“Reshaping” of regional critical infrastructure under the impact of war: the case of Ukraine, Russia and the EU
Analysis by Dionis Cenușa
Russia’s war against Ukraine that began in February 2022 has had a number of negative effects on critical transport and energy infrastructure regionally. In the almost 11 months of war before the end of 2022, decision makers in Ukraine, the EU and Member States, Russia and its allies (Belarus, Iran, etc.) have revised their views on the old way of operating the regional infrastructure.
The economic losses registered by the state actors affected by the Russian war are due in large part to the “freezing”, cancellation or destruction of infrastructure elements in charge of transport and energy (basic critical infrastructure). Elements of infrastructure on Ukrainian territory continue to be the constant object of military attacks by Russian forces (IPN, November 2022). Under the pressure of European sanctions, the Russian infrastructure is forced to adapt to the reorientation of Russian exports towards markets other than Western ones. Russia is pivoting to Asian markets and will increasingly depend on integration processes within the Eurasian Economic Union. At the same time, the decoupling process initiated by Russia and the European Union (EU) also led to the initiation of infrastructure architecture changes in “Wider Europe”. On the one hand, the “war of economic attrition” (IPN, July 2022) launched by Russia forced the EU and European capitals to deal urgently with the infrastructure that would allow the diversification of natural gas imports from sources other than Russian (IPN, July 2022), either by gas pipeline (North Africa, Caspian Sea) or by sea (LNG). On the other hand, the EU and Member States are exploring other opportunities to transport energy at the European level (hydrogen) and to import energy, on the seabed, from the South Caucasus.
Rethinking critical infrastructure: the case of Ukraine and its neighbors
Russian military attacks, combined with the occupation of the Ukrainian territories in the Black Sea area, in the first half of the year, caused major disruptions in the functioning of Ukraine’s shipping infrastructure. The safety of the transport of agri-food products through the Black Sea depends on the navigability of the ports that remain under Ukrainian control. Thus, with the exception of the port of Mykolaiv, another three – Odesa, Chornomorsk and Pivdenny – needed the security guarantees provided for in the “grain deal” in order to function. These ports account for 80% of Ukraine’s total port capacity, which until the 2022 war controlled 13 river and sea ports (capacity 260 million tons in 2019). The “grain deal” entered into force on July 22, thanks to the facilitation of Turkey and the UN. The international supervision mechanism of Ukraine’s export and import operations, established by this agreement, was extended for another 120 days in November (Bloomberg, November 2022). Between July and December 2022, about 12 million tons of agricultural products were exported (corn – 43%, wheat – 29%, sunflower products – 13%, etc.), involving about 500 ships. Even so, the full operation of the ports is hampered by the Russian attacks on critical infrastructure in the energy sector, which paralyzed the activity of the port of Odesa in early December after a drone attack (with 15 Iranian-made units, of which 10 were destroyed).
In addition to the “grain deal”, rapid investments were made in the railway infrastructure connecting Ukraine with Moldova and Romania. This allows the replacement of part of the previously available export capacity by sea. In this sense, in just two months (July-August), the Ukrainian side renewed the Berezine-Basarabeasca section (21 km), which was dysfunctional for about 20 years. Through this intermediary, certain exports can be more easily redirected from Ukrainian ports to the Moldovan railway and then to the EU. In 2021-2022, the European financial institutions have provided financial assistance (loans) for the future modernization of the railway system in Moldova (about €230 million). In addition, the expansion and modernization of the Ukrainian railway has humanitarian significance (about 4 million people evacuated between February and November 2022). This category of effort includes the relaunch of the Kyiv-Chișinău route in November, which has been non-functional for nearly 20 years. In addition, some investments were allocated to restore railway capacities in the direction of Romania. Thus, the railway communication on the Rakhiv – Valea Vișeului route came back to life, after about 15 years of technical pause. On this route, Ukrainian passengers can reach Romania in as little as 40 minutes (border control is carried out on board), taking into account the difference in gauge between Ukraine (Soviet type – 1,520 mm) and Romania (European type – 1,434 mm).
