One of the largest geopolitical stories of recent times is the recent tensions between Russia and Ukraine, and thus the rest of Europe.

There has been a great deal of posturing by NATO and Russia alike, with the two sides of the impending conflict jostling for negotiating power and public appeal.

There have been negotiations, which have so far been relatively fruitless. Over the last few weeks the situation has continued to escalate with many fearing the invasion may be coming soon.

One thing is for sure, this would be disastrous for not just Ukraine but the entirety of Europe…

What is going on with Russia and Ukraine?

The growing tensions between Russia and Ukraine (backed by their various allies) have had disastrous consequences for energy markets. Uncertainty is a killer for any market, with the anxiety surrounding this conflict potentially leading to prolonged periods of sky-high gas prices across Europe, say analysts.

“It’s a very tight gas market … and there’s no question that this sense of imminent crisis building with Russia and Ukraine is also hanging over the market, particularly since Russia does provide about 35% of Europe’s gas… Were sanctions to be placed on Russia’s energy exports or were Russia to use gas exports as a tool for leverage, European natural gas prices would probably soar.”- energy expert Dan Yergin interviewed by CNBC

If the current crisis is to continue down the current path of escalation, gas prices (already at record levels) across Europe would continue on their upwards trend. This is due to Europe’s reliance on Russian gas – a source of serious leverage for The Kremlin. This situation is exacerbated by the low stock supplies across Europe for gas.

Over the last few months there have been numerous confirmed reports of thousands of Russian troops amassed at the border with Ukraine, stimulating many to speculate that a full-scale invasion is on the cards in the near future. Russia has a recent history of meddling in the area and many will still have memories of the illegal annexation and occupation of Crimea in 2014. These allegations are denied by Moscow, however.

Diplomacy has so far failed to resolve the situation and have ended in the last week without any significant breakthroughs for either party. Both United States representatives and NATO members engaged with top Russian officials to discuss proceedings but no resolution was found. Compounding this were fresh warnings that the situation along the border is continuing to worsen.

The looming crisis has sparked talk of U.S sanctions against Russia to dissuade against a potential invasion, President Joe Biden has been outspoken on the matter. If this does indeed happen, Russian retaliatory actions are sure to follow – potentially pushing European gas prices well past the peak of £180 per MWh from late 2021.

Current gas supply from Russia is already lower than usual

As it stands, the gas supplies injected into Europe from Russia are already lower than usual. Imports from Russia into North-Western Europe from August through to December were already down 38% in comparison to the same period in 2018.

As already mentioned, this is compounded by the dwindling gas stockpiles across Europe. These reserves have already fallen by just over 20% since the 12^th of January vs the five-year average. Experts have stated that they expect the period of high natural gas prices to be long lasting, and so to the supply of gas from Russia.

The widely felt effects of a Russian invasion

As a member of NATO, the United States of America finds itself in a very tricky situation. Not just politically, but economically, and from a national security point of view.

Under President Joe Biden inflation has been a skyrocketing problem. This is already running the risk of becoming out of control with the recent rebound of petrol prices further aggravating inflation. Add in the potential for $100 oil from a Russian invasion of Ukraine and this could be the straw that breaks the camels back.

The current stance from the National Security Council is clear, protect American interests above all else.

“Whatever we decide is the right course for our collective interest and security… We are prepared to deliver severe costs to the Russian economy including its financial system and sectors deemed critical to the Kremlin and President Putin’s ambitions — while minimizing unwanted spillover.” – Spokesperson for the National Security Council as interviewed by CNN

Interestingly, it is mitigating the potential impact where President Biden may encounter the most trouble. Senior administrations have been outspoken in the fact that they are taking contingency planning very seriously, seeking to address any spillovers and prepared to mitigate any impact. To do so, they have been working closely with other countries and energy companies.

It is clear that natural gas prices would, could, and already have spiked. Although Europeans would pay the heaviest price in a conflict, the effects are far reaching. Germany too has been outspoken in their potential sanctions against Russia, warning that halting development of the Nord Stream 2 pipeline is very much a possibility. Worryingly, this would then further limit the supply of natural gas to Europe.

For American consumers, the impact is less direct – although Goldman Sachs have warned that oil prices could reach $100 later this year. Russia only ships a relatively small amount of oil to the U.S, a figure of around 200,000 barrels per day as of October. This may seem like a vast amount but is contextualised by only representing around 3% of total US oil imports (6 million barrels).

Crude oil is, however, a globally traded commodity with the prices from the pump being derived from world oil prices. Any shock in oil is felt globally.

Inflationary sanctions

Putting in place sanctions against Russia could take its toll on the United States. As such, the decision-making process is a minefield.

Energy is certainly a vital component of Russia’s economy – rendering it the obvious choice for sanctions. Natural Gas and Crude Oil made up around 43% of the Russian government’s annual revenue between the years of 2011 and 2020 – with recent oil and gas revenue spikes (60%) during the first three quarters of 2020 making them the largest driver of growth for government revenue.

Many experts have pointed out the homogenous nature of the Russian economy with its lack of diversification presenting a clear target for sanctions. However, to do so would then reinforce and further drive prices higher during a period of already record highs.

What does this mean for consumers?

It is difficult to draw any concrete conclusions at this point as the situation is still developing with every new day bringing new changes. However, one thing above all is a recurring theme – energy prices are likely to continue rising.

This will be passed onto consumers through energy bills and it something to keep an eye on.

Different suppliers will feel the aftershock of this crisis in different ways, so it is crucial to be aware of the current situation your energy supplier finds themselves in. Energy Solutions keeps up to date supplier profiles for all of the energy suppliers in the UK, which you can find here.

At a time where bills look set to rise due to market volatility, it is also a good idea to ensure that you are not being overcharged for any of your utilities. It can be a tricky task to navigate but Energy Solutions has curated online tools to remove the hassle.

You can find our free online Gas Bill Calculator here.

You can find our free online Electricity Bill Calculator here.

Energy Solutions by us, for you

At a time of great uncertainty in global energy markets, it is easy to feel lost in it all.

Keeping up to date with developing situations and the associated ramifications is a tricky and time-consuming job. It is also one that is not likely a priority for you and your business.

So, what do you do?

You partner with energy procurement experts to take the load off of your desk.

Energy Solutions have been trusted brokers for countless businesses for over twenty years, which means we know how to navigate the energy markets during a time of uncertainty.

Website: https://www.energybrokers.co.uk/

Email: nick@energybrokers.co.uk

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