Putin’s response shows Russia’s blazing position amidst the European energy crisis

  • Putin said to be manipulating markets in European energy crisis
  • Putin making gas supply conditional on Nord Stream 2 certification 
  • Europe’s over reliance on Russian LNG and use of energy as a weapon
Putin - Russia
Source: BBC News

Why is Putin’s temperature BLAZING right now?

Answer: The European energy crisis is heating up Putin’s temperature as demand for Russian gas is skyrocketing. 

Europe and the United Kingdom are currently facing increasingly high natural gas, coal and electricity prices. The surge in prices began at the end of September and has subsequently been coined a crisis, soaring up to five times their amount last year at this time. Sources indicate that it is a supply issue due to a combination of energy demand post-COVID-19, extreme weather and prolonged winters, supply chain disruptions, and poor regional and global stockpile. 

Since October, the global energy watchdog, the International Energy Agency (IEA), has been calling on Russian President Vladimir Putin to increase Russia’s supply of Liquefied Natural Gas (LNG) to Europe by approximately 15%, arguing the country has the capacity to do so. The Paris-based organization responsible for advising global governments on energy policy has argued that Putin is leveraging the current energy crisis to place pressure on the final certification process for the Nordstream 2 pipeline completed earlier this year. 

In response, on October 13th, President Vladimir Putin offered to pump more Russian gas to the continent, stating that Gazprom will increase supply “if Europe asks for it,” part of the Kremlin’s effort to ‘meet partners halfway.’ As a result of Putin’s announcement, regional gas prices fell after having soared to 500%. However, just five days later, a highly anticipated auction revealed that there had been no provisions made to pump more gas either through the Ukrainian pipeline or via Poland to Western Europe. On the one hand, this fed into the rhetoric of Putin manipulating supply and, on the other, broke the final hope of Putin coming to Europe’s rescue.

When the crisis will ease remains uncertain as the German regulator has shown no sign of approving the project, as they argue that they need to ensure the project does not violate competition rules by limiting which suppliers have access to it. The regulator has until January to approve or reject the usage of the pipeline and the European Union has until the end of May to review the decision. However, Putin does not seem very likely to budge either. 

What is changing Putin’s temperature?

Answer: The completion of Nord Stream 2 and a largely dependent Europe on Russian LNG and coal is causing Putin’s temperature to heat up.

Analysts believe that Putin is purposefully withholding gas supply to Europe to incentivize the final certification process of the Nord Stream 2 pipeline that is set to carry Russian gas under the Baltic Sea directly to Germany. The pipeline represents a major political power play by Putin as it bypasses Ukraine, depriving the country of revenue flows from the transport of Russian gas.

Not only does it cut Ukraine’s dependence on transit revenues, but experts argue that it can be used as a tool of political pressure for unknown political gains. In 2015, the European Commission released a statement of objections to Russian company Gazprom’s breaches of European competition law and highlighted the illegality of the company’s use of excessive non-marketing pricing methods. The fear is that Putin is doing the same with Nord Stream 2. 

There has been additional criticism from Polish late President Lech Kaczyński stating that the pipeline is set to undermine the security not only of Ukraine but the Baltic states and in fact the whole of Europe. However, the issue remains that even with the full application of EU laws on the Nord Stream 2 pipeline, ownership building, non-discriminatory and cost-reflective tariffs, and third-party access, the rules would not be able to prevent Putin from using the pipeline as some form of political leverage in the future.

Furthermore, although Europe is largely dependent on Russian LNG, Russia is not solely dependent on Europe to export its LNG and coal. While Russia captures 43% of Europe’s need for natural gas, Putin has been turning towards the Chinese market to export both coal and gas. China is a huge market that Putin has been tapping into. As the sixth largest exporter of LNG and the third largest exporter of coal to China, Putin is solidifying a cosy place in the largest economy and in an alternative market to Western Europe.

Matched with increased Chinese demand for gas amidst their own energy crisis and compensation for decreased coal production, China doubled its LNG imports from Russia last year. With both Europe and China seeking to obtain gas from Putin at any cost necessary to brace for the winter, Putin and his Russian gas have been placed in a position of high demand. 

Finally, as a result of the crisis, some member states are deciding to resort back to coal to make up for the gas deficit, a source that produces double the carbon emissions as gas. This move, however, does not get rid of Europe’s reliance on Russia as an energy exporter. Russia is the largest exporter of coal to Europe, usurping 41% of the EU’s coal imports and tying Europe once again to Russian energy and to Putin. As a whole, Putin is set to gain from the runaway prices experienced in Europe and the UK either through increased demand for LNG or coal from Europe or from China.

