Overreach, p.34
Overreach, page 34
In September the Kremlin announced that Nord Stream 1 would remain closed indefinitely for technical reasons – which would not be resolved until ‘the collective West’ lifted sanctions on Russia. Only Putin-friendly Hungary was still getting its full supply via older overland pipelines through Belarus.
Except the feared meltdown didn’t happen. Europe – and Germany in particular – proved far more nimble in finding alternative sources of energy than Putin had expected. On the eve of the invasion Europe did indeed import some 46 per cent of its gas from Russia. But it also received 25 per cent from Norway via pipelines and 29 per cent in the form of liquid natural gas (LNG) from the US, Algeria and Qatar. Europe’s imports of LNG ramped up with surprising rapidity. In January 2022 Europe was importing just over 4 billion cubic metres (bcm) of American LNG a month versus just under 8 bcm in piped gas from Russia (already a historically low figure, thanks to the introduction of renewables). But by the end of June imports of US LNG alone had increased by nearly 50 per cent to 5.5 bcm – compared with reduced Russian supplies of 4.5 bcm. German engineers rushed to build floating terminals that would double its LNG import capacity by November 2022. It was not enough to fully compensate for the near-complete cut-off of Russian supplies, but by 1 September German storage capacity was already 80 per cent full. More importantly, the country’s politically powerful Green Party had acknowledged that political realities trumped climate goals and agreed to the reopening of coal-fired power stations and suspending the closure of the country’s three remaining nuclear power stations.
Instead of bullying Berlin into submission, Putin’s attempt at blackmail in fact alienated his most powerful one-time European ally. ‘We must stop self-deception that we ever received cheap gas from Russia,’ said German Foreign Minister Annalena Baerbock on 28 August. ‘We might not have paid a lot of money for it but we paid for it with safety and independence. And Ukrainians already paid for it with thousands of lives.’26
For Russia, weaponising gas supplies was more than risky – it was the diplomatic equivalent of strapping on a suicide vest. On 1 September, when Gazprom announced its second ‘temporary’ shutdown of Nord Stream 1 since the invasion, the wholesale price of gas in Europe actually dropped by 21 per cent from 405p per therm to 320p, as the European Commission confirmed it was working on ‘emergency measures’ and the German government said it was ‘prepared’ for the winter.27
Russia ‘is trying to attack with poverty and political chaos where it cannot yet attack with missiles’, Zelensky said after news of the Nord Stream shutdown broke – as Germany announced a €65 billion (£56 billion) package of help for struggling consumers.28 Weeks later, new British Prime Minister Liz Truss announced a state-funded energy price cap worth up to £100 billion to protect the economy from the price shock. But with wholesale gas prices up ten times on the previous year, energy bills soaring across the continent and inflation in the Baltic states topping 20 per cent, political unrest looked inevitable. In early September, over 70,000 protesters in Prague took to the streets to protest against their government’s support for Ukraine. But the Europe-wide political crisis that the Kremlin had hoped for did not result in mass demands to capitulate to Moscow and resume business as usual. On the contrary, despite the economic pain, Europe’s leaders resolved to move permanently away from reliance on Russian gas. On 5 September German Chancellor Scholz said Russia was ‘no longer a reliable energy partner’. And EU Council President Charles Michel said that Russia’s ‘use of gas as a weapon will not change the resolve of the EU … We will accelerate our path towards energy independence. Our duty is to protect our citizens and support the freedom of Ukraine.’29
The prospect of Europe breaking free from its dependence on Russian gas represented a strategic catastrophe for Russia. If the continent were to succeed in finding alternative sources of energy, Putin will have permanently blown up a source of income that accounted for over a third of Russia’s overall energy exports, lost its largest gas export market and lost forever the political leverage over Europe built up over decades. On 26 September that destruction of Russia’s energy relationship with Europe look literal form as four underwater explosions cracked both Nord Stream 1 and 2, causing the Baltic Sea to boil with kilometre-wide gas leaks as the estimated 300 million cubic meters of gas in each pipe bubbled to the surface. Putin claimed in a televised speech at a Kremlin ceremony to mark the annexation of four Russian-occupied areas of Ukraine that ‘the West … has switched to sabotage’. But according to Swedish, Danish and UN investigators, by far the most likely culprit was Russia itself. If true, the destruction of Russia’s €23 billion Nord Stream pipelines was one of the most extraordinary acts of self-harm in the history of warfare, akin to Hernán Cortés demolishing (not, in fact, burning) his ships on landing in the New World in 1519. The blowing up of Nord Stream could have been meant as a threat to the West that Russia could do the same with a newly opened Norway–Denmark pipeline. Or it could, like the 1939 attack by German soldiers in Polish uniforms on the Gleiwitz radio station, have been intended as a false-flag operation to create a spurious justification for Russia’s annexation of parts of Ukraine. Either way, the Nord Stream attack marked a point of no return for the war’s endgame. Whatever deal would be eventually reached, a return to cheap Russian gas for Europe could now never happen.
