Cables From The Diplomatic Frontlines

US Contingency planning: EU’s energy crisis

• As things stand, the preponderance of evidence suggests that Russian attack invasion of Ukraine (or at least a limited military campaign) is still more likely than not.

• Consequently, it is indeed correct for the US to lead certain contingency planning efforts - and the most pressing issue is undoubtedly the dependence of the EU on Russian gas, and the possible widespread repercussions that could take place if this gas was indeed cut off.

• We shall take things in order, and consider first, if even such a gas cutoff from Russia is likely.

• We will then look at possible coercive and diplomatic tools that the West could utilize to dissuade Putin from pulling the gas cut-off trigger.

• Finally, we shall unpack shorter-term policy options available to the EU, and what the US could do to help - if this gas crisis does indeed take place.

• 1. The likelihood of Russia pulling the gas cut-off trigger

• Given that Russia currently maintains an extreme leverage over the EU by supplying 41% of its gas, it is only natural for the NATO leadership to raise alarms around this unfortunate dependence - and what Russia may consequently do to force the EU into appeasement.

• Indeed, many have (persuasively) argued that Putin deliberately chose winter for escalations in order to maximize his leverage over the EU - when the general public would put the most pressure on their governments, demanding affordable heating.

• But in determining the likelihood of Putin utilizing this tool, we need to unpack three major factors:

• a. Limited time-frame of effective applicability

• Given that any possible military operations would take place after the conclusion of the Beijing Olympics on February 20, if/when Putin decided to pull this lever, he would have only about 30-40 available for maximum effect - before the warmer spring weather rescues Europe.

• Some have dismissed the argument that Putin wouldn’t mess with the Olympics in China, by pointing out the August 2008 invasion of Georgia - which happened only a few days before the start of the summer 2008 Olympics in Beijing.

• But this is not a great analogy, for three reasons:

• 1) Even though Ossetia and Abkhazia were internationally recognized Georgian territories, and Georgia did indeed have a right to reclaim them by force, the initial conflict still escalated after Georgia initiated a blitz attack - Russia was in fact responding to the attack.

• And if it chose to wait out the Olympics, it would have been forced to recover those territories from Georgia - which would have been both: a) much more politically difficult, and also, b) more costly in terms of treasure and blood.

• 2) Invading Georgia is an easier and a 10x less time-consuming affair than invading Ukraine.

• The entire 2008 conflict lasted for only about a week (with most of the fighting taking place within 5 days).

• 3) Back in 2008, Russia-West relationships weren’t at such a low point, and Putin was not depending on his relationship with Beijing as much.

• China furthermore, didn’t have a leader like Xi - someone as ambitious and combative (and therefore, willing to partner up closer with Putin).

• In other words, back in 2008, the Russia - China relationship wasn’t as strong, and Putin didn’t feel any strong obligation not to steal the spotlight from the Beijing olympics.

• So then, Putin would only have this lever available (at its highest impact) for only 1.5 months - before April comes around the corner and the heating needs come down enormously.

• And at that point, a lack of Russian gas will only amount to a significant inconvenience - instead of a major crisis.

• b. Costs and Benefits of this ploy

• Gains:

• 1) In addition to the most obvious and impactful gain (hostage-taking and dissuading the EU from joining the US in implementation of the the harshest sanctions), Putin could also aim for something bigger - a more extreme version of divide & conquer, where the EU becomes eager to avoid the crisis and agrees to have a separate ‘‘new European security architecture’’ type deal with Russia.

• Such a deal would be devastating to the sidelined US.

• Washington’s power and influence over the European theater would permanently weaken, and future transatlantic alignment on foreign policy would be difficult to achieve.

• With extreme loss of trust between the EU and the US, future joint decision-making in other theaters would become harder to pull off as well - China will benefit, and will undoubtedly try to apply the same Putin formula if/when such a need arises.

• This would be the best outcome for Putin, and although still unlikely, it wouldn’t be a shocker either - after all, the French President Macron offered precisely this formula even prior to a major gas crisis.

• (side note: the Kremlin already demonstrated early indications of an interest in this ploy: Putin expressed his hopes to continue the diplomatic dialogue with French President Emmanuel Macron, who will soon visit Moscow as he seeks a greater role for the EU in defusing the crisis.)

• And if his calls were dismissed the first time, there is no guarantee that when in a tougher spot, the EU would conduct itself with similar resolve.

• 2) Create long-term rifts within the EU - saving the best possible outcome above, this scenario would also be highly advantageous for Putin.

• The gas crisis will no doubt reveal deeper cracks within the EU alliance.

• We already see the foreign policy contrast between Germany (and to a lesser extent, Italy) on the one hand, and Poland/Baltic states/Spain on the other.

• When the gas crisis comes into its full swing, these rifts will only deepen further, and become nastier too - Putin will benefit from this lack of unity for years to come.

• He could both: a) prevent unanimity-requiring EU sanctions, and b) keep playing member states against each other.

• 3) Pressure on Ukraine to make concessions

• Even if the EU member states refuse to make direct concessions to Russia, at least some of them may indeed put pressure on Ukraine to offer some concessions to Putin - this would especially be the case, if the Ukrainian military suffers rapid battlefield losses, army morale tanks/counter-attacks look futile, and refugee inflows into the EU put further pressure on member states that are already struggling due to gas shortages.

• 4) Higher global gas prices would drive up a cost-push inflation amongst the EU member states.

• Manufacturing/transportation costs will go through the roof.

• The American public would also feel the costs of the conflict - as, 18% of the goods imported into US come from the EU.

