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Thursday, October 21, 2021

Putin’s gas war with Europe is far from over

The underlying causes of the crisis lie elsewhere and are by now well-understood: a cold wet spring in Europe, a move from coal to gas due to rocketing carbon futures, a V-shaped industrial recovery worldwide and a drought in South America that forced a switch from hydro to liquefied natural gas (LNG). 

It is above all caused by a surge in Chinese LNG demand, in part due to China’s dash-for-gas in homes and the parallel closure of death-trap coal mines in Shanxi and Mongolia earlier this year. It is therefore unfolding events in China that will set the price of our gas this winter, not Mr Putin’s elliptical utterances.

But Mr Putin can influence prices at the margin, and the margin is good enough in circumstances of parabolic panic. “This would have been impossible a year ago. Gazprom’s deliberate refusal to pump a little more gas is the last straw,” said Russian economist Maxim Blunt.

This episode is a unique chance for the Kremlin to try to kill two strategic birds with one stone: to castrate Ukraine by means of Nord Stream 2, and to subvert Europe’s Green Deal before it is set in stone. “You want decarbonisation? We will show you decarbonisation,” said Mikhail Krutikhin, a Russian energy veteran at RusEnergy and author of a caustic Moscow blog.

“The thinking goes: First, we will make you freeze this first winter and cut down gas flows, and then tell me if you need these windmills. You will come back crawling on your knees, begging for help and forgetting about the European antitrust energy laws, and cursing the Swedish student Greta,” he said.

Checkmate to the Kremlin, say many in the West. Mr Putin holds the trump cards. But Mr Krutikhin says it is the Kremlin that has misjudged the speed of Europe’s green transition and the competitive threat of renewable technology. Mr Putin’s gas squeeze is the last hurrah of a failed national strategy. It is likely to backfire as Europe wakes up to the security threat and accelerates its push for energy autonomy.

Either way, the result is the same. Mr Putin has added a risk premium to winter gas futures, first by withholding top-up flows through Ukraine needed to replenish depleted inventories (yes, while complying with minimum contract deliveries), and then by slashing October flows through the Polish Yamal route (claiming that Russia still needs to fill its own inventories). 

It was the latter “signaling shock” that sent UK contracts to an all-time high of 407 pence per therm last week. They have since dropped back to 225 pence on Mr Putin’s supposedly soothing words, but that is still five times higher than a year ago. 

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