Economics/Class Relations

Russian Roulette: What’s Vladimir Putin trying to accomplish by cutting off gas supplies to Europe?

The Signal

What’s Vladimir Putin trying to accomplish by cutting off gas supplies to Europe? Samantha Gross on Moscow’s energy-blackmail scheme amid “the first global natural-gas crisis.”
Scott Rodgerson
Scott Rodgerson
Finland was prepared for Russia to cut off natural-gas exports to the country last week, cabinet ministers in Helsinki said, as their government was getting ready to announce its decision to join NATO. With Moscow’s military campaign in Ukraine having largely failed, and Western sanctions having badly damaged the Russian economy, President Vladimir Putin has started to use his energy resources as a weapon. Two weeks ago, Moscow stopped sending gas to Poland and Bulgaria, a move that amounted to “energy blackmail,” according to the German government. Putin said he’d halted gas supplies to the two countries because they didn’t accept his recent demand for payment in the currency of Russian rubles, even though the European Union had told all member countries that using rubles would violate EU sanctions on Moscow. But stopping gas exports deprives Russia’s already hobbled economy of a vital source of income: In the years before the war, revenues from oil and gas sales usually accounted for more than 33 percent of Russia’s annual GDP. So why would Putin do this?
Samantha Gross is the director of the Energy Security and Climate Initiative at the Washington-based Brookings Institution. As Gross sees it, Putin knows Europe is more reliant on Russian gas than Moscow is reliant on revenue from it—and he wants to show Europe he’s willing to use it as a weapon in the economic conflict between Moscow and the West. Russia brings in far more money from oil exports than from gas. Still, Gross says, it’s hard to see Putin’s decision as rational: He’s destroying his country’s reputation as a reliable supplier, and countries in Europe and around the world will react by phasing out Russian oil and gas as quickly as they can. As the West and its allies decrease their energy imports from Moscow, that will only increase Russia’s economic reliance on China. But, Gross says, China can’t and won’t buy all of Russia’s oil and gas—meaning it’s highly uncertain where Russia will end up finding long-term buyers for all the fossil fuels so critical to its economy.
Michael Bluhm: How do you understand Putin’s strategy here?
Samantha Gross: In natural gas, Putin has the upper hand over the Europeans. They’re extremely dependent on natural gas—and on Russian natural gas, in particular; it’s much more difficult to get natural gas from elsewhere. Europe is directly connected by pipeline from Russia, and gas delivered by pipeline tends to be less expensive than gas delivered from overseas as liquefied natural gas [LNG]. The Europeans’ own natural-gas production is declining, and they’re losing it faster than they’re replacing it with renewables, so they’ve become more dependent on Russian gas.
Bluhm: If no European country is agreeing to pay Russia in rubles, then why is Putin cutting off gas just to Poland and Bulgaria?
Gross: It’s a warning shot. It’s not that much gas, and Poland has worked hard at replacing Russian gas as an energy source. It’s not awful for Poland’s energy needs, and it’s not a big hit to Russia’s income. The Russians are showing that they can do it. The question is, do they want to use the gas weapon against the rest of Europe?
There are a few reasons why they hold a better hand with gas than they do with oil. Europe is so dependent on Russian gas, but Russia makes three times as much income from oil exports as from gas. Granted, all income is super important when they’re dealing with sanctions—but it’s less of a hit to their income to shut off gas supplies than it would be if someone were to start messing with their oil exports.
Bluhm: You say cutting off gas might be Putin’s way of lashing out. But what’s he trying to compel European countries to do?
Gross: He’s trying to demonstrate that he has the upper hand in this relationship and that he can hurt Europe if he wants to. Whether he chooses to is a big question, because there’s mutually assured damage to the Russians and the Europeans.
I’ve had people ask, What’s Putin’s rational move in doing this? Frankly, we haven’t seen a lot of rationality in Putin’s moves. Trying to ascertain his rational move may be assuming too much about how he’s approaching the situation.
Tamara Malaniy
Tamara Malaniy
More from Samantha Gross at The Signal:
Russia was already going to face serious problems as the world transitions away from fossil fuels. They’re the most important exports in the Russian economy. Moscow has now intensified that problem, because the world—and particularly, Europe—is now disproportionately cutting out Russian fossil fuels. So Russia is going to face those inevitable effects sooner than it would have. Putin’s gamble invading Ukraine was a terrible decision for many reasons, but certainly for his economy, because he’s taken this looming problem and brought it forward in time, with potentially disastrous consequences.”
Europe imported about 4.5 million barrels a day of Russian oil before the war. The world market is 100 million barrels a day. That Russian oil may not have another outlet. If they’re shipping it to Europe by pipeline now, they’d probably have to ship it somewhere else by tanker. And there aren’t many oil tankers waiting to transport Russian crude. A lot of them either won’t transport it or they’re charging exorbitant prices. Insurers don’t want to insure them. … If Europe stopped buying, it’d be very difficult to sell all 4.5 million barrels a day. You could be in a situation where Russia couldn’t sell its crude oil and would have to shut down production. But if you shut off oil, it’s not like a spigot that you can just turn back on; you might never return to the same level of production. If Russia has to shut some oil production off, it might permanently damage Russia’s oil-production capacity. The Europeans are aware of this.”
Russia’s long-term prospects are bleak. China will buy more Russian oil and gas, but Beijing won’t become overly reliant on Russia in the way Europe has. The Chinese government is very aware of the danger in becoming too dependent on one supplier. Energy security has been top-of-mind for them for a long time. China won’t cover the difference from what Europe isn’t buying, so that leaves Russia in a bad place. Which is yet another reason why this war is so tremendously damaging to the Russian economy and the Russian energy industry. It’s destroying demand for their products. That’s not going to come back.”

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