Energy War, Interdependence and Russian Economic Offensive

Adriana Castagnoli
Historian and economist; columnist for “Il Sole 24 Ore”. She investigates geopolitical and economic relations at a global level. She has taught Contemporary and Economic History at the University of Turin. Her most recent publications include Il lungo addio.

Since the beginning of his presidency, Vladimir Putin has recognized the importance of energy as an instrument of political power[i]. In a report by the Russian Federation, published in 2003, the energy sector is listed as a priority for domestic and foreign policy. The role of Russia in world energy markets determines, to a large extent, its geopolitical influence. Russia is a petro-state that had a moment of maximum wealth and power in 2011-12 when gas prices reached a peak. At the time of the first major gas confrontation between Ukraine and Russia, in 2005-06, the EU had taken a position of neutrality toward the two contenders, albeit it was clear that the crisis had direct effects on the Community's energy security.

According to the Eu-Russia Centre, the Kremlin interpreted this attitude as a political position of conciliation and tacit consent, which contributed to the process of forming a more serious conflict in early 2009. The lack of a unified European position in its relations with Moscow showed the multiple vulnerabilities of the EU. Starting with its inability to stand up to a supplier that used commercial means to achieve political goals, or to cope with the fragmentation at the national level of its energy market, the different and conflicting interests in the energy sector of the EU states, to the levels of cooperation between European and Russian national companies: very high in the German, Italian and French cases, looser in others. Although it signed the European Energy Charter with the EU in 1991, Russia never ratified it and officially confirmed its intention in April 2018.[ii]2

At the time, the Kremlin had also insisted on the exclusion of gas and oil from an eventual agreement on free trade with Brussels. In practice, the lack of a single market for gas in Europe ended up fostering the divide and the rule of Moscow. In the 2010s, the Russian Federation became the EU's most important energy sector partner, which imported, in addition to hydrocarbons, coal and uranium from Russia. The EU became the Kremlin's most significant trading and financial partner, providing 75 percent of Moscow's inbound foreign direct investment.

Until the energy diversification policy pursued by Brussels began to annoy the Kremlin. In December 2010, Minister for Energy Sergey Ivanovich Shmatko declared that "unfortunately" there remained an air of distrust and mistrust between Russian and European authorities. Gas remained the mainstay of cooperation with the Europeans, but the Kremlin believed that a way had to be found to expand cooperation to renewables as well. According to Moscow, the policy of diversification ended up creating additional costs.

The global energy system was under stress even before President Putin decided to invade Ukraine. In February 2015, the document that indicated the Energy Union as a strategic goal and a key priority of the EU was published by the Juncker Commission (2014-2019). A few months later, in an interview with the "Corriere Della Sera," Putin clearly expressed how the energy issue was crucial for Moscow. He criticized the Third Energy Package and, with ill-concealed animosity, the Baltic states. While they were still part of the energy system of the former USSR and, therefore, of Russia, they were now supposed to connect to the European electricity grids due to their accession to the EU.[iii]3

After the annexation of Crimea perpetrated by Moscow in May 2014, the European Energy Security Strategy pointed to the synchronization of the Baltic countries as a crucial step for the security of Europe's electricity networks. The first Memorandum of Understanding (MoU) on the Baltic energy market interconnection plan (Bemip) was signed in 2009. Other declarations followed until the Policy Roadmap, signed in June 2018, set the goal of completing the technical agreement of de-synchronization with the operators of Russia and Belarus. Meanwhile, it prearranged the adoption of some measures to ensure the necessary services to the Russian enclave of Kaliningrad, in a scenario that put an end to the possibility of cross-border energy flows.

In July 2021, the European Commission adopted a package of proposals to cut greenhouse gas emissions by 55 percent by 2030, a crucial reduction with a view for the EU to become the first climate-neutral continent by 2050 by turning the Green Deal into reality. Now, as a consequence of the war in Ukraine, energy security has returned to the forefront, along with climate change and other global challenges, among policymakers' concerns.

Russia’s economy remains heavily dependent on energy production. Since the beginning of the war in Ukraine, Russian oil production has been declining. At the end of April, Moscow produced about one million barrels per day less, which could increase depending both on the EU’s ban on Russian fossil fuels and the OPEC+ group's decision to slash oil production. For now, demand for minerals and energy from emerging economies, such as China and India, seems to have offset Russian losses in the European market. The Russian-Chinese trade grew 29 percent from January to July. However, in the opinion of several oil experts, there are limits to the amount of Russian crude oil that refineries can store.

