The West’s energy war with Russia requires sacrifices

By Liam Denning

Although Russia and Western countries are avoiding a real-life war for Ukraine, they have already entered an energy war. The initial skirmishes take the form of selective interruptions in energy flows and the imposition of sanctions on Russian supply. However, there is a distinct gap between the rhetoric of war and the realpolitik of energy diplomacy – a gap that Russia will exploit and that the West must find a way to close.

In a recent New York Times article, US President Joe Biden wrote that being on the side of Ukraine and making Russia pay a “heavy price” is a vital American national interest, in part because if not We do it:

“Or we would endanger the survival of other peaceful democracies. And that could mark the end of an international order based on rules and open the door to aggression elsewhere, with disastrous consequences around the world.”

German Chancellor Olaf Solz, in a speech last month celebrating the end of World War II, explicitly linked the current war to that conflict, saying “there must be no victorious peace dictated by Russia.” . Polish Prime Minister Mateusz Morawiecki warns that European leaders “have forgotten the lesson of the 1938 Munich Agreement”. In short, this is an existential issue for the West.

The energy “strangulation” of Russia is needed

The United States and Europe have provided vital military and humanitarian assistance to Ukraine. But without immediate Western military intervention, a Russian defeat would mean a strangulation of its resources. And that means tackling the world’s dependence on Russia’s energy resources, especially its oil and gas. As it stands, despite the sanctions so far, higher commodity prices mean that Russia’s war machine is making more money than last year.

Biden began his analysis by saying that “the invasion that Vladimir Putin thought would last a few days has now entered its fourth month.” It could have replaced the words “Vladimir Putin” with “everyone” and was just as accurate. Ukraine was expected to collapse, and quickly. Obviously, the US and Europe would have responded with harsh words, more sanctions and strengthening the defense of NATO’s east wing. I doubt, however, that they would have imposed substantial sanctions on Russian energy because of the reservations that Soltz referred to:

“We will not do anything that could do more harm to us and our partners than to Russia.”

That, at least in the short term, is more or less what sweeping sanctions against Russian energy resources would do. However, Ukraine’s resilience and Russian barbarism have made energy sanctions inevitable. The most important ones were agreed by the EU earlier this month, after much controversy.

Gas has been left out – Russia accounts for about a third of Europe’s supply – and oil sanctions have been carefully weighed: imports of crude oil by ship will be completely banned six months from now and those of products refining in eight months. However, crude oil delivered through pipelines – about one-fifth of Russia’s oil exports to Europe – is excluded. Few countries, such as Bulgaria and Croatia, receive exemptions for certain products. Potentially extended bans on providing insurance to ships carrying Russian barrels do not apply until December 2022.

As energy divorces progress, it becomes more of a conscious disconnection effort. However, it is not in Putin’s interest to play the role of partner with understanding. Assuming he has a long campaign of decay, the Russian president needs Europe and the US to quickly get tired of this war and its hardships. Higher energy prices are already a political burden for country leaders on both sides of the Atlantic.

A unilateral disruption of Moscow’s energy supply would be madness if one is really concerned about the long-term health of Russia’s energy industry and economy. However, Putin now takes elements of foreign policy from Peter the Great – the first Russian emperor, if that tells you anything – so the economy is not his main concern.

On the contrary, it divides the West, both internally and vis-.-Vis Ukraine, by all possible means. As the war draws to a close and winter is approaching, Putin’s temptation and ability to reverse the planned course of action in the EU will intensify. The not-so-mysterious cut in Russian-controlled gas reserves in Europe last year and the subsequent price increases provide a model for expansion. In addition to energy, Russia is also branding real threats to other vital supply chains, from grain to industrial gases.

If this struggle is really as existential as it is in articles and speeches – and I believe it is – then our approach to the energy dimension of the issues must be proportionate. “There is a price to pay for adhering to these fundamental principles,” said Helima Croft, head of RBC Capital Markets’ global commodity strategy.

War economy measures

The US and Europe are openly involved in this war and have far-reaching war goals, even if they do not pull the trigger. And while the fighting is concentrated in a confined space, Russia’s exports of goods make the problem so global that, if the West takes what it says seriously, it could demand the kind of measures it has to do with the war economy.

This implies strong state intervention. We have already seen signs that Biden is moving in this direction, with its diplomatic push to direct more liquefied natural gas to Europe and its almost certain retreat from criticism of Riyadh in order to bring more barrels of OPEC crude to market. The use of the defense production law to encourage domestic production of critical minerals and to dismantle US solar panel imports, although not directly linked to the crisis in Ukraine, also suggests a willingness to intervene more vigorously.

All of this should involve more than just efforts to accelerate the energy transition, which is one of the safest long-term strategic energy weapons against Russia available to the United States. It should also include encouraging greater production of oil, gas and other fuels domestically or in friendly countries, in order to displace as much Russian production as possible.

Balancing this short-term need with carbon offset targets is difficult because it requires companies to invest today in assets that may not be fully utilized in the future. The capital markets will not accept this without the state taking some of the risk. Such an intervention would disappoint environmentalists, however it could be structured to encourage smaller cycle energy sources such as slate or be accompanied by conditions for reusing infrastructure to be created for energy-compatible purposes over a period of time.

Sacrifices and compromises

None of this can happen, however, unless it is openly acknowledged that the emergency in energy markets requires sacrifices and compromises.

Progressives will be called upon to “swallow” measures to support drilling. Conservatives will be asked to accept climate-related terms. And the sacrifice can also be extended to the demand side. Higher prices are already putting pressure, but heightened sanctions and real cuts in Russian supply may eventually require demand to be curtailed or new directives to limit it, at least in Europe.

This is of course the last thing any US president who wants to dismiss comparisons with Jimmy Carter wants to hear. However, when you have made the confrontation between democracies and dictatorships a decisive principle of your presidency and you are now engaged in a real conflict to defend a democracy from a great dictatorship, such possibilities must be taken into account.

Jason Bordoff, founding member of the Board of the Columbia Center on Global Energy Policy, recently wrote an excellent article in Foreign Affairs on “How Governments Will Transform Energy Markets,” as they seek to balance climate goals with security. When I asked him about the distance between the harsh language of war and the more careful implementation of energy policy, he noted a similar dynamic in terms of climate change: “If we really believed it was existential, we would think differently about what we would be willing to sacrifice. for the sake of dealing with it. ”

As with tackling climate change, although the majority of Westerners support Ukraine, it remains unclear how much personal costs, including behavioral change, they are willing to incur to support it. Putin bets that their support will prove to be ephemeral. Equally unclear, however, is whether this hypothesis will lure him into a kind of dramatic escalation that will harden their resolve.

Source: Bloomberg

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