28/2/22, 09:06 What a Russian Invasion Would Mean for Energy Markets

REPORT

What Would a Russian Invasion Mean

for Energy Markets?
It would be “almost impossible” for any country to fully substitute Russian gas
to Europe, experts say.
By Christina Lu, Robbie Gramer, and Sara Hagos

FEBRUARY 23, 2022, 6:00 PM

The growing threat of Russia invading Ukraine has rattled global commodity
markets—and underscored how the continued crisis could prolong Europe’s
energy woes as the West rolls out punishing new sanctions on Moscow.

Russia Invades Ukraine

A major land war looms over Europe.

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The Kremlin’s recent decision to deploy forces to Donetsk and Luhansk, two
breakaway regions in eastern Ukraine, has jolted markets and hiked up
commodity prices. Just this week, crude oil prices climbed to their highest
levels since 2014, approaching nearly $100 per barrel, while coal and energy
prices also spiraled.

“The threat of [military action] has really sent a lot of shockwaves in the energy
markets,” said Eugene Chausovsky, a nonresident fellow at the Newlines
Institute.

The Biden administration’s announcement on Wednesday that it was imposing

sanctions on Nord Stream 2, a controversial Russian gas pipeline project in
Europe that would have directly transported 55 billion cubic meters of gas
between Germany and Russia every year, has further strained energy markets
on the continent. More economic retaliation is likely if the crisis becomes more

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acute, as the Wall Street Journal and other outlets report, saying Ukraine
received intelligence that a Russian offensive could begin in the coming days.

Russia is the second-largest producer of gas and third-largest oil producer in

the world. It is also one of the world’s top exporters of coal and wheat and a
leading producer of other important resources, such as palladium and
ammonium nitrate.  

New Western sanctions aimed at buckling Russia’s economy could significantly

curb those exports to most countries abroad—or convince Moscow to halt
exports on its own, depending on the severity of the sanctions and the
Kremlin’s response. 

Some experts believe the commodity markets have not taken into account the
crisis’s severity. In other words, prices aren’t as high as they probably should be
given the immediate risk of war. 

“I do not think that the market is pricing in right now, in any way, a full
invasion scenario that results in weeks of really serious … financial sanctions
that could, in turn, lead Russia [to] withholding supplies,” said Helima Croft,
global head of commodity strategy at RBC Capital Markets, an investment
bank. 

Moscow “could make the decision to try to change calculations in the West, use
commodities as a form of hybrid warfare by essentially curtailing exports,
making sure Ukraine cannot export, and then you have a big inflationary spiral
coming,” she added. 

Europe is deeply reliant on natural gas from its eastern neighbor, with Russia
accounting for nearly 40 percent of its supply. U.S. and Eastern European
leaders have repeatedly warned that the Kremlin won’t be afraid to wield its gas
supplies as a geopolitical cudgel if it decides to launch its own
counteroffensives in the spiraling economic warfare. In the past, Russia has
weaponized its supply to Ukraine over pricing feuds by cutting it off from
exports.

“Europeans are worried that military action in Ukraine could impact supply
flows,” Chausovsky said. “We’re at a stage where that could happen at any
moment.” 

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U.S. President Joe Biden had previously held off on expanding Nord Stream 2
sanctions despite immense pressure from Congress, but on Wednesday, he
announced new sanctions on the company managing the project, Nord Stream
AG, and its corporate officers, including CEO Matthias Warnig. Although the
company is registered in Switzerland, it is a wholly owned subsidiary of
Russian state gas giant Gazprom. Warnig, a German citizen, is a former agent of
the East German secret police who maintains close ties with the Kremlin. 

“We will not hesitate to take further steps if Russia continues to escalate,”
Biden said after confirming the new sanctions. “Through his actions, President
Putin has provided the world with an overwhelming incentive to move away
from Russian gas and to other forms of energy.”

Biden’s decision comes a day after German Chancellor Olaf Scholz announced
he would freeze the pipeline’s certification. Halting the pipeline’s certification
was “a hit to Russia, financially speaking,” Chausovsky said. “They had
invested a lot of money into this.”

Biden’s sanctions announcement added salt to the wound, since the company
and officers are now blocked from U.S. trade and financial institutions.

Since the pipeline was still awaiting certification and wasn’t operational,
experts said the decision wouldn’t impact Europe’s existing gas supply—but
would likely spook nervous traders and investors in an already volatile market. 

But Russia immediately hit back after Berlin announced it wouldn’t certify the
pipeline by previewing more market shocks to come. “German Chancellor Olaf
Scholz has issued an order to halt the process of certifying the Nord Stream 2
gas pipeline. Well. Welcome to the brave new world where Europeans are very
soon going to pay €2.000 for 1.000 cubic meters of natural gas!” Dmitry
Medvedev, deputy chairman of Russia’s Security Council, tweeted on Tuesday. 

On the oil side, Europe energy companies are heavily enmeshed in the Russian
market, with companies such as BP, Royal Dutch Shell, and TotalEnergies
involved in multibillion-dollar oil exploration and production projects.
“Second- and third-order sanctions could make it really complicated for
international oil companies to operate in Russia,” Croft said.

Additionally, some of the major Russian banks on the target list for Western
sanctions—such as Sberbank, VTB Bank, and Gazprombank—are heavily

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invested in the energy sector. 

In recent months, Biden administration officials explored plans to allay supply

shocks to Europe, including options to ship U.S. liquefied natural gas (LNG) to
Europe and push Qatar, a top gas exporter, to divert more supplies to Europe.
But experts said those efforts couldn’t make up the difference of Russian
imports if Moscow decides to turn off the tap to Europe. Even then, most of
Qatar’s gas exports are already spoken for. 

On Tuesday, the Qatari government said it would be “almost impossible” for

any country to fully substitute Russian gas to Europe, with most LNG already
tied down in existing contracts. According to Saad al-Kaabi, the Qatari energy
minister, only 10 to 15 percent of the Qatari supply could feasibly be diverted to
Europe. 

As long as this dependence on Russian gas continues and the conflict escalates,
experts warn Europe will bear the brunt of the supply crunch, even as it affects
commodities globally.

“The Europeans have more to lose than we do from either sanctions on the
energy sector or Russia’s retaliation to sanctions,” said Samantha Gross,
director of the Energy Security and Climate Initiative at the Brookings
Institution. “Over the shorter term, it’s really painful for Europe.”

Christina Lu is an editorial fellow at Foreign Policy. Twitter: @christinafei

Robbie Gramer is a diplomacy and national security reporter at Foreign Policy. Twitter: @RobbieGramer

Sara Hagos is an intern at Foreign Policy. Twitter: @_sarahagos

TAGS:
ENERGY AND THE ENVIRONMENT,
ENERGY POLICY,
EUROPE,
RUSSIA

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