Mutually assured disruption: Energy as a weapon in the Ukraine crisis

American politicians have a habit of describing Russia’s reliance on its oil and gas exports as a fatal weakness. “Their economy doesn’t produce anything that anybody wants to buy, except oil and gas and arms,” President Barack Obama scoffed in 2016, as if those weren’t among the world’s most in-demand commodities. More recently, Republican Utah Sen. Mitt Romney dismissed Russia as a “gas station parading as a country.” And at a press conference with German Chancellor Olaf Scholz this week, President Joe Biden gave his version of the argument. “What everybody forgets here is Russia needs to be able to sell that gas and sell that oil,” he said. “It’s the only thing they really have to export. And if, in fact, it’s cut off, then they’re going to be hurt very badly, as well.”

No question — Russia is dependent on oil and gas sales; revenue from those sales accounted for more than a third of its budget last year, and these commodities have been key to its recent reemergence as a global power. But this also smacks of wishful thinking. For one thing, several of Russia’s buyers for all that oil and gas sit in Europe and would be punished by any crackdown on Russian exports. More broadly, the West has been trying to use economic coercion to deter Russian President Vladimir Putin from his geopolitical ambitions for well over a decade now, and in that time Russia’s influence — along with its energy windfalls — have only grown.

As the showdown over Ukraine nears its crucial juncture, tensions over energy sources are boiling as well. Biden made his remark in response to a question about whether Russia’s role as Europe’s most important supplier of oil and natural gas gives it leverage in the Ukraine standoff, limiting the punitive sanctions the West might impose if Russia decides to invade. Critics of the Scholz government, at home and abroad, have charged that Germany’s reliance on Russia for its energy needs are the reason it hasn’t been as tough on Russia as some of its allies.

It’s true, as Biden suggests, that the energy weapon is a double-edged sword. If Putin wants to use it, Russia will have to absorb significant pain as well. Among the many questions in this tension-filled moment for Europe, this one looms large: Will Putin decide the pain is worth it?

The pipes that bind

We’ve seen this movie before — or at least a version of it. Russia has, on several occasions, shut off gas supplies to Europe over pricing disputes, and since 2014, Western Europe has been in the awkward position of enforcing sanctions against its main energy supplier.

For years, the nations of Europe that rely on Russian oil and gas have discussed the need to wean themselves off of Russian supplies, but kicking the habit has been difficult.

“They’re getting more gas from alternative sources, and there’s more renewables and more energy storage, but they’re still dependent to a great extent on Russian gas,” Richard Morningstar, a former U.S. ambassador to Azerbaijan and founding chairman of the Atlantic Council’s Global Energy Center, told Grid.

The European Union currently relies on Russia for about 35 percent of its natural gas, though there’s a wide disparity between the member states. Some Eastern European countries — including the Czech Republic and Latvia — get all their gas from Russia; Spain and Portugal, which have pipelines to North Africa, get hardly any. Germany is right in the middle at about 50 percent of its supply. In total, gas accounts for about 22 percent of Europe’s energy mix. While total European imports of Russian oil and gas have actually grown in recent years, to around 180 billion cubic meters in 2019, some countries have been able to find alternatives. Poland, for instance, let a long-term gas contract with Russia lapse in 2020, amid rising tensions between the two countries, and plans to stop Russian imports entirely in 2022.

Most of the gas we’re talking about enters Europe through pipelines. These include two major pathways transiting Ukraine as well as the Yamal-Europe pipeline which crosses Belarus into Poland and Germany. In recent years, the Russian state gas monopoly Gazprom has been developing more pipelines in what many see as an attempt to bypass Ukraine altogether. Since 2011, Nord Stream, the longest subsea pipeline in the world, has been pumping gas 760 miles across the Baltic Sea from Russia to Germany, bringing 55 billion cubic meters of gas into Europe every year. The planned Nord Stream 2 pipeline would double existing capacity. (More on that later.) Meanwhile, several European countries get their Russian gas via the Black Sea and Turkey.

Russia also supplies about 27 percent of Europe’s crude oil, though oil is a more fungible commodity and easier to transport, so the risk of disruption isn’t quite so high.

