Russia's Suicide

August 4, 2022

History will show that Vladimir Putin’s fatal miscalculation was his belief that Europe would buckle if he invaded Ukraine because of its excessive dependence on Russian energy. It didn’t. He also failed to understand that excessive dependence works both ways: The Euros needed his oil and gas but he, in turn, completely relied on their market. Put another way, Putin should have parked his Imperial ambitions in the West until he had diversified his customer base and built pipelines and Liquefied Natural Gas (LNG) facilities in the East to export to China, the world’s biggest energy buyer. Instead, he invaded Ukraine then blackmailed and abused the rest of Europe which sent it scrambling to sign up new suppliers and alternative energy sources. Europe is finding new sources more easily and Russia cannot replace Europe with new customers. He has lost economically.

Russian pipelines: All west, nothing north or east.

Putin also fails on the battlefield. Ukrainians valiantly fight back with Western firepower. Consider his current situation: He’s alienated Europe permanently. Even if he gets his quarry, Ukraine, it will be decimated and ungovernable. Russia’s army is damaged. His economy has no future without European oil and gas purchases in the absence of a China market. The European Union and Britain impose sanctions and vow to end their reliance on Russian oil, gas and coal. Energy and food are the lifeblood of economies and Putin’s weaponization of both won’t be forgotten.

He cannot replace Europe’s market with China and other Asian markets for years and, besides, pipelines across vast territories are becoming obsolete when it comes to natural gas. LNG is the future of energy, relatively clean and powerful. Its popularity and portability by ship to anywhere in the world cheaply is growing exponentially, but Russia, with more gas than any nation on earth, has missed the boat and remains far behind in developing this technology. He cannot catch up now because the Western expertise and capital and companies that Putin has relied on to build the Russian oil and gas industry have fled in protest over the war. And Russians won’t be able to raise the hundreds of billions needed to build pipeline or LNG projects to link Arctic and Siberian gas and oil fields to Asia.

The United States, Australia, and Qatar dominate the production and distribution of LNG. Their plants and terminals and fleets cost billions but deliver huge volumes gas safely with a minimum of emissions. The process consists of cooling gas to minus 162 degrees Celsius, which shrinks the gas’s volume by 600 times into a non-toxic liquid that is easy to store and transport. One LNG ship, more than three football fields long and carrying five cryogenic tanks, delivers the equivalent of three day’s gas flow from Russia’s biggest gas European pipeline. They criss-cross the oceans constantly.

There are 641 active LNG vessels in the world in 2022 and hundreds under construction

Germany is building several LNG terminals and the rest of Europe dozens more. Russian oil and coal is banned by law and gas boycotts are in the works. Germany is burning its own coal again, and nuclear facilities in France and Germany are being brought out of mothballs or enlarged. Europeans have signed giant natural gas contracts with Algeria, Saudi Arabia, Azerbaijan, and negotiations are underway with Central Asia’s Turkmenistan and Kazakhstan as well as with the United States, Australia, Qatar and Norway. On the demand side, European countries are imposing strict conservation measures on industry and individuals to get through this winter because Putin threatens to stop gas altogether. In the longer term, Europe will transition to a post-Russia energy situation.

Worse for Putin, his much-vaunted energy deal with China isn’t worth the paper it was written on due to permanent geopolitical and geographic challenges. Dreams of vast amounts of gas transiting through pipelines across Siberia have been all but scuttled by costs, distances, terrain and construction challenges. The cost of shipping LNG from the United States, Australia, or the Middle East to China and Asia is substantially lower and has made such projects unviable.

The most ambitious pipeline to pivot to China is the Power of Siberia 2 pipeline. The strategy is to link the fields in West Siberia, which now supply Europe, with China via Mongolia. An even crazier notion behind this was that the line would allow Moscow to arbitrage between European and Asian markets – a sort of Putin-like version of controlling the world. He wanted to weaponize gas markets but that’s not how they work.

Power of Siberia 2019

Worse, even the most optimistic scenarios — if such a link could be completed — is that Russian pipeline volumes to China would never match volumes to Europe. Besides that, they would fetch much lower prices because China would drive a hard bargain, in the knowledge that Russia was overly dependent on its business. Now the reality is that every nation in the world now realizes that Russia is not a trustworthy partner, neighbor, supplier or customer until there’s a regime change.

China’s LNG suppliers: Australia, Qatar and others dominate

Russia is a commodity-based economy run by a dictator as a war machine. Since he took power, 11 million Russians have left. Attempts at manufacturing or technology have been abysmal failures. With Western help, Russia by 2021 was the world’s leading exporter of natural gas followed by the United States — a pre-eminence that will never return. Now as Putin attempts to peddle his petroleum and LNG outside Europe, his companies find this is a tough sell. As one expert wrote: "Its isolation from the West has devastated Russia's strategic hand in negotiating with China and India, notoriously price-conscious buyers who retain close ties to other major commodity exporters.” Notably, the price of Russian crude oil recently fell from a premium of $1.50 a barrel over benchmark price to a discount of $25.80 a barrel, said Bloomberg.

Putin destroys Russia. His plan for conquest and control was flawed from the beginning. He belongs in a dock at The Hague, not in a palace or in charge of a country with a nuclear arsenal. He resurrected the Cold War and got America’s attention. He weaponized trade with a scheme to place all his export eggs in one basket – Europe -- then hold it hostage and force it to accept whatever peace deal he wanted to offer on Ukraine. Instead, he united and strengthened NATO whose members back Ukraine. The only option for Europe and the world is to defeat Putin.