Russia Forces Energy Crisis in Europe: How to Restore Stability

December 26, 2022
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Due to the full-scale Russian invasion of Ukraine, many countries worldwide have experienced an energy price shock. The war in Ukraine is often cited as the most prevalent cause of the energy deficit. However, the truth is that the energy crisis did not start when Russia invaded Ukraine in February 2022 – it has been going on for years. Still, it has always been under the influence of the Russian government, and it has also been a result of their attempts at gas blackmailing.

In addition, by orchestrating targeted attacks on Ukrainian electrical and heating infrastructure in October, both with cruise missiles and Shahed136 drones, Russia directly threatened the stability of the European electricity market by causing widespread damage to Ukraine’s energy distribution network. Russia hit the head office of Ukrenergo which is the state-owned company that is responsible for managing the whole Ukrainian power grid. Ukrenergo is also a member of ENTSO-E.

The President of the European Commission Ursula von der Leyen said that Russian attacks on energy infrastructure are “pure terror attacks.” She also proposed a strong legal package to address the energy crisis in the EU including pooling for joint purchase of gas at the EU level, saving energy, sharing gas, showing solidarity across the EU, and price mechanisms to address spikes.

Gas prices have always fluctuated, depending on various factors. On the one hand, most countries are still recovering from the COVID crisis. Governments are trying to restart the economy as soon as possible, and this process requires sufficient energy resources. Accordingly, countries are forced to compete for available energy resources in the market, and this competition is driving up the prices of fossil fuels around the world. On the other hand, world gas suppliers do not have enough capacity to increase production quickly (or, in the case of Russia, they intentionally sabotage the process).

Russia is a major player in the global energy market. Russia is one of the world’s top three crude oil producers, and it vies for the top spot with Saudi Arabia and the United States. One way or another, gas prices change yearly. Still, the fact that Russia has failed to fulfil the terms of gas contracts this summer and is constantly reducing supplies of natural gas to Europe made this year’s price jump particularly painful.

Source: https://ycharts.com/indicators/europe_natural_gas_price

Inflation continues to grow, affecting the cost of living in all European countries. Their governments are constantly looking for new ways to protect households and industries from sharp increases in energy prices. As noted by Euronews, “inflation jumped to a new all-time high of 8.9 per cent in July in Europe for the 19 countries bound by the Euro, fuelled by rising energy costs.”

Forecasts from various sources sound roughly the same: experts suppose that there is a considerable risk that the crisis will continue not only this winter but also for the next few years. This was stated by the Shell management and the International Energy Agency. According to the IEA’s latest quarterly Gas Market Report, natural gas markets worldwide have been tightening since 2021. Global gas consumption is expected to decline by 0.8% in 2022, and the market tightness is expected to continue well into 2023.

“The outlook for gas markets remains clouded, not least because of Russia’s reckless and unpredictable conduct, which has shattered its reputation as a reliable supplier.”

Keisuke Sadamori, IEA Director of Energy Markets and Security

The situation is unstable, so its further development depends only on the joint efforts of the European governments. For decades, Russia has been developing a system of energy blackmail in Europe, creating dependence on Russian gas and manipulating people’s basic needs. The problem is that many European officials considered Russia a reliable, adequate partner who cared about the market share and profitability of its oil and gas industry more than geopolitical blackmail. Meanwhile, the Kremlin led by Putin was building long-term plans for gas dominance in Europe all this time. Cheap gas came with strings attached.

Source: CREA

Contrary to existing opinion, the cessation of hostilities in Ukraine will not save Europe from the gas crisis. Europe became dependent on cheap Russian gas way earlier. Now Europe must find a way out of this trap while balancing security and local economic challenges. The solution to the problem would be to review the mistakes made over the last decade and build a new, more durable system that will not depend on the dubious goodwill of the Russian authorities. Questions like “what is currently happening in the world,” “how is the current state of affairs directly impacted by the policy that Russia has pursued for decades,” and most importantly, “what is the most acceptable way for Europe to get out of this situation” are the key topics to discuss on the matter.

