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Russia’s war on Ukraine has pushed the climate crisis off the agenda. But we need a ceasefire and global demilitarisation for a 1.5°C world War brings death and destruction – not least to the environment and climate. Russia’s invasion of Ukraine offers a depressing reminder of that fact, and further increases the military sector’s already enormous global CO2 footprint. In addition, the eastern Ukrainian cities where fighting is taking place are home to fossil fuel infrastructure such as chemical factories, oil refineries, and coal mines, the bombing of which produces a cocktail of toxic substances that has devastating environmental impacts. Efforts to arm the two sides, moreover, are consuming materials and resources that could otherwise go towards tackling the climate crisis. Based on the global C02budget, humanity has less than eight years to ensure it still hits its 1.5-degree warming target. To do so, we need to urgently implement reforms in all areas, to bring about ‘systemic change’, as the IPCC report from early April puts it. The military sector barely gets a mention in this almost 3,000-page document, however, with the word ‘military’ coming up just six times. You might thus conclude that the sector is of little relevance to the climate emergency. The reality is rather different. Using military hardware results in huge quantities of emissions. In the war in Ukraine, 36 Russian attacks on fossil fuel infrastructure were recorded in the first five weeks alone, leading to prolonged fires that released soot particulates, methane and C02 into the atmosphere, while oil infrastructure has been ablaze on the Russian side too. The oil fields that were set on fire in 1991 during the second Gulf War contributed two per cent of global emissions for that year. While greenhouse gas emissions are one of the most significant impacts of war, the quantity emitted depends on the duration of the conflict and on what tanks, trucks, and planes are used. Another is the contamination of ecosystems that sequester CO2. Staff from Ukraine’s environment inspectorate are currently collecting water and soil samples in the areas around shelled industrial facilities.Military emissionsThe ramifications for the climate can be catastrophic in scale. According to a study by the organisation Oil Change International, the Iraq War was responsible for 141 million tonnes of C02equivalent emissions between its outbreak in 2003 and the report’s publication in 2008. By way of comparison: some 21 EU member states emitted less CO2equivalent in 2019, with only six states topping that figure. Post-war rebuilding also produces significant emissions. Estimates suggest that reconstruction in Syria will lead to 22 million tonnes of CO2 emissions. The rebuilding in Ukraine, too, will consume vast amounts of resources. At the World Economic Forum in Davos, President Volodymyr Zelensky stated that at least 5 billion US dollars of reconstruction funding was needed per month. Every effort should thus be made to achieve an immediate ceasefire – both for the sake of the climate and to avoid further human suffering. Emissions from armed forces and military equipment cause considerable environmental harm around the globe. And yet, bowing to pressure from the US, military CO2 emissions were excluded from climate treaties such as the Kyoto Protocol of 1997 and the Paris Agreement of 2015. As a result, they do not form part of their binding agreements and are neither surveyed systematically nor published transparently. The consequent lack of data means we can only make vague estimates as to the military sector’s impact on global heating. According to a study by Neta Crawford, co-director of the Costs of War project at Brown University, the US defence ministry alone is a bigger contributor to the climate crisis than individual countries such as Sweden or Portugal. This makes it the largest institutional source of greenhouse gases in the world. Globally, the military sector is estimated to generate around six per cent of all CO2emissions.Germany’s roleWith its new €100bn fund for the military, Germany seems willing to countenance further far-reaching climate impacts. This military investment will tie up financial and intellectual resources, making it highly unlikely that the 1.5-degree target can be achieved. That countries wish to better protect themselves against potential Russian aggression is understandable. But the public debate around this issue needs to balance an uncertain increase in security against a reduction in our ability to fight climate change. The German military was already responsible for around 4.5 million tonnes of CO2 equivalent emissions in 2019, significantly more than the 2.5 million tonnes contributed by civilian aviation within Germany. This is now set to increase. Just one of the F-35 jets ordered from Lockheed Martin emits around 28 tonnes of CO2 equivalent per tank of fuel. For comparison: the average annual emissions footprint in Germany is 11.2 tonnes per head. The income from the sale of fossil fuels provides ongoing funding for Russia’s war of aggression. From 24 February to 24 April 2022, the country’s fossil fuel exports via sea routes and pipelines had an estimated value of €58bn. The EU accounts for 70 per cent of that total, or €39bn, while Germany is the largest single importer of Russian fossil fuels at €8.3bn worth. Our fossil fuel dependency is thus a factor in both the climate crisis and the invasion of Ukraine. And yet representatives of politics and business are using the war as an excuse to delay the necessary socio-ecological transformation. While corporations still stuck in the fossil fuel age – such as BP, Shell, and Saudi-Aramco – are posting record profits, the climate crisis continues apace. The likes of Rheinmetall and NATO chief Jens Stoltenberg may champion climate-neutral warfare using eco-friendly tanks and hydrogen fuel, but this is surely not the answer. Western armed forces, security experts, and arms manufacturers are well aware of the significane of climate change, as evidenced by the numerous security strategies, policy statements, and sustainability reports published on the subject in recent years. These outline ways to adapt to a changing climate while ensuring the doctrines of growth and hegemony are nonetheless defended against any and all resistance.Ceasefire nowTogether with the EU and NATO, Germany is preparing for scenarios such as war, environmental disaster, and influxes of refugees in order to ensure its foreign policy will still be fit for purpose and its security interests protected. A cynical approach given that the worst affected – those who, as some see it, Germany needs protecting from – will be those who have contributed least to global warming. And one that seems even more absurd when you consider that the environmental destruction brought about by military investment and resource-related conflicts will help to further heat the climate. At the same time, steps are being taken to reduce dependence on fossil fuels. Nonetheless, a Greenpeace report published last year demonstrates that the majority of all EU military missions have links to the protection of oil and gas imports. This dangerous relationship between fossil fuels, military missions, and war needs to end. More arms mean more damage to the climate, not greater security. Rising defence budgets among NATO states will simply convince Russia and China to increase military investment in turn. At $2.1 trillion, global arms spending has already reached record levels. As the war in Ukraine goes on, the biggest challenge of the 21st century – the climate crisis – has slipped down the agenda. We mustn’t forget, though, that efforts to tackle that crisis can only succeed if all countries – including Russia – work together. The immediate demand is for a ceasefire, followed by measures to build trust, such as international disarmament treaties. Moreover, Russia will need outside help if it is to transition to a climate-friendly energy industry. What’s required is a fundamental socio-ecological transformation, with policy-making dictated by the needs of all. That may seem inconceivable at present, but what’s the alternative? Unchecked global warming would be catastrophic for the planet’s entire population.

China’s silence towards the European Union’s electric vehicle probe could mean that a more harmful retaliation is on its way During her State of the Union address on 13 September, European Commission President Ursula von der Leyen announced that the European Union would undertake an anti-subsidy probe against the Chinese electric vehicle (EV) sector. This signalled a major step in the EU’s shift to a more aggressive trade defence against China and raises the question of how China will react, given the importance of the Chinese market to key sectors of the European economy (including the auto and luxury sectors), and also given China’s crucial role in providing goods to the EU for the green transition? An EU-China High Economic and Trade dialogue on 25 September in Beijing, between EU Trade Commissioner Valdis Dombrovskis and his Chinese counterparts, may have given a glimpse into China’s mindset. There were fears Chinese officials would respond aggressively to von der Leyen’s announcement during Dombrovskis’s visit but this was not the case. Nevertheless, the silence may be deceptive. Three main factors should be taken into account when considering potential Chinese retaliation. Subtle but harmful retaliation First, China might file its own anti-subsidy investigation at the World Trade Organisation against key European sectors. This would not be difficult since Europe has ramped up its subsidies massively since the pandemic, and more recently has attempted to gain more ‘strategic autonomy’ in sectors including semiconductors. There is very little the EU can do about this potential retaliation, which would be costly for the sectors targeted and for the EU’s image as a free-trade and WTO champion. Second, China could try to persuade EU governments that the Commission-led investigation should be withdrawn. A similar probe happened in early 2014, when the EU launched an anti-subsidy investigation into solar panels produced in China. President Xi Jinping visited then Chancellor Angela Merkel right after the anti-subsidy investigation was announced. Subsequently, the issue was settled quickly, with the Commission withdrawing the case from the WTO. Based on this previous experience, China might prefer to take up the issue bilaterally, possibly with Germany again, rather than enter discussions with the Commission. But a major difference this time is the relative importance of the auto sector in the EU compared to solar power. The auto sector accounts for 14 million jobs in Europe and a good part of the EU’s exports. Exports of cars and components are heavily concentrated in a few EU countries, especially Germany. These exports to China have plummeted in 2023, with a close to 30% drop, and Chinese competition in third markets and even the EU market, has become much more intense. Third, also unlike the solar-panel probe, it is the Commission and not the sector being harmed that has filed the case. It will be harder for the Commission to withdraw the investigation because it would lose credibility. Merkel decided to accommodate Xi Jinping’s request in 2014 because she wanted to save the auto sector, even at the cost of hurting a smaller part of the German economy – the solar panel companies. The new investigation aims to protect the automotive sector. There could be consequences for major European auto companies producing electric vehicles in China, but jobs in Europe are now more important than the future of those companies in China. In any case, the future of European manufacturers is bleak; they seem to have already lost the EV race to their Chinese competitors. China will find it much harder to move the EU away from its decision to pursue an anti-subsidy investigation, differently to what happened in 2014. Lessons to learn There might be a lesson for Europe in what happened to Apple in China in September. Days before Apple’s launch of its new iPhone 15, Huawei launched its Mate 60 with upgraded functionalities which require high-end semiconductors. Beyond raising doubts about the effectiveness of US-led export controls on advanced semiconductors, this announcement constituted a direct challenge to Apple’s phone sales in China. Chinese officials were also prohibited from using iPhones and rumours spread in Chinese media in advance of the Apple launch about the underwhelming quality of the iPhone 15. Investors dumped Apple stock globally and the company lost about 6% of its value in a few days. China’s retaliation against the Commission’s anti-subsidy investigation might not be as direct and transparent, but it will still be harmful and might offer less room for the EU to respond. Europe’s strategic dependence on China is greater than in 2014 and this probe has the potential to cause a bigger fall-out for the EU. China has strengthened its position as a global power and uncompetitive behaviour could hit European core sectors harder because China has more power to retaliate. On the flip side, the stakes are higher for the EU given the importance of the auto sector in terms of jobs and exports. For that reason, China may not manage to deter the EU’s investigation as easily as it did in the past. But this may prompt China to threaten even larger retaliation.

