How Kyiv ‘Weaponising’ Natural Gas in Russia-Ukraine War is Bad Gambit for Europe

SEATTLE (Oil Monster): On Wednesday, the flow of natural gas from Russia to Europe through the Urengoy-Pomary-Uzhgorod pipeline stopped after a five-year-old pre-war agreement between Russia and Ukraine lapsed due to the refusal of the Ukrainian government to renew the same.

The pipeline was built in the Soviet era to carry the Siberian gas to European markets. With the long-awaited stoppage of the carriage of gas through the pipeline, Russia’s last remaining major energy supply corridor to Europe got closed. Earlier in 2022, the Nord Stream pipeline to Germany was sabotaged—the needle of suspicion is on Ukraine—and after that a route through Belarus to Poland was closed.

However, Russia can still supply gas to Hungary, Turkey, and Serbia through the TurkStream pipeline across the Black Sea.

Not on Our Blood

Announcing the decision to terminate the transit agreement, Ukrainian President Volodymyr Zelensky said that his country would not allow Russia to earn additional billions on Ukrainian blood.

Zelensky had warned for months that he would not renew the pre-war contract, which expired at midnight on December 31, because of Russia’s full-scale invasion of Ukraine.

Kyiv’s decision to suspend the flow of gas through a pipeline that had carried Soviet and then Russian gas to Europe for decades is part of a broader campaign by Ukraine and its Western allies to undermine Moscow’s ability to fund its war effort and to limit the Kremlin’s ability to use energy as leverage in Europe.

With the closure of the pipeline, Ukraine and Western nations plan to give an economic blow to Russia, which in 2023 made around $5.2 billion from supplying gas to certain Eastern European countries.

Immediate Impact

To ward off the impact of the closure of the pipeline, the European Union has laid out plans to fully replace the gas earlier transiting through Ukraine, and the EU has found alternative sources in liquefied natural gas (LNG) from Qatar and the US, as well as piped gas from Norway, since Russia has been at war.

But the alternative source comes attached with a high price tag in terms of high energy prices, inflation, and cost to the economy.

Meanwhile, the immediate impact of the closure of gas transit through Ukraine is already visible. Here are two immediate impacts:

One, Energy Crisis in Moldova: Not a part of the European Union, Moldova, which generates much of its electricity from a power plant fuelled by Russian gas, is already seriously affected due to the closure of the pipeline. Moldova has already declared a 60-day state of emergency in the energy sector and asked its citizens to save energy. It also has urged residents to dress warmly, gather family members together in a single room, hang blankets or thick curtains over windows, and use electric heaters.

Two, Tensions in Slovakia: The revocation of the transit agreement has also already caused serious tensions between Slovakia and the EU. Slovakia is the main entry point for Russian gas to the EU that earned significant transit fees from piping the gas on to Austria, Hungary, and Italy.

This “weapon of mass economic destruction” has fanned out since the onset of the Russia-Ukraine war.

Weapon of Mass Economic Destruction

Since the beginning of the war, fossil fuel flow and its prices have been used as the biggest weapon of mass economic destruction by both sides, Russia and the Western Powers led by the European Union. Irrespective of who acted, whether it was due to the stoppage of supply by Russia or the impact of the embargo on Russian fossil fuel supply due to sanctions on it (the sanctions were supposed to cripple Russia economically), the main sufferers have been countries in Europe, big or small.

And with the lapse of the latest agreement, the era of supply of the cheap Russian gas to Europe has formally eclipsed. Though the avowed purpose of Ukraine and Western nations of the non-extension of the transit agreement is to give a material blow to the Russian economy, its real consequences in terms of strategic, economic, and symbolic impact for the whole of Europe will be enormous, even though the European Commission claims that the EU has prepared well for the change and most states will find it hard to cope with.

To understand what impact the drying up of cheap Russian oil to Europe has had so far, let’s dig deeper into the period before the war began.

Trilemma Disturbed

Before the commencement of the Russia-Ukraine war, Europe was substantially dependent for its energy needs on Russia, which exported a large number of energy products to Europe. These included crude oil and oil products, uranium products, coal, and liquefied natural gas (LNG).

The onset of war witnessed both a voluntary reduction/stoppage of the supply of energy sources to European nations by Russia as well as due to the sanctions of the European Union on the purchase of Russian fossil fuels. But the major impact of both has been the same: the loss of a “trilemma”—a balance between supply security, environmental sustainability, and affordability of energy sources to European countries.

And the result has been a spike in energy prices, a high inflation level, and significant economic stress.

