Putin’s Energy War Is Crushing Europe

The big question is whether it ends up undermining support for Ukraine.

By , a reporter at Foreign Policy.
Steam rises from cooling towers at the Niederaussem coal-fired power plant during the coronavirus pandemic near Bergheim, Germany, on Feb. 11, 2021.
Steam rises from cooling towers at the Niederaussem coal-fired power plant during the coronavirus pandemic near Bergheim, Germany, on Feb. 11, 2021.
Steam rises from cooling towers at the Niederaussem coal-fired power plant during the coronavirus pandemic near Bergheim, Germany, on Feb. 11, 2021. Lukas Schulze/Getty Images

Factories, businesses, and families across Europe are battling for survival as Russia’s chokehold on the continent’s natural gas supply sends prices to astronomical heights, unleashing a brutal economic storm that has tested European solidarity about Russia’s war in Ukraine and fueled fears of an impending recession

Crushingly high energy prices have soared to 10 times their average level throughout the past decade, leading to spikes that have throttled industries and left households scrambling to pay their bills. The resulting bloodbath has catapulted European leaders into emergency action as they rush to institute sweeping emergency measures in an effort to drag down prices. Brussels is talking about rationing gas; national governments are racing to find alternative supplies now that Russia has cut off essentially one-third of the continent’s gas supplies as part of its campaign to make Europe cry uncle before Moscow’s scarecrow forces vanish altogether in Ukraine.

“People have shockingly high electricity bills. Small businesses are struggling to pay the bills. Factories are considering whether or not to close or to curtail production,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies (CSIS). “And this is before the winter has come, so it could get worse.”

Factories, businesses, and families across Europe are battling for survival as Russia’s chokehold on the continent’s natural gas supply sends prices to astronomical heights, unleashing a brutal economic storm that has tested European solidarity about Russia’s war in Ukraine and fueled fears of an impending recession

Crushingly high energy prices have soared to 10 times their average level throughout the past decade, leading to spikes that have throttled industries and left households scrambling to pay their bills. The resulting bloodbath has catapulted European leaders into emergency action as they rush to institute sweeping emergency measures in an effort to drag down prices. Brussels is talking about rationing gas; national governments are racing to find alternative supplies now that Russia has cut off essentially one-third of the continent’s gas supplies as part of its campaign to make Europe cry uncle before Moscow’s scarecrow forces vanish altogether in Ukraine.

“People have shockingly high electricity bills. Small businesses are struggling to pay the bills. Factories are considering whether or not to close or to curtail production,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies (CSIS). “And this is before the winter has come, so it could get worse.”

From the energy-intensive aluminum industry to fertilizer manufacturers, companies across Europe have been forced to slash production or even go bankrupt in the face of eye-watering prices. To shield households and businesses from greater pain, governments have funneled hundreds of billions of dollars into subsidies, immense sums of money that reflect the continent’s grave economic state—and the unprecedented nature of the crisis. 

“We are not in any kind of normal set of market conditions. These are extreme market conditions,” said Alex Munton, an expert on global gas markets at Rapidan Energy Group, a consultancy, who described the situation as an “energy war.” For decades, Russia provided a huge chunk of affordable natural gas for the European Union, but those supplies have become a casualty of Russian President Vladimir Putin’s bid to subdue Kyiv and the countries that support it. So far, despite simmers of discontent, European governments are holding the line.

“In wartime … this is the type of thing [governments] do,” he added. “They will stretch their finances to the limit to get through the conflict that they’re in.”

Take the European Commission, which proposed extensive emergency interventions that would redistribute roughly $140 billion in windfall taxes to cash-strapped businesses and households. The United Kingdom has also unveiled a $46 billion bailout while Sweden has announced more than $20 billion in liquidity guarantees for its struggling energy companies. As German energy companies are pushed to near-bankruptcy, Germany is now reportedly moving to nationalize three major gas giants, including Uniper, in a historic intervention that would help rescue them from the brink.

