The Fearsome Trap Set by Vladimir Putin for Europe With Russian Gas.

EU payments for Russian gas allow Putin to finance his war.

It is a paradox that is increasingly difficult to justify. Despite the war in Ukraine, day after day, the Europeans finance the Russian army by buying gas at a high price. Despite the sanctions, the grand declarations and the promises of an embargo, the 27 Member States send 200 million dollars a day to Gazprom, the public company that holds the monopoly on Russian gas exports by pipeline. This is enough to cover Russia's defense budget, estimated at $180 million per day based on last year's expenditures by the Center for Research on Clean Air and Energy.

Thanks to soaring prices, Russia is expected to receive $100 billion in gas revenues from Europe this year, almost double last year's already high prices, according to Citi analysts. And that's without counting revenues from oil, coal, and other raw materials ...

Europe's ultra-dependence on Russia for gas has turned into a trap that Vladimir Putin handles with formidable efficiency. “As soon as prices calm down slightly, a statement or a threat of a cut from the Kremlin is enough to make them rebound,” observes Anne-Sophie Corbeau, a researcher at the Center on Global Energy Policy at Columbia University.

Very high prices compensate for falling volumes

Beyond the often violent daily variations, European gas prices have been five to six times higher than normal consistently since late last year. Gazprom had begun to reduce its shipments to Europe even before the war began, triggering unprecedented concern in the gas markets.

There is no sign of a decline if futures contracts are to be believed, which are sold at similarly high prices until the beginning of 2023. Unquestionably, Vladimir Putin has won the first round of the energy battle. Because even if Europeans are starting to buy a little less gas, the explosion in prices is more than compensating for the drop in volumes delivered.

The first illustration is the case of Poland and Bulgaria. These two countries will no longer buy a single molecule from Gazprom, as they have refused the new ruble payment system demanded by Vladimir Putin. Bad news for Russia? No!

Because by closing the taps, the master of the Kremlin has shown that he is ready to carry out his threats. In response, gas prices have jumped more than 15% in two days ... enough to compensate for the loss of a relatively modest turnover on the scale of Gazprom. Poland had in any case decided not to renew its contract with the world's leading gas company, which expired at the end of 2022.

Last week, the Kremlin put pressure on the Polish government in a similar way. The Kremlin placed several European subsidiaries of Gazprom under sanctions, in retaliation for the Brussels sanctions. The concrete consequences are difficult to assess in the immediate future, but Germany, Russia's largest customer, is likely to be affected. A piece of pipeline that passes through Poland will no longer be used, Gazprom has also announced.

The volumes involved are small, and other pipelines can take over in theory. In any case, Russia will recover in price what it loses in volume because this decision has caused an umpteenth blow on the European prices.

Nord Stream 2 is already paid off

The figures are so huge that they make one's head spin. In just one quarter, at the end of 2021, Gazprom's excess profits have paid in full for the Nord Stream 2 pipeline, which cost Russia ten billion dollars. This pipeline under the Baltic Sea will probably never come into operation, due to European Union sanctions.

However, the investment has already been repaid by soaring prices. So much so that some people are beginning to question the strategy of the EU-27: “We brandish the threat of sanctions, which drives up prices," says an industrialist in the sector. But we do not implement them, which means that the volumes sold by Russia are still as high. Putin wins on both counts”.

The solution, according to this source, would be to clearly state that there will be no gas embargo in the short term:

“This would immediately bring down prices that no longer have any relation to the reality of the European market, where gas is largely sufficient to ensure our needs.”

Such a solution, of course, would not prevent Moscow from continuing to threaten to turn off the taps, admits Mike Fulwood, a researcher at the Oxford Institute for Energy Studies. But at least the certainty given to European importers would reassure the market, lower prices, and reduce Russian state revenues, he argues.

Until Europe can do without Russian gas, in a few years. But recognizing that the embargo is not tenable in the short term, which is a reality, is however politically impossible: “It would be capitulating to Putin”, confides the same source.

Europe is well and truly trapped in the formidable trap set by Vladimir Putin in the field of energy.