Russia’s new weapon against America threatens our markets

If you’re troubled by Russia’s attack on America’s election in 2016, you should be scared to death about what they can do to global energy markets. The news that Russian hackers are targeting America’s electricity grid, water supply plants and aviation systems underscore how adaptive this adversary can be. Russia is actively pursuing multiple paths to weaponize energy to hurt our economy the same way Moscow weaponized social media to assault our democracy.

Russia continues to test our cyberdefenses. Now it is moving methodically to capture so much global natural gas market power that it adds the world’s energy supply to its asymmetric arsenal. Russia can hurt our allies. It is time to wake up and realize Russian mischief in energy could make its misdeeds on our elections look like child’s play.

{mosads}The slow motion threat from Russia is happening right under the noses of the world’s energy markets. Russia’s energy goliath Gazprom is expanding its market share in two key regions: Europe and Asia. Gazprom’s drive to dominate the European natural gas market and establish a strong beachhead in the Asian markets is consistent with the Russian strategy of using its energy wealth for geopolitical gains. Vladimir Putin even wrote his university thesis on this topic.

Russia is acting out of weakness, not strength. Moscow’s focus on Europe and Asia is a “Plan B” strategy. Its “Plan A” strategy exporting enormous amounts of Russian liquified natural gas to the United States, was shot down by the American shale revolution, which changed the United States into a natural gas exporter and helped accelerate the globalization of natural gas markets. With the United States able to supply liquified natural gas to the world, Russia’s market power has been eroded, global liquified natural gas prices have been reduced, and pricing differentials in the Atlantic and Pacific basins have converged.

But U.S. liquified natural gas exports remain challenged by high startup costs, as expensive export terminals must be constructed to transfer supplies to distant markets. Unlike previous waves of liquified natural gas construction, the new terminals are being built in a “buyer’s market” characterized by flexible offtake contracts that make financing more difficult. On the “import side” of the equation, Gazprom is able to offer lower gas prices to countries and large natural gas consumers to dissuade them from developing necessary liquified natural gas import infrastructure, even if it means dependence on Russian supplies.

Gazprom has remained dedicated to building Nord Stream 2 to Germany and Turk Stream through Turkey. Similar to a pincer attack, both allow Gazprom to infuse the European market with an abundance of even cheaper natural gas, unhindered by the Russia-Ukraine relationship. That makes it even more difficult for the United States to enter the European energy markets. It is simply cheaper to buy Russian natural gas.

With its huge market share, Gazprom could employ multiple schemes to manipulate physical and financial energy markets. In the physical markets, Gazprom can create artificial shortages to exert influence over European nations in conflict with Russia. That would be déjà vu all over again: Russia cut off power to Ukraine in 2009 to influence and prevent its entrance into NATO. Russia’s ability to exert influence through shortages will only increase as weather patterns become increasingly unreliable because of climate change. This past winter, demand for Russian natural gas surged to unprecedented levels when Siberian arctic weather coursed throughout Europe.

Gazprom can also deploy surpluses to flood world energy markets with cheap natural gas, forcing prices to drop substantially. This has two apparent effects. First, it makes it difficult for other energy exporting nations to compete with Russia, especially in Europe. Second, it damages investment and development of other alternative energy sources by making them financially unsustainable or unprofitable to investors.

In addition to manipulating physical natural gas markets, Russia can utilize its market power to influence hub index pricing and, indirectly, the value of energy derivatives that are tied to these hub prices. The volume of energy derivatives traded each day are enormous, as market participants seek to hedge their commercial risk or profit from correctly predicting energy price movements. The behavior of these market participants must be closely monitored to prevent price manipulation and market failures that erode confidence in, and pose significant systemic risks to, world financial markets.

Russia is a creative and adaptive adversary. America must also adapt. Moscow weaponizes everything it can, with energy the next logical battlefield, and drawing upon their experiment in Ukraine, the tactic is battle tested. From Houston to Washington, shame on us if we aren’t ready. We should be drawing up our own energy battleplans to draw a line in the shale.

Mark Boling is the founder and chief executive officer of 2C Energy.