Russia and Ukraine: Is Europe finally beginning to wean itself off its dependence on Russian fossil fuels?

-
  • Alexei Kalmykov
  • Russian section, BBC

January 23, 2023

image copyright GettyImages

photo comment,

Russia’s oil exports helped President Putin create a massive war fund

Europe is enormously dependent on Russian fossil fuels.

Since the first day of the invasion of Ukraine, the EU has paid the Kremlin €135 billion (US$146 billion) for Russian oil and gas, according to the Center for Research on Energy and Clean Air.

Now, with almost a year since the war began, and after nine rounds of EU sanctions on Russia, has Europe finally begun to wean itself off Russian fossil fuels?

Fortress Russia

Russian President Vladimir Putin has been preparing for this economic confrontation since sanctions were imposed on his country in 2014, after his first attack on Ukraine and its annexation of Crimea.

Indeed, Putin’s economic team, which received much praise, was the reason for calling the country “Fortified Russia”, as its economy is ready to overcome any difficulties it faces.

Over the past eight years, Russia has built up a huge monetary reserve. It has sold more fossil fuels than ever before, and used the proceeds from that fuel to build more pipelines.

It has also invested in critical Western technologies, commodities and infrastructure such as gas storage facilities and oil refineries in the European Union.

Meanwhile, as Europe attempts to shift away from coal – the most polluting of all fossil fuels – the EU’s reliance on cheap, relatively clean and abundant Russian gas has increased dramatically.

image copyright GettyImages

photo comment,

President Putin bet everything on the war in Ukraine

In 2020, Russia supplied the EU with an estimated 25 percent of the oil and 40 percent of the gas the bloc consumed during that year, according to statistics agency Eurostat.

And when Putin embarked on his invasion of Ukraine in 2022, it was impossible for the EU to cut all economic ties with Russia immediately.

Hence, the sanctions were gradual, and there were major exceptions to those sanctions, as the West found itself walking on an unclear path.

Never before has he imposed such complex sanctions on a large country like Russia – a nuclear power with a permanent seat on the UN Security Council.

Russia is one of the three largest oil and gas producers in the world, along with Saudi Arabia and the United States.

In an effort to shrink Russia’s war fund, the West has frozen 300 billion euros (324 billion US dollars) of the Russian Central Bank’s cash reserves.

To deprive Russia of Russian technologies and goods, the West banned the export of almost all technology, as well as sales of expensive goods and services, to Moscow.

Finally, in order to stem the flow of oil and gas money to the Kremlin, the European Union imposed a graduated ban on all coal imports starting in August 2022, an embargo on all marine oil imports starting in December 2022, and a ban on all imports of diesel fuel and other fuels. Petroleum products, starting in February 2023.

However, “the full impact of the Russian crude oil embargo is not yet clear,” according to the latest report issued by the International Energy Agency last December.

Russian revenge

In the absence of a comprehensive embargo, with prices soaring and oil still flowing, Russia has continued to make billions in revenue from the fuel it exports to Europe.

The Kremlin has also weaponized gas, cutting its supplies to Europe by 80 percent.

The Prirazlomnaya offshore ice-resistant oil-producing platform is seen at Pechora Sea, Russia on 8 May 2016.

image copyright GettyImages

photo comment,

Relations between Russia and the West have been frozen since its invasion of Ukraine on February 24, 2022.

--

But whatever profits Putin’s tactics yield in the short term, most economists agree that it will be very difficult to sustain as a long-term strategy.

-

Konstantin Sonin, an economist at the University of Chicago, says that President Putin has fallen into the same trap as other powerful leaders in the former Soviet Union, Iraq, Iran and Venezuela.

They all set out to sell oil and use the proceeds to invade other countries, but they ended up in conflict with the West and then blacklisted.

“The example of the Soviet Union proves that no matter how big the growth is, long-term stagnation is not possible when the country is isolated,” says Sonnen.

The Kremlin’s energy war is rapidly destroying its most important industries.

Russia’s state-owned energy company, Gazprom, announced a 20 percent drop in production and a 45 percent drop in exports in 2022.

Oil production is stable at a level 2 percent lower than before the war, but the International Energy Agency predicts a larger decline of 13 percent when the EU embargo takes full effect during the winter months.

Because of the high prices in Europe, the decline in gas sales did not harm the Kremlin’s revenues. But as the energy war continues, Russia will lose market share.

The International Monetary Fund predicts that the Russian economy will contract by between 3 to 5 percent during the years 2022 and 2023, which is more than the fund’s predictions before the war broke out of a contraction of 2 to 3 percent.

The Russian labor force is shrinking as more people have fled the country and more have been killed in the war, imports are falling and consumption is shrinking.

Trying to diversify the economy so that it is less dependent on oil and gas is very difficult because of the sanctions, as Russia has been completely dependent on Western technologies, investments and trade with it since the collapse of the Soviet Union.

President Putin had tried to do this during his first years in power at the beginning of the second millennium, but later he bet heavily on making Russia a superpower in the field of fuel.

Can China, India and Turkey save Russia?

Since the invasion began, while Russian sales to the European Union have declined, China and India have received Russian oil, the prices of which have been heavily discounted.

Turkey, too, hastened to take advantage of the estrangement between Russia and the West, to become a transit center for Russian gas exports.

Graph of European oil imports from Russia, compared to Indian and Chinese imports

According to the European Network of Transmission System Operators, more than half of the gas imports entering the European Union are transported from Russia to Turkey, and from there to the European Union.

But although Putin’s new allies are happy to exploit his declaration of the failure of the West’s “economic blitzkrieg against Russia” and get fossil fuels at rock-bottom prices, the war in Ukraine is doing them a lot of damage.

It harms their main trading partners in the West. And in trading, volume is extremely important.

Developed Western countries make up two-thirds of the world’s economy, while the Russian economy makes up only 2 percent.

The West is the source of modern technologies, money, skills, education and wealthy consumers. Russia has only oil and gas, and it does not have the infrastructure to divert supplies eastward, as an alternative to the European Union.

Europe previously accounted for 60 percent of Russia’s oil and gas exports, which in turn accounted for more than half of Russia’s revenues.

The Prirazlomnaya offshore ice-resistant oil-producing platform is seen at Pechora Sea, Russia on 8 May 2016.

image copyright GettyImages

photo comment,

As Russia’s economy becomes increasingly isolated from the rest of the Western world, how will this affect its people?

With oil and gas money running low and war expenditures piling up, only Russia is in danger of going backwards, while the rest of the world is moving forward.

Ironically, one of the unforeseen consequences of that forced and costly separation from the West is a danger to Putin’s vision of Russia’s future.

As the European Union prepares to end its dependence on Russian fossil fuels, Putin has given Europe the push it needs to accelerate the transition to clean energy.

And if that happens, Russian oil and gas will not be welcome in Europe on the same scale as before the invasion, whether the war continues or not.

-

--

NEXT Days before Blinken’s visit.. Beijing calls for “common ground” with Washington