Will the world be able to abandon the energy resources of the Russian Federation and how to replace Russian oil?
Russia earned more than $ 250 billion from energy exports in 2021. This year, according to Bloomberg, the Kremlin’s oil and gas revenues could grow by more than a third and could be more than $ 320 billion – due to record prices in world markets due to the deficit caused by the inability of suppliers to meet the rapid growth of energy demand. In this case, Russia will end the current year with a record current account surplus of $ 240 billion, and thus will have significant reserves to stabilize the ruble and generally painlessly survive the sanctions currently imposed on it. Therefore, the only means of punishing the aggressor and limiting his ability to finance the war of aggression against Ukraine remains a total energy embargo. At least – from the West.
Gas as a geopolitical weapon
During Vladimir Putin’s more than the 20-year rule, the Kremlin has persistently entangled Europe with “gas nets.” He persuaded governments into long-term contracts with very confusing price formulas, set up joint ventures, built new pipelines to bypass hated Ukraine and spent a lot of money on aggressive PR, always trying to justify his lack of alternatives as a “blue fuel” supplier. And to facilitate the process of this “gas occupation”, he bought bundles of local politicians, public figures and journalists.
Former German Chancellor Gerhard Schroeder was a textbook example of such betrayal. After stepping down in 2005, he headed the shareholders’ committee of Nord Stream AG, the operator of the Nord Stream gas pipeline, with an enchanting salary of € 250,000 a month. The term “shredderization” has even appeared in the European political lexicon, meaning open lobbying by local politicians of the Kremlin’s interests with a pronounced corruption trail.
– Of the current political heavyweights, the newly re-elected Prime Minister of Hungary, Viktor Orbán, fully meets this definition. Schroeder, in principle, when he was German chancellor, was not noticed in the work on Gazprom, this work began later, although questions actually arise when it began. But Orban, holding senior government positions and being the country’s prime minister, is practically in the mode of escort service of the Kremlin’s whims, – said the President of the Center for Global Studies Strategy XXI Mikhail Gonchar.
Schroeder’s successor, Angela Merkel, was not caught in the act of corruption but contributed to the development of Gazprom’s projects. It was during her term, despite warnings from Kyiv, Washington and her own opposition, that North Stream 2 was built after Nord Stream 1 and only Putin’s attack on Ukraine on February 24 prevented it from being put into operation. But even without it, contrary to EU energy legislation, Germany has become 55% dependent on Russian gas. Italy, the Netherlands, Austria, Slovakia, etc. found themselves in a similar situation.
Volodymyr Omelchenko, Director of Energy Programs at the Razumkov Center, cites relentless statistics:
– The European Union consumes only about 400 billion cubic meters of gas, including Russian – somewhere 160-170 billion, ie we see that this dependence is about 40% on average, so when for many, many years there was such a reckless policy of increasing dependence on Russian energy, then break this policy for a few days are very difficult. This is exactly what Moscow’s goal was to make Europe dependent and thus influence its political decisions. “And if they don’t take it, we’ll turn off the gas!”
Oil is their everything
The situation with oil is almost identical. But Russia is in a more dependent position here. The fact is that gas, despite its geopolitical significance, compared to “black gold”, does not bring so much money.
China is the largest buyer of Putin’s oil. Last year, according to the Russian resource TAdviser, it accounted for more than 70 million tons, or almost 30.5% of 230 million tons of all Russian exports. At the same time, EU countries buy a total of about 60%!
Together with gas and coal, the European Union is involuntarily the biggest sponsor of the Putin regime.
Against this background, the EU’s efforts to support Ukraine in resisting the Kremlin’s invasion are outright ridiculous. And this is acknowledged by European politicians themselves.
– We have provided € 1 billion in aid to Ukraine. It may seem like a lot. But we pay Putin € 1 billion every day for the energy he supplies us. We have paid him € 35 billion since the beginning of the war. Compare that to the billion we gave Ukraine in arms. This is a huge difference! – said the EU High Representative for Foreign Affairs and Security Policy Josep Borrell during a recent speech in the European Parliament.
