Putin’s ‘Gambler’ Mentality is a Wild Card in Global Energy Markets

By Ariel Cohen

Dr. Ariel Cohen is a Senior Fellow at the Atlantic Council and the Director, Energy Growth and Security Program at the International Tax and Investment Center.  He is a recognized authority on international security and energy policy, and leading expert in Russia, Eurasia, and the Middle East.  Dr. Cohen is the Founding Principal of International Market Analysis Ltd, a boutique political risk advisory firm.

Interstate relations are normally governed by self-interest and restraint but the ongoing war in Ukraine, when coupled with Russia’s escalatory bent, have rendered predictions about a return of political and energy stability precarious, if not impossible.

The Cipher Brief recently spoke with Ariel Cohen, director of the Energy Growth and Security Program at the International Tax and Investment Center, about the spillover of the war into a global energy crisis and what that means for 2023, when Cohen says we may experience “the toughest circumstance in Europe probably since World War II.”


The Cipher Brief: Are the early unexpected advantages in energy — mild weather, full storage facilities — equally distributed across Europe, or are some countries benefiting more than others? And even with these advantageous conditions, what weaknesses still exist in the immediate term for Europe?

Ariel Cohen: I would say that some of the countries made their opposition to Russian sanctions very loud and clear, such as Hungary. There is a relationship between Viktor Orban, Prime Minister of Hungary, and Mr. Putin, and the Hungarians are screaming bloody murder that the sanctions would freeze them and put them at a disadvantage. Hungary is landlocked, of course, since the Austria-Hungarian Empire lost World War I, and they’re getting most of their energy from Russia, either through a gas pipeline or by the supply of uranium to the Hungarian nuclear reactors. And fun fact, even after the invasion of Ukraine and escalation in October, the Hungarians are continuing to expand the nuclear plants and plan to build more Russian nuclear reactors. 

The main beneficiary of the mild winter in Europe is Germany. Germany of course, is the engine of the European economy, and it got 40 plus percent of its gas from Russia. And it was planning to expand its dependency on Russian gas by activating all-but-built Nord Stream 2 gas pipelines. Of course, with the war, there were sanctions, the pipelines did not become operational. And then there was some kind of an explosion that blew up two out of three Nord Steam 2 pipelines. 

There’s a debate and three investigations of these pipelines. Germany, Sweden, and Denmark are conducting three independent investigations. Now, in terms of who wins and who loses, interestingly enough, the Iberian Peninsula — Spain and Portugal — have large capacity for LNG terminals. And I noticed that the national gas prices in the Iberian Peninsula at some point can be three times lower than in Northern or Eastern Europe.

France is a problem because Macron resists building a pipeline from Spain and Portugal across the Iberian Peninsula, that is, the pipeline that would bring gas, that would be brought through LNG terminals on the Atlantic coast of the Iberian Peninsula to the rest of Europe. Macron is doing it because France wants to sell its nuclear-generated electric energy to Europe and it is blocking gas, which of course the Germans and the rest are extremely pissed off. 

The Italians are going out of their way to scramble and get more gas from across the Mediterranean, as they always do, from Algeria in particular. There are plans to build pipelines from further south in Africa from Nigeria but these are desperate measures for desperate times. Azerbaijan is increasing putting more gas into the Trans-Anatolian pipeline and Trans Adriatic pipeline. I predicted a long time ago when they first built their system that they will be putting compressor stations and increasing their supply from the current 16 to 26 billion cubic meters (BCM) a year. 

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But this is still a drop in a bucket because the Europeans need to replace over 150, maybe as much as 160 BCM. So it’s a challenge. The Norwegians are great beneficiaries of high gas prices. Instead of having $1.5 trillion in their sovereign wealth fund, they’re going to $2 trillion. Clearly, there are winners and losers. 

