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By Hamish Armstrong (PR and Communications Manager (Interim)), Published

Russia’s invasion of Ukraine has exercised political and economic tensions around the world, with the threat and execution of sanctions and counter sanctions sparking volatility of prices and uncertainty.

One of the main sources of this volatility is natural gas, and the importance of Russia’s supply to the UK and other EU nations.

Professor Michael Tamvakis, Professor of Commodity Economics and Finance at Bayes Business School (formerly Cass), said any sanctions Russia imposes may hit EU nations more than the UK, given its heavier reliance on Russian gas supplies, but warned of severe price hikes if this is interrupted.

“The European Union is more heavily reliant on Russian gas supplies than the UK,” Professor Tamvakis said.

“Germany imports more than 50 per cent of its gas from Russia, hence its investment in Nord Stream and Nord Stream 2. Now that the second pipeline has been put on hold, Germany must rely on pipeline imports from the rest of Europe – such as Norwegian supplies via pipeline and liquefied natural gas (LNG) – via other EU ports because it does not have its own LNG import terminals.

“Alternatively, imports could come from the United States and Caribbean, Qatar, Australia, Nigeria and even re-exports from Japan, but if gas flows from Russia are interrupted in any way prices will jump even higher and importers will have to pay the price.

“Any market disruption, whether in oil, gas, minerals – including platinum, palladium and nickel – or grains, which Russia also exports heavily, will have an impact on world prices and ultimately wholesale and retail prices in individual markets. The sheer uncertainty will initially keep gas markets very jittery, so we must be prepared for even more pain in the short term.

“In the longer term, however, we could alternatively invest in any type of energy which offers better supply security. This includes more domestic renewables and gas from alternative sources, such as increased UK North Sea production and imports from elsewhere.

“To quote the late Sheikh Zaki Yamani, ‘in the short term, politics rule the (oil) markets, but in the long term it can only be economics’. If gas or other commodities are used as bargaining chips by any country with a dominant position, those who over-rely on this country will seek alternatives.

“This is of particular significance to Germany which may now be hit with a double whammy: high gas prices for its industry (chemicals in particular) leading to loss of competitive advantage, and high gas prices for heating and electricity generation for commercial and residential consumers.”

Despite what is seemingly a critical dependence on cordial relations with Russia to maintain a plentiful supply, Professor Tamvakis said using gas as a political weapon is not sustainable for Russia in the long run.

“In the short term, Russia can probably use the threat of limited gas supply and higher subsequent costs effectively because of the foreign currency and gold reserves it has built up along with the continuing support of China,” he continued.

“However, this is unlikely to be sustained in the long run. Currency reserves will eventually be exhausted and exports to China are limited by the export capacity of Russian LNG from Sakhalin and Yamal, and pipeline routes such as the Power of Siberia which connects directly to China and should be fully operational later this year.

“Even this may not be sustainable as China will not want to be seen to be financing war in Ukraine.

“I think hesitation of the West to expel Russia from SWIFT shows an intention for oil and gas to keep flowing between Russia, Europe and the rest of the world until diplomatic negotiations can resume.

“Whatever the outcome of the current situation, it should be a major incentive for the UK to build more resilient energy infrastructure, expand the adoption of renewables at micro, small and large scales and have less exposure to gas.

“With oil it took the whole of OPEC to unilaterally disrupt oil supplies. In gas it seems that one country is quite enough.”

All quotes can be attributed to Professor Michael Tamvakis, Professor of Commodity Economics and Finance at Bayes Business School (formerly Cass).