The story so far: Intensifying projections of an imminent Russian incursion into Ukraine, even as the Kremlin continues to deny it, the United States said on February 18 that Russia may have now amassed as many as 190,000 troops in and around the Ukrainian borders. Besides, the announcement that Russian president Vladimir Putin will oversee the country’s latest show of strength on the weekend — the nuclear drills where it will launch ballistic and cruise missiles — has also raised alarm in the West.
Aside from mobilising troops, the US and European Union allies have laid emphasis on taking the economic sanctions route if Mr. Putin follows through. They are threatening Moscow with the possibility of halting U.S. technology, aerospace, and defense exports, cutting off Russia from SWIFT, restricting access to Western financial markets, and even placing direct restrictions on Mr. Putin, among other measures.
More importantly, however, a major sanction being discussed against Russia is to somehow block the new 1,222-km-long undersea gas pipeline called Nord Stream 2, running from Russia to Germany, the development of which was completed in September 2021 but is still awaiting regulatory approval from Germany to actually become functional.
The $11-billion pipeline would run under the Baltic sea, passing Finland, Sweden and Poland before making an entry into Germany, bypassing other pipeline routes passing through Ukraine. The first leg of Nord Stream, already functional since 2011, had cost Ukraine a substantial loss in the transit fee it would charge Russia for its supply routes — as high as US$720 million annually.
Mr.Biden has “promised” that “there will no longer be a Nord Stream 2” if Russia invades Ukraine. Washington is also pushing for lowering Europe’s gas imports from Russia. While EU allies, including Germany have shown support for the sanctions route, this solidarity might lose momentum when it comes to one big measure — withdrawing support from Nord Stream 2.
This is because of Europe’s high dependence on Russia for its energy needs, mainly natural gas, which is used in the continent for industrial purposes and heating millions of households. Experts say the impact of other economic sanctions may be undermined if Moscow keeps receiving revenues from gas trade with European countries, which will increase further with the new pipeline.
How much does Europe depend on Russia for natural gas?
Russia is the biggest supplier of natural gas to Europe, which depends on the former for nearly 40% of its natural gas requirements. Russia is followed by Norway, which supplies about 22% of Europe’s gas needs; Algeria and Azerbaijan supply under 20% and 10% respectively.
Europe’s dependence on Russia was put into perspective in late 2021, when Russia lessened its gas supplies to Europe in the wake of the deepening Ukraine crisis. This was not done overtly, as Moscow was still meeting its contractual gas; it stopped selling additional natural gas purchased on a spot basis. This led to energy watchdog International Energy Agency, accusing Russia of undermining Europe’s energy security.
When the additional sales were cut back, energy prices in the continent went up almost five times from 19 euros per megawatt hour to 95 euros per megawatt hour. This rise, however, also had to do with low gas storage levels in Europe and higher coal prices. The effect of the supply cutback was also felt by the consumer, who received high gas and electricity bills, with the governments having to introduce tax breaks and subsidies.
About one-fifth of the European Union’s energy demand is met by natural gas, which makes gas the continent’s second largest source of energy, according to Eurostat, the Union’s statistical office. Natural gas makes up about 20% of the continent’s electric power generation. Its use as an energy component and the continent’s dependence on other countries to procure it, is observed to be increasing as the region looks at low carbon emissions to meet climate goals.
Germany, Europe’s largest economy depends on Russia for 65% of its natural gas needs, while Italy gets 43% of its gas from Russia, and France, a little over 16%. Other smaller countries however, such as Czech Republic, Hungary and Slovakia are almost fully dependent on Russia for their requirements of natural gas, while Poland gets 50% of its gas from the latter.
Gazprom, Russia’s natural gas producer largely controlled by the Kremlin, is responsible for supplying gas to Europe under its long term contacts. On top of that, it makes spot sales to countries on its Electronic Sales Platform (ESP) based on their time-based requirements. In a timeline coinciding with the volatile Ukraine situation, the platform has not been offering additional sales on ESP since last August, sending just enough gas to fulfill contractual requirements.
According to its official data, Gazprom likely missed even its contractual targets to Europe in 2021. While it had initially planned to send 183 billion cubic meters (bcm), figures released for gas it sent outside the former Soviet bloc were 185.1 bcm, which included an export of 10 bcm to China. The 2021 supply to Europe was down from the record high levels of 2018, when it sent 201 bcm of gas to the continent. The company said however, that it raised gas pipeline supplies in 2021 to Germany by 10.5% and to Italy by 20.3%.
This dependence of Europe on Russia will only increase if the Nord Stream 2 pipeline to Germany becomes functional, as Gazporm has said the new pipeline would have the annual capacity to deliver 55 bcm, which would make the annual Nord Stream supply 110 bcm, factoring in the existing pipeline. This does not include the gas that enters Europe from other pipelines.
Over the last two decades, Russia has been building supply routes to Europe that circumvent Ukraine; meaning, if it cuts off gas to Ukraine in a crisis situation, European supply would not be adversely affected owing to other available lines. Before the 2000s, the Brotherhood pipeline passing through Ukraine would deliver 110 bcm to Europe annually, but newer pipelines like those passing through Turkey-Yamal, Turkstream and Blue Stream made it possible to deliver almost 80 bcm annually without going through Ukraine.
Mr. Biden has been making efforts to lessen Moscow’s leverage by supplying and asking more suppliers to send LNG or Liquified Natural Gas to Europe.
The U.S. is the European Union’s largest LNG supplier, with the former sending a record 400 million cubic meters of LNG per day to the region in recent months. More incoming LNG also led to a drop in spiking energy prices.
However, there are constraints here as well, for gas to be liquified at onloading, liquefaction plants are needed, and for LNG to be converted back to a gaseous form, offloading ports require regasification plants. Both kinds of plants cost billions of dollars and a whole lot of time to build.
While Europe has significantly expanded its regasification capacity over the years, global suppliers of LNG are already producing as much gas as they can.
While experts say that a complete cut off of natural gas from Russia in the event of a conflict is not likely, if it does happen, LNG supplies from the U.S., which cannot be increased overnight, would only be able to meet two-thirds of Europe’s gas needs, according to Amy Myers Jaffe, managing director of the Climate Policy Lab at Tufts University.
In cases of shortages, LNG ships going elsewhere have been diverted to Europe when buyers offered to pay higher prices, but this would not always be possible.
What will be the impact on Russia?
While Europe is dependent on Russia for a substantial part of its energy needs, it is also the latter’s biggest buyer, consuming nearly three-quarters of the gas it produces, which means significant revenue coming into Moscow. Europe also buys oil from Russia and together, oil and gas exports make up a large portion of Russia’s federal budget.
In recent years, however, Russia formulates its budget in such a manner that it can keep aside $630 billion in foreign exchange reserves, meaning if revenue from gas is hit for a short time, the country would be able to afford it.
A longer term trade cut off with Europe would not prove favourable, however, as Europe would also start ramping up its efforts to find alternative suppliers and sources of natural gas.