Cliff Taylor: Boycotting Russian gas may be necessary in the economic war

As the war on Ukraine grinds on, taking its terrible toll, the West's response moved to a new level this week. The weapons which the EU and the US are firing are economic ones. The sanctions, and their knock on impact, will take a heavy toll on the Russian economy. But they leave a big question hanging. How long can the EU keep buying Russian energy and in turn providing Vladimir Putin's regime with valuable foreign exchange?

The financial sanctions included carve-outs which allow the purchase of energy to continue – and the resulting revenue is a vital lifeline for Moscow, which has lost access to much of its central bank’s foreign reserves. The Russian banks most involved in energy trading were not excluded from the Swift banking payments network. Despite this, purchases of Russian oil are down sharply as companies worry about the knock-on impact of the sanctions. The market is already boycotting Russian oil.

But gas supply from Russia to Europe continues and big countries such as Germany and Italy depend on it, as well as many in eastern European ones. The EU will rue the political decisions which led to this and gave Russia such a strong hand in energy supply.

For now, the talk politically is of weaning the EU off Russian gas – a slow process which would take years as new renewable sources of energy are developed. There are plans to increase European gas storage over this winter. But what happens in the meantime? Can Europe keeping fuelling itself with Russian gas as the war continues?

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If, somehow, the fighting ends soon, or dialogue opens to try to achieve this, then Europe’s leader may be able to content themselves with the long-term move away from Russian gas. But if it doesn’t, then the politics of this will surely demand swifter action. The problem is that cutting off Russian gas will send prices sky-rocketing and leave Europe scrambling for energy supplies.

Things could be done to diversify the supply of EU energy via liquefied natural gas (LNG) shipments, or perhaps delaying the closure of Germany’s nuclear facilities and so on. Renewable investment will be stepped up. Measures to make homes and offices more energy efficient could be expedited.

But cutting off the supplier of 40 per cent of your gas is still going to lead to significant disruption. So-called "demand measures" would be needed if Russian gas was suddenly cut off – emergency steps to reduce gas demand for energy generation, for industry and so on. Some rationing of supplies would be likely and for Ireland it seems there are protocols in place with the UK on this.

In imposing the economic sanctions, the EU is accepting that it will pay a price, as part of its response to the terrible suffering that Putin is imposing on the Ukrainian people. Trade flows benefit both sides – and so when they are cut both pay a price. Financial sanctions inevitably disrupt the West, even if Russia is much more heavily exposed. The knock-on impact of sanctions is pushing energy prices up even further and threatening a wider hit to inflation.

Europe does not want to damage its own interests and its own citizens any more than necessary. As a big energy importer, Europe is now already facing a significant economic shock from higher energy prices, which will inevitably require governments – including our own – to act. A disruption to gas supplies would make this significantly worse. But you would presume that emergency planning is under way. Because cutting off Russian gas may be a necessary step up in the economic war, or just become become politically inevitable. Or Putin could decide to close the taps himself.

Tánaiste Leo Varadkar pointed out in the Dáil this week that Ireland did not rely on Russian gas and said "energy supplies are as secure as they can be in the current context". Which, in reality, is not very secure at all.

We have very limited gas and oil energy stocks and no capacity to import LNG directly

Any sustained gas supply disruption would pose a threat to our energy security as well. Some Norwegian gas, one of our key sources, would likely be diverted to countries directly hit, such as Germany, for example. Gas prices would rise yet further and the security of supply – 70 per cent of our gas comes via the UK – would be threatened.

Nor is Ireland particularly well positioned if this happens. We have very limited gas and oil energy stocks and no capacity to import LNG directly. The Corrib gas field is slowly running down, though does still supply about 30 per cent of of our gas.

A Government review of energy supply, started in 2019, has still to be completed (or if it is completed it has not been published). What emergency plans there are in the public domain are designed for a temporary supply problem. Our gas-powered electricity plants could run on stored fuel, but the plans suggest that this would only last for five days. The tanks could be refilled I suppose, but it doesn’t look like a long-term solution. Moneypoint will hobble on fuelled by coal, some now coming from Colombia rather than Russia.

Other EU countries will be making their own plans. A big drop in purchases of Russian gas over time now looks inevitable, as renewables are developed. They are a key step towards energy security, as well as for combatting climate change and developing vital green energy sources. But what about now?

The EU leaders will hope that they will be able to avoid making the call to cut off Russian energy supplies, given the disruption it would involve.They will promise to accelerate a move away from Russian energy in the years ahead. They have argued that they need to keep measures in reserve, in case more sanctions are needed. But how much worse can it get?