By Paul J. Davies
This is one of a series of interviews by Bloomberg Opinion columnists on how to solve the world’s most pressing policy challenges. It has been edited for length and clarity.Paul J. Davies: You’re a professor of political economy at the University of Cambridge and author of “Disorder: Hard Times in the 21st Century,” which analyzes how the interplay of energy, finance and international politics have contributed to the crises we face today. Let’s start with Ukraine directly. How much of Russia’s invasion is due to Putin’s seeking security for Russian gas exports through Ukraine’s pipelines? Or did he perceive Western weakness because of Europe’s reliance on Russian energy?
Helen Thompson, professor of political economy, University of Cambridge and author, “Disorder: Hard Times in the 21st Century”: It’s more of the second than the first. I don’t think we could say that the situation of gas transit through Ukraine was a motive for Putin. What we can say is that for the last two decades, Putin tried to weaken Ukraine’s position economically by eliminating it from the transit system for the export of Russia’s gas and oil. He didn’t succeed, but the way he went about it was very divisive within the European Union. Poland was convinced that trying to remove Ukraine from transit would weaken Ukraine. Meanwhile, the European Commission was rather more tolerant of the pipeline that went under the Baltic Sea, Nord Stream, which took gas from Russia to Germany, than it was for what was coming into southern Europe under the Black Sea. The fact that there were double standards for Russian gas coming in different pipelines caused internal European disunity that to a considerable extent Putin sought to exploit.
PJD: Europe’s reliance on Russian gas has a very long history. In your book, a key moment seems to be the 1956 Suez Crisis, when Israel, Britain and France tried to retake control of the Suez Canal from Egypt. It was the moment of realization that British and French imperial power was spent — but also the time that Russia hooked up its energy exports to Europe.
HT: In the 1920s and 1930s, there were quite a number of European countries, including Britain, that were willing to buy Soviet oil. Pretty much all European countries were trying to loosen their dependency on oil from the western hemisphere. After the Second World War, the United States didn’t want European countries going back to importing oil from the western hemisphere, because it was concerned about future supply for itself; but nor did it want them importing oil from the Soviet Union. So the solution was for Europe to import oil from the Middle East. The role of guaranteeing those energy interests for western European countries in the Middle East was given to Britain, the dominant imperial power still in the region. It’s not something the United States wanted to do itself.
So, there was a huge psychic shock during the Suez crisis when the Eisenhower administration turns around and says: No, you’re not supposed to behave in this way and we’re not going send you any emergency oil, either. The response of the west European countries — more France and West Germany than Britain — was to say, “Well, if the Americans can behave like that, we need alternatives.” And their really consequential response was to cultivate an oil relationship with the Soviet Union.
By the middle of the ’70s, it was quite clear that a significant number of European countries had a dependency on then-Soviet oil and gas. Once the Soviet Union was dissolved in 1991 and there were 15 independent republics in its place, the pipelines taking Soviet gas to Europe went through an independent Belarus and most critically, an independent Ukraine.
PJD: So this independent Ukrainian state is very important for gas transit. Russia and Europe are both reliant on it in some way. How does that affect Ukraine and its neighbors?
HT: Beginning in the 1990s, Russian governments began to look to remedy a dependency on Ukraine that they didn’t like. What you see is the attempt to say, we’re going to deal with this problem by ending this problem. And that means transiting gas under the Baltic Sea for Northern Europe and under the Black Sea for southern Europe and making it more difficult for the Europeans to start importing gas from Azerbaijan, which would have been a potential alternative to Russian gas. Meanwhile, you have a set of conflicts between Russia and Ukraine, including accusations by the Russians that the Ukrainians are siphoning off gas for themselves, rather than letting it flow where it’s supposed to into other European countries. Then, at a moment of crisis in 2009, Putin shuts down the flow of gas through at least one of the Ukraine pipelines, causing some southern European countries to really suffer.
So, we see a growing geopolitics around the pipelines, as Putin uses them to try to put pressure on various former members of the Soviet Union — not just Ukraine but Belarus and Georgia too.
PJD: There’s a financial element to Ukraine’s destabilization, too. You emphasize the importance of the central bank dollar swap lines, from the Federal Reserve and via the European Central Bank, that supported banks in many countries after the 2008 financial crisis. The really interesting thing is the effects on countries that are excluded, including Ukraine. How did that destabilize Ukraine?
HT: I think this is an important part of the story for what happened in 2013-14. The [Ukrainian President Viktor] Yanukovych government had negotiated an associate membership agreement with the EU that would have economically aligned Ukraine with the EU and its single market. Then, in the second half of 2013, it became clear that the Federal Reserve was tapering asset purchases. That really intensified the financial crisis that was already underway in Ukraine.
Yet Ukraine didn’t have a dollar swap line by the Federal Reserve. When the crisis came, there was no change in that policy. So, the Ukrainian government looked to the EU and the European Central Bank, but the support that was on offer was really quite meager.
