Why Putin’s secret weapon failed Opinion by The Atlantic

The Atlantic has published an article by David Frum arguing that the most significant defeat in Russia’s war on Ukraine was suffered not on a battlefield but in the marketplace.

Caliber.Az reprints the article.

The Russian aggressors had expected to use natural gas as a weapon to bend Western Europe to their will. The weapon failed. Why? And will the failure continue?

Unlike oil, which is easily transported by ocean tanker, gas moves most efficiently and economically through fixed pipelines. Pipelines are time-consuming and expensive to build. Once the pipeline is laid, over land or underwater, the buyer at one end is bound to the seller on the other end. Gas can move by tanker, too, but first it must be compressed into liquid form. Compressing gas is expensive and technologically demanding. In the 2010s, European consumers preferred to rely on cheaper and supposedly reliable pipeline gas from Russia. Then, in 2021, the year before the Russian attack on Ukraine, Europeans abruptly discovered the limits of Russian-energy reliability.

The Russian pipeline network can carry only so much gas at a time. In winter, Europe consumes more than the network can convey, so Europe prepares for shortages by building big inventories of gas in the summertime, when it uses less.

Russian actions in the summer of 2021 thwarted European inventory building. A shortage loomed—and prices spiked. I wrote for The Atlantic on January 5, 2022:

In a normal year, Europe would enter the winter with something like 100 billion cubic meters of gas on hand. This December began with reserves 13 percent lower than usual. Thin inventories have triggered fearful speculation. Gas is selling on European commodity markets for 10 times the price it goes for in the United States.

These high prices have offered windfall opportunities for people with gas to sell. Yet Russia has refused those opportunities. Through August, when European utilities import surplus gas to accumulate for winter use, deliveries via the main Russian pipeline to Germany flowed at only one-quarter their normal rate. Meanwhile, Russia has been boycotting altogether the large and sophisticated pipeline that crosses Ukraine en route to more southerly parts of Europe.

I added a warning: “By design or default, the shortfalls have put a powerful weapon in [Russian President Vladimir] Putin’s hands.”

A month later, the world learned what Putin’s gas weapon was meant to do. Russian armored columns lunged toward the Ukrainian capital, Kyiv, on February 24. Putin’s gas cutoffs appear to have been intended to deter Western Europe from coming to Ukraine’s aid.

The day before the invasion, I tried to communicate the mood of fear that then gripped gas markets and European capitals:

In 2017, 2018, and 2019, Russia’s dominance over its gas customers in Western Europe was weaker, and its financial resources to endure market disruption were fewer. In 2022, Russia’s power over its gas customers is at a zenith—and its financial resources are enormous … One gas-industry insider, speaking on the condition of anonymity in order to talk candidly, predicted that if gas prices stay high, European economies will shrink—and Russia’s could grow—to the point where Putin’s economy will overtake at least Italy’s and perhaps France’s to stand second in Europe only to Germany’s.

That fear was mercifully not realized. Instead, European economies proved much more resilient—and Russia’s gas weapon much less formidable—than feared. The lights did not go out.

The story of this success is one of much ingenuity, solidarity, sacrifice, and some luck. If Putin’s war continues into its second winter and into Europe’s third winter of gas shortages, Western countries will need even more ingenuity, solidarity, sacrifice, and luck.

Over 12 months, European countries achieved a remarkable energy pivot. First, they reduced their demand for gas. European natural-gas consumption in 2022 was estimated to be 12 percent lower than the average for the years 2019–21. More consumption cuts are forecast for 2023.

Weather helped. Europe’s winter of 2022–23 was, for the most part, a mild one. Energy substitution made a difference too. Germany produced 12 percent more coal-generated electricity in 2022 than in 2021. The slow recovery from the coronavirus pandemic in China helped as well. Chinese purchases of liquid natural gas on world markets actually dropped by nearly 20 percent in 2022 from their 2021 level.

Second, European countries looked out for consumers, and for one another. European Union governments spent close to 800 billion euros ($860 billion) to subsidize fuel bills in 2022. The United Kingdom distributed an emergency grant of £400 ($500) a household to help with fuel costs. Germany normally reexports almost half of the gas it imports, and despite shortfalls at home through the crisis, it continued to reexport a similar proportion to EU partners.

Third, as European countries cut their consumption, they also switched their sources of supply. The star of this part of the story is Norway, which replaced Russia as Europe’s single largest gas supplier. Norway rejiggered its offshore fields to produce less oil and more gas, I learned from energy experts during a recent visit I made to Oslo.

Norwegians also made sacrifices for their neighbors. Norway has an abundance of cheap hydroelectricity, and exports much of that power. During the 2022 energy crisis, those export commitments pushed up Norwegian households’ power bills and helped push down the approval ratings of Norway’s governing Labor Party by more than a quarter from its level at the beginning of that year. Nevertheless, the government steadfastly honored its electricity-export commitments (although it has now moved to place some restrictions on future exports).

The redirection from Asia of shipments of liquid natural gas from the United States, the Persian Gulf, and West Africa also contributed to European energy security. In December 2022, Germany opened a new gas-receiving terminal in Wilhelmshaven, near Bremen, which was completed at record speed, in fewer than 200 days. Two more terminals will begin operating in 2023.

The net result is that Russian gas exports fell by 25 percent in 2022. And since the painful record prices set in the months before the February 2022 invasion, the cost of gas in Europe has steeply declined.

Russian leaders had assumed that their pipelines to Europe would make the continent dependent on Russia. They did not apparently consider that the same pipelines also made Russia dependent on Europe. By contrast, only a single pipeline connects Russia to the whole of China, and it is less valuable to Putin—according to a study conducted by the Carnegie Endowment for International Peace, the gas it carries commands prices much lower than the gas Russia pipes to Europe.

To reach world markets, Russia will have to undertake the costly business of compressing its gas into liquid form. A decompression plant like the one swiftly constructed in Wilhelmshaven costs about $500 million. Germany’s three newly built terminals to receive liquid natural gas will cost more than $3 billion. But the outbound terminals that compress the gas cost even more: $10.5 billion is the latest estimate for the next big project on the U.S. Gulf Coast. Russia depended on foreign investment and technology to compete in the liquid-natural-gas market. Under Western sanctions, the flow of both investment and technology to Russia have been cut.

Russia lacks the economic and technological oomph to keep pace with the big competitors in the liquid-gas market, such as the U.S. and Qatar. In April, CNBC reported on a study by gas-industry consultants that projected growth of 50 percent for the liquid-natural-gas market by 2030. The Russian share of that market will, according to the same study, shrink to 5 percent (from about 7 percent), even as the American share rises to 25 percent (from about 20 percent).

If the war in Ukraine continues through the next winter, Europe will have to overcome renewed difficulties. For example, Germany’s nuclear-power plants, which eased the shock last year, went offline forever in April. And this time, the winter might be colder. But gas production by non-Russian producers keeps rising, outpacing demand in the rest of the world. The Chinese economy continues its slow recovery from COVID; India lags as a gas buyer.

Risks are everywhere—but so are possibilities. When this war comes to an end, the lesson will be clear: We have to hasten the planet to a post-fossil-fuel future—not only to preserve our environment but to uphold world peace from aggressors who use oil and gas as weapons. Yet perhaps the most enduring lesson is political. Through the energy shock, Europe discovered a new resource: the power of wisely led cooperation to meet and overcome a common danger.