EU Energy Dependence on Russia
By Sofia Bertolaja, 5 minutes.
European nations seek to eliminate their reliance on Russian fossil fuels in five years, and by the end of 2022, they hope to reduce their reliance on Russian gas by two-thirds. If Europe keeps its promises, Russia’s invasion of Ukraine might spark one of the most rapid energy shifts in history.
Shocking images from the Ukrainian village of Bucha and claims of war crimes levelled at Russia are increasing the demand for more sanctions against the country. This punishment is used as a geo-economic means to convince Russia that this is in its interest to respect the EU’s rules. A prominent possible target is Russian oil and natural gas and the $850 million (€775 million) per day that European importers pay for those commodities. However, this will not be easy given Europe’s reliance on Russian energy. How dependent is Europe on Russian energy imports, is a boycott of Russian oil and gas conceivable, and what impact would it have on European economies?
The EU’s Dependence on Russian Gas
The EU imports around 40 per cent of its natural gas from Russia, which is used to heat homes, produce power, and supply industry with both energy and a critical raw ingredient for goods such as fertilizer. Europe has some oil and gas reserves, but output has dropped, leaving the EU’s 27 member states reliant on imports.
One hundred forty billion cubic meters of the 155 billion cubic meters of gas imported by Europe from Russia pass through pipelines that span Ukraine, Poland, and the Baltic Sea each year. Europe is trying to get more supplies via ship in liquefied natural gas, or LNG (liquefied natural gas), but this will not compensate for the loss of gas through the pipeline. LNG is also significantly more expensive, and supplies are at capacity. While certain European nations, such as Spain, are well-connected to LNG terminals, and new projects are in the works in areas such as Greece and Poland, the infrastructure to bring supply to the rest of Europe is lacking. It might take years to build LNG import facilities and pipelines to link the gas to where it is needed.
Because dependency on Russia varies, reaching a consensus on an EU embargo is more complicated. For example, Lithuania will no longer purchase Russian gas and will instead rely solely on an LNG terminal it constructed in 2014. Moreover, Poland, which has spent years hunting for alternatives, has announced that it will not renew a gas contract at the end of 2022 and will take steps to prohibit Russian coal and oil.
Furthermore, even after reducing its dependency, Germany, the continent’s largest economy, still gets 40 per cent of its gas from Russia. The European state is connected to Russian energy because of the North Stream 2. Owned by the Russian energy company Gazprom, North Stream 2 is an $11 billion gas pipeline that spans the bottom of the Baltic Sea for over 1,200 km, from western Siberia to Germany. The North Stream project was born in 1997 to bring Russian natural gas to Germany without crossing the Baltic States. Completed in September 2021, the pipeline is not yet operational, pending the green light by the German regulators and the EU Commission. With the escalation of the war in Ukraine, this project has seen a halt. According to German Economic Minister Robert Habeck, Germany wants to cease Russian coal imports in the summer of 2022, oil imports by the end of 2022, and be substantially self-sufficient in gas by 2024.
Economic Sanctions and the Impact on the EU’s Economy
Following Russia’s invasion of Ukraine, the EU and the international community imposed the first diplomatic and financial sanctions. As the war continues, several nations have expanded the scope of sanctions to include trade. While these penalties are unusual, they are insufficient since the Russian economy continues to benefit from oil, gas, and coal sales. According to Eurostat, the EU’s Russian energy imports will be over €99 billion in 2021, accounting for 62 per cent of Russian imports.
Energy prices have skyrocketed as a result of the war. Currently, the EU pays Russia around €640 million per day for oil and €360 million per day for piped natural gas. Without a doubt, the EU’s reliance on Russia for energy is its Achilles’ heel and Russia’s most powerful economic lever. This has to end.
As Russia’s invasion of Ukraine proceeds, EU leaders are considering harsher penalties. Whether to restrict – or, in the worst-case scenario, embargo – Russian oil and gas imports is at the heart of this argument. While many economists have concentrated on the impact of an embargo, Hausmann (2022) and others have suggested that imposing taxes on Russian imports may harm the Russian economy at a considerably smaller cost to the EU. This is because tariffs, unlike embargoes, can be imposed without regard for the EU’s reliance on the commodities in the issue. This is because (a) tariffs allow EU consumers to continue purchasing products if they value them highly enough, and (b) while tariffs raise costs for EU consumers, they also produce income for the EU central budget – which may be returned to consumers.
What counts is not how dependent the EU is on Russia but how dependent Russia is on the EU because this determines how much tariffs may shift the pre-tariff price at which Russia sells to the EU. To the degree that Russia relies more on the EU as a buyer of natural gas than as a buyer of products currently embargoed by the EU, a gas tax would be a more efficient penalty for harming the Russian economy at the lowest possible cost to the EU.
Conclusion
Reduced Russian gas imports and improved access to alternate sources will benefit Europe as a whole and the environment. This entails increasing investment in gas storage and other infrastructure, hastening the adoption of renewable energy, and boosting nuclear power use. Europe will not be able to cut its reliance on Russian gas from one day to the other, but it can avoid being kept hostage. European leaders may lessen their susceptibility to supply interruptions and Putin’s capacity to inflict harm by implementing a concerted effort to diversify their energy resources.
