Russia is the big loser from the weaponisation of energy

Reuters/Vasily Fedosenko

As Russian tanks rolled down the highway towards Kyiv a year ago, it seemed certain that in their wake would follow an energy apocalypse.

Either through direct physical disruption to European energy markets, or through the effects of sanctions immediately proposed on Russian energy exports, the world faced an energy crisis – a dramatic spike in the price of oil and gas as supplies were interrupted, with all that entailed for the fragile post Covid-19 economic recovery.

The International Energy Agency forecast some three million barrels per day of Russian oil would be lost to global energy markets within two months of the invasion, and it was not the most pessimistic of the forecasters. Others suggested crude oil prices would hit $150 per barrel in the short term.

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Europe seemed destined for a freezing winter to come as gas prices soared and a mad scramble began for alternative supplies to replace the Russian product piped to warm homes and keep factories running across the continent. The “weaponisation” of energy supply was imminent.

Today, hardly any of that has come to pass. There was a short term spike in crude, but for most of the year has traded below the $94 it closed on on February 24 2022 (today it stands at just above $81 per barrel).

European gas prices are at an 18-month low on the back of a comparatively mild winter, full storage tanks and ample alternatives to Russian gas. Fears of savage economic recession in Europe have, so far, proved wildly pessimistic, even in Germany, the country most dependent on Russia for energy.

Winners and losers

But this generally benign picture clouds the fact that there have been some clear winners and losers from the vicious conflict unleashed on Ukraine a year ago, and which is certain to result in major shifts in global energy patterns, with all the disruption and uncertainty those will inevitably involve.

Perhaps the biggest winners have been major global oil producers – the Organization of the Petroleum Exporting Countries (Opec) nations and the independent oil companies of the USA and Europe.

While prices did not spike as some had predicted, they have been significantly above the average of the previous seven years. Western corporate balance sheets and national exchequers in the Middle East have been big beneficiaries.

In gas, the liquidified natural gas (LNG) exporters of the USA and Qatar have been the main winners, as the scramble for supplies in Europe and Asia saw a surge in exports from those regions, as well as in North Africa, where Algeria seeks to compensate Europe.

India and China also turn out to be energy net gainers from the war. Because of sanctions hitting Russian oil and gas output, Asia has been able to buy up Urals crude at anything up to a 50 per cent discount and have jumped at the chance to do so especially when price caps imposed by the G7 make those discounts permanent.

The flip side of this, however, is for countries of the “global south” that do not have the market scale or the financial resources of the Asian giants. Many oil importers in Africa, for example, face accelerated energy poverty as a result of the war.

Accelerating attrition

The big loser in this mayhem is, of course, Russia. While economic and financial sanctions have perhaps taken longer to bite than expected when they were first introduced, the slow attrition of the Russian oil industry has accelerated recently.

Figures from the Moscow finance ministry last month showed a near 50 per cent drop in revenue from oil and gas. Coupled with a big increase in expenditure on the war, this is an economic time-bomb for the country, which has no way to raise funds to combat budget deficits on international capital markets.

Simultaneously starved of western investment and technology, the Russian oil and gas industry has effectively opted for “energy suicide”, one commentator decided recently.

Russia’s central role in the global energy infrastructure was to a great extent set by its leadership of the Opec+ group of producers, in partnership with Saudi Arabia. Now, under the pressure of war, the long-term viability of that organisation is in question.

In a recent paper for the Columbia University Centre on Global Energy Policy, authors Robin Mills and Ahmed Mehdi raised the prospect of “Saudi-Russian tensions” and a shift in power relations within Opec+ as their production profiles diverge.

For the time being, the two main architects of Opec+ remain committed to the relationship.

Ukraine, of course, has suffered immensely. Its energy exports have been decimated, its nuclear facilities occupied and bombarded, and its national power grid remains under sustained and deadly attack.

That will all have to be rebuilt. But maybe Ukraine’s President Zelenskiy can take some satisfaction from the fact that, in the long term, Russia’s energy economy looks to be in a decidedly worse position.

Frank Kane is a communications consultant focused on Saudi Arabia and the UAE