United States pressurizing European Union to buy its LNG and quit Russian gas

Pressure is mounting on the European Union to abandon Russian gas supplies as individual countries begin turning off the tap. The Baltic states of Lithuania, Latvia and Estonia became Europe’s first region to abandon Russian gas supplies entirely past weekend, and they urged other nations on the continent to do the same.

Lithuania, the first EU nation to make the move, declared on Saturday that the country was acting “in response to Russia’s energy blackmail in Europe,” according to a news release from the country’s Energy Ministry.  

But whether this leads to other countries in Europe abandoning Russia’s gas is a big question.

German Finance Minister Christian Lindner on Sunday said Russia’s crimes could not go unanswered, but on Monday argued a full-scale embargo would hurt Germany more than Russia.

“We must plan tough sanctions, but gas cannot be substituted in the short term,” Lindner told reporters before meeting with the Eurogroup, the informal body of EU finance ministers.

“We would inflict more damage on ourselves than on them,” Lindner said.

Germany is in a particularly difficult position, as it imported about 55% of its gas from Russia last year. The EU as a whole gets about 40% of its gas from Russia.

The Baltic states comparatively import much less gas from Russia. Lithuania received about 26% of its gas from Russia directly last year, according to Bloomberg. The country will now rely on liquefied natural gas (LNG) imports from the United States and Norway, Bloomberg reported, citing the country’s Energy Minister.

Morgan Bazilian, a public policy professor at the Colorado School of Mines, told The Hill that Lithuania eight years ago developed a floating storage and regasification unit at the country’s Klaipėda LNG terminal, which enables the country to take in gas from other countries.

“They were able to make the statements because of planning they had done eight years ago,” he said. “And Latvia and Estonia are sort of coming along with them.”

“While Lithuania might not be an example of how nations can get rid of Russian gas overnight, the country is a very good example of planning for your energy security and not just leaving it to market forces”, Brenda Shaffer, an international energy specialist at the Naval Postgraduate School, told The Hill.

Lithuania’s gas transmission system has been running without Russian gas imports since April 1, with zero flow of Russian gas coming through the Lithuanian-Belarusian interconnection, according to the country’s Ministry of Energy.

“From this month on — no more Russian gas in Lithuania,” Lithuanian President Gitanas Nausėda tweeted on Saturday.

Lithuanian Prime Minister Ingrida Šimonytė followed up on Sunday by tweeting, “from now and so on Lithuania won’t be consuming a cubic centimeter of toxic Russian gas.”

Meanwhile, Uldis Bariss, CEO of Latvia’s Conexus Baltic Grid, told Latvian radio this weekend, “Since April 01, 2022 Russian natural gas is no longer flowing to Latvia, Estonia and Lithuania.”

The Baltic states are much smaller economies than other nations in Europe that import Russian gas, and as a result the moves, while important, will have a smaller affect on Russia than if larger nations turned off the spigot.

Bazilian noted that while the shift gives the right optics, it is a relatively small piece of the European puzzle.

“It’s very small in comparison to, say, Germany or Italy or other countries that rely on natural gas,” Bazilian said.

In the short to medium term, a larger European embargo on Russian energy is unlikely given the dependence of nations such as Germany on Russian gas, Shaffer said.

Germany and other big EU members also have much larger industrialized manufacturing sectors dependent upon Russian gas.

This has given Russia leverage over Germany, which before Moscow’s invasion of Ukraine was backing a controversial new pipeline from Russia.

“For a country like Germany, which is heavily manufacturing based — like steel and cars and other equipment — the question of the price of the gas has very different economic impact than for a country like Lithuania, which is mostly light industry,” Shaffer said.

Shaffer also noted the tension between European climate goals and the present need to bolster traditional energy needs through more pipeline projects and LNG infrastructure.

“There is a conflict in a sense between European climate goals and building new infrastructure that would ensure their energy security,” Shaffer said. “In a strange way, almost, the climate camp would prefer the status quo.”

While the decision of the Baltic states to stop importing Russian gas will not likely carry over to the entire EU, Bazilian described the weekend’s events as a symbol that the rest of Europe is really serious about this and that the continent “is going to look to diversify from Russia.

One way to do that will be through US LNG supplies. President Biden recently announced the US would be supplying an additional 15 billion cubic meters of gas to Europe this year.

The EU has also said it is going to release a pathway on how to wean off Russian energy imports by 2027, and Bazilian expressed confidence that the US will be part of that solution.

Despite its small size, the Baltic region is yet another market that will be importing LNG, according to Shaffer. And while that won’t be solely from American sources, more market demand for LNG in general also means more demand for American LNG, she explained. 

Lithuania’s capital, Vilnius, also houses the NATO Energy Security Center of Excellence, which reflects how the country views energy “as a really important issue of national security,” Shaffer added.

“They’re sort of like the main voice within NATO on these issues, so I think it will have some impact on NATO thinking,” she said. 

 

Russia enjoys edge over United States

The global reliance on Russian petroleum and natural gas is a major hurdle for Joe Biden, President of United States and Western allies as they attempt to dial up economic pressure on Russian President Vladimir Putin. 

Sanctions on Russian companies and asset freezes, are leading to a lot of nervousness among people in the global system. You could argue that even though the sanctions aren’t really targeting Russian crude ... they’re already having an impact.