In the nearly 11 months of war, Russian forces have launched more than 4,000 missiles at Ukraine. In addition to the military and civilian infrastructure (apartment blocks, schools, etc.), a large number of facilities that produced or supplied electricity were destroyed. Around 50% of the critical infrastructure in the energy sector was damaged by Russian missiles (including with the use of Iranian drones) in October-December 2022 (IPN, November 2022). By de-electrifying Ukraine, the Russian military intends to cause a humanitarian crisis, if not in Ukraine, then in the EU, as a result of a new flow of refugees. The geographical proximity and the high degree of interconnection with Ukraine made Moldova a collateral victim (RUSI, December 2022). Due to the synchronization of the electricity transmission systems of Ukraine and Moldova with the EU energy grid, accelerated by the European side, the two countries can import European electricity from March 16, 2022. This helped Moldova to obtain electricity from Romania to weather the energy crisis, while Ukraine started the necessary procedures to test the capacities to import electricity from Slovakia (IPN, November 2022).
Rethinking critical infrastructure: the case of Russia and its allies
The ban on access of Russian ships to European ports and restrictions on the entry of land freight (the fifth package of sanctions), as well as the embargo on Russian oil transported by sea (from December 5 – for crude oil, followed of that for all petroleum products on February 5, 2023), forced Russia to rethink its strategic infrastructure. The reorientation of infrastructure is part of Russia’s resilience strategy against European sanctions.
The situation was made worse by Russia’s own restriction of natural gas supplies to the EU. The use of gas as a tool of geopolitical coercion over EU states has had a suboptimal result, as Russia has failed to break Western solidarity with regard to Ukraine. The sabotage action against the Nord Stream 1 and 2 pipelines at the end of September (Guardian, September 2022), of which Russia is suspected (so far without conclusive evidence), permanently reduced Russian pipeline deliveries to the EU by up to 9% of total gas imports (compared to 45% or 155 billion m3 in 2021).
To replace the European market, Russia aims to increase gas exports to China. In 2021, the Russian gas supply amounted to about 15 billion m3: through the pipeline 7.6 billion m3 and 6.2 billion cubic meters in the form of LNG. In 2022, Russia sold gas to China at discounted prices, about 50% for the LNG delivered by the operator Sakhalin 2 until the end of 2022. During 2021, the price of Russian pipeline gas was $120-148 per 1000 m3. This price is more than 10 times lower than the maximum price of €2,000 per 1,000 m3 set by the EU as a ceiling under the new correction mechanism against future artificial increases, similar to those implemented by Russia in 2022 (EuroActiv, December 2022). However, the existing gas infrastructure geared towards China is not sufficient to replace the volume of gas previously exported to the EU (155 billion m3 in 2021). Russia has set as a strategic goal to increase the volumes of gas delivered through “Power of Siberia” to 38 billion m3 and to start construction of the “Power of Siberia – 2” gas pipeline through Mongolia in 2024, with a capacity of 50 billion m3. As a result of the development of these pipelines, Russia could become the main source of gas imports for China, totaling 88 billion m3 by 2030, if Chinese consumption is not reduced. The main gas exporters to China in 2021 were Australia (43.6 billion m3 – LNG) and Turkmenistan (31.5 billion m3 – by pipeline). As for the supply of oil, there is a Russian intention to intensify the use of the “Arctic Silk Road”. The second Russian tanker in history left for China in November. The Arctic route would allow goods to be transported twice as fast as through Russian ports on the Baltic Sea and then through the Suez Canal, which has been hampered by sanctions.
