Europe is on a tear to reorient its energy markets away from Russian natural gas in response to the war in Ukraine.
But the continent’s entrenched trade relationship with its neighbor, buttressed by long-term and legally binding purchasing contracts, is currently keeping the fuel flowing.
The Europeans are still piping in gas from Russia to the tune of hundreds of millions of cubic feet per day, even as the West has made it a main project to starve President Vladimir Putin’s “war chest” of funds received via oil and gas purchases from state-owned companies such as gas giant Gazprom.
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Still, oil and gas are coming in daily while the European Union plans a divorce from Russian imports, and there are a few reasons why.
Thousands of miles of gas pipelines connect the two, allowing ease of transport, and continental Europe has been consistently receiving a plurality of its gas supplies from Russia.
Some 41% of gas imports in 2019 came from Russia, per EU data, while the share of Russian imports climbed to nearly 44% for 2020 and were up to nearly 47% for the first half of 2021.
The extent to which Europe relies on Russian gas means the economic and social consequences of a shut-off would be astronomical, leaders and analysts have said.
German Vice-Chancellor Robert Habeck, a Green Party member and proponent of renewable energy sources, said recently that a loss of Russian energy would portend a 3% to 5% loss of gross domestic product for Europe’s largest economy and its single-largest Russian energy purchaser.
That would mean “some people no longer earning any money at all,” Habeck said.
“If certain sectors, such as the chemical industry or steelworks, can no longer produce, entire supply chains will break down,” he said. “Not only are these sectors affected, but the entire production process breaks down in many places.”
Another critical, and perhaps more decisive, factor at play is the contractual obligations between Russia and EU member states governing gas acquisition, most of which apply beyond 2030.
The contracts, involving a variety of countries including Germany, Italy, and Hungary, have so-called take-or-pay and deliver-or-pay commitments that cannot simply be disregarded, explained Jonathan Stern, who was representing the EU in the EU-Russia Gas Advisory Council a decade ago as the bloc renegotiated its gas purchasing terms.
“These are international legal contracts underpinned by massive punitive damages if they are not honored,” Stern, now a distinguished senior fellow with Oxford University’s Institute for Energy Studies, told the Washington Examiner.
“If the EU or national governments will say to companies, ‘You can’t take — we are stopping you taking gas from these contracts,’ the first thing that company will say is, ‘Fine, so you will indemnify me against any future claims, and in addition to that, you will help me pay for the replacement gas that I’ve got to buy,'” Stern said.
Purchasing agreements are typically “sacrosanct,” analyst Vinicius Romano with energy data firm Rystad Energy said in assessing Putin’s demands earlier this week that “unfriendly” Western nations pay for gas with the ruble rather than euros or dollars.
Romano said further that insisting on ruble payments “may give buyers cause to reopen other aspects of their contracts, such as the duration, and simply speed up their exit from Russian gas altogether.”
Some critics of the European leaders’ decisions not to interrupt gas purchases have emphasized that the situation demands a cold-turkey approach.
“We will have to accept a loss of prosperity in the medium term anyway if we want to become independent of Russia,” Veronika Grimm, one of four members of the German Council of Economic Experts, wrote on Twitter.
President Joe Biden, who announced a ban on Russian energy imports March 8, expressed understanding of the Europeans’ reluctance to move forward in kind.
“We can take this step when others cannot,” he said, making reference to the United States’s vast domestic energy production capacity.
The British government, which will oversee a phaseout of Russian oil by year’s end, explained in its announcement that the United Kingdom is similarly situated to make up for losses caused by a moratorium.
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Meanwhile, Biden and the EU are teaming up to increase Europe’s gas stores by supplying more shipments of liquefied natural gas from the U.S. and other countries.
Biden announced Friday that the administration would seek out 15 billion cubic meters of additional LNG from the U.S. and partner countries to provide to Europe this year and would seek to send an additional 50 bcm of U.S. LNG to the EU annually through 2030.
The U.S. stands atop the global pack of LNG exporters currently, having surpassed Qatar and Australia in December, and the Energy Information Administration projects a 16% increase in average daily export volumes for 2022.
