Analysis

How Will Moscow Use Its Energy Leverage Over Europe?

The Kremlin holds one of the keys to resolving Europe’s energy crisis.

By , a senior fellow at the Carnegie Moscow Center.
The Gazprom logo is seen at the International Gas Forum in St. Petersburg on Oct. 7.
The Gazprom logo is seen at the International Gas Forum in St. Petersburg on Oct. 7. OLGA MALTSEVA/AFP via Getty Images

Europe is in the throes of an energy crisis. Supplies of natural gas are so tight that prices are up by almost 400 percent since the start of the year. Utilities are switching to power generated from coal and even fuel oil, two of the world’s dirtiest fuels. That has some accusing Russia—which supplies 35 percent of the European Union’s gas imports—of using energy as a weapon. It didn’t help calm waters when the Russian ambassador to the European Union, Vladimir Chizhov, recently suggested a linkage between gas supplies and Europe’s behavior, hinting that the gas shortage could get resolved if Europe stopped treating Russia as an “adversary.”

But accusations that Russia is restricting gas on purpose are “nothing but politically driven and entirely groundless bloviation,” Russian President Vladimir Putin said at a much-awaited energy conference in Moscow last week.

Putin’s public messaging comes amid heated debate on whether Russia has weaponized its dominant role in the European gas market gas to achieve political goals, including forcing Germany to give final regulatory approval of the controversial Nord Stream 2 gas pipeline or to damage Ukraine by denying it transit fees for Russian gas flowing to Europe.

Europe is in the throes of an energy crisis. Supplies of natural gas are so tight that prices are up by almost 400 percent since the start of the year. Utilities are switching to power generated from coal and even fuel oil, two of the world’s dirtiest fuels. That has some accusing Russia—which supplies 35 percent of the European Union’s gas imports—of using energy as a weapon. It didn’t help calm waters when the Russian ambassador to the European Union, Vladimir Chizhov, recently suggested a linkage between gas supplies and Europe’s behavior, hinting that the gas shortage could get resolved if Europe stopped treating Russia as an “adversary.”

But accusations that Russia is restricting gas on purpose are “nothing but politically driven and entirely groundless bloviation,” Russian President Vladimir Putin said at a much-awaited energy conference in Moscow last week.

Putin’s public messaging comes amid heated debate on whether Russia has weaponized its dominant role in the European gas market gas to achieve political goals, including forcing Germany to give final regulatory approval of the controversial Nord Stream 2 gas pipeline or to damage Ukraine by denying it transit fees for Russian gas flowing to Europe.

Critics of the state-owned gas giant Gazprom point to the International Energy Agency’s estimate, published on Sept. 21, which stated that “Russia could do more to increase gas availability to Europe.” Putin has angrily countered the IEA report, stating that Gazprom has already sent 10 percent more gas to Europe this year than during the same period in 2020. Total gas exports from Russia to Europe have increased by even more—15 percent—if shipments of liquefied natural gas (LNG) from the Yamal Peninsula are taken into account.

Even among Russia’s critics, few would argue that the current European energy crisis in Europe is entirely Gazprom’s fault. A perfect storm of negative factors, including a cold winter followed by a hot summer, high demand for LNG in Asia, too little wind power, and a drastic decrease in domestic European gas production have contributed to the crisis. But key questions remain: Why is Russia not pumping more, since there is plenty of pipeline capacity? Is it deliberately withholding gas from European markets? And if so, what does the Kremlin want to achieve?

Whether or not Russia will be able to achieve its goals will depend on market conditions, European politics, and, of course, the weather.

The answers to these questions have to take both market factors and geopolitics into account. Moscow’s handling of Europe’s energy crunch is a tough balancing act, in which the Russian government wants to achieve three goals: Make sure Russia itself has enough gas in storage for the winter, facilitate swift approval of Nord Stream 2, and deny Ukraine extra profits from the transit of additional Russian gas to Europe.

This past summer, European gas traders and utility companies started to notice that Gazprom was reducing its shipments through the Yamal-Europe pipeline that goes through Belarus and Poland, as well as through the pipelines transiting Ukraine. Gazprom, which has a monopoly on pipeline gas exports, said it needed to prioritize refilling its own domestic storage facilities, which it said were depleted from last winter. Another alleged reason for the cutback in gas supplied to Europe was a fire at the Novy Urengoy gas processing plant in early August. Available data shows that Gazprom really does need to replenish its domestic gas inventories after a long, cold Russian winter.

