It has been a good couple of months for Russian President Vladimir Putin. The opportunities for enhancing Russia’s “great power status” — long Putin’s strategy for shoring up support at home — are coming faster than he can take advantage of them.
In the past, his strategy has often involved taking big risks, such as the annexation of Crimea or military involvement in Syria. Yet in recent weeks, the geopolitical gods are delivering Putin manna from heaven. While this moment brings the US and its allies warnings about Russian near-term behavior, it also delivers messages going beyond Russia that are missed at their peril.
As if the calamitous US withdrawal from Afghanistan wasn’t enough to make Putin smile, the energy crisis unfolding in Europe has put him in the catbird seat. Russian actions thus far have not helped alleviate natural gas shortages in the UK and Europe. But Russia is not the original culprit for the crisis as it has unfolded.
Instead, the rise in price of natural gas — almost 600% in the past year for a Dutch benchmark — is the result of a complex set of factors. These include an unusually cold spring that left European gas inventories low, a quicker-than-expected economic recovery from Covid-19 that has spurred competition for gas from Asia, and a carbon-price mechanism has that has pushed rates for fossil fuels higher.
European policy makers are all too aware that things could worsen and even lead to loss of lives in the months ahead as the weather chills. Which puts Putin on a par with Mother Nature: In the short term, this looming energy-turned-political crisis can only be averted by an increase in Russian gas exports to Europe or an unseasonably mild winter.
Growing accusations that Russia has been withholding more natural gas from Europe in order to expedite the complex and slow approval process for the Nord Stream 2 pipeline to Germany have reached a crescendo in recent days. On Wednesday, Putin finally indicated Europe might look to Russia for help. Although not pledging anything specific, the gesture brought the price of gas contracts for delivery in November down from the peak they had climbed to that morning. Here is a chart Bloomberg Opinion’s John Authers compiled on Thursday:
The advantages here for Russia go beyond putting Putin in a strong position in dealing with Europe. A similar crisis brewing in Asia also creates opportunities for Moscow to strengthen its ties to Beijing.
China is feeling the crunch of higher prices and is nervous about meeting future energy needs. Chinese Vice Premier Han Zheng recently instructed state-owned energy companies to “secure supplies for winter at any cost.”
More generally, the crisis is likely to generate a renewed interest in long-term contracts (which afford Russia more influence over the terms) after a move toward spot markets in the age of energy abundance. According to multiple parties, the Russian energy firm Gazprom PJSC has fulfilled all of its long-term contracts; it has simply done little to supply the spot market in Europe, which is where an increasing number of European buyers now go to acquire gas.
The fuel crunch could also advance another sort of objective held by Putin: sowing polarization in American domestic politics. A lengthy and contentious debate about US exports of liquified natural gas exports seemed resolved, after many studies convincingly concluded that domestic natural gas was so abundant and cheap that its export would not jack up prices paid by US consumers. Despite a balanced market at home, many interpret increases in US natural gas prices in the past few months as an indication that international prices are beginning to push domestic ones higher.
This development could resuscitate that fierce political debate, especially at a time when President Joe Biden’s administration is keen on helping domestic manufacturing. Moreover, after the Donald Trump administration touted how US energy prowess could be used to alleviate European reliance on Russian gas, America’s non-role in easing this crisis suggests that the ability of the US to shield its allies has been overstated.
Policy makers should anticipate ways in which Putin will try to use his new leverage. The focus thus far has largely been on Nord Stream 2, but there are other, less-direct places where Russia might try to turn this moment to its advantage. These include bolstering its stance in the Eastern Mediterranean, its position in talks to reinstate the Iran nuclear deal, and its influence in Central Asia in the aftermath of the US withdrawal in Afghanistan.
The implications of this price spike aren’t limited to the realm of energy or to Russia. Two additional takeaways deserve consideration.
First, policy makers — particularly those in Congress — who were placated by the July agreement between the US and Germany over Nord Stream 2 should be on alert not to fall for such vague pledges again. The agreement states:
We commit to … respond together to Russian aggression and malign activities, including Russian efforts to use energy as a weapon. Should Russia attempt to use energy as a weapon or commit further aggressive acts against Ukraine, Germany will take action at the national level and press for effective measures at the European level, including sanctions, to limit Russian export capabilities to Europe in the energy sector, including gas, and/or in other economically relevant sectors.
Senior officials in the Biden administration — including Secretary of State Antony Blinken and Secretary of Energy Jennifer Granholm — have recently warned Russia against using “energy as a weapon.” But do not expect any specific finding that this is the case. Rarely are judgments that mix economic and political interests so easy to categorize.
That Russia has met the exports it has committed to in its long-term contracts, but not offered more gas to be sold on the spot market, may be difficult to characterize definitively as using energy as a weapon. But there is little question that Russia is using its ability to make more gas available as leverage in its tussle with Europe over the final steps in Nord Stream 2.
Does that mean Russia is using energy as a weapon? And if so, how will the US hold Germany accountable for its commitment to punish Russia, as a senior US State Department official told journalists it would at the time of the signing of the agreement? It is beyond unreasonable to think that Germany has any intention of rallying other European nations to put sanctions on the export of Russian gas to Europe at this time, given that more Russian gas is what they desperately need.
Second, this energy crisis highlights the vagaries of — and even dangers to — the transition to alternatives. The political discontent from rising prices and shortages are a challenge, but could become even more so if high energy prices, power cuts and industrial curtailments stoke a galvanized opposition to Europe’s fast pace of movement away from fossil fuels.
Equally important, one should not dismiss this energy crunch as a once-off— as it likely will be a repeated feature of the energy transition. Reining in supplies of fossil fuels before demand for them is weakened will lead to such price spikes again and again, particularly as investors come under increased pressure to steer clear of the fossil-fuel industry.
Thus far, Europeans and others have given insufficient attention to the geopolitics of ensuring fossil-fuel supplies until renewable energies are much more abundant and are coordinated in ways to address the problem of intermittency. (Interestingly, the UK and Norway just opened the North Sea Link — an undersea network that enables them to exchange renewably-generated electricity to manage daily and seasonal supply variability for each.) Particularly in light of the recent OPEC+ decision to adhere to its plan to increase oil production only conservatively, do not be surprised if the national gas dynamic on display in Europe is replicated in oil markets in 2022.
Price spikes that can deliver revenue windfalls and provide geopolitical leverage during the energy transition may sound like a good thing for producers of oil and gas. There are some downsides, however. The likely prospect, but the uncertain timing, of these peaks makes the jobs of policy makers in producer countries even harder than they already are.
At some level, all leaders of big oil- and gas-producing countries know that diversifying their economies is crucial to their long-term survival. But the right time to move investments out of fossil fuels and into other sectors becomes even harder to discern when oil and gas are still intermittently delivering big benefits.
After natural gas prices peaked and plunged during a single day this week, an analyst commented that it had been “the most volatile and unpredictable day that many in the industry will ever witness.” Unlikely. Rather than seeing this gas crisis as a singular event, we need to perceive it to be a window into the future of what will inevitably be an uncoordinated and often unpredictable energy transition.
Bloomberg
