Why Russia’s Natural Gas Leverage Won’t Last Much Longer

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Last week, as anyone following Russia and the war in Ukraine should have seen coming, the Russian government stopped shipments of natural gas to Poland and Bulgaria over payment issues. Following a Putin directive, Russia’s Gazprom – majority-owned by the state – said it would only accept payment in rubles. Italian oil firm Eni is setting up a ruble account, Forbes reported. So is Uniper of Germany. This is all because the US and allies have frozen more than $250 billion worth of Russia’s Central Bank dollar and euro accounts abroad. Russia’s government has a hard time exchanging currency now. So if the Europeans want its natural gas, it is going to have to exchange currency for them and send the Russians rubles.

This should be interesting…

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That Europe is still wedded to Russian natural gas might be considered a side effect of Trump Derangement Syndrome. Recall, the ex-president’s comments to the Germans in 2018 when he said their dependence on cheap Russian natural gas was an economic and national security risk. They disagreedof course, because when it comes to national security, Germans posited, Trump doesn’t know what he is talking about.

Today, Germany’s producer price inflation is at its highest level since 1949 thanks to that dependence.

But Russia’s ability to use natural gas as a political weapon, much in the way the US uses the dollar, has a time limit.

Europe is going to double down on a post-fossil fuel economy, or at the very least, make deals with other countries that can provide reliable sources of energy, including oil and gas. None of this will be as cheap as what the Russians offered. American liquefied natural gas (LNG) costs about 30% more, though this differential fluctuates greatly.

Some said that Europe might ban Russian imports of oil and gas altogether, rather than pay in rubles.

On Tuesday, the EU energy commissioner said the bloc can replace two-thirds of Russian natural gas supplies by the end of the year, with a third coming from alternative suppliers and another third being replaced by renewables.

The European Commission is expected to detail a sixth round of sanctions against Russia this week, with Germany on Monday saying it would now back an EU embargo on Russian oil. German Economy Minister Robert Habeck noted that such a move would come at a significant cost, saying: “We will be harming ourselves, that much is clear.”

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Russian natural gas accounts for around 40% of EU supply. An embargo, if implemented, and this will be tricky to pull off, would have grave consequences for Russia’s economy, but also for Europe. Their short-term energy needs require a natural gas baseload in most of Western Europe.

They are going to want to change that. And that means Russia – still an oil and gas power – will watch its biggest market whither away in the years ahead. China will pick up some slack by buying Russian gas, but it comes from Eastern Siberia, while Europe is supplied from Western Siberia. Additionally, China is moving to renewables and is the leader in much of the renewable energy supply chain.

To attach a number to how much Russia would lose financially, the country has reportedly taken in some $66 billion worth of oil and gas receipts since the war in Ukraine began in early February, according to the Center for Research on Energy and Clean Air in Finland.

Professor Alexander Mirtchev, a Distinguished Professor of Government at George Mason University, and Vice Chairman of the Atlantic Council, has been looking at these issues of energy power politics for years. I wrote about his book, “The Prologue: the Alternative Energy Megatrend in the Age of Great Power Competition” last year. He argues that renewable energy will become a commercial battleground, shifting allegiances between countries. Russia is one poster child in all this. Saudi Arabia is another: Europe has told the Saudis that they are not interested in what they are selling.

“Mirtchev outlines issues (in his book) that will occupy scholars and policymakers for decades to come,” Henry Kissinger wrote on the book jacket.

In those pages lies an important message for Gazprom and OPEC in general: Russia is behind when it comes to the new “megatrend” of renewables. Their economy is not about manufacturing electric cars and wind turbines. And now their divorce from the West is turning their former partners off to their biggest revenue stream. Mirtchev, who knows the post-Soviet world better than most, says Russia will ultimately “pay the price” as Europe will speed up the creation of domestic sources of energy and diversify away from Russia.

