Putin’s gas strategy is doomed | Energy

As Russia continues to unleash devastating attacks on Ukrainian civilian infrastructure, Europe envisions a future without Russian gas. European Union countries are negotiating a common response to the energy crisis while seeking agreements with other gas suppliers.

In order to understand the direction of the Russian-Western economic war, and thus ensure continued support for Ukraine in its resistance to Russian invasion, it is more important than ever to understand President Vladimir Putin’s strategy.

First, the drop in gas flows to Europe has a significant impact on the Russian economy. Despite the recent spike in energy prices, the record budget surpluses the Kremlin recorded in the first six months of the war have been all but wiped out. The Kremlin remains without significant credit support from abroad, as even China remains reluctant to provide financial support.

While Beijing and some non-aligned countries like India are happy to buy its oil and gas at a discount, shrinking discretionary spending and lower industrial output in the wake of the sanctions will further weigh on the economy. Russian in the short term. Russia’s long-term outlook is also increasingly bleak due to the impact of sanctions and the country’s declining population – a trend that has been exacerbated by Putin’s project and the hundreds of thousands of people who fled as a result.

The reality is that Russia’s entire economic model depends on hydrocarbon exports to Europe. Putin chose to bet everything on his Ukrainian madness. As gas flows dwindle, so does the lifeblood of the Russian economy. The Russian president seems to be playing an energetic game, while hoping his fortunes will reverse.

For example, he authorized the continuation of certain flows of Russian gas towards Europe. A road passes through Ukraine. Extrapolating from current flows, the route is only expected to deliver 15 billion cubic meters (bcm) per year, but its effect on the European market is mainly a reminder that Putin can increase gas flow. It is important that the Kremlin keep it operational to lay the groundwork for later arguments that its actions in economic warfare are separate from the invasion of Ukraine – a claim that has no basis in reality.

The other way is through the Turkish gas pipeline TurkStream and its Bulgarian extension, Balkan Stream, through which Russian gas is transported to Serbia and Hungary. These gas flows are important, not least because they allow the Kremlin to reward its only major remaining supporter in the EU, the government of Viktor Orban. This, too, is intended to allow Moscow to eventually try to become a credible supplier to Europe and other countries rocked by energy crises.

Balkan Stream has a current capacity of 15 billion m3 per year which can be increased to 20 billion m3. This could be just a fraction of the combined 110 billion m3 capacity of the two sabotage-damaged Nord Stream pipelines at the bottom of the North Sea and connecting Russia to the German pipeline network. Nevertheless, it offers sufficient supply which could eventually be used to attract other gas-hungry European countries to Central and Eastern Europe, including Austria.

Russia also expects economic and political instability to bring other EU states back into its energy fold. In August, an interim government in Bulgaria considered negotiating with Gazprom, which had cut gas supplies in April following Sofia’s refusal to pay in roubles. Previous Bulgarian governments have moved closer to Moscow, including building the TurkStream extension at high cost and with limited returns in the form of transit fees.

With that in mind, Putin is likely hoping that the suspended parliament after the Oct. 2 election and the negative economic outlook will eventually force Bulgaria’s next government – whether interim or regular – to bow to its terms.

In addition to the gas pipeline game, the Kremlin’s strategy is also increasingly relying on liquefied natural gas (LNG). As part of its attempt to diversify from Russian piped gas, the EU has built major LNG infrastructure, which the Kremlin hopes to use as a Trojan horse. We already have proof of this: European imports of LNG from Russia increased by 15% in the first eight months of 2022 compared to 2021.

So far, the EU has not wanted to target the market. The biggest player in the Russian LNG market is the private company Novatek. Led by Leonid Mikhelson, one of Russia’s richest men, the company remains off Western sanctions lists.

Mikhelson owns just under 25% of Novatek, while 23.5% is held by Gennady Timchenko, a close Kremlin ally already under US sanctions since 2014. Another 9.99% is held by Gazprom, and just under 20% of the company remains listed on the stock exchange. public markets (although its listing in London is suspended).

The remaining 19.4% is owned by France’s TotalEnergies, which before February was among the most eager Western energy companies to continue investing in Russia despite sanctions imposed after Putin’s initial 2014 invasion of Ukraine.

TotalEnergies was also initially reluctant to pull out of Russia following Putin’s escalation in February. However, on March 22, it announced that it would “no longer provide capital for the development of projects in Russia” and that it would stop buying Russian oil by the end of the year. He also said there would be no new funding for the Arctic LNG 2 project, of which he is a 10% shareholder. Nevertheless, Total continues to buy Russian LNG.

European authorities are now tightening the noose on Russian gas sales, working to put in place a price cap on gas sales, although the process has been difficult. Russia’s atrocities will continue to spur adoption of this measure and although the EU has never been known for its ability to quickly agree on such significant measures, the market seems to recognize the reality that even sales of Russian LNGs will eventually be discontinued.

In August, TotalEnergies announced that it had agreed to sell its 49% stake in Terneftegaz, which operates the Termokarstovoye gas field, by selling it to Novatek. And although Mikhelson remains on US and EU sanctions lists, he was blacklisted by UK and Canadian authorities in April. Ultimately, he is likely to be targeted by Brussels and Washington as well.

With the EU’s increasingly full gas storage and related drop in spot gas prices, Western officials may imminently rip the bandage off of Russian LNG. However, even if they don’t, LNG won’t prove to be a panacea for Putin anytime soon.

Russia’s current LNG export capacity is around 40 billion cubic meters per year. And although Putin has ordered an increase to at least 160 billion cubic meters by 2035, there are serious doubts that this is feasible, especially given the withdrawal of Western capital investment. For the foreseeable future, LNG alone cannot offset the decline in pipeline gas sales from Russia to Europe, which were around 140 bcm in 2021.

And while Russian officials have said they will refocus on China with the Power of Siberia 2 gas pipeline that will give it an outlet for an additional 50 billion cubic meters of gas per year, Beijing has all the means to secure a rebate. even more important than when the agreement on the first Power of Siberia pipeline after the annexation of Crimea. This explains the lack of progress in reaching a final agreement and Moscow’s insistence on selling gas to Europe via Nord Stream 2.

Putin’s strategy can be summed up in hoping that “the bridges he is burning will light his way”. It is historic folly that will leave Russia weaker and poorer, as it wreaks economic havoc around the world.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.

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