‘Putin’s attempt to blackmail us has been a staggering failure’: Has Russia lost the energy war?

Standing at the podium of the European Parliament, commission chief Ursula von der Leyen declared Russian president Vladimir Putin has lost an energy war that he himself began.

“He thinks it would be easy to blackmail Europe, because at the time of the start of the war we were heavily dependent on Russian oil and gas. But he got that one wrong. One year on from the start of the war, he has lost the energy war that he himself triggered,” she said.

“Putin’s attempt to blackmail us has been a staggering failure.”

Has the Kremlin lost the energy war?

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The figures tell a dramatic story. So far in 2023, Russian pipeline gas has accounted for just 7.5 per cent of EU gas imports, far below the 37 per cent of 2021.

The financial consequences for Russia, whose domestic spending was long funded by sales of fossil fuels, have been stark. Last week, its finance ministry released figures showing its oil and gas revenues in January were almost half what they were a year earlier, due to reduced exports and lower prices.

Western sanctions have forced Russia to sell its energy to buyers like China and India at a discount, and it has begun selling off its foreign currency reserves to try to plug its widening deficit.

While the Kremlin has played down the efficacy of the oil price cap, which limits the price the G7 largest economies and EU member states will agree to pay for Russian crude, finance minister Anton Siluanov acknowledged last year that such a cap would increase the Russian budget deficit in 2023.

According to calculations by the Helsinki-based Centre for Research on Energy and Clean Air, the oil price cap is costing Russia €160 million a day. And that was before the tougher phase of the cap, which imposes it on petroleum products as well, kicked in on February 5th. Meanwhile, wholesale gas prices are now lower than they were before the invasion.

In contrast, the EU has fared better economically than was expected. It avoided a winter recession, and employment is at an all-time high. Inflation, which was largely caused by high energy prices, peaked in October and is now expected to continue easing.

Whereas in the summer politicians openly spoke of the risk of energy blackouts, the EU’s gas storage levels brimmed so full through the winter that a glut of liquid natural gas shipments (LNG) accumulated at ports, and even now storage is about 75 per cent full, having depleted only slightly since the start of the cold season.

The story of how this was achieved is down to a reduction in energy usage, a diversification of supply, and luck.

The EU aimed to cut gas use by 15 per cent this winter, but actually substantially overshot this in October and November, using 25 per cent less than the average for those months.

Imports of shipped LNG almost doubled, from 21 per cent in 2021 to reach 42 per cent in early 2023. This came from range of suppliers from the Middle East to Asia, but particularly the United States.

Some trends worked against the EU. The generation of hydropower suffered a steep drop in 2022 due to drought, while unplanned outages and maintenance in French nuclear plants, and planned phase-outs in Germany, reduced the availability of nuclear power last year.

But wind and solar power generation increased and in 2022 more electricity was generated from them than from gas, according to the European Commission.

It may be too soon to declare outright victory. According to an analysis by the International Energy Agency (IEA), the EU was helped by three factors in 2022 that may not reoccur this year.

The first was a mild winter, which was chance – and the winter is not fully over yet. The second was lower Chinese demand for LNG due to its Covid-19 lockdowns and lowered economic activity, which may rebound, making for more competition for supply.

The third is that while Russia sharply cut the supply of gas to the EU, it nevertheless kept some flowing, and this was part of what helped the union refill its storage. In 2023, this supply may drop to zero.

At worst, the EU could face a supply crunch of 53 billion cubic metres of gas, according to IEA calculations.

The solution according to the agency is to renovate buildings, install heat pumps, and increase renewable energy production. Speeding up these projects this year by increasing public subsidies, it argues, should bridge the gap.