Which countries are most dependent on Russian energy supplies

Until now, Russian gas supplies to Europe have never stopped, no matter what crimes the Russian authorities committed. For Germany, Russia’s main business partner in the supply of gas to Europe, this issue has always been an economic project. The state had almost no influence on the gas market. Russian gas flowed to Europe after the USSR invaded Afghanistan (1979), during the Russian war in Georgia (2008), and after the invasion of Ukraine and the annexation of Crimea (2014). There was never any talk of giving up on Russian gas. On the contrary, the Russians managed to blackmail or corrupt the governments of many countries, threatening them with an energy deficit and forcing them to pay more.

Germany has always been and still is the most dependent of all European countries on Russian gas. The reason lies in a series of political and economic decisions that have been made since the 1990s when Germany’s energy security was in the hands of large corporations. The history of Germany’s dependence on gas began in the 1950s and reached its climax during the leadership of Angela Merkel. The idea was to turn the country into a reseller between Russia and the rest of Europe, getting profits from the difference in gas prices.

Source: Daily Mail

In 2005, Merkel’s government began encouraging gas purchases without being tied to oil prices, and Russia provided discounts on long-term contracts. The next step was the active promotion of abandoning nuclear energy, which was only partially caused by the Fukushima accident in 2011. Thus, Germany became almost entirely dependent on Russian gas, relying on the “honesty” of this partner and its stable economic position. Currently, Germany is trying to develop a plan to help reduce its dependence on Russian natural gas to zero by 2028. This plan has already proved to be successful. Gas storage facilities in Germany are currently 96% full.

A detailed description of German-Russian gas relations can be found in an investigation conducted by Der Spiegel.

Other European countries are closely following Germany in Russian gas consumption. Until February 2022, Austria was receiving almost 90% of its gas from Russia, the Czech Republic – 86%, Finland – 68%, Italy – 41%, the Netherlands – 36%, and Hungary is still wholly dependent on Russian natural gas supplies, according to the IEA. Slovakia is highly reliant on Russian gas too. Recently, Slovakia’s Prime Minister Eduard Heger said that soaring electricity costs had left the country’s economy at risk of “collapse,” as reported by the Financial Times.

On the other hand, many countries have already reached noticeable progress on the way to independence from the Russian Federation. For example, Finland and Estonia have managed to reduce energy imports from Russia by 50% by mid-summer 2022. Significant progress is being made by Lithuania, which in April 2022 refused to buy Russian gas. In May 2022, Lithuania got rid of all Russian energy carriers. Russia cut gas supplies to Poland in April 2022 when the country’s government refused to pay in roubles. On October 1, 2022, gas started flowing to Poland through the new “Baltic Pipe” pipeline from Norway via Denmark and the Baltic Sea, as reported by Reuters. Small volumes of Russian gas are still entering EU countries, as Austria, Hungary, and Italy are still directly buying gas from Russia. Other countries like Bulgaria are still receiving large amounts of Russian gas from third parties, as reported by NGI.

Russian “methods” of controlling energy prices by creating a deficit

The main aspects of conducting business “the Russian way” are deception, blackmail, and intimidation. This became evident long before the full-scale invasion of Ukraine in 2022, but Europe’s dependence on Russian gas was too strong to begin actively reacting to these crimes. Energy prices and supply volumes: both factors strongly influence European countries’ economies, enough to destabilize them.

“Russia is blackmailing us. Russia is using energy as a weapon. Therefore, in any event, whether it’s a partial major cut-off of Russian gas or a total cut-off of Russian gas, Europe needs to be ready.”

Ursula von der Leyen, the European Commission President

For Ukraine, which has been a critical player in the transit of Russian gas for quite a while, this blackmail had become routine since the 1990s when Russia used energy prices to force the Ukrainian government to give up nuclear weapons. Basically, Ukraine has been receiving threats of price increases for the past 30 years.

Since the early 2000s, Russia has been using gas to blackmail Latvia, Belarus, Lithuania, Moldova, Armenia, the Czech Republic, Kyrgyzstan, Poland, Slovakia, Germany, Turkmenistan, and even Venezuela. Propaganda, corruption, and terror are the three main principles on which the “Russian World” rests. Fortunately, European leaders are finally openly admitting this, refusing to further believe in the false-positive image of Russia, often created by Russian propaganda.

Source: Statista

According to Italian Foreign Minister Luigi Di Maio, Russian propaganda wants to make people believe that the problem with energy prices is sanctions.

“But we understand that it is Russia that is blackmailing Europe with the gas issue. That is why, together with united Europe, we are fighting for the introduction of limits on the price of gas and the diversification of sources,”

Di Maio said.

