Russia has Europe over a barrel on energy

If St. Petersburg is Russia’s window to Europe, then the colossal glass and steel headquarters of Gazprom that dominates its skyline is the country’s open sign.

Relations between Moscow and the West may have only worsened decade after decade, but the state-run energy firm’s profits have soared – reaching a record £24bn last year – by selling fossil fuels to countries across the continent. Alexey Miller, the company’s director, has long been at pains to make out it is above the political fray, never failing to fulfil its contracts, interested only in pumping fuel and earning fortunes.

Now though, his business model is quickly becoming a casualty of Vladimir Putin’s war, and energy is the weapon of choice.

Last week, Gazprom slashed daily deliveries of natural gas to Western Europe through the Nord Stream pipeline by a further third, following a series of supply cuts. Miller’s team say the move is due to “repair work” on its infrastructure. EU leaders suspect an ulterior motive. “This is a political decision and not a technically justifiable solution,” Germany Economy Minister, Robert Habeck, has said.

The squeeze on shipments comes after Moscow forced Berlin, along with France, Austria, Czechia, and a host of other nations to settle their bills in rubles to evade sanctions. Those who refused have been left without, and the Kremlin has even switched off electricity exports to Finland over its application to join NATO.

And yet, while Western countries spent years preparing militarily for a potential conflict with Russia, shipping tons of arms and armour to shore up Ukraine’s defences, almost nothing has been done to prepare for a potential energy blockade. Russia’s 2014 annexation of Crimea may have drawn international condemnation, but it didn’t slow the flurry of deals coming into Gazprom’s headquarters.

Germany in particular has walked this tightrope. In 2020, the year opposition figure Alexey Navalny landed in Berlin in a coma after being poisoned on a flight from Siberia, the country bought up around 56 billion cubic meters of Russian gas undeterred. Dependent on Moscow for more than half its supplies, Germany’s major manufacturing and chemical complexes are the main customer.

Now, with its pipeline imports being choked off, Yasmin Fahimi, head of the German Federation of Trade Unions has warned the consequences could be catastrophic. “Because of the gas bottlenecks, entire industries are in danger of permanently collapsing: aluminium, glass, the chemical industry,” she told Berlin tabloid Bild am Sonntag on Sunday.

Dependency on a hostile foreign power for fossil fuels, however, is a decades-old policy choice that will be almost impossible to undo overnight. “Germany’s growth model has been to import cheap energy from Russia, use that to assemble manufactured goods and export those goods to the rest of the world,” says Robin Brooks, Chief Economist at the Institute of International Finance. “While Germany now seeks new energy suppliers, its trade balance and that of the eurozone will look ugly.”

Until now, Gazprom was seen as so reliable and apolitical that governments of all political stripes felt confident enough to hand it the keys to their economic growth. Hungary, where strongman leader Victor Orban has made no secret of his admiration for Putin, has fought tooth and nail to protect Russian oil and gas from sanctions, given it accounts for around half of its energy mix. But Czechia, a country that has long led the way in its condemnation of Russia and its support for Kyiv, still relies on Moscow for almost all its gas.

The late US Republican senator John McCain once described Russia as a “gas station masquerading as a country.” These days though, it seems more and more like it is a fiercely self-interested autocratic state that spent a good few decades pretending to be an innocuous gas station. And for the most part, the West bought the act because it wanted cheap supplies.

That naivety, and the EU’s failure to diversify and find alternatives, are now a major source of leverage for Putin, as well as a lifeline with which to fund his war. In the first 100 days after the start of the invasion, Russia earned close to $100bn in fossil fuel exports, overshadowing much of its losses from sanctioned parts of its economy.

Ultimately, the only way to break the cycle of dependency on foreign powers is to invest in generating renewable energy at home. And yet, the long-promised green transition has been sluggish across much of the West, and the EU only draws a quarter of its electricity from renewables, putting pressure on gas and coal.

Worse still, Germany has actively destroyed its own generating capacity by shuttering its nuclear power plants as part of a 2011 panic following Japan’s Fukushima disaster. Given the Bavarian Highlands are hardly infamous for tsunamis of their own, and the country’s power grid is now under increasing strain, that decision looks increasingly short-sighted.

Even countries that rely very little on Moscow’s fossil fuels, such as the UK, are feeling the reverberations. Last year, only 4 per cent of Britain’s gas and 9 per cent of its oil came from Russia, but energy prices have skyrocketed as the market heats up and EU nations look for alternatives. The result is a cost-of-living crisis that few have any real answers to.

Up until now, Brussels has failed to achieve a consensus on divesting, and many of the fossil fuel-rich nations it could turn to – Saudi Arabia, Iran and Azerbaijan – come with their own host of foreign policy headaches. Whether the West repeats the same mistakes it made with Putin remains to be seen.