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Putin Under the Sword of Damocles


Dining With the Devil


Europe’s dependency on Russian gas is the déjà vu historical folly of trusting autocracies to honor binding commercial and governmental agreements. The priority of autocracies is hegemonic power & influence over economic success. Furthermore, they view everyone around them, regardless how small, as an existential threat. Appeasement & acquiescence only fuels their contempt. It’s an arrangement akin to the adage, “If you’re going to have soup with the devil, make sure you use a long spoon.”


For this reason Europe’s energy network’s dependency and vulnerability are forever changed with the Russian invasion of Ukraine. Disengaging from this high-level of dependency will be slow and costly.


The following chart entitled Which European Countries Depend on Russian Gas? provided by European Union Agency for the Cooperation of Energy Regulators present the leverage Russian gas suppliers have on the European market.



The countries with the greatest dependency for Russian gas are small, thus require far less total gas than their far larger more industrial and populous counterparts who, although less dependent percentage wise require far more total gas than the smaller countries.


The following chart entitled The Gas Pipelines Linking Russia and Europe provided by JP Morgan via The Economist present an excellent visual as to how the major pipelines linking Russia to Europe are routed.



Indeed as a natural gas producing powerhouse and favorable geography it makes political and business sense to do business with Russia. The intangible vague line that crosses from competitively-priced multi-sourcing into dangerous dependency without a sufficient alternate source is the realm of pathological realpolitik naivete.


Putin’s Peril


Present-day Russia is 40% dependent on energy commodities gas, oil and coal exports for revenue. During the buildup they are taking advantage of soaring energy prices thanks to the artificially low European inventories because some claim Russia has not delivered the requested quantities.


A Cold War in politics or business is one thing. Outright mass hostilities against another European country is quite another. This is why Putin eill have crossed the Rubicon if he wages war with Ukraine.


Putin will have rebranded himself from tough talking bully to bar brawler. All his allies are either those of convenience (China) or under historically dark geographical shadow of the Soviet Union or Russia (Belarus),


Even if Russia continues to honor their contractual obligations of gas to European countries during and after the conflict, it will not mitigate Europe’s fury and inevitable aggressive plans to delink their energy dependency on Russia.


On the other hand if the Russian armies suffer heavy or unacceptable losses during the invasion or are mired in a guerilla war with Ukrainian partisans who will be generously supplied by US/Nato, this might trigger a palace coup in the Kremlin and depose Putin. Nonetheless Europe’s new paradigm shift would be unchanged because whoever the next Russian president might be doesn’t necessarily change Russia’s aggressive policy today or in the future.


Here Comes the Cavalry!


The good news is that in December 2021 US became the biggest LNG exporter surpassing Qatar which can provide a stop-gap supply of liquified natural gas (LNG) to European countries that may be cut off from Russian supplies. Furthermore, Qatar is negotiating an agreement to ship more LNG to European countries while still satisfying their Asian market. Already European firms are seeking long-term contracts for US gas.


To provide a perspective as to how LNG can satisfy European demand, a LNG large tanker provides enough energy to light 70,000 homes for a year because the compressed gas to liquid, cooled at minus 260 degrees F, is 1/600th volume.


The immediate downside is the dearth of European LNG terminals to handle these specialized shipments especially an armada of LNG vessels. Furthermore, LNG terminals are quite expensive. However in the long-term the construction of LNG terminals will be cost effective because it will handle a considerable amount more of an essential commodity annually.


With respect to environmental concerns, the EU is accelerating a proposal to reclassify certain gas investments as green to attract more buyers.


China & Russia | Fair Weather Friends


Historically Russo-Chinese relations are one of convenience, short-lived, with few if any binding contracts except for the occasional dog & pony show of join military maneuvers. Their series of joint declarations are not worth the paper they’re written on. Despite similar attempts at rejoining “lost” territory namely Ukraine and Taiwan, neither Russia nor China have made official comments confirming each other’s “right” to forcefully, if necessary, absorb those countries.


In the energy sector Russia has avoided becoming an OPEC member, even when invited, but co-leads the OPEC+ group which produces 37% of the world’s oil, with Saudi Arabia in establishing quotas. It’s a crafty policy of economic and political flexibility without accountability.


The Tiger at the Mountaintop


There can’t be both a bear and tiger at the top of the mountain. Russia does brisk energy export business with China. However despite Russia’s “economic fortress” of $630 billion in reserves through their de-dollarisation policy, the world’s rage against Russian aggression might pressure China to slack off on energy purchases.


While Russia is focusing on squeezing the west by threatening the invasion of Ukraine, the short-term consequences might be China’s decision to reduce considerably purchases of Russian energy exports thus forcing Russia to rapidly deplete its $630 billion reserve and take the dominant and commanding lead between them on China’s terms.


Even if Russia continues to supply gas to Europe during the invasion and subsequent occupation, Russia may find itself thoroughly cut-off from any legal international banking and payment system and unable to collect revenues.


Conclusion


War in Europe presents an enviable opportunity for China to apply the Middle East adage, “The enemy of my enemy is my friend.” By using economic leverage by reducing the purchase of Russian energy exports, it can neutralize Russian aggression in Europe. China would gain immediate favor to a certain extent of the US and its allies – simply playing one off against the other.


The fate of Putin personally depends whether or not Russian boots touch Ukrainian soil. This emerging possibility may be the reason he has hesitated in making a decision whether to invade or not.



© Copyright 2022 Cerulean Council LLC


The Cerulean Council is a NYC-based think-tank that provides prescient, beyond-the-horizon, contrarian perspectives and risk assessments on geopolitical dynamics and global urban security.

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