Journal of Turkish Weekly, Turkey
Jan 17 2009

2009: Russian Gas Policy – First Step Taken

Rovshan Ibrahimov
Editor of USAK Energy Review

For the past few years, the New Year has begun with a tradition:
confrontation between Russia and Ukraine. The two countries celebrated
this New Year with differences in their views of Ukraine’s natural gas
price and a transportation fee for Russian gas to pass through Ukraine
territory to European countries. While in previous years these two
countries have been able to reconcile their differences before
resorting to confrontation, the situation this year has
changed. Russia and Ukraine have accused each other of suspending of
gas transportation, which has left European countries without gas.

Russian gas is normally transported through four export pipelines
traversing Ukraine. Recently, though, they have not carried natural
gas to their normal European markets, specifically Bulgaria, Romania,
Slovakia, Slovenia, Croatia, Czech Republic, Poland, Hungary, Turkey,
Bosnia-Herzegovina, Greece, Macedonia, Serbia, in short all of Central
and Eastern Europe. These countries depend varyingly on Russian gas,
with the annual percentage of consumed gas supplied by Russia totaling
45% in Poland, more than 60% in Greece, Austria and Hungary, and more
than 80% in Bulgaria, the Czech Republic and Lithuania; Slovakia
depends entirely on Russian gas. In addition, many Western European
countries also import Russian gas. Approximately 43% of Germany’s
annual consumed gas comes from Russia, in Italy 20 %, in the
Netherlands 6%, and in Great Britain 4%. As such, the dispute between
Russia and Ukraine has affected many states in Europe.

It is noteworthy that Russia is the first large-scale gas owner and
uses this advantage as an instrument of pressure in foreign policy. It
is no secret Russia has long been trying to reap dividends from the
existing potential in order to secure a privileged position in the
export of natural gas to Europe. For the past several years, beginning
with an annual increase in gas prices, Russia has attempted to
pressure former Soviet states by giving a discounted price to the
countries allied with Russia and charging more to objectionable
regimes.

If the policy of providing cheaper gas prices for its allies was to
provide Russia with a lever of pressure, then it has not been
successful. The reason is that the pro-Western regimes, formed after
the Velvet Revolutions in Georgia and Ukraine, have the opportunity to
import cheaper gas. Ukraine, in particular, has been able to import
cheap gas from Central Asia with Russia only responsible for its
transportation. Georgia, in turn, started receiving gas from
Azerbaijan, which by early 2007 sharply increased production , thereby
ensuring an adequate supply for both domestic and international demand
and saved Georgia from paying higher gas prices. But on the eve of
2009, Russia took a series of steps, in accordance with the leverage,
to become more efficient.

First of all, Russia has agreed to a sharp increase in prices for
natural gas imports from Central Asia, in order to prevent Ukraine
from acquiring cheaper gas from these countries and forcing the
country to pay a higher price. Moscow’s purpose is to prevent regimes
of Central Asia from seeking alternative routes to European markets,
as well as to fill the shortage of gas resulting from a decline in
production in Russia itself. It is no secret that the European
countries, especially the EU members, are considering Azerbaijan,
Turkmenistan, Kazakhstan, and Uzbekistan as alternative gas suppliers
to their markets. In this case, European countries have proposed the
Nabucco pipeline project, in which gas from these countries would be
sent to Europe. By paying double the gas price to Central Asian
countries, Russia has succeeded in reducing the interest of these
countries to the Nabucco project ` dispelling a potential political
risk.

During President Medvedev’s expected visit to Uzbekistan on 22-23
January 2009, it is expected that Russia will offer a price of $326
per thousand cubic meters to import Uzbek natural gas. If so,
Ukraine’s hopes of acquiring gas at $201, as well as Russia’s original
offer of $250, are inconceivable. As the Prime Minister of Russia
Putin has said, the time of cheap gas has passed.

In addition, in 2008, Russia took a step towards the creation of a gas
OPEC, together with the other two largest holders of natural gas
reserves: Iran and Qatar. Although this plan is unfeasible as the
countries lack common interests on the issue of export of gas, the
psychological significance of the matter is still filed a response in
the international arena.