But Putin was lining up – or so he imagined – a plan B: to export Russia’s gas to China instead. In a video meeting with top energy and economy officials in April 2022, Putin admitted that ‘Western countries’ attempts to push out Russian suppliers and to replace our energy resources with alternative supplies will inevitably affect the global economy as a whole.’ He claimed that ‘the consequences of [sanctions] may be extremely painful, primarily for the initiators of the policy’ and emphasised that it was essential for Russia ‘to redirect our exports gradually to the rapidly growing markets of the south and the east. To achieve this, we must determine the key infrastructure facilities and start their construction in the near future.’30
But Putin’s plans for a povorot na vostok, or pivot to the east, made little economic or practical sense. In February 2022 Russia exported 83 per cent of its gas, or 170 bcm, to Europe, 12 per cent to former Soviet states and just 2 per cent, or 12.5 bcm, to China. In autumn 2022 the westernmost Russian gas field with a pipeline connection to China was Chayanda, some 2,400 kilometres directly north of Beijing. Chayanda’s maximum projected annual capacity was just 25 bcm – and then only by 2025. Connecting Chayanda to China was the Power of Siberia 1 pipeline, built between 2014 and 2019 at a cost of $45 billion and wholly financed by Russian banks. The massive cost, plus generous tax breaks offered to the Chinese, made the pipeline unprofitable – as Russian Deputy Minister of Energy Yuri Sentyurin admitted in April 2015 when he said that the Power of Siberia was ‘not about investing in a project which has to pay off its costs’.31 Other pipelines currently under construction will link Power of Siberia 1 westwards to the Kovytka field and eastwards to gas fields in Sakhalin and Khabarovsk via the Amur gas processing plant – which has a maximum capacity of 39 bcm annually, equating to about 9 per cent of China’s annual gas consumption. That means that even at its maximum future capacity, Power of Siberia 1 can pump less than a single one of Russia’s Europe-bound pipelines, the 55 bcm Nord Stream 1.32 Furthermore, long-term gas contracts negotiated with the Chinese in 2019 were based on low, pre-crisis pricing.
The only way that Russia could come close to replacing its lost European customers would be through a projected 50 bcm-per-year Power of Siberia 2 pipeline that would link the Yamal peninsula in the Arctic to China via 2,800 kilometres of pipe running across the entirety of Siberia and Mongolia. But that so far remains a plan on paper. And who would finance it? Not the internationally sanctioned Gazprom, cut off from raising international finance and buying Western equipment. In anticipation of ‘massive capital expenditures’, Gazprom took the unprecedented step of suspending dividends for the first time in 30 years in April 2022. Essentially, ‘if Russia cannot sell its gas to the West it cannot sell it to anyone,’ said economist Andrei Movchan. ‘That will mean capping off gas wells.’33
In other words, Putin’s proposed ‘pivot to the east’ was entirely reliant on Beijing’s goodwill and money. But despite ostensible diplomatic support from Beijing for Moscow, the threat of US sanctions on their global operations caused many leading Chinese banks such as ICBC, the New Development Bank and the Asian Infrastructure Investment Bank to withdraw all credit and financing from Russia. Chinese energy giants such as Sinochem also suspended all Russian investments and joint ventures. In August, UnionPay – the Chinese equivalent of Visa and Mastercard – also ceased its cooperation with Russian banks, citing sanctions.34 Some Chinese companies remained active in Russia – but only those who had no operations outside Russia and China and nothing to lose from international sanctions.
