Russia, Ukraine & Europe: The Consequences Of Energy Blackmail

Speaking of wintry cold and those who must suffer through it, we have decided to take the plunge on analyzing the deteriorating situation in Eastern Ukraine.

Russian Orthodox Christmas was January 7th and, surprise, surprise, with its passing has come the rise of saber rattling from Vladimir Putin and the Russian armed forces vis a vis Ukraine.

It might be quite a bit more than saber rattling. Russia has well over 100,000 troops including tanks and artillery along the Ukrainian border and apparently has plans to bring nearly another 100,000 in the event of an invasion.

So, tank rattling? Tank rumbling? We will workshop it.

Now, we certainly don't pretend to either:

  1. Know what Vladimir Putin is thinking.

  2. Or have any deep experience in military strategy.

And in fact we find the sudden emergence of armchair generals to be both pretty funny and quite a sad modern phenomenon.

Who knew that spending a career analyzing balance sheets in Lower Manhattan or studying structuralist theory was ideal preparation for understanding the geopolitics of Eastern Europe and Russia's still latent imperialism for its near abroad?!

To paraphrase a better writer than us: The sound of a thousand writers opening up Ukraine-related Wiki pages to try and prognosticate is nearly audible.

Keeping that in mind and trying very hard to avoid making a fool of ourselves, we would just like to point out the following relatively undisputed facts:

  • Russia still has Europe cornered over its energy supplies.

We have shared this chart before which tracks the amount of Russian gas entering Germany from Poland at the Mallnow crossing point.

(we like this data set because it is less open to abuse for political or financial reasons.....)

As you can see, December's new low is now continuing in an impressive flatline into the new year.

Someone in Russia is sending the bare minimum of gas to Western Europe.

No prizes for who it could be.....

Low supplies mean that Europe is drawing down its inventories far more than typical.

Here is an update:

Low supply and low inventories mean that, even with LNG shipments from the US at an all time high, European appetite for conflict with Russia will likely be very limited.

As we have written since early September, European dependence on Russian energy isn't just a foolish economic proposition but also a deep strategic vulnerability.

That vulnerability is now clearly being exploited to its absolute maximum by a very cunning operator.

Furthermore, we also feel it is uncontroversial to state that:

  • Europe is in the middle of a period of political flux amid a series of democratic political transitions.

This is especially the case among its major players:

  1. In Germany, Angela Merkel is gone. The new chancellor is an unknown quantity, as is the new ruling coalition which includes parties new to power.

  2. The United Kingdom, the most anti-Russian large member of the EU (and one with a nuclear deterrent), has left the bloc.

  3. France has an election in April and Emmanuel Macron will be risk averse and, anyway, he has called for "reset" with Russia in the recent past.

Add domestic political weakness to the energy dependence and it means that Europe is unlikely to be either ready or able to challenge Russia over Ukraine.

New, untested and possibly naive leadership is combining with the always difficult task of getting quick agreement and consensus in the ponderously slow European Union to signal that Europe is unlikely to resist Russian aggression.

This puts the Ukrainian question squarely in the court of non European powers.

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