Jul 19, 2022
Russian Gas and E.U
They are mutually dependent
If there’s one important outcome of Russia’s Ukraine invasion, it would be E.U (European Union) countries revisiting their dependence on Russia for natural gas.
Many articles have highlighted the EU’s dependence on Russian natural gas and have called for the EU’s boycott of Russian gas.
On Medium, I saw an article that declared Russia has already won the war because the EU continues to import gas even after Russia’s invasion.
I guess the need to publish every day on Medium got the better of the author, and in the process, the author appealed to emotion rather than logic.
The Russia-EU gas relationship will largely remain unaffected in the short to medium term. Yes, Russia is demanding the countries to pay in Roubles, but one can view it as a minor issue.
The Russian gas will continue powering the EU economy unless Putin decides to nuke the NATO countries.
Globalisation and mutual dependence
Globalisation was one of the cornerstones of post World War 2 period; countries engaged in trade at a large scale, and economies became interdependent. No country has the resources or expertise to produce everything by itself, and even North Korea depends on China for its survival.
During peace, the mutual dependence of economies works well, although the countries would have had a strained relationship in the past. For example, Russia, the former Soviet Union, and NATO countries have differing world views, but they have continued their trade relationship.
But the mutual dependence of economies can make a country vulnerable during the war, as it’s happening now and has happened in the past. The 1971 Oil crisis because of opposing interests of importing and exporting countries is an example of dependence becoming vulnerability.
Nord Stream, diverging interests, Russia-Ukraine gas crisis
The EU countries had different energy interests, and Russia took advantage of the split.
Central and Eastern European Countries (CEEC) demand for natural gas constitutes 20% of the EU’s total gas demand; around 80% of the demand for natural gas comes from the Western European Countries (Germany, Italy, UK, France, Netherlands, Spain and Belgium) (1PDF)
The extent to which countries in the EU are dependent on Russian gas varies greatly. Smaller European Countries rely almost entirely on Russian gas: North Macedonia, Bosnia and Herzegovina and Moldova.
In Finland and Lativa, the dependence on Russian gas is 90%, and in Serbia, the dependence is 89%, while countries like Netherland, and Romania have low dependence on Russian gas and almost negligible dependence exists in Georgia, Ireland, and Ukraine. Ukraine has been buying gas from the EU since 2015.
In the past, 80% of Russian natural gas exports to Europe transited through Ukraine, but that number has fallen to 50–60% since the Nord Stream pipeline, which connects Russia and Germany via the Baltic sea, became operational.
Functional since 2011, the Nord Stream pipeline affected Ukraine’s earnings as it lost $720 million in transit fees annually.
The day Nord Stream went online [2011], the Western EU Countries sent a message to their eastern counterpart and Ukraine that we don’t care what happens with you; our interests are our priority.
In 2009, During the Russia-Ukraine gas crisis, 18 EU countries lost access to Russian gas amid a bitter winter. This event further accentuated the need to circumvent Ukraine and Eastern European territory for transiting Russian gas, aka the Nord Stream pipeline.
And that’s the fundamental problem with the EU: it’s not a homogenous group. The strong countries foist their decision on the weaker countries in the group. It always happens in a group: the powerful ones always call the shots, which may not accommodate the weaker ones’ interests.
EU-Russia gas relationship different
But having said that Russia-EU gas relationship is different. It’s like a person sharing a prison cell with a cantankerous inmate, but the person doesn’t have an option because the warden has refused his transfer request.
First, the Western E.U countries view CEEC’s dependence on Russian gas and Ukraine’s interest as separate issues, and their interest doesn’t converge, which was clear from the Nord stream, and Russia knows this and is exploiting the diverging interest within the E.U.
Second, As much as the EU is dependent on Russia, Russia is also dependent on E.U for its foreign earnings. Reports estimate that Russia’s export earnings from selling gas to the E.U. form 66% of their total foreign earnings, and the earnings constitute 50% of the Russian state budget. At least in the short/ mid-term, both countries would like to keep up their export-import relationship.
Reasons why EU’s dependence deepened
And there are reasons why E.U’s dependence on Russian gas has crept up over the years.
In the 1960s-70s, E.U’s demand for gas was mostly met without importing natural gas, but as the demand soared, E.U’s gas production dropped, and as a result, their imports increased.
The Groningen gas field, Netherlands, one of the largest gas fields in Europe, cut back its production because of safety reasons which emerged after tremors were felt in the areas close to its gas fields.
The E.U has been weaning off coal to comply because of its cleaner, greener fuel targets as part of the E.U’s aim to reduce its greenhouse gas emissions by 55% by 2030.
The Fukushima disaster pushed E.U countries like Germany away from Nuclear energy.
And the bottom line is that Russian gas was the cheapest alternative fuel as the article puts it, “In terms of foreign suppliers, Russian gas was just the cheapest. Rather than diversifying suppliers, routes to import Russian gas were diversified,” Schittekatte told CNBC.
E.U’s gas dependence on Russia built over years and now runs deep within the E.U countries, and it will be highly unlikely that it can get rid of the dependence in the short term.
It’s like if you want to get rid of a bad habit, you stop it early because once the habit becomes ingrained, it will be difficult to get rid of that bad habit.
People would want the E.U to completely stop importing gas from Russia overnight, but that will be a fool’s paradise. At least, in the short to mid-term, E.U will continue importing gas from Russia, although the imports may not be as high as we have seen in the past.
