Ukraine's critical infrastructure vs. Russia's energy positioning - the "war of nerves". Analysis by Dionis Cenușa

Op-Ed
	During this winter, a fierce "war of nerves" will take place. On the one hand, with Western help, Ukraine will need to secure a viable energy system to effectively expand the geography of the counteroffensive. And on the other hand, Russia will have to guarantee the protection and resilience of its exports of energy resources in the face of new Western sanctions...
Dionis Cenuşa, Senior Contributor

Ukraine's critical energy infrastructure could be one of the main targets of Russian aggression over the winter. The recapture of Kherson by the Ukrainian army demonstrated that Ukrainian patriotism, combined with Western aid, could lead to a stalemate and the withdrawal of Russian forces. Military assistance allocated to Ukraine by NATO states since the beginning of the war (worth about $40 billion) played a key role. By the end of November 2022, the US and the EU had provided military assistance totaling around €23 billion (IPN, November 2022). This support makes it possible to keep the Ukrainian military potential in tune, and its perpetuation will have added value. The military industry of some NATO states is focused on the production and delivery of Soviet-style military equipment to support the Ukrainian army. There is also a strong push to transition from voluntary donations from EU/NATO states to Ukraine to purchases based on long-term contracts (ECFR, November 2022). Under such conditions, the continued equipping of the Ukrainian forces will get solid guarantees. All of these aspects put enormous pressure on Russia, which in order to gain at least a tactical advantage decided to annihilate Ukraine's critical energy infrastructure.

Among the main objectives behind Russia's motivation to destroy critical infrastructure for Ukraine's economy and civilian population, qualifying as "war crimes" and "acts of terror", could be the following: 1) weakening social resilience among Ukrainians by causing or multiplying humanitarian crises, which would also lead to new waves of refugees or internally displaced persons; 2) increasing material costs for the Ukrainian state related to the repair and restoration of electricity supply; 3) increase the need for external assistance, which until the Russian attacks on critical infrastructures reached 400 billion euros (IPN, November 2022); 4) complicate the conditions for Ukrainian military forces in winter, because external actors are forced to prioritize military support simultaneously with that provided to the civilian sector (social infrastructure, public services for civilians, etc.).

It is certain that Russia wants Kyiv to capitulate and sign a ceasefire agreement beneficial to Russian positions on the territory of Ukraine, legitimizing the annexation of Russian-occupied parts within the Ukrainian regions of Kherson, Zaporozhzhia, Donbas and Lugansk, stopping the Ukrainian counter-offensive in the south and east, and seeking urgent solutions to unlock the sanctions (at least partially). Recently, Russian Finance Minister Anton Siluanov admitted that it is examined the possibilities for a swap between the Western assets frozen by the Russian side and, respectively, those owned by Russia, sanctioned by the EU, in the context of the war against Ukraine (about €60 billion). Such approaches are doomed to fail until Russian aggression is stopped. Contrary to them, European decision-makers are discussing the ninth sanctions package (Reuters, November 2022), which would follow the last wave of sanctions in early October.

Currently, the EU and the G7 countries are in the last hundred meters of the negotiations to limit the price of Russian oil, although there are still conflicting opinions in the EU between the limit of $20-30 per barrel (Poland) and $70 (Greece and Malta). Likewise, the European Commission proposed the introduction of a ceiling of €275 per MWh for natural gas (€2,974 per 1,000 cubic meters). In reality, this limit is designed as a corrective mechanism against Russia's manipulation of gas for geopolitical purposes. For now, the limit for natural gas will be temporary. If it is accepted by the EU states, then it can be activated from January 2023. However, sceptics among the EU states believe this price cap would not correspond to the objective of reducing the price of natural gas. The other camp, however, is concerned with securing the natural gas supply (Euroactiv, November 2022), which requires long-term contracts and minimal intervention in price formation. Effective capping of oil and natural gas prices could limit the effects of Russia's petro-gas leverage, used against EU solidarity with Ukraine, on the one hand, and war financing, on the other.