At the same time, during the record energy prices in Europe, Russia was spotted burning an estimated $10m (£8.4m) worth of gas every day, which would previously have been exported to Germany. The Russian authorities severely reduced gas supplies to Europe in mid-June 2022, causing an energy deficit. But the gas itself needs to be used somewhere, so a large gas torch was lit up in the Leningrad Region last summer, visible even from Finland.

In 2021, energy prices were also at record highs, and Russia actively took advantage of this, blackmailing European countries with gas starting from Moldova. In September 2021, the country was short of Russian gas, and a critical situation occurred. Russia, without even concealing it, directly blackmailed Moldova, stating that their only condition for gas supplies would be Moldova’s refusal to implement the Association Agreement with the EU. The country started purchasing gas outside the Russian Federation for the first time. Neighbours such as Ukraine and Poland tried to help Moldova get out of the crisis by providing gas supplies on credit.

Being an authoritarian country, Russia uses gas as a tool in its strategy of “Divide et impera,” as happened with Hungary in 2021. Budapest was offered a profitable contract bypassing Ukraine, and they agreed, provoking problems for the Ukrainian economy. Hungary is not the only example of a country that was forced to such behaviour, relying on a Russian “candid” partnership. Another example is Germany’s position regarding “Nord Stream 2”.

Source: Le Monde

“Nord Stream 2” was meant to be completed at the end of 2020, but in mid-December 2019, the US State Department imposed sanctions on the Russian companies that were building the gas pipeline. These sanctions were caused by the Russian invasion of Ukrainian territories in 2014: Luhansk and Donbas regions, and Crimea. In May 2021, Joe Biden announced that the administration had decided to lift sanctions on the pipeline construction because the project was almost finished and sanctions would harm the US’s relations with Germany and other European allies. Both sides have pledged to take action against Russia if it tries to deprive Ukraine of gas transit, but most likely Russia would have succeeded in achieving its goal of removing Ukraine from the scene if “Nord Stream 2” had been launched.

The accident at the “Nord Stream 2” gas pipeline, and the Siemens turbine that Germany demanded from Canada, are blackmail tools used by Russia. The country uses them for not fulfilling the fuel supply obligations specified in the long-term contracts with Germany and other European countries. At the very beginning of the gas war, the Ukrainian operator of the gas transportation system insisted on the need to redirect the supply of gas from “Nord Stream 1” to the Ukrainian transportation route to avoid such manipulations from the Russians. If European business had listened to this, the arguments about the unreliability of Russian gas pipelines, which can easily be used in a gas war with the EU, would not have become so relevant.

How to get out of Russia’s “gas trap” and reach energy stability

Although the world is still asking whether the sanctions imposed against Russia after the invasion of Ukraine are working, relevant data is finally emerging. In April-May 2022, Russian business profits from selling oil, petroleum products, and gas were extremely high. Still, in the summer of 2022, the revenues of the Russian budget were already lower compared to 2021. That is, it still needs some time for the sanctions to become effective. However, the effect will be even more visible when the embargo on Russian oil begins (December 5, 2022) and petroleum products (February 5, 2023). Another factor is that Russia is forced to sell energy carriers to its Asian partners at significantly reduced prices.

The European Union’s reliance on Russian gas and the risk that Moscow could cut supplies has pushed the bloc to target an 80% filling level of its storage sites by November 1, 2022, in time to meet high demand during winter. The chart below shows the percentage of gas filled in EU storage sites.

Source: Reuters

Since the highs of August, the price of gas in the EU has fallen by more than 60%. Gas storage facilities are currently 93.4% load on average across Europe. This is +4.1% more compared to the 5-year average. As we can see, the situation has been stable and positive since August. This means that Russian blackmail is not working. Moreover, Olaf Scholz visited Saudi Arabia, the UAE, Kuwait, and Norway to secure more gas shipments.

In addition, some European countries are much less dependent on Russian gas and can already support others. For example, Spain has heavily invested over the past decades into its capacity to unload and regasify liquefied natural gas. Now the country has little dependence on Russian energy supplies. With its undersea pipeline links to Algeria and vast network of LNG terminals, Spain may help Europe reduce its reliance on Russia. Spanish Energy Minister Teresa Ribera said that “it makes sense” to use this capacity to “benefit our neighbours” and secure gas supplies.

