Russia, the 'Energy Superpower,' Stumbles Amid Ukraine Crisis... Market Landscape Shifts

Russian President Vladimir Putin
[Photo by Reuters]

[Asia Economy Reporter Jeong Hyunjin] Russia's airstrikes on Ukraine are reshaping the energy market landscape. Russia used energy, the core of its economy, as the economic foundation for launching airstrikes on Ukraine, but paradoxically, this invasion is shaking Russia's status as an 'energy superpower' built over the past 20 years.

As movements to reduce dependence on Russian crude oil and natural gas spread mainly across Europe, Russia is also damaging its own reputation as a stable energy supplier by cutting crude oil supplies in retaliation against Western sanctions. South Korea, which has a high dependence on crude oil imports from Russia, is also being urged to prepare for the mid- to long-term.

Russia Undermining Its Own Credibility

According to Russia's TASS news agency and others on the 22nd (local time), the Russian state-owned oil company Caspian Pipeline Consortium (CPC) announced that it would suspend the use of the crude oil loading facility (SPM) at the offshore terminal near Novorossiysk, a southwestern port city of Russia. CPC stated that serious damage occurred to this SPM, leading to the suspension of its use, and that bad weather is forecasted, which will cause repairs to take a long time. The Russian Ministry of Energy assessed that the damage to this pipeline connecting Central Asia and the Black Sea could halt crude oil delivery by up to 1 million barrels per day for about two months.

[Image source=Reuters Yonhap News]

This announcement came ahead of U.S. President Joe Biden's visit to Europe. The pipeline to be suspended connects the Tengiz oil field in western Kazakhstan to the Novorossiysk port on Russia's Black Sea coast over 1,500 km and is used by U.S. energy companies Chevron and ExxonMobil. The Biden administration imposed sanctions on Russian crude oil imports but excluded crude oil produced through CPC's pipeline, considering it originates from Kazakhstan. Major foreign media evaluated CPC's move as "a measure taken by Russia, cornered by Western sanctions, to further threaten global crude oil supply."

The most troubled region is Europe. Last year, Europe received 29% of its gas supply and 35% of its crude oil supply from Russia. Feeling Russia's energy power acutely, Europe is belatedly pouring efforts into reducing dependence. The European Union (EU) announced on the 11th that it would pursue independence from Russian fossil fuels. Since the EU heavily depends on Russia not only for natural gas but also coal and oil, it declared plans to establish an energy strategy to secure supply sources, promote renewable energy, and strengthen energy-saving measures.

However, it is not easy for European countries to immediately cut off Russian energy. On the same day, EU foreign ministers gathered to review a ban on Russian crude oil imports, but Germany and the Netherlands opposed it, citing difficulties in finding alternatives. Global crude oil traders such as Vitol, Gunvor, and Trafigura also expressed concerns that abruptly cutting Russian crude oil could cause system shortages and indicated intentions to continue crude oil imports for the time being.

BP, Shell, and Now Total Also Halt Transactions with Russia

Nevertheless, Russia's position in the energy market has already begun to falter. After Russia's airstrikes on Ukraine, major oil companies have been suspending transactions with Russia, mindful of Western sanctions. Following British energy company BP and Dutch Shell, French TotalEnergies also announced that it would not renew its diesel and crude oil supply contracts with Russia, which expire at the end of the year. At this stage, since the EU is maintaining Russian gas supplies, gas will continue to be supplied, but diesel will be replaced by Saudi Arabia and crude oil by Poland, the company added.

India and China continue to import Russian crude oil, but the U.S. has imposed an embargo, and European countries including Germany are strengthening ties with other Middle Eastern countries such as Qatar. Germany signed a liquefied natural gas (LNG) supply contract with Qatar on the 20th. In the mid- to long-term, analyses suggest that Russia's invasion of Ukraine will shake Russia's economic position as an energy superpower.

"Putin Severely Damaged Russia's Economic Source... Permanent Loss"

Daniel Yergin, Vice Chairman of IHS Markit

Daniel Yergin, a global oil expert and vice chairman of IHS Markit, wrote in a column for the British weekly The Economist, "Russia has destroyed the reputation it built as a stable supplier for over 20 years since the collapse of the Soviet Union in just a few weeks," and diagnosed that "its role will clearly diminish as it is regarded as an unreliable energy source in Europe."

He also predicted that Russian crude oil, which cannot head to Europe, will be redirected to Asia, including India and China, but that the oil market will struggle to find balance and face conflicts as OPEC and Asian markets lower prices to compete. He emphasized, "What Vladimir Putin has done is not only to break unity but also to damage the most important source of Russia's economic power."

Sarah Johnson, Senior Director at S&P Global Market Intelligence, forecasted, "The Russian economy will suffer permanent losses due to sanctions, withdrawal of foreign companies, and new emphasis on energy security."

This content was produced with the assistance of AI translation services.