Europe needs new rules if Russia offers gas again

the authors

Axel Ockenfels (right) is an economist at the University of Cologne. Georg Zachmann is a senior fellow at the Bruegel think tank in Brussels.

(Photo: Mauritius, private)

Russia has not succeeded in plunging the EU into a deep political and economic crisis through a gas embargo. As such, it may be tempted to change strategy and use its gas supply strategically to boost profits and divide the EU.

Strategically motivated gas deliveries to individual member states or companies – which are difficult but not impossible – would currently be little for the EU to counter, as it has not imposed any sanctions on Russian gas imports or related financial or logistical services. In view of the persistently high European wholesale prices, it cannot be ruled out that attractively priced Russian gas will find buyers.

Voices are growing from various political camps and countries, including Germany and Austria, calling for a long-term return to Russian gas or even considering allowing increased imports in the short term.

This leads to three significant political and economic risks for the EU: On the one hand, Russian gas supplies increase Russian state revenues and thus counteract the sanctions policy of the pro-Ukrainian coalition.

On the other hand, targeted Russian supply offers to individual companies or member states undermine the political cohesion of the West. And finally: The very possibility of resuming important Russian exports makes alternative investments in energy supply more expensive, delays or prevents them.

In the short term, the EU should ban new contracts for gas from Russia

It’s not about cutting out Russian gas supplies forever. However, with Russian gas supplies now falling to less than 15 percent of previous gas flows, the EU has a unique opportunity to implement new instruments to control gas imports from Russia.

If designed intelligently, these can prevent Russia from continuing to use gas supplies as a political weapon against the EU and systematically manipulating the gas market with the help of its market power. At the same time, the cohesion of the EU and the pro-Ukrainian coalition will be strengthened.

To this end, new contracts or contract adjustments for gas supplies from Russia to the EU should be banned in the short term. A ban restricts Russia’s strategic room for maneuver in political and economic conflicts and can create trust among European partners. At the same time, this gives the EU time to develop long-term mechanisms for dealing with Russian gas supplies.

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In the long term, any gas trade with Russia could only take place via a politically appointed central buyer, with clear specifications regarding volume, distribution key and price caps.

This could be implemented via the European gas purchasing platform, which is also supported by Germany. If this works successfully, all gas imports from Russia could be processed through it.

Restrictions on volumes, prices, transit routes, trading platforms and the like that apply to Russian gas that can be implemented in a decentralized manner are also conceivable.

As a first step, Germany could make a proposal in the EU Gas Supply Coordination Group to agree on maximum delivery volumes for Russian gas in the EU energy market and in every regional or national market. The extended “N-1” criterion could serve as a point of reference: Russian gas must be able to be replaced at any time and anywhere.

A tariff on Russian gas imports will help in the long term

In any case, an import duty on any Russian gas imports is advisable in the long term. An import tariff reduces discrimination within the EU, siphons off the profits of Russian gas producers, makes Russian dumping and strategic market behavior more difficult, and protects investments in alternative energy supplies.

The tariff can increase with the Russian market share in the market area and thus have an additional positive control effect. The revenue from customs could be used for a specific purpose, for example for the energy transition or for reconstruction in Ukraine.

Russia does not shy away from using gas as an economic and political weapon. It has gained control of critical infrastructure, systematically manipulated market prices and volumes, and played gas customers off against one another.

In order to reduce the dependency on Russian gas and the strategic vulnerabilities caused by Russia’s gas supply, a structurally and institutionally anchored European set of rules is needed for the short-term and long-term handling of any Russian gas supplies. The time is right and good proposals are on the table.

The authors: Axel Ockenfels is an economist at the University of Cologne. Georg Zachmann is a senior fellow at the Bruegel think tank in Brussels.

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