20 years under Putin: a timeline

Is the surge in natural gas prices in Europe this winter related to the escalation in Ukraine following Putin’s ultimatum to the West and threat of war? According to economist Vyacheslav Inozemtzev, director of the Center for Research on Post-Industrial Societies (Moscow), the answer to this question is not as straightforward as it might appear.


Nord Stream II pipeline was completed in November 2021, but since then it has been pending the certification of the European regulator, which, according to the latest estimates, will not take place until the second half f 2022. Photo: Pixabay.


The current tensions in the relationship between Russia and the West, largely triggered by the situation around Ukraine and Moscow’s demands for this country to be part of the “Russian world,” have economic implications: we recently saw how the escalation seriously affected the Russian and Ukrainian financial markets. However, this conflict, regional in its essence, has been gaining global dimensions as well. 

First and foremost, there is its influence on the global energy market: Russia finished last year second in the global ranking of oil and natural gas producers with a total of 524 million tons of oil and 762 billion cubic meters of gas; it was also the second and first largest exporter of these raw materials, respectively. Moscow doesn’t just reap profits from the surging oil prices (Russia’s exports grew by 45.7 percent in 2021, and its budget’s oil and gas revenues by 3.1 trillion rubles, or $40.5 million), but also takes advantage of its unique position in Europe, its key market for gas sales. In 2021, Russia’s share of European gas imports stood at 46.8 percent (it was around 10 percent in the Chinese market). Hence Western experts’ concerns and suggestions that the Kremlin may be stoking military hysteria to boost gas prices, among other reasons.

There is some rationale for this hypothesis. On the one hand, last year, natural gas prices in Europe increased almost 10-fold, and 13-fold compared to the 2021 minimum and maximum data. Still, Gazprom was not keen on taking advantage of that fact to grow its exports and kept reserves at its gas storage sites at a record low. On the other hand, Russia has strongly insisted on a prompt launch of the recently completed Nord Stream-II gas pipeline, which was opposed by the United States, Ukraine, Poland and other Central European countries, who have vehemently spoken against it. This pipeline allows Moscow to cease gas transit through Ukraine, and, as many experts noted, the mere existence of this powerful gas artery has long prevented Russia from invading its neighbor. 

However, the possibility that Russia had a preexisting plan to connect its Ukraine escalation with the ups and downs of the energy market is rather low. Most likely, the gas price situation has been influenced by three factors.

First, there is the gas market reform implemented by European countries, which aimed to create a unified gas market operating on the basis of spot contracts. As European policymakers themselves note, the achievements of “green” energy policies were overestimated, as was the level of coordination on behalf of the member states. As a result, having unified the rules of the game for the EU and even some bordering countries (even Moldova switched to spot contracts), Europeans failed to create a centralized gas storage system, while 10 percent of the gas storage capacities were controlled by Gazprom, a potential price manipulator. All this did not so much boost gas prices as it did create conditions for their rapid growth, which became unavoidable due to the surge in oil prices, and was further accelerated by speculations, exporters’ activities and a significant decline in electricity production by French nuclear plants.


It should be noted that the main beneficiary of this situation (at least in the last months of 2021) was not Gazprom, whose main export deliveries were implemented under long-term contracts, nor even Norway’s Equinor, but the European countries that delivered and sold the gas to the final consumer. An additional factor, however strange, was the policy of those governments that attempted to compensate for rising energy bills through subsidies to the public (in the U.K., such subsidies covered half of the expenses caused by increased energy consumption), which allowed prices to rise even further. 

