Monday, February 21, 2022
Dining With the Devil
Europe’s dependency on Russian gas is the déjà vu historical folly oftrusting autocracies to honor binding commercial and governmental agreements.The priority of autocracies is hegemonic power & influence over economicsuccess. Furthermore, they view everyone around them, regardless how small, asan existential threat. Appeasement & acquiescence only fuels theircontempt. It’s an arrangement akin to the adage, “If you’re going to have soupwith the devil, make sure you use a long spoon.”
For this reason Europe’s energy network’s dependency and vulnerability areforever changed with the Russian invasion of Ukraine. Disengaging from this high-levelof dependency will be slow and costly.
The following chart entitled WhichEuropean Countries Depend on Russian Gas? provided by European UnionAgency for the Cooperation of Energy Regulators present the leverage Russiangas suppliers have on the European market.
The countries with the greatest dependency for Russian gas are small, thusrequire far less total gas than their far larger more industrial and populouscounterparts who, although less dependent percentage wise require far more totalgas than the smaller countries.The following chart entitled The GasPipelines Linking Russia and Europe provided by JP Morgan via TheEconomist present an excellent visual as to how the major pipelines linkingRussia to Europe are routed.
Indeed as a natural gas producing powerhouse and favorable geography itmakes political and business sense to do business with Russia. The intangiblevague line that crosses from competitively-priced multi-sourcing into dangerousdependency without a sufficient alternate source is the realm of pathological realpolitiknaivete.Putin’s Peril
Present-day Russia is 40% dependent on energy commodities gas, oil andcoal exports for revenue. During the buildup they are taking advantage ofsoaring energy prices thanks to the artificially low European inventories becausesome claim Russia has not delivered the requested quantities.
A Cold War in politics or business is one thing. Outright mass hostilitiesagainst another European country is quite another. This is why Putin eill havecrossed the Rubicon if he wages war with Ukraine.
Putin will have rebranded himself from tough talking bully to barbrawler. All his allies are either those of convenience (China) or underhistorically dark geographical shadow of the Soviet Union or Russia (Belarus),
Even if Russia continues to honor their contractual obligations of gas toEuropean countries during and after the conflict, it will not mitigate Europe’sfury and inevitable aggressive plans to delink their energy dependency on Russia.
On the other hand if the Russian armies suffer heavy or unacceptable lossesduring the invasion or are mired in a guerilla war with Ukrainian partisans whowill be generously supplied by US/Nato, this might trigger a palace coup in theKremlin and depose Putin. Nonetheless Europe’s new paradigm shift would be unchangedbecause whoever the next Russian president might be doesn’t necessarily changeRussia’s aggressive policy today or in the future.
Here Comes the Cavalry!
The good news is that in December 2021 US became the biggest LNGexporter surpassing Qatar which can provide a stop-gap supply of liquifiednatural gas (LNG) to European countries that may be cut off from Russiansupplies. Furthermore, Qatar is negotiating an agreement to ship more LNG toEuropean countries while still satisfying their Asian market. Already Europeanfirms are seeking long-term contracts for US gas.
To provide a perspective as to how LNG can satisfy European demand, a LNGlarge tanker provides enough energy to light 70,000 homes for a year because thecompressed gas to liquid, cooled at minus 260 degrees F, is 1/600thvolume.
The immediate downside is the dearth of European LNG terminals to handlethese specialized shipments especially an armada of LNG vessels. Furthermore, LNGterminals are quite expensive. However in the long-term the construction of LNGterminals will be cost effective because it will handle a considerable amountmore of an essential commodity annually.
With respect to environmental concerns, the EU is accelerating aproposal to reclassify certain gas investments as green to attract more buyers.
China & Russia | Fair Weather Friends
Historically Russo-Chinese relations are one of convenience, short-lived,with few if any binding contracts except for the occasional dog & pony showof join military maneuvers. Their series of joint declarations are not worththe paper they’re written on. Despite similar attempts at rejoining “lost”territory namely Ukraine and Taiwan, neither Russia nor China have madeofficial comments confirming each other’s “right” to forcefully, if necessary,absorb those countries.
In the energy sector Russia has avoided becoming an OPEC member, even wheninvited, but co-leads the OPEC+ group which produces 37% of the world’s oil, withSaudi Arabia in establishing quotas. It’s a crafty policy of economic andpolitical flexibility without accountability.
The Tiger at the Mountaintop
There can’t be both a bear and tiger at the top of the mountain. Russiadoes brisk energy export business with China. However despite Russia’s“economic fortress” of $630 billion in reserves through their de-dollarisation policy,the world’s rage against Russian aggression might pressure China to slack offon energy purchases.
While Russia is focusing on squeezing the west by threatening theinvasion of Ukraine, the short-term consequences might be China’s decision to reduceconsiderably purchases of Russian energy exports thus forcing Russia to rapidlydeplete its $630 billion reserve and take the dominant and commanding leadbetween them on China’s terms.
Even if Russia continues to supply gas to Europe during the invasion andsubsequent occupation, Russia may find itself thoroughly cut-off from any legalinternational banking and payment system and unable to collect revenues.
Conclusion
War in Europe presents an enviable opportunity for China to apply theMiddle East adage, “The enemy of my enemy is my friend.” By using economicleverage by reducing the purchase of Russian energy exports, it can neutralizeRussian aggression in Europe. China would gain immediate favor to a certainextent of the US and its allies – simply playing one off against the other.
The fate of Putin personally depends whether or not Russian boots touchUkrainian soil. This emerging possibility may be the reason he has hesitated inmaking a decision whether to invade or not.
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