When Russia entered self-destruct mode – DW – 08/31/2023

For more than 50 years, Russia has been a reliable supplier of natural gas to Europe, fulfilling its contractual obligations even at the height of the Cold War. Moscow’s reputation played a major role in feeding Germany’s addiction to Russian gas, as Europe’s economic engine was a business model based on exports and cheap energy.

This is until the first Russian tanks entered Ukrainian territory on February 24, 2022. The Russian invasion was followed by a series of unprecedented Western sanctions against Moscow. Natural gas has been exempted from any official sanctions, unlike Russian oil and coal, even as Germany – which depended on Russia for more than 50% of its supplies before the war – and other countries race to diversify away from Russian gas.

Moscow responded to the EU’s unequivocal support for Ukraine by weaponizing its own gas supplies to the bloc, which was getting more than a third of its gas needs from Russia before the invasion. State-owned Gazprom arbitrarily cut off flows through Nord Stream 1, Russia’s largest gas pipeline to Europe, before closing the pipeline indefinitely a year ago due to an engine oil leak in a gas turbine at a major Russian compression plant.

Four weeks later, both the Nord Stream 1 and Nord Stream 2 parallel pipelines were severely damaged by explosions that remain unexplained to this day.

Gas shortages shook Europe, amid fears of power outages and power rationing in the winter. Gas prices in Europe rose to a record high of over €343 ($371) per megawatt-hour in late August last year, sending inflation to historic levels.

Worst fears did not materialize, and Europe averted a full-blown energy crisis thanks to a milder-than-usual winter, lower gas consumption and increased LNG imports from around the world.

“The whole Russian strategy was self-destructive, and it failed miserably,” said Simon Tagliapietra, an energy expert at the Bruegel think tank in Brussels. “The Kremlin believed that by using gas as a weapon against the EU, the EU would be forced to immediately reduce its support to Ukraine, and this has been proven completely wrong.”

The German economic model is called into question

However, turmoil in the gas markets has forced energy-intensive industries such as chemicals, fertilizers and paper to close factories or reduce production. In Germany, production in energy-intensive sectors fell by about 20% from pre-war levels between late 2021 and late 2022.

Rising energy prices have hurt Germany’s international competitiveness. According to a recent report by German Chamber of Commerce and Industry, Nearly a third of German manufacturers are considering or implementing plans to move production abroad amid rising energy costs at home.

While gas prices have fallen significantly in the past year, trading at €35 per MWh on Monday, they are still well above levels seen in previous years.

Europe’s natural gas reserves are more than 90% full, well ahead of the EU’s November 1 target. The region has replaced much of the lost Russian supplies with gas from the United States, Norway and Qatar.

Gas demand remains weak amid a slowdown in the manufacturing sector, which keeps prices under control. However, the gas market remains vulnerable, as freezing temperatures this winter and consequently high demand for heating could deplete inventories quickly.

Russia is no longer a major player in the global gas field

Experts say that for Russia, which ships two-thirds of its gas exports to Europe, the decision to shut down Nord Stream was its own goal.

Russia’s share of the EU market has fallen dramatically to around 10% even as it struggles to redirect spare gas supplies. Russian gas exports via a pipeline to Europe fell by about 60% to 62 billion cubic meters in 2022, prompting Gazprom to cut production by a fifth. It is expected to fall further this year with only 10 billion cubic meters delivered via Ukrainian and Turkish pipelines remaining in the first five months.

“Russia has lost its position as a major international gas exporter, and has lost it forever,” Tagliapietra told DW.

Natural gas, compared to oil, which Moscow has been able to successfully redirect to countries like China and India, despite deep cuts, is less fungible. It is more difficult to transport and requires huge investments in pipelines and liquefaction and regasification plants.

With most of its gas export infrastructure designed to cater to European buyers, Russia is finding it difficult to redirect its gas to China and other customers to the east.

Bloomberg news agency, quoting data from the Russian Ministry of Finance, stated that gas revenues decreased by about 45% to 710 billion rubles (6.8 billion euros, 7.4 billion dollars) in the first five months of 2023 compared to the same period last year. On Tuesday, Gazprom reported a loss of 18.6 billion rubles in the second quarter due to lower flows to Europe.

Russia is looking to take advantage of former Soviet countries such as Kazakhstan and Uzbekistan to sell its gas, boost its LNG exports and expand its domestic gas network to keep the gas flowing. It also depends on Russia as an alternative route to Europe, but the details are still vague.

Moscow sees China as an alternative to the huge European market. But that would require building new pipelines to supplement the existing Siberian Energy Pipeline.

“If (Russian President Vladimir) Putin plans to build pipelines to China with the same capacity as pipelines to Europe, he will have to wait two decades,” Russian energy analyst Mikhail Krutyakhin told DW. Hesitant to buy more Russian gas at the moment.

European demand for Russian liquefied natural gas

Continued deliveries of Russian gas, despite a small portion of what the EU had earlier bought, have led to calls to phase out LNG imports, which increased by 37% to 22 bcm last year. Belgium, France and Spain bought record quantities from Russia in 2022.

And while increased LNG imports undermine the bloc’s plan to become independent of all Russian fossil fuels by 2027, it also helps contribute billions of euros in revenue to the Kremlin.

Earlier this year, EU Energy Commissioner Kadri Simsun urged EU companies to refrain from signing new contracts with Russian LNG suppliers.

Those who continue to buy Russian gas cite potential legal troubles in the absence of any EU-wide measures, inflation risks and, in the case of landlocked Austria-Hungary, a lack of alternatives to quickly diversify supplies.

Countries like the Netherlands and Spain are taking steps to stop buying Russian LNG, but in the absence of any sanctions, getting rid of Russian gas forever could take some time.

As for Moscow, its gas war, which has led the European Union to find new suppliers and accelerate its green transition, has permanently damaged its position as the number one supplier of gas to Europe.

“Although Russia can offer gas at very low prices in the future, the Europeans will remember that it can break the contract at any time for political reasons,” Krutykhin said. “Signatures and contracts made by Russian officials cannot be relied upon. Russia cannot be trusted.”

This article was updated on August 31 to include figures on Gazprom’s losses in the second quarter and to include a reference to unexplained explosions at Nord Stream pipelines.

Edit: Uwe Hessler