The Russian invasion of Ukraine has drawn global attention on the Russian Federation, with analysts from many spheres, ranging from economics to military, trying to predict the outcome of the war in their respective domains. Militarily and financially supported by the United States and the European Union, Ukraine is putting up a brave front as it tries to protect its sovereignty.
The devastating economic shock waves, stemming from a variety of reasons, of the Russia-Ukraine war is having a global impact. They come at a time when the world was facing a fragile recovery from the COVID-19 pandemic which literally brought most industries to a halt across the globe. Apart from this humanitarian crisis, the war in Ukraine, a country considered as the ‘breadbasket of Europe’, has exacerbated vulnerabilities in existing food systems and the blowing up of the Russian Nord Stream pipelines have resulted in sky rocketing energy prices.
Financial Benefits in blowing up Nord Stream pipelines
While European governments are yet to formally release their findings of who was responsible for sabotaging the two Russian underwater pipelines carrying natural gas to Europe, it is reasonable to expect that after careful review, some of the findings could be declassified.
In the meantime, key players from the energy sector such as International Energy Agency are not holding back. “It is very obvious (…) who was behind this issue,” said Fatih Birol, a director from the International Energy Agency with regard to the identity of the culprits.
Russian officials have squarely placed the blame on Western countries and had convened a UN Security Council session to discuss the matter. Since many players in the energy space appear to have motive since they would reap massive financial benefits from Russia’s inability to sell its gas to Europe, it would be prudent to take a look as to who stands to benefit.
On September 26, 2022, pressure drops were reported at both the Nord Stream 1 and Nord Stream 2 pipelines, which run under the Baltic Sea. According to Sweden and Denmark based seismologists, three leaks were recorded off the coasts of their respective countries impacting both pipelines. They have suggested that in order to blow up these pipelines, which run at the bottom of the Baltic sea, at least 100 kilograms of TNT would have to be used for both incidents.
At this juncture it is important to note that the gas pipelines provided Moscow with enormous geopolitical advantages vis a vis the United States. The gas pipelines fetched Russia billions of euros and allowed the EU to negotiate rock bottom prices for energy which powered much of its industries. Until August 31, 2022 Europe continued to avail Russian gas despite US sanctions.
Nord Stream pipelines
The leaking of methane gas, a greenhouse gas which significantly impacts global warming, from the damaged pipelines is likely to have a major impact on climate change. Initial assessment of the quantum of methane leaked out from the pipelines state that around 500 million cubic meters of gas was lost; this is equivalent to 8 million tons of carbon dioxide.
Circumstances surrounding Nord Stream 1 and 2 are different. While Nоrd Stream AG is a Swiss company, not subject to US Sanctions, and a member of the Pipeline Subsea and Repair Intervention Pool led by Norway’s Equinor, which incidentally provides its members with access to specialist equipment and crews, pipelines for Nord Stream 2, was laid solely by Russian ships. It was sanctioned by the United States. Washington had applied enormous pressure on Germany to not formally activate the pipelines. Germany put an end to the project 2 days before the Russian invasion of Ukraine.
Given the unlikely statistics of the three accidents occurring on the same day on the Nord Stream 1 and 2, it would be reasonable to suggest that they were indeed sabotaged. Given the complexity of successfully planting explosives at the bottom of the sea, and given the nature of the explosives, it is very likely that a nation state was involved in the attack.
A statement by Maria Zakharova, a spokesperson for the Russian Foreign Ministry, claimed that sabotage had been carried out by “countries that are completed controlled by the U.S. intelligence services.”
Tucker Carlson from Fox News, implied a U.S. involvement in the sabotage saying, “If you are Vladimir Putin, you would have to be a suicidal moron to blow up your own energy pipeline. That’s the one thing you would never do.”
Blowing them created strategic value
The attack may, however, have signaling value. If so, that does change the strategic landscape in the energy war. If perpetrated by Russia, the signaling value toward the West — which would certainly know Russia is behind the explosions — may be a threat to the rest of the marine energy infrastructure. Back in 2021, Putin told a gathering of military leaders: “If our Western colleagues continue the obviously aggressive stance, we will take appropriate retaliatory military-technical measures and react harshly to unfriendly steps. I want to emphasize that we have every right to do so.” Was the Nord Stream attack a hint that similar mishaps might happen to some or all of the seven major pipelines delivering Norwegian gas to the UK and continental Europe? The explosions coincided with the inauguration of the Baltic Pipe taking Norwegian gas to Poland, so this is hardly an academic hypothesis.
The sabotaging of the Nord Stream 1 and 2 helped Ukraine in gaining European support. Since 2014 Kyiv had feared that if Europe was forced to choose between abundant, cheap Russian gas and support for itself, Europe may choose the former. This was one of the primary reasons why Kyiv opposed Nord Stream 2.
The sabotaging of the pipelines resulted in strategic limiting of options available to key players in the war. Russia lost the option of being able to offer an easy restoration of gas supplies to Europe in exchange for concessions from the West, while it freed Europe from legally binding contracts to buy Russian gas. This however had consequences for Europe since now it was forced to buy for more expensive gas from other sources.
