In an overt act of weaponising energy, Russian President Vladimir Putin first started cutting off gas supplies by asking unfriendly European nations to pay in Rubles, while the existing contracts stated the payment had to be made in Euros. This sudden shock was Putin’s rebuttal to SWIFT sanctions that cut off its Central Bank from the international payment systems denying Russia access to half of its $640 billion foreign reserves held abroad.
Putin’s shock divided Europe, which until then, had seemed united against his war in Ukraine and had imposed unprecedented sanctions on what they called ‘Putin’s war machinery’. States like Hungary and some companies in Germany with severe dependence on Russian gas agreed to pay in Rubles flouting the EU’s pleas to remain united. However, states like Poland, Bulgaria, Finland and Denmark, which also depended largely on Russian gas, refused to give in to Putin’s demands. And as a result, had their gas supplies cut off. This diametrically opposite response reflects the EU’s internal chasms and vulnerability as a bloc.
156 days into the war, Russia is doubling down on the offensive and Ukraine is gearing up with a counter-offensive with newly acquired HIMARS (High Mobility Artillery Rocket Systems) from the United States. The war is far from ending. The longer the war stretches, the deeper the faultlines will be among EU members. That said, the desperation to diversify from Russia is also palpable and the efforts visible. The question is: are they enough?
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Russia’s revenue
Even after several tranches of sanctions against Russia, Europe continues to fund what it has set out to stop through the sanctions regime. There is a hullaballoo of disarrayed information on how Europe is tackling its dependence on Russian gas and oil—a factor that needs de-cluttering.
Russia earned almost $100 billion in fossil fuel revenue within the first 100 days of the war. Crude oil, which is shipped on tankers, has accounted for $48 billion (about 50 per cent) of total Russian exports, while pipeline gas accounted for 25.8 per cent of the same. Meanwhile, the EU has accounted for 61 per cent of total Russian exports ($60 billion). It imports 41 per cent of its total natural gas imports from Russia alone and some EU countries remain almost exclusively dependent on Russian gas.
Sanctions have also impacted different European countries unevenly. Unexpectedly, sanctions have made Italy more dependent on Russia’s crude oil. It has a refinery in Sicily that is owned by a Russian company. Due to the sanctions, this refinery has only been able to buy Russian oil. Banks have been unable to offer credit to any other source.
France is one of the top ten buyers of Russian fossil fuels that made an early transition to Liquified Natural Gas (LNG), instead of pipeline gas. Situated far from Russia and with enough coastline, France has been quick to invest in re-gasification facilities all around its coast and depends less on pipelines coming directly from Russia. That, however, is not true of other landlocked countries within Europe.
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The misconstrued game
Putin goes on twisting the arm of a badly prepared Europe by threatening to turn off gas taps. He recently came close to cutting Nord Stream-1 gas to 20 per cent capacity. In a helpless display of Europe’s dependence on Russian gas, Canada had to circumvent its own sanctions and deliver the turbine required by Gazprom to service the Nord Stream-1 so that gas flow may be resumed without dangerous delays.
It’s important here to gauge the contours of Europe’s energy vulnerability. Europe let itself get overtly and conspicuously dependent on Russian gas for two reasons. First, that getting natural gas directly through the already existing network of pipelines is the cheapest means; and two, they thought Putin would never completely erode the post-World War II security and economic architecture. This approach had some merit. Rational Choice Theory would suggest that it is a mutual lose-lose situation for rational actors to go to war when their economies are interdependent and thriving. Despite its practical merit, Europe did commit a fallacy in predicting Putin’s actions. States view critical drivers of their national interest and national identity based on complex perceptions of history, experience and capabilities; all intersecting in a rather dynamic matrix than a static rational choice like pure economics would suggest. Russia’s war on Ukraine belongs to this category as much as China’s thwarting its economic interests with a top trading partner like Taiwan, rendering it a non-negotiable factor in the quest for China’s larger re-unification.
Europe was late in realising that the booming energy trade with Russia is not enough to prevent wars with Georgia (2008), Crimea (2014) or Ukraine (2022). In Russia, Europe was not engaging with a fellow democracy but with an authoritarian leader, whose coming to power rode on a wounded Russian pride that considered Soviet disintegration an accident of history and consolidation of Russian glory as an existential narrative of the State.