A single European Union cleantech manufacturing capacity target should be based on an understanding of the situation in each cleantech sector. Securing a competitive edge in cleantech manufacturing has increasingly come to be seen as a priority for Europe. China’s dominance of this sector and the subsidies offered under the United States Inflation Reduction Act (IRA) (Kleimann et al, 2023), compelled the European Commission in February 2023 to publish a Green Deal Industrial Plan with the goal of boosting the European cleantech sector and speeding up the transition towards climate neutrality (European Commission, 2023a). The industrial plan’s regulatory pillar is the draft Net Zero Industry Act (NZIA), which includes a target for the European Union by 2030 to have the capacity to manufacture at least 40 percent of its cleantech deployment needs (European Commission, 2023b). Assessing Europe’s cleantech manufacturing capacity Meanwhile, basic facts on the status of cleantech manufacturing in Europe are missing from the discussion, which has so far been mainly about global shares of cleantech manufacturing capacity (Figure 1). When looked at from a high-level perspective, China is dominant but this perspective does not allow the situation in Europe to be captured fully. Figure 1: Regional shares of manufacturing capacity of selected clean technologies, 2021  To address this, we provide an overview of Europe’s current cleantech manufacturing capacity and compare it to current cleantech deployment levels. This assessment is useful for two reasons. First, it allows for a better appreciation of the scale of the EU’s manufacturing capacities. Second, it shows that adopting a one-size-fits-all 40 percent manufacturing target, as proposed under the NZIA, may make little sense considering the very different situations of different clean technologies. A caveat is here important. A significant share of European cleantech production is currently destined for export and not the EU domestic market. We ignore this trade dimension and compare only domestic cleantech manufacturing capacities to deployment levels, thus taking an approach that is similar to the NZIA and its 40 percent headline target. Our analysis covers the manufacturing and deployment levels of five technologies pinpointed by the NZIA: solar photovoltaic (PV) panels, wind turbines (onshore and offshore), electric vehicle batteries, heat pumps and electrolysers (Figure 2). A variable picture Figure 2 shows the limited scale of the EU solar PV industry. EU countries installed 41.4 GW of new solar PV capacity in 2022, while EU manufacturers only produced 1.7 GW of wafers, 1.37 GW of cells and 9.22 GW of modules (SolarPower Europe, 2023). In other words, EU solar manufacturers, had all their output been deployed in the EU, would have met only 4 percent, 3 percent, and 22 percent of solar deployment needs, respectively. For wind turbines, however, Europe is well placed. In 2022, EU countries installed 19.2 GW of new wind power capacity in 2022: 16.7 GW onshore and 2.5 GW offshore (Wind Europe, 2023). In 2021, for onshore wind capacity, EU manufacturers produced 17 GW worth of turbine blades, and more than 11 GW of nacelles and towers (Wind Europe, 2023), equivalent to 102 percent and 71 percent of the deployment needs of the following year. For offshore capacity, they produced blades, nacelles, and towers equivalent to 2.9 GW, 6.7 GW and 7 GW respectively (IEA, 2023), or the equivalent of 116 percent and 286 percent of the deployment needs of the following year. Meanwhile, over 90 percent of clean energy transition-related additions to battery capacity in the EU in 2021 were related to electric vehicles (Bielewski et al, 2022). European electric vehicle sales in 2021 amounted to 2.3 million units, roughly equivalent to a battery capacity of 156 GWh. But domestic battery manufacturing capacity hovered around 60 GWh, or the equivalent of about 38 percent of the domestic deployment needs (but currently representing only about 7 percent of global manufacturing capacity) (IEA, 2022). Heat pumps produced in Europe mostly serve the domestic market. In 2021, global heat pump production capacity (excluding air conditioners) was 120 GW. The EU contributed about 19 GW and accounted for 68 percent (Lyons et al, 2022) of Europe’s 2.18 million newly installed heat pumps. China supplies most compressors for air-air pumps, while Europe remains the main source for air-water and ground-source pumps. Finally, water electrolyser manufacturing capacity in Europe stands currently between 2 GW and 3.3 GW per year (Hydrogen Europe, 2022), many times more than the current installed capacity, which is equal to 0.16 GW (European Commission, 2023c). The wide disparity between the current manufacturing capacity and deployment is explained by delays between investment decisions and operational deployment, lack of hydrogen demand compared to supply capacity, and regulatory bottlenecks. It is noteworthy that EU electrolyser manufacturing capacity is still far from the 17.5 GW/year target set for 2030. Too easy for some, too hard for others One implication of this analysis is that applying the same 40 percent manufacturing target to each cleantech sector as set out in the NZIA proposal, may make little sense considering the very different situations of different clean technologies. For solar panels, reaching this target would be very challenging and likely very costly, while it would be much easier (and even too conservative) for other technologies, including wind turbines and batteries. It is also unclear to what extent the target would apply to the components and materials used in the identified clean technologies. This is a crucial issue, because access to these components is often a major bottleneck for domestic manufacturing in Europe (Le Mouel and Poitiers, 2023). Instead of setting cleantech production targets, the EU would better focus on facilitating private sector investment in cleantech by providing the right enabling framework conditions. That is the only course of action that might ultimately secure Europe a competitive edge in cleantech manufacturing.

If the Global Gateway is to compete with the Belt and Road Initiative, it must go big, green, digital, and ethical. And it can prove it in Latin America  The European Union launched its Global Gateway initiative in December 2021, but its results have not yet matched the expectations it raised. If it is to compete with China’s Belt and Road Initiative (BRI), the Global Gateway must be bold, green, digital, and ethical. The digital alliance that the EU is setting up in Latin America and the Caribbean provides an opportunity for the EU to put its money where its mouth is.  On 14 March, the executive vice-president of the European Commission, Margrethe Vestager, and several ICT ministers from Latin America and the Caribbean established the EU – Latin America and Caribbean (EU-LAC) Digital Alliance – one of the European Commission’s initiatives launched in the framework of the Global Gateway programme. The alliance will focus on three pillars: investments in connectivity, aimed at closing the gap in internet access between the region and the EU, and within and between the countries of the region; cybersecurity, where despite the great progress made by the region, significant gaps remain that threaten citizens, businesses, and sovereign states alike; and digital rights, a field of enormous potential, as both regions share a human-centric approach to digital transformation. The project is of major strategic importance and potential for the EU. Russia’s invasion of Ukraine has given new prominence to the EU’s relationship with Latin America and the Caribbean. The region comprises 33 countries which are key to sustaining a rules-based multilateral order and whose votes China and Russia have courted in the United Nations General Assembly. There are also massive investment opportunities in the green and digital sectors in Latin America and the Caribbean, making it an important region in the EU’s search for strategic autonomy. However, relations between the two regions have gone through numerous ups and downs since leaders first spoke of a “strategic association” at an EU-LAC summit in Rio in 1999. In recent years, the EU financial crisis, the United States’ lack of interest in the region, and the covid-19 pandemic have allowed China and, to a lesser extent, Russia to expand their presence in the region: while EU trade with the region doubled between 2008 and 2018, China’s trade multiplied tenfold thanks to its strategic approach through the BRI, which has added to China’s already significant foreign direct investment flows and loans to the region. The EU is seeking to revitalise this relationship. But for the EU-LAC partnership to be successful, it is essential that these political agreements and declarations are accompanied by a meaningful investment agenda and package, as well as a clear roadmap for implementation. So far, the EU’s approach to the region has focused on programmes such as the Bella submarine cable connecting Europe and the region and the Copernicus Earth observation satellite system, which lack the scale to change perceptions of the EU. For its part, the Global Gateway programme is far from mobilising the €300 billion in investments initially announced, and the €3.5 billion  earmarked for investment in Latin America is insufficient to alter the strategic balance in a region where the required investment just for connectivity is estimated at $51 billion. The digital transition that the EU and the countries of the region want to promote could be the catalyst for a change of step in relations The digital transition that the EU and the countries of the region want to promote could be the catalyst for a change of step in relations. But for this to be feasible, certain conditions must be met. Firstly, if the Global Gateway is to be attractive for the region and effectively compete with the BRI, it must rebalance its geographical focus to pay more attention to the region. At present, 60 per cent of projects are focused on sub-Saharan Africa, while only 20 per cent are devoted to Latin America, and another 20 per cent to Asia. It should then focus more efforts on digital initiatives: currently, energy and green transition initiatives make up 80 per cent of projects, while digital initiatives account for 15 per cent and social initiatives for 5 per cent. The projects identified in the digital field are almost exclusively focused on connectivity issues, such as financing fibre, cable, satellite, and 5G investments. Closing connectivity gaps is urgent. Currently, over 35 per cent of Latin Americans still do not have access to a fixed broadband internet connection, and 20 per cent do not have mobile broadband access  – twice the average for OECD countries – concentrated in the lowest income quintile and rural and remote areas. However, the digital agenda in 2023 must be one of transformation, not just connectivity. It should therefore include issues such as cybersecurity, the digitisation of public administrations and services (including health, migration, justice, and taxation), training and education in key skills, the regulation of artificial intelligence, and data governance. Alongside the deployment of 5G and investment in digital, technical, and soft skills, this would bring the financing requirements for the region closer to $300 billion, which is 3 per cent of regional GDP. To address these geographical and thematic imbalances, the region therefore requires a more intensive European investment plan. The Global Gateway envisages mobilising private financial resources by setting up co-financing mechanisms from development banks, in particular the European Investment Bank, the CAF bank, Central American Bank for Economic Integration, and the Inter-American Development Bank. Despite the current meagre projections, it should be possible to mobilise the funding. After all, the EU is the leading foreign direct investor in Latin America, its telecom companies are global players, it plays a pioneering role in digitalisation in banking, insurance, infrastructure, energy, public services, industry, agriculture, and mining, and it holds first-class cybersecurity and hybrid threats capabilities. The launch of the digital alliance is expected to be accompanied by a business meeting of key Euro-Latin American companies, which, if confirmed at high-level, is a promising sign.   The EU’s digital agenda is attractive to third parties compared to China’s BRI because it includes green, social, and ethical components, making it an ally of the green transition, not a competitor. Many of its initiatives contribute to both digital and green goals, including the development of the ‘internet of things’ for the design of smart cities, the use of big data and cloud data to monitor the temperature of the oceans, and artificial intelligence applied to the protection of biodiversity. Europe’s rights-based, human-centric approach to digitalisation should also appeal to Latin America and the Caribbean. The region is seeking to align its approach with that of the EU, with a special focus on social, gender, and territorial inequalities and inclusiveness, which are not Chinese priorities. The cost of these inequalities is huge: achieving full gender parity in Latin America would expand the region’s GDP by $2.6 trillion – the equivalent of Brazil’s economy. Closing the internet access gap and investing in skills will help reduce these inequalities in the region, especially among women and in rural areas, and help younger generations. The Global Gateway has been criticised for over-promising and under-delivering. The EU-LAC Digital Alliance offers an opportunity for the EU to show the worth of the Global Gateway and demonstrate that it can offer an alternative to the Chinese Digital Silk Road.