At this juncture it is important to note that Europe saw Russian gas as an essential energy source. An uninterrupted supply of energy is essential to for the smooth running of its industries, which is the bedrock of its economic strength.
Tweets by RadioGenova is an eye opener: “Sanctions on Russia have destroyed European businesses and families. The Germans understood this and protested daily against Ursula von der Leyen and the EU, our real enemies who said seven months ago: “In ten days, Russia will go bankrupt!” In the end, we Europeans went bankrupt”.
“Thousands of people in Gera in Germany (protested) against Olaf Scholz’s policy and the explosion of energy and gas prices. They demand an end to sanctions on Russia and the reopening the Nord Stream 2 gas pipeline. Demonstrations also in other German cities, but EU media censors them” – RadioGenova.
US Navy’s manoeuvres in Baltic Sea
Coincidentally, in June and July of 2022, navies of NATO countries under the leadership of the US Sixth Fleet conducted “BALTOPS 22 manoeuvres” in the Baltic sea.
“BALTOPS, with the high degree of complexity, tested our collective readiness and adaptability while also highlighting the strength of our Alliance and resolve in providing a maritime domain with freedom of navigation for all,” said Vice Admiral Gene Black, commander, of the US Sixth Fleet and Commander of the Naval Striking and Support Forces NATO (STRIKFORNATO).
The US Navy’s research and warfare centres also supported the BALTOPS manoeuvres, “to bring the latest advancements in an unmanned underwater vehicle mine-hunting technology to the Baltic Sea to demonstrate the vehicle’s effectiveness in operational scenarios.”
Accompanying the US Navy ships in the Baltic Sea was the USS Kearsarge, universal amphibious assault ship, which coincidentally was just 30 kilometres from the site of the sabotage on the Nord Stream-1 gas pipeline and 50 kilometres from the Nord Stream-2 gas pipeline.
Following the sabotaging of the Russian gas pipelines, ABC News had played back a video showing US President Joe Biden saying “If Russia invades, that means tanks or troops crossing the border of Ukraine again, then there will no longer be a Nord Stream 2. We will bring an end to it.”
Deriving Economic value from the war
With the Russia Ukraine war prolonging for months, efforts to end the conflict is not gaining much traction. In fact, there appears to be efforts aimed at prolonging the conflict to the last Ukrainian.
With no gas pipelines supplying cheap energy to fuel European industries, the latter has turned to the US to help to fill energy gaps, even as they try to find alternative suppliers of LNG and crude to comply to sanctions on Russia.
Even as Russian armor began rolling into Ukraine, the US fossil fuel industry had swung into action. A letter was dispatched to the White House for an immediate boost in gas production and exports to Europe, ahead of an impending energy crunch.
The letter, dated February 25, just a day after Russian forces launched their attack on Ukraine, went on to note in urgency that the Biden Administration must swiftly approve an increase in proposed gas export terminals and apply pressure on the Federal Energy Regulatory Commission, to greenlight pending gas pipelines.
It also envisaged a “virtual transatlantic gas pipelines” flowing from the US to Europe, essentially replacing Russia’s Nord Stream 1 and 2.
Nearly ten months from the date on which the letter was written, the US gas industry has achieved almost all of its initial objectives. The Biden Administration, which initially flaunted its green credentials, reversed its policy on fossil fuels and adopted the gas industry’s major demands as policy. This paved way for laying new pipelines and export facilities; the Biden Administration was also quick to establish a taskforce to boost gas exports to Europe and approved $300 million in funding to help build gas infrastructure on the continent.
“I can’t even begin to tell you how much the momentum has changed for companies in the United States that have wanted to bring their projects forward and just haven’t been able to get long-term contracts,” said Fred Hutchison, president of LNG Allies, the industry group that sent the letter.
The Biden Administration’s policy turnaround on fossil fuel dismayed climate activists who have warned that it will lock in decades of greenhouse gas emissions and push the world closer to climate catastrophe.
“The fact that just weeks after those demands were laid out, President Biden was turning industry wishes into policy is a damning indictment of a president who had promised to tackle the climate crisis,” opined Zorka Milin, senior adviser at Global Witness.
She went on to add, the US gas industry was “licking its lips” at the onset of the Russia Ukraine war.
“There is no doubt that Biden’s apparent capitulation to the gas industry has opened the door for these companies to continue to profit off the backs of those suffering in Ukraine, those living close to new gas infrastructure in the US and the millions affected by climate change globally,” said Milin.
The Biden administration has vowed to supply the European Union with at least 15 billion cubic meters of LNG, which is equivalent to around 50% of the gas used by Spain every year, by the end of 2022.
The Department of Energy did not respond to questions as to how the new gas operations fitted with Biden’s goal of slashing US emissions in half this decade.
