Putin’s war is economic suicide
Historians will write that Russian President Vladimir Putin’s fatal miscalculation was his belief that Europe would collapse if he invaded Ukraine due to his overreliance on Russian energy. But overreliance works both ways: Europe relied on Russian oil and gas, but Russia relied heavily on the European energy market.
Given this co-dependency, Putin would have been well advised to postpone his predation against Ukraine and its customers in the West until he had secured equivalent energy markets in the East. But he did not do it. Worse, its militarization of energy has forced Europeans to find new energy suppliers and substitutes for fossil fuels. Now they sign long-term energy contractsand Russia cannot replace these customers.
If Russia were a business, it would be headed for bankruptcy. For years Moscow has built pipelines to Europe (through Ukraine, Belarus, Poland, Turkey and under the Black Sea and the Baltic Sea), but it has not built a single pipeline connecting Russian oil or gas fields directly to China, the world’s largest energy buyer and declared ally. Putin’s pre-war blustering statements about massive Siberian pipelines to China are years away from completion. And after the war, such projects will be impossible, given Western sanctions and the mass exodus of oil and gas companies from Russia in protest. It was these foreign companies and their expertise that built the Russian oil and gas sector which, in turn, financed its military buildup. Today, their departure will not only tie up Russian resources, but will indefinitely hinder the development of Russia’s engine of economic growth. To start, China and others buy Russian energy but require significant discounts because they can.
Putin has no idea how to run an economy. Russia has more natural gas reserves than any other country on Earth, some 19.9% of total. But it has failed to capitalize on the liquefied natural gas (LNG) revolution underway around the world, which allows gas to be shipped anywhere in the world. The gas liquefies if cooled to minus 162 degrees Celsius and its volume shrinks 600 times into a non-toxic liquid that is easy to store and transport.
An LNG ship, more than three football fields long and carrying five cryogenic tanks, can supply three days’ worth of gas from Russia’s largest gas pipeline. Currently, an estimated 657 of these tankers are constantly crisscrossing the oceans, and all oil and gas producing countries are rapidly building plants to liquefy their gas and export terminals to regasify LNG for customers around the world. But Russia is years behind the others.
This year, the United States – with only 6.7% of the world’s gas reserves – became the first leading LNG exporter, in part because of its expedited shipments to Europe since the start of the war. In fact, the United States has overtaken Russia in LNG shipments to China this year, with a market share of about 11 percent against 6% for Russia. Australia, Qatar, Malaysia and Indonesia have carved out the lion’s share of China’s LNG market.
Post-war Europe will turn away from Russian energy altogether because Putin’s blackmail and price shock maneuvers created disastrous price hikes and inflation and ruined its reputation as a reliable supplier. European nations currently have 36 LNG ports and have increased their consumption of LNG from other suppliers since the start of the war 50 percent. Dozens of additional LNG terminals are under construction and massive gas supply contracts have been signed by European nations, with Azerbaijan, Algeria, Saudi Arabia as well as with the United States, Australia, Qatar, Nigeria and Norway.
The European Commission recently launched an emergency plan to reduce gas consumption this winter 15 percent and eventually replace all Russian fossil fuels. Conservation and substitution measures are being deployed that will reduce the use of gasoline, home heating, public transportation, street lighting, air conditioning, and shift work. Shelters will also be made available to house the inhabitants in the event of a gas cut by Russia, which is threatened.
On the supply side, Germany is again burning its own coal, nuclear facilities in France and Germany will be mothballed or expanded, and in a few years LNG from the United States, North Africa , Central Asia and the Middle East will definitely replace Russian gas.
Russia’s reduction in gas volumes over the past year to lock in prices provided it with additional cash flow during the war and bolstered the value of the rouble. But that advantage will be short-lived as Europe weans itself off Moscow’s fossil fuels and punitive Western sanctions, combined with brain and capital drain, destroy Russia’s economic future. More than 1,000 large Western companies have closed there, Russian oligarchs have hidden assets and themselves abroad, and hundreds of thousands of educated young Russians, and about 15,000 Russian millionairesshould move abroad this year.
Frankly, Putin’s war is economic suicide. The late Senator John McCain (R-Arizona) once insulted Russia as simply a “petrol station pretending to be a country”, but it’s worse than that now. Putin has kicked out all customers and employees of the gas station and will be completely bankrupt sooner than he imagines.
Diane Francis is a Nonresident Senior Fellow at the Atlantic Council’s Eurasia Center. She is the editor of the National Post in Canada, a columnist for the Kyiv Post and the author of 10 books. She writes a bi-weekly newsletter about America on Substack.