Agathe Demarais is the global forecasting director at the Economist Intelligence Unit. Her new book on the effects of U.S. sanctions, “Backfire,” will be released next week.
Russia has turned energy supply into an economic weapon. The strategy is obvious in Ukraine, where Russian drones and missiles are bombing power plants. But it’s also evident in Europe, where Moscow has turned off gas taps and possibly blown up a gas pipeline.
However, Russian President Vladimir Putin’s master plan now looks set to backfire.
In the short term, Putin will, indeed, inflict economic damage on European Union countries — that much is inevitable. But in the long run, Russia simply can’t win this energy war. Putin’s maneuver will only accelerate the demise of his country’s energy sector, and precipitate the loss of its coveted status as a global energy superpower.
Russia’s weaponization of energy has three objectives. The first, which was applicable when the gas taps were still more or less open, was to create uncertainty and prevent EU countries from preparing for what lay ahead.
The second objective was to sap European economies. And on that front, Russia’s strategy is working — the euro zone will likely register a recession next year.
Putin’s third goal, meanwhile, was to fuel political divisions in Europe by spreading the idea that sanctions are causing the energy crisis. This is, of course, an inversion of cause and consequence — it’s Russia’s decision to invade Ukraine that’s causing the crisis. However, the narrative has gained some traction in the EU.
In the short run, Europe is in a difficult predicament. An economic and social crisis is mounting, as high energy prices fuel inflation and a cost-of-living crisis, which may well last for two or three years. In addition, things could get much worse than they are now. An especially cold winter would raise demand for energy, further worsening the squeeze.
The situation could be become more dire still in the 2023 to 2024 winter season, as European countries managed to refill their gas storage this summer, while Russian gas was more or less still flowing. However, they may not be able to do so ahead of next winter.
Clearly, there’s no denying that times are tough for the EU, but there may be some comfort in the fact that Putin’s strategy is bound to backfire.
Moscow’s blackmail has, once and for all, convinced EU countries that Moscow isn’t a reliable energy supplier. And as a result, Europe’s redoubling its efforts to shed its dependency on Russian hydrocarbons, with LNG infrastructure being built at a fast pace to boost imports from the United States, Australia and Qatar. The first of many new LNG terminals will soon open in Estonia, Latvia and Finland as well, and new gas contracts are being negotiated to boost supply — from Algeria or Norway, for instance. The bloc is also accelerating plans to develop renewable energy sources too.
As such, it’s starting look like, within three years or so, Europe won’t need Russian oil and gas anymore.
In just two months from now, the bloc will stop almost all imports of Russian oil, leaving Russian oil companies in need of alternative buyers for Russian crude. This shouldn’t be too hard, as demand from China, India and several other emerging countries is still high. Yet, these countries won’t be a perfect replacement for the European market — which used to be Russia’s biggest buyer of hydrocarbons — as they will now expect big discounts on the price of Russian crude.
In addition, the U.S. could start imposing secondary sanctions on Russian oil exports — further constricting Russia’s sales.
Meanwhile, the Kremlin’s position looks even worse when it comes to gas. Russia exports its gas via pipelines, which are currently positioned to serve Europe. And building new pipelines in their stead will take time and money, both of which are in short supply.
Exporting gas via pipeline also means signing new contracts with willing buyers. And here, again, things look tough for Moscow, as China’s currently the only country that could absorb more Russian gas, but Beijing is in no hurry to oblige.
This isn’t a surprise. The growth in China’s gas demand has slowed, and Russia’s also made it clear that it’s not a reliable energy supplier. This is something Chinese leaders won’t forget, and they will naturally seek to avoid becoming dependent on Russian gas.
Given all this, it’s no exaggeration to say things look dire for the Russian energy sector, which represents one-third of the country’s economy, around half of its fiscal revenue and roughly two-thirds of its exports. The International Energy Agency’s (IEA) latest forecasts now assume Russia’s annual receipts from energy exports will drop by more than half by 2030, all the way down to $30 billion from $75 billion before the war in Ukraine started.
The IEA also believes that by 2030, Russia’s share of globally traded gas will have dropped to only 15 percent — compared to 30 percent in 2021. The bottom line is stark for Moscow: In the coming decade, it will lose its status as a global energy superpower — and the Kremlin’s problems won’t end there.
Due to sanctions, Russian energy companies no longer have access to Western financing and technology. For the Kremlin, this is an existential threat. The reserves of their current energy fields are gradually depleting, and though they have new fields in the Arctic, developing them will require huge amounts of money and top-notch Western technology. Without access to either, Russia’s energy production will slowly decrease in the coming decades.
Coupled with a drop in demand for fossil fuels as the world transitions toward renewables, this all means the energy war that Putin himself started can only end badly for Russia.
