Executive Summary
- Europe and Ukraine have repulsed Russia’s attempts to weaponize energy as part of its full-scale invasion of Ukraine through a set of flexible and ambitious policy responses.
- While Europe is well positioned to carry the success of this winter into next year, the European Commission and national governments must remain ready to support households and industries if price volatility returns.
- US and European Union (EU)-led projects to bolster the resilience of Ukraine’s energy systems – while welcome – may not be enough. Large-scale investment is needed to integrate Ukraine into European electricity and gas networks.
- Western governments and industries should ramp up the production of hardware tailored to the specifics of Ukraine’s energy infrastructure in order to avoid supply bottlenecks as the war continues.
- To protect these gains against further Russian escalation, Ukraine will need robust and reliable air defense systems. Neither Ukraine nor Europe will have true energy security as long as Russia can continue to attack critical infrastructure.
- To take the energy war to Russia, the US, Europe, and the G-7 will need to bolster sanctions enforcement and head off the development of alternative routes for the monetization of Russian energy exports, including a mooted Turkish oil hub.
Introduction
The first salvos of Russia’s onslaught on European energy have – like many of Russia’s offensives in Ukraine – fallen far short of Moscow’s objectives. For Europe, though, the energy war with Russia is not yet won.
One year into Russia’s full-scale invasion of Ukraine, Europe has moved decisively, if belatedly, to disentangle its energy system from Russian supply. While some dissenters remain, particularly in Budapest, Europe as a whole has come to recognize that the price of energy dependence on Russia – in both geopolitical and economic terms – is no longer sustainable. When Europe sources energy from Russia, it pays twice: first to purchase the fuel, and again to defend against the security threats Moscow generates with that income.
As a result of a multi-pronged approach, including restructuring Europe’s own natural gas markets, the imposition of sweeping sanctions, and targeted economic mitigation, Europe has effectively dashed Russian President Vladimir Putin’s hopes of using energy as a weapon to undermine support for Ukraine. With support from the US, Europe has not only been able to improve its own energy security, but has also blunted the impact of Russian attacks on Ukraine’s energy infrastructure.
However, there is much still to be done. Having survived one winter, Europe must begin preparing for the next in a potentially volatile market with ongoing inflationary concerns, all while seeking to increase the pressure on Russia’s economy. Russia, meanwhile, retains the ability to funnel energy income into its war machine. Maintaining the momentum on energy security will be critical to ensuring both economic and social stability in Europe as well as victory in Ukraine.
This paper is part of CEPA’s ongoing focus on European, and in particular Ukrainian, energy security and resilience under the aegis of the institution’s Democratic Resilience Program.
Keeping Europe Warm
Russia’s attempts to squeeze Europe – and particularly European natural gas markets – have failed. At the end of January 2023, the price paid in the EU for natural gas imports stood at $20.18 per million BTU, down 71% from their peak in August 2022. This number was reached after a decision by Moscow to stifle gas exports. Even in the face of inflated prices, the EU managed to fill its gas storage to 96% of capacity by mid-November 2022, and storage currently stands at 70% of capacity, matching its historic high for this time of year.
While Europe’s relatively mild start to the winter played a role, in addition to reduced demand in China for liquefied natural gas (LNG) supplies due to COVID-19 restrictions, Europe’s ability to withstand pressure from Moscow is more a product of policy than luck. An EU-wide energy conservation effort combined with a state-sponsored gas buying campaign over the summer of 2022 helped to boost stored supply, while the rapid construction of new LNG terminals has helped diversify supply routes. Industry and households responded strongly as well by reducing consumption well ahead of expectations. In Germany alone, industrial energy consumption fell by 19%, while households and small businesses slashed their energy use by 36%. As a result, European governments were able to avoid energy rationing. Even during a particularly bad cold snap in December, drawdown from gas storage remained moderate.
A combination of national energy rescue plans and EU coordination will be critical to ensuring that Europe’s resilience this winter extends into next winter and beyond. Refilling gas storage in the summer of 2023 – without resorting to Russian supply, and competing with Asian consumers for limited global LNG supplies – will keep gas and electricity prices for European households and businesses at high levels without risking further economic contraction and social tension. Cost-of-living protests have erupted from Paris to Prague, and the reality of medium-term high energy prices – and particularly its impact on food prices — has not fully hit markets and is likely to have a lasting impact. If not properly managed, such protests are likely to recur.
