Amid the escalating military conflict in Ukraine, natural gas prices have soared as the United States, Europe and elsewhere tighten economic sanctions against Moscow.
About 40% of natural gas imported by Europe comes from Russia, a dependence that has increased governments’ concern in the current scenario of war.
Although Germany has suspended final approval of the Nord Stream 2 pipeline, which would allow it to increase gas imports from Russia, European countries continue to buy Russian gas, while intensifying financial sanctions against Moscow.
The shortage of global supplies and the gigantic wave of inflation that affects the world have left European governments “between a rock and a hard place”, according to experts in this area, especially Germany, which has taken the decision to reduce its nuclear energy sources.
“Russian gas is Europe’s Achilles heel in this war, that’s its great vulnerability, that’s what allows Russia to capitalize and finance this adventure,” says Ángel Saz-Carranza, director of the school’s Center for Global Economics and Geopolitics. Spanish business Esade and visiting professor at Georgetown University, in the United States.
An aeronautical engineer from Imperial College London and a PhD in Management Sciences, Saz-Carranza specializes in political risk analysis, governance, lobbying and regulation.
Check below the main excerpts of the interview, given to BBC News Mundo, the BBC’s Spanish service.
BBC News World – How much does Europe depend on Russian natural gas to supply its demand?
Angel Saz-Carranza – Dependence is very high, as we see now, about 40% of gas demand in Europe depends on Russian gas supply.
And at the other end, how much does Russia depend on the European market for its gas exports?
This is what balances the situation a bit, because Russia’s dependence on the European market is also very high. In fact, its ability to transport gas to the East is residual.
With the exception of liquefied natural gas, which can be exported by ship, almost all gas pipelines from Russia come to the West.
How likely is it that the Russian government will decide to close the gas taps in response to the sanctions that Europe and the United States have imposed?
It is a real possibility, given the moment we are in and given Russia’s own reaction. Russia is acting without rationality, a certain excessive missionaryism on the part of the president, something messianic.
So we are in a somewhat unknown scenario, Russia could turn off the taps. However, at this time, with the sanctions and economic pressure that Russia is experiencing, it is also true that the only capital inflow it has is through the payment of this gas.
Russia could cut off the gas and Europe could go two or three months without that fuel, but it is also true that Russia would lose the only source of international capital it has now.
How much of Russia’s tax revenue depends on gas sales to Europe?
The estimates I’ve seen recently are about half of the public budget. That’s a lot, but it’s also true that Russia currently has very low public debt, it has a lot of reserves.
Everything indicates that Russia has been preparing for years so that its financial situation would allow the country to face any external threat, at least for a while…
Russia has spent some time cleaning up its public accounts, both reserves and debt, despite the country’s economic difficulties and suffering caused by previous sanctions.
That’s why the country may have some leeway. But now it is not convenient for Europe to stop buying Russian gas, we have to see how sanctions continue to be defined with Swift [sigla para Sociedade de Telecomunicações Financeiras Interbancárias Mundiais, sistema internacional de transferências financeiras].
In principle, neither Russia nor Europe should turn off the gas tap.
Which companies sell and which companies buy Russian gas?
In Russia, piped gas comes via Gazprom and liquefied natural gas, especially destined for Asia, is supplied by Rosnef, an oil company that also produces liquefied gas.
In Europe, there are large gas companies that are normally private companies, albeit with important public shareholders.
So governments alone cannot stop buying gas from Russia…
Countries are now under tremendous pressure that they had before due to very high electricity and energy prices in Europe. In Europe, prices have tripled so far this year.
In the face of this pressure, which already results in some social discontent, you have some political leaders who would have to decide not to buy.
It’s certainly too late to react now, so the political incentive is really the opposite, that is, the political incentive is please don’t raise prices. That’s what Europe’s political leaders think.
How not to raise gas prices in the short term? Well, keep buying from Russia.
We should have made a strategy not only with public incentives, but even with political direction, to guide these private companies in one direction or another.
