Agathe Demarais is director of global forecasts at the Economist Intelligence Unit. His new book on the effects of US sanctions, “Backfire”, will be released next week.
Russia has turned energy supply into an economic weapon. The strategy is evident in Ukraine, where Russian drones and missiles bomb power plants. But it’s also evident in Europe, where Moscow has turned off the gas taps and possibly blown up a gas pipeline.
However, Russian President Vladimir Putin’s master plan now looks set to backfire.
In the short term, Putin will indeed inflict economic damage on the countries of the European Union – this is inevitable. But in the long term, Russia simply cannot win this energy war. Putin’s maneuver will only hasten the demise of his country’s energy sector and precipitate the loss of its coveted status as the world’s energy superpower.
Russia’s weaponization of energy serves three purposes. The first, which applied when the gas taps were still more or less open, was to create uncertainty and prevent EU countries from preparing for what lay ahead.
The second objective was to undermine European economies. And on this front, Russia’s strategy is working: the eurozone is likely to experience a recession next year.
Putin’s third goal, meanwhile, was to stoke political divisions in Europe by spreading the idea that sanctions are the root of the energy crisis. This is of course an inversion of cause and consequence: it is Russia’s decision to invade Ukraine which is at the origin of the crisis. However, the narrative has gained traction in the EU.
In the short term, Europe finds itself in a difficult situation. An economic and social crisis is setting in, as high energy prices are fueling inflation and a crisis in the cost of living, which could well last two or three years. Also, things could get much worse than they are right now. A particularly cold winter would increase the demand for energy, further aggravating the pressure.
The situation could worsen further in the 2023-2024 winter season, as European countries managed to fill their gas storage this summer, while Russian gas was still more or less flowing. However, they may not be able to do so until next winter.
Obviously, there is no denying that times are tough for the EU, but there may be some comfort in the fact that Putin’s strategy is doomed to backfire.
Moscow’s blackmail has once and for all convinced EU countries that Moscow is not a reliable energy supplier. And as a result, Europe is stepping up its efforts to shed its dependence on Russian hydrocarbons, with LNG infrastructure being built at a rapid pace to boost imports from the United States, Australia and Qatar. The first of many new LNG terminals will soon also open in Estonia, Latvia and Finland, and new gas contracts are being negotiated to boost supply, from Algeria or Norway, for example. The bloc is also accelerating plans to develop renewable energy sources.
As such, it looks like in about three years, Europe will no longer need Russian oil and gas.
In just two months, the bloc will stop 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 countries is still high. Yet these countries will not perfectly replace the European market – which was once the biggest buyer of hydrocarbons from Russia – as they now expect deep discounts in the price of Russian crude.
In addition, the United States could begin to impose secondary sanctions on Russian oil exports, which would further restrict Russian sales.
Meanwhile, the Kremlin’s position looks even worse when it comes to gas. Russia exports its gas via pipelines, which are currently positioned to serve Europe. And building new pipelines in their place will take time and money, both of which are lacking.
Exporting gas by pipeline also means signing new contracts with willing buyers. And here, again, things seem difficult for Moscow, because China is currently the only country that could absorb more Russian gas, but Beijing is in no hurry to agree.
It is not a surprise. China’s gas demand growth has slowed and Russia has also made it clear that it is not a reliable energy supplier. This is something Chinese leaders will not forget and they will naturally seek to avoid becoming dependent on Russian gas.
Given all of this, it’s no exaggeration to say that things are looking dire for Russia’s energy sector, which accounts for one-third of the country’s economy, around half of its tax revenue and around two-thirds of its exports. The latest forecast from the International Energy Agency (IEA) now assumes that Russia’s annual revenue from energy exports will more than halve by 2030, to $30 billion, from $75 billion. billions of dollars before the start of the war in Ukraine.
The IEA also estimates that by 2030, Russia’s share of global gas trade will have fallen to just 15%, from 30% in 2021. The track record for Moscow is clear: over the next decade, it will will lose its global market status. energy superpower – and the Kremlin’s problems will not end there.
Due to the sanctions, Russian energy companies no longer have access to Western financing and technology. For the Kremlin, this is an existential threat. The reserves of their current energy fields are gradually being depleted, and although they have new fields in the Arctic, their development will require huge sums of money and advanced Western technology. Without access to either, Russia’s energy production will slowly decline for decades to come.
Coupled with a drop in demand for fossil fuels as the world switches to renewable energy, all of this means that the energy war that Putin himself has started can only end badly for Russia.