Social media loves a good conspiracy theory, but it has gone off the Richter scale speculating on who was behind the take-down of the four Nord Stream gas pipelines, two of which sprang leaks on Sunday night (September 25) as we reported yesterday morning.
In the afternoon the Swedish seismological service reported that it had registered explosions in the vicinity of the pipelines and emphasised it was sure it was not an earthquake. That set the match to the fuse, as everyone immediately started blaming separately the Russians, the Ukrainians and the US. Almost no one thinks it was an accident and indeed it seems very unlikely to have been so, as two pipelines, built on different technological platforms, sprang leaks simultaneously.
So who did it? What makes this story such rich grist for conspiracy theories is each of the three main protagonists all have equally good motivations for blowing up the pipelines and there is no evidence at all, apart from the confirmation there was almost certainly an explosion, to allow one to choose between them.
If you want my take on it, I think the least likely is Ukraine. The problem is the pipelines are at the bottom of the Baltic Sea, 300m underwater, which strongly suggests you need a submarine to get at them – it is in theory possible to drop a bomb from the surface, although that would be very difficult. Ukraine doesn’t have any submarines.
As a sports diver myself, sending frogmen down to anything below 15m means you need a helium mix and 300m means serious decompression and a special boat with a decompression chamber, which would be easy to spot.
That leaves Russia and the US. Chatting to our Moscow correspondent, the Russians are convinced that the US did it. Videos of Deputy Secretary of State and well-known Russia hawk Victoria Nuland testifying to the Senate Select Committee were widely circulated yesterday saying that “We can stop the flow of gas through Nord Stream.” And not only the Russians think the US was behind the leaks.
What complicates things here is the US really does have a very good reason to take the Nord Stream pipes off the table. Putting aside the politics for a moment and looking at just the economics, the EU gas market is worth tens of billions of dollars a year, but the two main NS pipelines shut the US out of that market, as they sell far cheaper gas and have had a stranglehold on the EU market for decades. The US has lobbied against NS pipelines from the start, saying they “threaten Europe’s energy security” when in fact – from an economic point of view – they improved it, as they don’t run through a warzone.
Of course, with hindsight the security problem is that Russia has now weaponised gas in retaliation for the US weaponising technology exports and the use of the dollar, but before the invasion who expected that? From the German point of view, it has been buying Russian gas since the 1970s and throughout the Cold War with no problems, so its commitment to Russian gas is not insane, whereas the US objections were highly questionable. And besides, Germany was already diversifying away from Russian gas with renewables, so the share of Russian gas in the mix had fallen from c.70% to 35% before the war. Former chancellor Angela Merkel told Russian President Vladimir Putin last year that Germany would import zero Russian gas within the next 20 years. The problem today is the war started before that process was completed.
The argument against the theory that the US did it is technically the NS pipelines belong to Germany, not Russia. The idea that the US would blow up a major piece of infrastructure belonging to an ally – especially one as crucial as energy infrastructure (even if it was turned off) – beggars belief.
Personally, I am convinced that German Chancellor Olaf Scholz was secretly hoping that all this would eventually blow over and he could turn the gas back on again. The way he closed down NS2 was to remove a single document from the package that went to the regulator, effectively killing off its approval. But that makes it ridiculously easy to restart the process at any time simply by returning that document. Moreover, we know that he is under a lot of pressure from the industrial lobby to make peace, as it seems the entire German economic model – import cheap Russian gas to export high quality widgets – is under threat. This is an existential moment for Germany.
So, imagine the brouhaha that would follow if it ever came out the US is behind the explosion. Still, the US did bug Merkel’s phone, something they have never apologised for. Moreover, when a commission was set up to investigate the incident the CIA got caught a second time placing a spy on the commission to follow what was going on – something else Washington has never apologised for. So, I guess it’s not an entirely crazy theory. Like China, Washington always looks out for itself first and foremost.
The second theory is that Russia did it, and to be honest this seems more likely to me. Presidential spokesman Dmitry Peskov went on the wire to say the Kremlin thought it might have been sabotaged already by lunchtime yesterday, but that means nothing.
But this theory is also very problematic. We had a big internal discussion about this and our staff at our sister energy publication newsbase.com asked what Russia could possibly get out of it? By taking NS out of the picture entirely not only does it lose the leverage of turning on gas supplies again in the midst of winter – a useful bargaining tool – but it also forgoes all the money it makes, some €30bn year to date.
