Europe has been in the grip of a new cold war. This struggle has not been fought with militaries, but rather with energy exports. Yes, Russia and Ukraine are having their annual tussle over natural gas exports, and Europe has felt the effects. It is tempting to see the fight as a geopolitical faceoff — yet another attempt by Moscow to flex its muscles and restore its dominion over the “near abroad.”
The real issues, though, are considerably more mundane. Russia wants fair value for its energy exports and is prepared to play hardball to get it.
Two years ago, in January 2006, Russia cut off gas supplies to Ukraine. The dispute had been building for months as Gazprom, the Russian national gas supplier, wanted to end the subsidy it had provided for Ukraine and sell natural gas at market prices. That subsidy had been in place for decades and Russia was no longer prepared to give Ukraine special treatment. The subsidy had reduced the price to less than half of that paid by other customers. Unable to reach agreement on a new price, and alleging that Ukraine had siphoned gas from the pipelines as well as stolen gas stored in Ukraine — both charges denied by Ukraine — Gazprom closed the spigot.
The shutoff lasted four days before the two sides reached agreement on a new price that was higher than before, but still did not reflect market rates. The shutoff affected Russia’s European customers too. Europe gets a quarter of its natural gas from Russia and 80 percent of that arrives via pipelines that cross Ukraine. Four cold days in the middle of winter raised questions about Russia’s reliability as an energy supplier.
Those concerns erupted last year, when Russia and Ukraine were again disputing gas supplies. Russia still wants to raise prices to market levels, but in addition, it accuse Ukraine of failing to pay $1.5 billion in bills as well as siphoning gas from the pipelines. Once again, on Jan. 1 Gazprom cut off supplies to Ukraine, a move that has affected customers on the other end of the pipeline as well.
Austria, Bosnia, Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Romania and Slovakia have lost all their Russian natural gas — in the midst of a bitter cold spell. France and Italy have also been affected, but they are less dependent on the Russian supplies. Factories such as a Suzuki facility in Bulgaria have been forced to close temporarily. The European Union brokered an agreement last week that is supposed to put European observers in place to ensure that gas shipped through Ukraine are not impeded, even though the two disputants were unable to agree on a price.
Many see the Russian move as an attempt to restore its diplomatic influence in a country that has delighted in provoking Moscow since 2004 when the “Orange Revolution” brought a West-leaning government to power. But the gas dispute long predates the arrival of reformers in Kiev. Coming after the war with Georgia, Russia’s response is considered another attempt to flex its muscle and intimidate governments on Russia’s periphery as well as in Europe.
Energy is the key to the restoration of Russian power and influence. Russia’s leaders — and the public — see nothing wrong with using its vast supplies to its advantage. But the recent plunge in energy prices has undercut Moscow’s leverage. The Russian economy has been hit hard by the global downturn, with industrial production falling more than 10 percent and unemployment ranks swelling to 5 million people. An economy that grew an estimated 8 percent in 2008 is expected to increase only 2 to 3 percent in 2009. Foreign exchange reserves have fallen by one-third.
In this environment, the Russian leadership is focused on eking out every economic advantage it can. Geopolitics is a secondary concern. Oil and gas exports provide more than one-half of the Russian budget, and oil prices have fallen by about two-thirds since they peaked last summer. Russian Prime Minister Vladimir Putin personally announced the cutoff to Ukraine, making clear that he was in charge and showing his resolution in handling the situation. Blaming Ukraine for Russia’s problems is a popular tactic.
This faceoff raises questions about Europe’s energy strategy. The continent has chosen to accept reliance on Russian supplies, but the ill will between Moscow and its immediate neighbors could make that a risky approach. There is talk of building alternative pipelines to avoid countries like Ukraine, but such projects are expensive and time-consuming. And if the problem is Russia, not the transit countries, then new pipelines change nothing.
Ultimately, Moscow needs its European customers as much as they need Russia’s gas. Russia cannot afford to lose European revenues especially given the need for long-term investments to rebuild the country’s infrastructure. It may be uncomfortable, but interdependence is the reality for Europe and Russia — they have to huddle together against the cold.
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