Russia's Natural Gas Keeps Europe in its Thrall

September, 2008

The European Union, in its wisdom, has chosen to do nothing but shake a finger at Russia over the war in Georgia. Russia responded by patting Europe on the head. This is not a good omen. EU leaders, meeting in an "emergency session" in Brussels on Monday, had trouble finding an emergency they needed to worry about. True, Russia has rewritten a bit of the map by force, first "liberating" and then recognizing two tinpot republics that had been parts of Georgia, at least in theory. True, many other European states, including some EU members, could be next in line for Russian revanchism and pseudo-irridentism. But, the Europeans calculated in their supple fashion, Russia has quite a lot of natural gas, essential to keep Germany's industry running. And companies in France, Germany, and Italy have fat contracts with Gazprom, the Russian energy firm. What the heck, most people aren't even sure where Georgia is. Why invoke sanctions and upset the Russians over such a little place?

Naturally Russia reacted with pleasure, Prime Minister Vladimir Putin praising the EU's "common sense." Just yesterday we argued in this space that Russia could not keep invading its neighbours with impunity. That analysis presumed a stern Western response, among other things. But now the EU has chosen to be stern in words only. The EU is divided. Eastern European members, who know the Russians best, wanted real sanctions, as did Britain. And the International Monetary Fund is reported preparing a $750-million line of credit for Georgia's government. And U.S. Vice-President xxxx Cheney, visiting Georgia this week, will likely announce new U.S. aid.

But some European states are paralyzed by their need for Russian natural gas. In theory pipelines through Georgia can get Caspian Sea gas and oil to Europe, but Russia demonstrated last month that it could gobble down Georgia, pipelines and all, in one bite whenever it chooses to do so. What the Europeans should be doing, in the face of this political, military and economic menace, is seeking more secure natural-gas supplies. As the Economist magazine noted this week, one useful measure would be better inter-connections among European gas systems, so that supplies could be shared in a crisis. Equally, infrastructure for liquefied natural gas would reduce dependency on Russia. For now, however, European policy consists of hoping this problem will go away.


A Bear At The Throat

The European Union is belatedly grasping the riskiness of its dependence on Russian gas, but it is disunited and short of ideas for how to reduce it

RUSSIA'S president, Vladimir Putin, must be feeling smug. His strategy of using the country's vast natural resources to restore the greatness lost after the break-up of the Soviet Union seems to be paying off. If power is measured by the fear instilled in others—as many Russians believe—he is certainly winning. The Soviet Union relied on its military machine for geopolitical power: its oil and gas were just a way to pay for it. In today's Russia, energy is itself the tool of influence. To use it the Kremlin needs three things: control over Russian energy reserves and production, control over the pipelines snaking across its territory and that of its neighbours, and long-term contracts with European customers that are hard to break. All three are in place. For all the talk of a common strategy towards Russia, the EU is divided and stuck for an answer.

Gazprom, Russia's energy giant, cherished by Mr Putin as a “powerful lever of economic and political influence in the world”, has long-term supply contracts with most European countries, including France, Germany, Italy and Austria. It also has direct access to these countries' domestic markets. The EU reckons that half its gas imports now come from Russia. Newer EU members, such as Hungary and the Czech Republic, are almost entirely dependent on Russian gas. Moreover, a pipeline network that it inherited from the Soviet Union gives Russia control over gas imported from Central Asia. The EU has few ideas for how to deal with its chief energy supplier. “We know we should do something about Russia, but we don't know what,” one Brussels official says. “In the EU we negotiate on the rules, whereas Russia wants to do deals.” The deals are coming thick and fast. Last month, Russia secured one to build an oil pipeline from Bulgaria to Greece that will bypass the Bosporus. Symbolically, it will be the first Russian-controlled pipeline on EU territory. The pipeline will carry Russian and Central Asian oil straight to the EU, avoiding Turkey.

Oil can at least be bought from elsewhere. The bigger worry is about the EU's dependence on Russian gas. The flow of natural gas depends on the routes and control of pipelines, as European consumers were reminded when Russia switched off the gas supply to Ukraine just over a year ago and Ukraine started to steal Russian gas that was destined for the EU. Russia's pipeline routes encircle the EU from the north and south. Russia and Germany have teamed up to build a gas pipeline under the Baltic Sea, bypassing Ukraine and Poland (see map). Gerhard Schröder, a former German chancellor signed up by Mr Putin to preside over this Nord Stream pipeline, claims that it will make Europe safer. But a study by Sweden's Defence Research Agency concludes that it will divide the EU and increase dependence on Russia. It will let the Kremlin turn off gas supplies to Ukraine, Poland and Belarus without affecting “more important” customers. Understandably, Poland is anxious. The pipeline will increase the flow of gas to Germany and hook in countries that do not yet consume much Russian gas, including the Netherlands and Britain.