Germany has taken the lead in trying to head off this threat, allocating $212 billion to cushion the blow on households and industry (though the moderation of gas prices has meant that much of that funding may not be needed). Meanwhile, France has allocated roughly half that amount through subsidies, tax cuts, and other measures. Other EU members have done what they can – though none can match Germany’s largesse. That, in turn, puts pressure on the European Commission, whose controversial gas market correction mechanism entered into force on February 15, 2023, but which – in the absence of a severe supply shock – has yet to be tested.
Keeping Ukraine Safe
Unable to take and hold territory in Ukraine’s east and south, in October Russia began a concerted and ongoing bombardment of Ukraine’s power plants, district heating systems, and other critical infrastructure, plunging large parts of the country into rolling blackouts, robbing Ukrainians of heat and running water, undermining the country’s health care, financial and communications systems, and costing thousands of lives.
While Ukraine has rationed energy in an effort to keep the electricity grid intact, Western economic and military assistance are the only viable short-term solutions. As Ukraine acquires and deploys the Patriot and other air defense systems it needs to ward off Russian attacks, Western governments have hurriedly redirected aid programs to focus on energy. In December, the EU announced that it had procured some 800 electric generators for shipment to Ukraine. In January, the US Agency for International Development announced a $125-million program to deliver gas turbines, voltage autotransformers, substation repair equipment, and backup electricity and heat sources, on top of the 1,548 generators already delivered.
The next step is to increase the physical integration of Ukraine’s energy systems – especially its gas storage and transit systems, and its electricity grid – with those of the EU, ensuring that the energy supplies Europeans are willing to ship to Ukraine have a viable route for getting there. To meet existing needs, Ukraine has asked to increase electricity import capacity from Europe up to 2,000 MW. The same measures, not incidentally, will help bolster energy security in neighboring Moldova, which has also been hit by blackouts as a result of Russia’s attacks on Ukraine.
To maintain this momentum, Western governments and industries will need to surge the production of both “off-the-shelf” hardware – particularly mobile energy support units – and custom electricity hardware, tailored to the specifics of Ukraine’s energy infrastructure. Meanwhile, government-backed loan and insurance mechanisms can help foster direct interaction between Ukrainian utilities and private European and American suppliers. As long as the war continues, however, the only effective means of maintaining the integrity of Ukraine’s energy system will be robust air defenses.
Recognizing Russia’s Residual Energy Arsenal
Russia has failed to weaponize gas supplies and distribution against Europe, and has instead sought other avenues for bringing to bear its considerable array of other energy exports. Moscow actively seeks to reinforce energy dependencies in other parts of the world in order to gain geo-economic and geopolitical leverage.
Russia has more than doubled its LNG exports to China while increasing oil exports to China by 44%, to India by some 3,300%, and elsewhere in Central Asia, Iran, and the Global South. Therefore, Russia seeks new allies as much as markets. Beyond hydrocarbons, Rosatom is actively developing new nuclear power plants in South Africa and Central Asia, and Russia has the largest share of the world’s uranium enrichment capacity. While it remains unclear to what extent Russia will be able to find alternative markets and sources of revenue, in the short run these relationships help encourage non-Western states to vote with Russia in the United Nations (UN), and to eschew compliance with American- and European-led sanctions on Moscow. In the longer run, they are designed to create the same kind of reluctance to challenge Russia in other parts of the world that once prevailed in Europe.
In Hungary and Serbia, where dependence on Russian oil and gas remains high, and in Turkey, where a mooted oil hub would traffic in Russian oil, there is still work to be done. Russia’s persistent obstruction of measures that would allow for alternative supplies to Europe aggravates this issue. Russia is capable of weaponizing energy, but can do so only to the extent that the West allows it. Through a combination of regulatory tightening, careful diplomacy, and aggressive enforcement, there is considerable room to decrease the financial and political dividends that Russia can extract from its energy resources.
Winning the Energy War
Depriving Russia of the ability to both undermine European energy security and convert fuel into firepower will require a coordinated and comprehensive campaign of defensive and offensive measures.
