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April 11, 2014

Putin's Energy Threats Come with Cost to Russia

by Mary Motta

Russia is again using its role as Europe’s dominant natural gas supplier to pressure Ukraine and the West. Europe gets about 30 percent of its gas from Russia, and half of that passes through Ukraine.  But how much leverage does Russia really have in using energy exports to achieve diplomatic or geopolitical objectives in Europe?

When former president of Ukraine Viktor Yanukovych met with EU foreign policy chief Catherine Ashton in December 2013 he was expected to sign key trade and political agreements with the European Union.

But to the dismay of many Ukrainians, Yanukovych turned down the deals on the advice of Russian President Vladimir Putin, who tempted the former president with the promise of cheap gas.

Considering the large amounts of Russian gas Ukraine burns through every year, the deal seemed like a good one for Yanukovych.

But since Yanukovych's ouster amid massive protests in February, Russian gas has become more of a punishment than an enticement.

Price hike

Last month, Alexei Miller, the chief executive of Russia’s gas giant, Gazprom, agreed with Russian Prime Minister Dmitry Medvedev to impose a 44 percent increase in the price of gas sold to Ukraine.

With the price boost, Ukraine now owes Gazprom $2.2 billion. If Ukraine continues not to pay its bills - and without outside help, it cannot- Gazprom can cut it off.

This is potentially bad news for Europe, says Antony Froggatt, a senior research fellow with Chatham House. He says Russia will likely continue to use gas as a political tool.

“The Russian economy is heavily dependent on energy,"  he explained. "And, so if it no longer sees potential and economic benefit from supplying Ukraine at lower prices, then it will increase it [the price]. And, it’s always that … changes we’ve seen in Europe over the last couple of months.”

But this time, the threat is not as ominous as it was during price disputes in the winters of 2006 and 2009. European countries have since found other options for meeting their energy needs, and, in any case, will not rely on Russian gas in the summer months. And though most European countries refill their storage facilities at this time, those facilities are likely well stocked after a mild winter.

“The previous sort of Ukraine gas prices in 2006 and 2009, there was a different situation because: A, it was winter; B, the EU as a whole was more dependent on Russian gas; and, C, more of that Russian gas came through the Ukraine and more of it is diversified, so it goes around the Ukraine,” Froggatt said.

Russia must also consider the cost to its own economy of withholding gas exports, which provide its most important source of revenue. Whatever Vladimir Putin's geo-political ambitions, most energy analysts seem to agree he will think twice about jeopardizing that revenue.

EU working on plan to help pay for gas

In Vienna Friday, European Energy Commissioner Guenther Oettinger said he is working on a plan to help Ukraine pay some of its gas bills to Russia.  According to a Reuters report, he told Austria's ORF radio on Friday, there was "no reason to panic'' about Russian gas supplies to Europe.

"We are in close contact with Ukraine and its gas company to ensure that Ukraine remains able to pay and the debts that the gas company has to Gazprom do not rise further,'' Oettinger said, adding he would meet Ukraine's energy and foreign ministers on Monday.

"I am preparing a solution that is part of the aid package that the IMF, the European Union and the World Bank is giving to Ukraine and from which payment for open bills will be possible,'' he said.
     
Oettinger advised against taking Putin's threat at face value, saying Russia wanted to deliver gas and needed the revenue.

"Part of the bills is justified. Another part is unjustified. We will put together a package in the weeks ahead so that paying the justified open bills will be possible, but not according to Mr. Putin's accounting but rather by what is contractually correct,'' he said.   

Some information for this report provided by Reuters.