The Russia-Ukraine Conflict and Europe’s Energy Dependency

As Russia’s invasion of Ukraine intensifies, the international conflict is disrupting global energy supply chains since Russia is one of the world’s largest oil exporters.

A major uncertainty from this conflict is its implications for global carbon transition plans. The crisis has the potential to slow the transition in some areas, with deaccelerating climate financing and international investment if countries ramp up internal fossil fuel production or transition reliance to other partners such as Saudi Arabia. Conversely, the conflict could also speed up energy transition efforts as countries look to diversify their energy supply away from fossil fuels due to fuel price spikes while decreasing dependency on Russia through strengthening green infrastructure. However, this may be tough in practice, as many economies are still reeling from the pandemic and recovery costs.

A notable example of this dynamic is in the EU, where the invasion has highlighted the bloc’s high energy dependency—it imports over 60% of its energy needs from external countries, and much of this comes from Russia. The EU has been a global leader in the low-carbon transition, so the world will closely watch its energy choices in the face of the Russia-Ukraine conflict.

The conflict is a concerning development for the EU’s energy security. It may push the region to diversify its energy supply either through speeding up its clean energy transition or reverting to coal and other fossil fuel sources as it faces potential fuel shortages from its dependency on Russia. Primary energy production in the EU has decreased between 2010 and 2020, partly because of the bloc’s energy decarbonization efforts. More than half of the EU’s overall current energy supply comes from nonmember countries. Germany, Italy, France, and Spain are the largest net energy importers of energy in absolute numbers.

The energy dependency rate indicates an economy’s reliance on imports to meet its energy needs. It is defined as net imports divided by the gross available energy, expressed as a percentage. As Figure 1 shows, oil and petroleum products have the highest dependency rates, followed by natural gas. Malta, Cyprus, and Luxembourg have the highest energy dependency (see Figure 2). In 2020, renewable energy sources accounted for around 40% of the EU’s total production, followed by nuclear energy (30.5%). In fact, during the 2010-2020 period, the production from renewable energy was the only source of energy to have increased (39.2%). The largest reduction (-62.4%) was recorded for natural gas, although this remains the second-most consumed fuel, as fossil fuels continue to be the most significant energy source in the EU.

A significant proportion of the EU’s natural gas imports are concentrated among a few external partner countries, with over 40% supplied by Russia. Russia is the bloc’s leading supplier of natural gas, crude oil, and hard coal, and it has maintained its position for the past 10 years. Most of the gas is delivered through pipelines like Yamaal (via Belarus and Poland to Germany), Nord Stream (directly to Germany through the Baltic Sea), and TurkStream (via Turkey).

Given the global dependence on Russia’s energy exports, the country’s energy sector is largely isolated from sanctions except for Nord Stream 2, a major gas pipeline that connects Russia with Germany through the Baltic Sea, which has not yet received final certification from German regulators in response to Russia’s invasion of Ukraine. However, international oil companies that own stakes in Russian joint ventures, such as BP Plc, Shell, and Exxon Mobil Corp., have announced plans to exit the region. This move is leaving Russia without foreign investment and oil industry expertise. Importantly, there is a debate around the ethics of selling of oil assets, since those assets can then move into the hands of private companies that have less incentive to disclose and reduce emissions and plan for the climate transition. Russian state-owned oil companies have shown resistance to climate transition planning and greenhouse gas reduction targets.

The implications surrounding the disruption to global energy supply chains go beyond those countries reliant on Russian energy supply. Oil prices have soared above $100 a barrel as sanctions continue, which will inevitably increase costs for businesses and end consumers. The potential supply shocks and higher energy costs in recent weeks have prompted governments to seek alternative supplies and pursue policies to move away from oil and natural gas.

Russia has not given any indication of cutting off its gas exports. However, the EU’s energy security would be threatened if Russian gas supplies to Europe were halted or disrupted—and this would have enormous economic consequences for the region. This dynamic is especially worrisome given that the EU’s natural gas storage is currently lower than year-ago levels, and it may become fully depleted by this month or next. Still, this scenario seems unlikely: Cutting off the EU’s energy supply would have substantial financial repercussions for Russia, as oil and gas revenues represent nearly 40% of its federal budget.

Even so, the two biggest European importers of Russian gas, Germany and Italy, are considering alternatives to meet energy demand and decrease Russian reliance. Germany, the largest importer, receives more than half of its natural gas from Russia. Although it could turn to other countries such as Norway or Algeria for fossil fuel imports, this could have spillover effects on the supply available to other EU members. Before the invasion, Germany was planning to ramp up its renewable power generation, and it had recently announced its goal of producing nearly 100% of its electricity through renewable power by 2035, instead of its previous target of 2050. However, the country is now weighing the option of prolonging coal use to reduce its Russian reliance, but this would likely force the country to extend its 2030 deadline to phase out coal. Nuclear power is not a viable option for Germany since the country is phasing it out; Germany’s remaining three nuclear plants (Emsland, Isar, and Neckarwestheim) are expected to close by year-end.

Since Germany only imports natural gas through pipelines, the government plans to build two liquefied natural gas (LNG) terminals to reduce its dependency on Russian gas. There are several LNG terminals in Europe but none of them are in Germany. It has also proposed legislation mandating storage facility owners to have a minimum level of gas stocks filled.

After Germany, Italy is the second-largest natural gas importer in Europe, and it is heavily reliant on imports to meet its energy needs. Italian Prime Minister Mario Draghi recently announced that the country is looking into reopening certain coal plants to meet energy demand.

Energy security has been an important focus for the European Commission. This concern has been included in the commission’s plan of reducing greenhouse gas emissions at least 55% by 2030 and achieving climate neutrality by 2050. By domestically producing renewable energy and using other low-carbon energy sources, the EU expects to decrease its dependency on energy imports and strengthen its energy system. According to the International Energy Agency, the EU could withstand a one-third reduction of its Russian natural gas imports within a year through a combination of investing in clean and efficient technologies, accelerating the deployment of renewable projects, and diversifying its energy sources.

Catalyzing Europe’s green agenda is a long-term positive from an environmental perspective. However, it could prove expensive in the shorter term, and the countries dependent on imports will have to rely on coal-fired power to fill the gap, which may actually set back Europe’s transition to clean energy. KBRA will continue to closely monitor the conflict between Russia and Ukraine and how it could impact not only energy supply, but also climate financing and international investment in the transition to a low-carbon economy.