In the first instance, Europe will need to invest in extending the energy stability it achieved in 2022 into 2023 and beyond. Diversifying the energy mix will remain the crux of this equation, requiring both increasingly active industrial policy from the Commission and EU member states, and a deepened recognition that energy security is not an exclusively economic issue. In particular, Europe will need active diplomacy to help secure new LNG supplies at manageable prices, and a clear commitment to implement the gas market correction mechanism when – not if – volatility recurs. Governments and the Commission should also proactively develop plans to support transition in industries, such as Germany’s chemicals sector, that may have trouble adjusting. Providing guarantees to energy suppliers that gas will remain an accepted fuel, even in the context of the green transition, will also go a long way toward helping private and state-owned companies negotiate contracts.
There is more to do in securing the European energy market internally and on its periphery.
- Job one is continuing to evict Russian companies from gas storage and other critical infrastructure, and nationalizing energy companies that cannot otherwise extricate themselves from Russian ownership or dependence.
- Job two is putting in place a plan to wean Hungary and Slovakia off of Russian hydrocarbons to ensure their current temporary carve-outs from EU oil sanctions do not become permanent.
- Job three is developing a plan to fully incorporate Ukraine, Moldova, and the Western Balkans in a common space of European energy security and resilience.
An effective defense of European energy security will require taking the fight to Russia. Bolstering the existing sanctions regime is the top priority. Europe’s price caps on Russian oil and oil products will need to be policed proactively. While there is an important role for the media and civil society in supporting compliance, Europe will need to prioritize further investment in its formal enforcement capacity. Infrastructure and expertise for monitoring and verification needs to be ramped up. The same is true for maritime shipments of Russian LNG, to the extent possible. Second, Europe and its global partners should ensure that the oil price cap applies not just to Urals, but also to Siberian Light, Sakhalin Blend, and Sokol.1
Further, Europe and the US should mobilize now to prevent the launch of oil and gas trading hubs in Turkey or elsewhere. These would disguise Russian supplies and help Moscow rebuild its revenue streams while establishing new client-state networks. Europe will also need to work with the US to develop a joint approach to isolating Rosatom and replacing Russia’s uranium refining capacity on the global market.
Finally, European policymakers should clearly differentiate between mechanisms designed to create market stabilization, and mechanisms designed to deprive Russia of revenue. The oil price cap is designed to do both at the same time, creating a potential tension between the two goals. A better approach would be to enact separate measures to reduce Russian energy exports on the one hand, and to protect European economies from the consequences of reduced Russian energy imports on the other. The Commission and member states might consider creating a separate mechanism to shield European markets from the price volatility caused by sanctions on global oil and oil product markets. Having done that, Europe could then reinforce its effort to deprive Russia of oil revenues by progressively lowering the price caps on oil and oil products.
The politics of building energy security and resilience will be no less complex than the economics and engineering. The investment required is significant at a time when the fiscal pressure on governments throughout the transatlantic space is increasing, and uncertainty is growing. Differences in approaches among EU member state governments, and between EU capitals and the Commission, are likely to reassert themselves. Success will require maintaining the solidarity, flexibility, and clarity of focus that underpinned responses in the early weeks and months of Russia’s full-scale invasion.
About the Authors
Margarita Balmaceda is Professor of Diplomacy and International Relations at Seton Hall University and author of Russian Energy Chains.
Sam Greene is Director of Democratic Resilience at CEPA and Professor of Russian Politics at King’s College London.
Janis Kluge is a Senior Associate at the Germany Institute for International and Security Affairs (SWP).
Olena Pavlenko is President of the DiXi Group, a Kyiv-based energy thinktank.
Benjamin Schmitt is a Senior Non-Resident Fellow at CEPA and a Senior Fellow in the Kleinman Center for Energy Policy at the University of Pennsylvania.
CEPA is a nonpartisan, nonprofit, public policy institution. All opinions are those of the author(s) and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.
- Russian crude oil grades differ by API gravity and sulfur content. Urals (API gravity: 30.6; sulfur content: 1.48) fetches the lowest price, while Sakhalin Blend (API gravity: 44.7; sulfur content: 0.16) fetches the highest. Urals accounts for the lion’s share of Russian exports, particularly to Europe, while Sakhalin Blend mainly serves Asian markets. [↩]
