Russian Roulette: The Kremlin’s Gamble in the Midst of the European Energy Crisis
By Nidhi Bhatia
Research Associate at Law & Order
St. Xavier's College Kolkata
Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.
The key to global cooperation lies in the ability and willingness of nations to provide aid in a time of calamity. This becomes especially important when the crisis is widespread, transnational, and potentially lethal for the economies and the populations of these nations alike. The ongoing scarcity of Liquified Natural Gas (LNG) across Europe has caused a crisis of this nature that will almost certainly become worse if it is not attended to immediately. Over the years, Europe has been the only continent to have been consistent in its attempts to combat climate change and reduce its rates of net carbon emissions (McGrath, 2021). Thus LNG has become the primary transition fuel for the continent as it works on reducing its dependence on fossil fuels; and any disruption in its supply is capable of plunging Europe into a deficit of fuel and inflated prices, not unlike its current predicament. This makes it amply clear that the continent is still fairly unprepared to put into motion the transition of energy sources (Rosenburg, 2021). The issue is further complicated by Russia’s recent invasion of Ukraine, considering the latter’s integral role in the transportation of gas from Russia to Europe. (Patel, 2022)
Over time, the European Union has tried to diversify its sources of procuring fuel which includes branching out to import LNG from China, the United States, and the GCC, along with intra-continental production by member and non-member States, including Poland, the Netherlands, and Norway. This network of internal suppliers was set up to offset export shortages. However, with the Dutch government slowly shutting down Groningen — Europe’s largest internal field for natural gas — due to the unsafe conditions for work and the small earthquakes the production process triggered, Europe has lost out significantly on its swing supplies.
The reduced domestic manufacturers, coupled with a shift in the priorities of exporting nations due to the attractively high-value market for natural gas that is emerging in Asia have been the two primary causes of this extreme shortage of fuel across the continent. Countries such as China and India are looking to move away from traditional non-renewable fuels to more sustainable ones. They are also accepting of a fairly large price tag for the cargo, making exporters such as Qatar consider increasing their reach in the Eastern markets (Sheppard, 2021). What further compounds the strain on the energy grid is the growing need for fuel as countries emerge from lockdowns, but are faced with a significantly reduced stock of LNG due to the unusually cold winter of 2020-21. However, the most complex cause of the amplification of this crisis is the involvement of Russia as a key player in the European fuel industry. Being the largest exporter of natural gas to the European continent, its rather subdued reaction to this inflation of prices is both alarming and concerning. The Kremlin’s response suggests that there is a specific intent behind Russia’s mellow response to an unusually profitable market (Sheppard, 2021). What must be considered now, is how Russia’s politically-driven attempts at destabilizing the European process of decarbonization for its own monopolistic, economic gain is further amplifying the energy crisis in Europe.
The Russian involvement
Russia’s share of the European natural gas market is 40%, making it the largest global supplier of fuel for the continent. (Kramer, 2021)
Gazprom, the monopolistic natural gas giant run by the Russian government, has gradually developed a relationship with the European market and buyers over decades. It has seldom faltered in meeting its supply requirements over this time. The company also has a steady record of taking advantage of inflated market opportunities and price hikes. (Chadwick, 2021) However, when put into the current perspective its complacent non-involvement in the volatile market seems like a major break in character. Members of the European Parliament demanded an investigation into Gazprom in the middle of September 2021 as they believed that Moscow was holding back gas supplies purposely (Majewski, 2021) in order to exert its dominance over the market, propel its geopolitical agenda and derail the decarbonization process that Europe was preparing to implement. The preliminary results so far show that while Gazprom has fulfilled its contractual obligation and exported its stipulated amount of gas, and still does during the Ukrainian invasion, it has not produced gas to its fullest capacity based on data from the last few quarters (Chadwick, 2021).