Unexpected effects of the destruction of Ukrainian infrastructure

The intensification of attacks on energy infrastructure worsened the situation of the civilian population behind the frontline. Against this negative backdrop, the Ukrainian political-diplomatic effort regarding the attribution to Russia of the qualification of a "terrorist state" has materialized at the international level. The Parliamentary Assembly of the Council of Europe declared the regime in Russia, that is, the one led by Vladimir Putin, as "terrorist" with 99 votes and one abstention from Turkey (October 13), followed by a resolution with a similar message, adopted by the parliamentary delegations of the 30 NATO member states (21 November). The last international forum, which established that Russia finances terrorism, is the European Parliament, with 494 votes in favor, 58 against and 44 abstentions (November 23). The next goal could be the adoption of such a resolution by the UN General Assembly.

If the destruction of Ukraine's critical infrastructure will result in a humanitarian crisis (including the scenario of an epidemiological crisis) of such proportions, then Russia risks being labelled a "terrorist" regime, even within the UN. The latest resolution of the UN General Assembly on war reparations for Ukraine obtained 94 votes in favor, 73 abstentions and 14 against (November 14). In the case of previous resolutions on Ukraine, the support was higher: a) the resolution on the recognition of the territorial integrity of Ukraine of October 12 was supported by 143 states (5 against and 35 abstentions); b) the resolution on the recognition of the Russian aggression against Ukraine on March 2 obtained 141 positive votes (5 against and 35 abstentions).

Table: Ukraine-related resolutions adopted by international forums against Russia

Source: Author's compilation with reference to www.un.org, www.coe.int, www.nato.int, www.europarl.europa.eu

Risks for Russia and implications for the regional energy market

Russia is aware that Ukraine's survival this winter will degrade Russian positions both on the battlefield (Ukraine) and internationally (the West). This risk has a very high probability and its impact can be fatal for Vladimir Putin's regime. Precisely for these reasons, the Russian federal budget has been adjusted for the years 2023-25 in order to increase spending on Russian law enforcement and military by 40-50% (MoscowTimes, November 2022). It is about €150 billion (approximately 9 trillion rubles). The increase in the budget for the pillars of "force" of the Putin regime has a double meaning: the prevention and suppression of possible mass protests organized by the opposition (internally) and the protection of the occupied territories against the Ukrainian counteroffensive (externally, in Ukraine).

The regime's costs of survival are rising, while revenues from exports of energy resources are falling as a result of Western sanctions. In October alone, Russia did not receive about €124 million (7.5 billion rubles) from oil sales. The entry into force of the embargo on the import of Russian oil by sea from December 5, 2022, and the possible price cap for Russian oil will create additional problems for the stability of the balance of payments. At the same time, under the conditions of decoupling of the EU from Russian gas imports, the Russian side foresees the reduction of gas exports by about 40% until 2025 (205.6 billion m3 per year in 2021 compared to the 142 billion m3 estimated for the end of 2022 and respectively only 125.2 billion m3 in 2023). This could cause losses of €6.3 billion (400 billion rubles), but also the impossibility of selling some 100,000 million m3 due to the possible loss of the European market.

To overcome the downsides in the energy sector, which is starting to feel the sting of Western sanctions (to which the ninth package of EU sanctions may be added), Russian energy companies are adjusting their capital investment priorities. Thus, Gazprom approved a new investment package for 2023, worth €36.5 billion (or 2.3 trillion rubles compared to 1.9 trillion in 2022 and 1.1 trillion rubles in 2021). Therefore, Russia wants to increase financial resources for the diversification of natural gas exports (about 70% in 2023 compared to 2022). The intention is to increase LNG production capacities (Yamal, Yakutsk and Irkutsk) and gas pipeline export capacities respectively to China ("Power of Siberia"). In addition, Russia plans to support Turkey's aspirations to become a regional "energy hub" (Reuters, November 2022). President Tayyip Erdogan plans to capitalize on the energy decoupling between the EU and Russia to redirect the Russian gas to Turkey. Along with imports from Central Asia (Interfax, November 2022), Russian gas will strengthen Turkey's role in transiting Eurasian gas to Western markets. This scenario becomes even more possible after Gazprom made some indirect threats to cut gas exports through Ukraine at the end of November. Russia wants to use as a pretext that Ukraine stores some 50 million m3 of gas in its warehouses (Bloomberg, November 2022), which the Moldovan government bought from the operator MoldovaGaz (50% owned by Gazprom) as a strategic reserve.

