Russia’s weaponisation of its energy exports was an alarm call for countries that must now reassess their high dependency on energy imports from sources sensitive to geopolitical risks.
Russia’s export disruption as a response to large-scale sanctions, or as a deterrent to Western support for Ukraine, has made it extremely difficult for Europe to manage supply chain disruptions. Moscow’s logic is that rich energy resources allow it to better weather market volatility; hence, it is willing to sacrifice some of its export revenue to deprive the West of energy supplies.
Although Europe has been speeding up gas supply diversification and renewables investment to confront its Russian gas dependence, these measures will require years to take effect and are unlikely to ease supply shocks and reserve shortages over the next 1–2 years. This is likely to result in further energy crises in Europe that will drive higher utility bills, disrupt industrial activities, stoke popular discontent and prompt governments to recommission coal and nuclear as a short-term solution.
Russia’s pivot to the east
Escalating tensions with the West and crippling economic sanctions are speeding up Russia’s ‘pivot to the east’. More imports from Russia will help Asian countries diversify sources of supply to further boost their energy security. In particular, major importers, such as China and India, will be in a more comfortable position to negotiate terms with other energy suppliers.
While Asian developing economies will be the major beneficiaries of cheap Russian oil, economic benefits and energy security will increase their reliance on Moscow. The longer these countries rely on discounted Russian supply, the harder it will be for them to remove Russia from their supply chains. Closer economic ties could eventually push Asia further into Russia’s political orbit. The region’s major importers of Russian energy will also have to ensure they are not stepping on the red lines drawn by the US and the EU, otherwise they risk secondary sanctions.
US sanction bandwidth under strain?
Since the start of the war, the West has been working on a range of mechanisms to curtail the energy revenues Moscow uses to fund its hostilities, but their overall effectiveness is in question.
The latest idea to place a price cap on Russian oil exports reflects the pressure the West is under to avoid an energy security crisis, especially when the EU’s Russia import ban begins in December for crude oil and in February for oil products. US secondary sanctions also appear to have their own limitations, given that China and India have become the new biggest buyers of Russian oil.
So far, Beijing’s support for Moscow has been cautious, and it has been urging the US to soften its hard China policy. But with the two coming closer together due to Russia’s pariah status in the West, it would be a tough decision for the US to impose sanctions on both powers at the same time. Indeed, the US will likely avoid starting trade wars on multiple fronts, considering the impact on the global market and supply chains. Such a concern will only leave more room for Russia-Asia energy cooperation, as Apac countries will be on the lookout for signals of the US’ resolve to meet future challenges from Beijing.
The Russia-Ukraine crisis has also deepened the global division on climate action. While energy insecurity has sped up the energy transition in Europe, it has also pushed some Asian countries to rely more on fossil fuels to ensure basic supplies. Although opportunities in Asia for renewables remain robust, major emitters have doubled down on coal (and nuclear in some countries) to ensure basic energy supplies. Moreover, cheaper oil will also disincentivise them from phasing out fossil fuels, thus hindering the energy transition to cleaner fuels.
The global division on emissions has brought many developing countries together in terms of their climate politics. Despite carbon-neutrality pledges, countries such as China and India have prioritised domestic development agendas, including poverty eradication, economic growth and energy security. Their economies are more sensitive to the social impact of a robust carbon policy, such as unemployment caused by lower investment in fossil fuels. In upcoming Cop meetings, these developing countries will likely stand together as a bloc negotiator to fight for a ‘just transition’ and press rich countries for more support in climate finance, mitigation and adaptation.
Green energy dilemma
The need to decarbonise the world’s economy has driven the global race for critical minerals and created new trade dependencies for resources that could be as vulnerable to geopolitical and ESG risks as gas and oil have proven to be.
In the global competition for dominance of the green tech space, China has already secured significant control over the global supply chain of materials that are indispensable inputs for clean energy development. China’s dominance extends to solar manufacturing, rare earth minerals and refined lithium and cobalt. It is also building up manufacturing capacity for electric vehicle battery components and green hydrogen electrolysers. Although China’s strategic competitors have begun to diversify the supply chain of strategic materials to other Asian countries, any relocation could take years.
While the West is actively reducing its reliance on Russia’s fossil fuels, it continues to be dependent on critical mineral imports from its strategic rivals, leaving it open to further potential disruption to its energy goals and climate commitments. Solutions to this bind are thin on the ground, and until such time as the West can extricate itself from both Russia and China’s hold over traditional and renewable energies, uncertainty and vulnerability will remain on the table.
Kaho Yu is the head of energy and resources research at the intelligence risk company, Verisk Maplecroft.
This article is part of our special Outlook 2023 report, which features predictions and expectations from the energy industry on key trends in the year ahead. Click here to read the full report