Putin’s war is economic suicide

Historians will write that Russian President Vladimir Putin’s fatal miscalculation was his belief that Europe would cave if he invaded Ukraine because of its excessive dependence on Russian energy. But excessive dependence works both ways: Europe relied on Russian oil and gas, but Russia relied heavily on the European energy market.

Given this co-dependency, Putin would have been well-advised to postpone his predation against Ukraine and his customers in the West until he had secured equivalent energy markets in the East. But he did not. Worse, his weaponization of energy has forced Europeans to find new energy suppliers and fossil fuel replacements. Now they are signing long-term energy contracts, and Russia cannot replace these customers.

If Russia were a business, it would be headed for bankruptcy. For years, Moscow built pipelines to Europe (through Ukraine, Belarus, Poland, Turkey and under the Black and Baltic Seas), but it has not built a single pipeline directly linking Russian oil or gas fields to China, the world’s biggest energy buyer and its avowed ally. Putin’s ballyhooed pronouncements before the war about massive Siberian pipelines to China are years away from completion. And post-war, such projects will be impossible, given Western sanctions and the mass exodus of oil and gas companies from Russia in protest. It was these foreign companies and their expertise that built Russia’s oil and gas sector which, in turn, financed its military buildup. Now their departure will not only strand Russian resources but impede development of Russia’s engine of economic growth indefinitely. To boot, China and others buy Russian energy but demand deep discounts because they can.

Putin is clueless when it comes to running an economy. Russia has more natural gas reserves than any other nation on Earth, some 19.9 percent of the total. But it has failed to capitalize on the liquified natural gas (LNG) revolution underway worldwide, which makes it possible to ship gas anywhere in the world. Gas liquefies if cooled to minus 162 degrees Celsius and its volume shrinks by 600 times into a non-toxic liquid that is easy to store and transport.

One LNG ship, more than three football fields long and carrying five cryogenic tanks, can deliver the equivalent of three days’ gas flow from Russia’s biggest gas pipeline. Currently, an estimated 657 of these tankers criss-cross the oceans constantly, and all oil and gas producing nations are quickly building plants to liquefy their gas and export terminals to re-gasify the LNG for customers around the world. But Russia is years behind the rest.

This year, the United States – with only 6.7 percent of the world’s gas reserves – became the world’s biggest LNG exporter, in part because of its stepped-up shipments to Europe since the war began. In fact, the United States has overtaken Russia in LNG shipments to China this year, with a market share of roughly 11 percent compared with Russia’s 6 percent. Australia, Qatar, Malaysia and Indonesia have captured the lion’s share of China’s LNG market.

Post-war Europe will transition away from Russian energy altogether because Putin’s blackmail and price shock gambits have created disastrous price hikes and inflation and ruined its reputation as a reliable supplier. European nations currently have 36 LNG ports, and increased their LNG uptake from other suppliers since the war began by 50 percent. Dozens more LNG terminals are under construction, and massive gas supply contracts have been signed by European nations, with Azerbaijan, Algeria, Saudi Arabia as well as with the United States, Australia, Qatar, Nigeria and Norway.

The European Commission recently embarked on an emergency plan to cut gas usage this winter by 15 percent and eventually to replace all Russian fossil fuels. Conservation and substitution measures are being rolled out and will curtail the use of gasoline, home heating, public transportation, street lighting, air conditioning and factory shifts. There will also be shelters made available to house residents in the event of gas curtailment by Russia, which has been threatened.

On the supply side, Germany is burning its own coal again, nuclear facilities in France and Germany will be brought out of mothballs or enlarged, and in a few years, LNG from the U.S., North Africa, Central Asia and the Middle East will permanently replace Russian gas.

Russia’s throttling back on gas volumes for the past year to jam up prices has provided it with additional cash flow during the war and bolstered the value of the ruble. But this benefit will be short-lived as Europe weans itself from Moscow’s fossil fuels and as punitive Western sanctions, combined with brain and capital drains, shred Russia’s economic future. More than 1,000 major Western corporations have shuttered operations there, Russian oligarchs have hidden assets and themselves abroad, and hundreds of thousands of young educated Russians, and an estimated 15,000 Russian millionaires, are expected to move offshore this year.

Bluntly speaking, Putin’s war is economic suicide. The late Sen. John McCain (R-Ariz.) once slurred Russia as being merely a “gasoline station masquerading as a country,” but it’s worse than that now. Putin has driven away all the gas station’s customers and employees and will be completely out of business sooner than he imagines.

Diane Francis is a non-resident senior fellow in the Eurasia Center at the Atlantic Council. She is editor at large of National Post in Canada, a columnist for Kyiv Post and author of 10 books. She writes a twice-weekly newsletter about America on Substack.