Mutually assured disruption

Europeans were already jittery about the gas market before Russian battalion tactical groups started massing on the Ukrainian frontier. European gas prices rose more than 400 percent last year. There were several reasons for the spike, including rising demand — particularly from Asia, as countries ended covid lockdowns — and a cold 2021 winter that depleted supplies. But some are also blaming Russia for deliberately driving up prices. In a statement last month, Fatih Birol, executive director of the International Energy Agency, said there were signs of “‘artificial tightness’ in European gas markets, which appears to be due to the behavior of Russia’s state-controlled gas supplier.” Birol noted that unlike other suppliers, Russia had reduced its exports to Europe by 25 percent at a time of surging prices. (Gas exports are generally negotiated in yearslong contracts, but short-term “spot” contracts can also be negotiated when supplies are tight.)

The fear now is that if it comes to war in Ukraine, and European countries join the U.S. in sanctioning Russia and providing aid to Kyiv, Russia might turn off the taps entirely. This probably wouldn’t lead to people freezing — for one thing, unlike last year, this has been a mild winter — but as leaders from Kazakhstan, Mexico, France and other countries have learned in recent years, the quickest way to get people calling for the overthrow of the government is to quickly raise their energy prices. If Russia were to cut all supplies later this month, supplies would hit minimum levels by April or late March in the event of bad weather. Eastern European countries that rely most heavily on Russian imports would be the worst hit.

The U.S. has reportedly been in talks with international gas companies and other gas-rich countries, including Norway and Qatar, to step up shipment of liquefied natural gas to the EU in the event of war, but it’s not clear that could happen fast enough to prevent major disruptions.

There is truth to Biden’s argument that if Putin were to turn off the spigots, it would present a classic case of a leader cutting off his nose to spite his face. According to an analysis referenced in the Economist, a complete cutoff of gas to Europe would cost Russia’s Gazprom between $203 million and $228 million a day in lost revenue, or about $20 billion if the embargo lasts three months. Putin has been preparing for this type of contingency, building up currency reserves of more than $600 billion, and Russians have been uniquely willing to endure economic hardship for geopolitical gain in the past. But this is still serious money, particularly when combined with a potential raft of new Western sanctions.

So which side has the upper hand here?

“Russia has leverage in the short term, but I would say Europe has the long-term leverage,” Filip Medunic, who leads the Task Force for Strengthening Europe Against Economic Coercion at the European Council on Foreign Relations, told Grid. “You can’t underestimate the long-term importance that the European market has for Russia.” Of course, it’s possible that in Putin’s mind, the short-term goal of bringing Ukraine under control may be worth the long-term damage.

The German question

When it comes to Ukraine and the “energy war,” no European country has attracted more attention than Germany, whose new chancellor, Scholz, took power just two months ago.

While the U.S. and U.K. have been taking a hard line and providing the Ukrainian military with weapons, Scholz’s government has not only declined to do so itself, it has blocked other NATO countries from sending their German-produced weapons to the Ukrainians. Germany’s reluctance to push back more aggressively against Russia may have something to do with the 20th-century history between the two countries, but energy certainly plays a role.

Germany is the largest consumer of energy in Europe, and with almost half of its gas coming from Russia, more dependent on Russia for its energy than any other Western European power. As part of a national transition to low-carbon energy known as the Energiewende, Germany has been reducing its use of coal and recently made the decision to close its nuclear plants following Japan’s Fukushima disaster in 2011. In practice, this means that imported gas has remained a stubborn part of Germany’s energy mix, at about 8.6 billion cubic feet per day.

To meet that demand, Angela Merkel’s government agreed in 2015 to build Nord Stream 2, the pipeline that would double Russian gas exports to Germany. Nord Stream 2 has been completed, but its operation awaits final approval from German and EU regulators. In one of the seedier subplots of this story, former German chancellor Gerhard Schröder, a friend of Putin’s, is chairman of the board of the consortium building Nord Stream 2 — and just this month, he was nominated to the board of Gazprom as well. This didn’t look great for the newly minted Scholz, who is a member of Schröder’s Social Democratic Party and is busy fending off accusations of being soft on Russia.

Even delays in Nord Stream 2’s certification sent European gas prices surging as much as 12 percent. So it’s understandable that the German government has been reluctant to use Nord Stream as leverage against the Russians, despite pressure to do so from Washington.

In the U.S., the pipeline has become something of a rallying cry for Biden’s Republican critics. Former president Donald Trump has mentioned it in interviews, and Texas Sen. Ted Cruz spent much of last year holding up Biden’s nominees unless the administration slapped sanctions on the pipeline. Biden hasn’t done that, but he did vow during Scholz’s visit that “we will bring an end” to Nord Stream 2 if Russian troops cross the Ukrainian border. Scholz would not go that far, saying only that the U.S. and Germany have the same approach to the crisis.

