A Bleak Outcome

What if Russian gas supplies to Europe through Ukraine were cut off?

08 February 2022


Tensions have escalated on the Russian-Ukrainian border, with Russia mobilizing thousands of soldiers since late 2021, prompting Western claim that Moscow is on the verge of invading Ukraine with the aim of appointing a president endorsed by the Russian regime. Accordingly, the US and European leaders threatened to impose extensive economic sanctions on Russia, should it take any military action against Ukraine. Meanwhile, the Western powers also rushed to arm the Ukrainian army with heavy military equipment.

Some Western views speculate that Russia may use gas as a geopolitical weapon against Europe by cutting off all gas flows to the European continent, in order to counter potential Western pressure against it, in the event of its invasion of Ukrainian territories. However, this speculation seems highly unlikely, since this will not only harm Europe, but also Russia's economic system, in addition to damaging Moscow's reputation as a reliable global supplier of natural gas.

 

The Energy Crisis

The energy crisis experienced by European countries last year is the worst since the seventies of the previous century, as the continent faced a severe shortage of energy supplies, including natural gas. This comes in addition to the decline of renewable energy, which prompted several European countries to relaunch coal-fired plants. Amidst these circumstances, natural gas prices in European markets reached about 6 times their pre-COVID-19 level.

Among the reasons for the record rise in gas prices globally and in Europe is the exceptional global economic revival following the gradual recovery from the COVID-19 pandemic, in addition to the disruption of liquefied gas supplies due to the maintenance of liquefaction plants of some producers. Some observers also consider the lack of gas supplies coming from Russia to be the main cause behind the 2021 gas crisis in Europe.

In this respect, the International Energy Agency (IEA) accused Moscow of being a core factor in the "artificial tightness" of European gas markets, which was evident when Russia cut its gas exports to Europe by 25% in the fourth quarter of 2021, compared to the same period in 2020, and to 22% compared to 2019.

Russia provides about a quarter of Europe's needs for both natural and liquefied gas. It sells about half of the pipeline gas supplies under long-term contracts, while the rest is sold through the spot market, most of which got suspended close to the end of last year. 

The slowdown in Russian gas supplies to Europe has caused a decline in gas storage levels at 47% of full capacity as of early January 2022, compared to an average of 60% over the past decade. This deprived the markets of the needed flexibility to deal with emergency situations in demand for gas caused by unusual cold weather waves or other conditions. 

 

The Brink of a War

The crisis between Russia and Ukraine has witnessed an unprecedented escalation since late last year. Western powers have accused Moscow of getting ready to invade Ukraine, which is evident in the following:

 

1.     Mobilization of Russian forces: 

Russia has escalated its stance against Ukraine, amassing more than 100,000 soldiers and heavy weapons on the borders between the two countries, in addition to deploying Russian forces in Belarus. European powers accused Moscow of plotting to invade Ukraine and attempting to appoint a pro-Russia leader there.

 

2.     Military preparations by the allies of Ukraine: 

In light of the Russian military escalation, the US and some European countries headed to provide the Ukrainian army with heavy military equipment to counter any possible Russian threat. NATO also expressed its readiness in case of any military aggression against Ukraine, saying that it "has put its forces on alert". 

 

3.     Threats of sanctions against Moscow: 

The US administration and European leaders have vowed to impose severe economic sanctions on Russia, which may amount to imposing sanctions on President Putin himself, in the event of any military action against Ukraine. Western powers are also considering depriving Moscow of the Swift global payments system, although the idea is strongly opposed by some European countries. 

 

4.     Threats to stop the operation of the Nord Stream 2 gas pipeline: 

The US and European leaders have threatened to stop the operation of the new Nord Stream 2 gas pipeline, which links Germany and Russia via the Baltic Sea, in the event of any hostilities against Ukraine. Germany has mentioned that the escalation of the Ukrainian crisis may imply the cancellation of this project, and the end of the pipeline.

 

Possible Setbacks

Some Westerners doubt that Moscow will adopt a rational approach in dealing with the Ukrainian crisis, as President Putin insists, according to Western views, on re-forming political alliances in Europe, restraining the bias of Eastern European leaders towards the West, as well as curbing the influence of NATO in this region. Accordingly, there is a possibility for Russian military action to take place against Ukraine in the foreseeable future, which will have clear repercussions on the European gas market, portrayed in the following:

 

1.     A complete cut of off Russian gas supplies to Europe: 

In this extreme scenario, Russia's Gazprom could respond to any economic sanctions against Moscow by completely cutting off gas supplies to Europe, which would cripple the continent's energy systems, resulting in a massive hike in gas and energy prices in general. Many views consider it unlikely that Russia would resort to this option.

 

2.     Reducing gas quantities to Europe via Ukraine: 

In the event of a war, gas flows through Ukraine may be practically stopped, either by Moscow or due to war conditions. This jeopardizes the gas flows of about 40 billion cubic meters, which Russia is obliged to transport annually through Ukraine under an agreement due to expire in 2024. This may give Moscow leverage to dictate its terms to Ukraine and the EU, in addition to promoting the importance of the Nord Stream 2 pipeline.

