Molecular Virtue Signaling

Europe continues to humble brag about its reduction in Russian fossil energy imports, but it hasn't materially impacted Russian revenues or necessarily enhanced European energy security.

Europe’s defining energy policy response to Russia’s (re)invasion of Ukraine in February 2022 was its May 2022 REPowerEU initiative. One of the key objectives of REPowerEU was to phase out Russian fossil fuel supplies to the European Union by 2027 with the belief it would weaken Russia’s economy and war machine. Here is what the European Commission said about its efforts in May of this year (bolded is my addition):

When Russia invaded Ukraine, and turned its energy resources into an economic weapon against Europe, our reaction was rapid and robust. We adopted the REPowerEU Plan to end Europe's dependency on Russian fossil fuels.

Two years later, the results of our collective efforts are clear to all. We have made a massive cut in Russian energy imports, squeezing the Kremlin's war economy and standing in solidarity with our Ukrainian friends. We have worked with reliable international partners to replace Russian imports where needed…

Have the energy sanctions against Russian fossil fuel imports had the desired effect of hurting the Russians more than Europe? Let’s explore how successful they’ve been.

Coal

The first step the European Union took to reduce its reliance on Russian energy was its fifth sanctions package in April 2022 which prohibited the imports of Russian coal by August of the same year. As you can see from the chart below (taken from a report by Centre for Research on Energy and Clean Air), this has since resulted in a nominal impact on revenue for the Russian government as alternative coal buyers like China and India have stepped in to replace European buyers. The gray bar below remains relatively consistent throughout the time period. Note that 2022 saw massive spikes in prices for energy and the current Russian revenues are consistent with amounts received pre-COVID.

Euracoal (a European coal industry body) has this to say about the impact of EU sanctions on Russian coal exports and revenue:

The impact of EU sanctions, introduced in August 2022, are seen to be minimal: Russian coal exports have barely changed, only the direction of coal flows which no longer arrive in EU member states…

Coal trade with Russia was disrupted even for those countries that chose not to impose sanctions as Russia was excluded from the SWIFT international payment system which made payments more difficult. In terms of revenues, the heavy discounts for Russian coal exports seen in 2022 appear to have largely disappeared and export earnings remain stable.

Europe has seen a reduction in domestic coal demand due in part to larger shares of renewable power generation coming online, but also due to the deindustrialization of Europe (see

Robert Bryce

’s piece from February 2024) and the elevated price of carbon emissions via the European Emissions Trading System. I suppose a European political leader could say this is a positive, especially if you worship at the Church of Carbon (h/t

Doomberg

), but a reduction in coal demand does not, on its face, signal a net positive for the European economy.

Oil

The sixth sanctions package in August 2022 prohibited the import of seaborne Russian crude oil (by December 2022) and petroleum products (by February 2023). Pipeline imports were allowed as a small number of EU member states (primarily Hungary, Slovakia, and the Czech Republic) were at risk of supply shortages. In fact, Hungary and Slovakia still import Russian crude oil via the Druzbha pipeline today because it is much cheaper than alternative supplies (Ukraine and many EU member states are pressing Hungary and Slovakia to end their imports).

The EU also prohibited the provision of financial services and insurance to tankers shipping Russian crude oil to global markets. This critical piece of legislation could have caused a serious impact on global oil markets and it forced the United States to scramble together its oil price cap sanctions regime to ensure significant barrels of Russian oil were not removed from the market. Here is what I said about this in my November 2023 piece on oil markets:

The U.S.-led price cap was put in place to diminish the impact of the European Union’s Sixth Sanctions package against Russia in June 2022. This package prohibited European buyers from importing Russian seaborne crude oil and petroleum products.

But more importantly, it also banned European insurers from providing insurance to Russian oil and product cargoes. The UK government agreed to go along with the EU insurance ban, removing 85-90% of the international shipping insurance options for Russian crude. The same type of sanctions on western [shipping] insurance was put in place against Iranian oil exports in 2012 and it resulted in roughly 1 million barrels of oil coming off the market — this is not the outcome United States wanted to happen to Russian oil.

