Filenews 15 June 2022
By Liam Denning
Although Russia and Western countries are avoiding a war with real fire on Ukraine, they have already entered an energy war. The initial skirmishes take the form of selective interruptions in energy flows and the imposition of sanctions on the Russian offer. However, there is a distinct gap between the rhetoric of war and the realpolitik of energy diplomacy - a gap that Russia will exploit and that the West must find a way to close.
In a recent article-analysis in the New York Times, US President Joe Biden wrote that being on the side of Ukraine and making Russia pay a "heavy price" is a vital national interest of Americans, in part because if we don't: "... we will endanger the survival of the other peaceful democracies. And this could mark the end of a rules-based international order and open the door to aggression elsewhere, with devastating consequences around the world."
German Chancellor Olaf Scholz, in a speech last month to mark the end of the Second World War, explicitly linked the current war to that conflict, saying that "there must not be a peace of the victorious dictated by Russia". Poland's prime minister Mateusz Morawiecki warns that European leaders "have forgotten the lesson of the Munich Agreement of 1938." In short, this is an existential issue for the West.
The need for Russia's energy "strangulation"
The US and Europe have provided vital military and humanitarian assistance to Ukraine. But without an immediate Western military intervention, a defeat for Russia means the stranglehold of its resources. And that means tackling the world's dependence on Russia's energy resources, especially its oil and natural gas. As things stand, despite the sanctions to date, higher commodity prices mean that Russia's war machine is earning more money than last year.
Biden began his analysis by saying that "the invasion that Vladimir Putin believed would last a few days has now entered its fourth month." He could have replaced the words "Vladimir Putin" with a "everyone" and been just as precise. Ukraine was expected to collapse quickly. Obviously, the US and Europe would have responded with harsh words, more sanctions and a strengthening of the defence of NATO's eastern wing. I doubt, however, that they would have imposed sanctions on Russian action in a meaningful way, because of the reservations to which Schultz referred:
"We will not do anything that could cause more damage to us and our partners than to Russia."
This, at least in the short term, is more or less what sweeping sanctions against Russian energy resources would do. However, Ukraine's resilience and Russian barbarity have made energy sanctions inevitable. The most important were agreed by the EU earlier this month, after many disagreements.
Gas has been left out - Russia accounts for about a third of Europe's supply - and oil sanctions are carefully 'weighed': imports of crude oil by ships will have been completely banned six months from now and those for refined products in eight months' time. However, crude oil delivered through pipelines - about a fifth of Russian oil exports to Europe - is excluded. Few countries, such as Bulgaria and Croatia, receive an exemption for certain products. The potentially extensive bans on providing insurance to ships carrying Russian barrels do not apply until December 2022.
As energy divorces progress, it is more of an attempt at conscious disconnection. However, it is not in Putin's interest to play the role of partner with understanding. Assuming he reserves a long campaign of attrition, Russia's president needs Europe and the US to get tired quickly of this war and its hardships. Higher energy prices are already a political burden for the leaders of the countries on both sides of the Atlantic.
Moscow's unilateral interruption of energy supplies would be madness if one is really concerned about the long-term health of Russia's energy industry and economy. But Putin is now taking elements of foreign policy from Peter the Great - the first Russian emperor, if that tells you anything - so the economy is not his main concern.
On the contrary, it divides the West both at home and vis-à-vis Ukraine by all possible means. As the war drags on and the next winter approaches, Putin's temptation and ability to reverse the EU's planned course of movement will be amplified. The not-so-mysterious cut in Russia-controlled gas reserves in Last year's Europe and subsequent price hikes provide a model for expansion. In addition to energy, Russia is also brandishing real threats to other vital supply chains, from grain to industrial gases.
If this struggle is really as existential as it is mentioned in articles and in speeches - and I believe it is - then our approach to the energy dimension of the issues must be proportionate. "There is a price to be paid for adhering to these fundamental principles," as Helima Croft, head of RBC Capital Markets' global commodity strategy, puts it.
Measures of war economy
The US and Europe are openly involved in this war and have far-reaching war objectives, even if they do not pull the trigger. And while the battles are concentrated in a limited place, Russia's exports of goods make the problem so global that, if the West is serious about what it says, it could demand the kind of measures associated with the war economy.
This implies strong state intervention. We have already seen signs that Biden is moving in this way, with his diplomatic push to direct more liquefied natural gas towards Europe and his almost certain retreat from criticism of Riyadh in order to bring more barrels of OPEC crude to the market. The use of the defense production law to encourage domestic production of critical minerals and to unstick imports of solar panels into the U.S., although not directly linked to the crisis in Ukraine, also indicate his willingness to intervene more forcefully.
All of this should involve more than just efforts to accelerate the energy transition, which is one of the safest long-term strategic energy weapons against Russia that the US has. It must also include encouraging greater production of oil, gas and other fuels at home or in friendly countries, so that as much Russian production as possible can be displaced.
Balancing this short-term need with its decarbonisation targets is difficult because it requires companies to invest today in assets that may not be fully used in the future. The capital markets will not accept this without the state taking on some of the risk. Such an intervention would disappoint environmentalists, but it could be structured in such a way as to encourage smaller cycle energy sources such as shale or to be accompanied by conditions for reusing the infrastructure to be created for purposes compatible with the energy transition over a period of time.
Sacrifices and compromises
None of this can happen, however, unless it is openly recognised that the emergency in the energy markets requires sacrifices and compromises.
Progressives will be asked to "swallow" measures to support drilling. Conservatives will be asked to accept climate-related terms. And the sacrifice can also be extended to the demand side. Higher prices are already putting pressure, but strengthened sanctions and real cuts in Russian supply may ultimately require a reduction in demand or new directives to curb it, at least as far as Europe is concerned.
This is, of course, the last thing any US president who wants to ward off comparisons with Jimmy Carter wants to hear. However, when you have made the confrontation between democracies and autocracies a decisive principle of your presidency and now you have engaged in a real conflict to defend a democracy from a great absolutism, such possibilities must be taken into account.
Jason Bordoff, a founding member of the Board of Directors of the Columbia Center on Global Energy Policy, recently wrote an excellent article in Foreign Affairs about "how governments will transform energy markets", as they seek to balance climate goals with security. When I asked him about the distance between the harsh language of war and the more careful implementation of energy policy, he noted a similar dynamic when it comes to climate change: "If we really thought it was existential, we would think differently about what we would be prepared to sacrifice for the sake of tackling it."
As with tackling climate change, although the majority of citizens in the West support Ukraine, it remains unclear how much personal costs, including changes in behaviour, they are prepared to accept to support it. Putin is betting that their support will prove ephemeral. Equally unclear, however, is whether this case of his will lure him into a kind of dramatic escalation that will harden their resolve.
Source: BloombergOpinion
