Russia may retaliate against Europe by halting natural gas exports — if Europe doesn't do it first
Russia's economy is fueled by energy, especially natural gas exports to Europe. That could be an important tool in the arsenal used in Ukraine -- and either side can play it.
- Russia is the top natural gas supplier to Europe.
- Europe could halt or limit its natural gas supply from Russia to apply pressure in the Ukraine conflict.
- Even though it would be painful to its economy, Russia might do it first to retaliate against other sanctions.
With Russia's invasion of Ukraine having begun, the U.S and its allies are reviewing the additional, heavy sanctions that it can levy.
The biggest weapon for both sides may be a commodity that most homeowners take for granted — natural gas.
Here's what's at stake:
Ukraine isn’t a member of NATO and there is no appetite so far to confront Russia militarily over its invasion. Instead, the allies have chosen to try to squeeze Russia economically, hoping that Russians will be so dismayed over the state of their economy that President Vladimir Putin will back off.
President Biden announced sanctions on financing to Russian banks, the freezing of assets and targeting Russian “elites.”
But one of the largest sources of revenue for Russia is the natural gas it supplies to western Europe, much of it through pipelines. In fact, Russia is the world’s largest supplier of natural gas to Europe. Its exports accounted for about 39% of the continent's supply as of 2018, McKinsey reports. Norway was a distant second at 27%.
The pipelines are juicy targets for economic sanction planners.
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Why is natural gas so important?
It boils down to this: If Russia proceeds with a full invasion of Ukraine, going beyond the two provinces that Putin has deemed as “republics,” Europe could retaliate by reducing or stopping its Russian natural gas imports, denying Putin a key source of revenue.
Could Europe stop importing Russian natural gas?
Germany has already said it won’t approve the opening of Nord Stream 2 in retribution for the invasion. The big pipeline that was due to supply Russian natural gas to Europe.
But that won’t have any impact on Russia’s current exports.
Europe “desperately needs Russian gas, Russian crude and Russian refined products,” said Tom Kloza, global head of energy analysis for the Oil Price Information Service. At the same time, the fear of Russia’s ultimate intentions — “there is no script for Putin,” Kloza said — and the possibility that Ukraine is just the first of several European nations in the crosshairs may provide the incentive that citizens will need to endure sacrifices.
It's wintertime in Europe, which could prompt an outcry from those left out in the cold if the gas gets shut off. On the plus side, the warmer temperatures of spring are right around the corner.
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What if Russia cuts off exports?
Russia may decide it wants to inflict pain right back on the West for sanctions. Putin could move to reduce or restrict natural gas exports. Sanctions “may be countered by the Russian side and this is where the energy issue comes in,” said Margarita Balmaceda, professor of Diplomacy and International Relations at Seton Hall University and author of “Russian Energy Chains.”
Wouldn’t Russia suffer right along with Europe?
Yes. Russia’s natural gas exports last year were valued at $54.2 billion, its central bank reported.
Here's what could mitigate some damage from such a dire move: Russia benefitted high natural gas prices in Europe and now has a historically-high surplus of $120.3 billion, equal to 7% of gross domestic product, Reuters reports.
That cash stash could see Russia through the crisis.
Couldn’t Europe just get natural gas somewhere else?
Most natural gas moves by pipelines, which are time consuming and expensive to build. Compared to oil, natural gas is hard to move by ship. It needs to be chilled to minus 260 degrees in order to transform it into a liquid, which reduces its volume 600 times.
The U.S. is the world’s largest natural gas producer, but the special plants and ships needed limit the ability to make up for lost supplies from Russia.
Qatar has been mentioned as a source for Europe, but its minister of state for energy affairs was recently quoted by Reuters as saying that neither it nor any other nation would be in a position to fill the void if Russian cut off Europe.
What’s it mean beyond Europe?
Americans know all too well how turmoil in the Middle East can drive up gasoline and oil prices. But the difficulty in transporting natural gas means that America's supply is likely to stay put, lessening the chance that prices will be affected dramatically by the Ukrainian situation.
A Putin decision to halt energy exports to Europe would be “mutually destructive" and "I would think that would be unlikely given that given that gas and oil exports compose 20% of Russia’s GDP,” said Troy Vincent. senior market analyst for DTN, a commodity data and research company.
But Patrick De Haan, head of petroleum analysis for GasBuddy, a gasoline price tracking site, isn’t so sure.
“The sanctions are starting. The escalation is beginning,” he said. The question is “how soon will Russia pull out the ‘nuclear option’ and stifle exports.”
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