Russia looks east

There is another major player in this mix of energy and geopolitics.

During his visit to Beijing for the Olympic opening ceremony last week, Putin met with Chinese President Xi Jinping, the first face-to-face meeting the Chinese leader has held with a head of state since the start of the pandemic. Ukraine was very much on the table. Energy was as well.

After the meetings, Putin unveiled $117.5 billion in new energy deals with China, including a 30-year contract between Gazprom and the China National Petroleum Corporation to supply 10 billion cubic meters of gas per year via a new pipeline from Russia’s Far East region to northeast China. Russia is already China’s third-largest gas supplier and has been looking to increase the level of trade.

While the deals had almost certainly been in the works for some time, the fanfare with which they were announced seemed deliberate. Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security’s Energy, Economics and Security Program, told Grid that part of the messaging involved “sanctions-proofing” — in other words, making clear to the rest of the world that Russia has alternatives if it loses business in Europe — as well a longer-term strategy. “Russia is looking and saying, where is the demand for these resources we produce going to come from over the next five, 10, 20 years? It’s going to come from Asia, it’s going to come from China,” she said.

Still, if the idea in the Kremlin is to replace one customer with another, there’s a lot of ground to make up. China currently consumes about 5 percent of Russia’s natural gas exports; Europe buys 72 percent.

Ukraine in the middle

The country that best knows what it’s like to be on the receiving end of the Russian gas weapon is Ukraine itself. Several times since Ukraine’s pro-European Orange Revolution in 2005, Russia has turned off supplies as a form of pressure or punishment. In 2013, Putin and Ukraine’s Moscow-backed President Viktor Yanukovych struck a deal under which Ukraine received cheap gas after agreeing to give up attempts to further integrate into Europe. The agreement was one of the precipitating events of the “Euromaidan” protests that drove Yanukovych from power.

These days, Ukraine no longer imports its own gas from Russia. (In a somewhat convoluted system, European countries import Russian gas and then export it to Ukraine.) But it still receives around $1.3 billion each year in transit revenue for the Russian gas that crosses its territory.

On the other hand, Ukraine relies increasingly on Russia for most of its coal imports. Ukraine is also heavily dependent on imports of gasoline and bitumen, the petroleum product used to pave roads, much of it from Russia and Belarus, which appears to be cooperating with the Kremlin in the Ukraine crisis. Andrian Prokip, an energy analyst at the Kennan Institute’s Kyiv office, told Grid that while Russia alone has limited energy leverage over Ukraine, “if Russia, Belarus and maybe Kazakhstan start working together, it’s going to be a problem.”

A greener, safer future?

Perhaps one silver lining of the Ukraine crisis — and its confluence of energy and geopolitics — is the extent to which it underlines the importance of shifting away from fossil fuels, which in addition to cooking the planet, make countries dangerously dependent on suppliers. Some European leaders are making this point directly. The German Greens, who are coalition partners with Scholz’s Social Democrats, have opposed Nord Stream 2 for both environmental and national security reasons.

The EU has pledged to make the continent carbon neutral by 2050. But over the next 30 years, Europe still needs energy — and in the short term at least, renewables alone won’t be enough. As Morningstar notes, while this crisis highlights the urgency of the energy transition, “it also underlines the importance of gas right now to energy security. It’s not an either/or proposition. We have to do everything we can to move as quickly as possible on the energy transition, but that includes gas in the short- to mid-term.”

Even if the crisis pushes Europe to finally end its reliance on Russia, that doesn’t mean it will quit gas. It may just mean more reliance on liquefied natural gas shipped from overseas.

And as is so often the case with European politics, the countries aren’t on the same page. Poland may be leading the charge when it comes to weaning Europe off of Russian gas, but it also gets 70 percent of its power from coal and has been a leading opponent of aggressive climate targets. It’s unlikely to see Russian aggression as a reason to move away from its domestic energy supplies.

In any event, the Russian government seems to be thinking ahead. The Kremlin has instructed energy companies to be prepared to convert pipelines like Nord Stream to ship cleaner hydrogen gas to Europe. It has also been making a push to build up lithium production and secure mineral resources in Africa.

When it comes to Ukraine, we don’t yet know the precise role the energy weapon will play. But there’s a good chance it will remain a part of Russia’s arsenal long after this crisis is over.