Second, there’s the discord surrounding the Nord-Stream II pipeline, which had been nearing completion back in 2019 when it was sanctioned by the U.S., delaying its construction by nearly two years and making the participating companies very toxic. Germany, which has been a consistent supporter of the project, ended up alone and remains relatively isolated on this issue. Facing opposition to the pipeline’s certification, Gazprom virtually resorted to blackmail, curbing gas transit to Europe through Ukraine. Formally, the company claimed that it abided by all its responsibilities, however, under different circumstances, considering the colder winter season and more frantic energy consumption, Gazprom could have increased transit volumes in 2021 (over the last five years, its exports to the EU fluctuated by 12-17 percent around the average point), making additional profits and lowering speculatively high prices at the same time. Last fall, for example, European gas prices would fall by more than a third on a single day of sale following Putin’s reassurances about exports. However, Moscow considered its efforts to force Europeans into certification of the Nord Stream II more worthwhile than extracting short-term profits. Even as the situation remained problematic for Europeans, they did not balk: first, the German regulator demanded that the project operators renew their registration in Germany, and then European authorities announced that they would make their final decision in the second half of 2022.

The most dramatic events in the European gas market took place before the hysteria around the “inevitability” of Russian aggression against Ukraine emerged, and before the Kremlin served the West with its “thoughts” on issues of “collective security.”

The third factor is Moscow’s current policy toward Ukraine and the reaction of the U.S. and NATO to it. When it comes to gas prices, the problem here, I would say, is not the threat of conflict itself (in 2014–2015, during the Donbass military conflict, Russian gas exports through Ukraine did not halt), but the Western governments’ possible reaction to Russian aggression. A number of proposals to sanction Russia for a potential invasion in Ukraine provide for a limited response against the Russian oil and gas sector, and many policymakers believe that Moscow may retaliate by limiting its exports. Regardless of how unbelievable this scenario sounds (Russia, as I have repeatedly noted, depends on the European gas market more than Europe depends on Russian exports), Washington has specifically assessed the possibility of replacing Russian pipeline-delivered gas with LNG: the State Department, for instance, discussed it at a meeting with the managers of international energy companies, and the White House with the emir of Qatar. As the Russia-Ukraine conflict is still far from being resolved, it continues to exert influence on prices—but it is hardly the strongest factor. 

The idea that Russia intentionally provoked the conflict around Ukraine in order to manipulate gas prices in Europe seems to me rather far-fetched. The logic of the conflict indicates that it developed independently from gas problems: If Russia wanted to hit the jackpot in the European market and simultaneously bid Ukrainian gas transit farewell, it could have postponed the military buildup on the border and ultimatums to the West until Nord Stream-II was completed and certified. And then Moscow could have announced a kind of accident (one may recall how the transit from Turkmenistan to Europe was halted in 2009), pause transit through Ukraine indefinitely and skillfully manipulate prices—with all the ace cards at its disposal and no prospective sanctions. 

As the events of late 2021 have shown, Russian authorities could significantly move the European gas market with mere public statements, and could have continued doing so for a long time, considering all the aforementioned problems. Moreover, as Russia’s exports expand eastward, where China intends to cover its energy needs at any cost (last year, it became the world’s biggest LNG importer, even as gas prices in Asia were higher than in the EU), Moscow would have received additional leverage to pressure European consumers. Yet it should be noted that the most dramatic events in the European gas market took place before the hysteria around the “inevitability” of Russian aggression against Ukraine emerged, and before the Kremlin served the West with its “thoughts” on issues of “collective security.”

What are the potential consequences of the events of 2021for the European gas market? In my opinion, the prospect of war in Ukraine and Western sanctions against Russian oil and gas exports doesn’t seem very realistic—therefore, we should consider the “inertia” scenarios first. Lately, gas prices in Europe vary between $820 and $900 for a thousand cubic meters, which means the following: gas costs a little less than twice the price of oil in terms of their respective thermal power. This ratio seems justified from the European perspective of environmental consciousness, especially given that EU authorities plan to put natural gas on the list of “green” energy sources. In turn, oil prices are supported not so much by conflicts in various parts of the world, but by enormous speculative pressure on the market caused by the leading central banks’ emission policies. The inflation provoked by these policies will remain significantly above average for the coming few years—and, therefore, oil prices will stay at around $100 per barrel as well. Everything points to the fact that Russia will feel quite comfortable in terms of its export revenues, even without a large military conflict in the post-Soviet territory.


Text translation: Elizaveta Agarkova.