The European Union-Russia energy divorce: state of play

Two years on from Russia’s invasion of Ukraine, trade in energy products between Russia and the European Union has largely disappeared. The EU has adapted remarkably well to a decoupling that many would have considered impossible. Russia has redirected oil exports to Asia, but has not been able to replace Europe for its natural gas exports. We provide an overview of what has changed since February 2022 and then give more details about EU-Russia trade in oil, natural gas, coal, uranium and electricity.

The EU reduced imports of Russian fossil fuels from a high of $16 billion per month in early 2022 to around $1 billion per month by the end of 2023 (Figure 1). Cuts to oil imports accounted for the largest part of the reduction.

The impact of this evolution on Russia’s trade balance has been comparatively muted. While Russia no longer enjoys extraordinarily high export earnings, driven by high prices at the beginning of 2022, its mineral fuel export earnings are comparable to 2019 (Figure 2), mainly because of a shift in oil exports towards China, India and Turkey.

Figure 3 shows a timeline of events in EU-Russian energy trade since 2021. 

Figure 3: The EU-Russia energy divorce: a timeline of energy sanctions and retaliation

Crude oil and oil products

An EU embargo on the import of crude oil came into force in December 2022, followed in February 2023 by an embargo on oil products (including petrol and diesel). Before sanctions, Russia accounted for 25 percent of the EU's crude oil supply, and 40 percent of diesel imports (Figure 4) ¹ But diesel imports are only 20 percent of total supply. . To compensate for reductions in Russian imports, the EU has increased imports from a pool of countries. 

The EU and G7 also implemented a global price cap on Russian oil. Most shipowners and insurance companies who facilitated Russian oil exports at the time were based in the EU or G7 countries. These companies were not permitted to facilitate Russian oil exports at a price exceeding the cap, set at $60/barrel for crude oil. 

For the first half of 2023, Russian crude oil traded consistently below the cap ² Russia sells different grades of oil from western and eastern ports. We refer here to Urals, grade which is sold from western ports typically to European consumers. ESPO (eastern ports, typically serving Chinese customers) grade crude oil was sold above the price cap already in early 2023. See Global Witness, ‘The price ain’t right’, 20 March 2023, https://www.globalwitness.org/en/campaigns/stop-russian-oil/the-price-a…. . However, since then, it has remained above the cap, reaching $80/barrel. The observed discount relative to global oil prices has shrunk from $30/barrel in January 2023 to $15/barrel in February 2024 ³ Data from Neste: https://www.neste.com/investors/market-data/crude-oil-prices#f50955ea. .

The US, EU and other G7 partners aimed to keep Russian oil flowing to markets, preventing a global oil-price spike, while keeping the price low to limit revenue to Russia (McWilliams et al, 2022a). But Russia has maintained its oil exports (Heussaff et al, 2022), and prices have been determined largely by market forces, not the price cap. Part of the reason Russia has been able to continue selling oil at prices above the cap is that G7 (including EU) shipowners and insurers have been replaced. The share of G7 providers facilitating Russian trade has fallen from 70 percent in December 2022 to 40 percent one year later ⁴ See CREA, ‘Tracking the impacts of G7 & EU’s sanctions on Russian oil’, Centre for Research on Energy and Clean Air, https://energyandcleanair.org/russia-sanction-tracker/. . However, the fact that G7 shipowners and insurers still account for 40 percent of Russian exports and prices are consistently above the cap suggests weak enforcement and potential violations.

Nevertheless, the $15 Russian oil discount relative to global prices implies over a $10 billion annual hit to Russia’s oil revenues ⁵ Assuming the $15/barrel discount applies to exports of 2.5 million barrels/day Urals grade. . However, evidence suggests this has been driven by the EU's embargo, which reduced demand for Russian oil and gave considerable power to other buyers, rather than by the price cap itself (Ribakova et al, 2023).

Natural gas

The EU has not imposed meaningful sanctions on Russian gas ⁶ In its fifth sanctions package, the EU introduce limits on the export of equipment related to liquefied natural gas technology. . However, Russia has cut gas supplies to the EU, arguably at a heavy cost to its own long-term interests. In summer 2021, before the invasion, Gazprom already cut supplies to European buyers and left gas-storage facilities that it operated in the EU empty in autumn 2021. After the invasion, Gazprom further cut its exports to the EU in retaliation against the refusal of some EU countries to pay in rubles (see Figure 3).

