Energy will test Europe’s unity on Ukraine — Putin knows it

Only a few days ago, European officials were feeling pretty good about their united position regarding Russia's troops along the Ukraine border. But the quiet hope was that Moscow wouldn't push them to the brink of actually having to deliver on their threat of sanctions.

This week, as the dust settled on China's Winter Olympics, Russia did exactly that, with a decision to recognise two breakaway areas in Eastern Ukraine and send in troops.

It was a calculated slap in the face on several levels. The recent shuttle diplomacy by French President Emmanuel Macron had secured several "promises" from Vladimir Putin, including an eventual withdrawal and a ceasefire in contested areas. Those have now seemingly turned to dust. 

The 2015 Minsk accords, which had turned a hot conflict in the Donbas region into a nominally frozen one, have also been torn up by Moscow. Europe will now be trying to restrain both sides via a diplomatic process that's been shattered.

And the threats stacked up by a concordance of Western powers, from sanctions on Russia to more support for Ukraine, have failed to deter Putin from moving to rewrite a country's borders in the zone between the EU and Russia's historical backyard.

What's chilling is how little time has passed since the last time "war came to Europe." The annexation of Crimea in 2014 prompted a diplomatic EU riposte — 185 people and 48 entities are currently under sanctions by the EU for threatening Ukraine's territorial sovereignty and independence — but didn't change the reality on the ground. Nor did it reduce the EU's dependence on Russia for 40% of its gas. Throughout the years, the desire to bring Russia in from the cold via commercial ties or a geopolitical detente has persisted.

EU depends on Russia for 40% of its gas. Sanctions against Russia may result in the winter lasting longer. Photo: Bloomberg

Something seems to have finally snapped this time around. In keeping with a recent sense of unity, the West's response to Putin's latest move has been a swift pledge of more sanctions. Germany has called for a halt to the certification of gas pipeline Nord Stream 2, while the UK has targeted the banking sector.

But Russia will keep testing this resolve, betting those existing commercial ties will be to its advantage in playing divide-and-rule.

Already in the background, internal EU cracks are emerging over sanctions between hawks and doves. Does this count as an "invasion" or an "incursion?" Is it time to unleash the "mother of all sanctions" in US terminology — targeting an array of sectors from banking to technology — or the more "targeted" punishment that's being flagged by officials in Brussels? If it's the latter, which is looking increasingly likely, Putin won't be paying the full cost of Western retaliation — partly by design, but also self-interest.

Energy is the real elephant in the room. German Chancellor Olaf Scholz has rightly acknowledged that letting Nord Stream 2 run as normal in the current environment would be beyond the pale. Yet as think tank Bruegel has pointed out, giving up on Russian gas supplies without curbing demand looks impossible. Researchers at the European Central Bank estimate a 10% cut in gas supplies would reduce gross value added in the euro area by about 0.7%. Wielding the "gas weapon" has worked in Moscow's favor, with rising energy prices a boon for the national coffers.

If the West stands any chance of raising the price of war for Russia, Europeans need to work on weaning themselves off Russian gas. That could include diversifying into other sources like nuclear or diversifying gas supplies and building a pan-EU strategic reserve. Italy has floated the idea of excluding energy from sanctions, which would go against European Commission chief Ursula von der Leyen's call to directly tackle the EU's reliance on Russian supplies. Less unity means any sanctions will be less effective and Putin's ability to exploit them greater.

Sanctions on their own aren't an answer to the long-term future of Ukraine, whose location along a potentially new form of the Iron Curtain has kept it outside NATO and the EU and exposed it to effective dismemberment without real deterrence. The Minsk accords only congealed a situation whereby Ukraine wants full sovereignty while separatists want to keep their territory. But for the EU to speak with one voice, while addressing dependencies, would be a start.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.