Ukraine update: Russia’s leverage over Europe has disintegrated even faster than its army

Back in August, Bloomberg carried a piece titled “welcome to Europe’s dark, cold winter.” It warned that even if countries were able to find gas to fill their storage facilities, it might not prevent a winter filled with blackouts, business closures,  and an economy in freefall. That’s because prices were soaring and “replenishing storage and reducing demand still may not be enough.” 

That story as just part of a running theme that’s been going on since even before Russia rolled across the border into Ukraine. In 2021, 53% of Germany’s gas supply came from Russia. The Nord Stream 1 pipeline was a powerful economic connection directly tying Berlin to Moscow, and Nord Stream 2 was sitting there ready to open. It wasn’t just Germany. In the 2019 figures, 41% of all the natural gas in Europe came from Russia.

When Vladimir Putin said he was prepared to let Europe freeze at the beginning of September, he was only repeating a threat that had been made many times in the past. That threat has been sufficient to make politicians all over the world treat the Russian dictator with kid gloves, and to have fiscal analysts engaging in dark fantasies of closed factories and Europeans shivering in their frosty homes.

But eight months and one day after Russia began its illegal, unprovoked invasion of Ukraine, the idea that Europe is going to “freeze in the dark” without Russian gas seems laughable. Gas storage facilities in Germany are over 97% full, well ahead of last year’s status. That gives the nation a significant buffer against any market disruptions.

Across the entire E.U. storage facilities are over 90% full. And even as Europe has been topping off its tanks, the actual price for natural gas has continued to fall. On Monday, prices reached a four month low, with the per megawatt hour cost dropping below $100—less than a third of cost on the day Putin made that “let them freeze” threat.

Across Europe, gas has simply not proven to be as hard to come by as many speculated at the outside of the invasion. Not only did Russia continue to supply some of this gas, other sources opened up. That includes a rush to build new liquid natural gas facilities to support imports from the U.S. and elsewhere. As S&P Global reports, this has included a number of floating facilities that can be assembled and made ready much quicker than traditional shore facilities. Projects are reported to be “moving forward at unprecedented speed” specifically to address any lack of gas from Russia.

Even as gas has become cheaper and more available, the demand for gas has also been falling sharply. That’s because the major use of natural gas in Europe is generating electricity, and the Russian invasion has helped rush forward initiatives on both conservation and renewables that are cutting into the demand for gas. In fact, the biggest threat to renewable projects right now in Europe is … the plunging price of gas, which is making some of the counties and companies that had jumped onto making a clean break between electrical generation and gas rethink their positions.

Ironically, there’s another factor that’s cutting into the demand for Russian gas: the human-generated climate crisis. Putin should have noticed that, even in Moscow, temperatures have risen sharply in the last decades. Even as Russian politicians, and tankies on Twitter, have been rubbing their hands together contemplating the masses of Europe genuinely huddling for warmth, the fall has been exceptionally mild. So is the winter forecast. 

When Russia blew up its own pipeline—an act done purely as a false flag provocation, and which is readily reparable—it shut down one pipeline that had never gone into business and another that hadn’t pumped at a level above 20% capacity in months. That explosion at the end of September was intended to renew European fears around gas and drive global prices up. It worked. For about three days. Then prices continued dropping right past where they had been before the explosion.

Of course, Russia has been selling its gas. It’s switched primarily to selling to China and Southeast Asia. But there’s a problem: Cut off from its biggest market and a pariah in the fiscal world, Russia hasn’t been in a very good position to negotiate pricing. As a result, there are articles like this one on Yahoo News noting that “China has secured Russian gas at a 50% discount until the end of this year.”

They’re not the only ones. Some nations are actually buying more Russian gas than they need, disguising it as gas from other sources (Malaysian production is up something like 200% without drilling any new wells, a miracle) and then reselling it at market prices. 

But Russia isn’t getting market prices. It’s getting half of market prices. That might have been enough when those prices were through the roof, but now they’re down everywhere. Russian gas is selling dirt cheap, and without those handy European pipelines, Russia’s transportation and storage costs are up.

When it comes to the export market, Russia is a one-trick pony. Vladimir Putin broke that pony’s leg. Now, with those new LNG facilities and increasing use of renewables for electricity, he’s made sure that Russia will never again enjoy the kind of profits or political leverage it held before invading Ukraine.