Also, Germany has finally made a decision to temporarily suspend the closure of two nuclear power plants in an effort to strengthen its energy security after Russia stopped supplying gas to the country.

According to IEA’s latest report, in addition to diversifying supply, the European Union and its member states have taken other steps to increase gas security and gain energy stability, such as setting minimum storage obligations and implementing energy-saving measures for the coming winter.

Of course, the government of every European country is trying to reduce the burden on the population. Currently, the most common tactic is to apply drastic measures and freeze energy prices, as France does or the British government plans on doing. A similar statement was made by the government of Greece.

“After months of deliberation and deflection, it is time for Europe to place a cap on natural gas prices. Russia has weaponized energy, and its clear aim is to destabilize our societies. Fifteen member states have clearly expressed their support for capping prices. Europe should take back control of its gas market.”

Kyriakos Mitsotakis, Prime Minister of Greece

The price threshold will prevent a sharp increase in oil prices, which may occur as a result of the EU’s complete ban on the supply of Russian oil by sea beginning December 5, 2022. Markets are already signalling price stabilization and even predicting their decline.

Olena Pavlenko, President of DiXi Group in Ukraine, believes that Russia will continue to use gas and energy crises to blackmail Europe. Regarding the diversification of gas supplies to the EU, the countries will have to additionally build LNG terminals and connectors between Western and Eastern Europe. In addition, Europe will try to increase gas supplies through pipelines from Norway and Algeria. A big bet will be placed on increasing LNG supplies from the United States and Qatar.

Source: BloombergNEF

Also, Olena Pavlenko believes that Poland and Bulgaria should submit to arbitration Russia’s violations of gas supply contracts. Both countries have every chance to win whether it is a contractual arbitration or a Stockholm arbitration. As a result, a situation will occur when Russia will be forced to supply gas as promised, will pay extra for this gas, and for the fact that Russians did not fulfil the terms of the contract. In general, the victory of Ukraine in the war started by Russia should be considered a strategic goal for European countries to reduce the financial burden of an energy deficit on the budget.

Conclusions

The European Union is taking active measures to overcome the energy crisis that is partially resulting from Russia’s war against Ukraine. On October 5, 2022, there was a plenary session of the European Parliament where the consequences of the Kremlin’s escalation in its aggressive war against Ukraine were considered. European Commission President Ursula von der Leyen mentioned measures such as “increasing the security and diversification of energy supply routes, implementing a common energy procurement policy, and coordinated energy saving measures in the Single Market.”

Source: Boell

It is worth remembering that energy stability can only be reached by stopping Russian aggression first. Otherwise, the current gas war will become a protracted and unpredictable process. Plus, Russian domination has never led to the prosperity of conquered lands. Transnistria, Abkhazia, South Ossetia, the annexed Crimea, and the occupied Donbas in Ukraine are experiencing the terrifyingly rapid degradation of these territories. One may confidently claim that not only oil and gas but also terror and demotion are the primary “goods for export” the Russian Federation offers.

“Assistance to Ukraine is the best investment in Europe’s long-term security, as well as international peace and security,”

states Mark Savchuk, UA PR Army coordinator, an expert in the energy sector, GR specialist, and Head of the Oversight Committee of the National Anti-Corruption Bureau of Ukraine.

“Attacks on Ukrainian energy infrastructure, explosions at the Nord Stream pipelines, Russian spies taking pictures of European energy sites – all these events are leading us to one conclusion – that the European energy crisis is the “last joker” that Putin is going to play to disrupt unity within the EU and sabotage the support of Ukraine. Russians are even stating this out loud on their state TV: “We plan to freeze Europe,” – Mark adds.
“A successful counter to Russian strategy is achieving energy independence from Russian oil and gas and military aid to Ukraine. Only by fully committing to these two goals will Europe finally be able to break away from the constant Russian blackmail and the corruption it spreads. At the same time, by providing military aid to Ukraine, Europe will guarantee peace to its borders since Russia will simply have no army left to fight in Europe.”

The war that Russia has unleashed in Ukraine affects the economies of the countries directly involved in it and the world in general. Russia’s invasion is already causing severe damage to many countries and entire industries, which is only confirmed by the energy crisis Europe is suffering from.

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Bogdan Logvynenko

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Dariia Lytoshenko

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