The New Winter War

Date: 11/05/2021
Author: Mr. X


The European Union is facing a potentially disastrous winter depending on whether Russia restricts natural gas supplies to the Continent. Why Russia is doing this remains somewhat unclear. President Vladimir Putin denies it is even being done at all. Yet there could be several motives.

Late last month, President Putin ostensibly instructed the state-controlled energy concern Gazprom to increase shipments to Europe and bolster reserves in Germany and Austria. This, he said, would “create a more favorable situation on the European energy market.” Natural gas prices dutifully fell.

However, Gazprom has so far failed to open the floodgates. This all comes during a supply crunch in which gas prices on the Continent are reportedly five times higher than they were a year ago. Russia is also using its gas weapon to play hardball with countries like Moldova.

On November 2, Gazprom reportedly failed to book more pipeline capacity for shipments through Ukraine and Poland to Europe. Deputy CEO Elena Burmistrova said that Gazprom was not to blame for European energy shortages and suggested that there was no short-term pressure being exercised on the company. “We do not receive any pressure to sell as much as we can in the short term,” she said. “It would undermine the market’s predictability, both for us and for our customers.”

Yet the distinction between “short-term” and “long-term” is critical here. At the massive United Nations Climate Change Conference recently held in Glasgow, the United States, the United Kingdom, and Canada agreed to stop government funding of overseas oil and gas operations. “Gas is the new coal,” says Bill Hare of the environmental group Climate Analytics, which has produced a report with the same slogan. He said gas is a “fossil fuel” and argued that, like coal, it should be phased out as soon as possible.

Let’s pause here for a moment. Lofty, long-term goals like these that win public approval and what the public actually is willing to accept are not the same thing. For example, you might notice that spending on entitlement programs is ultimately going to lead to fiscal catastrophe. That said, few politicians benefit from promising to give less money to their constituents. This might be a structural problem with democracy itself.

If that frankly right-wing and reactionary argument shocks you, let’s look at it from a more progressive perspective. Assume climate change predictions are true and that we face a dire future unless energy production worldwide is radically changed – right now. What countries are willing to do that in the short term when heating costs – something that truly hurts the most vulnerable – are skyrocketing? Do politicians really believe what they are saying when it comes to climate change? Do they believe it but are too afraid to do anything about it anyway for political reasons? Or is there simply no good solution?

If we look at the rhetoric coming from the climate change summit and compare it to what governments are doing right now, it’s no wonder that environmental activists are fed up with what Greta Thunberg called “blah, blah, blah.” The Biden Administration is currently lobbying OPEC+ (which includes Russia) to provide more oil. Europe of course is begging for more natural gas. President Biden lambasted China and Russia for not sending their heads of state to the climate change summit – but given who has the leverage, why should they?


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While oil and natural gas production isn’t something that can abruptly be ramped up within days, the United States could at least theoretically meet its own needs in a true crisis. Over the medium-term, new wells, reserves and projects could be tapped.

It would be far harder for Europe. Europe is also being hit on two fronts. A major dispute between Morocco and Algeria is threatening the supply of natural gas to Spain. Spain is now having to import more gas by sea because Algeria will no longer ship gas exports through Morocco. There have already been protests earlier this year over high electricity costs in the Spanish capital. Those costs now seem ready to increase.

President Putin, who has skillfully played a weak hand to increase his country’s geopolitical influence, can do the same thing from the east. The recent German elections showed that the formal approval of the Nord Stream 2 pipeline (something Washington fiercely opposes) is not a sure thing. President Putin can forcefully remind Europe of how badly it needs Russia not by restricting supply, but simply by not expanding it. Who could blame him? International Energy Agency executive director Fatih Birol said Russia could supply 15% more gas if it wanted too – but how would you prove it?

President Putin is also using his military to send a message. Satellite photos indicate a Russian military buildup near Ukraine. A recent Ukrainian military strike against an artillery piece in Donbass, within the territory of the semi-autonomous Donetsk and Lugansk “People’s Republics,” has Moscow accusing Kiev of wanting to restart the simmering conflict. The Atlantic Council accuses Russia of pushing a civil war “myth,” rather than admitting that Russia is seizing Ukrainian territory.

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Of course, many Russian elites would respond that the “Maidan” revolution in 2014 that pushed (some of) Ukraine out of the Russian sphere of influence was itself illegitimate. Late last month, just about the time Russian gas shipments suddenly became more volatile, President Putin said NATO’s military presence in Ukraine poses a “threat” to his country. Given that President Putin has spoken of the collapse of the USSR as the “greatest geopolitical catastrophe of the century,” it’s not surprising he’d use every tool he can to maintain at least some leverage over Ukraine.

Still, both sides have something to lose if they overplay their hand. European governments may be dealing with high energy costs and angry voters, but they are also potentially being given a foreign scapegoat to pin it on if Moscow pushes its luck. Similarly, Russia may have leverage over the Continent now (and the Algerian situation was especially good fortune) but the last thing it wants is for Europe to actually back up its climate change rhetoric and start treating natural gas like coal. Russia may want concessions – but it doesn’t actually want high natural gas prices for the long term. It doesn’t want to break Europe’s addiction to natural gas.

The short-term situation will present major opportunities for investors with natural gas, oil, and other energy plays. Political maneuvering and possibly even a bit of military saber-rattling could drive further increases in energy prices, especially if we get a cold winter. However, like policymakers in both Europe and Russia, investors shouldn’t try to overplay their hand. Neither side has an interest in forcing the other to extremes.

Still, there’s one thing investors can take for certain. If you want to know what policymakers really value, look for what they want from other nations when comes to energy supplies. The numbers tell the tale not the promises they give to reporters.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.

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