Putin has another gas shock for us: the deindustrialisation of Europe

It is the President’s bet that he can break Europe before it breaks Russia

Ambrose Evans-Pritchard

24 November 2022 •

Putin

Vladimir Putin lost his energy war this year. He may still win it next year by exhausting Europe’s will to resist through another gas and power crunch.

The secondary target of his bombing blitz on Ukraine’s energy infrastructure is the EU itself. The damage deprives Europe of crucial electricity imports from Ukrainian plants. Power will have to flow in the opposite direction to prevent a humanitarian disaster in Ukrainian cities.  

The switch in flows is large enough to change a fragile energy balance. It compounds a fresh gas squeeze already in the works. The effect is to shave Europe’s margin of energy security to wafer-thin levels and to ratchet up the pain through 2023, pushing Europe’s industries closer to the wall.

Putin has already burned so many geopolitical bridges, and suffered such battlefield reverses, that he is almost forced by events to play his final energy cards. Cost fatigue and the wave of appeasement sentiment across the EU core renders the temptation almost irresistible.

“His goal is to set off an uprising of European consumers against their own governments. He wants a Yellow Vest 2.0, this time on steroids,” said Helima Croft, an ex-energy analyst at the Central Intelligence Agency now at RBC Capital.

It is Putin’s bet that he can break Europe before it breaks Russia. He may also break Rishi Sunak’s Government and Britain’s social stability unless gas storage levels are massively increased by next winter, and buttressed by an emergency campaign to insulate buildings.

“Putin knows exactly what he is doing. He is targeting the electricity substations and the step-up transformers which are difficult to replace,” said Professor Alan Riley, an energy expert at the Atlantic Council and an adviser to Ukraine.

“He has complete sight of every target because he has detailed plans dating back from the Soviet Union. It is an energy war on Ukraine and Europe at the same time,” he said.

Helima Croft expects Russia to keep escalating through the winter with deniable sabotage of gas pipelines. We must assume that nothing is off limits, given that Putin has already destroyed his own Nord Stream pipelines in the Baltic.

“Infrastructure is vulnerable wherever the FSB [Russian intelligence] is present. The Italians have diversified their gas supplies to Libya, Algeria, and Azerbaijan, and the FSB is operating in all of them,” she said.

The new Norwegian pipeline to Poland is a prime target. So are the Norwegian gas and power links to the UK. A clear attack on this infrastructure would trigger Nato’s Article 5 clause on alliance solidarity, probably a risk too many even for this bad Tsar.

Murkier cases of disruption are another matter. There is no shortage of skittish EU states that would try to block Article 5 escalation. Estonia was denied such support when its critical infrastructure was attacked. A Russian strike on North African terminals shipping gas to Italy could be blamed on Jihadis, muddying the waters sufficiently to blunt any response. That is the soft underbelly of Europe’s integrated gas nexus.

Warm weather has given us false comfort. So has the displacement effect of Beijing’s zero-Covid policies. China has been reselling its contract deliveries of LNG to Europe to exploit the arbitrage spread. The country will be the world’s biggest buyer again as soon as it reopens.

This fluke reprieve has allowed Europe to fill gas storage to 96pc. Germany reached 99.9pc earlier this month. Cargoes of LNG have been anchored off-shore because there is nowhere to store the gas. The average winter price of benchmark TTF futures has dropped to €132 MWh from €350 during the August panic. Unfortunately, this has been the calm before the next storm.

“We have absorbed the shock only because Putin did not cut off gas flows completely. Some 24 BCM (billion cubic metres) kept flowing through Ukraine and Turkey because Putin wanted to play his tricks and divide Europe,” said Thierry Bros, France’s former head of energy security.

Even this is now drying up. On Tuesday, the Kremlin started to cut off the remaining gas flowsto southern Europe via Moldova.

Nor should we assume that oil supplies are safe. Putin will retaliate in some way against Europe’s embargo on Russian crude exports starting on December 6, either by withholding supply or by sabotaging such targets as the electric pumping station on the Druzhba pipeline to Hungary, Slovakia, and the Czech Republic.

These landlocked states were given an exemption on the embargo because they have no other sources of oil. “We could be looking at a multimillion-barrel shortage after December 6. It is not clear whether it is even possible to reroute enough barrels to Europe,” she said.

JP Morgan says Russia could give us a nasty surprise by cutting oil output by three millions barrels a day (3pc of world supply), which is physically possible without damaging its own drilling infrastructure. This would drive prices to an all-time high of $190.

If Putin went for the jugular with a five million cut, prices could reach $380 a barrel. China and India would be unhappy, but they stiffed Russia at the G20.  

Putin warned at the St Petersburg Economic Forum this year that European sanctions would have “catastrophic consequences on the global energy market”.

On this at least, we should take him at his word. He left no doubt that his objective is to drive commodity costs to levels that destabilise democracies and cause a “system-wide decline” of the European economy.

“This will aggravate the deep-seated problems of European societies. There will be a further growth of inequality, which will split their societies still more. Such a disconnect from reality will inevitably lead to a surge in populism and extremist and radical movements,” he said.

Russia has a trade surplus of 20pc of GDP and an ample war chest. It can ride out months of restricted exports. Can Europe last as long?

German industry cut its gas consumption by 27pc in October. This is an impressive display of national will but the longer it goes on, the greater the existential threat to Deutschland Inc. The German chambers of commerce and industry (DIHK) says that a quarter of the chemicals sector is either cutting production or shifting output abroad.

Europe has become a net importer of chemicals for the first time in the modern era. Cheap US shale gas – trapped inside the US market by lack of LNG export terminals – gives the US an unbeatable edge in petrochemicals, fertilisers, or glass.  

Eurometaux says aluminium and zinc production in Europe has halved. Ten smelters have either closed or slashed output, and once they close there is no clear business case to reopen them.    

The democracies have not cracked yet but only 42pc of Italians and 49pc of Austrians now support sanctions against Russia. A Globsec poll showed that 19pc of Slovakians want a Russian victory, and 34pc don’t know or don’t care. In Bulgaria the support for Russia and Ukraine is equally divided.

The main hard-Left and hard-Right parties in both France and Germany blame “Nato aggression” for the war. Visceral anti-American views are spreading, a remarkable state of affairs given that the European project would be dead by now if the Great Republic had not rescued Europe from itself a third time.

Putin has ample motive to exploit the glaring lines of cleavage running through Europe’s deformed political culture.

These are dangerous circumstances for Britain. It has outsourced most of its gas storage to Germany and Holland, or indirectly through the LNG markets. Neither forms of back-up can guarantee energy security in a sustained crisis.

The Government has reopened the Rough storage site but this is just a fifth full so far. Nor is it enough. This country has onshore salt caverns and disused gas wells in the North Sea. Either could be exploited for strategic storage in time for next winter. It is not happening.

We will never know for sure but the West may have made a grave error by withholding long-range artillery and fighter aircraft from Ukraine over the summer and autumn campaign. This fear of escalation prevented a decisive knock-out blow and a political chain reaction within Russia.

We have allowed Putin to dig in over the winter on frozen lines and play for time. We have given him a second chance to deploy his energy weapon against us.

One comment

  1. This article is why ALL criminal putinazi cash and assets need to be seized now.
    All visas for Russians in civilised countries must be cancelled. All putlerites must be kicked out; the worst ones arrested.
    All corporations still trading in putlerstan must immediately pay a 100% tax on all their profits from that nazi snake pit for the last 5 years.
    All air, sea and land links with putlerstan must be closed. No putinazi shipping allowed anywhere in Europe or North America.

    Liked by 2 people

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