Exploiting LNG demand in Europe
The Russia Ukraine war has helped several US LNG companies record bumper profits. Case in point: Cheniere earned $3.8bn more in cash from its operations in the second quarter of 2022 compared to the same period last year. Sempra, another US gas liquifying company, enjoyed an 800% increase in LNG sales to Europe.
According to a report by Reuters, the United States increased the price of the LNG after the Nord Stream pipelines were sabotaged.
“There is a party that, in the absence of the functioning of these gas pipelines, is able to sell more LNG at a higher price. This side is well known, it is the United States,” said Kremlin’s spokesman Dmitry Peskov in the Reuter’s report.
Russia was not the only country which stated the obvious. France and Germany have also accused the United States of overcharging for LNG.
Before the Russian invasion of Ukraine, Russia was Europe’s biggest gas supplier. It had a 55% share of the market and supplied gas at low prices. However with war breaking out and following waves of sanctions against Moscow, Russian deliveries of gas through the pipeline came down dramatically. The EU was then forced to start importing LNG from the US and other countries. The market share of the US of LNG in Europe increased a modest 28% to whopping 45%.
The attempt of economic domination by the United States on a weakening Europe was raised by French Finance Minister, Bruno Le Maire. He made it clear that Washington should not be allowed to dominate the global energy market and dictate LNG prices. He went on to add, it is unacceptable to let the United States export gas at 400% margins compared to peers in other countries.
It is crucial that Europe has a balanced relationship with the US, said Le Maire.
Mirroring Le Maire’s view, German Economy Minister Robert Habeck also voiced serious concern and accused the United States of charging astronomical prices for LNG when Germany, Europe’s biggest economy, was struggling to balance its energy mix resulting in many companies closing down due to high gas prices.
In a statement to Germany’s Neue Osnabruecker Zeitung newspaper Habeck said, some nations, even friendly ones, are charging “astronomical prices”.
Deindustrialization of Europe
Germany and France are two of Europe’s biggest economies. They are powerful because of their underlying industrial strength. High energy prices are eroding the economic strength of German and French industries forcing them to relocate to the United States where energy is available with abundance at cost effective prices.
At this juncture it is important to note that the deindustrialization of Germany & the economic destruction of Europe is just collateral damage for the United States; it is its deliberate strategy to ensure European economies are never in a position to challenge its global clout.
Many European industries including specialty chemicals, ferroalloys, and fertilizer plants are forced to shutter down as a result of high energy prices.
In a statement, German industrial conglomerate BASF said, it will permanently downside its operations in the country and expand it in China. “The European chemical market has been growing only weakly for about a decade [and] the significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains,” said BASF’s chief executive, Martin Brudermueller.
The steel and aluminum industries are also feeling the pinch, since they are among the most energy-intensive industries.
According to an estimate from Jefferies, a global financial services company, a tenth of Europe’s crude steel production capacity has been lying idle due to high energy prices. Zinc smelters have slashed production, with some even shutting down operations. At least 50% of primary aluminum production has come to a grinding halt as well. As for fertilizers, 70% of factories have been idled because of energy shortage.
Chemical plants are curbing their activities, ferroalloy furnaces, plastics and ceramics manufacturing concerns are also coming to a halt.
This is a cause for concern and requires urgent action on the part of lawmakers.
The closure of industries is leading to their relocation to countries where energy is more widely available at competitive prices. According to observers, many European companies are relocating to the United States, which has abundance of LNG at low prices.
Certain European industries may not come back, even once the energy crisis eases.
The elephant in the room is why does the United States not sit down for peace talks with Russia? For clearly aid worth billions of dollars which Washington continues to provide periodically is unlikely to bring about peace and stability. The conflict not only brings devastation to Ukraine but increased deindustrialization to Europe as well.
On his visit to the United States, French President Emmanuel macron stated, “We need to prepare… on how to give guarantees to Russia the day it returns to negotiating table”.
Macron has been one of the few leaders, of global standing, who has tried to find workable solution to the ongoing conflict. While Washington continues to craft war strategies using Ukrainians, the brunt of the war is felt in Europe with devastating economic consequences for the Franco German economies.
A major point of concern is the US Inflation Reduction Act, which supposedly aims to fight climate change but in practice focuses on subsidizing US enterprises. Drawn by financial incentives from the Inflation Reduction Act, European industries are being increasingly drawn to the US, to the detriment of the European economy.
European leaders are certainly no fools. There is growing concern in Brussels over US “profiting” from the war in Ukraine, an accusation that underscores deep rooted skepticism over US intentions.
The Biden’s Administration’s goal of pursuing a “foreign policy for the middle classes” has also been met with caution in Brussels, where there are concerns of whether this is window-dressing for the economic nationalism, as pursued earlier by Donald Trump.
Thierry Breton, EU commissioner for the internal market, remarked that U.S. “protectionism” represents an “existential challenge” to the European Union’s economy, especially at this juncture where it is facing an energy crisis leading to accelerated deindustrialization.
It would be prudent that Europe trim its dependence for security on the United States and take a relook at the emerging global order.