Russia Shows Its Growing Sway Over Global Energy Markets

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Moscow’s vast oil and gas reserves give it a greater impact on Western and Chinese economies battling rising prices

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Western officials accused the Kremlin of trying to gain geopolitical points by withholding additional supplies, a charge Moscow denies. Instead Moscow says it is a troubleshooter in volatile global energy markets. Moscow denies that it is exploiting its vast energy reserves for political gains.

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Moscow’s leverage was on display last week when gas prices suddenly fell after President Vladimir Putin’s comments that Russia would help stabilize the energy market.

In the oil market, Russia has increased its influence over the Organization of the Petroleum Exporting Countries in recent years, despite not being a formal member. In Asia, Moscow has become a significant energy player, starting gas exports to China in 2019 and increasing coal deliveries there this year. Coal plays a major role in powering the Chinese economy.

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“The European gas crisis has shown Russia’s excessive leverage in Europe and beyond,” said Thierry Bros, an energy expert and professor of science Po Paris. “Putin is the only one who can stop the blackout in Europe because Russia has excess capacity. This is a position of power.”

European countries such as Germany have said that Russia is fulfilling its long-term contracts. However, European officials say Russia is deliberately withholding gas from the short-term spot market and lawmakers have called for an investigation into Russia’s market manipulation.

The International Energy Agency said last month that “Russia can do more to increase gas availability in Europe and ensure that storage is filled to sufficient levels in preparation for the warmer winter season to come.”

Last week, Mr Putin said Europe made a mistake when it shifted more of its supply to the spot market and Moscow urged Europe to move to more long-term contracts.

“Nothing can be given beyond this” [existing] contract,” Kremlin spokesman Dmitry Peskov said on Wednesday. Any additional delivery is a “negotiable matter”.

Russia’s growing energy influence gives the Kremlin significant geopolitical advantages, amid deteriorating relations with the West and challenges to Washington’s clout. It also provides an important source of revenue for Moscow to address the stagnant stay-at-home conditions.

Russia has dominated the supply of gas to Europe since Soviet times, when it built a pipeline to the West, but its grip on that market has increased in recent years as it opened routes to China and liquefied natural gas exports. started. While the US has increased its own exports in recent years, LNG cargo traveling by ship from the Gulf Coast and elsewhere often cannot compete on price with cheaper Russian pipeline gas.

According to BP plc’s annual statistical report, Moscow accounts for 25% of global gas exports, and controls 13.3% of global oil production, including condensate, compared to 12.3% for Saudi Arabia.

“Russia is a superstore when it comes to energy,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

Rising European gas prices have closed factories and left government officials scrambling to contain rising energy bills before the region’s winter. The European Commission is setting out a number of measures this week it believes national governments can take to reduce price increases, from tax cuts to price targets for low-income households.

While the gas shortage has been caused by a number of factors, including low reserves, falling European production and rising Asian demand, Moscow’s reluctance to book large excess flows has exacerbated the deficit. European officials say Moscow is using it to pressure regulators to approve Nord Stream 2, a controversial gas pipeline for Germany that is nearing launch.

The pipeline would allow Moscow to bypass Ukraine and Poland, whose governments criticize the Kremlin. Russian Energy Minister Alexander Novak said last week that approval of the pipeline would help resolve the crisis. Moscow denies that it is using the gas shortage to pressure regulators to approve Nord Stream 2.

“Russia has a vast gas resource and proximity, and has not yet delivered as much natural gas as might be expected of them,” said Frank Fannon, assistant secretary of state for energy resources under the Trump administration. Western governments “should deny the Kremlin the ability to use, however route, gas transit as a geopolitical weapon.”

Mr Putin said last week that Russia’s energy exports to Europe could reach a record this year.

But while analysts believe Russia is complying with contracts, it has yet to use its vast excess capacity to send more gas to the west.

“There’s a lot of Schadenfreude in Moscow,” said Alexander Gabuev, Senior Fellow at the Carnegie Moscow Center. “The mood here is that we did everything in our power to supply what we promised, and for the rest, it’s a big middle finger.”

Russia, as a top exporter and kingpin in the global oil-producing alliance, is enjoying new influence in oil markets.

In 2016, Mr Putin formed an alliance with OPEC that helped reverse the collapse in oil prices by agreeing to cuts. But Russia has also repeatedly vetoed OPEC leader Saudi Arabia’s proposals. In 2020, Moscow’s refusal to support the Saudis’ proposed production cuts amid the COVID-19 pandemic triggered a price war, causing US oil benchmarks to turn negative for the first time in history.

Recently, when Saudi Arabia predicted that the current gas crisis would increase oil demand by 500,000 barrels per day, Russia said the group’s plans for a gradual increase in production did not need to change. Moscow’s position remained the same at last week’s OPEC meeting, which decided to gradually ease production cuts.

In Europe, Moscow controls 53% of the oil market, compared to 16% for Riyadh, according to BP.

Moscow is also stealing market share from the US, according to a confidential internal OPEC report. Russia’s oil production will increase by 1 million barrels per day next year, compared to 780,000 barrels per day for the US.

In Asia, Russia is making up for a coal shortage in China, following Beijing’s ban on Australian imports of coal. It is also planning a second gas pipeline for China after the $55 billion gas pipeline, which began exporting there in 2019.

“Russia’s role as an energy superpower is suddenly very clear,” said Daniil Yergin, vice chairman of consulting firm IHS Markit..

Georgi Kantchev at [email protected] and Benoit Faucon at [email protected]

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