Wishful thinking has been Europe’s first fundamental error. And second, was that it did not diversify its energy import basket enough. Russia ensured Europe’s dependence on itself, while successfully diversifying its own export basket to China and India under attractive discounts on crude oil. China has been the top destination for Russia’s total fossil fuel exports, while India bought 18 per cent of all Russian oil exports. Russia is also developing new economic routes such as the International North-South Transport Corridor (INSTC) at a time when sanctions are limiting its transit access through most of Europe. While the previous maritime route from St. Petersburg took longer, INSTC’s transit time was far less and at a 30 per cent lower cost. It is definitely good news for India, but hardly a matter of rejoicing for Europe.
Even with buyers like China and now India, it will be difficult for Russia to divert all of its fossil fuel exports from Europe as it has also defaulted on its foreign debt obligations. Further, as winter sets in, the impact of sanctions will become more and more pronounced for the Russian as well as the global economy.
While Germany and Italy alone generate almost 22 per cent of Russia’s fossil fuel export revenue, neither country has the infrastructure in place to move away from this arrangement to switch to LNG facilities as France has. Therefore, all else unchanged, it is critically far more difficult for Europe and especially for the big economies to diversify from Russia in a short span of time.
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Diversification efforts
Building new gas pipelines can help gas exports from new sources, but that cannot be done overnight. Second, Europe could set up LNG terminals that use a different infrastructure. For this to work, the gas first has to be liquefied and then sent through LNG terminals and then re-gasified at facilities before being distributed.
Germany has recently signed a $1 billion deal with a Norwegian company, which is likely to reduce its dependence on Russia’s natural gas by an ambitious 25 per cent. It has also entered into similar agreements on floating LNG terminals with Greece and Denmark. Germany is likely to source LNG from Qatar and the US in a few years as well. The rising cost, however, is a key ponderable. With $12 billion stuck in the Nord Stream-2 and global inflation soaring, it will become difficult for these deals to remain economically viable unless time is tightly factored in.
In a similar fashion, Italy also missed the bus when it came to making a transition to LNG facilities unlike France and kept receiving natural gas directly not only from Russia (majorly) but also from Algeria. In order to reduce Italy’s 30 billion cubic metres dependence on Russia, supplies from Algeria will be stepped up but it would hardly be enough to lower dependence on Russia significantly unless supplies from the Caspian Sea support it. Italy has also signed a deal with Norway to provide itself with floating LNG terminals and re-gasification units.
All of this ramps up significant pressure on Norway to cater to ambitious diversification efforts, whose feasibility remains to be seen.
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LNG facilities not a solution
Establishing LNG facilities by itself will not solve Europe’s problems. Several Central and East European countries are landlocked. What Europe needs to do is to quickly build several LNG facilities all around its coastline and link those facilities directly into the established network of pipelines in order to move that gas to all the countries that need it. It is, therefore, a race against time and from practical markers, the odds are not in Europe’s favour.
Filling Gas Storage by 90 per cent is the new EU mantra. Faced with technical challenges that cannot be mitigated overnight, the European Commission has proposed new legislation that will require EU member states to fill their gas storage by at least 80 per cent before next winter, increasing to 90 per cent later. By July this year, however, the storage has reached only 60 per cent. If done meticulously, this could provide a breather for the bloc.
Finally, bidding adieu to the Paris goals and its commitment to reducing carbon footprint, economic giants like Germany are going back to burning coal to reduce dependence on Russian gas. It is a contradiction of sorts for the Greens (a coalition partner in Olaf Scholz’s cabinet) who have been committed to making a transition to renewable sources of energy.
Natural gas is the Achilles heel of Europe. Desperation is rife and so is the effort to diversify. Russia, too, needs the revenue it generates from selling fossil fuels to Europe to fund its war in Ukraine and to support its depleting foreign reserves due to the SWIFT sanctions.
For now, both sides seem to understand the other’s vulnerabilities and are trying to diversify as fast as they can. But Putin does have a clear edge over Europe because turning off gas taps will send seismic shockwaves across the industries of Europe, which will further exacerbate an already impending economic crisis the world over.
That also explains why India’s acting in its national interest and building its own strategic reserves with discounted oil prices from Russia. It is not just Europe, but the entire world that is bracing to absorb the impact of an unfortunate war that they did not start and have no role in, either. What the European experience shows is the limit of rational choice theory in international politics, which ultimately is an anarchic world with often irrational drivers of perceived national interests.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute of Defence Studies and Analyses. Views are personal.
(Edited by Srinjoy Dey)