Vladimir Putin’s economic campaign to force European governments to stop supporting Ukraine by severely damaging their natural gas supplies appears to be a failure, with gas prices plunging, Russian government funding deteriorating and plans being prepared in Europe to ease pressure on households and companies.
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Russia’s long-term success in the economic battle against Europe is seen by both sides as essential to resolving the conflict in Ukraine. But signs that Putin’s economic strategy is failing are emerging alongside significant battlefield defeats and at the same time that the Russian president has been forced to acknowledge Indian and Chinese leaders’ concerns about the invasion.
European governments say Putin is betting that cutting natural gas supplies will hurt European households and businesses and then populations will oppose the governments’ current policies of imposing sanctions on Russia and supporting Ukraine with arms and financial aid.
It is not yet certain that Russia is losing this economic battle. But the consensus is growing among senior officials, energy experts and economists who think that despite the difficulty that Russia’s actions will cause in many places, Putin will fail and Europe will make it through the coming winter without running out of gas. Once winter is over, Putin’s influence over Europe’s energy stocks will be severely damaged, they say.
Looking for an escape route from the endless draw on the battlefield
Putin played his biggest energy card in late August when he halted natural gas shipments to Europe until further notice through the Nord Stream pipeline. “This is his moment. This is the peak point of leverage and he is fully engaged,” said energy historian Daniel Yergin, vice chairman of S&P Global.
Ukraine’s successes on the battlefield make it difficult for European governments to change policy, strategists say. “If people felt there was a never-ending draw, they would look for a way out,” said Lawrence Friedman, emeritus professor of war studies at King’s College London. For now, Friedman added, “nobody thinks the only way out of this is to give in” to Putin.
Russia’s energy bonanza during its war against Ukraine – when its oil and natural gas prices soared – appears to be fading, as gas exports have fallen sharply and oil prices have plummeted. Brent oil, the global benchmark, dropped from more than $120 per barrel in June to around $90 per barrel, which means that Russia is charging about $65 for its barrels.
Russian government data showed that the government ran into a large budget deficit in August. The government reported that the budget surplus was reduced to 137 billion rubles, or about 2.3 billion dollars, for the first eight months of the year, compared to about 481 billion rubles in July since the beginning of the year.
What will winter look like in Europe without Russian energy?
European governments managed to secure an alternative supply of natural gas to replace some of the Russian gas. The use of gas is also expected to fall in what economists call destruction, or the closing of factories and the reduction in household consumption due to the high prices.
Last week, the European Union put forward proposals – which have not yet been agreed by governments – to ease the pressure on consumers, including a mandatory reduction in electricity use. Some energy experts fear that direct government subsidies for energy will undermine any effort to reduce demand.
The coming winter is the most vulnerable period for European governments. If the season is harder than usual, leading to increased energy use, optimism may evaporate. Maintaining unity in Europe during the winter may require some countries to give their gas reserves to others.
One price Russia is paying is the loss of its Soviet-era reputation as a reliable gas supplier that does not use the resource as a political weapon. “Now they are using it not only as a political weapon, but as a weapon of war… It completely erases their credibility as a reliable supplier,” Yergin said.
One of the signs of the decline in Russia’s influence is the change in the trend in gas and electricity prices, which rose after the announcement of the closure of Nord Stream, but soon returned to their course.
On Friday, wholesale gas traded at around 185 euros per megawatt hour. This is a price that is three times more expensive than a year ago and more than double the price at the beginning of June when Moscow began to damage supplies through Nord Stream. But this is still a price 45% lower than the peak that was on August 26 and returns to the levels that were at the end of July.
Electricity prices have fallen by almost half of their peak. “The situation seems to be stabilizing,” said David Dan Hollander, co-founder of the Dutch energy trading company DC Energy Trading, pointing to the fact that gas reserves in central Europe are almost full, the closure of energy-guzzling fertilizer plants and smelters, and the installation of import terminals in the Netherlands and elsewhere for liquefied natural gas .
The new terminals are among the steps European governments have taken to diversify away from Russian supplies so they are never again at Moscow’s mercy.
There is no trace of any protest that would lead a European government to capitulate to Putin
Alternatives to Russian supplies – including liquefied natural gas from the US and other countries – are helping to fill some of the gap created by Russia’s shutdown of Nord Stream. Underground gas storages have reached 85% of capacity, surpassing the target set by the European Union to fill 80% by end of October
Simon Quijano Evans, chief economist at Gemcorp Capital, a London-based investment fund, said that even a complete halt in Russian supplies – Russia continues to export about 80 million cubic meters per day to the EU through Ukraine and the TurkStream pipeline since it closed Nord Stream – to the EU probably There is enough gas for the coming winter. “It’s going to be a challenge and depends on the weather, but it’s definitely achievable,” he said.
He calculates that the average consumption of natural gas in the European Union between October and March, from 2018 to 2021 was an average of 256 billion cubic meters. He estimates that gas sources – from places other than Russia and 92 billion cubic meters that will be drawn from reservoirs – contain about 242 billion cubic meters “K. The gap can be covered by savings – lowering the central heating thermostats by one degree should save 10 billion cubic meters – and other possible sources.
As the European Union and national governments like Britain take steps to ease the blow to consumers and companies, “I don’t see the kind of social protests that will force governments to capitulate to Putin,” said Stefano Stefanini, a former Italian diplomat and foreign policy adviser to former president Giorgio Napolitano.
He said that Italy, where elections will be held on September 25 and the polls point towards the formation of a center-right government led by Georgia Maloney, is not expected to interfere, even though some leaders of right-wing parties such as Matteo Salvini and Silvio Berlusconi, who are expected to be in the coalition that will be formed, are close to Putin.
Another factor that suggests European governments won’t back down, Friedman said, is that the Russian president — who has linked the resumption of gas supplies to the lifting of sanctions against Russia — hasn’t given European governments a softer withdrawal option.
The evidence of the abuse of civilians by Russian soldiers in Ukraine is hardening European positions, the British researcher said, and Putin is not offering the Europeans any deal they can realistically support. “It is not clear what he expects Europe to do,” he said.
If Europe doesn’t change direction, “then it will end up weakening Russia,” he said.
-Joe Wallace and Giorgi Kanchev participated in the preparation of the article.