Vladimir Putin is gaming Europe’s energy crisis



Of course it is. Energy, and gas in particular – Europe sourced about 40 per cent of its gas from Russia before the invasion – is Russia’s most potent response to the West’s severe financial and economic sanctions.

Weaponising energy hurts European economies and sows division between those European states, generally in southern Europe, that aren’t as reliant as those like Germany, which used to get 55 per cent of its gas from Russia, and the eastern European economies.

European Commission president Ursula von der Leyen has accused Russia of blackmail.Credit:Bloomberg

Putin is gaming Europe by leaving his intentions vague. He might completely cut off Europe’s access to Russian gas, or he might not. He might allow a trickle of gas or he might return supply to 40 per cent of capacity.

It is unlikely that Russia will completely shut down Nord Stream 1 because that would destroy Putin’s leverage and the value of the uncertainty he has created. It would also generate greater unity between the states that have historically been reliant on Russian gas and those that have alternate sources of supply.

Russia would like to increase the divisions and tensions within Europe generated not only by the energy crisis but more broadly by differences in attitudes towards the invasion.

The Europeans have been forced to respond to the bleak energy outlook for their winter, agreeing on Tuesday to a voluntary reduction in European Union gas consumption over the northern winter. The reduction could be made mandatory in an emergency – if Russia were, for instance, to completely shut down supply.


There are opt-outs and/or lesser cuts within the agreement for countries that are particularly dependent on Russian gas, as well as for those that are more self-reliant.

The news that Russian supply would be limited to 20 per cent of capacity sent European gas prices soaring this week, with the price spiking 20 per cent on Tuesday. European gas prices are now more than 10 times their average of the previous decade.

The reduced flows and the surge in prices will impact European economies already sliding towards recession.

They will particularly impact Germany and German industry because the Germans had shut down most of their coal-fired generators and were planning to shut down their three nuclear reactors at the end of this year. They were relying on Russian gas and renewables to power Europe’s strongest economy.

European households and industries are facing energy shortfalls ahead of the northern winter.

European households and industries are facing energy shortfalls ahead of the northern winter.Credit:AP

Now they are bringing coal-fired plants back into their grid and even the powerful Greens party, which led the campaign to phase out Germany’s nuclear plants a decade ago, is willing to contemplate keeping at least one of the ageing nuclear plants operating beyond the end of the year.

In the near-term Russia’s finessing of its gas supplies into Europe is going to damage the European economies – it is estimated that a complete cut-off would wipe about 1.5 percentage points off the EU’s GDP – and force governments to make invidious choices between households and industries. The price surges alone will make some major gas-reliant European industries uneconomic.

Longer-term Russia will be the loser. Europe will never allow itself to be as dependent on Russian energy. It is scrambling to contract alternate gas from the US, Qatar and elsewhere and is racing to buy floating LNG terminals and build new onshore terminals along with new storage and distribution networks.

Decarbonisation, the driver of European energy policies in recent decades, is taking a back seat to the imperative of energy security.

For the EU, the relationship with Russia and the state-controlled Gazprom has passed the point of no return. There is no alternative but to accept that Russia is no longer a reliable source of supply and will never again be one.

For Russia, that will ultimately mean that a major source of its income – it is the world’s second-largest gas producer – will dry up. It would take massive investments in LNG plants and pipelines that would probably be sub-economic at best to ship Russian gas to those markets, like China, that might accept it. Even then, it is unlikely that those prospective customers would replace the lost EU demand.

The Europeans’ plight could be worse. Where earlier in the year China was buying as much gas as it could after experiencing its own energy crunch, it seems to have reduced its purchases and some Chinese traders are now on-selling gas to the Europeans and others.

That’s being attributed to the effects of China’s “zero COVID” lockdowns, which have slowed its economy and reduced its industries’ energy consumption. A surge in domestic coal production as China tries to reduce its reliance on energy imports might also be a factor.

If China had maintained the earlier scale of its purchases, the already-ultra-tight market for LNG would be even tighter and the amount of uncontracted gas available to Europe even smaller.

In any event, for the EU the relationship with Russia and the state-controlled Gazprom has passed the point of no return. There is no alternative but to accept that Russia is no longer a reliable source of supply and will never again be one.


That acceptance will almost certainly involve significant economic pain and households’ hardship this northern winter but will accelerate the increase in renewables and more disparate sources of gas and other energy in future while reducing the demonstrated vulnerability of Europe of allowing itself to become so dependent on a single supplier.

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