In total, energy accounts for more than half of the Kremlin’s export earnings and accounts for more than 35% of the state budget. But that’s not all. Revenues from exports provide an opportunity to finance imports. In Russia, this is the vast majority of consumer goods, cars, industrial equipment, technology and software, as well as luxury items. Customs duties and VAT from this almost endless list also replenish the budget. At the same time, again, more than half of Russia’s energy exports go to the European Union.
Embargo: desire and reality
Washington was the first to announce a complete abandonment of Russian energy in early March. “Protecting democracy comes at a price. But we knew we had to do it,” President Biden said at the time. The decision found bipartisan support in Congress, and last week the White House announced the signing of the law. Ironically, the world’s largest producer of hydrocarbons, the United States, bought them in Russia. Last year, Russia’s share of US imports was 3% of crude oil, and together with petroleum products, mainly fuel oil, reached 8%. Obviously, it was cheaper and more convenient for the states.
The UK’s energy dependence on the Kremlin was even greater: 8% of total domestic oil consumption and 18% of diesel fuel. However, London has firmly stated its intention to completely shut down the crane by the end of this year. Canada and Australia also joined the embargo.
However, for the past year the so-called “Anglo-Saxon world” paid the Kremlin for hydrocarbons only $ 2 billion in 2022, taking into account rising prices, the amount could rise to $ 3 billion. Instead, the EU market in 2021 Moscow, according to Russian customs agencies have harvested more than $ 135 billion. Independent think tanks give an even higher figure – $ 155 billion. And if Mr. Borrell did not exaggerate, and the EU does pay Putin for energy € 1 billion a day, this year’s amount can be imagined by multiplying 1 by 365, minus the decline in demand in the warm summer months.
But so far, Brussels has not shown the same determination as Washington and London. Initially, the EU planned to reduce its dependence on Russian gas by two-thirds by the end of this year. The cessation of its supply much earlier was almost provoked by Russia itself – a requirement for the so-called “unfriendly countries” to pay for “blue fuel” in rubles. However, after the categorical refusal of the EU and the G7, the Kremlin decided to put the case on hold. In a decree solemnly signed by Putin, they left not just loopholes, but a wide road to avoid it.
The horrific footage of the Bucha massacre intensified the European debate, and a full energy embargo appeared on the agenda. France and Italy, in particular, supported it. At the same time, the genocide of Ukrainians in Germany and Austria obviously did not seem convincing. Not to mention Hungary, whose prime minister still sees no crime in paying for gas in rubles. Finally, on April 6, the European Commission presented the 5th package of anti-Russian sanctions, in which it forked only to ban the import of coal. And that’s a paltry € 4 billion a year.
At the same time, European Council President Charles Michel has publicly acknowledged that “measures against Russian oil and even gas” will sooner or later be needed. Some EU countries have already taken the initiative. Poland has announced a plan to completely abandon the Kremlin’s hydrocarbons. Warsaw promises to stop buying coal in April-May, oil – by the end of the year. The gas supply contract, which expires on December 31, will not be extended.
The example of Poland is exemplary, – says Mykhailo Honchar. But, again, in Poland, the current Polish leadership had a systematic approach and the political will to get rid of dependence on Russian energy. In Germany, there was a completely opposite political will.
Italy, in turn, is going to increase purchases of “blue fuel” in Algeria. Finland has announced its intention to “quickly” abandon Russian energy and plans to lease an LNG terminal with Estonia to receive liquefied natural gas. But where will it be brought from? The first to come to mind are Middle East Qatar, as well as the United States and Canada – at current insane prices, their expensive, shale deposits are becoming quite profitable.
– Germany has already started negotiations with Qatar, plans to build two new LNG terminals to import this LNG gas from Qatar or the United States, Italy also said it plans to build two additional LNG terminals to give up Russian gas. It is possible to give up, because many countries are planning to increase production, but it takes time. It is necessary to build infrastructure, well, let’s say so, I believe that in 3-5 years it is possible to significantly reduce gas supplies from Russia, – sums up the General Director of the GTS Operator of Ukraine Serhiy Makogon.
