Russo-European gas divorce would have a significant impact on the global energy order. Recent explosions along the Nord Stream pipelines have sped up the process of the European Union’s gas diversification. This process has also forced the Kremlin to look eastward in an attempt to find new buyers for its energy production. While Russia has long been able to use its oil and gas production as a weapon against Europe, this shift will have important ramifications for the Russian economy. Can the Russian economy survive without European markets for its oil and natural gas exports?
Oil and gas are an important source of revenue for the Russian government. In the three quarters of 2021, oil and gas revenues accounted for 34.5% the Russian federal budget revenue. In October 2021, Alexei Kudrin, chairman of Russia's Accounts Chamber, said that the country should end its dependence on oil and gas exports within the next 10-15 years. Efforts to reduce Russian dependence on oil and gas exports have already started. Back in 2009, the Russian government created a strategy that would help the nation to gradually transform its economy and reduce dependence on energy exports, especially to the European market. Russian experts, however, claim that fundamental changes of the very structure of the country’s economy are going very slow—meaning that Russia will continue to remain dependent on oil and gas revenues. That may explain why Russian President Vladimir Putin repeatedly insists that Moscow is ready to resume gas supplies to Europe via the Nord Stream pipelines.
Now that the Nord Stream 1 pipeline is no longer operational and Nord Stream 2 never entered service after Germany suspended the project in February due to Moscow’s recognition of the self-proclaimed Donbass republics, the only remaining pipelines for Russia to supply Europe with natural gas are those passing through Ukraine as well as the TurkStream pipeline—connecting the Russian Federation and Turkey across the Black Sea. For Europe, this represents a challenge as these flows are relatively low. However, many European countries have enough gas reserves to survive the coming winter. Despite this, in the medium term it remains uncertain if Europe will manage to find a replacement for Russian gas.
Quite aware of the Europe’s dependence on Russian gas, the Kremlin is prepared to pressure Europe—and Germany in particular—to put the Nord Stream 2 gas pipeline into operation. In attaining this goal, Russian Deputy Prime Minister Alexander Novak recently stated that “there are technical possibilities to restore the infrastructure…” and emphasized that Russia is “ready to start supplying gas over the undamaged string of the Nord Stream 2 gas pipeline within a short term if all required procedures are passed.”
Germany, however, remains firm in its determination not to make any concessions to Moscow and continue seeking to end its dependence on Russian energy. As such, Russia’s energy giant Gazprom will likely continue to seek to increase export volumes to Asia. In 2014, Gazprom and the China National Petroleum Corporation signed a 30-year purchase and sale agreement for the supply of 38 billion cubic meters of natural gas per year. However, in 2021 Russia—whose overall gas exports totaled 205 billion cubic meters—exported only 16.5 billion cubic meters of gas to China compared to the 155 billion cubic meters that the European Union imported from Russia that year. It is, therefore, rather debatable if China can replace Europe as Gazprom’s major market any time soon, if at all.
Even if the Power of Siberia 1 pipeline, connecting Russia and China, reaches its full 38 billion cubic meter capacity by 2023, this will still not replace the loss of the European market. Given that the Power of Siberia 2 pipeline is planned to have a capacity of 61 billion cubic meters per year, Russia may increase gas supplies to China in the long-term. However, this pipeline if only slated to break ground to 2024, meaning that Russia will have no choice but to find additional ways to diversify its gas exports. With these challenges on the horizon, it is not surprising that the Kremlin has sought to increase energy cooperation with Iran and Afghanistan.
Although there has been a great deal of discussion over the potential impacts of the Nord Stream 1 attack, oil and petroleum products—rather than natural gas—are the key source of the Russian export revenue. In 2021, $180 billion were generated from oil, while $64 billion from natural gas exports. Since the EU will stop importing Russian oil as of December 5, 2022, and petroleum products as of February 5, 2023, Western sanctions on Russia will have a significant impact on the Russian economy by the second quarter of 2023. For its part, the Kremlin will likely try to increase its oil exports to countries such as India and China while hoping that the EU continues purchasing Russian gas.
If Russian gas exports to Europe are completely halted, Gazprom will have to continue doing business with Turkey, China, Central Asian nations, and other countries that the Kremlin sees as “friendly.” Such a scenario will have an impact on Russia’s budget, but will unlikely be critical. Given that the Russian Federation annually consumes around 500 billion cubic meters of natural gas, Gazprom will have to adapt to a new reality in which the primary focus for the energy-giant will be Russia’s domestic market. However, to compensate for export losses, very low gas prices in Russia—around $36 per 1000 cubic meters—will need to rise. Indeed, the era of cheap energy may come to an end not only in Europe, but also in the Russian Federation.
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Divining the Future of Russian Gas Flows
Photo by SELİM ARDA ERYILMAZ via Unsplash.