 

The Feasibility of the Alternatives

It may not be easy for Europe to completely replace the gas flows transported through the Ukrainian territory, due to the following:

 

1.     Dependence on the Yamal-Europe pipeline "Belarus - Poland - Germany": 

Russia's Gazprom may re-route some of the supplies to the Yamal pipeline, which has a capacity of about 33 billion cubic meters. However, boosting transport through Belarus will not be without a political or economic price for Europe. Following the migrant crisis with Poland, Belarusian President Alexander Lukashenko has, on numerous occasions, threatened to cut off gas supplies to Europe, in response to any EU sanctions

 

2.     Resorting to additional purchases of liquefied gas: 

The most likely option for Europe seems to be increasing purchases of liquefied gas from the spot markets. However, this will cause an increase in gas prices as well, and Europe will be forced to buy any additional quantities of liquefied gas at very high price premiums. Recently, the US attempted to reassure its European allies that it will provide them with adequate supplies of gas in the event of a military intervention against Ukraine. The US administration recently conducted diplomatic tours with a number of gas producers in the Middle East, as well as Norway and Australia, to ensure securing Europe's needs of gas. However, it would be difficult for these producers to meet all of Europe's gas needs, with surplus production declining, not to mention their long-term contracts with customers in Asia and other regions of the world. 

 

3.     Reliance on coal or nuclear energy: 

The exacerbation of the energy crisis may compel European countries to resort to relaunching more coal-fired power plants, or even force some countries, such as Germany, to abandon plans to close nuclear plants this year.

 

Pragmatic Handling

Contrary to Western military assessments, Russian officials, including President Putin, have repeatedly argued that Moscow has no intention of invading Ukraine, or even installing a pro-Russian president there, which implies avoiding a massive energy crisis. Some observers believe that cutting off all Russian gas supplies to Europe is a far-fetched scenario, even in the event of a Russian invasion of Ukraine.

 

It is not in the interest of either side to cut off the entire supply of Russian gas to Europe, as it will not only harm the European economy, but also the Russian economy as well. This may also push Europe to relinquish its dependence on Russian gas forever. Furthermore, historically, Russian gas flows to Europe have been uninterrupted during the Cold War between the US and Russia, and even in the wake of Moscow's annexation of Crimea in 2014. 

Russian gas supplies to Europe were only disrupted for specific periods of time, with the escalation of disputes with Ukraine over the payment of its debt to Moscow in 2008, but it remained stable to a large extent. The US Goldman Sachs Bank indicates that the main scenario in the forecasts is “no disruption to Russian gas supplies”, warning that any disruption driven by economic sanctions against Russia would lead to “mutual destruction”. Thus, it is not in anyone's interest to stop the flow of gas through Ukraine.

 

Lessons for the Future

Undoubtedly, the recent military escalation between Russia and Ukraine has economic consequences for Europe, with the potential for reduced gas flows that would cause energy prices to rise in Europe. Gita Gopinath, the First Deputy Managing Director of the IMF, warned that the escalating conflict between Russia and Ukraine will likely lead to an increase in energy costs, as well as the intensification of inflationary pressures. Hence, the current crisis is pushing Europe towards adopting new policies for securing its energy for the future:

 

1.     Fostering the LNG infrastructure: 

According to S&P Global Platts, Europe has achieved great progress in building integrated natural gas networks and liquefied gas receiving stations, with a capacity of about 208 billion cubic meters annually. This is twice the volume of liquid imports, which range from 90 to 100 billion cubic meters annually. Nevertheless, parts of Central and Eastern Europe still need to enhance their LNG infrastructure in order to diversify their import options and reduce reliance on Russia in the future.

 

2.     Developing gas storage policies: 

The IEA believes that one of the key lessons that Europe should learn from the current crisis is the development of new policies for natural gas storage operations. They should include improving regulations in order to secure sufficient levels of storage at government strategic facilities as well as companies, in addition to enhancing the rules of disclosure and transparency in the management of stocks.

 

3.     Advancing Renewable Energy capabilities: 

The current crisis is likely to push Europe towards allocating more investments towards renewable energy projects, which will not only have a positive impact on the environment in terms of reducing carbon emissions from the European energy sector, but also enhance energy security in Europe, in addition to reducing Europe’s exposure to market fluctuations.  

 

In conclusion, the scenario of "cutting off the entire supply of Russian gas to Europe" seems to be very unlikely due to its negative and comprehensive economic repercussions on both the Russian and European sides. However, it is not inconceivable that the escalation of tensions between Russia on the one hand, and Europe and the US on the other, would lead to a possible decline in Russian gas supplies to Europe, specifically through the Ukrainian corridor. This may result in some considerable economic damage within the continent, but this will surely be less severe than a complete cut off of gas flows.