Europe pays a price for its energy shortage

Europe is too dependent on Russian gas, which limit its ability to respond strongly to Vladimir Putin’s provocations against Ukraine.

| 6 min read

Euro-area inflation is now running at 5.1% with signs of the inflationary pressures broadening out a bit from the surge in energy prices which has been the main cause. The European Central Bank (ECB) will need to think again about the leisurely pace it has proposed for reducing its support for bonds and equity markets through its money-creation programme.

Meanwhile, the core problem of energy remains persistent. Europe is too dependent on Russian gas, limiting its ability to respond strongly to Vladimir Putin’s provocations against Ukraine. The new German government is the western dove when it comes to shaping a response to Russia, knowing that it relies on the country’s vast gas reserves for an important part of its energy needs. Should the West exclude Russia from the western banking and settlement system in a bid to impose much-tougher sanctions it might induce the retaliation that Russia was unable to supply gas. Russia has built up its foreign currency reserves and kept its state debts down to give her some financial resilience were sanctions to escalate.

The problem of Ukraine is itself complex, but Ukraine’s view is simple. The government asserts the need for a united Ukraine on its borders before the annexation of Crimea. It regards the rebels in the east as terrorists seeking to wrench their cities and province from the state’s control. It wants the return of Crimea from Russia.

The Ukrainian state will use military force against rebel forces in its own country and is seeking to ensure its legal remit runs everywhere. The people leading the Donetsk Peoples Republic and the Luhansk Peoples Republic take a different view. They believe they speak for the majority in their territories in wanting to be independent of Ukraine with closer links to Russia. Around two million people in Donetsk and surrounding areas plus 1.5 million in Luhansk and its surrounding area want to be self-governing. They agreed in the two Minsk peace treaties in 2014 and 2015 to accept Ukrainian sovereignty in return for elected devolved government, but the terms of these agreements have still not been implemented properly. The West does not acknowledge either Republic as a state, nor does the West regard the rebels as terrorists. Russia falls short of recognising the two as states but does accept their ID cards and vehicle registrations.

Complex regional politics

It seems unlikely that Russia thinks it can invade, annex and govern Ukraine as a whole. Most Ukrainian people have no wish to be under Russian dominance. The act of invasion would encounter well-armed Ukrainian resistance and would do grave damage to the people and territory in dispute. The West would take tough action, falling short of sending in NATO troops to make it a direct international conflict.

Mr Putin is trying to rebuild the old USSR sphere of influence.

It may be that Russia sees an opening to foment the cause of Luhansk and Donetsk independence, with a view to getting closer and having more influence over the southern ports and the land strip that could connect Russia to Crimea. Mr Putin is trying to rebuild the old USSR sphere of influence. He deeply regrets the loss of control when the former Soviet Union broke up. He has no intention of returning Crimea, where Russia can exercise its authority without serious dissent from the local population and with the approval of many.

When President Biden blurted out that a limited incursion might be different from a “full-on invasion”, he undermined the West’s position, allowing Mr Putin to contemplate limited action in East Ukraine working with his allies in the two self-styled republics.

So far, Mr Putin’s actions have served to strengthen western resolve and have led to the opposite of his wishes. More NATO troops and equipment have been sent to the eastern states within the NATO alliance to reaffirm their membership and NATO’s support in return. The talks between various NATO leaders and Russia continue, with compromises possible on troop and weapons deployments on either side of the Russian/NATO borders.

NATO will not wish to rule out any new eastern European members in the future, claiming it is a matter for national choice. On the other hand, it seems unlikely Ukraine will be admitted to membership for the foreseeable future, given the dangerous proximity to Russia and the splits in the country. Moscow may have its way that there will be no further eastwards NATO expansion in former USSR lands.

Russia is an energy superpower

The more pressing problem for the EU is the energy shortage. All the time the bloc depends on Russian gas its responses to Moscow are somewhat constrained. The EU’s road to net zero entails the closure of all German nuclear power, all German, Polish and other coal mining and coal power stations as soon as possible, and an eventual switch from natural gas to hydrogen and renewable electricity. The road is fraught with difficulty.

The immediate impact on energy prices will slow the economy and force stricter action by the ECB.

The immediate impact on energy prices will slow the economy and force stricter action by the ECB. It is proving easier to close things it does not like than to have enough things it does like. It takes time to convert enough cars, heating systems, industrial processes to remove the dominance of fossil fuels in the European business model.

The shortage of reliable energy under EU control is a strategic weakness and Russian ambitions are a constant source of tension. The EU’s decision to rate gas as a green fuel for the transition eases the energy crunch slightly but strengthens Russia’s hand. We should expect more monetary tightening and pressures on fossil-fuel using businesses as a result.

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Europe pays a price for its energy shortage

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