Putin's Gas Suicide in Europe

Step by step, Putin has killed off Russia's gas export market in Europe, a business that had thrived for over half a century. Why did he do it? And could it ever be revived?

To this day, no one knows who did it. On September 26th, three powerful underwater explosions ripped through the NordStream gas pipelines that connected Russia to Germany under the Baltic Sea, disabling three of the four lines. The attack on the pipelines—even though they were not operating at the time—was the culmination of a steadily worsening series of interruptions and cutoffs that have now reduced Russia’s European gas exports to a trickle since the beginning of its invasion of Ukraine. Russia’s gas business in Europe, a relationship that had endured for half a century, is now all but dead.

But why did Putin decide to kill off Russia’s gas business in Europe? And could Russia’s European gas business ever be revived?

              PUTIN’S BAFFLING GAS SUICIDE

Since the start of the Russian invasion of Ukraine last February, Putin has cut Russia’s gas exports to Europe by nearly 80% compared to 2021. Out of five Russian pipelines to Europe, only two are presently operating, one through Ukraine and another through Turkey, and before the winter is out the flow through Ukraine may be cut off as well. Putin’s gas cutoffs are the main cause of the gas and power price spikes that now threaten Europe. In the process, Russia has systematically breached its sales contracts and alienated Europe’s gas consumers, buyers, and distributors, and outraged most of its governments. In effect, Putin has put a bullet through Russia’s business in in Europe.

              What explains Putin’s actions? Russia’s gas-export business in Europe was for half a century the very symbol of Russian-European détente and collaboration, both during the Cold War and after. After the fall of the Soviet Union, it became the prime example of the confident belief, which dominated Russian-European relations from the 1990s through the mid-2010s, that good business would build good relations. (On this see my recent book, The Bridge, https://www.hup.harvard.edu/catalog.php?isbn=9780674987951)

              The Russians had long prized the gas relationship with Europe, and for good reason. In Soviet times the capital, pipes, and machinery provided by the Europeans enabled the Russians to develop their gas industry in West Siberia, which provided much-needed foreign-exchange revenue. In the 1990s, after the collapse of the Soviet Union, money from gas exports allowed Russia to supply its ruined domestic economy with gas at ultra-low prices.

              With so much at stake, the Russians observed their European gas-export contracts carefully. The sole exceptions were due to Russia’s chronically contentious relations with Ukraine. which at the time had a virtual monopoly of the transit of Russian gas to Europe. (See Margarita Balmaceda, Politics of Energy Dependency, https://utorontopress.com/9781487520229/politics-of-energy-dependency/) These led to interruptions in 2006, 2009, and 2014, but despite this, in Europe Russia was still viewed overall as a reliable commercial partner.

Gas exports had long been one of Putin’s highest personal priorities. Putin spoke frequently on gas issues, calling natural gas the cleanest of all energy sources. In the mid-2000s, as the Soviet-era fields in West Siberia began to decline, Putin launched one of the largest investment projects of his reign, pouring over $200 billion into developing the next generation of gas, on the remote Yamal Peninsula in the north of West Siberia. In parallel, he built four major new export pipelines to Europe, aimed at modernizing the inefficient Soviet-era transmission system, but also at lessening Russia’s dependence on Ukraine. The famous Nord Stream 2 pipeline was meant to be the final capstone of that project.

              As a result, Russia’s gas position in Europe appeared to be assured for another generation. The delivered cost of Russia’s pipeline gas was by far the lowest in Europe, well below that of its nearest competitor, LNG from Qatar and the United States. Russia’s gas exports grew steadily; by 2020-21 they were breaking new records, and Russia’s share of the European market reached 45%. Yet in the space of a few months all that was thrown overboard.

              The destruction of Russia’s gas business in Europe did not happen all at once, but came about in a series of events over the spring and summer of 2022. It is highly unlikely that these were planned in advance in Moscow. Rather, the sequence of moves that took place in those months gives the impression of having been as improvised as everything else about the Ukrainian war. One episode followed another, seemingly at random; but taken together, they make a steady trail of footprints, all heading downhill. And every footprint is Putin’s.

CHRONOLOGY OF A SUICIDE

              It is true that in the decade leading up to the Ukrainian invasion, Russian-European gas relations had deteriorated. Gazprom was under steadily growing pressure from the EU, for two reasons. First, the European Commission had adopted a series of regulatory innovations aimed at making the European gas and power business more open and transparent. These were stoutly resisted by the Russians, leading to repeated confrontations between the EU Commission and Gazprom. In 2011 the Commission ran a series of so-called ‘dawn raids,” forcing its way into Gazprom offices in eastern Europe and hauling away computers and records. In parallel, Gazprom was compelled to renegotiate its long-term contracts with its major European buyers, on terms unfavorable to the Russians. Moscow—beginning with Putin himself--complained bitterly, but in the flurry of lawsuits that followed, the European Court of Justice backed the Commission. Gazprom, grumbling all the while, was forced to yield.

Second, right behind Brussels’s directives came Europe’s ambitious climate policy, which aimed at nothing less than the complete elimination of natural gas from Europe’s energy mix. In response, Russia had already begun to diversify its gas exports. It had built a first pipeline to China, the so-called “Power of Siberia,” and had begun negotiations with Beijing for another, this one from West Siberia. In parallel, a Russian start-up company called Novatek had begun to develop a Russian LNG business, with the aim of shipping LNG to Asia across the “Northern Sea Route,” taking advantage of melting sea ice in the Arctic Ocean. Putin strongly supported both projects.

