When Russia invaded Ukraine in February of last year, President Vladimir Putin counted on the fact that imposing meaningful economic sanctions on his country would be no easy feat. Putin’s leverage over the West (and many other key economies worldwide) has been growing for years as a steady stream of cheap and (until now) dependable oil and gas has been flowing over Russian borders. To hit Russia where it hurts, the world would have to endure a lot of pain at the pumps and in their energy and heating bills. Everyone’s economies would have to suffer.
But so far, the European Union has managed to slowly ramp up energy sanctions against Russia without incurring too much damage to its own economies. This was largely thanks to a very lucky break. Instead of a cold winter which would push Europe’s own energy production capacity to the limit and potentially send millions of Europeans into energy poverty and put lives at risk in dangerously cold temperatures, Europe experienced an uncharacteristically mild season which allowed it to skirt a major crisis.
However, Russia has also managed to avoid a lot of the economic damage that the world anticipated. Although Europe has slowly imposed more energy sanctions and imported less Russian gas, they were very slow to pull the trigger on meaningful and sweeping energy sanctions that could greatly exacerbate their energy crisis. Second, oil and gas revenues – 45% of the Russian government coffer – were through the roof thanks to extremely high prices. Third, Russia’s economic safeguards were extremely effective. Fourth, Europe, the UK, and the US may have banded together to squeeze Russia, but much of the world did not.
Since long before the invasion, Europe’s increasing dependence on the Kremlin had been a point of contention with the United States. This political tension came to a head with the Nord Stream 2 pipeline, which would have been the second major pipeline directly transferring natural gas from Germany to Russia. Even before its construction, Germany already depended on Russia for half of its natural gas supplies. But the $11 billion pipeline never came online.
But still, the world’s dependence on Russian energy is far from over. For example, the considerable Russian nuclear energy industry has managed to avoid sanctions entirely due to its irreplaceable contribution to the global nuclear power sector.
Russian state-operated nuclear energy firm Rosatom is a key global source of nuclear fuel, enrichment services, and lines of funding for new nuclear facilities, which are prohibitively expensive for nearly any private company. Nearly one in five nuclear power plants in the world is either in Russia or is Russian-built. And even now, Rosatom is expanding. Currently, the company is involved in building 15 more nuclear plants internationally. In fact, Russia has been using its long nuclear arm to increase influence in African countries that could not otherwise afford to build the massively expensive plants (as has China).
Russia’s spreading nuclear influence has gained it considerable leverage around the world, and that dominion is currently paying off. Slapping sanctions on Russian nuclear power would be a logistical and political nightmare, thanks to a “Russian doll’s worth of interlocking dependencies,” in the words of Paul Dorfman, chair of Nuclear Consulting Group. The outlook isn’t good for the Russian economy, on the whole, this year, but it seems that it can continue to count on its nuclear industry to keep raking in rubles. The result could lead to an even longer and more drawn-out war in Ukraine if the world isn’t able to ease its reliance on the Kremlin for nuclear fuel and financing.
By Haley Zaremba for Oilprice.com