Ukraine Standoff is a Red Flag for Energy

This week, three sets of diplomatic negotiations are taking place in Europe in an attempt to head off a possible further Russian attack on Ukraine. Over the past month plus, Russia has been mobilizing and moving over 100,000 troops to the borders of Ukraine. Russian leaders, including President Putin, have been painting this mobilization and the potential attack it signals as a response to Ukraine drawing closer to NATO and linking the threat to claims of unfulfilled promises by the United States and Western European states from as far back as 1990. Russia has put forward a pair of draft treaties designed to address its security concerns in ways that infringe seriously on the sovereignty of numerous states, including not just Ukraine but also states such as Finland and Sweden. The United States and its European allies have made clear to the Russian leadership, including in a phone call between President Biden and President Putin, that an attack on Ukraine would bring about significant retaliation in the form of trade, financial, and diplomatic sanctions. In addition, the United States and others have signaled that they would step up security assistance to Ukraine if such an attack occurred.

If the worst-case scenario were to unfold, it would significantly destabilize Europe militarily, economically, and politically. Such a series of steps would likely unfold somewhat along these lines. First, Russia declares that the series of talks this week – first bilateral with the United States in Geneva, then the NATO-Russia Council in Brussels, and finally the Europe-wide Organization for Security and Cooperation in Europe in Vienna – were a failure and that Russia’s security concerns were not only not addressed but were dismissed. A Russian attack on Ukraine is unlikely to be an all-out invasion designed to occupy the entire country completely. Instead, Russia would likely increase its hold on the Eastern Ukraine/Donbas region and conduct limited raids and long-range missile strikes designed to significantly degrade Ukraine’s military capability (and, therefore, the ability to resist in the future). The United States and European allies would retaliate with increased security assistance, economic and financial sanctions, and reductions in Russian diplomatic presence in their countries.

A key open question is whether Germany would suspend the eventual start of Nordstream 2, which is eagerly awaited by European natural gas consumers. Although U.S. officials have implied in recent statements that Berlin would do so, it is still unclear and may depend partly on the scope of any Russian attack. Alternatively, Russia could retaliate against Europe and the U.S. by cutting back or cutting off energy exports, which would significantly impact natural gas or oil prices. The EU relies on natural gas for about 30 percent of its natural gas imports. Europe also relies heavily on Russia for crude oil, importing about 2.0 million b/d, and on Russia for diesel, importing about 600,000 b/d. Meanwhile, the US imports about 500,000 b/d of oil from Russia, with about 200,000 b/d of crude oil.

In a better-case scenario, the discussions of these three diplomatic forums lead to some short-term, face-saving agreements for Russia, and Moscow calls its forces back to the barracks. This does not mean that Russia would give up its annexed Ukrainian territory (Crimea) or stop its actions on the Donbas region of Ukraine. In fact, if the diplomatic meetings this week set up both short-term actions and longer-term talks, then Russia is likely to keep up pressure on Ukraine (short of a new avenue of invasion or attack) as well as on European countries that are dependent on Moscow for part of their energy imports. Moscow has at least gotten something in this week’s meetings – a seat at a bilateral table with the United States and being front and center again in discussions of European security. The question remains whether this is sufficient for Putin’s Russia or whether it feels that it needs to act militarily to be taken even more seriously. Energy supplies in Europe hang in the balance.