PUTIN WINS THE HEARTHS AND MINDS OF EUROPE
by Tony Halpin

The Times (London)
December 27, 2006, Wednesday

Vladimir Putin is entitled to take immense satisfaction from 2006.

The year opened with Russia cast as the great gas ogre, embroiled in
a bruising "cold war" over supplies to Ukraine that also threatened
to dim the lights from Poznan to Paris.

As 2006 closes, the state monopoly Gazprom has become the energy giant
that ate Europe, extending the Kremlin’s influence from the corridors
of power to the kitchens of consumers. Add in his success in forcing
Shell to hand control to Gazprom of Sakhalin-2, the world’s largest
private oil and gas project, and Mr Putin can reflect on a year
well spent.

Europe depends on Russia for a quarter of its gas supplies, so Mr
Putin can fairly claim to be responsible for warming the homes of
millions of citizens across the Continent. Hence his tone of injured
surprise at international criticism of Moscow’s energy strategy,
which he argues is based on mutual self-interest. Russia needs the
markets, Europe needs the gas.

In reality, it isn’t that simple. Collectively, Europe has a chance
of negotiating with Russia on equal terms. Individually, Russia holds
the upper hand -Moscow can always find another buyer.

Russia’s closest neighbours know this very well. The row with Ukraine
exposed how far Gazprom was prepared to go to enforce its terms -the
sound of the taps being turned off reverberated across the European
Union. This was the wake-up call that prompted the EU to regard Russia
in a different light.

Belarus’s President Lukashenko imagined that he enjoyed a special
relationship with Russia through his much-postponed plan for a union
state. Mr Putin has disabused him of that notion by having Gazprom
demand a fourfold increase in gas prices next year to $200 per 1,000
cubic metres.

The "incentive" -more a ransom -on offer is to cede ownership of half
of Belarus’s network of pipes in return for a price reduction. Mr
Lukashenko is said to be deeply offended at this betrayal of his
loyalty.

But he cannot claim to have been surprised. At last month’s summit of
former Soviet republics hosted by Mr Lukashenko in Minsk, Mr Putin
made plain that Russia now sought "market-based relations in our
dealings with all of our partners, without exception".

Georgia’s difficulties with Russia run much deeper than energy, but
Gazprom has adopted the same strategy: turn over your gas network
or face a massive price increase, in Georgia’s case up from $110 to
$235 per 1,000 cubic metres. This is about the same price paid in EU
states, but by a country where the average income is $120 a month.

Georgia talked tough, insisting that it would seek alternative
supplies, principally from neighbouring Azerbaijan, rather than submit
to "blackmail". But submit it did, agreeing last week to meet Russia’s
price for this winter when it became clear that Azerbaijan could not
meet Georgia’s needs.

Neighbouring Armenia buckled without a fight. It handed Gazprom control
of a vital supply pipeline from Iran in return for holding down the
price of gas until after Armenia’s next presidential elections in
2008. Thus, Russia strengthened its presence in the strategically
important Caucasus while controlling Iran’s route to Europe as a
potential gas competitor.

For Kiev, Minsk and Tbilisi today, read Berlin, Rome and Paris
tomorrow. Turkey is even more dependent, relying on Russia for two
thirds of its gas supplies.

Gazprom is awash with cash, making profits before tax of £ 8.9 billion
in the first six months of this year alone. It aims to bolster earnings
still further by using its market strength and financial muscle to
gain direct access to western Europe’s consumers.

Gaz de France signed a new contract last week to extend Russian
supplies from 2015 until 2030 in return for allowing Gazprom immediate
access to homes and business consumers. Gazprom aims to sell 1.5
billion cubic metres a year, about 10 per cent of the gas it supplies
to France.

A similar deal was signed in November with Italy, which relies on
Russia for a third of its gas. Gazprom extended the supply contract
from 2017 to 2035 in return for the right to sell 3 billion cubic
metres directly to Italian consumers.

And what about Britain? Gazprom sparked a flurry of stock market
activity earlier this year with rumours of a takeover bid for
Centrica, owner of British Gas. That came to nothing, but deputy
chairman Alexander Medvedev fanned the flames again last month by
admitting that he would "never say no" to a bid as part of Gazprom’s
acquisition strategy.

He set a target of gaining 10 per cent of the UK gas market by the end
of the decade. An audacious swoop for Centrica’s 16 million customers,
however, would be likely to draw a sharp political reaction from the
British Government.

However strongly Mr Putin protests to the contrary, it is impossible
to separate Kremlin strategy from Gazprom’s activities, now and in
the future. The chairman of Gazprom’s board of directors is Dmitri
Medvedev, first deputy prime minister and a leading contender to
succeed Mr Putin as President in 2008.

Europe may be forced into uncomfortable compromises with the Kremlin
on democratic reform and human rights by too close an embrace of the
Russian bear over energy.

Russia argues that what’s good for Gazprom will be good for Europe
by ensuring stability of supplies in an unpredictable world.

Nervousness over the future in gas-rich Turkmenistan after the death
last week of "Turkmenbashi", the eccentric dictator Saparmurat Niyazov,
illustrates how dependent Europe now is on far-away places to keep
the lights burning at home.

The gamble across the Continent is that Russian gas will prove the
safest bet for Europe’s energy security, and not a political weapon
with which to extract concessions.

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