- The Russian invasion of Ukraine has outraged much of Europe, and the rest of the world.
- Aid to the Ukrainian administration is sizeable, but it pales before the amount the EU pays to Russia for energy imports.
- Supply diversification is a long-term solution. However, in the near term, we calculate that individuals and firms can make a sizeable contribution right now.
Europe Supports Ukraine – It Just Supports Russia More…
Europe is united in its horror at Russia’s invasion of Ukraine. Outrage has been sufficient for Germany to reverse its policy of pacifism and for Finland and Sweden to consider joining NATO. In monetary terms, it has driven an unprecedented commitment to send aid. This comes via €450mn in lethal and €50mn in non-lethal distributions from the (ironically named) European Peace Facility (EPF), €300mn from the EU’s Macro-Financial Assistance fund (to rise to €1.2bn eventually), and £526mn from the UK. That is not to mention the additional money and arms individual EU nations have donated.
However, the EU’s commitment to support such threatened democracies utterly conflicts with its reliance on Russian energy. The amount the EU spends on Russian energy dwarfs what it donated to Ukraine. Estimates put the former at €240mn per day – over €7bn since the first day of the invasion and still growing (Chart 1).
Russian energy’s importance to the EU is proven by its exclusion from sanctions. It is important to Russia, too, with oil and gas accounting for over a third of Russian government revenues (Chart 2). That is why, as we had predicted, Russian gas flows to the EU actually rose through the invasion via Belarus.
The Demand Side of the Equation
We now show how, to move the dial, individuals and firms can play their role in significantly reducing Russian gas usage, and with it, Russian government revenues.
Commercial Firms Can Cut Russian Energy Exposure by 83%
The UK government estimates that as of 2016, firms use 67% of their commercial building energy on lighting, heating and ventilation, cooling and hot water. Meanwhile, the Green Alliance estimates they could cut 14% of commercial building energy within months using on-the-market energy optimisation tools. If such a figure held across the EU, that would account for 19mn tonnes of oil equivalent – 83% of the entire current contribution that Russian oil, coal and gas provides the sector (Chart 4).
Households Can Cut Their Russian Energy Exposure by 80%
Households can also help. Using estimates by Endesa, the UK government, the EU and Connect4Climate, we have broken down household energy usage by appliance (Chart 5). With it, we calculated that through relatively minor, immediately actionable steps (including running washing machines cold, not heating empty rooms, and cutting water heating time down by an average of an hour to 2-3 hours per day), EU households could cut their total energy usage by over 20% and their exposure to Russian energy by 80%.
The Elephant in the Room – Oil in Transportation
In 2017, oil accounted for roughly 97% of fuel used in transport, with Russian oil accounting for 27% of the total energy used in the segment. The infrastructure importing oil from Russia is predominantly ship based. Pipelines, such as the Druzhba pipeline, account for 4-8%, while 70-85% is shipped from Russian ports in the Black and Baltic seas.
The changes in technology (EV in particular) are underway. But like in industry, progress is slow. At the end of 2020, 10% of EU new cars were EV or hybrid.
Instead, the lead must again come from the demand side. We have already been through a period of significantly reduced individual transport usage in 2020 (Chart 10). But we need not go so far to make a sizeable difference.
Using assumptions based on UK and EU data, we estimate that by keeping EU air travel to around 2016 levels, and keeping personal car usage to around its end-2021 level, we can avoid 35% of the Russian fuel imported for use in EU transport (Chart 11). This would minimise impact on commercial vehicular use (LCV and HGV, marine and rail).
In sum, without onerous changes to lifestyle or economic impact, individuals and firms in the EU could reduce total exposure to Russian energy (not just gas) by around 35% and deal Russia a serious fiscal hit.
How It All Fits Together: An Infographic
Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)