This is a strong argument, but playing devil’s advocate, if the Kremlin did do it then the argument would go something like this:
Europe’s gas business is already lost. One of the clear outcomes of this conflict is Europe will stop importing all but possibly the tiniest amount of gas from Russia as soon as it can. (I’m guessing when things finally calm down, European countries like Hungary will continue to import say up to 50bn cubic metres of Russian gas, simply because it’s far cheaper, but little enough so that this can be easily replaced with US LNG if there is another crisis.)
If the gas business is lost, then there is no loss to blowing up the pipelines. This has the practical result of stoking the energy crisis fears that sends gas prices up again and it is that ability to cost Europe a lot of money that is Putin’s main weapon in the economic war that Russia is waging with the West.
The price of gas has been falling in recent weeks after the EU rolled out a wide-ranging package of measures to counter the energy crisis, as we reported yesterday covering the recent Bruegel report on the issue. In Germany the price of gas was almost back to pre-war levels as the gas tanks are now 90% full, well ahead of schedule.
And now? Lo and behold, gas prices on the Dutch TTF spot market were up from around €175/MWh at the start of trade yesterday to €185 by the end of the day and this morning opened at €211/MWh ($2,144 per thousand cubic metres), up 12% in the last 24 hours and 134% year on year. That translates directly into adding billions to energy bills.
People have focused on gas supply and Putin’s ability to turn the gas on and off, but actually looking at the historical storage data and flows, we are having a perfectly normal year in terms of volumes. Storage is currently slap in the middle of the last five years' average levels and import volumes are also normal. The difference is only one of sentiment and the fact that (US) LNG has gone from a marginal source of gas that was supposed to even out the bumps in extreme weather years, to the main source of supply – which is a major change.
Cutting off Russian gas permanently stokes those sentiment-driven price rises and keeps the energy crisis in Europe going.
The other objection is that Putin wouldn’t forgo the money, but this assumes that he is interested in profits, which is a mistake. Putin is not interested in profits, or even prosperity. He is only interested in revenues: enough cash to fund the war in Ukraine and have sufficient left over to keep his citizens happy. At the heart of the Washington Consensus is individual freedoms and the pursuit of happiness. But as we have argued before, the Moscow Consensus places the most emphasis on security and the individual is expected to sacrifice some of his or her personal freedoms (and prosperity) for the sake of the Rodina (Motherland). And most Russians buy into this, as long as they are not made too poor.
Russia makes good money from gas, but it makes far more from oil exports and these provide more than enough revenue to meet these goals. In addition to oil export revenues, which will also fall soon, the Ministry of Finance has recently leaped into action with a 10% across-the-board expenditure cut (excluding key groups like pensioners) and has introduced new high obligatory social insurance payments, to the point that the oligarch lobby group Russian Union of Industrialists and Entrepreneurs (RSPP) loudly complained about Putin breaking his social contract with them. The finance ministry is in the middle of putting the Russian economy onto a war footing, something that Europe would be well advised to also do, but isn’t.
Finally, another factor that is not being widely discussed is the Kremlin’s ability to simply print its way out of trouble. The low level of debt and the tight capital controls that the Central Bank of Russia (CBR) imposed immediately after the war started will allow it to turn on the printing presses to cover any budget deficit if needed without doing too much damage. And it can keep this up for several years. It is exactly what the National Bank of Ukraine (NBU) is doing, as it is operating under the same conditions. Ukraine has been covering a circa $5bn a month budget deficit by printing money and, thanks to the tight controls, has more or less successfully kept control of the exchange rate and prevented financial and currency meltdowns so far.
If this theory is correct, then you can expect Putin to screw around with more commodity prices. The next one to watch for is grain. Russia reported yesterday that it is on track to smash previous all-time highs with its grain harvest this year, bringing in 150mn tonnes – way ahead of the previous all-time high of 135mn tonnes in 2018. However, the Istanbul grain deal signed on July 22 expires after 120 days in November and the Kremlin is already making noises about “technical problems”. If it stops the export of Ukraine’s grain again then that will only fuel more fear and inflation which will hurt the West. But with its bumper crop this year – and just wheat will be 100mn tonnes, or about 30mn tonnes more than normal, equivalent to almost all of Ukraine’s export potential – the Kremlin can help out its friends while punishing its enemies.
Having said all this, it is possible something else happened to the NS pipelines. We will probably never know the truth, because if either of the above theories are true neither government will ever admit to it.
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