Agathe Demarais is Global Forecasting Director at the Economist Intelligence Unit. Her new book on the impact of US sanctions, Backfire, will be out next week.
Russia has turned energy supply into an economic weapon. The strategy is evident in Ukraine, where Russian drones and missiles are bombing power plants. But it is also evident in Europe, where Moscow has turned off gas and possibly blown up a gas pipeline.
But Russian President Vladimir Putin’s master plan now appears to be backfiring.
In the short term, Putin will indeed inflict economic damage on the countries of the European Union – that much is inevitable. But in the long run, Russia simply cannot win this energy war. Putin’s maneuver will only accelerate the decline of his country’s energy sector and result in the loss of its coveted status as a global energy superpower.
Russia’s armament of energy has three purposes. The first, applicable when gas taps were still more or less open, was to create uncertainty and prevent EU countries from preparing for what lay ahead.
The second aim was to weaken the European economies. And on that front, Russia’s strategy is working – the eurozone is likely to see a recession next year.
Putin’s third goal, meanwhile, was to fuel political divisions in Europe by promoting the idea that sanctions are causing the energy crisis. This is, of course, a reversal of cause and effect – it is Russia’s decision to invade Ukraine that is causing the crisis. However, the narrative has gained traction in the EU.
In the short term, Europe is in a difficult situation. An economic and social crisis is coming to a head as high energy prices fuel inflation and a cost-of-living crisis that may well last two or three years. Besides, things could get a lot worse than now. A particularly cold winter would increase energy demand and further exacerbate the bottleneck.
The situation could get even worse in the 2023-2024 winter season, as European countries were able to refill their gas storage this summer while Russian gas was more or less still flowing. However, they may not be able to do this before the next winter.
Of course, there is no denying that times are tough for the EU, but it can be comforted that Putin’s strategy is bound to backfire.
Moscow’s blackmail has convinced EU countries once and for all that Moscow is not a reliable energy supplier. As a result, Europe is stepping up efforts to sever its dependency on Russian hydrocarbons, with LNG infrastructure being built at a fast pace to boost imports from the United States, Australia and Qatar. Also in Estonia, Latvia and Finland, the first of many new LNG terminals will soon open and new gas contracts will be negotiated to increase supply – for example from Algeria or Norway. The bloc is also accelerating plans to develop renewable energy sources.
So it looks like in about three years Europe won’t need Russian oil and gas anymore.
In just two months, the bloc will halt almost all imports of Russian oil, leaving Russian oil companies in need of alternative buyers for Russian crude. This shouldn’t be too difficult as demand from China, India and several other emerging markets is still high. However, these countries will not be perfect substitutes for the European market – which used to be Russia’s largest buyer of hydrocarbons – as they will now expect large discounts on the price of Russian crude oil.
In addition, the US could start imposing secondary sanctions on Russian oil exports – which would further limit Russia’s sales.
The Kremlin’s situation is even worse when it comes to gas. Russia exports its gas through pipelines currently positioned to supply Europe. And building new pipelines in their place will take time and money, both of which are scarce.
Exporting gas via pipelines also means entering into new contracts with willing buyers. And here, too, things are looking difficult for Moscow, as China is currently the only country that could take on more Russian gas, but Beijing is in no rush to comply.
That’s no surprise. Gas demand growth in China has slowed, and Russia has also made it clear that it is not a reliable energy supplier. The Chinese leadership will not forget this and will, of course, try to avoid dependence on Russian gas.
Given all of this, it is no exaggeration to say that things are looking bleak for Russia’s energy sector, which accounts for a third of the country’s economy, about half of its tax revenue and about two-thirds of its exports. The latest projections from the International Energy Agency (IEA) now see Russia’s annual energy export revenues falling by more than half by 2030, from $75 billion before the start of the war in Ukraine to $30 billion.
The IEA also predicts that Russia’s share of the world’s gas trade will have fallen to just 15 percent by 2030, compared to 30 percent in 2021. The bottom line is that Moscow is in great shape: In the coming decade it will lose its status as World market lose energy superpower – and the problems of the Kremlin will not 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. Their current energy fields are running out of reserves, and although they have new fields in the Arctic, their development will require huge sums of money and first-class western technology. Without access to both, Russia’s energy production will slowly decline in the coming decades.
All this, combined with a drop in demand for fossil fuels as the world transitions to renewable energy, means that the energy war that Putin himself started can only end badly for Russia.