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By Andrew Holland on Mar 3, 2014 with 7 responses

Europe Should Embargo Imports of Russian Natural Gas

The situation between Russia and Ukraine is rapidly spinning out of control. We see Russian troops occupying the Crimea, and the interim Ukrainian Prime Minister saying: “This is actually a declaration of war to my country” and has mobilized the Ukrainian military reserves.

What leverage does the United States and its allies in Europe have over Russia? Energy was central to the causes of the conflict, and it could prove to provide a solution.

The last two international crises between Ukraine and Russia (in 2006 and 2009) were over fees that Ukraine paid to Russia for supplies of natural gas and transshipment fees for sending it along to Europe. Natural gas was also a precursor for this crisis; a large part of the aid package given by Putin’s government to the Yanukovich government that sparked protests in November was for reduced rates of natural gas. A look at the maps of pipelines from Russia to Europe shows how they all enter from East and North from Russia and exit through to the EU in the West.

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Greifswald, Germany: the first time Russian Gas sees the surface after 740 miles under water from Russia.

In the last five years, the U.S. has undergone a boom in energy production. Europe, on the other hand, has gone through a prolonged euro crisis, and some are pointing to its energy prices as making it uncompetitive with a U.S. that is benefitting from the shale gas boom. It is ironic, then, that Europe, with few domestic energy resources, holds a trump card.

For more than 40 years, U.S. policymakers have worried that the network of oil and gas pipelines stretching from East to West were creating a dependence on first the U.S.S.R. and then Russia that would allow the Russian government to exert political pressure on European governments: they could threaten to cut-off supplies, it was thought, and the European governments would fold. What we overlooked is that energy dependence goes both ways. Russian firms and the Russian federal budget are even more dependent on Europeans to buy their gas than European countries are to receive it. It is time for Europe to play that trump card.

On Sunday, the G7 made a strong statement condemning Russia’s “clear violation of the sovereignty and territorial integrity of Ukraine.” The European members of the G7 can add teeth to this statement by embargoing the importation of any natural gas from Russia that is not transshipped through Ukraine. Such a statement would show solidarity with Ukraine by stopping gas imports while also giving Ukraine’s strapped budget the transshipment fees it needs.

The European G7 members of Germany, France, Italy, and the UK have a diverse and redundant energy system that could operate without imports of natural gas from Russia. Stepped-up Liquefied Natural Gas (LNG) imports from Norway and from the Middle East, plus other energy exports from the U.S., combined with fuel substitution (coal and renewables), along with reduced seasonal demand from warmer spring temperatures mean that this embargo could be enforced without substantial harm to European economies.

Germany would be the key country in an embargo. The Nord Stream pipeline stretches more than 750 miles under the Baltic Sea from Vyborg, Russia to Griefswald, Germany. Its twin pipes can provide about 2 trillion cubic feet of gas per year (around 10% of EU demand). From its start, seemingly the only reason for the extra expense to lay it under the Baltic was to avoid transit countries like Ukraine, Lithuania, or Poland.

With the announcement of an embargo, the German government could immediately cut off imports through the Nord Stream, immediately denying Gazprom and the Russian government a very significant source of hard currency. Germany has an opportunity here to punish Russia’s bad behavior by turning off the Nord Stream’s tap.

Russia has overstepped its bounds by invading Ukraine. One of its largest sources of income is from energy exports and production. The G7 can immediately add teeth to its statement of condemnation by announcing that it would not buy Russian natural gas – while also keeping solidarity with Ukraine by announcing that any gas passing through Ukraine would be exempt.

The U.S. should support this statement by announce support for NATO allies. The U.S. could providing energy exports to make up for the Russian shortfalls (though we could not export the natural gas without yet-to-be-build infrastructure). Russia should learn that the politics of energy insecurity goes both ways: it is not just importers that are threatened. Energy suppliers, too, cannot simply flout international norms by invading neighboring countries.

  1. By Forrest on March 4, 2014 at 7:31 am

    Your spot on with your analysis. I’ve change my thinking on the LNG export to align with what your saying. It’s good to have export capability to help stabilize international tensions when needed. This is the problem with such valuable or critical energy resources be held by those attempting to exploit market for wealth or power.
    Considering this, it is a huge mistake to regulate our coal plants out of business and push industry to NG. NG is just to valuable for such use within our large stationary power plants. Industry, home, and transportation use a better application and we don’t need to compete with power plants fuel. Since low cost coal is the fuel of developing nations and the most damaging potential to environment, it should be a no brainer to develop cost effective pollution control for modern coal combustion processes considering we have huge resources of coal. We should be replacing old polluting coal plants with best in class. We should be supporting the coal industry, to continue development of pollution control and energy stability. Same with the solar, wind, geothermal, bio, and nuclear development, but let’s not foolishly shoot our selves in foot to demonstrate to world how stupid we are. That’s NOT leadership….follow our lead as we have superior thinking and all full of virtue. We will not support your stupid decision to burn coal and develop better solutions for pollution control and energy conversion. Take that! We don’t need your stinking money. We can print our own.

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  2. By NicholB on March 4, 2014 at 8:24 am

    sounds reasonable .. but I’m sure that Gazprom made sure to have some long-term contracts with germans. Will germans need to break a contract to stop buying from nord stream? How expensive can that be? How large are the german gas storage buffers for the winter? Is there really enough easy wiggle room to make it hurt in russia while staying safe on the german side?

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    • By Andrew Holland on March 4, 2014 at 9:52 am

      I think that a government order would constitute Force Majeure and would allow E.On, Wintershall, and EDF to break their contract in the short term. Over the long term, Gazrpom will have to come back – they invested so much in Nord Stream that they need a return on their investment. As for the storage buffers – unlike here in the US, they had a warm winter and have lots of gas in storage. Besides, gas has been going down as a source of energy in Germany.

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  3. By steve003 on March 4, 2014 at 12:01 pm

    Doesn’t Germany have some nuclear reactors it could turn back on too?

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    • By Andrew Holland on March 4, 2014 at 5:29 pm

      Smart guy! History has returned to Europe… Maybe the Germans should realize it and get going!

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  4. By Forrest on March 5, 2014 at 9:46 am

    The Christian Science Monitor: Western Europe buys about 76 percent of Russia’s
    natural gas exports, the Monitor reported. Selling this energy abroad brings in half of the Russian government’s revenue.

    Also, was listening to Vladislev take on Russia operations via Putin. He claims Putin learned the lesson of international wealth corruption and the power it bestows to politicians. China and Russia are overrun with this corruption. Russia wealth mainly comes from sale of natural resources, a common corrupting factor. That countries like U.S. that have fair open markets competition suffer the least corruption. Also, the biggest benefit for poor is for countries like U.S. to invent international means to shine daylight on corruption and help enforce rule of law. Note regulations can be part of this, but mostly regulations are exploited to maximize corruption. Fair open market competition exposed by daylight and regulated to maximize the effect is the best government can do. Also, placing more GNP monies within government control the more corruptible influences created. This is natural law.

    The Corruption Contagion by Vladislav Inozemtsev: “As a Russia observer I can add that more than 60 percent of the officially calculated GDP of the Russian Federation is generated by enterprises controlled through different offshore registered holding companies. While more than $290 billion fled the country over the past five years, its economy is formally controlled by “foreign” investors.”

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    • By Andrew Holland on March 5, 2014 at 12:12 pm

      Yes – and if those corrupt businessmen knew their cash cow (gas exports to Europe) were threatened by Putin’s Crimean gambit, they would put some serious pressure on Putin’s government.

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