• Already suffering from the public perception that it is mishandling the economy, the Biden administration would feel extra pressure from the added cost-push inflation.

• Possible losses:

• 1) Putin would be emptying his chambers here - he can pull this trick only once (at least with maximum effect).

• Alienated and angry, the EU may decide to double down on finally diversifying its energy sources - and undoubtedly, the US will be doing everything possible to help in this transition (as it is already doing, more on that later below).

• Putin’s most important leverage would therefore be gone.

• On the other hand, he may calculate that the EU is already seeing how precarious its situation vis-à-vis Russia really is - and that they will focus on diversification regardless if Putin pulls the trigger or not.

• So then, Putin may decide to empty his chambers before completely losing his opportunity to utilize this lever.

• 2) The EU public may react differently.

• Instead of putting pressure on their own governments, (and so, also on Ukraine) to concede, the European public may decide to demonstrate unity and resolve in the face of Russian bullying.

• Especially since the worst part of the crisis will not last too long.

• Under this scenario, not only would the EU not back down, but (due to a boost of self-confidence) it could furthermore join the US in imposing the harshest sanctions on Russia.

• 3) The US may help the EU to weather the storm (more on that later below)

• Effective US leadership would further weaken Russia and increase Washington’s influence in the European theater.

• 4) China may grow impatient

• High gas prices are definitely not in the interests of Beijing.

• China may decide to demonstrate some restraint for some (limited) time, but if this thing drags on (and if the Russian efforts to weaken Ukraine and undermine the Western alliance don’t bear much fruit), Beijing will become increasingly restless and would start putting pressure on the Kremlin to end the gas crisis.

• Not something that Putin needs at the peak of the conflict.

• c. Issues with implementation

• Finally, even if Putin was to go with a cutoff move, how exactly would he implement this strategy?

• It is not like he could press one magical button and be done with it.

• The precise mechanics of it are not that simple, and depending on the specific chosen route, implications could range from very significant to mere symbolic.

• As it stands, Russian gas to Europe is delivered via three main pipelines:
  1. Yamal-Europe that goes through Belarus and Poland (33 bcm per annum), 2. Nord Stream 1 that goes to Germany via the Baltic Sea (55 bcm per annum), and 3. the TurkStream (31.5 bcm per annum).

• For the purposes of current analysis, we can safely ignore the BlueStream (that ends in Anatolia and doesn’t connect to the European grid in Thrace) and the three pipelines that go through Ukraine (presumably to be shut off if military operations commence).

• Now, here is the main dilemma: given that European national gas grids are linked with each other via interconnectors, to have any major game-changing effects, the gas cutoff policy has to be implemented in its entirety - all pipelines delivering gas to Europe must be shut down.

• Otherwise, those countries that are afflicted by one or two of the (now shut) pipelines, can secure access to gas from other EU states via interconnectors.

• (BUT:Some of the most vulnerable countries would include Ukraine, Romania and Moldova - all three depend on gas reversed from Central Europe, and all of them also have limited import infrastructures)

• And if this happens, Putin will merely end up causing significant inconvenience, rather than a major crisis - he will secure annoyance and frustration of many EU states, without ensuring their submission under overwhelming pressure.

• So to ensure the maximum effect, Putin would have to shut down all of the gas pipelines delivering to Europe.

• But, embarking on this path is extremely counterproductive - since Putin would then be punishing the EU states that have hitherto shown most willingness to appease him - countries like Italy and Austria, that have remained rather mute on Ukraine, demonstrated openness to Russia’s courting, and are amongst the countries most dependent on Russian gas.

• So then, the question of implementation is not that simple - it presents a dilemma: a) an all-out shutdown alienating warmer EU states, or b) a selective pipeline shutdown that leads to more limited effects, and therefore, ends up inhibiting the impact of Russia’s most powerful lever.

Tools of dissuasion and deterrence at hand

• There are three immediate steps that can be taken to dissuade Putin from pulling this trigger.

• 1. The threats of financial sanctions against Gazprom

• Similarly to what is being planned against the VTB (and should be considered against all other major Russian banks - starting with Sberbank), the US should also threaten analogous sanctions against the Russian gas supplier company, Gazprom.

• These would not be export bans (there is very little appetite for even higher gas prices), but rather, would limit the financing options available to Gazprom.

• If blacklisted, the company would lose access to the US capital market - this would be significant not because Gazprom wouldn’t be able to raise money elsewhere (they would, and at least in the short-term, effortlessly too), but because the sanctions would create a signaling effect, and warn about the long-term future and thus value of the company for other investors - driving down their share prices/market cap.

• 2. The EU should also threaten similar sanctions - Gazprom benefits greatly from the European bond market.

• The threat of losing access to this capital will be double significant:

• 1) Because of the lack of the Eurobond funding itself, and;

• 2) Due to the second-order impact of losing the (to date, ever-increasing) leverage over the EU (when the European investors get tied in with major Russian corporations).

• 3. The US/EU Restrictions on:

• a) Further Russian energy exploration project capital, and;

• b) Crucial supplies and machinery for Gazprom.

• There is a successful precedent for this - the 2014 US/EU sanctions already had an impact on the Arctic and Siberian oil and gas exploration projects.

• Combined with tighter restrictions on the Western supply of subsea operations equipment and oil recovery technology, these may create a significant long-term threat to the upstream oil & gas production projects in Russia.

• Added benefit: no immediate impact on the current oil & gas supplies, preventing further inflation.

Minimizing the potential harm - alternative energy sources and solutions.