Russian Prime Minister Vladimir Putin in 2011.

FABRIC COFFRINI | AFP | Getty Images

LONDON – After Russia rode to Europe to help and offered to increase gas supplies to the region while prices rose, one thing became clear: Europe is now largely at the mercy of Russia when it comes to energy, just as the US had warned.

Natural gas contracts hit new highs in Europe this week – and regional benchmark prices are up nearly 500% so far this year – with increased demand and supply scarcity putting pressure on the energy sector when the weather turns colder.

Prices fluctuated and hit new highs on Wednesday before pulling back and offering an increase in Russian gas supplies to Europe following the intervention of Russian President Vladimir Putin.

Market analysts said the move shows Europe is increasingly vulnerable to Russia waiting for Germany to certify the controversial Nord Stream 2 gas pipeline project, which will bring more Russian gas to Europe across the Baltic Sea.

The $ 11 billion pipeline has now been completed to the annoyance of the US, which has long resisted the project and warned for years during its construction that it would jeopardize Europe’s energy security and that Russia could try to use energy supplies to leverage the region.

The Obama and Trump administrations fueled bipartisan opinion against the pipeline, and President Joe Biden also announced sanctions against companies involved in the project, but these were lifted in May in what was seen as an attempt by the US to rebuild relations with Germany .

“Energy blackmail”

“Europe has now taken hostage over Russia’s energy supply,” said Timothy Ash, Senior Sovereign Strategist for Emerging Markets at Bluebay Asset Management, in a research note on Wednesday, calling the situation “incredible”.

“[It’s] crystal clear that Russia has Europe (the EU and the UK) in an energy headlock and Europe (and the UK) are too weak to challenge it and do anything about it, “he said, calling it a form of” Energy extortion “.”

“Europe crouches, as it fears [that] When the winter comes, Russia will keep turning the screws (the energy pipelines) and freezing it until it gets its way and is NS2 certified. “

Putin used a televised government meeting on Wednesday to offer an increase in supplies to Europe. He also reprimanded the region for terminating many of its long-term gas contracts in exchange for spot deals, and said the Kremlin was ready to negotiate new long-term gas sales contracts.

Many experts believe that Russia has deliberately withheld gas supplies to Europe in order to expedite Germany’s certification of the Nord Stream 2 pipeline. However, Russia has refuted this. Putin’s spokesman Dmitry Peskov denied on Wednesday that Russia played any role in Europe’s energy crisis.

Nonetheless, Russia’s Deputy Prime Minister Alexander Novak stated on Wednesday that the expected German certification of the controversial pipeline could help cool prices.

Specialists pose for a picture after welding the last pipe of the Nord Stream 2 submarine gas pipeline on board the laying vessel Fortuna in German waters in the Baltic Sea, September 6, 2021.

Axel Schmidt | Nord Stream 2 | via Reuters

Ash believed that the pursuit of a quick certification for Nord Stream 2 was “Moscow’s game plan all along,” adding that “the markets are really naive for believing that Moscow will do anything anytime before NS2 is certified to alleviate the European gas crisis. “

The German energy regulator is not yet showing any signs of certification of the pipeline, according to Reuters, and said Tuesday that the pipeline must demonstrate that it does not violate competition rules by restricting which suppliers they use to Germany without obtaining the necessary permits, according to Reuters .

Mike Fulwood, Senior Research Fellow at the Oxford Institute for Energy Studies, agreed that any decision to bring Russia more gas to Europe is “political” and tied to pipeline certification.

“Basically, [the situation for Russia is] If you approve Nord Stream 2, we’ll get some gasoline to send down Nord Stream 2 to show that we’ve stayed true to our word, ”he told CNBC on Thursday.

Bilal Hafeez, CEO and head of research at Macro Hive, told CNBC’s Street Signs on Thursday that he also believes Russia is using the situation to its advantage.

“I think Russia took advantage of this energy crisis to take advantage of the situation here and try to speed up the use of the pipeline, and in some ways there is some evidence that it may have been holding back pipeline supplies through Ukraine … with it Germany and the EU can accelerate the use of the Nord Stream 2 pipeline. “

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Rising prices have put the issue high on the EU agenda as heads of state and government call for more energy independence – as almost 90% of the bloc’s deliveries are imported, with Russia being one of the main sources of imports alongside Norway, according to the European Commission.

The pipeline has critics in Europe, with Ukraine being hurt and angry about the pipeline deal with Russia as it means bypassing their own pipelines and thereby losing valuable gas transit fees. Poland, too, feeling vulnerable from a more confident neighbor Russia, says the pipeline only serves to strengthen Russia.

In July, they issued a joint statement slamming the pipeline, saying that “the decision to build Nord Stream 2 in 2015 was made just months after the invasion of Russia and the illegal annexation of Ukrainian territory, security, credibility and created political crisis in Europe “.

The gas supply to Europe has long been a sensitive issue. It has often weighed on US-EU relations, with former Germany (the largest importer of Russian gas in the EU, before the NS2 pipeline) being reprimanded for signing the gas project with Russia.

Experts see the fight for Europe’s gas supply as a kind of proxy war between the USA and Russia, with both of them fighting for market share in the region with their supply of natural gas (Russia) and liquefied natural gas (USA).

Experts agree that Europe needs to diversify its energy sources away from Russia.

“The more Europe diversifies its supply, the lower the risk,” said Fulwood, adding that there have been attempts to source more and more US LNG in Europe, particularly from the US market, “he noted.

Commenting on the broader gas market and supply shortages of other gas producers around the world, Fulwood described the situation gas markets were experiencing as “a perfect storm of demand recovery from Covid and a tight supply situation”.

“There has been a temporary shortage of supplies and some of that logistics will wear off, but it won’t be until next year so we’re really at the mercy of the weather for the next few months,” he said.