8 September 2022, NIICE Commentary 8252
Pankhuri Mathur

In February 2022, as the Russian troops marched, penetrating the Ukraine borders, the energy sector across the globe saw a red flag waving at it. While the Russia-Ukraine conflict caused tremors in the world order, serious disruptions were caused to the energy, food, and fertilisers sectors. The first half of the year saw some of the highest prices of oil, gas, and other fossil fuels, due to the conflict. LNG prices bounced to USD 37 per million metric British thermal units. As per the OPEC basket prices, the prices of Brent oil per barrel leaped from USD 85.24 on 1 January 2022 to USD 123.73 on 14 June 2022. Although Russia is not the sole determinant of oil prices worldwide and OPEC nations have an essential role to play, Russia impacts the price trends.

Russia is a prominent player in the global energy market and is the largest exporter of gas and the second largest producer of natural gas. Russia also has its name among the top three crude oil producers, along with Saudi Arabia and the USA. The country’s revenue heavily depends on oil and natural gas. The restrictions on Russian energy export and production caused tightness in the market, thus leading to price hikes.

The skyrocketing prices of gas, cooking oil, and fuel, came as a result of sanctions put on Russia. With the escalations in the conflict, several states came up with sanctions on Russia, by exerting pressure on Russia through its economy. The USA had put sanctions on Russian energy exports, back in 2014, when Russia annexed Crimea, and history repeated as President Biden announced a complete ban on the import of Russian oil and coal on 8 March 2022. Shell, the oil industry company, also announced that the company would stop buying oil from Russian suppliers. The European Union (EU) took the stand by putting a ban on investments in the Russian energy sector and on dealings with Russian state-owned enterprises such as Gazprom and Rosneft. The economic sanctions on Russia, trade restrictions, and political level interventions have altogether created a supply deficit in the energy market. The supply chains are fractured, and the impact is seen on global energy security. The energy crisis has also escalated post-pandemic inflation, and blunt impacts are seen on developing nations.

EU’s Dependency on Russian Energy

In the energy market, the significance of Russia and Ukraine is such that the conflict situations have shaken it completely. Several European states have been impacted drastically. The EU imported 50 percent of its coal, 40 percent of its natural gas, and 25 percent of its oil from Russia in 2019. Bruegel, a Belgium-based think tank, recorded that Europe sent Russia EUR 22 billion for oil and gas in March alone. The EU’s dependency on Russia for its energy needs has been massive and the impact is now seen in several states like Denmark, Poland, Bulgaria, France, Slovakia, etc. However, the most affected state has been Europe’s strongest economy- Germany. The state has been in an acute energy crisis, provided that half of its natural gas and coal supplies and one-third of oil supplies were directly from Russia.

Following the sanctions, Russia cut supplies of gas and oil through the Nord Stream, which connected Europe with Russian suppliers of energy. There was a loss of 80 percent of supplies, leaving Europe in a state of energy shortage. In addition, Russia took to a strategic stance and announced on 25 March 2022 that Russian suppliers would accept payments only in Rubble. Again price hikes came as a response in the global market with many supply contracts stipulating payments in USD or EUR.

Impact on Ukraine’s Energy Security

The energy supplies coming from or through Ukraine were disabled due to heavy infrastructural destruction. Movement of goods and services through the Black Sea region became practically very difficult with the blockages at the Ukraine posts. Ukraine’s energy facilities were also damaged or captured. Since 24 February 2022, 30 percent of solar, more than 50 percent thermal, and 90 percent of wind energy generation in Ukraine was put out of operation. Nuclear energy facilities that supplied one-third of the country’s electricity requirements were at threat or captured. Zaporizhzhya nuclear power plant and others were occupied. Overall gas production dropped by 12-15 percent and around 30 oil deposits were destroyed.

Impact on the Global South and the Developing Countries

In early May, Business Standard reported India’s permanent representative at UNSC, T.S Tirumurti, stating, “Oil prices are skyrocketing and there is a shortage of food grains and fertilizers. This has had a disproportionate impact on the Global South and developing countries”. The COVID-19 pandemic had already weakend the developing economies, and the energy supply deficit and the price rises made it difficult for these economies to recover.

Mentioning South Asian economies Hartwig Schafer, the World Bank Vice President for South Asia, commented, “South Asia has faced multiple shocks in the past two years, including the scarring effects of the COVID-19 pandemic. High oil and food prices caused by the war in Ukraine will have a strong negative impact on people’s real incomes”. Asian economies are largely dependent on imported fossil fuels for energy needs and the price rises in the global market has  led to a profound crisis. Economies like Sri Lanka and Pakistan which were already strained have seen intense repercussions of the Russia- Ukraine conflict.

The market situations and price rises have left governments in the developing states with majorly three alternatives, increasing subsidies, increasing tariffs, or going without fuel. Either of the three paths leads to an increased economic burden on the economies, yet manage until the global markets see improvements.

The Way Ahead

As a response to the economic crisis, states have come up with the step of reducing the reliance on Russia for energy and looking for alternative more sustainable means. Robin Dunnigan, US Deputy Assistant Secretary for Energy Diplomacy, in conversation with the Atlantic Council stated, “There is a new commitment not only to diversifying away from Russian fossil fuels but diversifying into cleaner more sustainable energy in the future”. Countries have begun to look for alternative energy options in the background of the conflict, and the USA, Qatar, and Saudi Arabia are seen as emerging new strong players in the energy market.

While alternating Russian energy comes up as a way out, IEA Executive Director, Dr. Fatih Birol suggests, “The best way to address our current energy concerns, the current global crisis is through international cooperation and solidarity”.  This comes in as Ukraine signs in and becomes an association country of the IEA during a signing ceremony in Warsaw on 19 July 2020.

In a gist, from the perspective of energy security, the world looks forward to three major ways, i.e. Reducing Russian dependency, finding alternative sustainable energy sources, and engaging in energy diplomacy and cooperation, leading to reduced energy security concerns and better economic growth.

Pankhuri Mathur is Research Intern at NIICE.