Gas export revenue sustains the Russians' support of the war


What will happen if the EU stops buying Russian fuel tomorrow? Olena Pavlenko, energy policy and security expert and DiXi Group President, told the Heinrich Boell Foundation about the likelihood of a full embargo on Russian fuel in Europe and of gas and oil being completely replaced by renewables.

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Does an embargo on Russian fossil fuels in Europe make sense if Russia continues to sell it to other markets?

It does. The European market is extremely large, and it is the largest market where the Russian Federation sells its oil and gas.

“If Russia loses the European market, it will also lose about half of its exports. Russia will not be able to find the same large consumer country to substitute it. Besides, the whole world sees Russia blackmail Europe with gas. This is a significant reputational blow. It will also cause further reductions in purchases of Russian energy in all markets,” the expert believes.

“Russia is using its advantage as an energy sources supplier to achieve its own political goals. When gas prices rose to $2,000 per 1,000 cubic meters in the EU last year, member states had to subsidize their population. This crisis was largely caused by Russia — with up to 40 percent of the European market, it is easy to influence prices. Thus, the Russians manipulated and played on prices in the European Union while simultaneously demanding that the Europeans launch Nord Stream 2,” Olena Pavlenko explains.

Фото спікерки Олени Павленко

“For others, this is also a signal that Russia is not a reliable partner. It can use gas, oil, and petroleum products against them in the same way. I believe that considering this, China and other countries will try to keep the share of Russian imports low, so as not to fall into similar traps in the future,” the expert says.

Russia’s “Resource Curse”

Countries rich in natural resources should logically be the richest, most convenient, and most comfortable for their citizens — because they have a lot of money. In practice, however, the opposite is usually the case.

“With some exceptions, these countries are generally corrupt, and, mostly, are ruled by authoritarian regimes. Big money leads to big corruption, ordinary citizens of these countries remain poor, and the money is owned by the leadership. This is called a ‘resource curse.’ Russia also suffers from it, but the leadership there not only enriches itself, but also realizes its own imperial ambitions: it finances wars abroad,” Olena explains.

By turning a blind eye to trade with authoritarian countries without proper control over the use of funds, Europe also pays in the end. A simplified mechanism looks like this: Russia sells gas to, say, Germany, and receives money for it; the money is spent to produce weapons and tanks; the tanks go to war in Syria; and refugees flee from Syria to Germany. Then Germany has to solve the refugee problem. This circle can be broken by Europe itself through changing the terms of trade with such countries.

Is a full embargo on Russian resources across all Europe real?

Some countries in Europe are more dependent on Russian fuel than others. For example, Germany is still one of such countries, with about 40–50% of its gas imports coming from Russia.

“This is hard for Germany. It needs to refocus fast. This can be just as difficult for Bulgaria and Hungary. But this is a matter of political choice. Sometimes you have to suffer financial losses today to prevent war in your country tomorrow. People may disapprove of financial losses, which may affect politicians’ popularity. However, this is their task, to explain why such a choice is needed and to abandon the consumption of Russian gas. So far, this is not the case, perhaps there is still a strong business influence on political decision-making in Germany. This is what Russia is playing on,” Olena Pavlenko says.

Abandonment of Russian energy sources will not be easy, the expert believes. Many funds, including the World Bank and the IMF, do not finance fossil fuel projects today. Hence, mining companies are reorienting their business and developing renewable energy sources.

“Many countries that used to be able to quickly substitute Russian gas by increasing their own production now need more time to re-launch their production projects. Norway and the Netherlands want to increase their production, and Qatar plans to do so. I suppose that, in time, Russia will be completely removed from the market, but now it takes time,” Olena asserts.

Can a full embargo stop Russia’s war against Ukraine?

The expert is convinced that Russia will face internal problems if an embargo is imposed quickly. There will be problems with revenues from the sale of energy sources, or, simply put, there will be no funds in the budget.

“And if there is a problem with money, the ‘fridge’ will win the ‘TV’ for the population. The government will have to deal with internal issues more than with external ones. If the Russian population’s dissatisfaction grows and Putin’s rating falls quickly, the authorities will look for ways to reassure the population instead of financing the production of new tanks,” Olena Pavlenko says.

Why not replace one problem with another?

Having announced a course for decarbonization, neither the EU nor Ukraine can abandon Russian gas “in a linear way”, simply by switching from one supplier to another. The strategy of abandoning fossil fuels means that we need to look for ways to gradually reduce oil and gas consumption. For example, the plan announced by Ukraine’s Ministry of Energy to reduce gas consumption to the level of the country’s own production during Ukraine’s reconstruction sounds ambitious.

“We advocate, along with replacement, a simultaneous reduction of consumption of oil, gas, and petroleum products. Oil is easy to substitute; there are many countries that will “pick up” Russian quotas, and this will be a powerful blow, because Russia gets the biggest profits from oil. This is harder with gas because more investment is needed to increase production in other countries. At the same time, it seems that this is a good opportunity to give a boost to all countries and think about how to substitute gas with other sources,” Olena explains.

Is it possible to build a system of renewable energy sources within this time frame?

In the short run, this is difficult, the energy policy expert notes.

“I believe in a scenario in which we will substitute fossil fuels with renewable energy sources — I just do not know when it will be implemented and how much more money and technical capabilities are needed for this. I do not see any technical solutions yet to ensure the transition of all energy production in Ukraine to renewable sources in the next five years,” Olena says.

There are other sectors where it is currently unclear how to operate without fossil fuels — for example, the army. “So far, there are no technologies that would allow military equipment to completely abandon petroleum products. This task will probably take more than one year, to develop new technologies and launch their production. There will be solutions, but it is hard to say when exactly,” Olena Pavlenko continues.

What should Germany and the European Union generally do to stop being dependent on Russia?

“Germany must now stop grasping at Russian energy like at straws. Germany must publicly declare how it will develop without Russian gas. There must be a clear plan. If Germany could set an example for many other countries on how to substitute fossil fuels with other sources, that would be great. In my opinion, this would be its strongest step in support of Ukraine, and in order to remain a leader for Europe, and in order to stop Russia. That is why there are many great hopes for Germany,” the expert adds