In the south, Russia has a pipeline across the Black Sea which supplies gas to Turkey. Now Russia wants to extend this Blue Stream pipeline to Hungary. That would compete directly with Europe's own plan to build a pipeline called Nabucco from Turkey to Austria. Nabucco has been one of the EU's few concerted responses to Russian domination of its gas supplies: it would be filled up with gas from Central Asia and thus bypass Russia altogether. But it is now creating more friction than unity.

Hungarian rhapsody

Last month Hungary's prime minister, Ferenc Gyurcsany, called Nabucco a “long dream”. Instead, he suggested that Hungary would support the extension of Blue Stream. Gazprom already supplies 80% of Hungary's gas and has promised to build a large gas-storage facility that could be a hub for central Europe. “Blue Stream”, enthused Mr Gyurcsany, “is backed by a very strong will and a very strong organisational power.” (When Hungary was accused of undermining the EU's common energy policy, the tart response was that it was impossible to undermine something that did not exist.) As well as controlling pipelines, Gazprom has also been busy buying up pieces of Europe's gas infrastructure. It owns 35% of Wingas, a German distribution company, and also has stakes in the Baltic countries' distributors. It has 10% of the interconnector pipeline between Belgium and Britain and wants a similar share of a British-Dutch link. It is also muscling its way into electricity, oil and liquefied natural gas (LNG) projects. “It is not enough for us to meet 25% of global gas consumption. We want to be the biggest energy company in the world,” Alexander Medvedev, Gazprom's deputy head, has said of his company's modest ambition.

Most European governments have been careful not to alienate Russia. As long as Gazprom plays by the rules, they say, it should be allowed to invest in their markets. Belgium recently said it had no problems with Gazprom owning parts of its infrastructure. Russia, in contrast, has a big problem with foreign companies owning, let alone controlling, any of its natural resources. It has bullied Royal Dutch Shell into ceding control of the Sakhalin-2 project in the far east of the country; it has blocked BP's plan to develop a gas field in eastern Siberia; and it has kept foreign companies out of the development of the giant Shtokman field in the Barents Sea, saying that it will go it alone. In the same spirit, the Kremlin has flatly ruled out ratifying the EU's energy-charter treaty, which would require it to open up its gas pipelines to other countries and other suppliers. The Russians have made a mockery of a joint declaration on energy issued at the G8 summit they chaired in St Petersburg last July. The declaration called for more honesty, competition and transparency. Yet just two days later, Mr Putin enshrined into law Gazprom's monopoly position as the sole exporter of gas.

Then there is the talk of creating a gas equivalent to the OPEC oil-exporters' cartel. On April 9th Russia joined other gas producers in Qatar to discuss the possibility, and offered to lead a study into gas pricing. The next meeting of the group will be in Moscow. With almost 60% of the world's gas concentrated in just three countries —Russia, Iran and Qatar—the notion of a cartel sounds appealing. But fixing prices for a commodity that is not traded on world markets will prove much harder than it has been for oil. Even so, as Mr Putin said earlier this year, “it would be a good idea to co-ordinate our activities.” Gazprom has already signed a memorandum of understanding with Algeria's Sonatrach to co-operate in gas production. This has unnerved European consumers, as Algeria is their third-largest supplier of gas, after Russia and Norway. America, too, is nervous. “Russia's commercial and political shadow over the governments in central Europe makes it harder for us to deal with our allies,” says a senior State Department official.

The EU's dependence on Russian energy is hardly new. Nor is tension between Russia and America. “The Americans were constantly telling us we were too dependent on Russian gas in the 1970s and 1980s,” says Sir Rodric Braithwaite, a former British ambassador to Moscow. Yet, throughout the cold war, Russia remained a reliable gas supplier. Why should things be different now? First, says, Cliff Kupchan, director of the Russian programme at Eurasia Group, a consultancy in Washington, DC, the Soviet Union was politically more predictable than its successor. “It was run by geriatrics, but we knew that one geriatric would succeed another.” Russia's political stability is ephemeral. It relies on Mr Putin's will, not on an institutional transfer of power. With nationalism on the rise, it is anybody's guess who will be in charge of Russia in ten years' time.



Q&A: Why Europe needs Russian gas

The threat from Russian state monopoly Gazprom to cut off the gas flow to one of its neighbours, Ukraine, has again raised questions about the security of Europe's energy supply.

Why is this a worry for European countries?

Gazprom controls about a third of the world's gas reserves and it is responsible for a quarter of Europe's supplies. Most of Europe's gas is piped via Ukraine, and when Gazprom shut down the pipeline in 2006, the flow to the rest of Europe fell, in some areas, by 40%.

Is the latest deal between the two presidents the end of the matter?

For the moment, yes. President Putin has said that Gazprom is satisfied with Kiev's commitment to begin paying its bills. Gazprom says Ukraine amassed debts of $1.5bn since November 2007, while Kiev argues the figure is closer to $1bn. But it is the way payments are made that is at the heart of the dispute and that may not have been resolved. The debt is owed not to Gazprom but a subsidiary RosUkrEnergo, part-owned by two Ukrainian businessmen. Ukrainian Prime Minister Yulia Tymoshenko wants an end to the system that allows RosUkrEnergo to import the gas and another intermediary, UkrGasEnergo, to sell it. Gazprom says it is prepared to negotiate once the bills are paid.