The objective of the price cap was never strong enforcement. It was designed to give the EU/G7 political cover to take action against Russian oil exports and add costs to Russian exports (thereby lowering the Russian government revenue). It’s primary purpose, however, was to ensure Russian barrels stayed on the market after the ill-advised European sanctions.

So, how successful have EU efforts been to reduce revenues for the Russian government from its oil sanctions? Just as with coal, the impact on Russian government revenues has been negligible. The below chart is from a recent Oxford Institute for Energy Studies (OIES) report:

You can see that the 2023 oil and gas revenues are fairly consistent with revenues from 2015-2021. The 2022 outlier was due to the extremely high energy prices. Same for 2011-2014 years when oil prices were consistently high. Remember, the majority of Russia government revenues from fossil fuel exports comes from its oil sector, not its natural gas sector. Here is another chart from the same OIES report:

You can see from the above that the most critical fossil energy sector for Russian government revenues is oil — 80% of the total oil and gas revenue for the Russian government since 2018 came from oil. The outlier in 2022 again reflects the astronomically high natural gas prices due to Russia’s restriction of exports to Europe in the run up to, and after, its (re)invasion of Ukraine.

Notice when Russia’s government revenues were lowest? That’s right, when global energy prices cratered due to the pandemic lockdowns in 2020 Russian government revenues plummeted. This is a foundational lesson the Europeans and Americans can’t seem to properly grasp. The most effective way to reduce Russia’s government revenues from fossil energy exports is to do everything possible to push global prices down (credit to

Doomberg

for writing about this multiple times).

I acknowledge other factors at play in bolstering Russian government revenues such as currency devaluation, but the overall effect is that European efforts to hurt Russia’s economy through its energy sanctions has been negligible at best.

So, EU efforts to ban Russian coal and oil imports have had little impact on the Russian government’s budget. And European consumers have often paid higher prices for replacement supplies given their need to buy more seaborne supplies from greater distances during an elevated price environment. It is also interesting that European importers are buying significantly higher quantities of oil and petroleum products from the likes of Turkey and India — both of whom have increased their purchases of Russian crude and product supplies since 2022.

Europe has essentially decided to buy Russian petroleum products from third countries just so it can claim the moral high ground of not buying directly from Russia. But instead of being honest with their citizens about the intricacies of the global economy and the critical importance of fossil fuels to modern life, European leaders continue to drone on about the promised land of renewable energy and no more Russian fossil fuels.

Here is a recent quote from European Commission President Ursula Von der Leyen:

I have not forgotten how Putin blackmailed us by cutting us off from Russian fossil fuels. But we withstood together. We invested massively in homegrown cheap renewables. And this enabled us to break free from dirty Russian fossil fuels. Therefore, together, we will ensure that the era of dependency on Russian fossil fuels is over. Once and for all.

I am supportive of European efforts to diversify their suppliers, and they never should have allowed themselves to reach such severe dependencies on Russian energy supplies in the first place. But stop claiming that renewables came to the rescue and that ending Russian energy imports has severely impacted their economy and boosted yours.

As

Doomberg

’s Postulate says, “Every molecule of fossil fuel produced worldwide will be burned by somebody somewhere, and local efforts to restrict consumption merely relocate the enjoyment of that privilege.” The European push to try and phase out Russian energy supplies will only shift the logistical construct of global energy markets, but Russia will still sell its commodities and still make a lot of money doing so. These sanctions also tend to foster a new black market where criminal organizations make huge profits skirting international law. What do those criminal organizations do with their new found riches? Nobody ever asks that or takes that into serious consideration when assessing sanctions impacts.

