When Gazprom announced on July 21 that routine maintenance work on the Nord Stream 1 pipeline was complete, Europe breathed a sigh of relief. But just five days later, the Russian gas giant issued a caveat: the pipeline will now operate at just 20 percent of its capacity, down to 33 million cubic meters per day. The price of natural gas soared past $2,000 per 1,000 cubic meters on the back of the news.
The most plausible explanation for the recent moves by Gazprom and statements by senior Russian officials is that what we are seeing is not simply a string of technical and legal problems, but a Moscow-orchestrated effort to reduce the supply of Russian gas to Europe as part of the broader geoeconomic standoff between Moscow and the West. The workings of European gas markets offer some insight into what is driving the Kremlin’s strategy in this standoff.
Gazprom started gradually reducing its gas flows to Europe back in May, claiming a combination of technical mishaps, regulatory requirements, political circumstances, and other reasons beyond its control—with a vanishing degree of plausible deniability. By the end of June, of five possible routes for exporting Russian gas to Europe, just three were in use: Nord Stream 1; the Urengoy-Pomary-Uzhgorod pipeline through Ukraine; and TurkStream, passing underneath the Black Sea.
The Yamal-Europe pipeline through Poland, which had been used in the past to help make up gas volumes when Nord Stream 1 was undergoing regular summer maintenance, was sanctioned by the Russian government on May 10, while Kyiv declared a war-related force majeure at the Soyuz pipeline through Ukrainian territory. This backdrop explains why the latest decrease in volumes pumped through Nord Stream 1—which Gazprom is blaming on some missing paperwork from Siemens, which was responsible for servicing one of the pipeline’s turbines in Canada—had such a profound impact on the markets.
In the summer, when gas consumption is half of the winter peak, Europe can manage without Russian gas, replacing it with LNG. That requires outbidding Asian buyers for LNG cargoes, and makes gas expensive for Europe, damaging economies that are already teetering on the brink of recession and battling surging inflation, but it is just about tenable.
In winter, however, even with storage full and all the European LNG terminals working at full capacity, Europe will still need some Russian gas to keep lights on, homes warm, and industry working. If there is a cold spell, the call on the gas supplies from the east may exceed 350 million cubic meters a day, by this author’s calculations.
The reason for this is that the European gas distribution network has been built to feed gas from the border with Russia to demand centers in Central and Western Europe. In recent years, Europe has gained some LNG terminals—mostly still in the west of the continent—as well as some eastbound pipeline capacity, and gas storage in Central Europe has traditionally served as an additional response mechanism.
Still, the gas send-out rates of the LNG terminals and storage reservoirs are limited, and bottlenecks prevent major eastbound supplies, since much of Europe’s LNG capacity is concentrated in areas with poor connections to the pipeline network. For example, 0.2 billion cubic meters per day (bcm/d) of LNG send-out capacity is in Spain, while there is only 0.02 bcm/d of pipeline capacity from Spain to France.
Accordingly, the amount of gas in storage plays a crucial role. If storage is less than full, there will simply not be enough gas to get through the winter, even when demand is not at its peak. That situation will put the basic well-being of ordinary Europeans at stake, and will require tough and unpopular decisions from governments, such as energy rationing and industry lockdowns.
In Russia’s strategic calculus, that means European governments must either face a severe economic and political crisis at home, or call a truce in their confrontation with Moscow, accommodating some of the Kremlin’s political demands on Ukraine, and lifting sanctions. But this strategy will only work if EU gas storage levels are minimal. That’s why it is so important for Russia to keep the filling rate as low as possible right now.
So why restore gas flows via Nord Stream 1, even at significantly reduced levels, instead of cutting off gas supplies completely? First, there are legal considerations. Pretending that Gazprom is doing everything in its power might help in future disputes (there will likely be quite a few lawsuits filed by undersupplied Gazprom counterparties). Of course, in a radical scenario, the Russian government could solve this problem by issuing a ban on gas sales to “unfriendly countries,” enabling Gazprom to declare a force majeure.
Then there are economic considerations. Gazprom contracts are now mostly linked to hub and index prices, so right now, the Russian company is actually enjoying a windfall, despite the low volumes being sold. As long as the supplied volumes are not high enough to enable Europe to avert a winter crisis, Moscow can add insult to injury by forcing the Europeans to pay exorbitant fees on top of a gas crisis in the making.
There is also propaganda value for the Kremlin in keeping some gas flowing to Europe. Right now, Russia is saying that Europe’s gas woes are self-inflicted. That message is addressed to the European general public, which is already feeling the pinch of rising gas prices, as well as the fear of gas shortages.
Keeping some gas flowing also follows the Kremlin’s old playbook of “divide and rule” when it comes to Europe. Russia-friendly Hungary, for example, will most likely keep its gas supply (and at very favorable prices) until the last possible moment, and its example will be trumpeted to the struggling nationals of other European countries: if not by Russian propaganda, then by their own populist politicians.
Finally, there is a need on the Russian side for a calculated application of pain and measured deployment of the economic warfare arsenal. Cutting off gas completely is the strongest weapon at the Kremlin’s disposal, and it is probably more valuable as a threat—at least for now. Turning the valves now would leave few other meaningful options for further escalation, placing Russia at a disadvantage in a protracted conflict.
It might seem astonishing to some observers that Russia would want to weaponize and ultimately sacrifice a fifty-year-old gas trade with Europe that has brought a steady flow of income to Russia and to some key members of President Vladimir Putin’s inner circle. After all, until the Power of Siberia 2 pipeline to China is built, which will take several years, Russia has no other way to monetize this gas.
But it’s important to understand that from the Russian standpoint, the EU has not been playing fair since the beginning of the 2010s, when the Third Energy Package came into force and European energy companies started demanding changes to long-term contracts and taking Gazprom to arbitration over those demands. The Russians viewed judgments in favor of EU companies and Ukraine’s Naftogaz as biased. The growing European shift toward renewables and the prospect of U.S. LNG flooding the European market after 2025 (in Russian eyes, as a result of unfair competition) have also reduced the residual value of the gas trade with Europe for Russia going forward.
On the other hand, there is a view in the Kremlin that when Russia wins the conflict, or at least achieves an honorable peace settlement, the gas trade will be part of a comprehensive agreement with the West that will include long-term supply agreements, forgiveness of all damages and claims stemming from the nonfulfillment of contracts, and settlement of any other issues arising along the way. If Russia doesn’t achieve those goals, the destruction of the gas trade with Europe will be far from the biggest problem faced by Putin and his team.
