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Energy and Politics: lasting impacts of the war in Ukraine

Botond Feledy will be one of the speakers at the Budapest Hydrogen Summit, to be held on 10 March.

The war of Russia in Ukraine will accelerate the energy transition in Europe. This has significant political consequences in the long term inside the EU as well as in foreign relations in the short and mid-term.

While gas pipelines have not been closed – South stream, Nord stream 1 and those in Ukraine – and oil barrels kept flowing out of Russia in the first days of the war, it remains quite unpredictable for how long. The financial sanctions and especially the one targeting the SWIFT system may hinder the accounting of transactions. While this is clearly something that Berlin wants to avoid, it might come to a point where energy imports will be impacted. Furthermore, the Kremlin may want to impose counter-sanctions of its own, closing the tap himself. This would drive to selling its hydrocarbon resources elsewhere in the world, but only as long as US sanctions do not prohibit trading with Russia. That in turn might lead to a juncture with China.

In order to prepare to replace the Russian imports in the energy market of the European Union, negotiations have already kicked off earlier. Australia, Japan and others were seemingly ready to offer access to their reserves for a short-term solution, but that will not cover the need in case of major market disruption and restructuring.

Therefore, one may expect that the Biden administration’s incentive to negotiate the nuclear treaty with Iran might speed up and in turn, open the market for Iranian oil exports. That gives good leverage for the actors in Iran. Similarly, Washington might try to convince Riyadh to produce more – and on such a price level, it would also offer a chance for the COVID- and climate-hit region to catch up. The question remains what the Saudis might ask from the White House in return on the political level, in light of the Abraham accords and the many moving puzzles in the Middle-east as a consequence.

As for the speech of German Chancellor Olaf Scholz, he promised on the first weekend of the war that Germany was going to shift its energy policy. That is absolutely substantial, as the country got quite stuck between its Energiewende, the phase-out from nuclear on a speedy timeline, which – counterintuitively – brought back coal-fired power plants. Moreover, approximately half of the coal burned in Germany was imported from Russia. So the war in Ukraine gives a pretext to the German political elite to readapt its strategy without being punished by the electorate. Whether this will go down in the way of pouring money into hydrogen or to prolong (turn back on) some nuclear plants, remains to be seen, especially since nuclear is quite a taboo for a larger part of the population.

Now, the same might happen in the United States, facing surging export demands. There might be growing pressure that the Biden administration reverses its position in some issues regarding fracking and lease, to enable larger volumes of export, as it also gives the same international political leverage to the US as it offered to Russia until it voluntarily undermined peaceful commercial relations.

One more development that will stay with us for the years to come. The Anonymus hacker group with several others claimed to support Ukraine and promised to hack and slash the Russian government and industrial networks. This has been started already in the first days of the war. Several screenshots and databases have been published ever since one of them for example showing an industrial control system of a gas pipeline apparently around North Ossetia. Much more to come, supposedly.

The security breaches that we are going to witness in the weeks (and perhaps months) of the war will push the security paradigm of industrial actors. Either as elements of critical infrastructure of NATO Member States, the public regulation might get more severe and impose more mandatory security measures and reporting; or the companies themselves will also revert to invest more in security to assure continuity of business operations in times of heightened conflict.

The war in Ukraine will shape the security structures of Europe and remake the concept of “security” itself in the 21st century. Energy markets cannot stay out of it, so it might be better to anticipate.

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