              Yet on the eve of the invasion there was nothing to suggest that Russia intended to walk away from its prime gas market in Europe. Russia’s gas exports to the east would not replace those to the west for at least a decade. Russia’s gas was earning record revenues, thanks to rising gas prices in Europe. The Nord Stream 2 pipeline had just been completed, and despite opposition from the EU, Germany appeared disposed to let it start. European gas demand was projected to keep growing for at least another decade. Russia’s gas business seemed secure. (On this see James Henderson and Arild Moe, The Globalization of Russian Gas https://www.e-elgar.com/shop/usd/the-globalization-of-russian-gas-9781789900378.html)

              Then came the invasion, and the beginning of the downhill path of threats and cutoffs. It was a drama in four acts, leading to the September explosions:

              Act One: the Kremlin Demands Payment in Rubles: Within days of the invasion, the US, the EU, and the UK issued the first sanctions. Gazprom and its Gazprombank were spared, clearly because of the importance of Russian gas to Europe’s economy. But the financial sanctions included the Russian Central Bank, and thus threatened the system by which foreign-exchange payments could be processed. The Kremlin responded by demanding payment for gas in rubles. Most of Gazprom’s major buyers reluctantly acquiesced; but when a series of smaller buyers refused, Gazprom cut them off. This was the first shot in the war that followed.

              Act Two: Gazprom Sheds Gazprom Germania: On April 1 Gazprom abruptly announced that it was severing formal ties with Gazprom Germania, the holding company that managed all of its retail sales and trading throughout Europe, as well as its gas storage in Germany. Germania accounted for perhaps one-third of Gazprom’s total exports to Europe. The motives behind Gazprom’s action remain mysterious, but when Germany responded in self-defense by nationalizing Germania, Russia retaliated by sanctioning the now German-owned conglomerate and shutting off its gas. This was the second shot.

              Act Three: Gazprom Shuts Down NordStream1: In mid-June Gazprom cut deliveries through Nord Stream 1, in a supposedly technical dispute involving the repair of one of its compressor stations. This was clearly a pretext, aimed at forcing a now-reluctant Germany to allow NordStream2 to begin operating. The quarrel could have been settled amicably, but the Kremlin chose to cut off NordStream1 instead.

Act Four: The Pipeline Explosions: In September came the explosions that halted all gas flows under the Baltic. Whatever their precise cause, it is clear that they will be a permanent casualty of the war.

              WHY DID PUTIN DO IT?

              Could it have been otherwise? Why did Putin sacrifice a long-established business, which brought both commercial and political benefits to Russia? There are several plausible possibilities: Putin saw the climate handwriting on the wall in Europe, and he was already responding by going East. He saw LNG to Asia as the future of Russian gas exports, not pipeline gas to Europe. He had long been angry over Brussels’s perceived cavalier treatment of Russia. All of these explanations have a foundation of fact. But taken together they do not add up to a case for pulling the plug.

What, then? Why murder the milch cow? In the end, only one explanation is truly convincing: by early 2022, geopolitics had completely taken over Putin’s thinking. He clearly hoped that the resulting energy crisis would split Europe apart and give him a stronger hand in Ukraine. Indeed, in the near term, over the next two winters, he may turn out to be right. But the final result is clear; the Russian gas business in Europe, as we have known it for half a century. is dead.

COULD THE RUSSIAN-EUROPEAN GAS TRADE BE REVIVED SOMEDAY?

              Not as we have known it. Any revival of the Russian-European gas trade would require, first of all, some settlement of the Ukrainian war, of which there is currently little prospect. Second, it would assume continuing strong demand for Russian gas in Europe. But the Russian invasion has accelerated the whole timetable for Europe’s transition away from gas. On that reading, in five years’ time, the sole remaining buyer of Russian gas in Europe will be Turkey.

              But that is not necessarily the end of the story. On the supply side, Russia will continue to own the largest developed gas reserves in the world. Its domestic market, in a slow-growing economy, will not absorb much more gas than it does today, and it will be only marginally profitable; therefore the Russians will (sooner or later) have an incentive to resume exporting gas. Meanwhile, Russia’s pipeline system will still be physically in place: three major lines (Europol, Ukraine, and Turkstream) will still be functional, and the NordStream lines can presumably be repaired. In short, the physical fundamentals of Russian supply will still be there.

              On the demand side, once Europe’s climate agenda returns to the fore, it will continue to need natural gas as a “bridge fuel,” as it proceeds to dial coal back down, and if nuclear remains stuck in limbo. When the Chinese economy begins growing again, LNG will become more expensive, and Russian gas will remain the cheapest in Europe. In short, there could once again be an economic and technological case for Russian pipeline gas, at least in the form of short-term spot sales. (In the meantime, Russia may seek to expand its exports of LNG to Europe, although as mentioned above its primary goal is to ship LNG to Asia.)

              But what has changed is the entire political, corporate, and one might add, human setting for Russian gas in Europe. European trust in Russia has been dashed for a generation, if not more. In the gas world, European buyers and Russian sellers once formed a close-knit community; but that is now shattered. In Germany, especially, where the previous ties were strongest, there is only disillusionment and rancor. In short, Putin has not simply committed gas suicide. He has killed off the last half-century of entente along with it. And that will not soon be repaired.

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Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: The Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe (2020), and Klimat: Russia in the Age of Climate Change (2021), all with Harvard University Press. As always, I am grateful to Simon Blakey, Tom Nichols, Bob Otto, and Philip Vorobyov for their kind and helpful comments on earlier drafts.