What is driving Putin?

Answer: Putin aims to make Russia a great power. He aims to use the Nord Stream 2 certification to gain political leverage with Europe. 

This year, Putin saw the completion of the Nordstream 2 pipeline carrying Russian gas directly to Europe. Besides bringing substantial economic benefits to Russia and Europe, the pipeline is said to be a political tool to place pressure on Europe much like in the 2009 and 2014 energy crises. In both crises, Russia limited gas supply as a means to pressure Ukraine. These concerns are on the rise again amidst the current energy crisis, with parts of Europe accusing Putin of using Nord Stream 2 and its gas supply as a weapon as political leverage over Europe. 

However, as a response to these accusations, Putin has come out stating that Russia had no involvement in causing or aggravating the European crisis. Furthermore, Putin has further replied to such accusations calling them “politically motivated blather, which has no substance at all” and by naming it the “European caused crisis,” as Europe is too reliant on volatile short-term spot prices instead of long term contracts. 

In fact, Putin is using the same argument as he was when first dealing with opposition towards the completion of the Nord Stream 2 pipeline. He is stating that the Nord Stream 1 Ukrainian pipeline needs to see a reduced stream of LNG due to its poor condition and that it cannot possibly be used to supply more gas to Europe during this crisis, hence the need for Nord Stream 2. 

In this way, Putin is framing the certification of Nord Stream 2 as the only solution to the European energy crisis by stating that “Of course, if we could expand supplies along this route, then, 100 percent, I can say with absolute certainty, the tension on the European energy market would significantly decline, and that would influence prices, of course. This is an obvious thing.” Not very subtle is it?

Although we cannot know for certain whether Putin is ordering Gazprom to withhold gas to influence the certification process of Nord Stream 2, the power politics at play are very clear and Putin does not have a deficit of it.

What does this mean for you?

Answer: Sustained high energy prices for consumers, increased attention on the EU’s reliance on Russian gas, and weariness for the strengthening Russia-China relationship. 

First and foremost, consumers are going to see sustained high energy bills even as governments work to slash renewable energy taxes and find other ways to support consumers pay their bills. It is not likely that prices will drop in the near future, on the other hand, the futures market indicates that prices will more likely begin to cool at the end of the European winter. This means that a more swift regulatory approach may have to be taken: the approval of Nord Stream 2, which Europe, the US, and Eastern European countries like Ukraine are sure not to be happy about.

What is most obvious is that this energy crisis points to a trend that Europe is overly dependent on Russian gas and it is this vulnerability that has caused the current crisis. By having 40% of LNG supplied by Gazprom, Putin has a stronghold on Europe’s energy markets and therefore can use this as an instrument of political leverage.

In fact, that is exactly what Putin is doing in Moldova, by failing to renew its energy contract with the country amidst a shifting political climate favoring EU membership and pro-western reforms while pushing Russia further away. Putin’s use of energy as a weapon is not new however, it was introduced by Dmitri Medvedev in his tenure as President, but Putin surely is perfecting it. 

This energy crisis also brings into light the EU’s concern for greater energy cooperation between Putin and Xi Jinping which the West fears will leave the EU behind and will reassert Russian power in political and energy negotiations. Although China is a growing market for Putin, the EU is still the largest importer of Russian LNG standing at 219 billion cubic meters in 2020 alone whereas China hopes to reach 38 billion by 2024. However, with the established 2019 Power of Siberia pipeline to China, the two countries are already discussing options for a second one which would raise the further concern of sidelining the EU. 

The energy crisis comes just weeks before the COP26 conference in Glasgow. With many utility sectors having switched to carbon heavy coal to generate electricity, it not only undermines the EU’s green energy transition but shines a light on the overall success of the EU’s transition thus far. Unfortunately, part of Europe’s energy crisis has been attributed to the speed at which the continent has weaned off base load powers like traditional fossil fuels to embrace renewable sources. The argument stands that there is currently insufficient renewable energy sources like wind and solar to match demand for energy.

Moreover, with inadequate nuclear capabilities, the EU’s carbon neutrality plan has placed the energy market in a precarious situation, meaning that in this crisis when gas supply ran short, the EU did not have many alternatives to fuel households. Although it is clear that in the long term a transition to renewable energy would shield the energy market from price shocks and supply issues in fossil fuels, in the short run, the renewable energy market may not have the mechanisms in place to capture increased demand for heating and electricity. 

While a priority for the EU, green energy does not seem to be very high up on the priority list for Putin, as he and confident Xi Jinping have decided not to attend the upcoming COP26 conference. With a cold winter approaching, it is becoming clear that Europe might have to deal with this crisis on its own.