Russia imagined itself a major political and economic partner of Beijing’s, almost a fellow superpower. But the truth is that before the war Russia was only China’s 11th-most important trade partner. In 2021 China’s trade with the US was worth some $1.3 trillion, with the EU just over $1 trillion – and with Russia just under $70 billion. In the wake of the war Russian trade volumes with China soared to over $100 billion in the year to September, mostly thanks to increased Chinese imports of Russian crude oil. But Beijing’s trade relationships with the EU and US were still more than 20 times greater. Furthermore, there was every reason to believe that Beijing was taking full advantage of Russia’s sanctions-driven economic weakness.
Before the war, Russia accounted for some 12 per cent of global oil exports – 53 per cent of which went to Europe, 39 per cent to Asia. Unlike gas, Russian oil did not need expensive pipelines, so the oil no longer heading to Europe could be easily shipped to Asia instead. But both India and China ruthlessly insisted on a massive discount on buying Russian oil. Beijing had previously done exactly the same to Iran – one advantage of being the sanctions-busting buyer of last resort. Brent and Urals crude, which for decades had traded at near-parity, radically bifurcated by the end of March, with Urals retailing at a $35 a barrel discount – making the real price of Russian oil in late summer just over $60 a barrel. Moreover, shipping Russian oil had also become much more expensive because of sanctions that complicate maritime and load insurance as well as payments.
That meant that even a relatively small fall in world prices could be devastating for Russia. A 2019 study by Saudi Aramco found that Russia was one of the most expensive places in the world to produce oil, at around $42 a barrel for Russian onshore projects and $44 for offshore projects – compared with just $17 for Saudi crude. Factoring in the ongoing $35 discount on Urals crude and the $42 cost of production, a fall in world oil prices to less than $77 a barrel would push the profits from Russian oil below zero. And dropping world oil prices was precisely what Biden set out to accomplish.
World War Z
In July Biden headed to Riyadh for his first meeting with Crown Prince Mohammed bin Salman to negotiate an increase in Saudi oil production to ‘stabilise’ – i.e. lower – the price of crude. Using the Saudis to undermine Moscow was a tactic that worked for Ronald Reagan back in 1982. Congressman Charlie Wilson, among others, successfully persuaded the Saudis that the Soviets were annihilating their co-religionists in Afghanistan and needed to be taken down by a combination of Stinger missiles smuggled to the Mujahideen and low oil prices that would (and did) collapse the Soviet economy. Four decades later, though, the US had much less leverage over the Saudis – especially after Washington has blasted them for involvement in a brutal war in Yemen and over the kidnap and murder of dissident journalist Jamal Khashoggi in Istanbul in 2018.
Biden’s effort did not bring any immediate results, and by September world oil prices had begun to creep upwards towards the psychologically important $100 a barrel. But it was Putin, ironically enough, who supplied the strongest potential argument for the Saudis to crank up production and drop prices. A week after Biden’s visit to Riyadh, Putin showed up in Tehran to meet with Iran’s President Ebrahim Raisi, as well as Turkey’s Recep Tayyip Erdogan. The ostensible reason for the summit was to discuss the future of Syria – where Russia was instrumental in saving the regime of Iran’s ally Bashar al-Assad against Saudi- and Western-backed resistance. The real reason was to showcase a newly emerging anti-Western, anti-democratic alliance between Moscow and Tehran.35
Post-Soviet Russia’s relations with Iran had always been ambivalent. In the 1990s the Yeltsin regime constructed a civilian nuclear reactor at Bushehr and covertly helped Tehran develop its Shehab-3 medium-range ballistic missile. But under Putin Russia joined the West in putting a halt to Iran’s nuclear weapons programme – partly because Moscow was wary of a nuclear-armed Iran flexing its muscles in the region and partly because support for the ayatollahs had damaged Russia’s economic relationship with the West. The Ukraine war changed all that, as Russia overtook Iran as the world’s most-sanctioned pariah state.