The war in Ukraine accelerated a global energy crisis just as the world was beginning to recover from the Covid-19 pandemic. Venezuela has the largest crude oil and the eighth largest gas reserves in the world and can therefore offer an alternative for Europe to replace its fossil fuels imports from Russia. The problem is, of course, that EU–Venezuela relations have been in a sorry state since the EU denounced President Nicolás Maduro’s re-election in 2018 as neither free nor fair. Since then, the EU has adopted targeted sanctions against the Venezuelan government, thus adding to the maximum economic pressure that former US President Donald Trump imposed on Caracas in an attempt to fatally weaken Maduro. This approach has yielded no result in that respect, and the war in Ukraine, and its energy security implications for the EU, creates the occasion for a revision of EU and US strategies. The hope is that a “more carrots, less sticks” approach could convince Maduro to engage in meaningful dialogue with the opposition. The EU must seize this opportunity of rapprochement and readiness and push forward the recommendations put forth in its electoral observation mission’s report of 2021, reconcile internal disputes to focus on the big picture, give momentum to dialogue efforts, consolidate support among regional allies and rekindle its efforts towards humanitarian relief.A failed pressure strategyVenezuela used to be among the most prosperous countries in Latin America, but is now home to one of the largest external displacement crises in the world next to Syria and Ukraine, according to the United Nations High Commissioner for Refugees. When he came into power in 2013, President Maduro inherited from his predecessor Hugo Chávez a country in economic turmoil, high in debt and on an increasingly authoritarian track. The slump in oil prices in 2014 added fuel to the fire, prompting a wave of unrest to which Maduro responded with repression. He then tried to replace the democratically elected National Assembly, which had an opposition majority, with a loyalist Constituent Assembly in 2017. But it was after the 2018 presidential election, when Maduro secured a second term in what are widely considered rigged elections, that Venezuela descended into a full-blown political crisis. Juan Guaidó, speaker of the National Assembly, used a constitutional clause to declare himself interim president until new elections could be held, backed by more than 60 countries worldwide. In the following years, various negotiations attempts between Maduro and the opposition failed to solve the country’s political dispute, prompting fatigue in the opposition ranks while eventually consolidating Maduro’s authoritarian grip. As the political crisis unfolded, the EU and the United States responded with sanctions against the Maduro regime, although with different goals. The Trump administration pursued regime change through a maximum pressure strategy. Instead, the EU combined targeted restrictive measures with humanitarian aid and support for dialogue and mediation efforts. EU efforts have been hampered by: internal divergences, especially on the recognition of Guaidó as interim president; multipolar competition and the perceived excessive proximity with the United States; and regional fragmentation and polarisation. Sanctions have failed to produce substantial change as Russia and China, and to some degree Iran and Turkey, have continued trade (including in oil) and strengthened economic ties with the Maduro regimeHow has the EU mitigated constraining factors on its policy?There have been two issues over which the EU struggled, even failed, to reach consensus. The first was the recognition of Guaidó as interim president. While most member states eventually did so, Italy and Cyprus dragged their feet, until the issue became irrelevant in early 2021 when the term of the National Assembly of which Guaidó was speaker expired. EU divergences stemmed from the political composition of member state governments and their view of the EU’s role in the world. Left-leaning governments in the EU tended to frame the recognition of Guaidó as a US-led, “interventionist” initiative, while right-leaning governments advocated a confrontational approach to Maduro, including through the recognition of Guaidó. It was a missed opportunity to show EU unity and put the spotlight on the EU’s difficulty to reach agreement over its foreign policy. Second, internal disagreements within EU institutions and member states revolved around the opportunity to send an electoral observation mission to local and regional elections in November 2021, out of fear that this could whitewash the Maduro regime. The mission eventually garnered enough support to be deployed and was later largely perceived as a success by EU member states. The EU electoral observation mission (EOM) produced a report with recommendations that have become the benchmark for the conditions for a free and fair election in the agenda of the Mexico-based talks between the government and the opposition. The region’s fragmented and polarised approach to the Venezuelan crisis has been another factor hampering EU efforts. Trump’s push for regime change, embraced by most Latin American countries led by right-wing governments in 2019–20 (crystallised by the creation of the so-called Lima Group) exacerbated geopolitical tensions in the region. The EU-backed creation of the International Contact Group (ICG) in 2019, which aimed to promote dialogue but did not bear fruit because it coincided with the recognition of Guaidó and the EU's rapprochement with the Lima Group. Regional polarisation was epitomised by the appointment of a Guaidó representative in the Organization of American States, despite Maduro’s decision to withdraw from the pan-American body, and the prolonged stalemate in the Community of Latin American and Caribbean states (CELAC). The EU was dragged into a polarisation spiral where its policies were associated with those of the Trump administration, even though they had different objectives. Besides, Trump’s policy of maximum pressure as an instrument for democratisation proven ineffective in a context of geopolitical competition with China and Russia. Their support for the Maduro regime allowed it to survive, even though at the cost of the country’s descent into economic disaster. Russia in particular also invested political capital by participating in the Mexico talks as the government’s accompanying country.A changed scenario, a new strategy?President Biden’s election and Latin America’s shift towards the left created openings for a more constructive international engagement with Venezuela, which have further widened after the outbreak of the Ukraine war, providing the EU with a new set of foreign policy options. The EU and the US, together with Canada and the United Kingdom, have signalled a willingness to agree to conditional sanctions relief. The Biden administration has permitted American oil company Chevron to resume limited oil operations in Venezuela in exchange for an agreement by Maduro and the opposition to continue dialogue after a year of stalemate. The talks have made no progress other than an agreement to turn up to 3 billion US dollars of frozen government fund into aid to be distributed by the UN and the International Red Cross to alleviate the domestic humanitarian predicament. Although a more concessions-based foreign policy towards Venezuela may not lead to the regime change some have hoped for, it could still make Maduro willing to allow for fairly free and democratic elections in 2024, when his second term comes to an end. However, it is clear that the humanitarian crisis will not be over shortly, and the implementation of the 2022 agreement between government and opposition is proceeding slowly. Increased EU humanitarian aid could help promote goodwill in Venezuela and in the region, and thus is not solely to be considered an altruistic gift, but an important part of the EU’s foreign policy arsenal. Finally, Venezuela and the broader region of Latin America and the Caribbean is not only important due to its natural resources, but an important political partner for the EU in its bid to defend a rule-based global order. This has become ever more evident since the war on Ukraine, which has seen some Latin American countries refusing to pick sides. Over the last few years the political landscape in Latin America changed with the election of leftist presidents in almost all countries in the region, with interest in seeking a negotiated response to the crisis in Venezuela. The International Conference on Venezuela convened by Colombian President Gustavo Petro in Bogotá in April 2023 is an illustration of the region’s renewed engagement on the issue. The upcoming EU–CELAC summit in July, the first in eight years, is an opportunity to engage with regional partners to foster political cooperation on global and regional issues, including Venezuela. The EU’s pragmatic rapprochement with Venezuela offers the prospect for some progress in the negotiations between government and opposition, but it should not be perceived as a relegation of EU’s commitment to democratic norms. The EU should not waste the opportunity to step up its diplomatic engagement with the region and coordination with the US and like-minded countries to ensure that Maduro concedes a real level playing field for the 2024 elections while at the same time pursuing its strategic goal of diversifying energy supplies. This article is brief published under JOINT, a project which has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 959143.

