The writer is a non-resident senior fellow at the Carnegie Endowment for International Peace
Russia’s war against Ukraine has many fronts, not least energy. And as with the Kremlin’s plans for a swift victory in Ukraine, both sides in the energy conflict have seen their dreams of rapid triumph collapse amid grinding and attritional trench warfare.
The Kremlin was certain its gas could not be replaced, and that without it, Europe would face a winter with industrial shutdowns. Moscow believed that the ensuing social and political instability would force the EU to abandon its support for Ukraine.
The gas war did cost Europe hundreds of billions of euros in increased gas bills. Some European industries, such as fertiliser manufacturing, struggled and shut down, but the combination of a mild winter and suppressed Chinese demand restored the balance on the global gas market, while the European economy proved highly adaptable.
On the other side, there was a belief that Russia was heavily dependent on western technologies to keep its oil and gas flowing, western markets for its revenues and western financial systems to facilitate its energy exports. It was hoped that, if cut off from these, Russia would face rapid economic collapse that would limit its ability to wage war.
Following the invasion, amid boycotts by western buyers and Moscow’s attempts to keep supply chains alive and payments going through, Russian oil production decreased by 10 per cent between February and April, but later recovered. Now, a year after the war began, Russian oil production is at prewar levels.
The European oil and oil products embargo and price cap did result in higher costs for Russian operators, but do not appear to have significantly damaged the Russian oil trade. Russia’s tax levy on its oil industry had decreased substantially by the end of 2022 — not because its oil companies were making less money, but due to government errors currently being rectified through modifications in the tax system.
Both sides appear to have exhausted their immediate offensive capacity and switched to a war of attrition, hoping that time will be on their side. Russia’s hopes are for a hot summer and cold winter that will see increased gas requirements, plus a demand surge from China. Russia still has some pipeline gas going to Europe and Turkey. It may consider cutting Europe off completely, but the cost would be high. Moscow would lose its last remaining allies, such as Serbia and Hungary, along with an important trade channel via Turkey.
Liquefied natural gas has not yet become a part of the energy war. Russia is the fourth largest LNG exporter, accounting for 8 per cent of global volumes. But most of its LNG capacity is partially owned by Chinese and Japanese companies, and commandeering it to further Russia’s geopolitical goals would be difficult.
Moscow might also try single-handedly to recreate the 1973 energy crisis by withdrawing its oil from the markets. So far, though, it has been pragmatic, and preferred to work around the price cap and embargoes.
The west’s arsenal is limited, and most of the tools at its disposal have already been deployed against Iran and Venezuela. Europe will continue to diversify its energy portfolio, but gigawatts of solar and wind power cannot be added overnight. And major new LNG production volumes will only start to come online at the end of 2024.
So far, the monitoring of price cap mechanisms and re-exports of Russian crude and diesel through third countries appears to have been fairly relaxed. The goal of the EU and US was to keep Russian volumes in the market, so the message sent to market players was not to over-comply or create too much friction in operations. The noose may, however, now start to tighten, with some facilitators placed on sanctions lists, and shadow fleet tankers impounded.
At the same time, price caps might be lowered, reducing the Kremlin’s revenue. This, however, would create a massive value transfer to the Indian and Chinese economies and to intermediaries involved in the Russian oil trade and chosen by Russian sellers. At least part of the wealth that the Kremlin would be deprived of could end up with its friends. At the same time, western manufacturers might be facing tougher competition from Asia.
This is a novel conflict of unseen scale that has not been fought before. And just as the first world war did, it may signify a new era, this time in economic warfare, with new strategies, devastating new effects and, in the end, a new world energy order.
