Will Germany Hobble Western Sanctions Against Russia?

Last week, German Chancellor Olaf Scholz urged caution when it comes to potential sanctions on Russia. If Russia invades Ukraine, he told Süddeutsche Zeitung: “Prudence dictates choosing measures that will have the greatest effect [on Russia]. … At the same time, we have to consider the consequences this will have for us,” a veiled allusion to Germany’s significant dependence on Russian energy and its historic unwillingness to risk energy disruptions for the sake of its neighbors. His statements drew outcry in Washington. Indeed, much of the press coverage portrayed Scholz’s statement as an indicator that Germany was simply not willing to get tough on Russia, presenting the country as a potential spoiler of Western unity.

The core issue, however, is less one of German intransigence but rather that there are limited options on the table for sanctions in the event of a Russian invasion. Scholz’s statements reflected the challenging reality facing European states as they seek to find a response to Russia’s military buildup in the middle of a winter energy crunch. Policymakers face a Hobson’s choice: Exempt energy transactions from potential sanctions, and they are unlikely to be effective; or include energy transactions, and bear what could be extreme costs on Western economies.

In 2006 and 2009, Russia cut supplies to Ukraine in mid-winter and forced the government in Kyiv, Ukraine, to raise the price it paid for Russian gas supplies. Yet these incidents prompted responses, including a European Union push to better integrate gas markets across the continent, making it easier for countries in Western Europe to resell supplies to one another and increasing the uniformity of pricing. Today, it is effectively impossible for Russia to single out any one country for a gas shut-off.

Europe has done little to resolve the broader problem of continued energy dependence on Russia.

But although Europe has largely resolved the energy security problems that characterized the 2006 and 2009 crises—Russia’s ability to isolate one state and shut off its supply—Europe has done little to resolve the broader problem: continued energy dependence on Russia. Much of this question’s controversy in recent years has centered on Nord Stream 2, which would strengthen German energy security but continue European dependence on Russian supplies.

Although it might make more sense in a crisis to import liquified natural gas (LNG) from elsewhere, it would be far more expensive in general. On top of this, many in Berlin have long suspected that Washington’s insistence on curtailing Nord Stream 2 is as much about promoting the interests of U.S. natural gas exporters as it is about European energy security. U.S. President Joe Biden has been leaning heavily not only on U.S. producers but also on major producers like Qatar to dial up LNG shipments to Europe. But in both cases, the problem remains the same: LNG is more expensive than Russian gas in non-crisis times, and finding substantial spare capacity from any LNG producer during a crisis is extremely challenging.

The reality of Germany’s situation is also more complicated. No matter how out of touch German policymakers might seem to Russia hawks in Washington, they know what they’re doing. Germany—and the European economy more broadly—is heavily dependent on Russian energy. However, the Russian government is also heavily dependent on the profits of selling that energy.

Policymakers in Germany are aware that this is as much a story of interdependence as one of dependence, limiting the extent to which Russia can use energy as a cudgel. Almost 38 percent of the EU’s natural gas imports come from Russia, comprising around 70 percent of Russia’s natural gas exports. In 2021, the European gas export market alone was worth close to $50 billion to Russia. A shut-off in either direction would be mutually disastrous for the intertwined economies.

It is a mark of the current situation’s seriousness that the Biden administration has nonetheless sought to engage outside entities—from major energy multinationals to gas-exporting states like Qatar—in discussions about dialing up production to potentially substitute some of Russia’s gas supplies to Europe. Indeed, a senior administration official told reporters on Jan. 25 that “we expect to be prepared to ensure alternative supplies covering a significant majority of the potential shortfall.”

Exempting energy from any potential sanctions regime will render that regime far less painful—and far less likely to be effective at coercing or deterring Russia.

Yet, policymakers must be clear about the feasibility of alternative supplies to Europe in the short term. For one thing, Europe has been undergoing a notably tight gas market this winter; for a variety of (mostly unrelated) reasons, supplies are limited, few producers have the capabilities to increase production, and prices around the world are high. A shortfall would almost certainly force Europe to draw down reserves and bid against countries in Asia and elsewhere for increasingly scarce supplies.

Although it is likely that Europe could weather a moderate shortfall in gas supplies, such as a conflict-induced loss of supply through Ukraine, the resultant price increases would be punishing for European governments. Some experts estimate that around 15 percent of supplies could be replaced in the short term. Coupled with rising temperatures—and, more importantly, with the imminent arrival of spring in Europe—it is likely that reserves could be tapped to get the continent past the worst of the winter.