The Russian financial sector has taken a double hit from sanctions – both in infrastructure (affecting financial transactions) and in technology (affecting the hardware and software). Infrastructural sanctions imposed by Western countries in reponse to the war on Ukraine (de-SWIFTing, overcompliance, and breaking of correspondent relationships) affected their operational activity. Moreover, the Russian government banned the use of foreign software and equipment imports, which has been a drag on business development. The financial sector was able to withstand the first shock. However, the most recent restrictions on access to advanced technologies, especially from the US and the EU, will lead to import substitution based on technologies of yesterday.  - Since the war began, every second Russian company has lost tech support and access to cutting-edge technology. - Import substitution leaves tech companies scrambling for what they can get, not what they actually want or need, and stunts business development. - The financial sector is shifting from creating innovations to ensuring technological security and supporting current operations. Following Russia’s invasion of Ukraine, a coalition of Western countries led by the European Union and the United States imposed a large array of sanctions. Since then, the Russian financial sector has taken a double hit, namely sanctions on the infrastructure, affecting financial transactions, and on the technology, like software and hardware, it needs to operate. Infrastructure sanctions restrict banks’ ability to make payments (disconnection from the SWIFT global payments system and overcompliance). Technology sanctions create hindrances to technical upgrades and innovation. Before the war in Ukraine, the Russian financial sector was a world leader: it was third in financial technology penetration, in the top 10 in digital banking development, and fourth in the transition to cashless payments during the pandemic. Since Russia’s invasion of Ukraine and the imposition of sanctions in 2022, it has lost this competitive position.   The sanctions against Russia’s financial sector have largely isolated Russia from access to the global financial system. Inside Russia, however, only a small fraction of Russians have felt these restrictions. Russian payment infrastructure was and remains resilient primarily due to the financial messaging system (SPFS), the Russian equivalent of SWIFT, which was developed in 2014 and through which banks are required to exchange data within Russia. In 2022, traffic in the system increased by 22 percent. There are currently 469 participants, including 115 non-Russian banks from 14 countries. Among the foreign countries, banks in Belarus, Armenia, Kazakhstan, Kyrgyzstan and Switzerland are connected to the system. Due to the risk of new sanctions, Russia’s central bank does not disclose detailed statistics. Direct messaging channels allow for direct international transactions with those banks connected to the SPFS, including those bypassing SWIFT. Minimizing the damage of sanctions that target Russia’s financial sector infrastructure is considerably more difficult. Former partners, even in friendly jurisdictions like some post-Soviet countries, have been slow to help Russia with system-level transactions. It will take considerable time to build new payment infrastructure channels, as the technological constraints are much more difficult. The lack of access to modern technology keeps banks’ IT systems in their current state and impedes fintech development and innovation. Pain and Risk About 85 percent of software used in the Russian financial sector is produced abroad. For hardware, the situation is even worse. Only large-scale assembly takes place in Russia. For this reason, the departure of companies that ensure the viability of the financial sector has been particularly painful for the financial sector - companies like Oracle, SAP, Cisco, IBM, Intel, AMD, Diebold Nixdorf and NCR (ATMs). Every second Russian company was left without technical support after the war began. For Russian banks, it was impossible to quickly switch to domestic solutions, as the right quality and scale were simply not available on the market. Virtually all operations of a modern financial institution, from client services to internal operations, are heavily dependent on the smooth operation of software and equipment. This makes the financial system particularly vulnerable on the technological side. Banks and non-financial institutions may face operational risks due to the lack of servers and software. This could make systems more vulnerable to cyber-attacks, raise the risk of technical failures due to a shortage of equipment and maintenance specialists, and require failing equipment to be replaced with either used Western-made products or Chinese analogues. The Bank of Russia, which supervises the financial sector, pointed out these risks for the first time almost a year after the invasion. Import Substitution Software The withdrawal of foreign companies has left the Russian financial sector with a huge gap in software and services. Also, in October 2022, the government banned Russian banks from using foreign software, a rule that applies even if there are no domestic equivalents. This has forced critical information infrastructure facilities to urgently seek domestic solutions. The combination of these two factors has given a boost to software development in Russia. Thus, according to Ilya Sivtsev, CEO of Astra (developer of operating systems and PostgreSQL database management system (DBMS) based on open source code), the company’s revenue in 2022 doubled to over RUB 6.5 billion (USD 65 million) and the share of its revenues from the financial sector increased from 4 to 22 percent. Astra’s outlook for 2023 is for double-digit growth.  Astra’s figures generally reflect the situation in the Russian IT market in 2022: there was rapid growth due to the departure of foreign competitors. As Deputy Prime Minister Dmitry Chernyshenko, who oversees the industry, reported, IT firms in 2022 grew revenues by 35 percent and earned RUB 2.38 trillion (USD 27 billion). Despite the reduced presence of foreign companies, turnover in the Russian IT market has grown. Switching to Russian software instead of foreign software may not be the most significant challenge, but it is an expense that businesses could have invested in furthering business growth. With all the advantages of the Russian DBMS, migration from the US-made Oracle software may lead to performance degradation of 30-50 percent. This is a serious limitation for the financial sector, whose mission-critical core system (processing, the core of an automated banking system) requires high-speed interaction with databases. The banking applications must also be transferred to the new DBMS. In addition, information security risks that could jeopardize the stability of the financial system have increased. The massive migration to new IT solutions reduces the cybersecurity of the entire system. The growth of the Russian software market is limited by two factors: the Russian government’s permission for companies to use unlicensed foreign software and the country’s own borders. Before the war, Russian IT companies were rather active on the markets of neighboring countries, providing various services (e.g. 1, 2, 3 )–from the integration of IT systems and products to the provision of services to companies and private customers. Russian solutions were often cheaper and technical support in Russian was an important advantage in the regional Commonwealth of Independent States (CIS) market. And while Russian companies were also looking to expand abroad before the war, they will now have to compete there with Western companies that have left the Russian market and whose technological development is not restricted by sanctions. The relationship between customers and integrators running programs to implement products from different vendors has also changed. The customers say, “I want it like SAP, but faster and better,” while the integrators say, “My offer is limited, so take what I have or you will run out too.” In other words, customers have to accept a downgrade in software and hardware capacity for certain technologies. Import Substitution and Hardware Because it was not profitable, the equipment needed for  assembly in Russia is not produced in the country. Until 2022, only large-scale assembly from imported components was carried out in Russia. And the financial sector is not the only one waiting for servers, storage systems, controllers and components – industry, the public sector and retailers are also in line. In their search for equipment, Russian companies have turned to parallel imports, obtaining what they need from countries that have not imposed sanctions. They have also acquiesced to lower requirements for equipment quality and delivery deadlines. However, there are no systemic solutions or supply lines yet. Right at the beginning of the conflict, the US applied the Foreign Direct Product Rule (FDPR) mechanism to Russia. The FDPR prohibits exports to sanctioned countries of equipment that US companies were involved in developing or manufacturing – thus it affects companies outside the US in so-called third countries. This mechanism is primarily aimed at keeping the defense industry from importing technology. However, civilian products that can be classified as “dual-use” (military and civilian) are also largely subject to the restrictions – including the kinds of equipment needed by the financial sector. That has made systematic and large-scale purchases much more difficult. Third countries are willing to restrict technology exports to Russia, and the US is constantly updating its sanctions lists to include intermediaries. Nevertheless, loopholes in sanctions frameworks and delays in sanctions decisions allow Russia more room to adjust, finding new partners in Asia or new ways to bring hardware to Russia. Chinese partners, for example, support Russian companies not only with equipment but also with chips. Shipments of microchips and other semiconductors from China to Russia  are 2.5 times higher than than pre-war level; China now accounts for more than 50 percent of semiconductor imports to Russia. By the end of 2022, China supplied 40 percent of Russia’s imports and purchased 30 percent of its exports, and the RMB had become the only (albeit less convenient due to its incomplete convertibility) alternative to the euro and dollar for Russia’s international payments. In 2022, trade turnover between the two countries reached an astronomical USD190 billion, and it is quite likely that within these imports are sanctioned goods that Russia desperately needs. Reports that China is helping Russia circumvent sanctions, especially in the technology sector, are mounting. The Russian IT sector’s focus on Chinese suppliers and their products – from servers and data center equipment to bulk purchases of consumer electronics – reflects Moscow’s growing and asymmetrical dependence on Beijing. For second- and third-tier Chinese companies, this opens up opportunities to enter the Russian market. For example, Sber, Russia’s largest bank, is testing its own custom-made laptops. Sber’s partner, the Chinese company Shanghai IP3 Information Technology, is a contract manufacturer that takes orders for electronic devices and commissions them from Chinese production facilities. Whereas before the war Russian companies were free to choose their equipment and electronics suppliers, taking advantage of the wide supply on the market to obtain favorable prices, the choice has now narrowed to Chinese manufacturers. The lack of alternatives also forces them to accept less attractive terms. Innovation Inhibited The sanctions bottleneck in both hardware and software is shifting the focus of IT specialists in the Russian financial sector from creating innovations to ensuring technological security and supporting current operations. The most prominent example is the introduction of payment stickers for Russians who can no longer make contactless payments with their smartphones. A payment sticker has an embedded near-field communications (NFC) chip that exchanges data with a payment device. In other words, it is a bank card chip stuck onto an iPhone, as iPhone owners are considered to be the highest-paying target group, and banks have a vested interest in maintaining the usual number and volume of card transactions. Android smartphone owners will still have the option of making contactless payments via a MirPay wallet linked to their domestic payment system card. Frank RG, the Russian financial information publication, estimates that 12 of Russia’s 25 largest banks already offer stickers to their customers. Tinkoff, the leader in innovative banking, plans to issue over 1 million stickers by July 2023. At state-owned Sberbank, over 100 000 people applied for stickers within three hours of their offering. Issuing stickers is more expensive for the bank than standard payment card issuance, bankers acknowledge. Russian financial institutions have become so similar to IT companies that they are almost indistinguishable. Sberbank alone employs 38,000 IT specialists, Sberbank President Herman Gref reported to Vladimir Putin in March 2023. Besides the purely financial challenges, such as ensuring the sustainability of the payment infrastructure, the financial sector needs to work with the IT industry on providing non-sanctioned hardware and software, finding indigenous solutions to replace Western ones, and localizing instead of scaling up. An important but not decisive obstacle to innovation is the mass exodus of IT professionals. Competition for the remaining specialists is fierce and will only increase. The government is making gigantic efforts to keep the remaining skilled workers in the country. The slowness in changing the taxation of departing Russians seems partly related to the fear that most foreign IT professionals who continue to work in Russia will no longer do so. Prospects for the Financial Sector The Russian financial sector’s resilience to sanctions on its financial infrastructure has been limited to Russian territory. The sanctions have largely isolated Russia from the international financial infrastructure. Russia’s demand to allow banks to use SWIFT (e.g. under the Grains Agreement) is a clear indication of this. Technological restrictions and the withdrawal of Western companies from the Russian market may seem less painful at first glance, but this is not the case. Their impact is longer-term: declining quality of hardware and software, forced investment at IT, cybersecurity, and operational risks. And while infrastructural constraints have had only a temporary impact on the ability of the financial sector to operate smoothly, technological constraints have significantly limited its potential for growth and development. The Russian financial sector’s dependence on foreign, especially Western, software and hardware manufacturers is high. This poses a significant risk to Russia’s financial stability, especially if Western countries tighten sanctions against the Russian IT sector.