The EU countered falling Russian gas imports by increasing liquefied natural gas (LNG) imports and reducing gas demand. The share of LNG in total gas imports doubled from 20 percent in 2019 to 40 percent in 2023, driven largely by a fivefold growth in imports from the US. Imports of Russian LNG have also increased, but in absolute terms this increase represented less than a tenth of the gas transit through Nord Stream (Figure 5). Compared to the 2019-2021 average, EU natural gas demand was 12 percent lower in 2022 and 19 percent lower in 2023 ⁷ This was mainly driven by the price effect – forcing energy-intensive industries to curtail production – and partly by government information campaigns inducing behavioural change in households. In 2023 the power sector also saw a major natural gas demand reduction thanks to strong growth in clean-power generation. .

Figure 5: EU natural gas imports by supplier and route, 2021-2023

Infrastructure limitations mean Russia cannot redirect natural gas from western fields to the east. Consequently, it is unable to replace European buyers with Chinese ones in the medium term. Russia exported 155 billion cubic metres (bcm) of gas to the EU in 2021, and only 16.5 bcm to China. In 2023, Russian pipeline supplies to the EU fell to 27 bcm, while exports to China rose to 22 bcm ⁸ Reuters, ‘Russian pipeline gas exports to China to exceed 22.5 bcm in 2023 – Gazprom’, 28 December 2023, https://www.reuters.com/markets/commodities/russian-pipeline-gas-export…. , leaving a gap of 122 bcm in Russian gas exports that could not be rerouted. Even accounting for the marginal growth in Russian LNG exports (2 bcm from 2021 to 2023), the loss in volumes is substantial (Figure 6) ⁹ Even exports to the relative important Turkish market fell by a quarter, from 26.8 bcm in 2021, to 21.8 bcm in 2022 and 20.5 bcm in 2023; Filip Rudnik, ‘Gazprom in 2023: exports to Europe stabilise, China’s importance grows’, OSW/Centre for Eastern Studies, 2 February 2024, https://www.osw.waw.pl/en/publikacje/analyses/2024-02-02/gazprom-2023-e…. . 

Russia exports natural gas to China via the Power of Siberia 1 pipeline; expansion works are ongoing to increase its capacity to 38 bcm. A project to construct a second pipeline, the Power of Siberia 2, is still at the beginning and appears to be challenging ¹⁰ Filip Rudnik and Michał Bogusz, ‘The Power of Siberia-2 gas pipeline remains in the design stage’, OSW/Centre for Eastern Studies, 6 March 2023, https://www.osw.waw.pl/en/publikacje/analyses/2023-04-06/power-siberia-…. .

Russian gas flows passing through Ukraine into the EU may end in 2024. Ukraine’s national oil and gas company has signalled ¹¹ See Naftogaz press release of 24 October 2023, ‘Ukraine plans to end Russian gas transit contract in 2024 – interview for Deutsche Welle’, https://www.naftogaz.com/en/interviews/ukraine-will-not-extend-gas-tran….  that it will not renew the contract to transit Russian natural gas to the EU.

Commercial conditions in the Chinese market are worse for Russia than in the European market. Russia is estimated to charge $10/MWh on deliveries to China via the Power of Siberia pipeline, while it charges around $34/MWh on deliveries to Europe (Demertzis et al, 2022).

The loss in volumes and the lower price offered by non-EU buyers means that Russian revenues from natural-gas exports have fallen to a structurally lower level. In the first half of 2023, Gazprom’s revenues were down 70 percent compared to the average between 2018 and 2022 (first half of each year) ¹² Filip Rudnik ‘Gazprom: revenue slumps, debt rises’, OSW/Centre for Eastern Studies, 14 September 2023, https://www.osw.waw.pl/en/publikacje/analyses/2023-09-14/gazprom-revenu…. . In the meantime, a major Russian LNG project – the Ust Luga LNG terminal (Pepper, 2023) – is encountering delays. However sanctions seem to be ineffective for another crucial LNG project in Russia – Arctic LNG 2 – which has received Chinese support after US companies abandoned the project ¹³ Shotaro Tani and Anastasia Stognei, ‘Russia foils western sanctions on natural gas project as shipments near’, Financial Times, 21 February 2024, https://www.ft.com/content/665e913d-ae92-4c29-8bbb-598e121ffd50. .