Of course, all of this is easier said and done. The Europeans, on the clean energy side, are good at nuclear in France, and good at wind turbines in the UK, Germany, Denmark and the Netherlands. But solar and wind is a China game now. And six out of 10 largest wind turbine manufacturing companies in 2021 were Chinese.

The clash of titans between energy-exporting powers like Russia, and Europe’s pitiful dependence on Russian gas, will lead to new realities and conflicting national interests, including access to new sources of vital energy-related commodities – many of which are also dug up out of the ground (think lithium, for example).

Mirtchev says in “The Prologue” that the renewable energy market shift will not resolve the tensions of fossil fuels brought to world markets and geopolitics. The competition would shift. It will be about having the new rare earth and strategic minerals needed for new defense systems (think long-life batteries for drones or autonomous military vehicles).

This is not part of Russia’s wheelhouse. Though Russia is a huge source of nickel, the largest in the world, in fact, there are plenty of other places to get it from. Nickel is used in car batteries and stainless steel, for the most part. The US makes a lot of its stainless steel from recycled iron and steel scraps and is not dependent on Russia for that. The US is not dependent on Russia for anything. That’s Europe’s problem.

The more the two sides squabble over natural gas payments, and the longer the risk of an EU-wide boycott on Russian fossil fuels remains, the faster Russia is left behind. They will be left behind, if Mirtchev is right because the “megatrend” of new energy materials is not at the top of mind in Moscow today.

The only time Russia is interested in cleaner-burning fuels is when it has Rosatom nuclear reactors in operation. Otherwise, Gazprom and Rosneft are much better sources of steady cash flow for the state.

Russia: Left Behind?

For anyone interested in Russian macroeconomics, its energy business, and the global pressures of a post-fossil fuels world, the Mirtchev book is a must-read and a go-to volume to have handy on the office bookshelf.

The earliest chapters look at how alternative energy emerged as a socio-political and techno-economic megatrend; what questions do the push toward alternative energy raise about geopolitical dynamics and national alignments; and what does this mean for energy security.

Clearly, fossil fuels-rich Russia would not want to switch to solar and wind, and long-life battery storage. They can power their country on the cheap. Over 70% of Russia is powered by natural gas. What happens when Europe decides they don’t want it anymore? Gazprom revenue rose over 120% last year. It is the only Russian company responsible for shipping natural gas into Europe via pipeline, making it a monopoly. When that demand dries up, Russian export revenue dries up with it unless one believes China, Turkey, and the poor neighboring countries in the former Soviet Union could pick up the slack. It’s possible, but unlikely if countries are to be pushed into renewable sources of energy as a requirement for financing, especially from the big development banks (think World Bank and the European Bank for Reconstruction and Development, for instance). Still, Russian industry would have access to abundant and mega-cheap natural gas.

Mirtchev thinks that alternative energy is a catalyst for global change, with massive implications for Russia’s national security (and every other nation’s national security).

The development of coal and the steam engine in the 19th century, and diesel and oil in the 20th century, as well as nuclear power (for bombs and aircraft carriers), created economic and military powerhouses.

“Energy is soft power,” Mirtchev says. “But today we see that it is also a hard power, as it was, for example in World War II when both Japan and Germany were at a disadvantage because of a scarcity of oil, and as we now see Russia’s influence of gas supply on Europe’s policy in the Ukraine war.”

Trade Wars in the Post-Fossil Fuel Economy

Commercial wars, or economic wars, are heating up around energy once again.

The most obvious one is between the US and China, whereas China dominates US solar supply chains, is a key processor of minerals like cobalt and owns many rare earth minerals used in military applications.

The US is in yet another commercial battle with China over solar. The Commerce Department is investigating whether Chinese multinationals are circumventing punitive tariffs by manufacturing solar cells and modules in Southeast Asia instead.

Over 80% of US solar-related imports now come from a handful of poor southeast Asian nations, led by…

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Credit: www.forbes.com /

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