What will Putin get?

13 January 2022, 05:38 AM

The EU’s response to the Kremlin's outright gas blackmail will not be long in coming.

This article was published in a special issue of the magazine NV World Ahead 2022 under the exclusive license of The Economist. Republishing is prohibited.

A dramatic situation has arisen on the global natural gas market. When all gas was piped, regional gas markets were separated, but the development of liquefied natural gas (LNG) has combined the regional gas markets into one global market.

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As the East Asian economies have recovered, they have been ready to pay any price for LNG. Thus, both Qatar and the United States are sending all their LNG to China rather than to Europe, whose gas prices have also multiplied in 2021.

Gazprom has plenty of additional production and pipeline capacity for Europe, but instead of increasing its production and supplies, Gazprom has predictably reduced these deliveries and driven up European gas prices further.

In a blatant and aggressive fashion, Russia demands all kinds of things from its European clients to increase its supplies to them. The EU has been admonished to return to Soviet-style long-term gas contracts tied to the oil price; Germany is told to certify Nord Stream 2 swiftly; Moldova had better abandon its EU Association Agreement; Serbia is being encouraged to buy Russian arms. Ukraine is just told to shut up.

For the moment, Russia seems to have all cards in its hands, but the always arrogant Putin has a tendency to overplay.

He did so in January 2009, when he cut Russian gas supplies to sixteen European countries for two weeks. That summer, the EU responded by adopting its third energy package with unbundling and far-reaching marketization, contrary to Russia’s aspirations. My suspicion is that something similar is about to happen once again.

Russia has already minimized its gas supplies as well as its vast storages in Germany, Austria and the Netherlands. The natural outcome is that a gas supplier will no longer be allowed to own storage in Europe, while the owners of gas storages will be requested to maintain a minimum volume.

Putin is blatantly demanding an early certification of Nord Stream 2. The natural EU response would be not to certify Nord Stream 2 at all, and let it die. The European Court of Justice has already restricted its utilization.

Former European Council Chairman Donald Tusk proposed that the EU should coordinate its purchases of natural gas to fully utilize its market power. Gazprom almost only exports gas to Europe through its pipelines, and with few allies, it is far more vulnerable than it realizes. Moreover, Europe probably reached peak gas consumption in 2019 and is never more likely to consume that much gas again.

Russia is likely to make many European countries suffer from a shortage of gas this winter and let them freeze, but the cost of its ill deeds might be greater than it anticipates. However, slow the EU is, it usually reacts adequately to outright aggression.

Anders Åslund is a senior fellow at the Stockholm Free World Forum

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