The bottom line, Europe and Germany in particular, dug that hole for 30 years. They were warned again and again not to be too dependent on Russia. Myself and many of my colleagues made a point up to 2006, 2009 when Russia started using gas as a weapon that Europe may be a victim, and of course the German government. I’m a member of a high level strategy group called the Loisach] Group with the senior German experts and policy makers, and the Americans and the Brits made that point many times and it was like talking to a wall. And now they are repeating the same mistake again cozying up to China. 

If Germans don’t want to hear something, they really can do a good job of that.

The Cipher Brief: Let’s say from January on there’s an extended cold weather snap across Europe, or greater volatility in energy markets, or even sabotage of energy infrastructure anywhere in Europe. Any one of those could complicate what right now looks like an unexpectedly pleasant picture. Which of these negative downturns would you regard as most important?

Cohen: You just brought up a very important thing, which is Russia’s proclivity to escalate every time it meets a setback in the battlefield or a geopolitical setback. For example, they expected much more support from China, and it’s not transpiring. It may change after Xi won the power struggle in Beijing and secured his position. Unlike the faction that opposed him, he is viewed as a more pro-Russia, pro-Putin leader and he may increase China’s support of Russia. But every time Russia encountered either a military setback in the battlefield or geopolitical setback, it escalated, it doubled down. It’s a highly, highly dangerous and irresponsible behavior that was commented upon by as prominent an analyst as Gleb Pavlovsky, who was a Putin policy guru, and whom I have known personally very well for many years. He said that this is a mental state, or mentality, of a gambler. Every time they lose, they double down. 

For example, you hear a lot of chatter about using a tactical nuke, you hear now (Russian) chatter accusing the Ukrainians of packaging nuclear waste and shooting a mockup of the Iskander missile. Defense Minister Sergey Shoigu and Chief of Military Staff Valery Gerasimov actually were making phone calls on Putin’s behalf warning the West about it. I mean, even if I drank a lot of vodka, I couldn’t come up with that. Packaging a Tochka U missile with nuclear waste from a reactor and making it look like an Iskander. How you make a missile look like another missile? Out of paper mache? And now they’re also talking about shooting down Elon Musk’s satellites — Starlink. 

So the Russians are now threatening that so I would not be surprised if they dispatch the GRU Military Intelligence and Sabotage Organization of the Russian army and blow something up in Europe or cut cables. I suspect that pipelines, cables, nuclear reactors in Europe may be sabotaged by the Russians. The Russian mindset today is that they are at war with NATO and the United States, and it needs to sink in for us.

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The Cipher Brief: Apart from that potential for sabotage, are there any other wild cards that maybe most people aren’t thinking of right now, but that you see as possible complications?

Cohen: Basically they can try and shut down all of the gas supply. They’re still supplying, I think, between 30 and 50 BCM through Ukraine and some amount through Turkey. Another thing they’re doing — for those who care about the environment — they’re flaring a lot of that gas so they are increasing the CO2 emissions by a lot. And they may try and shut off the remainder of the gas supply, although Putin was talking to Erdoğan about making Turkey, as opposed to Ukraine, the hub for sale of Russian energy to Europe. 

The Cipher Brief: The G7’s gas price cap plan may create a multi-tiered price structure for Russian energy across the world. How would Russia try to counter this price cap, the impact of it, and what onward effects would that have on other global oil producers and consumers?

Cohen: It’s an interesting measure because it’s not only that the West will not pay beyond X, it is that anybody who facilitates the transaction that involves Russian oil above the set price, such as shipping, insurance, processing, et cetera, will become sanctioned. And this is where the Chinese, the Indians, the Turks, and others who may want to benefit from the sanctions and the resell. So what do you, you go buy Russian oil at 70, relabel the tanker and resell it for 90?

These people will be sanctioned and I think we should give it a roll, give it a try, watch it like a hawk. Mark my words for sure, there will be attempts to smuggle Russian oil and then try to sell it as Iraqi… Iranian. Iran is under sanctions too. Iraqi, Algerian, Egyptian, you name it, Chinese, Indian. And there will be the gray market and the black market for Russian oil. And this is why we have the agencies in this country and the Treasury that are very good at sanction design and sanction enforcement and it’ll be very important to work with our European allies with Japan, Australia, and other countries that are on board with the sanctions.

