EU sanctions and Russia's energy weapon - solidarity versus fragmentation. Analysis by Dionis Cenușa

Op-Ed
	Although it would seem that Ukraine has a greater unilateral need for the EU, in reality, the need is mutual. However, the war created a strong interdependence between the future of Ukraine and, respectively, the ability of the EU to become a more autonomous and resilient geopolitical actor...
Dionis Cenuşa, Senior Contributor

The European Union and Russia have entered into an endurance race in terms of maintaining sanctions and taking advantage of energy asymmetries, respectively. Through sanctions, used as an economic weapon, European actors want to weaken Russia's economy, thus stopping the aggression against Ukraine. In addition, the EU's restrictions in the energy field have acquired an additional utility, namely that of reducing dependence on Russian hydrocarbons, which also implies a transition towards oil, coal and natural gas not imported directly from Russia. In reality, trade in the global economy is interdependent, and Russian energy exports may reach the European market in one form or another due to third countries that for now refuse to align with the sanctions regime (such as India).

Immediately after the outbreak of war, it could be anticipated that with the energy superiority at its disposal (IPN, May 2022), Russia would attempt to use natural gas supplies as a counter-sanction against the EU. Russia's actions in the energy field constitute an economic response, applied for the first time, against the EU. The latter did not know how to draw lessons from the negative experience of the states of the common neighborhood, now with a European perspective (Georgia, Moldova and Ukraine), which faced "gas wars" during the last 15 years. Currently, the reduction of gas supplies to the EU allows Moscow to aggravate the energy crisis at the European level. The general scarcity of energy resources, partly stimulated by the EU sanctions, feeds and perpetuates the spiral of price increases in the EU (9.6% annual inflation in June compared to 8.8% in May). The obvious objective of Russia is to discredit European sanctions in order to produce feelings of betrayal in Ukraine, similar to those observed on a micro-scale in the case of Canada and Germany's decision to return to Gazprom, contrary to technological sanctions, the Siemens turbine used for the Portovaya compressor station of Nord Stream 1 (NS1) pipeline.

If European unity on sanctions weakens and the US is engrossed in the fall election campaign, then Russia believes that it can bring about Ukraine's defeat by keeping the recently occupied Ukrainian territories (Kherson, Zaporizhzhia, Kharkiv and other parts of Luhansk and Donetsk). With unlimited access to domestically produced hydrocarbons, Russia sees the upcoming winter season as a strategic opportunity to dismantle sanctions, cause dissension within EU states and prolong the "war of attrition" against Ukraine.

EU sanctions - delayed effects?

Following the introduction of the seventh sanctions package (EU, July 2022), the EU is focused on preserving unity around the sanctions regime, without which Ukraine's efforts to defend and recapture the territories occupied by Russian military forces (about 20% of the Ukrainian territory) could be in danger. Maintaining and strengthening the sanctions becomes a complicated mission due to the growing tiredness that is registered among the population. According to the Eurobarometer (June 2022), 58% of those surveyed are not prepared to withstand the increase in energy prices as a result of the sanctions against Russia. The same phenomenon is observed in the case of food security (see Table 1 below). National surveys in countries such as Germany indicate a relatively negative perception of the effectiveness of sanctions. Thus, according to INSA, 47% of the population believe that the sanctions regime hits Germany harder than in Russia, 36% affirm that both sides are affected equally and only 12% are convinced that the impact is major on the Russian side (Bild, July 2022).

Table 1. Negative responses (“not very ready", “not at all ready”) about the consequences of sanctions

Source: Author's compilation based on June 2022 Eurobarometer results.

While pro-Russian European actors such as Hungarian Prime Minister Viktor Orban question the effectiveness of the sanctions, European politicians resort to aggressive public diplomacy to defend the sanctions. Among the most ardent defenders of the idea that the sanctions are working is the head of European diplomacy, Josep Borrell. In a recent post, he commented that "sanctions require strategic patience" to have their desired effect, presumably referring to Russia's abandonment of the war or failure to wage it. In fact, all sanctions have some effect, but they are not only intended to harm the Russian economy, but also to help Ukraine win the war. This goal, however, does not depend only on sanctions, but on how they have been combined with military assistance to Ukraine and the results that the Ukrainian side achieves on the battlefront.

The EU and overcoming the energy crisis

In the context of some political mobilization to keep sanctions intact, the EU is showing serious signs of concern about the ability of member states to overcome the energy crisis. Brussels is aware that disruptions caused by the energy crisis can have costly political and socio-economic effects, especially in the dead of winter. For this reason, faced with the manipulation of the gas market by Gazprom and the possibility of stopping deliveries, the EU proposed the application of the principles of diversification, solidarity and rationing (saving) to overcome energy limitations.

To diversify its gas import sources, the EU engages in aggressive energy diplomacy, sometimes ignoring the liberal agenda. This was clearly seen with the signing of the agreement with Azerbaijan to double exports to the EU by up to 20 billion m3 in 2027, through the Trans-Adriatic gas pipeline (Reuters, July 2022). The latter is part of the Southern Corridor that delivers gas from the Caspian region to Greece, from where it passes to Italy and Bulgaria. In 2021, the EU secured its internal gas consumption from pipeline imports from Russia (41%), Norway (24%) and Algeria (11%), around 10% of local production and up to 20% of liquefied gas. Therefore, in addition to intensifying energy diplomacy towards the Caspian Sea (Azerbaijan), the EU is committed to increasing imports of liquefied gas from the African continent, where gas is already being exported through gas pipelines from Algeria. In this sense, the European Commission would have started negotiations with Nigeria to increase supplies of liquefied gas, after holding similar talks with Qatar. At the same time, the main EU LNG importers, such as Spain, openly declare their intention to reduce imports from Russia, which have been increasing (11.9% in 2022 compared to 6.6% in the same period of 2021). Therefore, diversification and distancing of Russian gas are taking place both in relation to distribution by pipeline and by sea.

