Why is Europe resisting a Russian energy embargo?

Why Is Europe Balking At A Ban On Russian Energy?




Images from the Ukrainian village of Bucha, as well as charges of Russian war crimes, are increasing calls for additional sanctions against Russia.

A main target might be Russian oil and natural gas, as well as the $850 million per day that European importers pay for such commodities.

However, considering Europe’s reliance on Russian energy, this is not an easy task.

So far, Western sanctions have targeted Russian banks and enterprises while excluding energy and gas payments, a concession made by the US to keep European allies on board and show a united front.

Here are some important things to know about Europe’s energy imports from Russia, as well as whether or not there is a way to stop them.

What kind of supply is at risk?

Natural gas, which is used to heat homes, generate electricity, and supply industry with both energy and a critical raw material for products like fertilizer, is supplied by Russia to the European Union at a rate of 40%.

It’s around 25% for oil, with the majority of it going to gasoline and diesel for automobiles. According to S&P Global analysts, Russia supplies 14% of diesel, and a shutdown could raise already high truck and tractor fuel prices.

Why can’t Europe, like the US, shut off Russian energy?

Because of fracking, the United States has become a significant producer and exporter of oil and gas, importing minimal oil and no natural gas from Russia. Although Europe has some oil and gas reserves, output has been dropping, leaving the EU’s 27 member states reliant on imports.

140 billion cubic meters of the 155 billion cubic meters of gas imported by Europe from Russia each year pass through pipelines that run through Ukraine, Poland, and beneath the Baltic Sea.

This will not make up for the loss of gas through pipelines. Europe is trying to get more supplies by ship in the form of liquefied natural gas, or LNG, but this will not be enough to make up for it.

LNG is also significantly more expensive, and supplies are at capacity. While some European countries, like Spain, are well connected to LNG terminals, and new projects are being developed in areas like Greece and Poland, the infrastructure to transport LNG to the rest of Europe is lacking. It can take years to build LNG import facilities and pipelines to link the gas to regions that require it.

Because people’s dependency on Russia varies, reaching an agreement on an EU boycott is more difficult. Lithuania announced on Saturday that it would stop importing Russian gas and rely solely on an LNG terminal it opened in 2014.

In addition to taking moves to prohibit Russian coal and oil, Poland, which has been exploring alternatives for years, has announced that it will not renew a Russian gas contract at the end of the year.

Even after reducing its dependency, Germany, the continent’s largest economy, still gets 40% of its gas from Russia. It will stop importing coal from Russia this summer and oil by the end of the year. Germany will be mostly dependent on gas by 2024.

Where else would Europe be able to obtain energy?

It is aiming to wean itself off Russian gas as quickly as possible by developing new energy sources, conserving energy, and boosting wind and solar power. The EU wants to cut back on its use of Russian gas by two-thirds by the end of the year and stop using it long before 2030.

Europe is asking for more gas from non-Russian pipelines from Norway and Algeria, in addition to LNG from places like the United States and Qatar.

Oil is unique in that it is primarily transported by ship. Nonetheless, with global markets constrained, replacing Russian supplies would be difficult. Taking Russia’s 2 million barrels per day of exports to Europe off the market would raise global oil prices. India and China might also try to sell the oil to Russia, albeit the profit margins would be lower.

What would happen if Russia’s electricity was banned in Europe?

Estimates differ, but a cutoff would have a significant impact on the European economy. A ban could make the government distribute gas to businesses in order to protect homes and hospitals from gas leaks.

Metals, fertilizer, chemicals, and glass producers would be heavily hurt. Many jobs could be lost even if only a small amount of gas was cut off to industry, says Michael Vassiliadis, the leader of Germany’s BCE union, which represents chemical and mining workers.

“We’ll likely continue to see opposition from Germany and a few other countries because they’re simply considerably more dependent on Russian imports of oil, gas, and coal,” said Craig Erlam, senior markets analyst at currency broker Oanda for the United Kingdom, Europe, the Middle East, and Africa. “The impact of an embargo is hard to predict, but it would almost certainly send the country into recession.”

An embargo, according to a committee of economists led by University of Notre Dame professor Ruediger Bachmann, would have significant economic implications for Germany but would be “obviously manageable.” According to them, the country has “weathered bigger slumps in recent years and rebounded fast,” including the global financial crisis of 2009 and the pandemic recession.

On the policy portal voxeu.org, they wrote, “Public fear-mongering about the catastrophic repercussions of an energy embargo by lobby groups and connected think tanks does not meet academic standards.”

Is there anything else that Europe could do?

At the Bruegel think tank in Brussels, economists Simone Tagliapietra and Guntram Wolff recommended an EU import duty on Russian oil and gas. This would limit Russia’s revenue while avoiding significant harm to Europe’s growth, with the added benefit of keeping contracts intact.

Last week, European leaders argued that the same contracts shielded them from Russia’s demand that gas be paid in rubles. The money raised from the levy might be used to shield low-income families from rising energy costs.

While the army that invaded Ukraine was already paid for, the tax would place the Kremlin in a “more difficult economic position,” Tagliapietra said, “in which they would perhaps start having issues buying items from the outside world, including arms, and paying public sector salaries.”

How did Europe end up in this situation?

After the Fukushima tragedy in Japan in 2011, Germany relied on natural gas as it transitioned away from coal and after former Chancellor Angela Merkel shut down the remaining nuclear facilities.

When she was in charge of Germany for 16 years, Angela Merkel pushed for diplomatic relations with Vladimir Putin. She said that energy supplies from Russia kept flowing even during the Cold War.

Despite criticism that it would strengthen Germany’s reliance on Russia, she backed the Nord Stream 2 pipeline from Russia. After the invasion, Merkel’s finance minister, Chancellor Olaf Scholz, put a stop to the endeavor.

As it migrated away from coal, Italy, another large EU economy, increased its reliance on Russian gas. 38% of the natural gas used for electricity and heavy industries like steel and paper mills comes from Russia, according to officials in Italy.

Italy “could not reject sanctions over Russian gas,” Foreign Minister Luigi Di Maio, who has been traveling to energy-producing nations in search of alternatives, told the news agency ANSA on Monday.

Premier Mario Draghi, though, who said last week that gas payments were fueling Russia’s conflict, made no mention of energy when condemning photographs of deaths on Ukrainian streets.