Russia, Europe escalate energy showdown

Russia and the West are engaging in an escalating energy sparring match as European countries seek to limit their dependence on the Kremlin because of its invasion of Ukraine. 

Members of the Group of Seven (G-7) said this month that they’d phase out Russian oil, while the European Union is separately weighing its own Russian oil ban.

But Russia is striking back, cutting off natural gas to Poland and Bulgaria and more recently also cutting off electricity to Finland. 

Experts say that the West’s energy efforts are likely to damage Russia’s economy, but will come at a cost.

“There are no winners in this situation,” said Samantha Gross, who worked in international affairs at the Energy Department during the Obama administration.

“What you’re seeing is the Europeans looking to embargo Russian oil to punish the Russians, whereas the Russians are pulling back on supplies of gas to punish the Europeans because those are the fuels in which each has the upper hand,” Gross, who is now the director of the Brookings Institution’s Energy Security and Climate Initiative, added.

At the start of the conflict, Western countries made moves to curb their dependence on Russian fuels, which are the country’s biggest export. 

It has stepped up those moves in recent weeks. The EU proposed banning Russian oil and the G-7 also said recently that it would phase out Russian oil.

But it’s unclear whether the EU push will be successful, as it faces resistance from Hungary. EU sanctions require the agreement of all member nations.

Russia cut off natural gas exports to Poland and Bulgaria late last month after the EU’s proposal.

More recently, Russian power provider RAO Nordic Oy stopped sending electricity to Finland. Russia claimed the country wasn’t paying its bills, but the move came as Finland asked for membership in NATO.

Nordic energy company Gasum said Tuesday that in the next few days, Russia may cut off natural gas to Finland as well. 

“I’ve always felt that we have … a very Eurocentric, egotistical view of these things where we always say, ‘Oh, well, we’re going to cut them off,’” said Robbie Diamond, president of the energy security think tank SAFE. “And I’ve always been like, what happens if they decide to cut us off?”

Gross said she views Russia’s actions so far as something of a warning shot, given Poland’s existing efforts to get off Russian gas. Finland, likewise, only gets 10 percent of its electricity from Russia. 

“Starting with Poland was kind of symbolic,” she said. “They were making a point without totally shooting themselves in the foot”

But she warned that with continuing escalations, Russia could cut off gas to even more countries and that larger consumers of Russian gas, like Germany, have more to lose. 

Russia may well expand the list of countries to which they cut off energy, Diamond added, and European nations “clearly are going to try to move as fast as they can to solve it, but if Russia cut off [exports] tomorrow, there’ll be a deep recession” that will reverberate across the continent, he said.

Diamond said the U.S. and Europe can counteract Putin’s leverage on energy by taking a pointer from the Allies’ strategy during World War II. As part of an “arsenal of democracy” approach, “the United States turned its industrial phase into supplying Europe with all the weapons that they needed and shipping over energy, oil to run the militaries where Germany began to run out of oil for its military,” he said, eventually forcing Germany to make an unsuccessful attempt at capturing the oilfields of Baku, Azerbaijan.

“What we need to do now is to be the arsenal of energy,” Diamond said. “That’s really where we have to get our political system aligned. Not only do we have to transition to electrification and then make sure the batteries aren’t being built in China, but at the same time ramp up our production” of natural gas. “So speed up the transition while using the energy we are blessed with here in the United States that we could share with our allies.”

Meanwhile, oil prices and U.S. gasoline prices have remained high. 

Claudio Galimberti, senior vice president of analysis at Rystad Energy, said that the impact on the U.S. of an EU ban on Russian oil would pretty much be “a wash.”

“You’re going to have higher inflation,” he said, but added that as the world’s largest oil producer, the U.S. would “benefit” from one of its main competitors being forced out.

Even as the energy conflict between Russia, the U.S. and Western Europe continues, two of the biggest energy markets in the world, China and India, remain wild cards, according to Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies.

Cahill noted that if Russia can sell to these countries the oil it normally would have sold to Europe, it could undercut efforts by the EU and U.S. to weaken the Kremlin.

“To me in this situation, the lifeline for Russia is China, India. If the European market is closed off to Russia, that really means they have to compete to sell into Asia. And there was already intense competition for market share. India and China, because those are the big growing demand centers,” he said. “But the US has closed off to Russian oil. The EU is certainly trying to do it as fast as possible. And so [Russia] will have to sell more in Asia.”

If Russia successfully appeals to those nations, it is likely to “become a problem” in the future, Cahill added.

“If Russia is successful in sending more crude into India and China, and it’s blunting the impact of sanctions, the White House and the EU will get concerned about that,” he said.

However, he added, a tighter bond between Russia and Asian nations could also spell trouble for Russia by straining the Kremlin’s relationship with oil exporters in the Middle East and the OPEC-Plus bloc that has so far declined to take sides against Russia.

“If Russia gets closed off from Europe, it’s going to have to sell more into Asia and that will put it in direct competition with the Middle East producers, and that will be harder to manage for OPEC-Plus,” Cahill said.