Russia and Europe's gas game

When it comes to gas supplies, Russia and Europe are locked in a careful dance, prodding and probing each other's vulnerabilities. Both are holding back from the nuclear option (a full embargo or shutting the pipes), for fear of the repercussions on themselves. But a build-up of small actions - a gas cut-off here, a transition plan there - is wearing away at the potential leverage either side possesses. At some point, the balance will tip, and the threat will no longer hold so much weight. Russia in particular may be incentivised to pull the trigger before then. 

First, let's step back and remind ourselves of where we stand. Over the course of many years, Europe and Russia built up an extensive trade in various fossil fuels - Russia produces them and Europe buys them. Depending on the fuel and the country, Russia's role can be anything from notable to dominating. 45% of Germany's hard coal imports are Russian. Italy gets about 40% of its imported gas from Russia. It's 96% for Slovakia's oil imports. 

Since the outbreak of the war, Europe has deployed more and more sanctions against Russia, with the energy trade increasingly coming into focus as a necessary target. Coal imports from Russia into the EU are set to stop by mid-August and a partial ban on imports of Russian oil has been signed off just this week. 

But an embargo on gas? That's still hard to imagine. Gas supplies are possibly the biggest point of dependence between Europe and Russia. For Russia, it's a major source of government revenue, which is used to subsidise other sectors and policies. For Europe, it's the energy providing heating to millions of homes and powering the processes of industry across the continent. Recent statements from EU leaders left little doubt that gas sanctions weren't part of the conversation. If that trade suddenly came to a total stop tonight, it would cause serious pain on both sides of the equation. 

So far, it's a weapon that neither Europe nor Russia has really been willing to use. With other sanctions mounting up, Russia arguably needs that income more than ever, and Europe has little desire to enter a major economic and social crisis (which, it must be stressed, could undermine public support in favour of helping Ukraine). 

However, there is a paradox here. As with any true nuclear option, this weapon is so powerful that, while neither side is keen to use it, neither side can really stay away from it either. 

When Putin decreed that companies based in 'unfriendly countries' would need to pay for their gas in rubles, he was using gas supply as an offensive tool, wielding the threat of a cut-off in order to move the gas payments onto a basis that was more favourable for Moscow. It has already followed through on this threat in the case of Bulgaria, Denmark, the Netherlands, Poland and Finland. 

Europe meanwhile is rolling out plans to cut its consumption of Russian gas, with the European Commission presenting a strategy for an increase in renewables targets, faster renewables permitting rules and an energy-saving campaign. There is already an EU-US agreement on bringing gas across the Atlantic and further negotiations are ongoing with gas-producing countries in Africa and the Middle East. This comes on top of national-level efforts to diversify gas supplies, such as the new deals between Algeria and Italy. 

This then, is the dance - the game that Russia and Europe are playing. Pushing each other's vulnerabilities, trying to provoke a reaction, without overextending and putting themselves at risk. 

The key is that this game is not static. The longer they play it, the more the severing of gas trade becomes a reality. Whether as acts of punishment ordered from Moscow or through a phase-out and diversification plan organised in Europe, the shift is not but fast, but it is there. And the further along we go, the more we play this game, the less powerful the weapon becomes. 

For example, let's assume that the war continues for another year. A number of countries in Europe have already been cut off from Russian gas. Others will have then used that time to find alternative suppliers. Some new supplies may already have started to flow. New renewable power projects could be finished off and others launched. Give it another year and there could be more floating regasification terminals, expanding the European infrastructure for importing liquified natural gas, allowing for further diversification away from Russia. Another year and more countries could be in a position to not only reduce consumption but to turn off Russian gas entirely. 

This quick series of steps would already take us to 2025. To put that in perspective, the European Commission set a goal of completely phasing out Russian gas by 2027. In other words, the tipping point for Russia to lose its leverage over Europe is not as far away as it may seem. 

This leads to the obvious question: what is Russia going to do about it? Potentially the war could already be over by the end of the year and Russia may not do anything drastic. But what if the war stretches on and Russia feels it needs to escalate its pressure on Europe? It can't stop Europe from pursuing all these other policies to reduce its dependence on Russian gas but it can still turn off the taps while that action still carries weight. Certainly, it would lose significant revenue, but that income will be declining anyway, with little prospect of ever coming back. 

Whether it will come in 6 months, 12 or 18, we can't be sure, but inevitably, Russia will be faced with a 'now or never' moment. Either they will follow through on the latent threat of a total gas cut-off or they will hesitate, the moment will pass and Russia will have lost its last and greatest means of influence over the European economy and its politics. Until that point, Russia's incentive to unleash chaos on our continent is only going to grow.