Here, it is important to note that this is not the first time Gazprom's reliability has been called into question. On several occasions in the past two decades, Gazprom has held back vital supplies to pressure and target its political adversaries. During the gas crises of 2009 and 2014, Gazprom withheld gas supplies as a tool to pressure Ukraine into political subservience to the Kremlin. In response to Gazprom's market manipulation, Poland has begun branching out its energy sources (Majewski, 2021). Since the EU's vehement opposition to Russia's annexation of Crimea in 2014 Europe's distrust toward an uneasy reliance on Russia has become increasingly visible (Sheppard, 2021). The EU suspects that this is a crucial reason behind Russia's denial of sending in more supplies. The primary pipeline that supplies gas to Europe from Russia is the Nord Stream pipeline. However, the construction of a new, and apparently more technically sound pipeline is being planned by Moscow, known as Nord Stream 2, which is currently awaiting ratification from Germany. Despite its notable technological advancement and enhanced efficiency and volume, certain Eastern European countries with growing anti-Russian tendencies deem the pipeline to be a strategic political weapon against them. Unlike the older pipeline, Nord Stream 2 aims to exclude Ukraine from its supply route and ultimately cut it off from gas supplies (Troianovski et al., 2021).
What makes the Kremlin’s geopolitical opportunism even clearer is the contrast between the conditions in two former members of the Soviet Union — Hungary and Moldova.
The former, with its pro-Russia administration, signed a fifteen-year contract with Moscow in September of 2021, while the latter, after recently electing a pro-EU government, was forced to go into a state of emergency due to the soaring gas prices (Marson & Wallace, 2021). The most apparent distinction, however, comes with the invasion of Ukraine by Russia. The steady escalation of the attack has led to the occupation of several infrastructural sites in Ukraine. This includes one of their biggest nuclear power plants in Europe, which was overrun by Russian forces one week into the invasion. (Levenson, 2022) This infrastructural takeover points to the possible points of leverage that Russia is trying to amass against Ukraine. It also seems likely that the gas pipeline may come under siege and be used by Russia as leverage against both Ukraine and Europe. Thus, Russia’s actions can be interpreted as a deliberate manipulation of the monopolized gas market and forced takeovers of infrastructure for its personal gain.
Russia's dominance in the global fuel market has been a steady concern for the EU throughout the 2000s. Over the years, Europe had managed to convince Gazprom to shift away from long-term contracts that were linked to oil prices. The disconnect with the oil prices results in more affordable natural gas supplies for the EU, since it creates a separate price dynamic for the gas markets. The continent has reaped the fruits of this deal in the form of gas that was far cheaper than oil for the better part of a decade. What this deal was not successful in achieving, however, is sufficient diversification and liberalization of the natural gas market. Russia remained the dominant supplier of gas to continental Europe and the United Kingdom. This monopoly is what has given Moscow incredible leverage in European markets and geopolitics and Gazprom’s open refusal to send Europe more supplies of gas during the crisis is proof of the same (Marson & Wallace, 2021 ). While Russian President Vladimir Putin has made commitments to start filling up the Gazprom supplies across Europe, it is yet to be seen how much of an effect such belated responses have on the overall crisis.
However, Moscow may be taking advantage of this crisis to stall a much larger looming threat to its markets. The oil and fossil fuel industry forms the backbone of the Russian economy, with the natural gas sector being a major focal point of its growth. Thus it is not difficult to piece together why Russia would want to hinder Europe’s gradual shift away from fossil fuels and towards clean energy. The continent is one of Russia’s largest markets, and losing it would be detrimental for it. In light of the resolution passed by Brussels in July of 2021 called “Fit for 55”, which aims to cut down on 55% of the continent’s emissions from its 1990 levels by 2035 - Russia seems to be making the most of this crisis to remind the continent of its heavy reliance on Moscow’s gas supply (McGrath, 2021). According to an opinion piece by Anton Troianovski from New York Times, this is Europe’s comeuppance from President Putin’s perspective, wherein the Europeans designed their own demise despite continued warnings from Russia, “putting the Russian president in a position to ride to the rescue.” It is evident that Moscow is threatened by the prospect of losing one of its biggest markets of natural gas and is attempting to make the most of the moment to send the European continent a strong message that Moscow is indispensable, even during the process of transition from fossil fuels to clean energy.
This message was, however, undercut by the recent invasion and its aftermath. Russia has faced unforeseen backlash from the US, UK, and the European Union for its military intervention in Ukraine among which is a reluctance from traders, banks, insurers, oil companies, and transportation vehicles to avoid buying Russian oil and gas.
