Russian President Vladimir Putin is, so far, winning the natural-gas war with Europe, or at least not losing it. There is little reason to think that will change in the next few months, or longer, even as evidence of Russian war crimes in Ukraine builds by the day, intensifying the European disgust with the man and his energy export profits.
Almost immediately after Mr. Putin’s invasion started on Feb. 24, European governments began plotting ways to greatly reduce, or even ban, imports of Russian natural gas, crude oil and coal. The fortunes spent on these commodities finance his destruction of Ukraine. Since the war started, European Union countries alone – led by Germany – have spent 35 billion euros for Russian energy, said Josep Borrell, the bloc’s foreign-affairs chief.
The transfer of more than half a billion euros a day of European wealth to Russia – “blood money,” in the view of Ukrainian President Volodymyr Zelensky – has already led to an EU ban on Russian coal imports, starting in August.
But the ban won’t hurt either the EU or Russia a lot. Just 13 per cent of the EU’s energy production comes from coal and the grubby fuel was being phased out anyway as part of the EU’s net-zero commitments. To be sure, the EU will have to pay up to find replacement coal, but there are ample supplies from Australia, South Africa, Indonesia and Canada.
Oil and gas – especially gas – are different stories. Europe is far more dependent on Russian gas than it is on coal. Germany produces only 5 per cent of its gas from domestic wells and the rest comes from imports – the legacy of the extravagantly pro-Russia energy policies of two successive German chancellors, Gerhard Schroeder and Angela Merkel.
The moral case to reduce, or eliminate, gas imports from Russia is clear and irrefutable; the practical case is not. There is even a credible scenario that suggests that reducing gas imports would benefit Russia financially, not the reverse.
The idea of ending Russian gas imports completely this year is alluring, but seems unworkable. In Germany, Europe’s industrial powerhouse, countless companies and employers’ groups have warned that eliminating Russian gas would plunge Germany into recession, or worse. A forecast released earlier this month by Germany’s top economic institutions said an outright energy embargo would destroy 400,000 jobs.
There is simply not enough renewable and nuclear energy to take up the slack. Germany, creator of the riskiest energy policy in the continent, compounded its energy problem in 2011, when it decided to phase out its entire nuclear-generating fleet; the last three of its 17 reactors are to close later this year.
There is no convincing the coalition government of Chancellor Olaf Scholz to keep those three operating and build new ones. The Greens, which are part of the coalition, are anti-nuke and run several of the most important ministries, including the economy, climate and foreign ministries.
That leaves finding gas elsewhere to replace the Russian gas. Again, no easy task, since pipelines can take a decade to build and receive regulatory approval. The best option for Europe is to import more liquefied natural gas (LNG).
Guess what? Europe has relatively few LNG import and regasification terminals. Germany, incredibly, has none, another indication that Mr. Schroeder and Ms. Merkel naively envisaged a scenario in which Russia would forever deliver endless amounts of cheap gas. Global LNG supplies are on the rise – Canada will soon enter that market and the United States and Qatar are already LNG powerhouses – but it will take years to build enough European import terminals to meet demand.
So, the only viable option is the staged phase-out of Russian gas. The speed of the phase-out is the crucial question, and here is where it gets interesting.
If the process moves fairly fast, say a reduction by half or two-thirds within a year or so, Mr. Putin might laugh all the way to the bank. The gas market is tight and prices are already painfully high (though lower than their post-invasion peak as Russian deliveries to Europe continue). If Europe were forced to scour the planet for replacement supplies in a hurry, the price would soar and the Kremlin would rake in as much or more loot to fund the war.
That’s the theory of Mike Fulwood, senior research fellow at the Oxford Institute for Energy Studies. “If the aim of reducing imports from Russia is to hit Russia’s revenues from gas sales, reducing flow and having prices shoot up is not the solution,” he wrote in a recent note. “If imports are reduced by two-thirds and the price triples, then revenues [to Russia] remain the same!”
Counterintuitively, the best way to punish Mr. Putin might be to take all the gas he has on offer under the somewhat flexible long-term contracts. Doing so would accomplish two things. It would push the price down, perhaps a lot, depriving Russia of energy revenue; and would buy Europe time to build LNG terminals, ramp up its renewable-energy output and build new pipelines, or expand existing ones, from North Africa and the Eastern Mediterranean, where big reserves have been found.
At that point – the effort could take several years – Europe could stop importing Russian gas. Reducing imports fast could easily backfire by creating a European recession, delighting Mr. Putin, and an even richer Kremlin as energy prices rise.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.