Putin’s gas strategy is doomed to fail
By cutting gas to the European Union, the Kremlin is shooting itself in the foot.
As Russia continues to unleash devastating attacks on Ukrainian civilian infrastructure, Europe is weighing up a future without Russian gas. European Union countries are negotiating a common response to the energy crisis while seeking to strike deals with alternative gas providers.
In order to understand the direction of the Russian-Western economic war, and thus ensure continued support for Ukraine in its resistance to Russia’s invasion, it is more important than ever to understand President Vladimir Putin’s strategy.
Firstly, the declining gas flows to Europe are having a significant impact on the Russian economy. Despite the recent sky-high energy prices, the record budget surpluses that the Kremlin recorded in the first six months of the war have been all but erased. The Kremlin remains without significant credit support from abroad, as even China remains reticent to extend financial support.
While Beijing and some non-aligned countries like India are happy to buy up its oil and gas at a discount, diminishing discretionary spending and a decrease in industrial production as a result of sanctions will further rack the Russian economy in the short term. Russia’s long-term prospects are also increasingly dim due to the impact of sanctions and the country’s declining population – a trend which has been exacerbated by Putin’s draft and the hundreds of thousands who have fled as a result.
The reality is that Russia’s entire economic model is dependent on hydrocarbon exports to Europe. Putin has chosen to gamble everything on his Ukrainian folly. As gas flows fall to a trickle, so does the lifeblood of Russia’s economy. The Russian president seems to be playing an energy game, while hoping his fortunes will be reversed.
For example, he has allowed some Russian gas flows to Europe to continue. One route is via Ukraine. Extrapolating from current flows, the route is set to deliver just 15 billion cubic metres (bcm) per annum, but its effect on the European market is primarily to serve as a reminder that Putin can increase the flow of gas. It is important for the Kremlin to keep it operational to set the groundwork for later arguments that its actions in the economic war are separate from the invasion of Ukraine – a claim that has no basis in reality.
The other route is via Turkey’s TurkStream pipeline and its Bulgarian extension, Balkan Stream, through which Russian gas is delivered to Serbia and Hungary. These gas flows are significant, in particular, because they enable the Kremlin to reward its sole major remaining supporter in the EU – the government of Viktor Orban. This, too, is intended to enable Moscow to eventually try to re-establish itself as a credible supplier to Europe and to other countries racked by the energy crises.
Balkan Stream has a current capacity of 15 bcm per annum which can be increased to 20bcm. This may be a fraction of the combined 110 bcm capacity of the two Nord Stream pipelines that lay damaged by sabotage at the bottom of the North Sea and link Russia to Germany’s pipeline network. Nonetheless, it offers a sufficient supply that could ultimately be used to entice other gas-hungry European countries in Central and Eastern Europe, including Austria.
Russia is also likely expecting economic and political instability to draw other EU states back into its energy fold. In August, a caretaker government in Bulgaria mulled negotiating with Gazprom, which had cut gas supplies in April over Sofia’s refusal to pay in roubles. Previous Bulgarian governments have cosied up to Moscow, including by building the TurkStream extension at a great cost and with limited returns in the form of transit fees.
With this in mind, Putin is probably hoping that the hung parliament after the October 2 election and negative economic prospects will eventually force the next Bulgarian government – whether provisional or regular – to bow to his conditions.
Apart from the gas pipeline game, the Kremlin’s strategy is also increasingly relying on liquefied natural gas (LNG). As part of its bid to diversify from Russian piped gas, the EU has been building up substantial LNG infrastructure, which the Kremlin is hoping to use as a trojan horse. There is already evidence of this: European LNG imports from Russia were up 15 percent in the first eight months of 2022 compared with 2021.
The EU so far has been unwilling to target the market. The biggest player on the Russian LNG market is the private company Novatek. Headed by Leonid Mikhelson, one of Russia’s richest men, the firm remains off Western sanctions lists.
Mikhelson owns just under 25 percent of Novatek, while 23.5 percent is held by Gennady Timchenko, a close ally of the Kremlin already under US sanctions since 2014. Another 9.99 percent is held by Gazprom, and just below 20 percent of the firm remains traded on the public markets (though its London listing is suspended).
The remaining 19.4 percent is owned by France’s TotalEnergies, which before February was among the Western energy firms most eager to continue investing in Russia despite the sanctions imposed after Putin’s initial invasion of Ukraine in 2014.
TotalEnergies was also reticent at first to withdraw from Russia following Putin’s February escalation. However, on March 22, it announced that it would “provide no further capital for the development of projects in Russia” and that it would halt purchases of Russian oil by the end of the year. It also said there will be no new financing for the Arctic LNG 2 project, in which it is a 10-percent shareholder. Nevertheless, Total continues to buy Russian LNG.
European authorities are presently tightening the noose on Russian gas sales, working on implementing a price cap on gas sales, although the process has been fraught. Russia’s atrocities will continue to incentivise moves towards the measure and while the EU has never been known for its ability to swiftly agree on such significant measures, the market appears to recognise the reality that even Russian LNG sales will eventually be cut off.
In August, TotalEnergies announced it agreed to divest from its 49-percent stake in Terneftegaz, which operates the Termokarstovoye gas field, selling out to Novatek. And while Mikhelson remains off US and EU sanctions lists, he was blacklisted by British and Canadian authorities in April. Ultimately, he is likely to be targeted by Brussels and Washington, too.
With the EU’s increasingly full gas storage and the related decline in spot gas prices, Western officials can tear off the Band-Aid of Russian LNG imminently. However, even if they do not, LNG will not prove to be a panacea for Putin any time soon.
Russia’s current LNG export capacity is roughly 40 bcm per annum. And although Putin has ordered an increase to at least 160 bcm by 2035, there are serious doubts this is achievable, particularly given the withdrawal of Western capital investment. For the foreseeable future, LNG alone cannot make up for the decline in Russia’s piped gas sales to Europe, which were about 140 bcm in 2021.
And while Russian officials have declared they will reorient towards China with the Power of Siberia 2 pipeline that would give it an outlet for another 50 bcm of gas annually, Beijing holds all the leverage to secure an even larger discount than it did when agreeing on the first Power of Siberia pipeline after the annexation of Crimea. This explains the lack of progress on striking a final deal and Moscow’s insistence to sell gas to Europe via Nord Stream 2.
Putin’s strategy can be summarised as hoping that “the bridges he burns will light his path ahead”. It is an historic folly that will leave Russia weaker, and poorer, as it wreaks economic havoc across the world.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.