Vladimir Putin is doing everything he can to ramp up Russia’s war machine.
Therefore, if Moscow’s figures are to be believed, the country’s economy has withstood Western sanctions better than one could have expected. Rather than reflecting anything like prosperity, the statistics show that more weapons are being manufactured for the meat grinder of eastern Ukraine.
The resources that finance this include oil revenues. Higher oil prices are pouring more money into the Kremlin’s coffers, thanks in large part to sales through Moscow’s “shadow fleet” of embargo-busting tankers that ferry black gold to morally qualmless customers in supportive or non-aligned countries.
But Putin’s financial clout does not include a previously reliable source of money: natural gas.
Gazprom, the largely state-owned energy giant, posted its worst loss in a quarter of a century last year, losing 629 billion rubles, equivalent to 5.5 billion pounds, while its revenue in ruble terms fell by more than a quarter.
It is the biggest loss in at least 25 years. The loss is a humiliation for the company and the regime. Putin had believed that the vast network of pipelines carrying his gas to Europe had created a craze that would force Western leaders to step down and allow him to take over Ukraine because they were unwilling to to wean yourself off the energy supply.
Before the war this view was widespread. Long after the occupation of Crimea and the war in Donbas, Germany in particular pushed ahead with Russian gas deals, including the construction of the Nord Stream 2 pipeline, which was scheduled to go into operation with Putin’s full invasion in February 2022.
Gerhard Schröder, a former chancellor of Germany, built a career in the Russian energy industry after leaving office and retained his post as chief executive of oil giant Rosneft for three months after the attack.
But Europe’s leaders did not comply with this request. When Putin rejected gas supplies in the hope that a cost of living crisis would change their minds, instead of coming to an agreement, they found sources elsewhere.
Olaf Scholz, chancellor of Germany, which has built much of its industrial prowess on cheap Russian energy, vowed that the country should “never again” become so dependent on hostile suppliers.
In 2021, more than 40 percent of the European Union’s gas imports came from Russia. According to the European Commission, this figure fell to 8 percent last year.
In terms of raw volumes, the decline led to purchases of just over 150 billion cubic meters to just under 79 billion in 2022 and to under 43 billion last year.
Once the contracts for the supply of gas via pipes through Ukraine expire, an extension is not expected, which would lead to a further decline in Russian sales.
Norway is now the EU’s largest gas importer and increased its sales from 79.5 billion cubic meters to 87.8 billion cubic meters.
Britain imported little natural gas from Russia before the war – Norway, Qatar and the US were all major suppliers – and purchases have since been banned.
Gazprom stopped publishing details of its exports in early 2023, but overall its sales outside Russia fell by more than half last year.
Europe made considerable effort to compensate for the loss of Russian gas, but new networks have now been built, meaning Moscow has lost control of the Western market forever.
The importance of liquefied natural gas imported on tankers has increased. The EU increased its capacity to import an additional 40 billion cubic meters of LNG last year and plans to increase capacity by another 30 billion this year.
Bill Weatherburn, commodities specialist at Capital Economics, calls the continent’s efforts “very successful.”
“It used to be stable, stable and reasonably cheap pipeline gas, and they have managed to build the infrastructure to import liquefied natural gas from global markets,” he says.
European imports from the US, filled with gas since the shale fracking boom, have increased from just under 19 billion cubic meters in 2021 to 56.2 billion cubic meters in 2023.
Qatar supplied 15.5 billion cubic meters last year, almost equal to Britain’s gas sales to the continent.
Weatherburn sees this as “stable in the sense that the US will massively increase its LNG capacity – more will be available at the end of this year and next year.”
However, there is a risk that prices will become less predictable in the coming months.
“An outage in any part of the world will now impact gas prices in Europe. Last year there were talks of strikes at an LNG plant in Australia. Even though Europe is not sourcing LNG from Australia, prices rose in Europe because there was a risk that they would compete more with Asia for other supplies,” he says.
Meanwhile, Gazprom is looking for ways to reach new customers. As with Russian oil, there are buyers who are happy to take the natural gas without having to worry too much about the consequences for Ukraine.
A small portion of the gas has been diverted to China and Uzbekistan, but plans to shift more with a major new pipeline are falling apart, despite prewar plans to expand into the Asian market.
James Waddell of Energy Aspects says Russia no longer has a large market due to arms sales of gas to Europe.
“Gas is much more difficult to transport than oil or coal. “You have to build very expensive, long pipelines that take years to build, or liquefaction terminals that also take years to build,” he says.
Even attempts to build such LNG terminals are complicated by Western sanctions.
“Everything that was lost in Europe was essentially stored in Russia or sent to the local market,” says Waddell.
There is a back door that Putin has used: “Russia has ramped up some of its own gas-intensive industries. One of the biggest is urea production, and they sell a lot of fertilizer to Europe,” says Wadell.
These are the remnants of Putin’s once powerful gas industry.
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