What would a war in Ukraine mean for Europe’s energy crisis?

What impact will a possible Russian invasion of Ukraine have on Europe’s energy-starved continent? It all depends on what President Joe Biden does.

Russia continued to send gas to Europe throughout the Cold War and, more recently, after its annexation in Crimea. According to Uniper SE, Russia is unlikely to risk affecting its reputation as a reliable supplier again. This comes after it annexed Crimea.

Biden warned that there would be severe economic sanctions if Russian troops crossed into Ukraine. The biggest threat to Europe’s gas supply would be the imposition of sanctions on Russia, which could result in it being unable to trade in foreign currencies or imposing other restrictions on its banks.

“We must prepare for almost all scenarios,” Gregor Pett (executive vice-president of market analytics at Uniper), stated in an interview.

Let’s take a look at what these scenarios might be and what they could mean for Europe, which depends on Russia for around a third of its gas. Europe is currently suffering from the worst energy crisis since the 1970s. Gas stockpiles are at an all-time low. Prices have more than doubled over the past six months due to fears of war and capped shipping from Russia. President Vladimir Putin repeatedly stated that he does not plan on invading Ukraine.

Financial Sanctions

Although the idea is being strongly opposed by several European countries, the West has said that they would consider unplugging Russia out of the Swift international payment system. Russian banks could also be targeted. However, it is possible that exemptions could be granted to preserve energy transactions. Many of these transactions are done in dollars or euros.

Russia Reduces Supplies

Gazprom PJSC could respond to any sanctions by cutting off gas supplies to Europe in the most extreme case. This would cause major disruption to the continent’s energy system and cause a massive rise in prices. Many believe Russia is unlikely to make it that far.

They would be reluctant to reduce their supply for two reasons. Uniper’s Pett stated that Russia has two main economic factors, one being its reputation as a reliable supplier and the other being Russia’s importance to Russia.

Nord Stream 2 Sanctions

One casualty in the event of an invasion could be Nord Stream 2, a multibillion-dollar pipeline connecting Russia and Germany. Although the undersea link was intended to increase supply, it has been embroiled in a highly politicized approval process.

Biden supports sanctions against Nord Stream 2 if Russia invades. However, the new German Chancellor Olaf Scholz has indicated that an escalation in the crisis could lead to the end of the pipeline. The market is counting on the 55-billion-cubic-meter capacity pipeline eventually bringing gas, and cancelling the project leaves fewer transit options.

Putin has repeatedly advocated for the controversial pipeline as it provides a direct route to Europe’s hungry market while avoiding Ukraine.

Russia Seeks Ukraine Out

The biggest uncertainty lies in what will happen to the enormous amounts of gas Russia has moved via Ukraine.

According to Volodymyr Olechenko, head of energy research at Ukraine’s Razumkov Centre, Moscow could stop flows through Ukraine in the case of conflict. Russia would have the ability to dictate its terms to Ukraine and the EU, thereby gaining leverage.

Others are not so certain. Russia wants to keep its status as a reliable supplier. Chris Weafer (chief executive officer at Macro-Advisory Ltd., Moscow) stated that Russia is determined to maintain this position.

There are 40 billion cubic metres of gas Russia has committed to moving annually through Ukraine, under a contract that will end in 2024. This is almost half of what Germany uses annually and a third of Russian gas that has been exported to Europe.

Transit Shutdown in Ukraine

According to Omelchenko, Razumkov Centre’s Omelchenko, this is the most unlikely scenario. He said that this is possible only if the pipes are damaged. Russia could make use of the situation to promote Nord Stream 2 pipeline if that happens.

Although Russian gas supplies to Europe were interrupted in the past by disputes with Ukraine over price, they have largely remained unaffected — even after the annexation and subsequent demonetization of Crimea.

However, the risks are huge and could have serious consequences for prices. It would be difficult to replace the volumes lost if Ukrainian gas transit is disrupted. Gazprom could redirect half the supply to a pipeline that runs through Belarus and Poland. Open market purchases would be the other source of supply, which can prove costly.

It wouldn’t be easy to boost transit through Belarus. On numerous occasions, President Alexander Lukashenko threatened to stop supplies as a reprisal for any EU sanctions that were imposed after a migrant crisis.

Accidents can happen

There is always a chance that key infrastructure could be damaged in any conflict. This could have had a lasting impact on European prices and supplies for many years.

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