Meanwhile, obsolescence looms over its machinery and plants. Sanctions banning the import of Western technology are clouding the prospects for Russian economy. The stability of the Russian economy becomes increasingly dependent on liquidity and asset injections from Beijing, a dynamics that puts strategic financial leverage in the hands of the Chinese Politburo.

As substantiated by the difficulty of finding a EU agreement to address the problem, energy has become one of the most critical issues on the political agenda of the EU. Further efforts are underway to complete the synchronization of the Baltics with EU networks by 2025, getting the most out of the efficiency and potential of both onshore and offshore renewable energy. In March, the electricity networks of Ukraine and Moldova were synchronized with that of the European mainland. In this compartment, Ukraine has become part of Europe. Any Russian hopes that it would join the Eurasian Economic Union have vanished. Nevertheless, the mix of imperial ambitions and economic vulnerabilities makes Moscow an opaque and dangerous partner.

Many believed that Russia’s reliance on western-European markets for its energy exports would encourage cooperation, and that economic interdependence would protect against threats to the world order. In the case of EU-Russia relations, the economic interdependence was more of a constraint on countries that had allowed themselves to grow reliant on Russia (for instance, Germany, Italy, and Hungary) than on Russia itself.

During the Cold War, the expansion of Moscow's oil exports was crucial for the so-called "Soviet economic offensive" strategy, that was directed mainly toward the less developed countries. From the American point of view, it was a plan whose implications for the West could be just as dangerous as military aggression. Not only could the Soviets quickly take advantage of this dependence, but they could also destroy the international markets by dumping raw materials and manufactured products, gaining market shares, and taking control of some sources of raw materials, thus manipulating markets to destroy Western economies and global supply.

As we know, the main instrument for stopping the spread of Communism by non-military means was the construction of an international economic system that spread affluence and economic growth through developing foreign trade.

The US pursued this goal in three ways: aid to allies and Third-World countries to strengthen their economies; prohibitions, restrictions, and controls (extending to sanctions and embargoes) to weaken the development of Communist economies and to prevent the Sino-Soviet bloc from benefiting from the most advanced Western technology, particularly in the military sector; promotion of a robust US economy, that was a model for allies and third countries, and the construction of a technologically advanced military and defense system. To achieve these goals, the US must work in concert with its European allies.

However, during the Cold War, economic competition characterized transatlantic relations far more than East-West relations. The main economic competitors of the United States were its closest allies Western Europe and Japan, not the USSR and the Communist countries. The picture, however, is not as simple as it looks. Under certain circumstances, in practice, trade relationships may serve as an inducement rather than a deterrent to war.

For those who assume that commerce can always help prevent great-powers conflict, it is crucial to assess the complex ways that economic forces have actually shaped strategic thinking in Beijing and Moscow.

Strategic trade also increases a great power’s vulnerability to commercial sanctions and embargoes after having become dependent on the import of resources and the export of goods for sale abroad. Economic ties are now seen as a tool for advancing geopolitical goals through “weaponized” interdependence.

Before February, the European Union relied on Moscow for approximately 40 percent of the natural gas it needed for its industries and to heat its homes. Putin had reason to fear that Russia's economic leverage over Ukraine and Europe would decline in the future. In 2010, substantial natural gas deposits were discovered in South-Eastern Ukraine. East of the Dnieper River there is over 90 percent of Ukraine’s natural gas reserves. There are also strategic atomic energy plants like Zaporizhzhya, the biggest one in Europe. All this portended a significant loss in Russia’s ability to use the energy as an “economic offensive” in the future, and perhaps increased Putin’s fear that liberal democracy might spread into Russia.

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[i] Nicholas Mulder, author of The Economic Weapon. The Rise of Sanctions as a Tool of Modern War, Yale University Press, 2022, does not mention Vladimir Putin in his book. Notwithstanding, he writes about Western sanctions and some US Presidents and States inconsistent with the interwar period he mainly covers. Nevertheless, in his Conclusion, Mulder suggests: "Economic sanctions do not project only material force; they also project political, social, and cultural values. Sanctions would no doubt work better in a world of perfectly rational, consistently self-interested subjects, but this is not the world that we actually inhabit. Most people in most places at most times make collective choices on the basis of a wider set of considerations. The economic weapon may be a form of politics by other means. But ultimately, stitching animosity into the fabric of international affairs and human exchange is of limited use in changing the world".

[ii] The Russian Federation officially confirmed its intention not to be considered a signatory to the Energy Charter Treaty and the Protocol on Energy Efficiency and Related Environmental Aspects.

[iii] The package entered into force in September 2009. Since then, some regulations were revised as part of the Clean Energy for all Europeans Package in 2019.