THE ENERGY WEAPON BACK TO SECURITY: CAN EUROPE BE TAKEN HOSTAGE BY RUSSIA’S NATURAL GAS SUPPLY?
by Ariel Cohen, Ph.D. and Owen Graham
The Cutting Edge
rticle=1071&pageid=20&pagename=Security
Fe b 2 2009
DC
On January 1, 2009, Russia’s state monopoly OAO Gazprom began reducing
gas supplies to Ukraine. Moscow and Kiev had failed to negotiate
the price for natural gas, and the initial reduction affected six
additional countries: Czech Republic, Turkey, Poland, Hungary,
Romania, and Bulgaria. As problematic as this was, the crisis has
extended beyond these initial victims.
Not surprisingly, Russia is losing its reputation as a reliable
supplier of gas to Europe. Motives for the Russian action include
sending a signal to Europe that Ukraine should not be integrated
into the Euro-Atlantic zone, but remain within the Russian sphere
of influence. The crisis demonstrates Europe’s strategic dependence
on Russian gas and highlights the necessity to change this situation
quickly in order to prevent Europe from being taken hostage by Russia.
Failed Negotiations Russia began halting supplies after Ukraine
rejected a proposal to raise gas prices in 2009 to $250 per 1,000
cubic meters from the 2008 price of $179.50. This was considerably
below European market price, and Russia claims that Kiev owes more
than $600 million in late fees and fines.
Subsequently, Gazprom escalated tensions, saying that it initially
wanted Ukraine to pay $418 per cubic meters, and then $450.
On Monday January 5, four days into the dispute, Prime Minister
Vladimir Putin appeared on Russian television with Gazprom chief
executive Alexei Miller and ordered supply to be cut by about 20
percent, withholding 65.3 million cubic meters of gas. Russia alleges
that Ukraine is siphoning off an equivalent amount without paying
for it.
As of January 6, 11 European countries had been affected by this
disruption: Greece, Macedonia, Serbia, Poland, Slovakia, Romania,
Hungary, Czech Republic, Italy, Turkey, and Croatia. Amidst
temperatures as low as 0 Fahrenheit, the demand for heating is
growing. Most countries have some gas storage to outlast a short
disruption, but if the crisis continues for weeks, these supplies
will run out.
It is clear that Russia has not ceased its efforts to use energy as
a weapon, while Europe and particularly Ukraine have made themselves
vulnerable by failing to diversify their energy baskets to expand the
role of nuclear energy and coal, to modernize their energy-intensive
industrial base to make it more efficient, and above all, to develop
a coherent policy toward their Russian supplier. Europe has clearly
made itself vulnerable by relying too much on Russian energy, while
the national governments and the European Union failed to develop,
coordinate, and implement effective policy which could have prevented
the current predicament.
Energy Transit and European Dependence Many Europeans look to Russia
because Europe’s own domestic gas production is in decline, while
demand is likely to rise for another decade. Demand is projected
to increase dramatically. In 2007, European demand for gas was 500
billion cubic meters (bcm) a year and is expected to rise to 800 bcm
within the next decade, according to most forecasts.
With the largest proven natural gas reserves on the planet and a
massive pipeline network built mostly in the Soviet era, Russia has
a natural leverage in supplying energy to Europe. Gazprom currently
provides EU members with one-quarter of its gas–about 160 bcm per
year; Gazprom officials hope that this number will climb to 250 bcm
per year by 2020.
Ukraine is a key energy transit state for producers in Russia and
Central Asia to European consumers. Around 80 percent of Europe’s gas
imports from Russia travel through Ukrainian pipelines: approximately
120 bcm per year. In turn, Gazprom receives around two-thirds of its
revenue from gas that passes through these pipelines, representing
20 percent of European demand.
Germany is dependent on Russia for close to 40 percent of its gas
and this number is expected to rise to 60 percent by 2020. Some
European countries areentirely dependent on Russian gas, as high
as 80 to 100 percent, such as Slovakia, Finland, Bulgaria, Greece,
Serbia, Montenegro, and Macedonia. Many of the Baltic States and the
Commonwealth of Independent States are also 80 to 100 percent dependent
on Russian gas, such as Belarus, Lithuania, Armenia, and Georgia.
The Kremlin uses this dependence as a foreign policy tool to apply
pressure against states that would adopt policies that go against
Russia’s national interests. Moscow has cut off supplies to numerous
countries over the last seven years with Ukraine as the primary target.
Undermining Ukraine Russia is escalating the gas crisis in order
to prove to the Ukrainian people that President Victor Yushchenko
and Prime Minister Yulia Timoshenko are discredited leaders, who
caused energy shortages in the middle of a harsh winter. This is the
price Ukrainians must pay, some in the Russian leadership imply, for
pursuing a pro-Western path toward NATO membership. Russia demands
that Ukraine abandon its road to NATO and the EU, and allow Moscow
to base its Black Sea Fleet in the Crimea after the current agreement
expires in 2017. If Ukraine runs out of gas reserves, this is a lesson
many Ukrainians will not forget quickly.
Gazprom has pressured Ukraine to pay higher prices since the
election of the pro-Western Victor Yushchenko. Some experts view the
current price war as outright economic warfare against Ukrainian
independence. Shutting off the gas to Ukraine denies the country
valuable transit revenue and undermines the government’s reputation
as an energy transit state.