Russia is losing massive revenue from exporting energy resources to Western markets, including as a result of the $60 per barrel oil price cap imposed by the coalition of Western states (US Treasury, December 2022). Already in November, Russia recorded losses of about €1.2 billion (about 90 billion rubles). That is why Moscow prioritizes the development of alternative routes to new markets. That would make it possible to seek some minimal compensation for losses in the federal budget, which can have repercussions for the political clientele of Vladimir Putin’s regime. The consequences of the Russian aggression against Ukraine are long-term. Therefore, from afar, the Russian authorities must ensure political and socio-economic stability at the national level, especially for the Russian enclave of Kaliningrad. The latter is subject to all sanctions, which are estimated to affect around 15% of the goods transported from the rest of Russia through Lithuania. Kaliningrad’s adaptation to new regional realities is carried out through the expansion of shipping from St. Petersburg. The number of vessels circulating between the exclave and the rest of Russia reached three in March 2022, and in October it increased 5 times and will continue to grow based on subsidies from the federal budget. This implies new expenses for the adjustment of the port infrastructure in Kaliningrad. Other costs that Russia has to bear as a result of its isolation from the EU, caused by the fifth package of sanctions (EU, April 2022), are related to the increase in taxes on Russian operators applied by transit states to Russian exports to China, Uzbekistan, Kyrgyzstan and Turkmenistan. Thus, in October, the Kazakh railway operator (“Kazakhstan Temir Zholy” – a network of 16,000 km and 1,720 locomotives) increased the tariff by about 15% for the carriage of wagons for internal use, import, export or transit. Consequently, the price of transporting a ton of wheat over a distance of about 2,000 km through Kazakhstan is double the taxes applied on Russian territory, or €34 (2,500 rubles). In other words, Western sanctions and Russia’s reorientation to the East put pressure on the integration process within the Eurasian Economic Union.
On the other hand, Russia integrates its allies in its adaptation strategy to the sanctions regime applied by the EU, the G7 states and their allies (between 30 and 50 states worldwide). Given that Belarus played a key role in the initial phase of the Russian aggression against Ukraine and that it continues to support the Russian military agenda, the EU extended the anti-Russian sanctions regime against Belarus from April. Russia is supported by Belarus in joint weapons production and joint military exercises starting in 2023. Instead, to ensure the survival of Alexander Lukashenko’s regime, Russia is facilitating the process of diversifying export routes for Belarusian producers. Already in August, the Belarusian authorities announced that they had developed 40 new export routes to more than 20 countries, transiting through Russia. In January-July, the volume of goods transported to Azerbaijan, Georgia, Kazakhstan, Tajikistan, and Uzbekistan increased (to China by 5 times). At the same time, Belarus uses the Russian port infrastructure (14 ports) to access global markets. Rail exports to Russian ports doubled compared to 2021, accounting for 34% of the volume rerouted in directions other than traditional ones. Belarus is also showing interest in expanding port facilities in Russia to increase the transport of Belarusian goods (Belta, August 2022).
Concomitently, the Russian authorities are looking for optimal ways to create new export routes by expanding transport infrastructure to connect the Black Sea with the Caspian region through the Volga-Don Canal and to reach Asian markets through from Iran. To stimulate the creation of the Russia-Iran-India route (3,000 km), the Russian side has announced that it will allow Iranian ships to navigate through its territory. Some $20 billion will be invested to increase the navigation and transit capacities of the Don-Volga canal, including the modernization and expansion of the rail network from Iran to the port of Chabahar (Iran) in the direction of Mumbai (Bloomberg, December 2022). Another ally with which Russia wants to develop new infrastructures, but already in the energy field, is Turkey. The Russian side supports Turkey’s ambitions to become a regional gas hub to meet the need to maintain a minimum westbound gas flow and redirect more than 100 billion m3, which in previous years reached Europe via Nord Stream 1 and Yamal-Europe. The realization of such a goal requires the construction of a new gas pipeline through the Black Sea and additional capacities for the storage and processing of Russian gas in Turkey. Currently, Russian gas supplied through Blue Stream and Turkish Stream is consumed in Turkey, which also has 7 gas pipelines that run through Turkish territory. In addition, Turkey possesses two LNG terminals, two floating regasification facilities and 2 gas storages (with storage capacities below 10 billion m3). Turning Turkey into a gas hub would serve Russia’s strategic interest to reduce Ukraine’s importance on the European gas market.
Rethinking critical infrastructure: the case of the EU
Russian manipulation of gas flows, which has resulted in record prices of almost €4,000 per 1,000 m3 in the spring and summer of 2022, is the main push for the EU to diversify its gas import infrastructure.
