In the weeks after Russia’s invasion of Ukraine, 2 years ago today on 24 February 2022, its foreign minister, Sergei Lavrov described the time as a ‘fateful, epoch-making moment in modern history’.
Russia’s invasion of Ukraine has so far created 6.5 million recorded refugees, caused 3.7 million people to be internally displaced, killed as least 10,000 civilians and resulted in at least 100,000 soldiers dead or wounded on both sides of the conflict.
Behind the human tragedy, the economics have also been catastrophic. Ukraine’s GDP fell over 30% in 2022. According to the World Bank, the cost of reconstruction from physical damage to Ukraine is expected to exceed $350 billion.
The impact on the global energy markets, given that Ukraine acted as the conduit for the 40% of Europe’s gas that it imported from Russia, and following sanctions, has been seismic. Also, as a vital grain exporter, the war has severely disrupted planting, harvesting, and export capabilities, contributing to rising global food prices.
Russia’s war spending is a state secret but estimates of its increased defence costs, combined with GDP losses, exceed $100 billion.
The West has so far provided well over $100 billion in support for Ukraine. The EU has pledged around another $50 billion for 2024 and a similarly sized support package from the United States sits stuck in Washington between the Senate and the House of Representatives, now included in a wider deal with inter-related commitments for Israel, Taiwan, and the US-Mexico border.
Russia invaded Ukraine within 48 hours of the 22nd February 2022 mothballing by Germany of the Nord Stream 2 gas pipeline and against a background of growing tensions with NATO after waves of expansions eastwards from the 1990s, contrary to reassurances provided to Russia. Nord Stream 2 was a joint venture between Russia’s Gazprom and a consortium of European energy companies. The pipeline, which was designed to bypass Ukraine, had been given the go ahead by the United States in July 2021 after a waiving of sanctions.
Russia now occupies over 15% of Ukraine’s territory. This includes a strip of land in eastern Ukraine, including parts of Kherson, Mykolaiv, Zaporizhzhya, and the Donetsk and Luhansk regions (including the industrial area of the Donbas), heading down towards Crimea and Sevastapol, which Russia annexed in 2014. This territory comprises some of the world’s largest unexploited natural gas reserves, control over pipelines to Europe traversing Ukraine to Europe, control over Europe’s largest nuclear power plant, Zaporizchzhya, huge deposits of metals and minerals (including iron ore in Crimea, manganese, salt and lithium), export routes for grain and other commodities, and a large proportion of all of the coal deposits of the former USSR.
But it’s hard to tell whether anyone is winning.
Right now, Russia appears to be on the offensive. This week, it took the city of Avdiivka, an eastern stronghold that had resisted capture for eight years after Russia annexed Crimea and seized the Donbas in 2014 and for two years after the 2022 invasion.
So far, the Ukraine counter-offensive appears to have failed, and support has been waning in the West. Indeed, defence seems enough of a challenge. This week, troops in Donetsk told the Telegraph newspaper that they cannot fire even when they have Russians in their sights, starved of ammunition and left only with the alternative of which village to retreat from next.
In one arena at least, the Black Sea, Ukraine has succeeded in pushing back the Russian fleet. This has opened the Black Sea for relatively free navigation from Odessa and allowed Ukraine to ship food and other goods to the rest of the world.
Risk of regional contagion has been feared and is by no means over. Bordering Ukraine, Moldova, is simmering. Next week, a pro-Russian breakaway region in Transnistria might call for a referendum on its annexation to Russia at Congress of Deputies meeting planned for February 28. It is likely that President Vladimir Putin would welcome this at the Russian Federal Assembly on February 29. In a more dangerous but less likely scenario, he could even take the opportunity to declare Russia’s annexation of Transnistria. Note that the gas transmission and distribution company Tiraspoltransgas is thought to be controlled by Russia’s Gazprom, although this has never been confirmed officially. The banking sector of Transnistria consists of 8 commercial banks, including Gazprombank. Further afield, Russian competition for resources is now reported to have spread into Africa, with Wagner forces mobilised after they were brought under full Russian control after the dispute following the Ukraine invasion.
Back in Europe, it has been a remarkable two years in political and economic history.
In the wake of the February 2022 attack on Ukraine, a full-blown energy price and availability crisis hit Europe, with devastating consequences for energy intense industry, business, and cost of living for individuals. Energy prices contributed to a historic ballooning of inflation, driving up interest rates as central banks wrestled to get it under control, which in turn contributed to a credit crisis.
The United States has since stepped into Russia’s shoes as one of the largest suppliers of natural gas to Europe. More energy intense shipped LNG has increased dramatically from the United States and Qatar. Contagion over competition for energy sources had spread to the Eastern Mediterranean, as Europe even turned to liquified Israeli gas, exported via Egypt (to the chagrin of Hamas and Hezbollah). Since Russia’s invasion of Ukraine, Europe has recognised its position and vulnerability as an energy importer, with a massively increased focus on energy security, and turning to energy efficiency and renewable energy to address the supply gap.
So, what does the energy balance of power in Europe look like in February 2024?
In some ways, if you squint, it might look like the energy crisis is all over. Household energy bills are set to fall in the UK as the regulator reduced by the price cap by 12%.