So Yanukovych turned to Putin, who was much more generous in financial support, including reducing the prices of gas. And having made that agreement, Yanukovych said, “We’re not going to go ahead with the associate membership of the European Union.” That produced the popular uprising that led to Yanukovych basically fleeing from power, after which Russia annexed Crimea.
PJD: And why do you think the U.S. and the EU were so reluctant to offer much support?
HT: It’s a really interesting question. I think that the Federal Reserve has not made a habit of giving dollar swaps to countries that are in crisis conditions. They have largely been offered to advanced economies, or to countries that the U.S. regards as fairly fundamental to its interests, such as Mexico or Brazil. So, I think that if you’re not on the dollar-swap line, that says something about where you are in U.S. geopolitical priorities.The harder thing to explain is the European position. It negotiated this associate membership agreement with Yanukovych’s government, but then at the moment of crisis, it wasn’t willing to really back it and extend substantial amounts of credit to support it. Once you throw in the fact that the EU had thought this agreement could happen without any resolution of the NATO membership issue for Ukraine — Germany and France were bitterly opposed to Ukrainian membership of NATO — it all added up to a really incoherent position.
PJD: The dollar’s role in international trade and as a reserve currency is being questioned again. For China and Russia this is a point of insecurity because of their need to hold dollar reserves and the extraterritorial and geopolitical power that it lends the U.S. Now that we’ve seen central banks freeze the foreign exchange accounts of the Russian Central Bank, what are the consequences of that? Will it end global dollar hegemony?
HT: The incentive that these sanctions create to say, “We can’t put ourselves at the mercy of the Americans like this” is huge. But the actual ability to protect yourself for these countries seems a lot, lot harder, simply because the dollar penetrates the entire international banking system. If you try to decouple from the dollar, you’re decoupling from that system, and that has profound consequences.
PJD: Another possibility could be that the world splits, with China and Russia more closely linked and forming one trade-economic-energy axis for the east and maybe the Global South; and a separate American-European-Middle Eastern axis. Is that possible?
HT: In practice, it’s going to be very difficult for the European countries to move with any alacrity away from Russian gas. To the extent that some countries will be able to do that more rapidly, they’re the ones that have capacity to import liquid natural gas. That means more intense competition between European countries and Asian countries in general, and China in particular, for those liquid natural gas imports. We saw last year that a big increase in China’s demand intensified competition for those imports and forced prices up. That was at the center of the energy shock that went on last autumn as the world economy started to move into recovery mode from Covid.
To the extent that the Middle East comes back into play, there’s a question of whether Saudi Arabia will want to give up the relationship with Russia and OPEC+ that they’ve had since the autumn of 2016. It’s quite difficult for the Saudis to control oil prices by themselves, but they proved they could do it reasonably effectively with Russia. Why are they going to want to give that up? At the same time, I don’t think Saudi Arabia is just going to cede the China market to Russia, particularly when the United States will be looking to increase domestic production of oil. I think the relations between the three big producers — Saudi Arabia, the United States and Russia — are going to continue to be pretty disruptive.
PJD: The other big factor has been the American shale oil and gas boom, which was driven by the flood of cheap money and higher commodity prices after 2008. That turned the U.S. into a net exporter again and changed its geopolitical interests to some degree.
HT: Yeah, I think the story of the rise of shale oil and gas is the big geopolitical story of the 2010s that was really underplayed. On the oil side, it shook up the U.S.-Saudi relationship at a time in which Saudi Arabia had a growing market in China and the United States was trying to reach some accommodation with Iran, Saudi Arabia’s principal regional rival. And in terms of gas, the consequences played out in Europe, because the U.S. was in a position to compete with Russia for European gas markets.
One of the things I think that Putin was always keen on was to frame any U.S. action against the Nord Stream pipeline as not being motivated by concern for Ukraine, but simply being about the commercial interests of shale gas producers in the United States. I don’t think we can understand the saga of Nord Stream, and the divisions that it caused within NATO, without understanding that this was something where there were economic interests at stake as well as the geopolitical situation in Europe.
PJD: There’s a hope that the green energy revolution will somehow free us from all of these fights and problems. Will it?
HT: Well, if the energy transition is successful and we move toward much higher use of renewables, geopolitics won’t be dominated any longer by the need for countries who import large amounts of foreign energy to exercise influence on those parts of the world that export oil and gas. The sun shines in your own country and the wind blows in your own country. So there is some escape. On the other hand, though, all the infrastructure around green energy requires metals and metals are also distributed unevenly around the world. And one country, China, particularly where rare earth metals are concerned, has an extraordinarily dominant position in the extraction and the supply chains around them. So for green energy to be a route to energy independence, there has to be a break in that metal dependency upon China.
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times Energiesnet.com does not necessarily share these views.
Editor’s Note: This article was originally published by Bloomberg Opinion on March 19, 2022. EnergiesNet.com reproduces this article in the interest of our readers. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.
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EnergiesNet.com 03 21 2022