Annotation        The systems of aggregation of demand for natural gas and its joint purchases in the EU are considered from the point of view of the impact on contractual relations in the international trade of natural gas, an assessment of their impact on regional and global energy supply is given KeywordsEuropean Union, AggregateEU, Russia, global climate change, anti-Russian sanctions, energy-intensive industries, international law, gas supply, LNG  In the modern world, various natural disasters occur almost weekly, primarily due to the consequences of global climate change. At the same time, their negative impact on the world economy will gradually increase in the future. This objectively worsens the economic and financial situation of the States directly affected to varying degrees, and in many cases the socio-economic situation there also deteriorates. Since the modern world economy predetermines the high interdependence of states, the constant accumulation of negative factors begins to have a negative impact on all participants in international economic relations.The deterioration of the economic and social situation also leads to political instability. At the same time, political events are increasingly taking place, the appearance of which previously seemed simply incredible - for example, the intention to reunite the Orkney Islands with Norway or the solution to the problem of hunger in Africa based on the intensification of abortion.The current stage of development of regional gas markets is characterized by certain features. The specificity of the situation in the gas supply of the European market is a significant fragmentation of parts of broken supply chains, the creation and improvement of which has been spent for more than 50 years.At the same time, political forces interfere in the most complex mechanisms for the formation and implementation of contractual relations between suppliers and consumers of gas, which do not sufficiently take into account the specifics of gas as an energy carrier and a commodity of international trade. If we add to this the numerous bureaucratic innovations of the European Commission, then the subjects of the EU gas market objectively cannot form guidelines for their long-term development, and this, in turn, negatively affects long-term investments.This is critically important, since gas trade is characterized by the need for huge and long-term capital investments, primarily for its transportation and storage. At the same time, hopes pinned on a regional energy transition with a corresponding reduction in hydrocarbon fuels are not justified even in the short term.Both the efficiency of the functioning of the national economy and the reliability of energy supply to consumers based on renewable energy sources are doubtful. All this is happening in the context of aggravating negative problems in the development of the world economy, a high probability of unexpected political events, and a deteriorating state of the environment.As for the expected decline in prices for energy products supplied from Russia under the influence of sanctions, it turned out that they, first of all, changed the structure of oil and gas imports to the European Union, as a result of which prices for them objectively began to rise.Economic practice has shown the futility of using anti-Russian sanctions for these purposes. In addition, anti-Russian sanctions in the context of the destruction of the system of international law objectively led to the destruction of the system of long-term contracts and, consequently, to an additional increase in prices.In April 2023, the EU bureaucracy finally began to gradually formalize the cartel principles of relations between regional buyers of natural gas and its sellers. It is obvious that the main goal of the proposed aggregate demand and joint purchases of natural gas is, first of all, the formation of a coordinated negotiating position to put pressure on gas suppliers in order to reduce prices.  In addition, the interest in expanding gas imports using the new principles implicitly confirms the recognition of the fact that the idea of focusing on the widespread use of green electricity is increasingly becoming questionable.By proposing a new form of preparation and conclusion of gas contracts (AggregateEU), the EU bureaucracy presents it as a means of increasing the transparency of transactions and forming new forms of cooperation (Regulation 2022/2576), as well as an important means of increasing the level of security of consumer security (Regulation 2022/1032). This highlights the particular benefits of aggregation for small companies or companies from landlocked countries (i.e., those with no potential access to LNG). However, in modern contracts for the purchase and sale of gas, everything is very obvious.  As for the development of new forms of cooperation, in gas supply, the aggregation of demand will further complicate the problem of contractual distribution of responsibilities of the parties.It should be noted that the mandatory aggregation of demand applies only to 15% of the volume of gas storage facilities of the EU member states, including those that do not have them on their territory. Surprisingly, gas storage facilities, the main purpose of which is to secure the gas pipeline network in conditions of peak levels of daily gas withdrawal (usually winter), are perceived by the European Commission as ordinary storage tanks (Regulation 2017/1938).Meanwhile, with regard to gas supply, now the second, summer peak of energy consumption has finally formed in the region. This means that with sharp fluctuations in weather conditions characteristic of modern climate change, their extremely negative consequences are possible both in winter and in summer. It will now be almost impossible to resist them, since for many consumer countries, a reliable and large-scale source of energy - pipeline gas from Russia - has been largely lost.It is important to note that a characteristic feature of the above-mentioned documents is the possibility of multivariate interpretation of their articles by buyers, which means in the future the uncertainty of their potential contractual obligations and, accordingly, the orientation of gas exporters mainly to spot supplies.That is why economic practice shows that the most far-sighted importers of natural gas in the EU countries are not going to lose a reliable and profitable source of gas supply, which based on the existing long-term trade and economic ties. Thus, in July 2023, the Austrian oil and gas company “OMV” confirmed its intention to continue purchasing natural gas from Russia on a long-term basis, and Spain became the European leader in the import of Russian LNG.Naturally, the energy-intensive industries of those EU countries that have lost access to reliable and cheap supplies of natural gas from Russia have finally lost their competitive advantages.Thus, the ideas of the European Commission on reforming the regional natural gas market on the basis of aggregate demand and joint purchases can be relatively successfully implemented only in terms of spot supplies. Moreover, LNG exporters, for whom the market of China and other rapidly developing Asian countries is more attractive in terms of volumes and prices, as well as in terms of stable long-term prospects for gas consumption growth, are likely to avoid direct contracts with buyers from Europe, preferring intermediaries. And this, naturally, will lead to an additional increase in regional prices.It is obvious that in order to really improve the situation with gas and energy supply to the EU countries, it is not bureaucratic exercises in the field of export-import operations that are required, but the integration of main gas pipelines with the subsequent creation of a unified gas supply system for the region.As for the global natural gas market, the impact of European "innovations" on it will be insignificant. It is obvious that the majority of modern politicians in the European Union are not sufficiently aware of the peculiarities and scale of changes in the global and regional economy. As before, external threats seem more dangerous to them in comparison with accumulating internal ones.However, it is the deterioration of the regional economic situation in the foreseeable future that will lead to the loss of effective access by the EU countries to global export flows of natural gas.  

