Putin Will Kill Russia’s Oil And Gas Economy And Ukraine Will Eventually Emerge Stronger

During the Cold War, the Soviet Union was isolated economically. But when Mikhail Gorbachev ushered in “Glasnost” in 1985, the western world warmed up to the Eastern Bloc. And when the Berlin Wall fell in 1989, the international community welcomed Russia’s oil and gas.

It’s been one of the big three producers, along with Saudi Arabia and the United States. In 2020, oil and gas revenues were $219 billion, according to Rosstat. And the two sectors combined made up 60% of Russia’s exports and 40% of its federal budget. However, President Vladimir Putin’s invasion of Ukraine has threatened global stability and subsequently strengthened NATO. The developed world is amping up Ukraine’s weaponry and enacting economic sanctions — like cutting off Russia’s oil and gas from world markets.

Russia’s Gazprom, Lukoil, Rosneft, and Surgutneftegas have been among the world class oil and gas enterprises with the highest net income, says Statista.

Putin is leveraging that energy clout, transporting less natural gas to Europe and charging more money for it. Thus, Russia is reneging on its contracts that provide about 40% of Europe’s natural gas. But once the Europeans sign long-term contracts with other suppliers — Norway for oil and Algeria, Qatar, and the United States for LNLN
G — it’s checkmate. Meantime, the globe is trending green, and Europe is going all-in on renewables and energy efficiency.

“Sending less gas and charging more for it is a tactical win for Putin. But Russia has strategically lost this war,” says Oleksiy Riabchyn, the former deputy minister of Ukraine’s Energy and the Environment. “Yes, indeed, Europe is waiting for American LNG. Germany, Poland, Latvia, Lithuania, and Estonia are all building LNG terminals. It will be more expensive. But Europe won’t be dependent on Russia.”

Riabchyn, also an advisor to Ukraine’s natural gas company, Naftogaz, told this writer in an interview that Russia is banking on higher oil and gas prices to pressure Western economies — to give in to Russia’s demands and to let it keep occupied Ukrainian territories. But that scheme will fail.

It will take a year to negotiate long-term contracts with new suppliers. And it will take a bit longer to have those resources extracted and delivered. It will also take time to build new LNG receiving terminals. So, western Europe won’t be able to rid itself of Russian oil and gas for a few years. But once it does, it will be the nail in Putin’s coffin. He gambled and lost.

Asian countries such as China and India represent an opportunity for Russia to sell oil and natural gas. But the region can’t absorb Russia’s expected losses.

“Now, Europeans see Russians as unreliable,” says Riabchyn. “It artificially created this energy deficit and left Europe without adequate natural gas storage for the winter season. Russia will never rebuild its economy once Europe finds new suppliers.” In the meantime, Ukraine will need to import 2 to 5 billion cubic meters to sustain its people and economy this coming winter. It can rely on domestic production for the rest.

Democratic Values

Ukraine had been a transit country — the logical throughway from Russia into Europe. It has several natural gas pipelines with a capacity of 146 billion cubic meters per year. It has significant storage capacity as well.

But things soured when Ukraine leaned West, voting to be a democratic country. In 2014, Ukrainians rose up and kicked out Putin’s puppet Victor Yanukovych. Soon after, Russia invaded eastern Ukraine and annexed Crimea. Riabchyn, who was also a member of the Ukrainian Parliament from 2014 to 2019, said Russia has long-planned an all-out assault on the country — well before the February 2022 invasion. Putin not only wanted to bring Ukraine back into its fold, but he also wanted to control the country’s natural gas pipelines.

Russia’s Nord Stream 1 moved 55 billion cubic meters of natural gas yearly into Europe. But it constructed Nord Stream 2 with the same capacity. Both lines were built to bypass Ukraine. However, Russia still sends natural gas through Ukraine: the two signed a $7.2 billion contract in 2019 that obliged Russia to pay Ukraine transit fees on 65 billion cubic meters in 2020 and 40 billion cubic meters until 2024 — even if it did not ship that amount.

Riabchyn says that Russia took control of the infrastructure and has been diverting some of the natural gas to feed occupied areas in Ukraine, thus shortchanging Europe: deficits persisted, and prices rose. It’s also paying Ukraine 30%-40% less in transit fees — to be disputed in court.

“Russian gas had been cheap,” says Riabchyn. “Russia built Nord Stream 1 and 2 to secure its gas income and control the supply to Europe. But when Germany shut down Nord Stream 2, Russia invaded Ukraine, thinking it would conquer us and control our pipelines. It could have used those billions to build hospitals instead of wasting this money to try and militarize its gas transit routes. We were a reliable partner for Europe before the war.”

Now, the United States hopes to fill that void. It has been a net exporter of natural gas since 2017. The United States has five LNG export terminals operating and more on the way. It already has markets in the United Kingdom, Spain, and France. But Germany could become the most lucrative.

‘Proud to be Ukrainian’

Ukraine is also an extractive country — 20 billion cubic meters of natural gas. But it has the second-largest reserves in Europe: 11.8 trillion cubic meters. After the war, Riabchyn says that the country could attract multinationals and access that energy potential. Naftogaz, the national company, accounts for about 75%-80% of Ukraine’s current output. The ultra-wealthy and politically connected produce most of the rest — favoritism that has kept foreign investment at bay.

Riabchyn says that a major hurdle is Ukraine’s inability to drill offshore — a problem made harder now because of the Russian fleet in the Black Sea. At the same time, Russia has been drilling for natural gas in occupied Crimea.

Putin thought that he could vanquish Ukraine in days. That failed. Now he wants to wreck the Ukrainian economy and cut the country out of the natural gas transit market. That would pressure Germany into opening up Nord Stream 2. That tact, too, will collapse — because Europeans are realigning their energy contracts and converting to green energy.

The Russian invasion of Ukraine has no doubt taken a huge financial toll. But Riabchyn says that Ukraine can win and rebuild. He tells this writer that even though his mother is Russian-born, his family — a wife and two children — refuses to speak Russian or listen to Russian music. After the war, a new ‘Marshal Plan’ is necessary to rebuild Ukraine’s economy — a reference to the plan that helped rebuild Europe after World War II.

“We are proud to be Ukrainian. We will not surrender. We are resisting heavily and fighting for our land,” says Riabchyn. “Putin won’t stop until he is defeated on the battlefield. It’s not just about business and pipelines. Putin sees this war as the historical mission of the Russian people — to capture Ukraine. After the war, we must rebuild. We will need to develop our natural gas resources and expand into hydrogen and biofuels. We are confident about our future.”

Russia’s economic link with the West has broken since its full-scale invasion of Ukraine. It’s not likely to be repaired given the damages and the subsequent boycott of all-things Russian. While Russia may get a piece of Ukraine’s territory, it will lose a lot more: economic growth and global respect. Ukraine, though, has a chance to reinvent itself — to become a full partner in the European Union.