The West’s Energy War Against Russia Requires Sacrifices

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Even if Russia and Western countries avoid a fire war on Ukraine, they have already joined an energy war. Early skirmishes took the form of selective cuts and escalating sanctions on Russian supplies. Yet there is a gaping gap between the rhetoric of war and the realpolitik of energy diplomacy – a gap that Russia will exploit and the West must find a way to bridge.

In a recent essay in The New York Times, President Joe Biden wrote that backing Ukraine and exacting a “heavy price” from Russia is in our vital national interest, in part because not to:

… will jeopardize the survival of other peaceful democracies. And it could mark the end of the rules-based international order and open the door to aggression elsewhere, with catastrophic consequences around the world.

German Chancellor Olaf Scholz, in a speech last month commemorating the end of World War II, explicitly linked today’s war to that earlier conflict, saying “there must be no victor’s peace dictated by Russia”. Polish Prime Minister Mateusz Morawiecki warns that European leaders “have forgotten the lesson offered by the Munich agreement of 1938”. In short, it is existential for the West.

The United States and Europe have provided vital military and humanitarian aid to Ukraine. But without direct intervention, defeating Russia means stifling its resources. And that means fighting the world’s dependence on Russia’s resources, especially its oil and gas. As it stands, despite sanctions to date, rising commodity prices mean Russia’s war machine is making more money than it did last year.

Biden began his essay by saying “the invasion that Vladimir Putin thought would last for days is now in its fourth month.” He could have replaced “Vladimir Putin” with “everyone” and been just as specific. Ukraine was expected to collapse, and quickly. Presumably, the United States and Europe would have responded with harsh words, more sanctions and a strengthening of NATO’s eastern defenses. I doubt, however, that they would have sanctioned Russian energy in any meaningful way, due to considerations that Scholz also mentioned:

We will do nothing that can cause more harm to ourselves and our partners than to Russia.

That, in the short term at least, is what sweeping sanctions against Russian energy would do. Yet Ukraine’s resilience and Russian brutality made energy sanctions inevitable. The most important were agreed by the EU earlier this month after much wrangling. Natural gas has been left out – Russia accounts for around a third of Europe’s supply – and oil sanctions have been carefully calibrated: imports of crude oil on ships are banned in six months and refined products in eight months. But crude oil delivered by pipeline – around a fifth of Russian oil imports into Europe – is exempt. A few countries like Bulgaria and Croatia benefit from exclusions for certain products. Potentially significant bans on providing insurance to vessels carrying Russian barrels do not come into effect until December.

As far as energetic divorces go, it’s more of an attempt at conscious decoupling. Yet it is not in Putin’s interest to play the understanding partner. In the event of a long campaign of attrition, he needs Europe and the United States to tire quickly of this war and its inconveniences. Rising energy prices are already a handicap for leaders on both sides of the Atlantic.

Unilaterally cutting off the energy supply is folly if you care about the long-term health of Russia’s energy industry and economy. But Putin now takes his foreign policy inspiration from Peter the Great – the first Russian emperor, hint hint – so the economy is not his primary concern. On the contrary, it is dividing the West both within itself and from Ukraine by any means possible. As the war drags on and next winter approaches, Putin’s temptation and ability to upset the EU choreography will grow stronger. The not-so-mysterious drawdown of Russian-controlled natural gas stocks in Europe last year, and the price spikes that followed, provide a pattern to build on. Beyond energy, Russia is also brandishing real threats to other vital supply chains ranging from grains to industrial gases.

If this struggle is truly as existential as the editorials and speeches claim – and I believe it is – then our approach to the energy dimension must be proportionate. “There is a price to pay for adhering to these fundamentals,” says Helima Croft, head of global commodities strategy at RBC Capital Markets.

The United States and Europe are openly involved in this war and have extended war aims even if they don’t pull the trigger. And while the fighting is localized, Russia’s commodity exports make it a global problem that, if the West is serious, could demand the kind of measures associated with war economies.

This requires strong government intervention. We’ve seen signs of Biden moving in that direction before, with his diplomatic efforts to direct more liquefied natural gas to Europe and his almost certain descent on Riyadh to put more OPEC barrels on the line. the market. His use of the Defense Production Act to encourage domestic production of critical minerals and to unblock solar panel imports, while not directly related to the Ukraine crisis, also suggests a willingness to intervene with more strength.

This should involve more than just efforts to accelerate the energy transition, which is one of the surest long-term strategic energy weapons against Russia available to the United States. It must also involve further encouraging the production of oil, gas and other fuels at home or in friendly countries to displace Russian production as much as possible. Balancing this short-term need with decarbonization goals is tricky because it forces companies to invest in assets today that may not be fully utilized in the future – drill, baby, don’t drill, in other words. terms. The financial markets will not accept this without the government assuming some of the risk. Such an intervention would dismay environmentalists, but it could be structured to encourage shorter-cycle energy sources such as shale or come with conditions to reallocate infrastructure for transition-compliant purposes down the line. .

None of this can happen, however, unless it is openly recognized that the growing urgency in energy markets calls for sacrifice and compromise. Progressives would be asked to swallow support measures for drilling. We would ask the Conservatives to accept the conditions linked to the weather. And the sacrifice can also extend to the demand side. Higher prices are already exerting pressure, but tougher sanctions and actual cuts to Russian supplies could ultimately require rationing or other mandates to curb demand, at least in Europe. That, of course, is the last thing any president who already pushes back on comparisons to Jimmy Carter wants to hear. But when you have made the face-to-face between democracies and autocracies a founding principle of your presidency, and you are now engaged in a real conflict to defend a democracy against a large autocracy, such possibilities must be considered.

Jason Bordoff, founding director of the Columbia Center on Global Energy Policy, recently co-authored a terrific article in Foreign Affairs on “how governments will transform energy markets” as they seek to balance climate goals with security. When I ask him about the disconnect between the strident language of war and the more cautious application of energy policy, he notes a similar dynamic when it comes to climate change: “If we really thought it was existential, we would think differently about trade-offs.

As with the fight against climate change, even if a majority of Western citizens support Ukraine, it is still unclear how many personal costs, including behavioral changes, they would bear to support this. Putin is betting that their support will be fleeting. However, it’s equally unclear whether that assumption will tempt him into the kind of dramatic escalation that stiffens their resolve.

More from Bloomberg Opinion:

• A united West is still essential to counter Putin: editorial

• It takes sanctions and endurance to defeat Putin: Clara F. Marques

• Difficult Lessons from 100 Days of the Ukrainian War: Leonid Bershidsky

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

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Post expires at 5:02am on Saturday June 25th, 2022

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