The priority of the EU is to increase gas import capacities outside of Russia. The same objective is pursued by Italy, which in 2022 replaced approximately 50% of the 23 billion m3 that it previously imported from Russia with gas received from other suppliers. Italy plans to completely abandon Russian gas by 2025 and buy gas from Africa (Algeria, Congo, Angola, Egypt and Mozambique), the South Caucasus (from Azerbaijan via the Southern Gas Corridor), the US and the Middle East. Germany, France and other European states have similar strategies, with few exceptions (Hungary). For reasons of geographic proximity, France, along with Italy, is turning to Algeria, which has signed $4 billion worth of deals with them and the US to increase oil and natural gas production. These intentions also imply the construction of new infrastructure elements in the field of energy and, respectively, of transport on the North-South dimension.
The growing strategic role of the South in supplying energy resources to Europe does not reduce the role of Norway, which in the context of the 2022 energy crisis has increased significantly and will remain at high levels. The new gas pipeline that supplies gas from Norway, through Denmark, to Poland (the Baltic Pipeline), inaugurated in September, will also contribute to this. The interconnection with Lithuania (GIPL), operational since May 2022, will bring about 2 billion m3 to Poland annually and will strengthen the Trans-European Energy Networks (TEN-E). Another interconnector launched in 2022 is the one linking Greece and Bulgaria (IGB), which will generate a delivery capacity of some 3 billion m3 per year in a South-North direction, transporting gas through the Southern Corridor, from Azerbaijan to the Western Balkans, Ukraine and Moldova (through reverse flow).
The explosion of the Nord Stream 1 and 2 gas pipelines prompted not only the completion of the construction of the Baltic Pipeline before 2023, but also massive investments from Germany in the development of the infrastructure necessary for the importation of LNG. For now, Germany has only one floating LNG station (storage and regasification). In total, there are plans to install at least five floating terminals, each with a capacity of 5 billion m3, which will be owned by the state (Guardian, November 2022). Together with LNG capacities from the private sector, Germany wants to secure around 1/3 of the gas needs based on 2021 consumption (25 billion m3). The debate on the nationalization and reuse of the land segment of the Nord Stream 2 gas pipeline to deliver the gas obtained from the LNG terminals under construction in the Baltic Sea was also opened. This would allow Germany to supply gas to the south (Bavaria) and east of the country without the need to build new infrastructure. A final decision could be made in 2023, though it will face resistance from Russia.
In addition to increasing the import of non-Russian gas, the EU and its Member States are forced to invest in the production and supply of new energy sources. Thus, the construction of the pipeline for the shipment of hydrogen from Spain (and Portugal) to France via Barcelona is planned. This pipeline is scheduled to be completed in 2030 and will require €2.5 billion, of which 50% will be covered by European funds (Euronews, December 2022). Another large-scale project that will ensure the supply of electricity from the South Caucasus is the submarine cable (1,195 km) that will connect the renewable production capacities of Azerbaijan and Georgia with the transmission networks of Romania and the rest of Europe (through Hungary), including the Western Balkans. Serbia is already discussing the possibility of importing electricity from Azerbaijan through this cable.
In addition to developing critical infrastructure to eliminate energy dependency on Russia, the EU aims to provide connecting routes to Central Asia, alternatives to the Russian ones. In this sense, the EU is willing to use the “Global Gateway” initiative (about €300 billion in investments), which has the objective to build critical transport and energy infrastructures. Therefore, the EBRD will provide Kazakhstan with $105 million to modernize and integrate the Kazakh railway into the Trans-Caspian railway route. The investment made will reduce dependency on the “Northern Corridor”, which provides around 95% of rail transport between the EU and China, transiting through Russia. Therefore, Kazakhstan could become the centerpiece of the “Middle Corridor” through which the flow of goods from China can reach Europe via Azerbaijan, Georgia and Turkey, respectively, bypassing Russia.
In lieu of conclusions …
The geopolitical circumstances, caused by the Russian war against Ukraine, triggered the start of a comprehensive process of reshaping the regional critical infrastructure. Disruption of the traditional channels through which the flows of goods and investment moved makes the replacement of infrastructure inevitable.
In the conditions of mutual decoupling between Russia and the EU, the connection points in the West-East dimension are in the process of breaking. Consequently, both Russia and the EU emphasize the objective of strengthening or building new critical infrastructures, creating both opportunities and new dependencies of the North on the South.
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