The Russian invasion of Ukraine has put European
energy and climate security through its most difficult test so far.
Although the current energy crisis began before the war,
it was exacerbated by Russia in an effort to blackmail the EU and
its members to abandon their common energy security and foreign
policy stance in support of Ukraine.
The geopolitical risks have increased for
all EU Member States as the security of oil and
natural gas imports has worsened noticeably.
The deterioration of the European energy security
comes on the back of a 20% increase in natural gas dependence
Germany and Italy have accounted for the bulk of EU’s
growing imports of Russian gas since the annexation of Crimea in 2014.
An ever more likely full Russian gas supply cut to Europe aims to undermine the EU unity on sanctions and drive a wedge in the EU strategy for a Russian fossil fuel phase out.
Affordability risks have skyrocketed across Europe in 2021 and 2022,
driven by the surge of fossil fuel prices and CO2 costs.
The high CO2 costs reveal that despite the success
of the energy transition in many EU countries,
the European economy remains highly carbon intensive.
Retail electricity, fuel and gas prices have skyrocketed
across the continent prompting demands for a EU-wide
reform of energy markets and comprehensive aid packages
for households and businesses.
Support programs for both households and businesses
would be best linked to energy savings measures and
optimization processes in energy-intensive sectors as
to make sure subsidies are not just financing higher energy consumption.
Italy relies excessively on natural gas for power generation.
50% of electricity production comes from gas plants.
A breakdown of the Italian power market in case of a full Russian gas supply cut cannot be ruled.
The reliance on Russian gas was also welcomed by the German industrial sector,
which makes up 37% of the total gas consumption in Germany.
Businesses have benefitted strongly from the lower price of Russian pipeline gas.
Sustainability risks have increased over the past 5 years
due to a return to higher coal and natural gas-based power generation.
Germany’s restart of some coal plants sends the wrong signal to
CEE countries looking to phase out coal.
Ambitious decarbonization goals are reflected in the share
of non-CO2 sources in electricity generation
which has been going up steadily until 2020,
thanks to the expansion of renewables.
Yet, the success of the energy transition process has been a mixed
bag across Europe as the some of the biggest EU economies
have lagged behind their renewable’s targets.
The energy crisis can become the engine for the acceleration
of the coal and gas phase-out, as well as the unleashing of cutting-edge
low-carbon technology investments such as green hydrogen,
offshore wind and storage solutions.
Germany risks a long-term lock-in in stranded fossil fuel assets
without a significant acceleration of the uptake of renewable
energy sources as a key measure to counter the energy crisis.
Italy is also lagging behind in the share of non-CO2
electricity capacity, with a 22% share compared to a 45% for the EU.
Between 2015 and 2020, Italy added only 5 GW of wind and solar plants
while adding 20 GW of gas facilities.
Russia has leveraged its control of oil refineries, gas storage facilities
and pipelines to squeeze supply and pressure governments
to drop their support for Ukraine.
The EU agreed on a ban of Russian oil and oil products
imports from the start of 2023. Yet, so far, Russian crude flows to Europe
have continued unabated mostly to countries with Russian
refining and storage infrastructure in place including Bulgaria,
Italy, Germany, Netherlands and Hungary.
Landlocked countries and Bulgaria have received
a sanctions exemption, which poses a serious risk of a backdoor
entry of Russian oil into the broader European market.
Russia has retaliated the oil sanctions
with a significant gas supply cut across Europe
aiming to undermine the EU unity on energy security and diversification.
Gazprom’s brazen geopolitical games are destroying
its reputation along with the Kremlin’s longstanding
narrative that Russia is a reliable gas supplier.
Germany’s over-reliance on Russian gas to power
a manufacturing boom means that a cut-off could trigger
a domino effect of business defaults.
A recession in 2023 is a real possibility for Europe,
which needs to grit its teeth in return for the ultimate reward
of sidelining Russia and protecting EU interests.
As in Putin’s favorite sport, judo, Europe needs to knock the Kremlin off
balance by accelerating the phase-out of Russian gas.
Despite the EU-wide embargo on Russian oil imports,
Russia has sold record-high volumes of crude and petroleum
products into Europe (up 20% since March).
Russia-owned or Russia-dependent refineries in
Central and Eastern Europe are now processing 100% Russian crude.
The EU, the U.S. and other Western powers have imposed
an unprecedented number of sanctions against
thousands of Russian companies and individuals.
Yet, the current Western sanctions against Russia
are not strong enough to stop the Russian war in Ukraine.
The majority of European countries have a small number
of Russian companies operating in the local economies
but most of the sanctioned firms play a major role in
strategic markets such as energy, infrastructure and banking.
The most strategically important Russian companies
are operating in the global economy via subsidiaries in countries
with preferential tax regimes such as the Netherlands,
the U.K., Luxembourg and Cyprus.
Ukraine was the first country to start imposing comprehensive
sector-level sanctions against Russian companies already in 2014.
Yet, Russian companies have been partially successful in circumventing
them by operating in Ukraine via their EU-based subsidiaries.
Germany and Cyprus emerge as the two European countries
with the biggest number of Russia-owned companies that are under different sanctions.
Cyprus has been the preferred destination for Russian companies
trying to evade sanctions and facilitate illicit financial flows in Europe.
Russian corporate presence is quite dispersed
but in most European countries, Russian firms
are only marginal players in the local market.
The total turnover by Russian companies in Europe
has decreased by 18% between 2013 and 2021,
however, in some countries such as Luxembourg,
Ireland and Portugal, it has more than doubled
revealing changing Russian investment patterns.
Russian corporate footprint is largely concentrated in the energy
and mining sectors whereas the largest Russian oil and gas companies
and mineral extraction companies operate on the global market through
their subsidiaries registered in the Netherlands, Switzerland,
the U.K., Cyprus and Germany.
Russian banks keep most of their assets in Cyprus (€22 billion),
UK (€11 billion) and Switzerland (€13 billion), followed by
Germany and Austria. After 2014, Russian bank assets decreased
in almost all European countries except in the Netherlands,
Switzerland and Germany where they skyrocketed over the last 8 years.
Cyprus, the Netherlands, the UK, Switzerland and Germany
have been the biggest hubs for Russian corporate registrations in Europe.
Cyprus has become the most vulnerable European country to Russian
corporate footprint becoming Russia’s ‘back office’ for corporate ownership
obfuscation and tax optimization strategies.
The unprecedented sanctions against Russia have spelled
the end of a three-decade-long process of Russian
economic and political accommodation with the West after the Cold War.
Russia has developed powerful informal networks of enablers that serve
to expand the Russian economic and political influence in Europe.
An estimated $1 trillion dollar of illicit Russian capital
has been invested across Europe since the collapse of the Soviet Union.
The funds have been used to take over key assets in strategic economic sectors
such as energy, telecommunications, banking, construction and logistics.
Russian FDI stocks in Europe have increased or remained stable
since the imposition of sanctions for the Kremlin’s annexation of Crimea in 2014.
Most of the Russian investment has again gone into oil and gas,
mineral extraction, banking and real estate.
The exposure of European banks on the Russian market
has fallen by USD 10 billion since 2014 but French,
Italian and Austrian remain very active in facilitating loans
to Russian companies and individuals or holding deposits of Russian entities.
Cyprus, Austria and the Netherlands have emerged
as the primary destinations of inward FDI from Russia,
with 61%, 11% and 8% of Russia’s total FDI in Europe