The US and European Union are reluctant to target the Russian energy sector and drive oil and gas prices even higher after months of rising costs for consumers. The dynamic gives Putin important leverage and could undermine unity among the US and its European allies in how they respond to his invasion of Ukraine.

Biden and European leaders have imposed strict new penalties on Russian banks, state-owned companies and business leaders close to Putin — and on Friday announced sanctions on Putin himself. But Western allies have avoided taking steps that could interrupt access to Russian oil and natural gas. While fossil fuels make up more than half of the US total imports from Russia, President Biden said that the country would avoid sanctioning them.

“In our sanctions package, we specifically designed to allow energy payments to continue,” he said.

Russia is the world’s third-largest oil producer, after the US and Saudi Arabia, and the second-biggest natural gas producer, after the US. Oil and mineral fuels, such as petroleum, coal and natural gas, make up a majority of its exports. While oil is a global commodity, the natural gas market is more localized, meaning that Europe and Asia are its biggest markets.  

“Energy sanctions that directly targeted Russian crude or product exports — they would hit the Russian economy harder than any other measures, but they also present the most risks to the global energy markets,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies at Energy Security and Climate Change Program. 

Asked Thursday during a press briefing about oil, Daleep Singh, the White House’s Deputy National Security Adviser for international economics, said the administration didn’t want to disrupt the energy market at this point. 

“When it comes to energy, this is the one area where Russia has systemic importance in the global economy. We’re not going to do anything which causes an unintended disruption to the flow of energy as the global economic recovery is still underway.” Daleep Singh

As a net exporter of oil and natural gas with a sturdy strategic reserve, the US has more flexibility to handle rising prices than its European allies, who could face severe energy shortages if Russia pulls back its supply. Sanctions on the Russian energy sector could also backfire if Russia can offset lower sales with higher prices. 

“Russia has been known to use energy as a weapon to cut exports, sometimes under the guise of additional maintenance or other issues,” said Rachel Ziemba, founder of macroeconomic advisory firm Ziemba Insights.

“Even to the extent that Europe and the US have said, ‘Well, we don't want to impact or impede too much domestic short-term energy trade,’ We don't know exactly what the Russian entities will do,” she added.

But because oil is a global commodity, less availability of Russian oil could impact US prices.

“I think that’s why the Biden administration and especially the Europeans are hesitant to impose direct sanctions on the oil sector, because it is somewhat self-defeating because you end up harming European and US consumer and businesses if there’s not enough spare capacity or strategic reserves or alternative supplies to provide a medium-term alternative to that Russian oil,” said Robert Johnston, a senior adjunct scholar at Columbia University’s Center for Global Energy Policy. 

And the issue is politically difficult for the Biden administration, as Republicans have repeatedly criticized him over high gasoline prices even though presidents have a limited impact on its cost. 

Putin promised unprecedented “consequences” for nations that try to hinder Russia’s invasion of Ukraine, and both Biden and his European allies face serious domestic blowback if sanctions cause a massive energy shock. US gasoline prices rose 40% year over year in January, and an interruption to global supplies would add even more fuel to inflation — particularly if both the U.S. and Europe lean more on American energy sources. 

"Vladimir Putin realizes what we all know, which is that a good chunk of allies in Europe are highly dependent on Russian oil and natural gas. Even if we impose these huge sanctions, they're only sustainable for American allies for a certain amount of time,” said Jamil Jaffer, founder and Executive Director of George Mason University’s National Security Institute. 

With Biden hamstrung by Putin’s leverage over the energy sector, the US has dialed up the pressure on Russia through its own power over the global financial system.

The Treasury Department on Thursday announced new sanctions meant to limit Russia’s financial sector and ability to raise money through global markets, including severe restrictions on major Russian banks with limited carve outs for energy transactions and humanitarian aid.

The new sanctions block any US-based financial firm from processing payments and transactions for Sverbank, effectively preventing Russia’s largest financial institution from access to the US$. The Treasury Department also blocked all business with VTB Bank, the country’s second-largest financial firm, along with its subsidiaries and three other Russian banks.

More than a dozen state-owned Russian firms and wealthy business leaders have also been blocked from the US financial system, days after Biden imposed a ban on any purchase or sale of Russian debt by US firms. 

The sanctions not only prevent Russian firms from most business within the US, but also makes it nearly impossible to conduct transactions in US$. Roughly 80% of the US$46 billion in foreign transactions processed each day by Russian banks use US$, according to the Treasury Department.

Financial sanctions imposed so far have already roiled the Russian economy and markets. Russian stocks crashed earlier this week, borrowing costs have spiked and the value of the Russian ruble fell to its lowest level in history — to worth just more than a US penny.

“This is not the outcome we wanted,” said White House Press Secretary Jen Psak during a Thursday briefing.

“It's both a tragedy for the people of Ukraine and a very raw deal for the Russian people. But Putin’s war of choice has required that we do what we said and to ensure this will be a strategic failure,” she said.

And while oil was left out, some noted that sanctions on the financial sector could have indirect impacts on the country’s energy sector.

“If you look at the pricing for Urals blend, which is the main export blend that goes to Europe from Russia, Urals blend is already trading at a big differential … buyers are very wary,” Cahill said.