The Biggest Weapon

But the biggest weapon that Russia wielded against Europe was its natural gas that Europe needed to heat its home, fire the power generation, and keep its factories/industrial processes running. In 2021, 40 per cent of Europe’s total imported natural gas came from Russia based on long-term contracts and was delivered by the state-backed gas monopoly Gazprom via four main pipelines.

A case in point was a few nations, like Austria and Latvia, who were dependent on Russia for more than 80 per cent of their gas needs. But the bigger European nations, Germany and Italy, were equally, if not more, vulnerable to energy supply shocks from Russia. By volume, Germany, followed by Italy, were the two largest customers of Russia’s oil and gas, with Russia having long been the biggest supplier to the two countries.

Even before Russia formally invaded Ukraine on February 24, 2022, it had already unleashed on Europe one of the most potent warfare weapons of mass economic destruction—“choking off” the Russian gas supplies that powered European power generation, headed its household heating, and turbocharged its factories and industrial processes.

Devastating Impact: Germany, a Case Study

Germany, the biggest European economy, and the extent of its suffering owing to the stoppage of the Russian fossil fuel flow to it is worth discussing. Before the war began, Germany was dependent on Russia for one third of its oil, half of its coal, and more than half of its total requirement of gas.

Three years after the war began. Back to circa 2024. As per a recent policy paper published by the “Forum for New Economy,” the impact of the energy shock perpetrated on Germany has been devastating. It has triggered the biggest collapse in German living standards since the Second World War and has resulted in the downturn in economic output comparable to the 2008 financial crisis while the real wages in the country slipped further than in any year since 1950.

Hysteresis Effect at Perilous Time

In addition, the energy crisis due to war witnessed inflation rates rising dramatically and real wages dropping more than in any other year in postwar Germany. There are also clear signs that the crisis is causing severe long-term economic damage (hysteresis effects). At the beginning of 2024, German GDP was down 7 per cent and the real wages 10 per cent below the pre-COVID-19 trend.

The economic crisis in Germany triggered not only major economic upheaval but also led to the downfall of the government of German Chancellor Olaf Scholz at a perilous time for Europe. Worse, what has been true for Germany is true for other European countries that are in the throes of varying degrees of economic crises, one worse than the other due to drying off the tap of Russian oil.

End of the Road

With the closure of Russia’s once-dominant gas supply to Europe via Ukraine, which flowed for decades on New Year’s Day with the collapse of a contract between the two warring countries that paid out billions to Moscow in gas revenue and to Kyiv in transit fees, it is finally the end of the road for the access of the European countries to the cheap energy source from Russia.

It is pertinent to note that the former Soviet Union and later Russia spent more than half a century building up pipelines to acquire a lion’s share of the European gas market, but the war in Ukraine has all but destroyed that business for Gazprom in Russia, whereas Europe has killed its golden goose, the cheapest supply of gas. In 2018, combined, various pipelines delivered a record 201 billion cubic meters (bcm) of gas to Europe in 2018. Only through Ukraine, Russia even in 2023 supplied 15 bcm of gas in 2023, down 65 bcm when the last five-year contract began in 2020.

Existential Crisis

With the fuel that once flowed through the continent from Russia now ending altogether, prices are soaring sky-high and forcing governments of European countries struggling to look for costly solutions to cheap Russian gas imports. As a result, the European Union has entered the vortex of the existential crisis owing to the depth, the breadth, and the structural repercussions of the oil and gas war— as aforesaid, the most potent weapon of economic destruction.

Impact on Europe

When Russia drastically reduced gas supplies to Europe in 2022, European countries scrambled to find new suppliers at much costlier prices. The Russian cutoff of gas supply created an unprecedented energy crisis in Europe. To quote once again from Germany, Europe’s biggest economy was forced to shell out billions of euros setting up floating terminals to import liquefied natural gas by ship, not by pipeline. Gas prices soared. Norway and the United States chipped in, becoming the two largest suppliers.

Notwithstanding the brave face put up by the European Union, the latest disruption means European nations must find newer, costlier sources for 10 per cent of gas needs for which Europe still was dependent on Russia. Even before the closure of the latest pipeline, Europe’s gas market rose in November by 5 per cent to its highest price in a year in anticipation of the stoppage of Russian gas.

After the closure of the pipeline, European gas prices rose by 4.3 per cent to almost 51 euros on the first trading day after Ukraine stopped transiting Russia’s natural gas to Central Europe. The rise in gas prices to 51 euros per megawatt-hour is the highest since October 2023 and comes ahead of freezing temperatures forecast across much of Europe.

What the future holds for Europe only the future knows. But if the past is any indication, with all roads to cheap Russian gas closed, Europe is unmistakably headed towards perilous disaster at an already perilous time for Europe.

Courtesy: www.firstpost.com