October 16, 2022
Russia has long been able to use its oil and gas production as a weapon against Europe. However, as Europe further diversifies its gas supplies following recent explosions along the Nord Stream pipelines, Russia’s economy will likely face vast ramifications, writes Nikola Mikovic.
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Russo-European gas divorce would have a significant impact on the global energy order. Recent explosions along the Nord Stream pipelines have sped up the process of the European Union’s gas diversification. This process has also forced the Kremlin to look eastward in an attempt to find new buyers for its energy production. While Russia has long been able to use its oil and gas production as a weapon against Europe, this shift will have important ramifications for the Russian economy. Can the Russian economy survive without European markets for its oil and natural gas exports?
Oil and gas are an important source of revenue for the Russian government. In the three quarters of 2021, oil and gas revenues accounted for 34.5% the Russian federal budget revenue. In October 2021, Alexei Kudrin, chairman of Russia's Accounts Chamber, said that the country should end its dependence on oil and gas exports within the next 10-15 years. Efforts to reduce Russian dependence on oil and gas exports have already started. Back in 2009, the Russian government created a strategy that would help the nation to gradually transform its economy and reduce dependence on energy exports, especially to the European market. Russian experts, however, claim that fundamental changes of the very structure of the country’s economy are going very slow—meaning that Russia will continue to remain dependent on oil and gas revenues. That may explain why Russian President Vladimir Putin repeatedly insists that Moscow is ready to resume gas supplies to Europe via the Nord Stream pipelines.
Now that the Nord Stream 1 pipeline is no longer operational and Nord Stream 2 never entered service after Germany suspended the project in February due to Moscow’s recognition of the self-proclaimed Donbass republics, the only remaining pipelines for Russia to supply Europe with natural gas are those passing through Ukraine as well as the TurkStream pipeline—connecting the Russian Federation and Turkey across the Black Sea. For Europe, this represents a challenge as these flows are relatively low. However, many European countries have enough gas reserves to survive the coming winter. Despite this, in the medium term it remains uncertain if Europe will manage to find a replacement for Russian gas.
Quite aware of the Europe’s dependence on Russian gas, the Kremlin is prepared to pressure Europe—and Germany in particular—to put the Nord Stream 2 gas pipeline into operation. In attaining this goal, Russian Deputy Prime Minister Alexander Novak recently stated that “there are technical possibilities to restore the infrastructure…” and emphasized that Russia is “ready to start supplying gas over the undamaged string of the Nord Stream 2 gas pipeline within a short term if all required procedures are passed.”
Germany, however, remains firm in its determination not to make any concessions to Moscow and continue seeking to end its dependence on Russian energy. As such, Russia’s energy giant Gazprom will likely continue to seek to increase export volumes to Asia. In 2014, Gazprom and the China National Petroleum Corporation signed a 30-year purchase and sale agreement for the supply of 38 billion cubic meters of natural gas per year. However, in 2021 Russia—whose overall gas exports totaled 205 billion cubic meters—exported only 16.5 billion cubic meters of gas to China compared to the 155 billion cubic meters that the European Union imported from Russia that year. It is, therefore, rather debatable if China can replace Europe as Gazprom’s major market any time soon, if at all.
Even if the Power of Siberia 1 pipeline, connecting Russia and China, reaches its full 38 billion cubic meter capacity by 2023, this will still not replace the loss of the European market. Given that the Power of Siberia 2 pipeline is planned to have a capacity of 61 billion cubic meters per year, Russia may increase gas supplies to China in the long-term. However, this pipeline if only slated to break ground to 2024, meaning that Russia will have no choice but to find additional ways to diversify its gas exports. With these challenges on the horizon, it is not surprising that the Kremlin has sought to increase energy cooperation with Iran and Afghanistan.
Although there has been a great deal of discussion over the potential impacts of the Nord Stream 1 attack, oil and petroleum products—rather than natural gas—are the key source of the Russian export revenue. In 2021, $180 billion were generated from oil, while $64 billion from natural gas exports. Since the EU will stop importing Russian oil as of December 5, 2022, and petroleum products as of February 5, 2023, Western sanctions on Russia will have a significant impact on the Russian economy by the second quarter of 2023. For its part, the Kremlin will likely try to increase its oil exports to countries such as India and China while hoping that the EU continues purchasing Russian gas.
If Russian gas exports to Europe are completely halted, Gazprom will have to continue doing business with Turkey, China, Central Asian nations, and other countries that the Kremlin sees as “friendly.” Such a scenario will have an impact on Russia’s budget, but will unlikely be critical. Given that the Russian Federation annually consumes around 500 billion cubic meters of natural gas, Gazprom will have to adapt to a new reality in which the primary focus for the energy-giant will be Russia’s domestic market. However, to compensate for export losses, very low gas prices in Russia—around $36 per 1000 cubic meters—will need to rise. Indeed, the era of cheap energy may come to an end not only in Europe, but also in the Russian Federation.
