The state of affairs at the Ukrainian border is now being referred to as a "crisis," with prominent news outlets such as the New York Times and CNN providing live updates on the rapidly developing tensions as Russian troops amass on the outskirts of the former soviet republic. According to CNN, US intelligence has indicated that Russia is currently "clearly advancing their ability to invade." European Parliament President Roberta Metsola, US Secretary of State Antony Blinken, and British Prime Minister Boris Johnson each made statements supporting Ukraine on Monday as serious conflict threatens to break out in the immediate term.
Geopolitical conflicts, especially with respect to energy and energy security, lie at the heart of Russia's impending invasion of Ukraine. Russia has been trying to use its hefty natural gas supply amidst the European energy crunch as leverage to strong-arm the European Union into greenlighting the Nord Stream 2 gas pipeline, which would allow the Kremlin to pump liquefied natural gas directly into Germany by way of the Baltic Sea, avoiding Ukraine entirely.
Although the construction of the pipeline is complete, it has not yet been greenlit to come online, as the project has faced major opposition in the west, where leaders including U.S. President Joe Biden have said that Nord Stream 2 will make the European continent energy insecure and dangerously dependent on Russia. On Monday, Ukrainian President Volodymyr Zelensky pleaded with the global community to provide the embattled nation with energy security guarantees in light of the "risks" to the local energy economy posed by Nord Stream 2, which he says poses "energy and security threats to us and to the region."
While Ukraine's economy, energy security, and sovereignty are under grave threat due to Russian political wrangling and military aggression, the Kremlin, too, could suffer under the weight of its own actions. Last week, Fatih Birol, the executive director of the International Energy Agency (IEA) warned that Putin's threats to Ukraine could easily backfire and wreak havoc on the Russian economy. He cautioned that if current tensions continue to rise, we could see a "seismic" disruption to the EU energy market which would ultimately have "more consequences for Russia" than for any other involved state actor, as European nations would be forced to find new sources of energy.
"Failure to maintain [supplies] would shatter Russia's reputation as a reliable partner and that would be a tectonic shift. Russia would be seen as a threat and that would have far-reaching consequences for European economies, but even more consequences for Russia. Europe would choose a strategy to diverge from Russia," he was quoted by the Guardian.
In light of this uncertainty and the great risks posed on all sides by the pipeline and the potential invasion of Ukraine, the next two months will be "critical", in Birol's words, in seeing how Europe's drawn-out energy crisis will continue to play out, and whether or not economic recovery or collapse is on the horizon. "Of course, we do not know what will happen if this political tension goes beyond being tension," Birol continued. "I hope there will be dialogue, and that there will be no major geopolitical distortions."
For now, although the situation at the border is dire and extremely precarious, Prime Minister Johnson and President Biden agreed in a phone call on Monday that "there remained a crucial window for diplomacy and for Russia to step back from its threats towards Ukraine," according to a Downing Street spokesperson, as reported by CNN. While world leaders remain hopeful about keeping the peace, the alternative is frightening, to say the least, and will have far broader implications than just disrupted energy markets. The recap of the phone call went on to say: "The leaders emphasized that any further incursion into Ukraine would result in a protracted crisis for Russia, with far reaching damage for both Russia and the world."
By Haley Zaremba for Oilprice.com
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Comments
The truth of the matter is that President Putin has no intention of invading Ukraine. He only wants the West led by the United States to address Russia’s legitimate security concerns including a refusal of Ukraine’s joining NATO. He knows that the presence of thousands of Russian troops on the border with Ukraine jogs western memory about the seriousness of Russia’s security demands and simultaneously allows him to act quickly if necessary.
In the aftermath of the collapse of the former Soviet Union, both former US Presidents Ronald Reagan and George H Bush promised former Soviet President Mikhail Gorbachev that they will never bring NATO to the borders of Russia. But they reneged on their promises taking advantage of a weakened Russia under former President Yeltsin to bring Poland and all the Baltic States into NATO. Now the United States is trying to bring Ukraine to NATO. This is a red line that Russia won’t accept. And Putin isn't Yeltsin.
The EU is dependent on Russian oil supplies for 27% of its needs and 40% of gas needs.
The entire LNG exports from the United States, Qatar and Australia could hardly replace the almost 200 billion cubic metres per annum (bcm/y) piped by Russia to the EU in addition to an estimated 15-16 million tons a year (mt/y) of LNG. Only Russia can satisfy the EU’s gas demand. However, Russia isn’t going to ship additional gas supplies to the EU until Nord Stream gas pipeline is certified.
Moreover, Europe has a limited LNG import capacity. This makes ramp-ups of LNG imports quite useless particularly if they are needed to replace Russia’s almost 40% share of the European gas market.
If the Ukraine crisis flares up into a military conflict, the United States will impose the harshest ever sanctions against Russia including oil and gas exports and Nord Stream 2 gas pipeline. Moreover, it will exert the maximum pressure on the EU to do likewise.
Germany will never join the United States in sanctioning Nord Stream 2. If it does, it will sink more than 150 major German companies which were involved in the construction of the pipeline and which contributed more than half the costs of the pipeline estimated at $11 bn. Moreover, it will be a major loser in economic and energy terms. Germany depends on Russia for 65% of its natural gas and oil needs.
And while the EU will impose new sanctions on Russia over the Ukraine crisis, oil and gas exports and Nord Stream 2 won’t be among them because Russia will immediately retaliate by halting all supplies to the EU thus prolonging and worsening an already damaging energy crisis.
Moreover, Russia isn’t dependent on the EU for its gas and oil exports. The huge 10-year oil deal signed recently between Russia and China for the supply of 100 million tons (733 million barrels) of Russian crude oil like the gas deal signed between China and Russia a week ago for the supply of additional 10 billion cubic metres (bcm) on top of the 38 bcm annually for the next thirty years signals China’s determination to help Russia circumvent any international sanctions against it. This also includes providing Chinese financial support to Russia against sanctions against its banks.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
What would the U.S. do if Canada or Mexico, 5 or 10 years down the road, would enter into a military alliance with China, and China started putting Nuclear tipped missiles on the U.S. boarders with flight times of 5 minutes to Washington DC?