Europe is not at the mercy of Putin

A year before Vladimir Putin entered the Kremlin as President of Russia, he wrote one academic article on the importance of raw materials for Russia. “Russia’s resource sector forms the basis of the country’s defense capability. A highly developed raw material base is a necessary prerequisite for the competitiveness of the country’s military-industrial complex and creates the necessary strategic reserves and potential. It is unclear whether Putin wrote the text himself. There is no doubt that the Kremlin ruler internalized these words.

Russian fantasies of omnipotence

Russia uses its wealth of raw materials as a weapon. In a speech in mid-June, Alexei Miller, the head of the state-owned natural gas company Gazprom and Putin protégé, made it clearer and at the same time more confused what Putin still sounded cryptic about twenty years ago: “The game is over. And why? Because the demand for commodities replaces the demand for foreign exchange reserves.” And: “The contours of a new economic structure are determined by Russia.” Whoever is the master of the molecules therefore commands.

Moscow has not been particularly squeamish about other countries of the former Soviet Union. Here a court decision on environmental regulations, there a technical mishap with a pipeline, and Kazakhstan, Georgia or the Ukraine could be put under pressure. Russia used not only its raw materials, but also its transport routes. For Western European countries, on the other hand, Russia presented itself as a reliable supplier with a long tradition: natural gas and oil flowed to Europe even during the hottest phases of the Cold War.

Moscow and the European energy industry have always said that existing long-term contracts will always be honored. That’s waste now. Gazprom already pushed up the price of natural gas in Europe and thus the price of electricity with restrained gas deliveries last year. In retrospect, it seems like a dress rehearsal. However, Moscow made sure to fulfill the long-term contracts.

The charade with the gas turbine

For a long time it was discussed whether Europe could afford a natural gas embargo. This question no longer arises. Rather, it is about how Europe can prepare for a complete stop in supplies from Russia. Gazprom has been cutting gas supplies via the Nord Stream 1 pipeline in the Baltic Sea since mid-June. Due to annual maintenance work, no natural gas flows at all for a few days. There is currently speculation in the gas industry that no more gas will be transported through the Baltic Sea after the maintenance has expired.

Gazprom blames Western sanctions for the throttling, which is why a necessary gas turbine cannot be delivered. That’s a charade. Previously it was ruble payments, now it’s the turbine, tomorrow it will be environmental violations. The Kremlin will always find an excuse why no or less natural gas is supplied. The Russian argument is also not very plausible because the other two main routes are also used less than before or not at all. The intention of the games is clear: the Kremlin is hoping for disunity and sanctions fatigue in the West.

The most likely scenario is that Gazprom will continue to supply greatly reduced gas volumes. This also increases the gas price, and income continues to bubble up. At the same time, Moscow can still spread panic among Europeans. But Russia is also cutting itself in the foot: most of its gas pipelines are aimed at Europe. Severe throttling is likely to cause significant damage to natural gas infrastructure. If the Russian gas storage facilities are full, production would have to be stopped.

But the logic of interdependence has collapsed. Putin is now using the energy weapon because its danger is gradually disappearing. In addition to sanctions against Russia’s oil sector, European countries have announced plans to break their dependency on natural gas from Russia. This has changed the Kremlin’s calculus: if the economic damage to the EU states is to be high, energy supplies must be stopped sooner rather than later. Putin’s coffers are still so full that he doesn’t have to compromise. This would probably be different if the gas price fell sharply.

Resistance to extortion attempts

The big question will be whether European solidarity with Ukraine will survive a cold winter. Linked to this is the assessment of whether the sanctions are effective. In any case, it was illusory to believe that the harsh measures would stop the war immediately or that the Putin government would collapse immediately. Examples such as Iran or North Korea even show that a regime can be strengthened through restrictions. But the sanctions are eroding the Russian economy and, at least over time, will limit Russia’s ability to act aggressively against other countries.

Europe has a large part to blame for getting into this predicament. The holy grail of energy policy is to reconcile security of supply, environmental compatibility and affordability. With the energy transition, the focus has shifted too much to climate policy. Many thought that there would also be a geopolitical dividend with renewable energy, which has proved to be an illusion during a period of transition. Security of supply at the mercy of an autocrat is not security of supply.

Western countries must therefore resist Moscow’s blackmail attempt not only because of the brutal war in Ukraine, even if this reason alone would be sufficient. It is important to make it clear to Russia and other petrostates that the West will not sell its soul for oil and gas. In addition, raw materials from “difficult” countries must also be used for the energy transition. Before the world slips into new dependencies for cobalt, lithium or rare earths, it is also important here to tackle the supply of raw materials more strategically and not to become vulnerable to blackmail.

Just because you’ve missed out on this in the past doesn’t mean you’re at the mercy of resource powers forever. Rather, it is important to seize the moment. The oil price shock in the 1970s was a wake-up call to oil dependency: as a result, industrialized countries increased energy efficiency and found new sources such as oil from the North Sea. The gas crisis should be a catalyst for a new energy policy.

The unmatched resource

However, it is important to avoid falling into the trap of a planned economy in the energy and raw materials sector. One could say nastily: in complex systems such as the energy supply, you have to plan carefully in order to finally reach your goal. So that raw material countries can use their natural resources less as weapons, it is necessary to expand the reserves for strategic goods, to build more flexibility into the energy system and to keep the number of energy sources, energy suppliers and transport routes as large as possible.

Market economy principles should also be in the foreground in order to cushion the short-term problems: First of all, prices should be able to unfold their signal effect. One Hertie School study shows that end consumers and industry in Germany have already reacted to the high natural gas prices with lower demand. Gas and electricity consumers should therefore not be protected from high prices; social hardship should be compensated for through direct transfers, not through artificial price caps. In addition, more markets for energy saving and reserve capacity should be established.

Politicians must also resist the reflex of pouring out a cornucopia of subsidies and bureaucratically deciding what the energy future should look like. Instead of promoting, obstacles to the development and introduction of new forms of energy and technologies should be removed. Because the unsurpassed resource can only be used with freedom: these are people and their creativity. This is the greatest trump card liberal democracies have against gas and oil weapons. The horror scenario of a collapse of the Western economies will not occur. Commodity autocrats will never understand this.

You can contact business editor Gerald Hosp follow on twitter.