Europe is now Russia ‘hostage’ for energy

LONDON – After Russia came to the aid of Europe and offered to increase the region’s gas supply amid soaring prices, experts said one thing had become very clear: Europe is now largely at the mercy of Russia when it comes to energy, just as the United States had warned.

Natural gas contracts hit new highs in Europe this week – and regional benchmarks have risen nearly 500% so far this year – with increased demand and supply squeezing putting pressure on the energy sector as the weather gets colder.

Prices hovered on Wednesday, hitting new highs before retreating after Russian President Vladimir Putin intervened, offering increased gas supplies from Russia to Europe.

Market analysts said the move shows Europe is increasingly vulnerable to Russia, which is waiting for Germany to certify the controversial Nord Stream 2 pipeline project that will bring more Russian gas to Europe via the sea. Baltic.

The $ 11 billion pipeline is now complete much to the chagrin of the United States, which has long opposed the project, warning for years during its construction that it compromises Europe’s energy security and which Russia may seek to use energy supply as a lever for the region.

The Obama and Trump administrations galvanized bipartisan opinion against the pipeline, and President Joe Biden also announced sanctions against companies involved in the project, but these were lifted in May in what was seen as an attempt by United States to renew ties with Germany.

“Europe has now been held hostage by Russia over energy supply,” Timothy Ash, sovereign emerging markets strategist at Bluebay Asset Management, said on Wednesday in a research note, calling the situation ” unbelievable”.

“[It’s] It’s clear that Russia has Europe (EU and UK) in an energy stalemate, and Europe (and UK) is too weak to call it out and do anything about it, ”he said, calling it a form of“ energy blackmail ”. “

“Europe curls up as it fears [that] As it heads into winter, Russia is going to tighten the screws (energy pipelines) again and let it freeze until it arrives and NS2 is certified. “

Putin took advantage of a televised government meeting on Wednesday to propose an increase in supplies to Europe. He also criticized the region for canceling many of its long-term gas contracts in exchange for spot deals, saying the Kremlin was ready to negotiate new long-term contracts for the sale of gas.

Many experts believe that Russia has voluntarily suspended gas deliveries to Europe, in an attempt to speed up Germany’s certification of the Nord Stream 2 pipeline. Russia has refuted this, however, Putin’s spokesman , Dmitry Peskov, denying Wednesday that Russia played a role in the energy crisis in Europe.

Nonetheless, Russian Deputy Prime Minister Alexander Novak noted on Wednesday that the expected German certification of the controversial pipeline could help cool prices.

Seeking quick certification for Nord Stream 2, according to Ash, was “Moscow’s game plan from the start,” adding that “the markets are really naive if they think Moscow will do anything to alleviate the European gas crisis at any time. before NS2 is certified “.

Germany’s energy regulator shows no signs of certification of the pipeline so far, saying on Tuesday the pipeline must show that it will not break competition rules by restricting suppliers who use it, according to Reuters , and fines could be imposed if he started pumping Russian gas into Germany without getting the necessary approvals.

Mike Fulwood, senior researcher at the Oxford Institute for Energy Studies, agreed that any decision to supply more gas to Europe from Russia was “political” and tied to the certification of the pipeline.

“Essentially, [the situation for Russia is] if you approve of Nord Stream 2, we’ll get gas to send Nord Stream 2 to show we’ve kept our word, ”he told CNBC on Thursday.

Bilal Hafeez, CEO and head of research at Macro Hive, told CNBC’s “Street Signs” Thursday that he also believes Russia is using the situation to its advantage.

“I think Russia used this energy crisis to take advantage of the situation here and to try to force an acceleration in the use of the pipeline and in some ways there is evidence to suggest that it could have dampened the supply. via pipelines crossing Ukraine, so that Germany and the EU accelerate the use of the Nord Stream 2 pipeline. “

Soaring prices have put the issue high on the EU’s agenda with leaders calling for more energy independence – given that nearly 90% of the bloc’s supplies are imported, with Russia being one of the main sources of imports with Norway, according to data from the European Commission. .

The pipeline has come under criticism in Europe, with Ukraine hurt and angry at the gas pipeline deal with Russia as it means its own pipelines are bypassed and it will lose precious gas costs as a result. gas transit. Poland too, feeling vulnerable to a more assertive neighbor, Russia, says the pipeline only serves to strengthen Russia.

In July, they issued a joint statement slamming the pipeline, claiming that “the decision to build Nord Stream 2 taken in 2015, just months after Russia’s invasion and illegal annexation of Ukrainian territory, created security, credibility and political crisis in Europe “.

Europe’s gas supply has long been a thorny issue. It has often soured US-EU relations, with the former Germany blaming Germany (the EU’s biggest Russian gas importer, even before the NS2 pipeline) for signing the gas project with Russia.

Experts see the battle for Europe’s gas supply as a sort of proxy war between the United States and Russia, with the two competing for market share in the region with their gas supply. natural gas (Russia) and liquefied natural gas (United States).

Experts agree that Europe must diversify its energy sources away from Russia.

“The more Europe diversifies its supply, the less risk there is,” said Fulwood, adding that there have been attempts to source increasing quantities of LNG from the United States. “We have seen in recent years a sharp increase in imports of liquefied natural gas into Europe, especially from the US market,” he noted.

Commenting on the broader gas market and the supply constraints affecting other gas producers around the world, Fulwood described the situation the gas markets were experiencing as “a perfect storm of recovery in demand from Covid and a tight supply situation “.

“There has been a temporary shortage of supplies and some of this logistics will start to relax, but it won’t be until next year, so for the next few months we are really at the mercy of the weather”, did he declare.