Russia may lose the energy war with Europe

Russia uses energy power to force European countries to end their support for Ukraine, but this effort risks failure.

European governments say Russian President Vladimir Putin’s strategy to cut natural gas supplies is to inflict pain on households and businesses in the old continent, prompting public opposition to the current policy of sanctions. in Europe with Russia and forced countries to stop supporting Ukraine.

The Russian-European economic war is considered to be able to determine the outcome of the Ukraine conflict. Observers point out that Russia is facing economic difficulties, along with setbacks on the battlefield.

Russia is not certain to lose in this economic war. But officials, energy experts and economists increasingly agree that while Russia’s actions will cause serious problems, Europe will get through the winter without running out of gas. They are optimistic that when winter ends, Russia’s influence over Europe’s energy supply will dissipate.

Reckrod gas storage in Eiterfeld, Germany in July. Photo: AP.

Reckrod gas storage in Eiterfeld, Germany in July. Photo: AP.

The Russian president used the energy “trump card” at the end of August, when he announced an indefinite halt to the supply of gas to Europe via Nord Stream 1. “He considers it the greatest leverage and bet on it,” said Daniel Yergin, energy historian and vice president of S&P Global.

Ukraine’s successes in the recent counter-offensive have given European governments no reason to change course, according to strategists. “No country in Europe feels the only solution is to make concessions to Russia,” said Lawrence Freedman, emeritus professor of war studies at King’s College London.

The fulcrum of the Ukrainian military campaign is high revenue from oil and gas thanks to skyrocketing prices. However, observers say that Russia’s revenue is dwindling as gas exports and oil prices fall. Brent crude has fallen from more than $120 a barrel in June to around $90 a barrel.

Russian government data provided early last week showed a large budget deficit in August. Russia’s budget surplus fell to 137 billion rubles (about 2.3 billion USD) in the first eight months of the year, from 481 billion ruble announced in July.

European governments have also had success in securing alternative gas supplies to Russia. Under the agreement reached at the end of July, from August this year to March 2023, all EU members will voluntarily reduce their gas consumption by 15%.

In the event of a supply shock, such as Russia shutting down a gas pipeline entirely, the EU can declare a state of emergency and make this reduction mandatory, effective immediately. Currently, about 80 million cubic meters of gas are still being transported to the EU through Ukraine and the TurkStream pipeline.

“Given the high cost of gas in Europe, cutting consumption is a very cost-effective move. It becomes all the more important when political considerations are taken into account,” said Jim Krane, a consultant. energy analyst at the Baker Institute of Rice University in the US, told VnExpress.

The coming winter will be the most vulnerable for European governments. If this year’s winter is harsher than usual, energy demand will increase, and Europe’s optimism will also “evaporate”, according to observers. To maintain European unity in the winter, some countries may have to share their gas reserves with others.

However, on the Russian side, the high price to pay for the energy war is the reputation of a reliable supplier that never uses gas as a political weapon. “Now, they’re using it, not just as a political weapon, but as a weapon in conflict. It completely wipes out their credibility,” Yergin said.

One sign that Russia’s influence is waning is that gas and electricity prices have fallen, after skyrocketing last month because of the announcement of the cessation of Nord Stream 1.

By the middle of this month, wholesale gas was trading at around $185 per megawatt hour. It is almost three times higher than the previous year and almost double that of early June, when Moscow began to squeeze supply through Nord Stream 1. However, it is still more than 45% down from the record high maintained since the end of the month. 7 to 26/8.

Electricity prices have nearly halved from their peak. “The situation seems to be stabilizing,” said David den Hollander, co-founder of DC Energy Trading, noting that gas storage in Central Europe is almost full.

In addition to the closure of energy-intensive smelting and fertilizer plants, new gas import depots have also been set up in the Netherlands and elsewhere to receive shipments of liquefied natural gas (LNG). The new facilities are one of the steps Europe has taken to diversify supply to replace Russia.

The alternatives, which include LNG from the US and other countries, help fill some of the void left by Russia’s shutdown of Nord Stream 1. Gas storage facilities have reached 85% capacity, exceeding their original target. of the EU was 80% at the end of October.

Simon Quijano-Evans, chief economist at Gemcorp Capital LLC in London, said that even if Russia completely shuts down supply, the EU could still have enough gas for the winter. “It’s going to be challenging and weather dependent, but totally doable,” he said.

He calculated the average EU natural gas consumption in October for the period 2018 to 2021 to be 256 billion cubic meters. Meanwhile, with gas from elsewhere plus 92 billion cubic meters of storage, Europe will have about 242 billion cubic meters by winter this year. The difference can be offset by savings.

Pipelines that deliver Russian gas to Europe.  Graphics: Reuters.

Pipelines that deliver Russian gas to Europe. Graphics: Reuters.

As the EU and governments like the UK race to soften the impact on people and businesses, “I don’t think the social unrest will cause governments to give in to Mr. Putin,” Stefano Stefanini, Formerly a diplomat and foreign policy adviser to former Italian president Giorgio Napolitano, said.

Analyst Jim Krane is also optimistic that Europe will certainly weather the Russian energy shock.

“It will take a long time to replace the Russian supply, but it is certainly doable,” Krane said. “No government allows energy relations to govern its diplomacy to the extent that Moscow wants it.”

Another factor keeping European governments from backing down is President Putin’s failure to offer them an easy way out. This week, the Ukraine crisis escalated with new developments including four Ukrainian provinces voting to annex Russia and Putin issuing an order to mobilize troops. At the same time, Putin has not offered a deal that Europe can agree to, as peace talks between Moscow and Kiev have been deadlocked for months.

“If Europe feels it doesn’t have to change its stance, Russia’s influence will inevitably decline,” Professor Freedman said.

Thanh Tam (Theo WSJ)

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