At the same time, he insists that the reduction of supplies from Russia should be due to the existing Nord Stream-1, and the Ukrainian gas transportation system, despite the war, must work as long as possible:
– We do not have separate pipes for transit and for internal gas transportation and currently transit for us acts as a so-called energy air defense. We see now that the Russians are not destroying our gas transportation system, because transit is very important to them, and at the same time we are able to supply gas to our population.
So, the process is already underway – despite the Kremlin’s many and multibillion-dollar efforts to confuse Europe with gas pipelines and corruption. Oil should be even easier, as it is much less tied to pipelines.
– The oil market is much more competitive and, unlike gas, it is very easy to jump out of oil, because there is just an alternative tanker, not Russian, for oil it is a daily business – tankers, – says the director of A-95 Consulting Group Sergei Kuyun.
And to confirm the example of same Poland:
– In 2020, they seemed to have 70% of Russian oil. Two years have passed and they are simply calmly abandoning it.
Moreover, Putin’s oil has become so “toxic” that many reputable world traders have refused to buy it, without even waiting for their governments to ban it.
– That is, tankers travel across the world’s oceans with Russian oil and they can’t find a buyer. This oil is not sold because many companies do not want to buy Russian oil because image losses are possible, – says Vladimir Omelchenko.
According to RusEnergy consulting partner Mikhail Krutikhin, Russia has already lost half of its oil and oil products exports. And then, obviously, will be.
The holy place will not be empty
But who will replace Russian oil on the world market, where there was already a significant deficit due to the rapid recovery of the economy after the corona crisis? First in line, of course, is Saudi Arabia and its OPEC partners. Every year, the cartel agrees on quotas, ie deliberately limits production in order not to lower prices. However, currently, the Arab countries of the Middle East are in no hurry to increase the production of raw materials. First, just do not keep up with the growing demand. Second, Riyadh is trying to bargain in the United States for more support in the fight against pro-Iranian Hussites, who repeatedly strike at Saudi oil infrastructure. Well, in the end, all suppliers of “black gold” really like the current prices, which almost do not fall below $ 100 barrels, and in early March reached even $ 140.
However, this cannot last long. Otherwise, traditional supplier countries outplay themselves, – warns Sergei Kuyun:
– The high price is always a revival of an alternative, an alternative oil production. These are shale deposits with a higher cost. They do not work at $ 80-60 per barrel, but at $ 100-120 they begin to revive. And begin to take away market share in OPEC.
This is primarily about the huge shale deposits of the United States and Canada. It is a little-known fact, but Canada ranks fourth in the world in both oil and gas production. It’s just that its contribution is not very noticeable at the global level due to its close integration with the market of its southern neighbor.
– The role of the United States is key, and I would even say that only the union of Canada and the United States in the energy field can cover the potential energy deficit if they impose an embargo on energy from the Russian Federation. Unfortunately, Canada itself will not be able to provide the capacity that the market needs. But a direct alliance with the United States, it will solve this problem, at least in part, – said the executive director of the ADASTRA think tank Taras Prodanyuk.
Meanwhile, the 6th package of anti-Russian sanctions of the European Union is already approaching. And it can still expect an energy embargo. Will Moscow be able to compensate for its losses in the European and American markets? Completely – definitely not, can only partially try. However, China is already buying Russian oil at the limit of its technical capabilities. India seems to have expressed a desire to buy 8 million barrels, but this is a drop in the ocean, just a little more than the one-day Russian sales of pre-war times. In addition, Delhi agrees to buy only at a huge discount, which calls into question the very profitability of production. The project of the gas pipeline to Pakistan, after the change of power in Islamabad, will obviously not be implemented. All sorts of “gray” schemes in the modern world will be extremely difficult to hide.
Russian propagandists are intimidating humanity with $ 200 a barrel of oil if an embargo is imposed. However, the world was experiencing major upheavals. For Russia, this will be the end of its existence in the form of a global gas station. It will suddenly lose about 20% of the state budget. And that will be just the tip of the iceberg. Imports, customs payments, VAT revenues will continue to increase, and hundreds of thousands of representatives of the oil and gas companies’ plankton fattened on sky-high salaries will lose their jobs.
The Kremlin will be much more concerned than fighting the imaginary “Ukrainian fascism.” The question of the very survival of the Putin regime will arise.