Natural Gas

Now let’s turn our attention to natural gas. Surprisingly, Europe does not have any current sanctions on Russian pipeline natural gas. It has limited sanctions on liquid natural gas (LNG), but not on imports into the EU. The huge reduction in Russian natural gas exports to Europe since 2022 (well, really since the middle of 2021) was due to Russia’s decision to reduce supplies, European importers unwillingness to pay for gas in rubles, and the weirdly non-attributed explosion on three of the four Nord Stream (I and II) pipelines in September 2022.

EU members states like Hungary, Austria, and Slovakia (and non-EU member Moldova) still receive Russian natural gas via a pipeline through Ukraine. The contract for those supplies is set to expire on January 1, 2025. Russian natural gas also transits pipelines under the Black Sea to Turkey and then on to European markets.

In December of 2023 the EU did pass legislation that allowed member states to ban Russian natural gas from its domestic gas grid, assuming a decision to do so would not negatively impacts neighbor’s security of supply. There was a lot of talk this year from EU leadership in Brussels about sanctioning Russian LNG supplies into Europe. But after months of talking and threatening, the EU’s 14th sanctions package announced in June only resulted in the banning of transshipment of Russian LNG in EU ports.

Transshipment in this case is when icebreaker LNG tankers from Russia offload its cargo onto normal LNG tankers (either direct or via onshore terminals) for discharge in non-European markets. European companies such as Total, Fluxys, and Shell are the primary counterparties to these transshipment contracts in Europe. Stopping this will have a negative impact on those company’s bottom line at a time when the European Union is desperate to increase its domestic company competitiveness. To make things worse, Shell and Total are considering delisting from their respective domestic stock exchanges and relisting on the New York Stock Exchange. At a time when major European companies may flee domestic stock markets, European political leaders decide to cut off a source of revenue for the very same companies. Dumb.

The ban on transshipments will have a nominal impact on Russian LNG exports. Yes, it may cause additional logistical costs to Russia as their tankers may have to transit farther distances, but the Russian government will still get its cut. And Doomberg’s Postulate will still ring true.

In addition, EU imports of Russian LNG have risen nearly 40% since 2021. This seems contrary to what Von der Leyen said in the above referenced quote.

Conclusion

The EU political leadership claims its energy sanctions are “squeezing the Kremlin’s war economy.” Where? There is talk about the overall reduction in Russian government revenues from its energy exports since 2022, but again, that period saw extreme prices which have since come down across the board. Everyone’s government revenues are down when it comes to fossil fuels based on 2022 figures. The sanctions have done little to impact the Russian war machine.

European political leaders claim credit for successfully navigating the energy crisis of 2022 without acknowledging the damning impact it had on Europe’s economy or the role of the fortuitously warm winters in 2022/23 and 2023/24. The sanctions on Russian energy imports have not helped Europe economically. The purpose of sanctions are to impose costs on the intended target while minimizing blowback to you and your allies. That argument can’t be made on the current slate of energy sanctions.

European leaders have set an arbitrary date of 2027 to end all imports of Russian fossil fuels, claim the shift to a clean energy economy will be the promised land for energy security and their domestic industry, and ignore the risks associated with those clean energy supply chains which are all dominated by China. They refuse to support domestic fossil fuel production or publicly ask major producers to grow production and ideally push prices down.

I am not naive about the necessity of messaging and virtue signaling in politics, but claiming you are enhancing domestic energy security and squeezing the Russian war machine by being able to publicly say you are ending imports of Russian fossil fuels is not a serious strategy. It is smoke and mirrors. Political leaders should tell their citizens that, despite what they’ve been telling you for years, fossil fuels are critical to our economies, we must maintain sufficient supply for the foreseeable future, and therefore we will not push for reduced Russian output. They will diversify their suppliers, but not overdo it just so they can claim the moral high ground. And God forbid political leaders tell their citizens they will increase domestic fossil fuel production to enhance energy security and reduce prices.

Is that too much to ask? To be treated like an intelligent, discerning adult who recognizes tough decisions have to be made in times such as this? Apparently it is.