Table 2. LNG import in the EU, 2021

Source: Europa.eu

On the side of solidarity and savings, the European Commission launched the idea of ​​mandatory savings in natural gas consumption by 15% (Euronews, July 2022), opting for a lighter option after the refusal of Spain, Portugal and Greece (Politico, July 2022). The opposition to the idea of ​​savings is due to the lack of transparency with which the Commission launched this initiative, which nevertheless corresponds to the state of emergency in the energy sector. On the one hand, the idea has not yet received the support of at least 12 member states (many of which have a public with a negative perception of the consequences of sanctions, as shown in Table 1 above). This creates obstacles in the adoption process that requires a qualified majority vote, provided by at least 15 member states representing 65% of the EU population. On the other hand, the assumption has crystallized that this initiative is determined by the Commission's desire to help Germany. It has not been able to accumulate enough gas volumes to get through the winter season (only about 65%), due to a lack of effective control of critical gas storage infrastructure and reduced deliveries through NS1, both caused by for Russia. Contrary to this idea, the President of the Commission, Ursula von der Leyen, suggested that at least 15 countries are in danger of possible gas cuts by Russia.

The EU understands that the energy collapse of an EU member state with serious political effects (anti-government protests and even government resignations and early elections), not only economic (up to 1.5% drop in economic indicators), can destroy the common position against the entire sanctions regime against Russia. More than that, an energy paralysis in Germany, Italy or France will cause shock waves in the other member states that depend on the markets of the European economic giants.

Russia's energy weapon - immediate effects?

Russia's calculations revolve around the need to survive the two-way impact of sanctions. On the one hand, the restrictions imposed by the EU and other Western allies are aimed at reducing the resources of the Vladimir Putin regime in order to exhaust Russian capabilities to wage war against Ukraine. During the approximately 5 months of the war, Russia would have spent approximately $200 million per day (a total of approximately $55 billion so far). Its international foreign exchange reserves are also shrinking sharply (in just one week in July, reserves fell by $7.5 billion to $527.7 billion, of which $300 billion is frozen under sanctions), and the ruble's strengthening against the dollar (with a 42%), compared to a few months ago, reduce revenue from the sale of expensive hydrocarbons. At the same time, Russia is putting itself in a position to ensure solutions to the political-economic isolation generated by European sanctions that is leading to technological degradation and the deindustrialization of the Russian economy. Added to this is the loss of access to Western production, services and markets and to investment, without which medium and long-term economic growth is compromised. These are partially offset by substitution with local production, parallel import from friendly states, and trade diversification.

On the other hand, Russia is using the EU's energy dependency, particularly on natural gas, to break up European unity. The increase in exports to Hungary (by 700 million m3), while Germany receives around 40% of the previous volumes through NS1, indicates that Russia would be interested in fueling the populist debates in the EU states about the Hungarian model of relations with Russian energy means. Data from previous polls show that there is fertile ground for favouring anti-sanctions discourse. Taking into account that at least until March 2023 (winter season 2022-23) the EU will need the cheapest possible energy resources, Russia will be able to consolidate its energy advantages. This also implies the possibility of continuing to obtain considerable income, identical to that accumulated in the first three months of the war from the sale of hydrocarbons (some 30 billion dollars per month).

Discontent over inflation and fears over lack of access to energy resources are two factors that can easily ignite feelings of frustration in European societies. Russia is banking on the fact that social unrest in EU states could put pressure on national governments, undermining cohesion around sanctions.

In lieu of conclusions…

It seems that Russia is fighting at least two "wars of attrition". One against Ukraine, by destroying the critical infrastructure that is essential for the functioning of the economy, but also the civil infrastructure, without which keeping the population in the country and dedicating it to economic activities becomes an unsustainable mission (30% of the population was put out of work in some 700 companies and moved the activity to the regions less affected by the war). As a result, Moscow seeks to disempower Ukraine militarily and economically, worsening conditions to the point where signing a truce would be perceived as a lesser evil.

The second "war of (energy) attrition" is waged against the EU, which is going through an unprecedented energy crisis. The consequences of the energy shortage already affect the economic productivity and the standard of living of the population, which could also experience energy shocks (temporary disconnections of the electricity supply, drop in temperature in residential spaces, etc.). These unfortunate experiences may lead to the decline of democratic institutions, political crises and increased support for Eurosceptic forces at the European level, some of which are openly pro-Russian. Under the most negative scenarios, anti-government protests are possible, with open demands for the suspension of sanctions against Russia and the reestablishment of dialogue to guarantee the supply of energy resources at affordable prices.

It is essential that both Ukraine and the EU resist the various pressures to which they are exposed. Otherwise, Russia will have a double victory: against Ukraine, but also against the EU. To avoid such an end, the EU needs solidarity both in sanctions and in the consumption of energy resources. The strategic patience of the EU must be connected with the strategic support to Ukraine, and the latter must be engaged in initiatives to strengthen European energy resilience. Although it would seem that Ukraine has a greater unilateral need for the EU, in reality, the need is mutual. However, the war created a strong interdependence between the future of Ukraine and the EU's ability to become a truly autonomous and resilient geopolitical actor.

IPN publishes in the Op-Ed rubric opinion pieces submitted by authors not affiliated with our editorial board. The opinions expressed in these articles do not necessarily coincide with the opinions of our editorial board.