According to Bloomberg’s estimates, Gazprom’s domestic storage was at only 16 percent of capacity in April, compared to usual levels at the end of winter of 35 to 40 percent. Just like in Europe, cold weather and the rebound in industrial production after the pandemic-induced slowdown had depleted inventories. This means that the company needs to pump up to 60 billion cubic meters of gas—more than two-thirds of what Germany consumed in 2020—into domestic storage in order to maintain stable supplies to Russian customers during the coming winter.

Gazprom has therefore adopted a policy of filling domestic reserves while also servicing its contract obligations in Europe, but not delivering any additional shipments. This cap on gas supplies from Gazprom, coupled with strong Asian demand that has led LNG suppliers to divert their cargoes there, has squeezed the European market. According to Russian Deputy Energy Minister Evgeny Grabchak, Russian storage facilities will be full by Nov. 1. That’s when Gazprom could start to divert a significant amount of additional gas to Europe—but until then, as analysts have warned, there will be no help from Gazprom to alleviate the spike in European gas demand.

The start of additional Gazprom shipments in November is when politics kick in. That’s because there are several potential routes for those shipments. There is much spare capacity in Ukraine’s gas transit system, built during the Soviet era to pump gas from Western Siberia to Europe. Since the 2000s, after Ukraine resisted Russian attempts to buy into its gas pipelines, the Kremlin has opted to build pipelines bypassing Ukraine. Some of them, like Turkish Stream, transport gas from older Russian gas fields to Southern Europe via Turkey—with the twin goals of circumventing Ukraine and boosting Moscow’s rapport with Ankara.

Others, like Nord Stream 1 and 2, connect newer gas fields and are more commercially viable, since they offer a shorter distance to customers and are cheaper to operate once built. Needless to say, building these pipelines was immensely costly and helped enrich contractors, most notably those owned by Arkady Rotenberg and Gennady Timchenko, two longtime Putin friends whose names were added to the U.S. sanctions list in March 2014 following the annexation of Crimea.

In late 2019, Ukraine’s state-owned Naftogaz signed a gas transit contract with Gazprom through 2024. The contract obliges Gazprom to pump at least 40 billion cubic meters of gas through Ukraine every year starting this year—and must pay for that capacity if shipments fall short. Gazprom can buy additional capacity at a monthly auction, usually at a higher price. Meeting with Russian energy executives and officials on Oct. 6, Putin made very clear that Russia doesn’t want to ship additional gas through Ukrainian pipelines. “Further increasing those volumes does not make economic sense for Gazprom, since the costs will also be higher,” Putin said. “It is much cheaper to supply gas using the new pipelines, saving us about $3 billion per year.”

Translation: Moscow doesn’t want Kyiv to reap extra profits. The Kremlin is very consistent in its attempts to make life difficult for Kyiv and increase Russia’s leverage over Ukraine. Withholding income from gas transit is one tool for achieving that.

At the same time, Russia is trying to push Germany to give final approval for the start of Nord Stream 2 operations more quickly. Putin and other senior Russian officials have been very clear that resolving the remaining legal obstacles to the inauguration of the pipeline is one way of alleviating pressure on the European gas market. Construction of the underwater pipeline is complete, but it still needs final approval from the German Federal Network Agency and the European Commission before starting gas deliveries. Gazprom has already started to fill the pipeline with gas, which will take about a month and require up to 1.5 billion cubic meters of gas.

The fate of regulatory approval for Nord Stream 2 rests with the new German government that will be formed in the wake of the September elections to the Bundestag. (One of the likely coalition partners, the Greens, have been outspokenly critical of the project.) Berlin and Brussels will need to agree on how much of Nord Stream 2’s capacity Gazprom can use, since EU energy regulations stipulate that pipeline networks should be open to any company’s gas. Although Gazprom is the only source of gas at this point, the Kremlin might help resolve the impasse by granting access to the pipeline to gas supplied by Rosneft, breaking Gazprom’s decades-old monopoly on exporting pipeline gas from Russia.

Russia is also trying to push Europe to move part of its spot market purchases—that is, gas purchased in addition to the fixed volumes secured with long-term contracts—to a new online gas-trading platform in St. Petersburg. The move to St. Petersburg from European gas trading hubs like Rotterdam would give Gazprom and other Russian companies more market power, and they could reap the profits from operating the gas trading hub itself.

Whether or not Russia will be able to achieve all of these goals at the same time will depend on market conditions, European politics, and, of course, the weather—the stronger wind and more sun Europe needs to produce more energy, and the coming winter in both Europe and Russia. While Gazprom alone does not have the power to restore balance in the European market, the vulnerabilities exposed by the energy crunch have shown that Russia will remain a powerful player in the EU’s energy landscape for a long time to come.

Alexander Gabuev is a senior fellow at the Carnegie Moscow Center. Twitter: @AlexGabuev

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