How can the European Union achieve its target of eliminating all Russian fossil-fuel imports by 2027?Executive summary The European Union has committed to eliminate all Russian fossil-fuel imports by 2027. Progress has been made, with sanctions on oil and coal already introduced. The glaring exception is natural gas, on which the EU has so far refrained from imposing limitations, owing to greater dependence on Russia. Nevertheless, pipeline gas imports have fallen by four-fifths following Russia’s weaponisation of gas supplies. However, Russia’s exports of liquified natural gas (LNG) to the EU have increased since the invasion of Ukraine. The EU needs a coherent strategy for these LNG imports. Our analysis shows that the EU can manage without Russian LNG. Anticipated impacts are not comparable to those felt in 2022 as Russian pipeline gas dried up. The regional impact would be most significant for the Iberian Peninsula, which has the highest share of Russian LNG in total gas supply. Meanwhile, the global LNG market is tight, and we anticipate that Russia would find new buyers for cargos that no longer enter Europe. We discuss the options available to the EU. Wait-and-see implies delaying any action until 2027, while soft sanctions would discourage additional purchases but not break long-term contracts. We argue instead for an EU embargo on Russian LNG, to reduce exposure to an unreliable and adversarial entity, and to limit the extent to which EU consumers fund the Russian state. The embargo may be designed to allow purchases only if they are coordinated via the EU’s Energy Platform, with limited volumes and below market prices. This could be accompanied by the implementation of a price cap on Russian LNG cargos that use EU or G7 trans-shipment, insurance or shipping services.  1 Introduction The European Union has a target of eliminating all Russian fossil-fuel imports by 2027. Swift progress has been made, aided by Russia’s own decision to decrease natural gas pipeline exports to the EU. However, the EU’s liquefied natural gas imports from Russia have remained remarkably stable. Discussions are ongoing about adding Russian LNG to the list of products banned from import to the EU (Table 1).  Throughout 2022, Russia cut natural gas pipeline exports to the EU steadily, but did not reduce exports of LNG, which had been much smaller in volume. In the year after Russia’s invasion of Ukraine, LNG exports to the EU were valued at €12 billion. Unless there is decisive change from the current situation, the EU could pay up to another €9 billion to Russia in the second year of the war (Demertzis and McWilliams,2023).   Accordingly, in March 2023, the European Union said it had started to develop a mechanism to allow member states to block Russian LNG imports. This would be done by granting permission to EU countries to block Russian companies from booking LNG import infrastructure. This is a similar approach to when Russian companies were prevented from booking gas-storage capacity in the EU that they were then intentionally leaving empty. At time of writing, this proposal is not finalised, and it is unclear how it would affect non-Russian companies that wish to book import capacity for the purpose of importing Russian-origin LNG.  In this context, we outline four different options available to the EU. In the first, ‘wait-and-see’, the EU would continue to import Russian LNG and would wait to introduce sanctions until the second half of this decade, when LNG markets are less tight. The second approach, ‘soft sanctions’, would entail a partial effort to reduce imports of Russian LNG without dramatically impacting long-term contracts that form the basis of much EU-Russia LNG trade. Under a full ‘EU embargo’ scenario, sanctions on Russian LNG would force companies to declare force majeure on long-term contracts and no Russian LNG would enter the EU. A fourth approach, ‘EU embargo with EU Energy Platform offer’, would see the bloc tear up the existing trade structure and return to the table as one entity to negotiate. This could be done through the new EU Energy Platform for joint purchasing of gas, which might make offers to purchase limited volumes of Russian LNG, which would be phased out over time, depending on the situation in Ukraine. This approach could be complemented by the introduction of a price cap on Russian LNG imports that rely on EU or G7 services, including trans-shipments, vessels and shipping insurance. To assess the options, we begin by providing an overview of the growing role LNG (including from Russia) plays in Europe’s gas mix. We assess the impacts on the EU of an end to Russian LNG imports, by evaluating quantitatively the impact on gas balances and storage, to identify whether the EU would manage without Russian LNG. In investigating the impacts on Russia, we discuss the nature of LNG exports from Russia to the EU, which are characterised by long-term contracts and the multi-nationally owned Yamal liquefication plant. Finally, we discuss the impacts of the options available to the EU on global LNG markets and Russia.  2 The growing importance of LNG Increased LNG imports, alongside domestic demand reduction, prevented the European Union from running out of natural gas during the peak of the energy crisis in 2022. Together, these measures enabled a remarkably smooth transition away from the EU’s historically largest supplier – Russia. Russian pipeline exports made up about 40 percent of the EU’s total gas supply prior to the invasion of Ukraine, but today account for less than 10 percent. In the year from 1 April 2022 to 31 March 2023, the EU imported 950 terawatt hours (TWh) less of Russian pipeline gas than in the previous 12-month period. The EU made up for the shortfall by boosting imports from other sources and reducing demand (Figure 1).   In 2022, the EU’s imports of LNG increased 66 percent year-on-year. The largest proportion of this growth came from the United States, while Russia is currently the second largest provider of LNG to the EU, though far behind the US. In the first quarter of 2023, Russian LNG exports to the EU were 51 TWh, accounting for 16 percent of LNG supply and 7 percent of total natural gas imports. The largest share of Russian LNG is imported through Spanish ports, while Belgian, Dutch and French ports account for most of the remaining volumes. We consider the Iberian Peninsula separately from the rest of the EU for our subsequent analysis because of the region’s relatively high dependence on LNG and because of the limited connections between the Peninsula and the wider European gas market. In the first quarter of 2023, the Iberian Peninsula imported 17 TWh of Russian LNG, or one quarter of total LNG supply and 20 percent of total natural gas imports to Spain and Portugal. Figure 2 plots EU LNG imports by supplier. The left panel shows the EU without Spain and Portugal and the right panel shows the Iberian Peninsula separately.   The nature of LNG imports means they pass through ports before distribution throughout the wider European gas grid. A country’s LNG imports do not necessarily remain there but may transit on to neighbouring countries. Contractual information on these flows is not publicly available, but we have estimated the relative importance of Russian LNG by country. Figure 3 shows these results for winter 2022-2023. According to our accounting basis, Russian LNG made up 18 percent of Spanish gas supply, 15 percent of French supply and 10 percent of Belgian supply.  Figure 3: Estimated shares of total gas supply to Russian LNG, winter 2022-23    3 EU gas balances without Russian LNG In the EU embargo scenario, all Russian LNG would stop flowing to the EU. This might also be the case in the EU Energy Platform offer scenario, and might happen irrespective of EU decisions if Russia chooses to block exports. We therefore assess the impact of an immediate halt to Russian LNG supplies by modelling the evolution of EU gas balances and storage, performing a separate analysis for the Iberian Peninsula and the rest of the EU (EU25). Scenarios begin with actual gas storage of 746 TWh in the EU25 and 36 TWh on the Iberian Peninsula as of 1 June 2023. We make assumptions about natural gas imports, with and without Russian LNG, based on the most recent flows (see Annex 2). In our baseline scenario, demand reduction would continue to be 15 percent below the five-year average. This is in line with the March 2023 Council of the EU agreement to maintain a 15 percent demand reduction target until March 2024, and recent observations of actual demand reductions (McWilliams and Zachmann, 2023). Figures 4 and 5 show our results.   Figure 4 shows that the EU25 will be well able to fill storage facilities over the summer months without any Russian LNG, with the only consequence being a slight postponement of the moment when storage reaches full capacity. While stored volumes will deplete at a marginally faster rate, the EU25 will also not face a substantial additional challenge to manage the winter of 2023-24.  It is notable that under both scenarios, storage would reach maximum capacity before winter months start to see draws on storage. The EU would be able to prepare better for winter 2023-24 if it had greater storage capacity. One area for exploration in this respect is the extent to which gas storage sites in western Ukraine could be used for storing excess gas that would benefit both the EU (largely eastern regions) and Ukraine.   For the Iberian Peninsula we assess three scenarios. Again, all scenarios assume that the 15 percent demand reduction target is met. In scenario A, all imports remain the same as they have in the past months (including Russian LNG), and the draining of gas storage facilities over the winter would be at typical levels, with the Peninsula comfortably managing. In scenario B, all Russian LNG flows would be halted and not replaced at all. In this scenario, storage facilities would run out by January.  We do not think scenario B is a serious possibility but include it for illustrative purposes only. In reality, Spain would replace lost Russian LNG cargos by purchasing on the global market. In scenario C, we show that this replacement rate would need to be 50 percent for the Peninsula to maintain reserves above 20 percent throughout winter, Spain should find alternative supply for one out of every two lost Russian cargos. We note also the possibility of increased pipeline imports from Algeria, although we do not include this in our scenarios because of ongoing diplomatic tensions. Therefore, while the EU25 would manage comfortably without Russian LNG, the situation on the Iberian Peninsula would depend on the ability to find alternative LNG supplies. As they are traded by sea, LNG cargos are somewhat fungible. If Russian LNG stops flowing to the EU, Russia will look to sell this LNG elsewhere at the same time as EU buyers look for alternative supply. In theory, the global market should rebalance with an additional layer of friction caused by less efficient trade routes. This would be similar to the impact of the EU’s Russian crude oil embargo (McWilliams et al, 2022). One limitation less present in the oil market is the volume of LNG, which is contracted under long-term contracts with fixed destination clauses, limiting the ability of markets to rebalance. However, the EU’s experience over the winter of 2022-23 suggests there is substantial flexibility in the market. Higher prices in Europe were well able to bring in additional cargos. The return of the Freeport liquefication terminal in the US also provides a boost. A fire in June 2022 stopped operations at the terminal, which had accounted for 20 percent of the US LNG export capacity. The plant’s capacity of 200 TWh per year matches Russia’s total 2022 LNG to the EU. In May 2022, the last month before the fire, the plant shipped over half (10 TWh per month) of its cargo to the EU. We consider that the EU is likely to be able to find cargos to replace Russian ones.  4 Russian LNG exports without the EU In any scenario in which Russian LNG stops flowing to the EU, the impacts on global markets and Russian revenues will depend on Russia’s ability to redirect cargos. If Russia is not able to redirect cargos, the extra demand from the EU in the market will have the effect of pushing up global LNG prices in a competition for a temporarily tighter supplies of global LNG. In 2022, Russian LNG exports to the EU amounted to 197 TWh, or 44 percent of Russia’s total LNG exports. Exports to China accounted for a further 20 percent, and the rest of the world 36 percent. Figure 6 shows the evolution of these shares over the past three years.   