It may astonish many to know that Russian gas has continued to make its way into Europe since the country invaded Ukraine on 24 February 2022. This is despite the fact that the money made from these exports is used directly or indirectly to fund Moscow’s ongoing war against Kyiv. It is also despite the fact that Europe’s long-running dependence on Russian energy imports consistently neutered its response to two previous illegal occupations of European sovereign independent countries by Russia. The first was of Georgia in 2008 and the second was of Ukraine in 2014 (during which Russia annexed the Crimea region). Perhaps most incredibly of all to most is the additional fact that the bulk of these Russian gas exports make their way into Europe via Ukraine itself. According to industry estimates, Moscow still earns around $3.2bn a year from these gas sales to Europe via Ukraine, while Kyiv makes about $1.1 bn. Perhaps the absurdity of all this has finally registered with Ukraine, as last week Ukraine’s Prime Minister, Denys Shmyhal, told his Slovakia counterpart, Robert Fico, that his government would not be extending this gas transit agreement past the end of this year. This raises the key issue again of whether this means that all Russian gas exports to Europe will finally be halted or whether another fudge will be implemented instead. Related: Oil, Gas Companies Set To Spend More in 2025
Top of the list of such options currently being mulled over by the European Union (E.U.), a senior source who works closely with it in the field of energy security exclusively told OilPrice.com last week, is a gas swap deal involving Azerbaijan. In simple terms, this is as obvious a piece of moral jiggery-pokery as it first appears, which would involve Russian gas being exported in the amount required by Europe to Azerbaijan in the first instance, whereupon Azerbaijan would then send the same amount of gas on to Europe. It is precisely the same idea as is involved with one of the many sanctions-busting schemes that Iran has used over the years to transform its sanctioned oil into non-sanctioned ‘Iraqi oil’ which can then be shipped on to anyone on the planet – all that it effectively involves is a change of labels, as analysed in full in my latest book on the new global oil market order. Unsurprisingly, the Russians have publicly and privately expressed their support either for a continuation of the importation of their gas by Europe either via the Ukraine transit route or through any other means offered up by the continent. Only last week, Russian Deputy Prime Minister Alexander Novak said that there are proposals from E.U. partners to continue Russian gas purchases after the end of this year, but that “the ball is in the court of Ukraine and the E.U.”. Aside from the very welcome multi-billion dollars revenue that this injects into the Russian economy, continued energy exports into Europe has enormous geopolitical positives for Moscow as well.
One of these is that it keeps its foot in the door of several E.U. member countries, which can then be pushed further open in the years to come, says the E.U. source. “Russia used its cheap and plentiful supplies of gas and oil over the past twenty years to secure enormous control over key elements of the core European Union apparatus, including its politics, its economics, and its corporate culture at the senior level in some cases,” he said. So dependent was the E.U. on Russian oil and gas imports by 2022 – including, most notably, its de facto leader, Germany – that the only real flurry of activity by the E.U. during the early weeks after Russia invaded Ukraine was aimed at ensuring that Russia did not stop supplying it with oil or gas, due to its not being able to pay in the way Moscow preferred, as also detailed in my latest book on the new global oil market order. This followed the 31 March decree signed by President Vladimir Putin that required E.U. buyers to pay in roubles for Russian gas via a new currency conversion mechanism or risk having supplies suspended. According to an official guidance document sent out to all 27 E.U. member states on 21 April by its executive branch, the European Commission (E.C.): ‘It appears possible [to pay for Russian gas after the adoption of the new decree without being in conflict with E.U. law],… E.U. companies can ask their Russian counterparts to fulfil their contractual obligations in the same manner as before the adoption of the decree, i.e. by depositing the due amount in euros or dollars.’ Helpfully for its member states, the E.C. added that existing E.U. sanctions against Russia also did not prohibit engagement with Russia’s Gazprom or Gazprombank beyond the refinancing prohibitions relating to the bank.
So obvious was it to the U.S. and its key European allies, the U.K. and France (all three being Permanent Members of the five-member United Nations Security Council) that no meaningful action would be taken by the E.U. if alternative urgent measures were not quickly put in place to meet its energy needs that they raced to make new deals. These had to be big, as the E.U. had imported a total of 155 billion cubic metres (Bcm) of gas from Russia in 2021, accounting for around 45 percent of its gas imports that year and almost 40 percent of its gas consumption. Germany itself was reliant on Russian gas for around 30-40 percent of its own commercial and domestic gas needs, depending on the time of year. Liquefied natural gas (LNG) became the focus of the U.S., U.K., and France with their initial focus on quick short-term deals being made with the world’s top exporter, Qatar, in the first instance. These were followed by similar deals with ‘friendly’ producers elsewhere, and by longer-term LNG and natural gas projects undertaken by U.S., U.K, and French firms in the Middle East and North Africa, most notably in Iraq, Egypt, and Qatar again, as also analysed in my latest book. At the same time, the U.S. itself dramatically ramped up its own production of LNG. From almost a standing start in 2016, it had become the world’s biggest LNG exporter by the end of 2022. It shipped around 119 Bcm of LNG that year, with about two-thirds of it going to Europe.
Consequently, the undermining of E.U. resolve to finally do away with all imports of Russian gas and oil is also a key plank in the Kremlin’s strategy to re-open any fissures in the relationship between Europe and the U.S. in their North Atlantic Treaty Organisation (NATO) security alliance. On the one hand, former U.S. President Donald Trump has often highlighted the absurdity inherent in key European members of this alliance continuing to bankroll Russia’s growing military with trillions of euros of oil and gas import money. On the other hand, there has long been a reluctance in Germany to follow the U.S., U.K., and French lead on matters relating to its sourcing of cheap energy supplies. After the U.S. unilaterally exited the Joint Comprehensive Plan of Action (JCPOA, or ‘the Nuclear Deal’) with Iran in May 2018, Germany’s then-Foreign Minister, Sigmar Gabriel, had warned: “We also have to tell the Americans that their behaviour on the Iran issue will drive us Europeans into a common position with Russia and China against the USA.”
By Simon Watkins for Oilprice.com
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