Revival of Ukraine's energy infrastructure: winter priority

Airstrikes against Ukraine's power production capabilities began on October 10 (IPN, October 2022). Since the start of the war, Russia has destroyed around 700 elements of Ukraine's critical infrastructure, including power facilities. By November 27, the Russian side had carried out seven massive attacks aimed at destroying Ukraine's energy infrastructure. The first nationwide blackout was recorded (BBC, November 2022). Although only 19 of the 70 missiles launched by Russia penetrated the Ukrainian defense system, they caused the most destruction since October. On November 27, the production shortfall in the Ukrainian energy system was around 20% and energy providers are forced to limit the supply of electricity to keep the system running.

The Russian attack on critical infrastructure on November 23 affected the operation of three nuclear power plants (in Netishin, Varash and Yuzhnoukrainsk) under Ukrainian control, which went into emergency mode due to a lack of power. In addition, the Zoporozhzhia nuclear power plant (the largest in Europe), which is not adequately supplied with energy, presents a significant risk of accidents. The latter is controlled by the Russian military and is used to stop the advance of the Ukrainian counteroffensive and to attract international attention. In the case of a negative scenario, not only the lack of electricity throughout Ukraine will be a problem (Forbes, November 2022). If all 15 Ukrainian reactors are affected, not only Ukrainian citizens, but the entire population of Europe will be in danger of suffering a nuclear disaster, which could be dozens of times worse than the Chornobyl accident (April 1986).

In the short and medium term, the EU has already announced the establishment in Poland of an accumulation center for donations from EU states and the G7 for the repair and relaunch of energy infrastructure (EU, November 2022), destroyed by missiles, attacks with aerial drones and kamikazes. The EU also redirected equipment from Lithuania (200 transformers and 1 autotransformer) and Latvia (one autotransformer), including 40 generators for small and medium-sized hospitals (from "rescEU" European stocks located in Romania). In the long term, Ukraine plans to build a small modular reactor (SMR) with help from the US. According to some estimates, an SMR would cost around a billion dollars, and to replace a nuclear power plant similar to those operating in Ukraine, a minimum of 6 small modular reactors would be needed (Unian, November 2022).

In addition to restoring critical infrastructure, it is necessary to deliver a sufficient number of anti-missile systems, but also to continue efforts to prepare civilians against the risks of winter power outages. The Ukrainian authorities make specific recommendations for the population regarding the provision of alternative sources of electricity and light (generators, lanterns, candles, matches, etc.), food products (canned food, etc.), medicines and items (blankets, warm clothing, sleeping bags, etc.). The Ukrainian experience should also be transferred to neighboring states, affected by the paralysis of the Ukrainian energy system, such as Moldova (where the central authorities ignore for the moment the issues related to the civil preparedness of the population).

In lieu of conclusions...

Russian attacks on Ukraine's critical infrastructure highlight that Russia's options are shrinking. Therefore, attempts are being made to take advantage of the winter to gain a tactical advantage against the Ukrainian counteroffensive. As Western sanctions hit Russian exports of petro-gas, reduced budget revenues in turn weaken the Russian war machine. This motivates Russia to attack elements of the Ukrainian energy sector with greater brutality.

During this winter, a fierce "war of nerves" will take place. For one thing, with Western help, Ukraine will need to secure a viable energy system to effectively expand the geography of the counteroffensive. On the other hand, Russia will seek to guarantee the protection and resilience of its exports of energy resources against the new Western sanctions.

This analysis is published for the German Hanns Seidel Foundation and the IPN News Agency.

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.