Is this politics or economics?

Analysts in Moscow say it is all about cash, and Western Europe has dramatised it as a political dispute. But Europeans are edgy. It seemed odd that the threatened cut-off coincided with a rare visit to Moscow by Ukrainian President Viktor Yushchenko. Ukraine's ambition to join Nato was as high on the agenda as the Gazprom crisis.

Is Moscow doing anything to secure Europe's supply?

Gazprom has embarked on plans for pipelines that bypass Ukraine and Belarus, former Soviet states which are currently essential for transit. Gazprom has two major projects, Nord Stream and South Stream. Nord Stream will run for 1200km along the bed of the Baltic Sea, and South Stream under the Black Sea. Gazprom has signed up big European partners: Italy's ENI for South Stream, and German companies E.ON Ruhrgas and Wintershall - along with Dutch provider Gasunie - for Nord Stream.

Is the EU happy about relying on Russian gas?

The EU has major concerns about security of supply and is moving ahead with a pipeline plan of its own. Nabucco will bring gas from Central Asia and the Caspian across Turkey into the European Union. But it will have only enough capacity to provide a small proportion, perhaps 5%, of Europe's needs.cSo Europe needs Gazprom, and that is why European companies and their governments have actively embraced the two projects. Austria is likely to serve as a hub for both. EU officials say that even during the Cold War the Russian gas supply was stable, so it is better to rely on Gazprom than potentially unstable sources such as Turkmenistan and Uzbekistan.


In other news:

Russia Is One of 10 Biggest Creditors of the U.S.

Russia ranks the eighth in the list of the U.S. creditors, according to Finance magazine. The RF share in the U.S. state debt was 2.5 percent ($65.3 billion) as of June 30, 2008. Japan ($583 billion) and China ($503 billion, less the debt to Hong Kong and Macao) are the key creditors for the United States, accounting for over 40 percent of the state debt on aggregate. What’s more, the debt to China goes up by 25 percent a year. Other major creditors of the United States are Britain, Luxembourg, Hong Kong, Switzerland, states of Caribbean offshore zone and the oil-exporting states, including Venezuela, the United Arab Emirates, Ecuador, Iran, Iraq, Kuwait, Oman and others. With the private sector taken into account, the U.S. foreign debt totaled $13.77 trillion as of early April, while the country’s GDP is projected to equal $14.4 trillion this year. The U.S. foreign debt didn’t exceed $6.95 trillion in 2003. The share of foreign governments in the U.S. state debt widened from 52.6 percent in 2003 to 73.9 percent in 2007.


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Arevordi will be taking a sabbatical to tend to personal matters. New blog commentaries will henceforth be posted on an irregular basis. The comments board however will continue to be moderated on a regular basis.

The last 20 years or so has also helped me see Russia as the last front against scourges of Westernization, Globalism, American expansionism, Zionism, Islamic extremism and pan-Turkism. I have also come to see Russia as the last hope humanity has for the preservation of classical western civilization, Apostolic Christianity and the traditional nation-state. This realization compelled me to create this blog in 2010. Immediately, this blog became one of the very few voices in the vastness of cyberia that dared to preach about the dangers of Globalism and the Anglo-American-Jewish alliance, and the only voice preaching the strategic importance of Armenia remaining within Russia's orbit. From about 2010 to 2015 I did monthly, at times weekly, commentaries about Russian-Armenian relations and Eurasian geopolitics in general. It was very difficult as I had no assistance in this endeavor. The time I put into this blog therefore came at the expense of work and family. But a powerful feeling inside me urged me to keep going; and I did.

When Armenia finally joined the EEU and integrated its armed forces into Russia's military structures a couple of years ago, I finally felt a deep sense of satisfaction and relaxation, as if a very heavy burden was lifted off my shoulders. I finally felt that my personal mission was accomplished. I therefore felt I could take a step back, as I really needed the rest. Simply put: I have lived to see the institutionalization of Russian-Armenian alliance. Also, I feel more confident now that Armenians are collectively recognizing the strategic importance of Armenia's ties with Russia. Moreover, I feel satisfied knowing that, at least on a subatomic level, I had a hand in the outcome. As a result, I feel a strong sense of mission accomplished. I therefore no longer have the urge to continue as in the past. In other words, the motivational force that had propelled me in previous years has been gradually dissipating because I feel that this blog has lived to see the realization of its stated goal. Going forward, I do not want to write merely for the sake of writing. Also, I do not want to say something if I have nothing important to say. I feel like I have said everything I needed to say. Henceforth, I will post seasonal commentaries about topics I find important. I will however continue moderating the blog's comments section on a regular basis; ultimately because I'm interested in what my readers have to say and also because it's through readers here that I am at times made aware of interesting developments.

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