President Vladimir Putin’s invasion of Ukraine is forcing governments worldwide to digest the geopolitical consequences of war pursued by an energy superpower.
The 27-nation European Union has responded by speeding up its disconnection from Russian gas, while the U.S. has barred Russian oil imports and is scouring the world for alternative supplies. Saudi Arabia is reveling in a renewed strategic importance as crude prices that collapsed two years ago hit new highs.
And Russia, by threatening to withhold energy exports to Europe, is being thrust closer to China.
With the war in its third week, the shifts underway are inflaming old grievances but also creating the opportunity for fresh alliances as blocs start to align in what looks like a new world energy order.
“This represents the biggest re-drawing of the energy and geopolitical map in Europe — and possibly the world — since the collapse of the Soviet Union, if not the end of World War II,” said Bob McNally, president of Washington-based consultant Rapidan Energy Group and a former White House official. The outcome, he said, could be “a sequel to the Cold War.”
Germany, at the nexus of the original Cold War standoff, is again at the forefront of the changes now being witnessed. Days after Russia sent its forces into Ukraine, Chancellor Olaf Scholz announced a massive increase in Germany’s defense budget along with plans to pursue greater energy security.
Putin’s unprovoked attack was a watershed moment, and “this new reality requires a clear response,” he told an emergency session of parliament.
For Berlin, loosening its energy dependence on Russia is not simply about hitting Moscow’s main revenue stream. It’s a threat to roll back “Ostpolitik,” a totemic post-World War II policy of rapprochement with the Soviet Union, and by extension later Russia, that involved economic and political engagement, notably through oil and gas links.
The demise of Ostpolitik — symbolized by the halt to the $11 billion Nord Stream 2 gas pipeline — is just one of the most visible signs of the rapid realignment underway as a result of Putin’s aggression.
Although initial sanctions deliberately spared Russian energy to avoid the knock-on effects for the world, government actions and near-universal condemnation since are rendering its supplies almost untouchable for buyers. Diesel prices in northwest Europe have hit the highest since the 1980s as a result.
Yet as customers desert Russia, its partnership with the oil titans of the Middle East, with which it jointly leads the OPEC+ coalition, has so far stayed intact. Russia and Saudi Arabia are the world’s top oil exporters, accounting for 29% of the global total.
Saudi Arabia has rebuffed U.S. pressure to replace Russian oil by tapping its spare production capacity, instead letting prices surge to a 13-year high of almost $140 a barrel. Riyadh refused to even brook discussion of Moscow’s difficulties when it was raised at an OPEC+ meeting on March 2. Saudi Crown Prince Mohammed Bin Salman spoke with Putin the previous day.
“The U.S. can try to make Saudi Arabia increase production, but why would they accept a break in the alliance, which is key for them?” said Paolo Scaroni, former chief executive officer of Italian oil company Eni SpA.
There’s a political dynamic at play to explain the kingdom’s fidelity to Moscow beyond the gusher of oil revenue.
Where Donald Trump cultivated a particularly friendly relationship with Saudi Arabia — making his first foreign trip as U.S. president to Riyadh — ties have turned colder under President Joe Biden. On the campaign trail, Biden pledged to make the kingdom a “pariah,” in part because of the killing of columnist Jamal Khashoggi. He will only deal with the elderly King Salman, relegating Mohammed bin Salman to interact with more lowly officials despite being the kingdom’s defacto ruler.
By contrast, Riyadh’s OPEC+ partnership with Moscow calmed years of distrust between the two oil rivals, and saved the kingdom from relying exclusively on Washington.
“Saudi Arabia doesn’t want to switch horses mid-race when they do not know if the other horse is actually going to show up,” said Helima Croft, chief commodities strategist at RBC Capital Markets.
Gulf Arab nations accused the U.S. of a lack of support in the face of repeated attacks by Iranian-backed militia on Saudi oil facilities and Gulf tanker traffic, and on Abu Dhabi this year. In a measure of the discord, the United Arab Emirates abstained in a U.S.-led United Nations Security Council vote to condemn Russia’s invasion.
“Now that we are in a crisis moment, we’re reaping the effect of that lack of trust that’s been building over the years,” said Karen Young, senior fellow at the Middle East Institute in Washington.
