Putin’s Aggression Will Test Russia’s Energy Supply Dominance

Russian President Vladimir Putin’s aggressive military moves on the Ukrainian border seem like a show of strength for Russia. But it’s possible that his war posturing could backfire and hasten the demise of Russia’s economy, starting with its energy dominance in Europe.

How it all plays out has a lot to do with Russia’s next moves, but some damage may already have been done.

Currently, Putin has amassed an army near Ukraine’s borders, is continuing the military buildup, and has threatened war if his demands are not met. Some think the Russian leader bit off more than he could chew, but Putin chose this moment and he’s stuck with it.

Should Putin decide on a full-scale invasion and occupation of Ukraine, it’s not hard to guess what sanctions would be unleashed.

Possible Sanctions for Russia

The EU, U.S., and U.K. sanctions would not be — and never are — identical, but they would be close enough, especially on financial penalties. It’s unlikely any of them would go after Russian energy exports and they would probably allow exceptions for payments for oil and gas.

They would likely impose variations of full treasury blocking sanctions on major Russian state banks, plus Russian financial institutions like the Russian state development corporation or the sovereign wealth funds. They would also place full blocking sanctions on Russian sovereign debt, including on the secondary market, probably with wind-down periods. Expect various carve outs and exceptions for food — which is usually not on a sanctions list — medical supplies, medicines, and other humanitarian goods. These sanctions would be a very big deal for Russian financial markets.

Heavy sanctions hit in the event of a full-scale invasion of Ukraine. If that happens, the effect on the energy markets is probably easy to predict. Investors would show immediate concerns and energy prices would spike.

Russia/Ukraine Impact on Energy Markets

The details of how the energy markets react after the initial scramble would depend on how much Putin turns off the spigots. He could cut gas transit through Ukraine and begin to curtail gas transit through Belarus. He could squeeze the Baltics particularly hard. If he does, it’s not clear what choices the United States will have. The U.S. happens to be a big consumer of Russian oil, too.

To protect its own fuel interests, Washington, D.C., has embarked on a search to find other sources for oil and gas, and it’s taken Europe along with it. The U.S. had some success — not overwhelming, but some — in locating alternative sources of fuel, especially in the Gulf region. That search by the U.S for other sources of energy threatens to damage Russia’s position in the global markets, and it seems to be making the United States more confident that Putin’s energy leverage is waning. If the U.S. and Europe are able to identify and publicly announce additional sources of oil and gas, the markets would likely calm and deal a blow to Putin.

Again, this scenario is predicated on Putin going for a full-scale invasion in Ukraine. What happens if Putin chooses a less fulsome attack is a little more difficult to estimate. But Putin’s energy stranglehold on Russia may already be loosening.

Dependence on Russian Energy Lessening?

Evidence for this can be seen in Germany, where completing the Nord Stream 2 pipeline has been of great importance. For decades the Germans have taken it as an article of faith that the Russians never use energy as a lever, which is an absurd, fatuous argument that is demonstrably wrong. The Germans have clung to this, and now it’s becoming clear even to some within the Social Democratic Party, the party of Chancellor Scholz, that this is not going to cut it, that they need to get serious about diversifying the sources of gas and energy. The Germans also look prepared to kill the pipeline if Russia embarks on a full-scale invasion of Ukraine. In that sense, Putin may have stimulated a shift away from reliance on Russia’s oil and gas by one of its biggest customers.

Russia was bound to feel a decline in its energy sector, but maybe not for 10 or 20 years when the relative weight of fossil fuels in the world’s energy mix is lower. Putin knows that will be catastrophic for Russian export earnings and would bring economic pressure like in the 1980s, when the Soviet Union collapsed. The trend toward shrinking energy revenue probably contributed to Putin’s decision to strike now, but he may not have anticipated how his actions would exacerbate the problems facing his country.

Russia and NATO

It’s a similar story for Putin with NATO.

The Russian leader wants very badly to keep countries like Ukraine, Finland, and Sweden from joining NATO, and has said that part of the goal of his aggression is a guarantee that they stay out.

But that may be backfiring as well. Both Sweden and Finland are more inclined than ever to seek NATO membership. A full-scale invasion of Ukraine by Russia might compel those Nordic countries to make the leap.

So Putin’s actions are bringing about the very results he doesn’t like, whether it is alienating Ukrainian society and increasing support for NATO membership in that country, invigorating a debate about NATO membership in Finland and Sweden, or diminishing Russia’s position in the world’s energy markets. Putin’s aggression is stimulating a counterreaction in Europe that is stronger than he expected.

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About Daniel Fried

Daniel Fried is a Distinguished Fellow with the Future Europe Initiative and Eurasia Center at the Atlantic Council of the United States (2017-present). He is also a visiting professor at Warsaw University, a guest lecturer at National Defense University, and a Member of the Board at the National Endowment for Democracy (2018-present). In the course of his 40-year foreign service career, Ambassador Fried played a key role in designing and implementing American policy in Europe after the fall of the Soviet Union. As special assistant and NSC Senior Director for Presidents Clinton and Bush (2001-2005), Ambassador to Poland (1997-2000), and Assistant Secretary of State for Europe (2005-2009), Ambassador Fried crafted the policy of NATO enlargement to Central European nations.