Most Western corporations do not want to be seen as supporting or bankrolling the Russian government under President Putin. (Krauss, 2022)
In the meantime, Europe is also diversifying its sources to replace as much of the Russian gas import as possible. While Norway, the Netherlands, and Qatar's combined stocks of LNG cannot bridge the gap left by the Russian supply, the belief is that these supplies will see Europe through this winter. (“Russia-Ukraine Crisis: What if Vladimir Putin Cuts off Gas Supplies to Europe?” 2022)
Nord Stream 2 and Russia’s leverage
There are two messages we must decode in these conditions: what are the stakes, and why are they so high? The Kremlin has made it amply clear on multiple occasions, even before the ongoing shortages, that it will not shy away from using widespread crises to its utmost advantage, despite the human or fiscal cost. Its market manipulation and refusal to send in more supplies of gas despite Europe’s dire pleas makes one wonder whether a deal or alliance with a power that so openly operates on the idea of schadenfreude is beneficial for them at all (Troianovski et al., 2021). President Putin, as well as his spokespersons, in multiple statements throughout the peak of the crisis in October, have often openly stated that the quickest, most profitable way for Europe to go about resolving the crisis is for it to authorise the controversial Nord Stream 2 pipeline (Kramer, 2021).
There were two major roadblocks in the way of the approval for the new pipeline at the head of the crisis in October 2021. Firstly, contrary to what the Kremlin said, Nord Stream 2 would not supply more gas to Europe than what it was contractually obliged to send. Instead, it would simply change the route of transport from the current one through Ukraine to go straight to Germany. The new route strategically bypassed Ukraine and the majority of Eastern Europe. (Majewski, 2021). Secondly, this elimination of Ukraine from the direct line of supply could be interpreted as a political weapon against it, by cutting off its primary source of energy and fuel, while also giving Russia a more dominant position in the European gas market (Troianovski et al., 2021).
The pipeline had become a source of discontentment among the member states of the EU. German Chancellor Angela Merkel, whose government had been in favor of approving the new pipeline, believed that it would be beneficial for Europe to be supplied through the new route. She believed that the EU’s regulations would act as sufficient checks and balances to ensure that no member states were disadvantaged from the new arrangement (Troianovski et al., 2021). This view was shared in part by the President of the European Commission Ursula von der Leyen, who saw the politics at play in the setting up of the pipeline, but was also optimistic about obtaining a net gain deal for the EU with a strict implementation of all its legal measures of protection (Majewski, 2021). The view of the Ukrainians, quite obviously, was the exact opposite. They had vehemently opposed the pipeline while also voicing their disdain about the EU’s inadequacy in curbing Russia’s monopoly in the natural gas market over the years (Marson & Wallace, 2021).
This internal conundrum amidst the crisis made the decision making the process even slower and also effectively delayed possible negotiations in the EU on its “Fit for 55” initiative ahead of the two biggest climate summits of the year, COP26 and the Paris Climate Summit, both of which were held in Europe in November. Russia’s absence from COP26 raises further questions about its commitment to climate control action and transition to clean energy. This may be seen as a supporting argument for those who hold the opinion that Russia is using the gas crisis to derail the European efforts to decarbonize and make itself virtually indispensable to the continent’s energy requirements and giving its own economy a long term safety blanket.
In the current circumstances, however, Russia has faced decisive resistance from Europe.
Newly elected German Chancellor Olaf Scholtz halted the final certification of the Nord Stream 2 pipeline in the wake of recent Russian aggression. This step is likely to hurt the Europeans in the short run, but Chancellor Scholtz believes it to be an important step to stand up to Russia.
Key takeaways
The energy crisis surging in Europe is a complex and multi-layered concern that exposes the structural vulnerabilities in the continent’s energy supply chain as well as its emission control and energy transition programs. Russia’s assault on Ukraine has made this crisis even more complicated for Europe. The EU has already begun its process of diversification of energy resources.
While the Nord Stream and Yamal-Europe pipelines are still pumping gas into Europe from Russia, the former will now have to consider the broader implications of its energy relations with the latter. This also gives Europe the opportunity to focus its attention on building its resources for renewable energy sources and pull itself out of the monopolized markets controlled by the Kremlin.
It is a much more difficult choice for Europe considering the immense hardships being faced by the general population as well as the economy. However, it seems to be the more viable option in the long run, both for the energy markets and Europe’s climate change policies. Most of all though, it will prove to be a unified stance against Russia and the unequivocal condemnation of its repeated military offenses and a more viable option than energy sanctions to be levied on them.
References
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