Energy Crisis Pays Dividends for Patient Putin

Russian President Vladimir Putin during the plenary session of the Russian Energy Week International Forum. Photo: RIA Novosti/Government of Russia
Russian President Vladimir Putin during the plenary session of the Russian Energy Week International Forum. Photo: RIA Novosti/Government of Russia

Russia has long prepared to reap political rewards from energy crises in Europe, particularly through the isolation of Ukraine.

Early this month, the price of liquified natural gas on the primary European exchange reached five times its price. The next day, Russia’s President Vladimir Putin delivered an address suggesting he would not withhold supplies, sending prices plunging by 25%. Putin’s ability to swing prices with a single press conference led to cries throughout Europe that he had turned gas into an “energy weapon” and suggestions that the crisis itself is of Russia’s making.  

These criticisms miss the mark: Russia has had little influence on bringing about the energy crisis, but has long prepared to reap substantial political rewards when such a crisis occurred, above all through the isolation of Ukraine. 

Russia’s European critics are correct that Russia stands to benefit enormously from the spike in gas prices. Oil and gas account for half of all Russian exports, and each of the country’s three largest firms is in that sector, with the largest, Gazprom, and third largest, Rosneft, owned by the state. Gazprom monopolizes sales to Europe, providing 43% of all gas on the European market. But much of that must pass through Ukraine, a country whose forces continue to fight Kremlin-directed separatists in the east, and which has been pummeled by Russia for almost a decade for its assertion of independence. 

A full two-thirds of Gazprom’s revenue comes from deliveries that pass through Ukraine while Ukraine’s fees on gas account for 6% of government receipts. The entanglement of the two led to disputes as soon as the Soviet Union dissolved, with Russia cutting off supplies to Ukraine at least once every year from 1992-1994, with subsequent shutdowns occurring in the winters of 2005-6 and 2008-9 

The putative cause of each crisis was economic; either to extract higher rents or force debt repayment, but geopolitical considerations were never far from the surface. Gazprom tripled prices after Ukraine’s Orange Revolution in 2004 replaced Russian ally Viktor Yanukovych with Western-leaning Viktor Yushchenko. The next year, Gazprom simultaneously lowered prices for Belarus, a more pliant neighbor, and doubled prices for independent-minded Georgia. After the Euromaidan Revolution in 2013-4, Gazprom increased Ukrainian prices by 44%. With the annexation of Crimea and the invasion of eastern Ukraine, the Russian leadership’s ambitions for suzerainty over its neighbor began to recede and it started to intensify the construction of alternatives. One alternative, pursued with gusto, involved alternative energy routes so that Ukraine’s gas could be switched off without provoking howls from the rest of Europe. Turkey and Germany proved willing to assist.   

Putin announced the construction of TurkStream, a pipeline connecting Russia’s gas transit network to European Turkey later in 2014. In 2015, Gazprom agreed to a partnership with Western firms to construct Nord Stream 2, a second pipeline under the Baltic Sea after the completion of the initial phase in 2012. Both terminate in Germany, cutting out Ukraine and Poland. With the completion of TurkStream (from Russia to European Turkey) in 2020, Gazprom diverted 6.5 billion cubic meters (bcm) from Ukrainian pipelines headed to Bulgaria, Greece, and North Macedonia, roughly 10% of all gas that transited through Ukraine the year before.   

The current energy crisis, which industry insiders attribute to a mix of demand swings stemming from lockdowns, rising Asian demand, and lower gas production in Europe, has proven the political value of Russia’s disinvestment from Ukraine.  

At worst, Russia will sell gas on the spot market at extortionate rates, as many Europeans, along with the CEO of Rosneft, are advocating. But the more strategic play is to wait. As winter approaches, pressure builds on European leaders to expedite the approval of Nord Stream 2 (currently unusable pending the resolution of court cases) or otherwise meet Russian demands. Hungary is already playing ball, agreeing on September 27 to a deal with Gazprom that would divert another 4.5 bcm around Ukraine using TurkStream. 

Russia’s presidential administration now taunts Ukraine like a vanquished foe. Dmitry Medvedev, the former president and current deputy chair of the National Security Council, published an open letter to Ukrainian leadership in Kommersant, calling Ukraine’s President Volodymyr Zelenskyy, who is Jewish, “a person with certain ethnic roots,” a Nazi ally, stating that “Ukraine itself has no value,” that American and European support would “crumble to dust” since “no fool would fight for Ukraine” and declaring “this country is headed by ignorant and unnecessary people.” Just in case anyone missed the message, Kremlin spokesman Dmitry Peskov rammed it home by stating that it was “in absolute unison” with the position of the Kremlin.  

For Ukraine, a decade of turmoil has hindered the long-term planning that has yielded such dividends for Russia. With Nord Stream 2 likely to go online shortly, Russian exploitation of more gas fields in Siberia, and no appetite or incentive for rapprochement, Ukraine’s leverage over Russia, and European willingness to back Ukraine, is faltering. Russia has and continues to invest heavily in a future without Ukraine. Ukraine must prepare for the same. 

Ben Dubow is a nonresident fellow at CEPA and the founder of Omelas, which specializes in data and analysis on how states manipulate the web.

October 18, 2021