The political price to pay now, in the midst of the crisis, could be very high. How do you see it?
There are two problems. In the short term, the politician has the incentive to continue buying gas as cheaply as possible — which is currently the case with Gazprom. On the other hand, there is a problem in Europe: State influence on the energy market through public companies is very limited.
[Uma intervenção estatal] could be seen as a disruption of the free market and free competition between companies. Certainly now, in a war situation, this can be done, but it is not easy to do in the long run either.
Right now, the barrier for gas companies in mixed capital Europe to stop buying is that prices would soar, that would block [a atividade de] many industries and would generate tremendous chaos at a time when we have very high inflation in Europe and we are trying to get out of the Covid crisis.
So stopping buying or reducing gas purchases from Russia is very unlikely given the political costs such a decision would have…
This can be done if the war continues to escalate a lot, and the European population is willing to bear the cost.
Clearly, we would see a doubling of the price. They’ve already tripled so far this year, so it would be a very, very difficult situation, but well, maybe that’s what this is all about.
This would have a high cost for Europe, this decision is not gratuitous. That’s why sanctions exempt oil and gas, including US sanctions, because US sanctions depend on the price of oil.
Sanctioning Russia would generate some very relevant domestic problems at the political level for [o presidente americano Joe] Biden.
Without Russian gas, Europe will not go out tomorrow, but we would need to rethink many things.
What other sources of natural gas can Europe turn to?
There is a portion that could be replaced, for example, by burning more coal, although this is not very positive for climate policy. Also [poderia haver substituição] with a little more own production [de gás natural]which is very little.
It could increase a little, not a lot, what comes from Algeria and what comes from Norway. Of course, what [a Europa] would have to try to buy as many shipments of liquefied natural gas delivered by ships as possible.
But it is clear that there is not enough liquefied gas available without having been previously contracted on the market to supply the 40% of gas that Europe buys from Russia.
We would have to go to other types of sources and then try to increase the [oferta das] sources that we already have at hand, which are Norway and Algeria, and finally the liquefied natural gas alternative.
While liquefied natural gas has its own difficulties…
It has the difficulty that regasification plants in Europe are not optimally distributed. There are logistical problems there. So having a year of gas demand covered in Europe without Russian gas is very hard to come by.
Furthermore, we would enter into a price war with Asia, in which we have already been involved to some extent for liquefied gas and I think demand management would have to be carried out, that is, consumption rationalization.
Europe was campaigning to move towards renewable energy, but it looks like it will be difficult to move on that path with the current conflict. What’s your opinion?
Europe has tried to diversify in the last decade with renewable energies and also with projects such as the gas pipeline that connects us to Azerbaijan via Turkey, but on the other hand, companies have approached Russian gas.
Therefore, there was a dissonance between political and business will. Incentives were not well calibrated.
Curious things also happened. In addition to the fact that Gazprom played its cards and managed to attract European companies, we also saw that it is very difficult to make the energy transition and move away from coal, close nuclear plants and diversify from [dependência da] Russia. Doing all this is very difficult.
Russia has also made strong alliances with the Middle East, with the Emirates, for example, and other parts of the Gulf countries.
Can it be said then that dependence on Russian gas is like Europe’s Achilles heel at the moment?
Undoubtedly, Russian gas is Europe’s Achilles heel in this war, this is its great vulnerability, this is what allows Russia to capitalize and finance this adventure.
The high price of oil and gas allows Russia to live relatively well and finance itself that way.
Do you think that a possible decision by Europe not to buy gas from Russia goes beyond economic and geopolitical considerations? I ask because there can also be an ethical dilemma. That is, to what extent does the fact that Europe continues to buy gas from Russia imply that it is indirectly helping to finance Putin’s military campaign?
Completely. Europe is funding Putin’s whims. This is something that Europe must start to consider, that is, it must consider how to align its private sector. It hasn’t done so during this decade, it hasn’t been able to diversify enough.
The lesson here is that, in the future, we have to be smarter to guide the business sector towards these policy goals.
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