But there is no practical way to substitute all Russian supplies in the short term. For one thing, unlike oil, it can be challenging to transport natural gas outside of pipelines. LNG—produced in the United States, Qatar, Australia, and elsewhere—allows for gas to be moved by ship, but it is more expensive than traditional methods and requires specialized technology to “regasify” the fuel into a usable form. Today, existing LNG terminals in Europe can only process around 40 percent of Europe’s regular gas demand. Europe might not freeze in the event of a sudden Russian shut-off, but it would be extremely costly in both economic and political terms—perhaps the largest energy-based dislocation since the 1970s, the majority of which would be borne by the United States’ European allies.

German policymakers are thus right about the current difficulty of using energy as a tool to force changes in behavior, whether on the EU or Russian side. The crisis couldn’t have come at a worse time for the new government. Scholz has limited political capital to spend. Indeed, he didn’t run on a campaign of transformative change; instead, he promised Germans a continuation of Merkelian stability. This leaves the new chancellor in a spot with little room to maneuver: trying to balance public opinion, divisions within his own party, and pressure from the hawkish Greens—who oversee both the foreign ministry and the energy and climate ministry—and are famously anti-Nord Stream 2 and want to take a tougher line against both Russia and China.

Yet the risk is that Scholz’s own political future—and future German influence on questions of European security—may be dependent on the outcome of the current crisis. Because of the tight spot Germany finds itself in, it’s been largely sidelined from ongoing sanctions discussions. Indeed, many in Berlin fear that punishing sanctions might drive a Russian energy shut-off, and Washington’s attempts to find ways to bridge the energy gap have thus far done little to shift the German calculus. Although Germany finally relented and said that Nord Stream 2 could be on the table as part of a broader sanctions package, almost no one in Europe actually believes the country will use its leverage as an economic powerhouse to de-escalate the ongoing crisis or deter Russia.

But even non-energy sanctions will be constrained by Russia’s heavy reliance on energy exports. Financial sanctions that target Russian banks, for example, will be less punitive if energy transactions are exempted, allowing European gas and oil revenues to continue flowing into Russian state-owned enterprises. Removing Russia from SWIFT, an international transactions system, will simply require European energy purchasers to find alternative ways to pay for their fuel.

Dialing down Russian gas imports to Europe over time (as some have proposed) might be successful in weakening long-term dependence on Russian energy but would equally allow Russia time to shift supply elsewhere. The most perverse outcome would be a kind of gas musical chairs: an extremely expensive swap, in which Russian gas increasingly flows to China while China’s former suppliers redirect their supplies to Europe. And although allies such as the Baltic states, which perceive a direct military threat from Russia, may be persuadable, it will be even more difficult to convince Germany to change its calculus.

This leaves arms exports, technology restrictions, and targeting Russia’s ability to refinance its sovereign debt as the most viable options in the event of Russian escalation, as these can be most easily compartmentalized from energy concerns. Germany—and other European states—should not fear a Russian gas shut-off if such tactics are used. Indeed, Russia has always been paranoid about being seen as a reliable supplier in Western Europe and thus has a long-term incentive to maintain its European gas markets; any move to shut off gas to Western Europe could finally push EU states to find potential alternative suppliers—regardless of the cost.

The reality of Europe’s energy security suggests it may be impossible to achieve allied unity around Washington’s current position. The threat of sanctions—particularly given the effective impossibility of sanctioning energy—is not likely to deter Russia from an invasion of Ukraine in the coming weeks. And although European diversification away from Russian energy might remove the threat of future shut-offs, such a project will take far longer than the time horizon of the current crisis.

Policymakers are thus left with a variety of unsatisfying options. The least bad of these may be for Washington to move closer to Germany’s more moderate position, looking for non-sanctions-related solutions to the current crisis, while continuing to expand dialogue with Russia on conventional arms control and issues of broader European security architecture.

As Leslie Gelb, former president of the Council on Foreign Relations, once put it: “[C]ompromise is not always the answer, and sometimes it’s precisely the wrong answer. But policymakers and politicians have to be able to examine it openly and without fear, and measure it against alternatives.” For the United States and its allies, the alternatives today are far worse.