Russia's Energy Supply Pantomime

The war in Ukraine has thrown the global energy landscape into disarray, exposing the precarious dependence of many nations on Russia's vast energy reserves. Russia, a major player in the global energy market, is the world's third-largest oil producer, pumping out 9 million barrels a day as of September 2023. It also holds the title of the second-largest gas producer, supplying a staggering 15% of the global market and 23% of Europe's gas consumption. This dominance has made Russia a critical player, but the ongoing conflict with Ukraine has disrupted its control over this key sector.

In response to the invasion, the West imposed a series of sanctions on Russia, aiming to cripple its economy and limit its war funding. Before the war, oil sales accounted for 30-35% of Russia’s budget revenue, making it an obvious sector to neutralise. A key element of these sanctions was a price cap of $60 per barrel on Russian crude oil. According to a US Treasury report published in May 2023 the sanctions were successful in achieving oil supply stability and reducing Russian tax revenue. Further evidence from additional sources also suggests the efficacy of the price cap and the European embargo. For example, Urals oil, exported from Russia's north-western port of Primorsk, had been selling for only $40 per barrel early 2023, suggesting a decrease in price compared to pre-sanction levels. This indicates that these measures have somewhat impacted the flow and pricing of Russian oil.

The impact of these sanctions is also felt outside of Russia, as we saw during the drastic energy crisis throughout Europe. A study published on ScienceDirect (which utilised a global multi-region model) simulated the economic consequences and found that, in a worst-case scenario, the EU could face a 1.5% economic loss, while Russia could experience a loss of 4.8%. This scenario also predicted a rise in global inflation. Although Russia suffers a substantial loss, is the EU also prepared to stomach the poison of its own making? The study further highlighted the potential for social instability and a decline in global output due to the profound impact of energy supply disruptions, which we are already seeing come to fruition.

Despite Western suppression, Russia also retaliated. The Nord Stream pipeline was opened in 2011 and is a 1200km pipeline that supplies the EU with 35% of their Russian imported gas, mainly supplying Germany. The Nord Stream 2 was a parallel pipeline that was due to come online in 2022, however, Germany postponed issuing its operating license due to the war in Ukraine. Germany’s defiance prompted an informal Russian response (a sort of ‘covert’ but obvious Russian agenda) - by June 2022 Russia had reduced its supply of gas through the Nord Stream 1 by 75%, even shutting it down completely for 10 days in July for supposed ‘maintenance issues’. When it re-opened, the flow was constricted to half of that volume. Then in late August, the Nord Stream was shut down entirely. Meanwhile, the next month, Denmark and Sweden were also reporting four gas leaks along these pipelines, seemingly caused by explosions. Naturally, EU leaders and the US have suggested the explosions were deliberate, stopping just short of pointing fingers towards Russia, however, Russia denies any involvement. Again it begs the question whether or not Europe is prepared for the ramifications of this war, especially with this disruption to energy.

Despite the sanctions and counter-penalties, Russia’s grip on the worldwide market remains strong. The International Energy Agency reports that Russia continues to export a significant 9 million barrels of oil daily, with increased supplies going to India and China - for which both countries have come under scrutiny. In just 2021, India was only importing 2% of its oil from Russia, but this figure rose drastically - ten-fold in two years. These mass imports from India were part of the reason why, in August 2023, the price of Russian oil exceeded the European cap and reached $73.57 per barrel. In 2022, Erdoğan also said that Turkey could not participate in sanctioning Russia because of its import dependency - at the time Turkey imported almost half of its gas from Russia. Consequently, even if Europe no longer purchases its oil, Russia has quietly been diversifying its previously Euro-centric exports.

Further complicating the situation, there are loopholes to the seemingly stringent embargo and price cap, which has also absorbed some of the economic damage Russia faced. For instance, the EU's ban on Russian oil imports initially exempted pipeline imports (it only really applied to oil transported via shipping routes), to appease countries like Hungary which rely heavily on Russian oil. While some European nations like Germany and Poland have pledged to end pipeline deliveries as well as seaborne oil, others remain dependent on this source.

Through yet another backdoor, the Atlantic Council, a US think tank, reported the existence of a "shadow fleet" of roughly 1,000 tankers used to ship Russian oil and gas, allowing it to circumvent some sanctions and reach European markets. Going back to Turkey, Erdoğan and Russian President Vladimir Putin planned for the country to become an energy hub for all of Europe. According to Aura Săbăduș, a senior energy journalist focusing on the Black Sea region, "Turkey would accumulate gas from various producers — Russia, Iran, and Azerbaijan [liquefied natural gas] and its own Black Sea gas — and then whitewash it and relabel it as Turkish. European buyers wouldn't know the origin of the gas." However, the extent of this reselling strategy via Turkey has been limited as it is practically impossible to re-configure gas flows with the European Union. Furthermore, gas supplies to Turkey are constrained due to the TurkStream pipeline running well below its 31.5 billion cubic meters annual capacity. China, on the other hand, has been a more likely partner for such tactics - the People’s Republic of China overtook Japan as the largest importer of LNG and is already experienced in the art of re-labeling Russian-sourced gas for export.

The war in Ukraine has exposed the fragility of the global energy system, highlighting the dangers of over-reliance on a single supplier, especially within the intricate web of European energy supply. It has also exposed the almost useless Western sanctions which have ultimately failed at their aim to meaningfully cripple the Russian economy - hence the war goes on. While the immediate shock of the conflict seems to be settling, the long-term consequences remain uncertain. The situation underscores the need for a global shift towards a more diversified and sustainable energy future, reducing dependence on fossil fuels and fostering energy independence for all nations.