Due to the gas crisis between Russia and Ukraine, Russia expects some
promising payoffs in foreign policy. First of all, 2009 is an election
year in Ukraine, and this visible conflict with Russia could lead the
electorate in Ukraine, an industrialized country totally dependent on
outside energy supplies, to lose trust in its pro-Western
government. Ukraine, which after the Velvet Revolution switched to a
parliamentary system of government, could not recover from the
political crisis taking place between the two branches of the
executive branch, and within the coalition government. In addition,
the accession of Ukraine to the WTO, which was seen as a further step
in the integration into Euro-Atlantic space, has paralyzed several
sectors of the economy. The situation worsened after the recent
international financial crisis, which also adversely affected the
industrial sector. These events open the door for the rise to power of
the pro-Russian opposition, led by Yanukovich.

Secondly, the transit of Russian gas through Ukrainian territory will
be observed by international monitors. It’s no secret that Ukraine
from time to time siphoned certain volumes of natural gas from the
transit pipeline for domestic consumption. It should be noted that 80%
of the gas exported from Russia to Europe passes through Ukraine. In
this case, Russia has made possible an unhindered supply of gas to
Europe, even the parties do not agree on the price of gas, and Russia
stop sending gas to Ukraine.

Thirdly, the crisis in Ukraine once again prodded European gas
importers to search for alternative ways of receiving Russian gas. In
this case, the relevance of two Russian pipeline projects, Nord
Stream, which will be constructed on the floor of the Baltic Sea and
the South Stream, which is intended to be laid in the Black Sea, once
again increased. And if at times some countries have resisted the
implementation of these projects, expressing fears for various
reasons, ranging from environmental issues to the security, the lack
of heating could cool the zeal of the hottest skeptics on this issue.

Demand in Europe is constantly growing. By 2020, Europe will consume
720 billion cubic meters of gas. In this case, importing such
quantities of gas will require additional transport
routes. Particularly interested in the construction of the Nord Stream
pipeline is Germany, which will receive direct access to Russian gas
and will be able to play the role of a distributor to EU countries,
thereby strengthening its position in Europe? In addition, according
to the press information, despite the fact that the price of Russian
gas has already exceeded $400, Germany supposedly pays only
$280. Despite unconfirmed information, it brings to mind serious
questions regarding the Russian-German alliance to determine European
gas policy.

Fourthly, the situation with Ukraine allows Russia to develop new
foreign policy responses to events directly related to the interests
of the country. As the experience of confrontation with Russia by
Georgia during the August 2008 `five-day war`, Russia does not choose
from a wide range of options, particularly in conflict situations. As
a result of its use of force in Georgia, Russia had to recognize the
independence of the two entities on Georgian territory, which in the
long term may adversely affect the situation in the North Caucasus
autonomous republics of Russia. In this case, the Ukrainian experience
could become a kind of experiment in the development of alternative
instruments of pressure on other countries.

There is no doubt that the crisis in Ukraine could encourage European
countries to seek alternatives to Russian natural gas, as well as new
means of importation. In this case, the main alternative is the
Nabucco project, the implementation of which has perhaps been
stimulated by the crisis in Ukraine. However, the passivity of
European countries in realization of this project, as well as the
increase in gas prices from Russia for Central Asian countries, has
led to a situation in which the Nabucco is unlikely; the only country
that still could supply gas to Nabucco is Azerbaijan. But Azerbaijan,
which must deal with the Karabakh conflict, is trying to be more
cautious in its policy towards Russia, especially after the events in
Georgia. Besides, concerns of Azerbaijan about this are
unfounded. Moreover, Russia, despite being a co-chair of the OSCE
Minsk Group, created to resolve the Karabakh conflict, in late 2008
provided Armenia, which is in actual conflict with Azerbaijan, with a
variety of weapons at a total cost of $800 million dollars. This step
can be regarded as the actual pressure on Azerbaijan, which holds a
more independent energy policy, and has been increasing its military
capabilities. At the same time, Russia has proposed to Azerbaijan to
sell, at world prices, the entire additional amount of gas that the
country plans to export. Azerbaijan has not yet made a specific
agreement, but the pressure of Russia and the passivity of Western
countries in realization of Nabucco are likely to lead Azerbaijan to
agree to Russia’s proposal.

In general, it is possible to say that Russia has quite effectively
met the New Year, increasing its capacity in the management of energy
policy in the field of gas in the Eurasian space and the use of these
advantages as an instrument of foreign policy. Thus begins a new era
in which the energy power factor will be more effectively used by
Russia, prompting one to question how the European countries,
currently lagging far behind Russia, will respond. One thing is clear:
we will not have to wait long for an answer. Western countries, used
to various disasters in the field of energy, are not the first to look
for ways out of this situation. A new round of resistance in the field
of energy in the Eurasian space begins.

Saturday, 17 January 2009

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