A Russian Invasion Of Ukraine Would Have Profound Implications For International Energy Markets

The conflict between Russia and Ukraine could spill into international energy markets. If Russia sent its troops into the heart of Ukraine, it could spell the end of Nord Stream 2 — an $11 billion natural gas pipeline. Germany, which is withholding approval of the line, warns of a “high price” if it invades Ukraine. 

This begs the question of who has the most power: the Russians feeding an energy-starved Europe or the western allies, which can “blacklist” President Putin and Russia. Because Russia got away with taking Crimea from Ukraine in 2014, it may reason that any aggression would be met with a feeble response — mainly because Nord Stream 2 would provide 15% of Europe’s natural gas.

But a takeover would come with significant costs. The Europeans may depend on Russian natural gas, but they have other options. And the United States wants to be a more prominent supplier of liquefied natural gas or LNG, albeit at a higher price than Russian natural gas. Notably, energy revenues make up nearly two-thirds of Russia’s income. Still, some experts say that the line is unnecessary — that Russia built the project to circumvent Ukraine and to stop paying it transit fees.

“There is already ample pipeline capacity,” says Suriya Jayanti, international energy counsel for the U.S. Department of Commerce, during a roundtable in which this reporter was a panelist. “Nord Stream 2 is a political project. It does not enhance energy security. We are not in competition with Nord Stream 2. We are trying to keep Russia from having more energy dominance over Europe. President Putin has already decided not to increase exports so he can force Germany’s regulator to approve the project. It is a geopolitical weapon.” 

Russia now supplies 39% of Europe’s natural gas. The United States supplies 3.5%. Europe is building more LNG receiving terminals to diversify its supplies. But Russian natural gas prices are 40% cheaper than LNG spot prices. And the continent is now short natural gas — and paying a high price for it. Russia won’t fully open the spigot until Germany certifies Nord Stream 2.

A short history: Russia gifted Crimea to the Ukrainians in 1954 — when the fall of the Soviet Union seemed unimaginable. And in 2014, Ukrainians rose up and kicked out its Russian-backed president. Russia invaded and took back Crimea while occupying parts of the so-called Donbas region, a large coal mining and industrial territory. That conflict is ongoing. 

Battle-Hardened

In 2019, Ukraine elected Volodymyr Zelensky, who wanted to rid his country of corruption and to align it politically with the West. And to become a NATO member. But President Putin sees Ukraine as part of the Russian fabric — Slavic peoples who have been intertwined for centuries. During several visits to Ukraine, this reporter witnessed many Ukrainians’ affection for Russia. The two have friends and family living across their borders. 

President Putin wants President Biden to understand this history: Ukraine can’t join NATO because it shares a 1,200-mile border with Russia. But the United States is founded on democratic principles. And while those values are now under threat, Americans still believe in the right of self-determination — a value embraced by many younger Ukrainians who have antipathy toward Russia’s leaders. Moreover, Biden explained to Putin that NATO is a defensive organization. 

Already, former members of the Soviet Union have joined forces with NATO: Bulgaria, the Czech Republic, Hungary, and Poland, Romania, Slovakia — and the Baltic States of Estonia, Latvia, and Lithuania. For President Putin, the fall of the Soviet Union was a tragedy. For NATO to be at his door is even worse.

Military action against Ukraine is one possibility for Russia. But so is economic pressure. At least three times this century, Russia has stopped moving its gas through Ukraine, which gets paid billions each year in transit fees. Russia, though, has agreed to send its gas through Ukraine until 2024. What comes next?

President Zelenskyy spoke with NATO’s Secretary-General Jens Stoltenberg about membership in the organization in 2022, who responded such an association is up to Ukraine and its 30-member alliance. “We have been at war for eight years,” Ukraine’s president said. “And the likelihood of large-scale or continuation of a strong escalation by Russia or militants backed by the Russian Federation may take place any day … I believe that Russia has pushed Ukraine into NATO.”

At this point, Ukrainians have become battle-hardened. The United States has supplied modern military equipment — assets that former President Trump had threatened to withhold if it didn’t investigate then candidate-Biden. That failed and led to Trump’s first impeachment. Beyond having those new weapons, Ukrainians would also resort to guerrilla warfare if an invasion occurred. 

A High Price

During the Biden-Putin virtual summit in December, Biden threatened Russia with punishing sanctions — ones that would freeze the assets of its oligarchs and prevent Russians from moving their money through the international banking system. The German government, though, holds a major billy club — preventing Nord Stream 2 from starting operations. 

“Any violation of territorial integrity will come at a price, a high price, and we will speak with one voice here with our European partners and transatlantic allies,” German Chancellor Olaf Scholz said in December.

Nord Stream 2 could certainly be used as a political weapon — by both Russia and the West. If Russian troops occupied Ukraine, Germany could deny its opening, and the United States could export its LNG. To that end, the U.S. Federal Energy Regulatory Commission has approved a dozen LNG export terminals, on top of the five that currently operate: Cheniere Energy’s Sabine Pass and Corpus Christi LNG, as well as Sempra Energy’s
SRE
Cameron LNG, Dominion Energy’s
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Cove Point LNG, Texas-based Freeport LNG, and Kinder Morgan’s
KMI
Elba Island LNG.

Nord Stream 2 is a legitimate business concern that supplies a much-needed natural resource to Europe. And financial sanctions against an economic rival violates fair play rules — unless international leaders determine that Ukraine’s right of self-determination has been violated. If it gets to that, the Europeans can further diversify their energy suppliers. That may hurt Russia’s pocketbook. But it would also hurt politically, forcing Russia to continue to move its gas through Ukraine.

SEE ALSO:

— Russia’s Nord Stream 2 Is Finished. What Now?

— Russia And China Have Much Closer Energy Ties

— Burisma, The Bidens, And Ukraine’s Bid To Be Energy Independent