Coal

In August 2022, the EU imposed its first energy sanctions on Russia with an embargo on coal imports. EU buyers –subsequently tapped into other major producers, mainly South Africa, the United States, Colombia and Australia (Figure 7). In any case, the declining trend in EU coal power generation – falling by 26 percent year-on-year in 2023 thanks to higher levels of renewable and nuclear generation (Brown and Jones, 2024) – put downward pressure on domestic demand. 

In 2021, coal represented only 4 percent of Russia’s exports in value, or about $17 billion, against $110 billion for crude oil (hence excluding oil products). However, the EU, together with Japan and South Korea, accounted for about 40 percent of Russia’s 2021 coal exports. The ban on imports of Russian coal thus could have represented a major economic hit to Russian coal-dependent regions. In the immediate aftermath of the coal import ban, production slowed in Russia's largest coal basin – Kuznetsk – and some open-cast coal mines suspended operations ¹⁴ The Moscow Times, ‘В крупнейшем угольном бассейне России из-за санкций останавливают добычу’ (Russia . Several western companies also liquidated their mining activities in Russia ¹⁵ Henry Lazenby, ‘Kinross in negotiations to sell Russian mines’, Mining.com, 29 March 2022, https://www.mining.com/kinross-in-negotiations-to-sell-russian-mines/. .

The International Energy Agency expects coal production to shrink further in central and western regions of Russia, while production in eastern regions will increase, further strengthening the trade with China (IEA, 2023). However, overall Russia adjusted to the shock and redirected its coal exports to Asian markets, with Russian sources indicating that in 2023 coal exports to China increased by 52 percent, and to India by 43 percent ¹⁶ TAdviser, ‘Coal mining in Russia’, 26 January 2024, https://tadviser.com/index.php/Article:Coal_mining_in_Russia. .

Uranium/nuclear fuel 

In contrast to the dramatic drop-off in EU-Russia fossil-fuel trade, trade in nuclear fuel products has increased steadily. Russian state-owned nuclear conglomerate Rosatom has continued to serve European customers. The absence of sanctions can be explained by, first, the EU's relative dependence on Russian nuclear fuel products, and second, the limited impact sanctions would have on Russia’s trade balance. In 2023, the EU imported around €1,064 million worth of Russian nuclear-industry products, according to Eurostat.

The EU does not mine any significant volume of uranium but is a significant player in other stages of nuclear fuel production – conversion into a gas, enrichment of the gas and fuel fabrication. In processing, the EU has enough capacity to cover internal needs (in a hypothetical world with no exports). 

Rosatom supplies the EU with both conversion and enrichment services, and final fuel assemblies. In 2022, Rosatom provided 22 percent of the EU’s conversion services, and 30 percent of enriched uranium deliveries (Euratom, 2022). Two European companies are involved in conversion and enrichment. Orano provides 24 percent of global conversion capacity, and 12 percent of enrichment capacity. Urenco provides 30 percent of global enrichment capacity. As Western utilities look to transition away from Russian enrichment services, both Urenco and Orano are expanding their enrichment capacities ¹⁷ See Orano Group press release of 26 October 2023, ‘Orano announces 30% increase in uranium enrichment capacity by 2028’, https://www.orano.group/usa/en/our-news/news-releases/2023/orano-announ…, and Urenco press release of 6 July 2023, ‘Urenco’s first capacity expansion to be at its US site’, 6 July 2023, https://www.urenco.com/news/global/2023/urencos-first-capacity-expansio…. . 

If forced, the EU would manage without Russian conversion and enrichment services. This would require drawing on inventories and ensuring that current plans to increase capacity are delivered on time (Euratom, 2022). Nuclear power plants in the EU hold an average of three-years’ worth of stocks (Euratom, 2022). In the long-term, a sustainable decoupling from Russia requires further investment and capacity expansion, particularly considering that many European countries plan to construct new nuclear reactors in the coming years. 