Mounting economic losses have “brought these companies financially to their knees,” Munton said. Without relief, he added, “At some point, things do reach a breaking point, and that’s sort of where we’ve got to.”

Public frustration is already boiling over in the United Kingdom, Moldova, Germany, Austria, and Italy, as protests erupt over skyrocketing energy costs and fuel concerns of wider unrest. In Prague, as many as 70,000 people poured into the streets in early September in a Czech Republic First demonstration against rising energy prices as well as to demand greater government action. 

“There is a mass of people forming that are scared of what’s going to happen in the upcoming winter, and they are afraid not only because of the energy prices but also the rise in inflation that we have had over the last year [in the Czech Republic],” Jan Kovar, deputy director of research at the Institute of International Relations Prague, a think tank, told Foreign Policy.

As ire against skyrocketing energy bills grows, European solidarity wilts. That’s bad for Brussels and for continued European support of Ukraine’s defense against Russian invaders. Even as leaders publicly vow support for Kyiv, protesters’ calls for greater neutrality in countries like the Czech Republic could lay the groundwork for future fractures in unity. Hungary, a European Union member, has been in Moscow’s pocket since day one. Germany has been lukewarm on the whole enterprise from the start. Italian business people recently staged a protest against high power bills, blaming Brussels—not Putin—for their plight.

Cahill, the CSIS expert, said European nations could face a major test of political unity if instability continues to grow. 

“If prices stay really high and the market looks really tight this winter, then the political stress will grow,” he said. “You could potentially have a situation where citizens become really unhappy and they start to blame governments for it, and maybe governments will start to go their own way and look out for their own interests. Maintaining that EU solidarity will be tough.”

With winter looming, nations have so far met the targets set for their storage facilities, though it’s unclear if that will be enough to sustain the continent through the winter with the near-complete halt of Russian gas flows. Much of Europe’s winter energy outlook will now hinge on energy demand; countries’ abilities to secure supplies of liquefied natural gas from countries like the United States, especially as other buyers turn to the same quantities in the colder months; and the weather.

“If it’s a mild winter, it will make it easier to live without Russian gas. Cold winter, it’s going to be a winter of discontent,” said Helima Croft, managing director at RBC Capital Markets. “It’s not going to be easy under either circumstance, but a cold winter potentially is a turn-off-the-lights situation.”

But moral hazards lurk in the radiator, too. Europe’s efforts to shield consumers from substantial pain and to tackle soaring prices could erode a crucial price signal that would help seriously blunt demand. 

“By potentially adopting measures that could address the very high costs for the consumer, one of the obvious effects of that will be that it reduces the incentive for consumers to use less,” Munton said. “It does nothing to alleviate that fundamental mismatch between supply and demand. If anything, it sort of buttresses demand while the supply side of the equation still very much faces real challenges.”

The Russian economy appears to have been spared the worst of the energy war so far, guarded by soaring oil and gas prices and its own oil export revenues. In the long run, as Europe finally finds alternative suppliers and Russia loses its major export market, the balance of power will shift. There’s simply not enough physical infrastructure for Russia to pivot all its sales to China, even if the demand was there; in the meantime, Russia is burning its own natural gas rather than selling it.

Russia is “writing itself out of the European markets,” said Antoine Halff, an energy expert at Columbia University’s Center on Global Energy Policy and a former chief oil analyst at the International Energy Agency. For a country that gets more than 40 percent of its government revenue from energy sales, cutting off Russia’s main export market is a drastic—and, at this point, perhaps irreversible—step. Over time, that will weaken Russia’s ability to cause havoc.

But the long run is different than a looming winter with no fuel.

“When it comes to energy markets, the next few months are quite unpredictable, partly because this is not a precedented situation,” Halff said. “This is pretty uncharted territory.”

Amanda Coakley contributed reporting to this article.

Christina Lu is a reporter at Foreign Policy. Twitter: @christinafei

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