Russia will lose the energy war Putin started – POLITICO

Agathe Demarais is director of global forecasting at the Economic Intelligence Unit. His new book on the effects of US sanctions, “Back to back,” will be released next week.

Russia has turned energy supply into an economic weapon. The strategy was obvious in Ukraine, where Russian drones and missiles bombed power plants. But it’s also evident in Europe, where Moscow has turned off gas taps and possibly blown up gas pipelines.

However, Russian President Vladimir Putin’s master plan now looks set to backfire.

In the short term, Putin will, indeed, cause economic damage to the countries of the European Union – it is inevitable. But in the long run, Russia simply cannot win this energy war. Putin’s maneuvers will only accelerate the demise of his country’s energy sector, and lead to the loss of its coveted status as a global energy superpower.

Russia’s energy weapons serve three purposes. The first, which can be used when the gas taps are still more or less open, is to create uncertainty and prevent the countries of the European Union from preparing for what will happen.

The second goal is to shrink the European economy. And on that front, Russia’s strategy is working – the eurozone is likely to register a recession next year.

Putin’s third goal, meanwhile, is to stoke political divisions in Europe by spreading the idea that sanctions are causing the energy crisis. This, of course, is an inversion of cause and effect – Russia’s decision to invade Ukraine is what caused the crisis. However, the narrative has gained some traction in the EU.

In the short term, Europe is in a difficult situation. The economic and social crisis is increasing, because energy prices are high, fuel inflation and the cost of living crisis, which can last two or three years. Besides, things could be worse than they are now. Winter in particular will increase energy demand, exacerbating the squeeze.

The situation may become more dire in the winter of 2023 to 2024, as European countries managed to replenish gas storage this summer, while Russian gas is more or less still flowing. However, they may not be able to do that before next winter.

Obviously, there is no denying that times are tough for the EU, but there seems to be some comfort in the fact that Putin’s strategy will surely backfire.

Blackmailing Moscow has, once and for all, convinced the European Union countries that Moscow is not a reliable energy supplier. As a result, Europe is redoubled its efforts to eliminate dependence on Russian hydrocarbons, with LNG infrastructure being built at a rapid pace to boost imports from the United States, Australia and Qatar. The first of many new LNG terminals will open in Estonia, Latvia and Finland as well, and new gas contracts are being negotiated to increase supply – from Algeria or Norway, for example. The bloc is also accelerating plans to develop renewable energy sources as well.

As such, it seems likely that, in three years or so, Europe will no longer need Russian oil and gas.

In just two months from now, the bloc will stop almost all Russian oil imports, leaving Russian oil companies in need of alternative buyers for Russian crude. This should not be too difficult, as the demand from China, India and some other developing countries is still high. However, these countries will not be a perfect substitute for the European market – which was once Russia’s largest buyer of hydrocarbons – as it will now expect a large discount to Russian crude oil prices.

In addition, the US may begin imposing secondary sanctions on Russian oil exports – further restricting Russian sales.

Meanwhile, the Kremlin’s position looks even worse when it comes to gas. Russia exports its gas through pipelines, which are now positioned to serve Europe. And building new pipelines to replace them will take time and money, both of which are in short supply.

Exporting gas via pipeline also means signing new contracts with willing buyers. And here, again, things seem difficult for Moscow, because China is currently the only country that can absorb more Russian gas, but Beijing is in no rush to force.

This is not a surprise. China’s growing gas demand has calmed down, and Russia has also made it clear that it is not a reliable energy supplier. This is something China’s leaders will not forget, and they will naturally seek to avoid dependence on Russian gas.

Given all this, it is not an exaggeration to say things are dire for Russia’s energy sector, which represents a third of the country’s economy, about half of its fiscal revenues and about two-thirds of its exports. International Energy Agency (IEA) latest forecast now consider Russia’s annual receipts from energy exports to drop by more than half by 2030, all the way down to $30 billion from $75 billion before the war in Ukraine began.

The IEA also believes that by 2030, Russia’s share of the gas traded globally will have gone down just 15 percent – compared to 30 percent in 2021. The bottom line is stark for Moscow: In the coming decades, it will lose its status as a global energy superpower – and the Kremlin’s problems will never end.

Because of the sanctions, Russian energy companies no longer have access to Western financing and technology. For the Kremlin, this is an existential threat. Current reserves of energy fields are gradually decreasing, and although they have new fields in the Arctic, developing them requires a lot of money and the highest Western technology. Without access to either, Russia’s energy production will slowly decrease in the coming decades.

Coupled with the declining demand for fossil fuels as the world transitions towards renewables, this all means that the energy war started by Putin can only end badly for Russia.

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