Twenty nuclear power plants in eastern Europe have been historically reliant on the Russian supply of VVER nuclear fuel assemblies produced by Rosatom ¹⁸ Two in Bulgaria, six in Czechia, two in Finland, four in Hungary and six in Slovakia. . US company Westinghouse has been able to replicate the design of these and offer an alternative ¹⁹ World Nuclear News, ‘Enusa and Westinghouse VVER-440 fuel collaboration’, 18 January 2023, https://world-nuclear-news.org/Articles/ENUSA-and-Westinghouse-agree-VV…. . Westinghouse currently supplies fuel to Ukrainian nuclear power plants and has signed contracts for future supplies to Czechia, Bulgaria, Finland, and Slovakia. Framatome (France) is also looking to develop its own VVER fuel designs ²⁰ Thereby, Framatome engages in a cooperation with Rosatom, including in new facilities in Germany. , but this is likely to be a lengthy process. Alternatives to Russian fuel assemblies therefore exist and gradual scaling-up of their use will reduce dependence. 

It is important for the EU to reduce its dependence on Russian fuel, both because nuclear fuel is a highly strategic commodity, and because Rosatom is a state-owned entity dealing in a commodity that can be weaponised, similarly to what Gazprom did with natural gas. From a technical perspective, the EU can decouple from Russian nuclear fuel, and there is no good reason why this should be delayed.

The US House of Representatives approved a ban on imports of Russian uranium as lawmakers seek to add pressure on Moscow for its war on Ukraine ²¹ See US Congress, H.R.1042 - Prohibiting Russian Uranium Imports Act, https://www.congress.gov/bill/118th-congress/house-bill/1042/.  (the bill is awaiting final approvals). Similar long-term political certainty in relation to Russian access to European nuclear markets would boost efforts to strengthen nuclear supply chains by providing investment signals to market participants.

Electricity

Before the war, electricity trading between the EU and Russia was marginal. Transmission capacity is limited to one interconnector in Finland and the BRELL ²² Belarus, Russia, Estonia, Latvia, Lithuania.  ring connecting the Baltic states, Belarus and Russia. Finnish electricity imports of Russian electricity were worth €600 million in the 12 months before Russia’s invasion of Ukraine. Finland halted these in June 2022. The Baltic states plan to decouple from the BRELL ring by 2025 ²³ Alex Donaldson, ‘Estonia, Lithuania and Latvia to end Russian grid reliance in 2025’, Power Technology, 21 July 2023, https://www.power-technology.com/news/estonia-lithuania-latvia-brell/. . 

A significant change was the finalisation of the decoupling of the Ukrainian and Moldovan electricity systems from Russia and their integration into the EU system. The integration process started before the invasion, but it is notable that Ukraine managed to complete it in March 2023, while much of its strategic electricity assets was targeted by the Russian military. As Ukraine unplugged its power grid from the old Soviet system hours after the invasion, the possibility to trade electricity with European neighbouring countries served as a buffer to shocks. With synchronisation and the beginning of the war, electricity trade was extensively reconfigured. Ukraine trade with Russia/Belarus (mainly imports before the war) went to zero, while trade with the EU was used to balance the war-torn-system, exporting mostly to Poland in several months and importing primarily from Slovakia in other months.

Summary

Table 1 provides an overview of how EU-Russia energy trade changed from 2021 to 2023. The drop in EU energy imports from Russia (excluding uranium products), from about 14,000,000 terajoules to 2,000,000 per year, represents a drop from 26 percent of the EU’s primary energy consumption in 2021 to 4 percent in 2023. 

Table 1: EU-Russia energy trade, 2021 vs 2023

The EU has proved resilient in the face of the great decoupling from Russian oil and gas. Such resilience was possible largely thanks to the strength of the EU internal market and the spirit of solidarity among EU countries (McWilliams et al, 2022b). While the EU has navigated through the supply crisis, attention is now turning towards the persistent issue of elevated prices and the looming long-term implications for competitiveness (Sgaravatti et al, 2023). Violations of the oil price cap underscore the urgent need for more rigorous enforcement and the imperative for more concerted action from the G7 (Hilgenstock et al, 2023). Finally, the EU should detach itself from dependence on Russian nuclear fuel products, which is feasible with a long-term investment plan.

References

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