Tight LNG markets mean that there is likely to be demand for Russian LNG, especially if it can be contracted at a discount to global prices. The experience of the EU’s crude oil embargo shows that Russia was able to find new buyers without difficulty as demand from the EU and G7 was withdrawn.  One peculiarity is the trade route a Russian LNG carrier must take. Much of the European LNG demand is served by LNG plants on the Yamal peninsula on the northwest Siberian coast. In summer months’ ships travel east to Asian markets where demand may be found for cargos no longer flowing to the EU. However, during the northern hemisphere winter – when LNG demand is typically higher – passing through the Arctic Circle is typically not possible. LNG carriers would have to embark on a substantially longer route via the Suez Canal, with higher costs. This route also involves trans-shipment via terminals in the EU, most notably Zeebrugge in Belgium (Figure 7) and the French terminal Montoir-de-Bretagne. Ships departing from Yamal unload LNG at Zeebrugge into storage or directly into different ships, in which it is then transported to Asian or other global markets. This trade is critical for smoothing year-round export from Yamal to Asian markets. Total volumes are significant, accounting for 12 percent of Yamal LNG exports in March 2022, and 38 percent of exports that were destined for Asian, Middle Eastern or South American markets. The trade is governed by a long-term contract that began in December 2019, allowing for up to 110 TWh per annum. The additional cost for Russia to re-direct cargos would depend on whether these services were still feasible in a scenario in which direct Russian LNG trade with the EU ends. Russia is also developing its own abilities for trans-shipment via domestic ports, including Murmansk.   BOX 1: Status of EU-Russian LNG trade  Exports to the EU from Russia mainly depart from the Yamal LNG terminal. The terminal has an export capacity of 16.5 million tonnes LNG per annum (235 TWh). The ownership of the terminal is a joint venture between Novatek (50.1 percent), Total Energies (20 percent), China National Petroleum Cooperation (20 percent) and the Silk Road Fund (9.9 percent). Over 90 percent of the exports from the Yamal terminal are covered by long-term contracts (Table 2). To attract this foreign investment into the Yamal LNG terminal, the Russian government provided a temporary exemption for exports from export duty and mineral extraction taxes. Firms that export from the terminal do pay a 34 percent tax on profits (Corbeau, 2023).)   The terms of these contracts are not publicly available, and therefore we do not have information on the prices paid for these LNG cargos. Typically, contracts will contain a weighted lag of regional or global natural gas pricing indicators. The exact terms of the contract are relevant for assessing the impact of sanctions, as they will determine the lost export revenues when compared to the ability of Russia or Novatek to resell unwanted cargos on the spot LNG market.   5 Options for the EU The EU’s target of phasing out Russian fossil-fuel imports by 2027 implies that long-term contracts will be interrupted before their end dates. Until they are interrupted, Russian LNG cargos cannot be considered a reliable component of the EU’s security of gas supply and the EU should work under the precautionary assumption that these flows might stop at any time. In the first scenario, wait-and-see, the EU would continue to turn a blind eye to Russian LNG imports. Global natural gas markets should be better balanced in the second half of the decade as a new wave of liquefication projects come online. As the EU approaches its 2027 deadline for ending Russian fossil-fuel imports, an embargo could be discussed. This option is a cautious one and refrains from testing tight global LNG markets. However, it implies that EU consumers continue to send billions of euros to Russia for LNG. A soft sanctions scenario, meanwhile, would discourage and ultimately prevent imports of spot LNG from Russia. It would also stop the renewal of expiring contracts and the signing of any new LNG contracts with Russia. At the same time, companies do have some flexibility over the volume of gas they import under long-term contracts, and could be encouraged to keep these volumes as low as possible. However, the scenario would not break the existing long-term contracts. Consequently, the EU would continue to import significant volumes of Russian LNG, while disruptions to the global market would be limited. This scenario is closest to our interpretation of the proposal that, at time of writing, has been put forward to the European Parliament, and which would prevent Russian companies from booking LNG-import capacities. A more significant move would be for the EU to explicitly sanction the import of Russian origin LNG (our EU embargo scenario). This would force importing companies to declare force majeure and exit existing long-term contracts. Consequently, the EU would cease to import Russian LNG and our analysis shows that the bloc would manage such a disruption. There would, however, be an impact on global LNG markets. The export of Russian LNG to the EU accounted in 2022 for a little over 3 percent of the total market, which would be the maximum supply shock. Any temporary increase in global prices would be determined largely by the ability of Russia to redirect cargos eastwards. An alternative approach, EU embargo with Energy Platform offer, might be facilitated by the EU’s new Energy Platform. The platform was initiated in April 2022 as a joint purchasing mechanism for the EU. In the first tender, 63 companies submitted requests for a total volume of 120 TWh of natural gas. The platform would be suitable as an EU vehicle to coordinate purchases of Russian LNG. After terminating existing long-term contracts with Yamal LNG, the EU as a bloc could then offer to purchase Russian LNG at a lower than market price, which may be revised, depending on the evolution of the situation in Ukraine.   This coordination mechanism would provide a pathway for the termination of long-term contracts that run post-2027, while smoothing any bumps to the gas market caused by the gradual phase-out of Russian LNG. It would also allow the platform mechanism to distribute volumes to areas of greatest need. There is no guarantee that Russia would wish to engage with such a strategy, and Russia might prefer to refuse any LNG exports to the EU. Russia’s compliance with the oil price cap, following an earlier declaration that it would be ignored, does however suggest cooperation may be forthcoming. Based on economic logic alone, geographical proximity implies that Russia should be willing to accept a discount on exports to the EU market. In any case, pursuing this fourth option must only be done on the basis that the EU is ready for a full termination. Beyond imports, the EU also faces a decision on the future of Russian LNG trans-shipment via EU ports. These trans-shipments are important for Yamal LNG to reach global markets, especially during winter months. Limiting these trans-shipments would be an even more aggressive step. It would increase the difficulty for Russia to re-route LNG cargos, but likely exacerbate global LNG tensions. The EU might consider a temporary tax or price limit on cargos using such trans-shipment facilities. In recent years, construction has been underway on two new terminals to facilitate trans-shipment in Russia. While trans-shipments are already taking place at the port of Murmansk in Russia, the exact capacity of the terminals and whether they are already able to replace all the volumes passing through Zeebrugge is not clear. It is possible that technology sanctions may have had an impact by delaying projects.  Such a strategy could be expanded into a full price cap on Russian LNG traded with third countries. In similar fashion to the trade in crude oil, EU and G7 members have significant control over the ownership and insurance of the ships used to transport Russian LNG. Between January and May 2023, all ships were insured by, and over 90 percent were owned by, companies resident in the EU or G7. One complication with imposing a price cap on LNG trade is that it is typically governed by long-term contracts with prices determined by a fixed formula. The price-cap mechanism therefore may not be appropriate for all Russian LNG exports but could be applied to exports from Yamal that may be sold on the spot market in a scenario in which an EU embargo puts an end to existing long-term contracts.  At the same time, the EU is yet to introduce sanctions on Russian pipeline gas imports and continues to import Russian gas by pipeline at roughly comparable volumes to LNG. These pipeline imports could be negotiated through the Energy Platform. Such a strategy would provide a European tool for exerting pressure on Russia, in the context of the EU’s ambition to develop strategic autonomy capabilities. The strategy has a clear aim of reducing dependency on an adversary and of phase this risk out gradually over time, while approaching the situation from a position of relative strength.  6 Conclusions LNG has become a crucial element of Europe’s security of energy supply. Flows from Russia have formed an important part of this for the past 18 months. However, the EU must now seriously assess whether this trade has a future. The possibility that Russia unilaterally blocks exports of LNG to the EU remains, and the EU must be prepared for such a risk. Moreover, the EU should consider sanctioning Russian LNG. Continuing the trade implies that European consumers will continue to send money directly to Russia and will remain dependent on an unreliable entity. Our analysis has shown that the EU would manage without Russian LNG. Impacts over the summer months should be very limited, while winter months may see marginal price increases. The extent of these price increases depends on the overall tightness of the global LNG market, which determines the premium EU markets must pay to attract flexible LNG cargos. The impact of an end to Russian LNG would not be comparable to the shocks caused by the drop in Russian pipeline gas flows in 2022. Meanwhile, Russia is likely to be able to re-route a large share of its LNG cargos. In the short run, there may be frictions in finding new buyers, especially during winter months, depending on the situation regarding trans-shipments in Europe. Ultimately, new buyers will step in for LNG cargos, as shown by the shift in Russia’s oil trade. The introduction of a price cap for access to EU or G7 controlled trans-shipment facilities, vessels and shipping insurance would increase the difficulties for Russia in re-routing. Nonetheless, the volume of the trade implies that sanctions will not have the same impact as the oil embargo and price cap in terms of reduced revenues for Russia. Given that the EU will be able to manage the shock, and that a scenario of inaction or limited sanctions implies that EU consumers will continue to fund the Russian state, and by extension the Russian war effort, we argue that the EU should bring forward a full embargo on Russian LNG. An embargo would also reduce exposure to an unreliable and adversarial entity. The embargo may be designed to allow purchases only if they are coordinated via the EU Energy Platform. Dealing as a bloc with Russian LNG would maintain the EU’s strategic position, allowing it to wind down imports in line with the 2027 target. Moreover, offers could be made to purchase Russian LNG at below market prices, with the accompanying threat or actual introduction of a price cap.