Another source of friction lies in U.S. efforts to reinstate the nuclear agreement with Iran, Saudi Arabia’s regional rival. A deal could see Iran revive production by 1.3 million barrels a day to pre-sanctions levels by the end of the year, according to the International Energy Agency.
It was Trump who unilaterally pulled the U.S. out of the Iran accord in the face of opposition from world powers including Moscow. Now it’s Russia that’s undermining U.S.-led efforts to refloat the deal by seeking to link its own treatment for starting the war in Ukraine to any agreement with Tehran. Indeed the efforts to revive the accord were suspended again on Friday.
Biden needs more oil to keep down the price of gasoline at the pump for American voters and help his Democratic party’s chances of retaining Congress in November’s midterm elections. Defeat could further damage his ratings and usher in a Republican — conceivably, even a Trump — comeback in 2024.
On Tuesday, as he announced a ban on all imports of Russian oil and gas, Biden acknowledged the domestic impact. “I’m going to do everything I can to minimize Putin’s price hike here at home,” he said.
Energy Secretary Jennifer Granholm went further as she reached out to domestic producers to boost supply. “We are on a war footing,” she told oil executives.
Demonstrating just how exceptional the times are, a U.S. delegation traveled to Russian ally Venezuela last weekend in an overture to a country that holds the largest known crude reserves in the world.
Venezuela has been subject to international sanctions since the Trump era that have crippled its ability to sell oil. While there is not yet talk of allowing exports to resume, President Nicolas Maduro responded by offering to turn on the taps anyway, saying that state oil company PDVSA is prepared to raise output to as many three million barrels a day “for the world.”
For Felix Arellano, a professor of International Relations at the Universidad Central de Venezuela in Caracas, the U.S. visit was “unexpected, surprising, a complete change in policy orientation,” with energy as the strategic catalyst.
“But I think there is a more important geopolitical move that is redefining the West,” he added. The U.S. is looking to confine the spheres of influence enjoyed by Russia and especially China, and for Venezuela that means a gradual process “to reincorporate with the West, through energy.”
China has been ambiguous toward Russia’s aggression, expressing concern about civilian casualties and saying it supports Ukraine’s sovereignty, without condemning the Kremlin’s actions or joining other countries in imposing sanctions.
China will continue to carry on “normal trade cooperation” with Russia, including in oil and gas, said Zhao Lijian, a foreign ministry spokesperson. China is considering buying or increasing stakes in Russian companies such as Gazprom PJSC, Bloomberg reported this week.
But as pressure grows to ditch Russian energy imports, Putin can’t just assume that Beijing will take up the slack. For one, President Xi Jinping is keen to avoid instability as he seeks an unprecedented third term later this year.
There are also business reasons. Even assuming a discount on the price per barrel, state-owned importers would weigh very carefully the impact on their global business of large purchases from a country that’s subject to so many sanctions, according to Qin Yan, an analyst with research house Refinitiv.
Neither would buying energy from Moscow be an easy solution, even if it meant less pollution, said Li Shuo, a climate analyst at Greenpeace East Asia. “To change China’s current energy structure, to replace a lot of coal it uses now with Russia’s oil and gas, would be a huge project for China, and it would take time,” he said.
In Europe, the EU is refusing to budge on its climate commitments as it seeks to slash imports from its biggest supplier this year and replace flows from Russia completely by 2027. Those efforts were given a jolt by a suggestion that Moscow might shut off gas supplies through the Nord Stream 1 pipeline to Europe.
“We simply cannot rely on a supplier who explicitly threatens us,” EU Commission President Ursula von der Leyen said as she unveiled the bloc’s plans this week.
A day later, Kremlin spokesman Dmitry Peskov said Russia “values its reputation as a reliable energy supplier,” but added that sanctions may cause a rethink.
Any immediate disruption would hit Germany particularly hard. Europe’s biggest economy is reliant on Russia for more than half of its natural gas supplies, and doing all it can to cut that dependence presents “extreme challenges,” Economy Minister Robert Habeck said Thursday.
Yet as Scholz told the Bundestag, Russia’s attack on Ukraine means “we are in a new era.” The world today “is no longer the same world that it was before.”
©2022 Bloomberg L.P.