With relations with the West irreparably broken down, an alliance with Iran came to look like an attractive strategic proposition for Moscow. In Tehran Putin’s foreign policy adviser Yuri Ushakov told reporters that a ‘trusting dialogue’ had developed between Russia and Iran and that ‘on most issues, our positions are close or identical.’36 More immediately, Russia needed Iranian drones to counter the threat of Turkish-made Bayraktars that the Ukrainians had used to devastating effect.
Putin affected not to care about Russia’s international isolation. On 8 July at the G20 summit in Bali, Indonesia, Russian Foreign Minister Sergei Lavrov had his first direct confrontation with Western leaders since Russia mounted its attack on Ukraine. ‘[Lavrov] spent a large part of the negotiations not in but outside the room,’ Germany’s Foreign Minister Baerbock told reporters. ‘There is not a millimetre of willingness to talk on the Russia side.’ Lavrov demonstratively walked out of the conference chamber when Baerbock began to speak – proof, she later said, that the mood in the room was ‘19 to 1 against Russia’s invasion, even if disagreements existed on sanctions’. Western leaders then refused to be photographed alongside Lavrov.37 In September Russia, Belarus, Afghanistan, Venezuela and Syria were pointedly not invited to even send their ambassadors to the funeral of Queen Elizabeth II – an event attended by representatives of North Korea and Iran.
China remained as Russia’s last – and more or less only – major international ally. Chinese Foreign Minister Wang Yi denounced Western ‘double standards’ on sovereignty and territorial integrity, and accused unnamed countries of upholding Ukraine’s sovereignty while they refused to recognise Beijing’s claim to rule Taiwan – an impressive feat of logical contortion. ‘The Chinese side rejects any attempt to draw parallels between the Ukraine crisis and the Taiwan question, and will firmly defend its core interests,’ Wang declared. ‘China opposes exploiting the situation to incite Cold War mentality, hype up bloc confrontation, and create a new Cold War.’38 But that diplomatic support did not, as we have seen, translate into a willingness to break US sanctions, pay a market price for Moscow’s oil, or supply Russia with desperately needed military materiel or financing.
But some other powers remained on the fence – notably India (which refused to participate in international sanctions, preferring to take as much cut-price Russian oil as it could) and Russia’s on-again, off-again ally Turkey. Putin’s relations with Erdogan had always been stormy, not least because Turkey remained an official US ally and stood on a different side of the fence to Russia and Iran on the conflict in Syria. At a meeting between Erdogan and Putin in Tehran in July, there was a clear shift in the balance of power between the two leaders who had once described each other as ‘friends’. Erdogan kept Putin waiting awkwardly in front of reporters – a classic dictator’s power play more usually employed by Putin himself, who famously kept Angela Merkel waiting for four hours and the Pope for nearly two.39
Turkey had hosted the first, abortive rounds of negotiations between Kyiv and Moscow in March and April. And in July, Russia, Turkey and Iran did find one thing to agree on: opposition to Syria’s pro-American Kurds. Erdogan’s transactional and occasionally confrontational relationship with Washington frequently aligned with the Russians’ and Iranians’ implacable hostility. In August Turkish Foreign Minister Mevlüt Çavuşoğlu also succeeded in persuading the Russians to open a maritime corridor for Ukrainian grain to be exported from Odesa – easing some of the criticism from African and Middle Eastern countries of Russia’s shipping blockade that had caused world grain prices to soar.
Internationally, Russia stood almost alone. In a 5 March vote in the United Nations’ General Assembly that ‘deplored in the strongest terms the aggression by the Russian Federation against Ukraine’, only Belarus, Syria, North Korea and Eritrea voted with Russia. Cuba spoke in Moscow’s defence but ultimately abstained – along with 34 others, including all the members of Putin’s Eurasian Economic Union and Russia’s ambivalent allies China, India and Turkey.40 North Korea, Russia’s unexpected international supporter, offered to supply artillery to Moscow to help conquer Ukraine and manpower to rebuild it – an offer that DNR President Denis Pushilin welcomed warmly. But Putin’s former allies in his own near abroad shunned not only Moscow but their association with Russia altogether. In August the leaders of Azerbaijan and Kazakhstan – both nominal Moscow allies – met in Baku but pointedly refused to speak Russian in public. Ukrainian flags were flown in cities across Kazakhstan.