Welcome address by Christine Lagarde, President of the ECB, at the 9th ECB conference on central, eastern and south-eastern European countriesFrankfurt am Main, 17 July 2023 It is a great pleasure to open the ninth ECB conference on central, eastern and south-eastern European countries. The CESEE region – which comprises 21 different economies – can overall be considered a European success story in recent decades, having enjoyed rapid convergence towards higher-income countries. Between 2000 and 2021, the economic size of the region almost doubled to 40% of the euro area aggregate. And this strong growth has led to rising living standards, with average GDP per capita jumping from 36% to 54% of the euro area aggregate in the same period. But the world has changed dramatically since we last held this conference in 2019. A series of shocks have upended our old reality and replaced it with new uncertainties. Devastatingly, one of those shocks has been the outbreak of war in Europe – an event that we once thought consigned to the history books. Russia’s unjustified war against Ukraine and its people is a human tragedy. And it has had deep economic consequences for the CESEE region in particular. In parallel, the world is changing in ways which make the growth models of many CESEE countries more vulnerable, as these models generally involve high levels of trade openness and integration into global value chains. But as Graham Greene once wrote, a “feat of daring can alter the whole conception of what is possible.” And the challenge now facing the CESEE region is how to continue its convergence story and ensure that growth remains resilient in this new landscape. Fortunately, CESEE economies can already look back on a strong history of resilience – be it mastering the transition from central planning to market economies in the 1990s or recovering from the global financial crisis with impressive speed. I therefore have every confidence that they will be able to adapt to these new uncertainties. A changing geopolitical landscape There are two broad shifts reshaping the global economy that may have profound implications for the CESEE region: rising geopolitical tensions and weakening global trade. After a long period in which the United States was the sole superpower, the world is becoming more multipolar, with greater competition between major powers, less respect for international rules and norms and a waning influence for multilateral institutions. In this environment, even deep commercial ties may be insufficient to prevent trading relationships from becoming adversarial. This makes the global environment increasingly prone to shocks and the task of macroeconomic stabilisation for all countries much harder. Unfortunately, the CESEE economies know this all too well. Russia’s war against Ukraine triggered a massive shock to the global economy – especially to energy and food markets – and CESEE economies have been particularly exposed, given their geographic proximity to the conflict. While inflation has now started to come down, over two-thirds of economies in the CESEE region saw annual inflation hit 13% or above last year, with several countries seeing markedly higher price increases. By comparison, annual inflation in the euro area was 8.4%. Geopolitical tensions risk accelerating the second shift in the global landscape: weakening global trade. Since the global financial crisis, trade growth as a share of world GDP has plateaued. And we are also seeing rising levels of protectionism as countries reconfigure their supply chains to align with new strategic goals. Over the last decade, the number of trade restrictions in place has increased tenfold. The CESEE region, and Europe more generally, may be vulnerable to such a shift. Last year, trade as a share of GDP was higher than the euro area average for two-thirds of CESEE economies. And while other major economies, such as the United States, have seen trade as a share of GDP fall since the pandemic, in the euro area it reached a record high in 2022. A new foundation for strengthening resilience A changing geopolitical landscape means that, in the euro area and the CESEE region, we need to build a new foundation for strengthening resilience. This foundation rests on further deepening the European Union and its ties to the surrounding region. I see three key elements. The first is reinforcing openness within our region. Trade fragmentation could see the flow of goods and services increasingly being pulled towards different trade blocs, at the expense of countries outside those blocs. By leveraging our regional strength, Europe and the CESEE region can recreate some of the benefits of globalisation on a smaller scale. The euro area is already the main trading partner for most CESEE economies. And we can capitalise on this existing momentum. Between the year 2000 and last year, the share of euro area imports from the CESEE region increased from 5% to 10%. And the share of euro area exports to CESEE economies reached 11% last year, almost double that at the start of the millennium. Moreover, CESEE economies in particular can benefit from changing global trade patterns as companies seek suppliers closer to home. Survey evidence shows that firms in the CESEE region, and especially those based in the EU, are seen as highly reliable trading partners. The ECB also has a key role to play here as the guardian of the euro. Our monetary policy plays an important anchoring role for the CESEE region, as the euro is widely used in trade invoicing and financing. Euro cash also serves as an important store of value – demand for it surged in CESEE economies following Russia’s invasion of Ukraine. The second key element is increasing our collective security. Europe and the CESEE economies have already taken substantial steps to increase their energy security, given the dangerous historical reliance on Russian fossil fuels in their energy mix. In February 2022, the EU was importing around 36% of its natural gas from Russia. Within the space of nine months, that fell sharply to 13% as the EU reduced its gas consumption and diversified towards imports of liquified natural gas. Most, though not all, CESEE economies have also made significant progress in substituting energy imports away from Russia and in building up gas storage levels. But we cannot stop there. We need to accelerate our efforts to decarbonise and increase our energy independence. That is why initiatives that help to build renewable energy sources are so important – such as Next Generation EU and the EU’s recent energy support package for countries in the Western Balkans. The third key element is defending and spreading our common values. The attack on Ukraine was also an assault on European values – such as the respect for international law and human rights. That is why Europe has imposed unprecedented sanctions on Russia and provided substantial support to Ukraine following the invasion. To date, the EU has made available €38.3 billion in economic assistance and over €21 billion in military support. The strength of the EU’s response demonstrates not only its capacity for action, but also its appeal as a political project that others see the benefit of joining – what the West German Chancellor Konrad Adenauer once described as the “Magnet Europa” effect. The push for EU enlargement has recently gathered momentum as a consequence of Russia’s war. Last year, the EU granted Ukraine, Moldova and Bosnia and Herzegovina candidate status. And it launched the process to open accession negotiations with Albania and North Macedonia, while also becoming open to granting Georgia the status of candidate country, conditional on reforms. Conclusion Let me conclude. A series of shocks have dramatically changed the global landscape in recent years. And today, rising geopolitical tensions and weakening global trade mean that economies in the CESEE region need to build a new foundation of resilience. But the record of past crises has already demonstrated just how resilient CESEE countries can be. Despite an exceptionally difficult 2022, the prospects for the CESEE region are encouraging. There are clear structural strengths that stand to benefit CESEE economies in the medium to long run, such as well-educated workforces and strong ties with Europe. So the task at hand is how to channel that spirit of resilience to counteract these new uncertainties. And by leveraging our regional strength and further deepening our economic and political ties, I have no doubt that Europe and the economies in the CESEE region can flourish together. Thank you – and I hope you enjoy today’s proceedings.

Russia’s invasion of Ukraine imposed a sudden energy shock on Europe 18 months ago. Faced with the prospect of much less Russian gas, there were fears that Europe’s energy infrastructure would not cope with winter 2022-23, causing economies to crumble.   Yet a mild winter and the EU’s gradual rollout of a plan to reduce its energy consumption and buy more from alternative suppliers saw it emerge shaken but not beaten on the other side.  Germany, Italy and other gas-reliant nations pivoted from Russian dependency without major electricity shortages. Since then, there has been more good news. Energy prices have fallen steadily in 2023, while Europe’s gas storage levels hit 90% capacity three months ahead of the November target and could even hit 100% in September.    According to politicians like the German energy minister, Robert Habeck, the worst of the energy crisis is over.  Yet, as we shall see, it’s a little early to be so confident.  New vulnerabilities  The share of EU piped gas imports from Russia fell from 39% to just 17% between early 2022 and early 2023. To cope with this shift, the EU has become much more reliant on shipments of liquefied natural gas (LNG) than before.  LNG’s total share of EU gas imports rose from 19% in 2021 to around 39% in 2022, amid a rapid upgrade to infrastructure that aims to have grown LNG capacity by one-third between 2021 and 2024. (Indeed, 13% of LNG imports into the EU actually still come from Russia, whose shipments have also significantly increased since the invasion).  This LNG increase has made European countries vulnerable to volatility in that market – particularly as 70% of these imports are bought at short notice rather than using the long-term oil indexed contracts that prevail in Asia.  For example, we’ve seen Europe’s benchmark gas price ticking upwards in recent weeks due to concerns over strikes at Australian LNG plants. This shows that supplies remain tight and that there are many potential disruptions in our highly interconnected world market.  To synchronise demand for LNG, the European Commission has introduced initiatives like the EU Energy Platform, an IT platform that makes it easier for supplier companies in member states to jointly buy the fuel. However, it is uncertain what level of supplies can be channelled through this instrument as it remains untested. Additionally, the industry fears this kind of state intervention could backfire and undermine the functioning of the market.  As for pipeline gas, Norway has overtaken Russia to become Europe’s leading supplier, providing 46% of the requirement in early 2023 (compared to 38% a year earlier). This extra load has strained Norway’s gas infrastructure. In May and June, delayed maintenance work caused sluggish flows that drove up prices, again showing how tight the European market is at present. Extended maintenance work in Norway leading to more obstructions in future looks distinctly possible.  Meanwhile, the EU is still expected to have to buy around 22 bcm (billion cubic metres) from Russia this year. That’s the equivalent of around 11% of all the pipeline gas used by the bloc in 2022. A large proportion is coming through Ukraine, and with the current Russia-Ukraine transit agreement unlikely to be renewed after it expires in 2024, this supply route is in jeopardy.  As part of the pivot away from Russia, the EU managed to reduce gas consumption by 13% in 2022, according to the International Energy Agency (against a target of 15%). In the months ahead, war-weary EU states may not do so well on this front.  It will not help that prices have fallen, nor that some states didn’t pull their weight last winter. Only 14 out of 27 EU members introduced mandatory energy reduction policies, while eastern states like Poland, Romania and Bulgaria did little to reduce consumption. Should there be a physical shortage of gas in continental Europe this winter, this might undermine calls for solidarity.  What comes next  The harsh reality is that for at least another two or three winters, Europe will have to hope for mild weather across the northern hemisphere without major interruptions to global LNG supply if it is to avoid significant gas price spikes.  Even as things stand, European gas prices remain around 50% above their pre-invasion long-run average, which is hurting both households and businesses. This is particularly important for Germany, the EU’s industrial powerhouse, with its energy-intensive automotive and chemical industries. There are growing concerns that continued high energy prices could promote de-industralisaton as energy-intensive industries move elsewhere.  The good news is that pressure on gas should at least subside from the mid-2020s. Significant new supplies of LNG will come online in the US and Qatar and the market will re-balance. European gas demand should also get significantly lower – down 40% by 2030, according to the energy reduction plan.  There is even talk of a supply glut by the end of the decade, depending on renewable energy deployment accelerating in Europe, and a new generation of nuclear power stations coming on stream. This would significantly reduce Europe’s need to import gas for good, but will only happen if the bloc coordinates effectively.  We saw what can be achieved in the months after the invasion when France supplied gas to Germany to help reduce its dependence on Russia, then Germany later supplied more electricity to French cities to help with outages caused by nuclear reactor maintenance.  The challenge is to take the same approach to decarbonisation. While France tries to gather support for nuclear modernisation both at home and elsewhere in Europe, it is facing opposition from the likes of the German-led “Friends of Renewals” group, which advocates building out only renewable energy. Divisions like these may prove a serious obstacle in achieving a more rapid energy transformation away from fossil fuels.  So while Europe has managed to pivot away from Russia’s pipeline gas, it will remain exposed to the volatility of global gas markets unless it reduces its gas demand significantly in the coming years.