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Is Economic Cold War Back?

Mar 24, 2023
  • Xiao Bin

    Deputy Secretary-general, Center for Shanghai Cooperation Organization Studies, Chinese Association of Social Sciences

The Russia-Ukraine war has led to a reorganization of the global energy supply chain, directly driven by the European Union. Energy had always been a pillar underpinning the EU-Russia relationship, and it was weaponized by both sides after the outbreak of the war. 

Gas crisis changes European thinking 

Eighty percent of Russia's natural gas exported to the EU transits through Ukraine. At first, the Russia-Ukraine natural gas crisis related mainly to supply and price, plus the debts of energy companies. It affected the stability of Europe's energy supply. Given the long-term economic downturn, Ukrainians wanted to be part of Europe sooner, as their country had fallen significantly behind its neighbors that had joined the EU. For example, according to the World Bank, the per capita net income of Ukraine in 2020 was 5.7 times less than that of Poland. As a result, the natural gas crisis gradually spilled from economics into politics. Even so, Germany and France, the biggest beneficiaries of Russian energy, were unwilling to lose their vested interests and repeatedly chose to appease Russia in the face of the latter’s aggressive military and diplomatic actions in the post-Soviet space.

As a matter of fact, appeasement failed to resolve the Russia-Ukraine conflict. The tension between Russia and Ukraine repeatedly led to sharp drops — even interruptions — in the natural gas supply in European countries, threatening their energy security. Europeans finally realized that their high level of dependence on Russian energy must be brought down. 

EU diversifies energy supply 

Although Russia and Ukraine indicated that they were able to keep energy disputes under control, the EU began developing plans to replace Russian energy by improving energy efficiency — reducing the energy intensity of economic activity and looking for more reliable sources, while vigorously developing renewables. However, the diversification pursuit was constrained by the close ties to Russian energy.

In 2018, about 40 percent of the EU’s natural gas was imported from Russia. And before 2015, when the Lithuanian Klaipeda LNG terminal was built, Baltic countries imported all their natural gas from Russia. Even after the outbreak of the war in Ukraine, imports from Russia still accounted for about 24.65 percent of the European natural gas market (from January to November 2022). At the same time, Russia got more than half of its total foreign exchange revenue from the EU energy market.

EU countries generally agreed that the close energy relationship with Russia posed a threat to their wealth, power and security. Admittedly, there are also different opinions within the EU, which see those concerns as an exaggeration. In that view, confronting Europe would be political and economic suicide for Russia and would not be in the latter’s interest. However, the past year has proved that Europe is unified. The European Council approved 10 rounds of sanctions against Russia.

According to Eurostat, energy imports from Russia in 2022 dropped sharply from the previous year, including natural gas by 24.3 percent and oil by 10.5 percent. Meanwhile, European energy dependence on the United States increased significantly, to 25.72 percent of the EU’s natural gas imports. 

Revival of economic cold war 

Political factors have increasingly become the key determinant of change in the EU’s energy supply chains. Suffering from the negative impact of high dependence on Russian energy, the EU now pays close attention to the supply-induced “structural scarcity,” which is usually subject to major-power politics and is the root cause of Europe’s energy security anxiety.

The U.S. and EU are cooperating to improve European energy security. To prevent energy revenues from flowing to Russia, the EU banned the import of Russian coal in August and imposed a comprehensive embargo on Russian offshore oil, diesel oil and other petroleum products in December. Even so, Russian President Vladimir Putin vowed to continue the war in Ukraine at all costs.

On March 10, European Commission President Ursula von der Leyen met with U.S. President Joe Biden, and the two sides agreed to work together to improve European energy security by diversifying sources, reducing consumption and reducing dependence on fossil fuels.

EU-Canada-U.S. transatlantic energy relations and cooperation will be further strengthened. Renewable energy is inseparable from key resources such as lithium, cobalt and rare earth metals. At present, most of the key resources needed by EU countries come from China —for example, 98 percent of rare earths. To avoid the risks of structural scarcity, the EU has begun to cooperate with Canada to import rare earths. At the same time, Russia has turned its attention to Asian energy markets with a view toward offsetting European sanctions. In view of the U.S.-EU energy cooperation, Russia has begun to internally discuss the possibility of a new mutual economic assistance council with friendly countries to counter EU sanctions.

In short, the transformation of the European energy supply chain — against the backdrop of the Russia-Ukraine war and its spillover effects — points to a revival of an economic cold war, which will undoubtedly impact the existing global order.

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