Europe in Russia's energy trap: How to overcome dependence?

EU energy sanctions are the most effective impact on the Russian economy.

Author: Mykhailo Gonchar, President of the Center for Global Studies "Strategy XXI".

The article was written specially for the Weekly Mirror, where it was first published.

The issue of restricting energy exports from the Russian Federation has been actively discussed in the EU for several weeks, and there is no consensus on what decision to take yet. Paul Krugman, a 2008 American Nobel Prize-winning economist, has made it clear that Vladimir Putin's war of aggression is being waged on the money Russia receives from selling fossil fuels to Europe. "And while Ukraine has, incredibly, repelled Russia’s attempt to seize Kyiv, Putin won’t be definitively stopped until Europe ends its energy dependence.e," he said.

As you know, Germany, the Netherlands, France and Italy are among the key buyers of Russian oil, natural gas and coal. According to Forbes, last year energy gave Russia 135.5 billion dollars income from supplies to the European Union. Russia supplies the EU with 51.8% of its crude oil and petroleum products, about 70% of its gas and a fifth of its coal.

The table below gives a retrospective view of the structure of Russia's revenues from energy exports. Oil and refined products are in the first place in terms of importance, natural gas is in the second place, but it produces three to four times less, coal is in the third place, but it is an order of magnitude less important than oil.

"In total, the EU consumes three times more energy from Russia than the largest buyer, China, which outperforms Europe only in coal supplies. Among the ten largest consumers are the five EU countries: the Netherlands, Germany, Italy, Poland and France. In 2021, Germany paid the Russians $ 23.1 billion. - this is 8.8% of annual "energy" revenue of the Russian Federation. Of these, $ 11 billion. - for gas ", - writes Forbes.

If European politicians banned the purchase of Russian oil, gas and coal, Russia would lose $ 135 billion, which is more than a quarter of export earnings in 2021. According to experts, - 10% of GDP. This is the desired reduction in arms spending for the war against Ukraine.

As the heating season is over, now is the best time to impose sanctions on Russian gas: there is time to ensure energy security for the next autumn-winter period. The US-EU transatlantic energy partnership is key and has already worked this winter, helping Europe mitigate the effects of Russia's special operation on price escalation in the EU gas market in 2021.

Equally important are the national approaches of EU member states. The Baltic states have announced their rejection of Russian gas. Lithuania, Latvia and Estonia have stopped importing Russian gas since April 1. The Estonian government has made a fundamental decision to set up liquefied natural gas (LNG) facilities at the Paldiski seaport. Lithuanian President Gitanas Nauseda has called on the rest of the EU to join in giving up gas from Russia: "If we can do it, the rest of Europe can do it too!"

Finland has also stated its readiness to quickly abandon Russia's natural gas and oil. Noting, however, that it is more difficult for other European countries to make such a decision. Italy, which receives about 40 percent of Russia's gas imports, is also trying to diversify its energy supply as the war against Russia escalates against Ukraine. To this end, it is planned to increase gas supplies from Algeria through the Transmed pipeline.

Why is a full energy embargo important?

However, after the latest sanctions on the embargo only on coal supplies, it seems that Europe is not sure of its ability to give up Russian oil and gas. EU foreign ministers have once again failed to reach a joint decision on an embargo on Russian gas and oil. Discussions on the sixth package of sanctions, which includes this issue, are scheduled for April 17.

The most decisive approach among the EU countries is demonstrated by Poland, which has clearly announced its refusal to import all types of fossil fuels from Russia this year. The Polish government and the corporate sector are increasing oil imports from Saudi Arabia, reducing Russian purchases. Poland is actively advocating a full embargo on Russian energy. Polish analysts make it clear that stopping imports from Russia will eventually create economic stability for the EU.

Ukraine, for its part, emphasizes that a full embargo on all Russian energy sources is the most desirable and correct course of action in this situation. It is energy sanctions and the impossibility of revenue from the sale of oil and gas that have the most effective impact on the Russian economy.

Meanwhile, a partial or short-term embargo is a false and dangerous strategy. It could lead to further increases in prices, in particular for gas, which apparently fully compensates for Gazprom's loss of exports, as was the case in the second half of 2021. The decision on a partial embargo without price cap restrictions will have the opposite effect.

In addition, it is important to limit the transportation of natural gas through the Nord Stream-1 gas pipeline. The construction of NS 1 at one time was due to political rather than economic expediency. And this route is still a lever of Russian pressure on European countries, in addition, it is actually a free route for gas transportation for Russia, which it has always used for political influence.

In 2020, Germany had already made a mistake when the Federal Agency for Networks decided to remove the Nord Stream-1 gas pipeline from the scope of the European Union's Gas Directive for 20 years. In early March 2022, Russia resorted to another blackmail, threatening to cut off gas supplies to Europe through Noed Stream 1.

Pressure and blackmail aimed at dismantling EU laws and the free market, subordinating all sources of gas supply to their own monopolies, and tying gas issues as much as possible to political demands are the means of influencing Europeans in the Russian Federation, which is currently torturing Ukrainians. And there must be a strong and comprehensive EU response to energy sanctions.

Ukrainian dimension
Today, accusations are being leveled against Ukraine over the continued transit of Russian gas.

In my opinion, Ukraine must do everything possible to, with the support of European partners, in order to remain a transit country in the transitional period of abandonment of Russian gas. As already mentioned, the work of Nord Stream 1 and TurkStream should be stopped at the first stage. After all, when there were no such pipelines, Russian gas was uninterruptedly supplied to consumers in the EU and Turkey for decades through Ukraine's GTS. Therefore, the last molecule of Russian gas going to the EU must pass through the Ukrainian pipeline. For us, this is first and foremost a guarantee that Russia will not cause intentional damage to our gas infrastructure, because we need it for domestic gas transportation for Ukrainians.

Meanwhile, the refusal of transit will now cause panic in the spot market and, unfortunately, in the next three months will only increase the aggressor's income. In addition, Russia will be able to redirect the flow of gas through the Yamal-Europe gas pipeline, which is currently operating at a minimum load, and the Turkish flow is likely to be reloaded. At the same time, Gazprom will be able to legally not pay payments under the five-year agreement with Naftogaz in 2019 and even try to impose penalties. We should not forget that for our GTS unilateral termination of transit will be a technological and strategic challenge due to the need to reverse the system in reverse mode in combat. In addition, under such circumstances, the Russian Federation may purposefully strike at key GTS facilities to destroy the gas supply system, which will lead to a socio-economic and humanitarian catastrophe in Ukraine.

And uncoordinated termination of transit with partners will dramatically reduce the likelihood of effective sanctions against Russian gas on their part. In addition, it may prompt Germany to overturn the decision to terminate PP-2. Unfortunately, Ukraine's own steps are not enough to cause significant damage to Russia. We have and must coordinate our efforts with the EU and the United States.



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