Gas prices in Europe have fallen to the lowest levels since before Russia started curtailing supplies in 2021. The price of Title Transfer Facility (TTF), the European benchmark, fell as low as €22.53 per megawatt hour on Friday, the lowest level since May 2021. This compares to twin peaks of over €200 in Q2 and Q4 2022 (and over €300 at its highest in August 2022). Contributing factors include strong imports of liquified natural gas, warm weather, higher storage levels (EU gas storage facilities were over 64% full this week, a record high), demand reduction (through a combination of destruction from high prices wrecking industry and deliberate waste reduction from Europe’s ‘energy efficiency first’ policy), low demand from China and low prices in the United States, also driven by mild winter and low demand from the East.
Even before Russia’s invasion of Ukraine, 2021 had offered plenty of lessons learned. Energy prices had increased from a prolonged cold winter, low storage levels (much of which in Germany had turned out to be owned or controlled by Russia), and because Russia had already started sending less gas to Europe, which was interpreted as a pressure tactic for government approval for the Nord Stream 2 pipeline.
Two years on from Russia’s invasion of Ukraine, piped Russian gas has fallen from 40% of EU supplies to 8%, according to the European Commission.
Austria, the Czech Republic, Hungary, and Slovakia still receive piped gas from Russia, although the EU is seeking to cut this to zero by 2027. Austria has said that it is looking at options for an early termination of its gas supply contract with Russia, which currently runs to 2040. Meanwhile however, shipped Russian liquefied natural gas (LNG) imports to Europe (which are not covered by sanctions) have even increased: Belgium and Spain ranked behind only China in the league table of the world’s largest buyers of Russian LNG by the second half of 2023.
And despite reducing – even if not having eliminated - its dependency on Russia, Europe has, in other ways, just swapped its dependency on one source of imports for dependency on others, including the United States and the Middle East.
Competition for LNG resources from Asia is currently low but could increase and cold weather events could tip the balance. Timing matters and circumstances can change quickly: new LNG production from Qatar and the United States is not expected for another 2 years, during which time demand is expected to meet or exceed supply and price shocks are possible. US LNG exports are also under review by the US DOE, reportedly while the climate policy impacts are assessed, but no doubt protecting US consumers from imported price volatility will feature in calculations.
Even in a lower gas price environment, there are tensions between EU member states over energy. The Financial Times reported this week that Austria, the Czech Republic, Hungary, and Slovakia have complained that they might be forced to step up imports from Russia because of a German €1.86 tax on supplies piped across its borders, equivalent to over 8% of the current benchmark market price. According to a reported communique, “This could force some member states to rely more heavily on gas imports from Russia, potentially increasing their geopolitical dependencies and undermining all efforts to diversify energy sources”.
After the Ukraine invasion, Russia pivoted to the East. Gazprom, formerly the Soviet ministry of natural gas and the world’s largest gas company, was struggling with the loss of Europe as its biggest market. President Vladimir Putin was delighted when Gazprom reported record sales to China in 2023, telling CEO Alexei Miller: “This is great, I congratulate you on the results of your work”. But now, as Europe has largely managed to wean itself off Russian gas, Putin has admitted that “Maybe it was more fun” before the war. In the immediate aftermath of the invasion, massive price increases offset the economic impact of reduced volumes, but this party has, at least for the moment, died. Gazprom’s pre-tax profits fell 40% year on year from 2022 to 2023. Full year results for 2023 are yet to be released, but the Russian Academy of Sciences has predicted a loss. At least on the surface, the outlook is challenging. New markets in central Asia and increased supplied to China and Turkey are estimated at only 5-10% of the lost European market.
No wonder China calculates that it can sit on its heels in gas import and pricing talks.
Gas matters a lot in the geopolitical, economic and energy arenas. But it also plays a pivotal role in the climate story as it remains an essential part of the energy system. It remains the largest source of primary energy demand in the UK, dwarfing renewable energy. As a fossil fuel, it is a substantial contributor to the 80% of excess human made greenhouse gas emissions that are attributable to the energy sector. According to the United Nations International Panel on Climate Change, we will run out of any remaining budget for further emissions from fossil fuels by 2030 if we are to keep global warming within agreed limits. And in the same 2 years since Russia’s invasion of Ukraine, the world has been reminded as to how close we are getting to these limits, with the European Union’s Copernicus Climate Change Service announcing that the 1.5C target had been breached for the first time over a 12-month period.
What to do about it? I write about the problem and solutions extensively in my book, ‘The Edge’. ‘EDGE’ is an acronym that I use in business for ‘efficient and decentralised generation of energy’ (and is also a reference to the literal translation from Russian into English of ‘Ukraine’, meaning ‘on the edge’). But here’s a glimpse:
Russia last invaded Ukraine in 2014 when it annexed Crimea. A campaign for energy efficiency in Europe followed. The European Commission cited that every 1% of energy saved meant a 2.6% reduction in gas imports. A decade or so later, Europe’s energy policy is described as ‘Energy Efficiency First’ (not second, tomorrow or maybe). But dependency on gas imports remains, so will anything change? A Danish MEP, Niels Fuglsang, leading the revision of the Energy Efficiency Directive in the European Parliament put it succinctly in the months after Russia’s invasion of Ukraine: “It is not just about business, it is about security policy. I think it will change this time because the Ukraine situation is the biggest security threat to Europe since the Cold War’.
If it changes this time, it could have profound implications for geopolitics, for economics, for energy and for the climate. And for peace …
Picture credit: ChatGPT 4
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