While Gazprom has raised the price of gas to most of the customers
in the former Soviet Union in recent years, allies such as Armenia
continue to pay lower rates, while "problem" states like Georgia pay
full price.
The New Pipeline Network to Bypass Ukraine?
The Russian leadership wants Ukraine to lose its leverage over
Gazprom as a transit country. Moscow is hoping to make Ukraine
appear an unreliable partner to the Europeans, which it believes
will justify building expensive Russian-proposed gas pipe lines to
Europe bypassing Ukraine. Some European governments, notably those of
Germany and Italy, would now support these "direct" pipelines which
bypass Ukraine, such as Nord Stream, chaired by the former German
Chancellor Gerhardt Schroeder, and the South Stream along the Black
Sea bottom. Yet, concerns over excess dependence on Russian energy,
the current economic crisis, and high costs of these projects raise
questions about the timetables and affordability of the new pipelines
from Russia.
The astronomic price tag for both projects, over $30 billion, makes
them seem less feasible today than even a year ago. Furthermore,
the pipelines proposed by the Russians would only increase Europe’s
dependence on Russia. The more Germany and Italy’s dependence on
Russian gas increases, the less they would be inclined to stand up
to Russia over any foreign policy excesses.
Ukraine’s Inefficient Energy Sector Ukraine is not without blemish,
as its leaders have made it vulnerable to Russian tactics and
pressures. Ukraine’s manufacturing sector is notoriously inefficient,
producing a mere 10 percent of Germany’s output, while consuming as
much energy as Germany does. Ukraine’s energy sector suffers from
lack of transparency and from corruption, regardless of who is in
power in Kiev.
Swiss-registered RosUkrEnergo, for example, was in charge of marketing
gas from Russia and Turkmenistan until October 2008. This company is
a shady entity with allegedly illicit ties, and is an intermediary
that benefits businessmen and government officials who prefer
anonymity. RosUkrEnergo, like a number of other middleman companies
Russia has set up in Europe, is a gas-trading company that does not
own any gas fields or pipelines. It is also not the first middleman
company in the Russian-Ukrainian gas trade.
RosUkrEnergo was created in 2004 and is owned jointly by Gazprom
and two unknown Ukrainian businessmen for the benefit of themselves
and unnamed government officials. Experts have pointed out that
the company appears to have links to organized crime. Despite the
lack of transparency, Gazprom has insisted on the continuing role
of RosUkrEnergo in the Russian-Ukrainian gas trade. In October 2008,
Ukraine and Russia agreed that their government-owned gas companies,
Naftogaz and Gazprom, will deal directly with each other.
The Ukrainian state-owned energy sector remains overly politicized,
mismanaged, and laden with conflicts of interests. By now, Ukraine
should have taken steps to modernize its energy sector, including
privatization and getting rid of the shady middlemen.
Recommendations for the Obama Administration The Kremlin derives
leverage from its control of gas production and supply networks. It
uses its energy supplies to divide Europe on key issues, thus weakening
Europe’s bargaining power in economic and geopolitical relations
with Russia. This dependence increases Europe’s "continental drift"
from the U.S. by limiting the foreign policy options available to
America’s European allies, and forcing them to choose between an
affordable energy supply and siding with the U.S. and NATO on key
strategic issues, such as missile defense or opposing Russia’s
treatment of Georgia.
U.S.interests lie in strengthening its European allies in their dealing
with Russia, promoting transparency and energy security in Ukraine,
and supporting Ukraine’s course for Euro-Atlantic integration.
In light of these circumstances, the U.S should:
Support European diversification of energy transporta¬tion routes in
Eurasia. Specifically, the U.S. should support the construc¬tion of
the Nabucco pipe¬line which would bring gas from the Caspian basin,
via Azerbaijan and Georgia, to Europe. The U.S. should oppose any
excessive dependence of its allies on Russian energy exports and
should encourage application of the European anti-trust legislation
against Gazprom.It will also be necessary to encourage EU members to
establish and implement a joint policy on their dealing with Moscow
in the energy sector.
Encourage Europe to construct more liquefied natural gas (LNG)
terminals, importing gas from Qatar, Algeria, and Nigeria, thus
diversifying the sources of gas. Moreover, Germany, Italy, and other
countries in Europe should be encouraged to develop coal, nuclear
power, and competitive renewables as sources of affordable electricity.
Support Ukraine’s efforts to modernize its energy sector, including
reforms to increase transparency and energy efficiency, privatize
and liberalize oil and gas sectors, depoliticize management, and
decisively remove middlemen in energy transactions.
Time to Face the Cold Facts As frigid Arctic winds blow across
Europe, it is time to face the cold facts: Dependence on Russian
gas is undermining European security. Russia is likely to use its
energy muscle to impose its geopolitical agenda on its neighbors,
today and in the future. To change this situation, European countries,
including Ukraine, need to work with the United States to diversify
sources of energy and stand up to Russian bullying.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian
Studies and International Energy Security at the Katherine and Shelby
Cullom Davis Institute for International Studies at The Heritage
Foundation. Owen Graham is Research Assistant at the Davis Institute.
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