Europe’s soaring gas prices: does Russia hold solution to crisis?

Some believe Kremlin sees gas prices as chance for Gazprom to pressure west to speed up Nord Stream 2 approval

Vladimir Putin. Vladimir Putin. The Kremlin has sought in the past to portray itself as a reliable gas supplier vis-a-vis the west. Photograph: Ümit Bektaş/ReutersVladimir Putin. The Kremlin has sought in the past to portray itself as a reliable gas supplier vis-a-vis the west. Photograph: Ümit Bektaş/Reuters

in Brussels and Pjotr Sauer in Moscow

The natural gas market has entered uncharted territory. The movements in the price of gas on Wednesday had been, in the words of one analyst, “unprecedented since the year dot of gas liberalisation in Europe”. In record swings, Dutch wholesale gas, a European benchmark, soared by 30% within one period of three or four hours from an already eye-watering level.

These are chilling numbers for European governments with winter stretching ahead, and when the EU sneezes, the UK, heavily reliant on imports from across the Channel, also catches a cold.

The shortage was caused by a confluence of events around the world, as economies emerged power hungry from their pandemic slowdowns. At the centre of the storm is Russia. While it supplies only 1% of UK gas, Russia is the biggest supplier to Europe, accounting for roughly 40% of all EU gas. And a squeeze on European gas volumes leads to price hikes in the UK and beyond.

There is no doubt that Russia did not deliver as high a volume of gas to north-west Europe this summer compared to pre-Covid years.

graphic gas supply to UK

From September to October, north-west Europe volumes dropped by about 17%, according to Tom Marzec-Manser, the lead European gas analyst at ICIS LNG Analytics.

The fact Russia’s Gazprom has also failed to book additional gas transit capacity via Ukraine to European destinations for October has led some to accuse the Kremlin of manipulating a crisis.

“While Russia has been technically fulfilling its contractual obligations with the west, it has not been interested in capitalising on the high demand to send additional gas to its European clients. It is the only country that could really ease the pressure on the prices and has decided not to,” said Maria Shagina, a postdoctoral fellow at the University of Zurich, who focuses on energy politics.

The Kremlin has always sought to portray itself as a reliable gas supplier vis-a-vis the west. The recent developments, however, could signify a new phase in its foreign policy as some analysts believe the Kremlin views record gas prices as an opportunity for Gazprom to pressure its western partners to speed up approval for the controversial Nord Stream 2 pipeline.

Nord Stream 2, seen as vital by the Kremlin, is expected to double natural gas supplies from Russia to Germany, but has divided European nations and caused friction between the bloc and the US. The pipeline will bypass Ukraine, costing the country an estimated €1bn (£0.85bn) in transit.

Nord Stream 2 approval may cool gas prices in Europe, says Russia

“Russia will feel like they are in a position of power and will try to use its gas supplies as leverage to speed up the final approval of Nord Stream 2,” said Shagina. “Russia hasn’t used its gas as a weapon with western Europe before.”

Fatih Birol, the executive director of the International Energy Agency, claimed on Wednesday that Russia has the capacity to alleviate the energy crisis, “if they wish so”. The agency’s analysis suggests it has the capacity to increase supplies to Europe by as much as 15%.

Serbia’s president, Aleksandar Vučić, described Vladimir Putin as a “kingmaker” in the energy market, but the Kremlin’s spokesman, Dmitry Peskov, has denied claims of a conspiracy, pointing to Russia’s own domestic needs in winter after a cold first quarter to the year.

Notably, the German chancellor, Angela Merkel, has also echoed the denial. And while Wednesday saw unprecedented hikes, what followed later in the day, according to some analysts, points to any suggestion of omnipotence on the part of Vladimir Putin as being hugely overblown.

“Let’s think through possibly increasing supply in the market, only we need to do it carefully. Settle with Gazprom and talk it over,” said Putin, in comments that immediately saw a significant reverse in the price rises of earlier in the day, even pushing prices lower than the day before.

On Wednesday afternoon a significant increase in gas supply from Russia came through Poland and Ukraine. “The flows were greater than the day before – there was an immediate step-change,” Marzec-Manser said. There is, he added, “some belief that there may be more of that in the days and weeks [to come]”.

Gazprom’s domestic gas storage fullness must reach a targeted 72.6bn cubic metres by the start of November. From then on, Russia ought to have more gas available to export.

Most analysts do not see any significant gain coming from Nord Stream 2 this year, even if approval is secured, given it is likely to be running at 10% capacity.

Whether salvation is coming will be clearer on 18 October, the date by when capacity through Ukraine and Poland for November will need to be booked.

Jacob Kirkegaard, a senior fellow at the German Marshall Fund, said the developments illustrated that Putin was not acting from a position of strength, but of weakness. “He needs to sell,” Kirkegaard said. “Yes, he may be playing the European gas markets but he is also responding to his own weakness … He does not have an interest in forcing an accelerated decarbonisation in Europe.”


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