The Cipher Brief: How does this complicate life for China and India?

Cohen: It does because they were beneficiaries of discounted Russian oil, but even discounted Russian oil may be above the floor. And I heard a U.S. senior official talk about $69 as a ceiling for Russian oil. So anything above that, and their companies can be sanctioned.

The Cipher Brief: So they’re not going to be able to evade this…

Cohen: Oh, they will try. They will set up fly-by-night companies, straw companies, or use desperate and impoverished countries in the emerging markets in Africa or Asia, so like a ship under Liberian flag or Trinidad or Vanuatu, a company from those jurisdictions may be engaged in illicit oil sales. So we need to watch all jurisdictions that will try to play monkey business and will try to reship, repackage, et cetera. 

The Cipher Brief: Even with Europe having over 90 percent gas storage capacity, analysts say this is a short term remedy if Russia pursues a near total cutoff of its gas supplies next year. What then does Europe do? 

Cohen: I think it’ll be the toughest circumstance in Europe probably since World War II. And the Germans and others already are dictating lower temperatures in offices, reducing heat to something like 66 F. They would need to recommission or bring back some of the nuclear reactors. I think Germans are bringing two reactors as a compromise between Social Democrats and the Greens, which is idiotic because they have three, not two, that they could bring back immediately. And they have three more that they could bring back probably within a year. And this nonsense about killing nuclear should stop. Nuclear is very capital intensive, so it will take years to build new nuclear reactors. There are new nuclear technologies that we all need to look at and are looking at, including the small modular reactors (SMR) into which luminaries such as Bill Gates and others are investing now, probably hundreds of millions and billions of dollars. Pebble-bed reactors are another such technology. 

The Canadian government is going to invest close to billion Canadian dollars into their nuclear technology. So I am optimistic in the long term, but I am pessimistic in the short term because at some point the political dynamics in Europe may bring to power the far right and far left. The far right in Germany, for example, the Alternativa fur Deutschland; the far left in France, led by Melancon, in the Parliament, these are the people who are anti-Atlanticist. They’re against NATO, they’re against a good relationship with the United States. And even a person like Macron is stressing how they should not isolate Russia, how Russia is going to be their “neighbor” and a part of Europe. How is Russia their neighbor unless it has overrun Poland and Germany? It’s not their neighbor, but maybe Mr. Macron needs to go and revisit the atlas. 

The last time Russia was their neighbor is when the Russians took Paris in 1814. So the split between France and Germany on one hand, and France and Germany and the central and east Europeans, the Poles, the Baltic states, the Scandinavians, that split is there. It doesn’t go away. And this is something the U.S. needs to level with our European friends and manage. We both need to co-manage this relationship, but keep an eye on the prize. Russia cannot win this war.

The Cipher Brief: The head of the International Energy Agency recently uttered this headline-grabbing phrase, saying that the world is experiencing the “first truly global energy crisis.” He bases this on fallout from the Ukraine conflict, OPEC production cuts, and about a later possible surge in Chinese demand for energy.

Cohen: China is the key. I was going to mention that the growing tensions in the Taiwan Strait may contribute to that because a conflict in Taiwan Strait would be more serious than Ukraine because the U.S. will be directly involved with our naval and Air Force assets. Many of them are old and tired and the costs of logistics and resupply… Can you imagine the supply line? What would it take to resupply three battlegroups that are at war in the Pacific — Okinawa, Guam, and the Philippines? We’re going to have probably 90 percent of our Navy and 60 percent of our Air Force or more deployed there. So how logistically challenging and expensive that’s going to be. Especially if the balloon goes up in Taiwan as China is making noises in their direction, my nightmare scenario is a two-theater war, in Europe and in Asia. I was at the Heritage Foundation for 22 years, we talked about it nonstop, we are not planning for two major theater wars. We’re not planning for that. So it is a threat and a possibility, but I hope that cooler heads prevail in Washington and in Beijing, although Beijing looks worse and worse.

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