine. But the worsening of international sanctions against Russia – the world’s largest exporter of natural gas (260 billion cubic meters per year), which is responsible for supplying 160 billion cubic meters per year to the European Union (which is about 45% of the total imports for all the countries of the continent, at a daily cost of 118 million dollars ) – turned gas into a political weapon and a means of economic blackmail in the hands of Putin against the West. It is true that until the outbreak of the war, Russian gas was considered cheap and available, but unlike the coal and oil markets, where there is a lot of competition, a large part of the EU countries have no alternatives to Russian gas.
The current situation, pushing European economies into the worst crisis since 1945, gives Russia a strategic advantage and great geopolitical power. This position is even stronger, since most of the natural gas flowing from Russia to Europe is not supplied in liquid form (Liquid Natural Gas, LNG) but through a network of pipelines that runs, among other things, in Belarus and Ukraine, as well as through Nord Stream1 (a submarine pipeline in the North Sea, which is considered the main gas carrier) and Nord Stream 2 (an underwater pipeline in the Baltic Sea, which flows gas directly to Germany), which are under the control of Moscow.
Russian monopoly
As tensions increase, Putin dismissed the claims of manipulative use of gas as a political weapon and even accuses Europe of being responsible for the serious supply disruptions. From his point of view, stopping the flow of gas will cause European economies to suffer more damage than Russia, to suffer more in the winter and in the coming years – which could lead to the lifting of sanctions.
And so, motivated by cost-benefit considerations, the head of the Kremlin works to enrich the Russian economy and continue to start the Russian war machine. Publications from the “Financial Times” show that the cessation of gas supply not only does not harm the revenues of Gazprom, the gas monopoly that owns 71% of Russia’s gas reserves – but the opposite. In the immediate time frame, she significantly increases her income from it.
If before the war Gazprom supplied the continental countries with an average of 480 million cubic meters of natural gas per day, today the supply has been reduced to only 84 million cubic meters. The reduction in supply led to a sharp jump in gas prices, which increased fivefold or more since the beginning of the war. These significantly increased the scope of the company’s revenues, which are expected to reach $100 billion this year (compared to $54 billion last year), as well as its net profit, which reached $41.75 billion in the first half of 2022 (compared to only $29 billion in the entire fiscal year 2021) .
The worsening of the energy struggle and the reduction of the total gas supply to Europe by about 85% since the beginning of the year have led to a severe shortage in the global gas market and severe damage to the EU countries. In recent months, Putin has ordered the cutting off of exports to Poland, Bulgaria, the Netherlands and Finland, a cut in supplies to Austria, Italy, Slovakia and the Czech Republic, as well as the freezing of the Nordstream2 gas pipeline project. Moreover, after self-initiated and partial outages in recent months due to “pipeline malfunctions”, Moscow officially announced at the beginning of September the closure of Nordstrom1 indefinitely, as a response to the statement of the Forum of the Seven Industrialized Countries (G7) regarding the limitation of Russian oil prices.
And so, parallel to the strengthening of the political-military conflict in Ukraine, the psychological war against Putin is increasing and the energy-economic struggle is intensifying. Moscow’s control of the gas supply, the extent of the export quotas and the prices of the gas supplied to the continent, along with the demand to convert the payment for it from dollars to Russian rubles, intensify the dimensions of the crisis. If this is not enough, then the damage to the gas pipelines in the Baltic Sea due to attacks and explosions, along with the enormous ecological damage caused by the gas leaking into the sea, exacerbates the tensions and escalation even more. It appears that this is a critical low point, in the most severe energy crisis in Europe in eight decades.
Ukrainian army (photo: social networks)400% per year
The energy struggle carries enormous economic meanings and consequences, which go beyond the borders of the continent. According to the estimates of the International Monetary Fund, following the war, the growth rate of the world economy is expected to decrease from 6.1% in 2021 to 3.6% in 2022, and also in 2023. A total decrease of 1.7% in the GDP of the EU countries and damage mainly to Germany and Italy – the two strongest economies in the Eurozone (along with France) – are a very important factor contributing to this.
Also, against the background of the jump of more than 400% in gas prices since the beginning of the year and the fact that the EU countries consume about 17% of the world’s energy, the global energy market is going through strong upheavals. In view of the reduction in the use of gas, the use of coal, oil and nuclear reactors is increasing, with the cumulative effect of all of these leading to an increase in energy prices (electricity, industrial gases, fertilizers and chemicals) which push prices up and increase inflation throughout Europe and the world. And so, the resulting energy crisis leads to a deep recession on the continent. This is a situation that requires thinking and reorganizing on the part of the EU countries, given the enormous importance of natural gas as a critical component in their economy and industry.
The lack of alternative sources of gas at least until 2025 and the complete cessation of the flow of energy from Russia cause great concern among the decision makers. It is already clear that the shortage of gas and its high prices have a differential effect on the growth rates of each of the Union’s economies, on the scope of their trade and investments, as well as on the nature of relations and the extent of connections between the countries and outside them.
For example, IMF reports show that the more the dependence of the countries in the center and east of the continent, primarily Hungary, Slovakia and the Czech Republic, on Russian gas to produce electricity, the greater their vulnerability and the greater the chance of a reduction in their GDP by about 6%. In view of the worsening of the crisis, the President of the Commission The European Union issued a call to the countries of the Union to reduce industrial and domestic gas consumption by 15%, to stock up for the winter, to increase cooperation between the countries and the use of liquid gas, and to locate alternative sources of energy, such as Norway, Azerbaijan, Qatar, Algeria, Turkey and Israel.
long-term consequences
Russia is rich in a variety of natural treasures and energy sources: it ranks first in the world in terms of the extent of natural gas reserves and second in terms of the extent of gas production, after the USA. Its dominant position in the energy market, including the global gas market, gives it tremendous economic and geopolitical power, which it leverages in the struggle In the countries of the Union. Putin who “sits on the taps” takes advantage of their vulnerability and dependence on Russia to influence the global energy economy, to crush European economies and to increase the political polarization and economic disparities between the countries. In the absence of alternatives to Russian gas in the near term, Putin is aware of the extent of the damage caused to the local economies and is working to exacerbate it.
From Putin’s point of view, stopping the flow of gas to Europe is evidence of Moscow’s enormous influence on the world economy and politics, which gives it an important strategic advantage in the fight against the West. Since Putin is motivated by an abysmal hatred for the USA and Europe, he works at any cost to change the world order while violating the status quo and the existing order. In this view, since he does not seek means and is ready to “go to the end”, Putin works to expand Russia’s influence even at the cost of sabotage and unprecedented explosions in the Nordstream 1 and 2 pipelines, if only to maximize the damage to the European Union.
Russia is also the world’s leading exporter of other important energy sources, and is responsible, among other things, for the supply of 30% of the titanium and 40% of the palladium in the world (essential for industries and advanced technologies in the West). A close look at his moves so far shows that there is a chance that Putin will also use them as another weapon/means of blackmail. With his back against the wall and well aware of Russia’s global isolation, the energy crisis is a dangerous situation that may provide him with legitimacy, and even be an incentive for further worsening of the conflict against the West.
The author is an expert on geopolitics and international crises
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