• Natural Gas News

    For Russia, Natural Gas Is Losing Its Potency as a Political Weapon - Stratfor



There was a time when Russia could manipulate other countries with its natural gas supplies.

by: Stratfor

Posted in:

Top Stories, Global Gas Perspectives, Security of Supply, Expert Views, Infrastructure, Nord Stream Pipeline, Nord Stream 2, South Stream Pipeline, Turk/Turkish Stream, White Stream, Yamal/Yamal 2, Russia

For Russia, Natural Gas Is Losing Its Potency as a Political Weapon - Stratfor

There was a time when Russia could manipulate other countries with its natural gas supplies. It still can, but the threat is less effective than it once was. Ukraine's national natural gas company, Naftogaz, confirmed Wednesday that it will consider negotiating direct natural gas purchases with Russian natural gas giant Gazprom without mediation from the European Union. Ukraine's willingness to deal directly is a sign of growing assertiveness and also of how much Kiev — with help from Brussels — has been able to chip away at Moscow's ability to use gas supplies as a political weapon. 

Depoliticizing Natural Gas

Moscow's use of energy to affect policy in not only Ukraine but also other countries in Central and Eastern Europe that import Russian gas almost exclusively was a constant theme of the 2000s and early 2010s. In response, the European Union enacted a number of initiatives designed to depoliticize natural gas. Legal architecture was created, such as the Third Energy Package, which split the ownership of natural gas transiting a pipeline from the owners of the pipeline, and physical infrastructure, such as gas interconnectors and pipelines, was built up so that gas could move more freely through Europe. 

Ukraine, which is not a member of the European Union, had been slower to develop this legal and physical infrastructure but now it largely has. There are now enough interconnections between Ukraine and its western neighbors — Slovakia, Poland and Hungary — that Ukraine can import up to 20 billion to 25 billion cubic meters of natural gas annually from Eastern Europe. Though most of the natural gas that Ukraine buys still originates in Russia, its ability to import from its neighbors means that Russia can no longer charge Ukraine a much higher price than it charges them because Ukraine could just buy the gas at a lower price from those countries. And, importantly, Brussels is breaking down an element of Russia's contract with natural gas importers that prohibits them from exporting or selling gas to others.

What is a Geopolitical Diary?

Moreover, the European Union has included Ukraine (and the Balkans) in its broader Energy Union initiative, which Brussels established to extend its common energy market initiatives to neighbors not in the European Union. Ukraine has been gradually adopting Third Energy Package principles and legislation.

In addition to building up its physical infrastructure, Kiev has also implemented measures to limit natural gas consumption, including increasing efficiency in winter heating and using more coal for power generation. In 2011, Ukraine consumed 53.7 billion cubic meters of natural gas. In 2015, it consumed just 28.8 bcm, consequently reducing natural gas imports to 16.2 bcm in 2015, of which only 7 bcm was directly purchased from Russia. (Ukraine imported 9.2 bcm via Europe.) This trend even continued over the entire course of 2015. Ukraine has not directly purchased gas from Russia since November 2015 and did not during the worst of the 2015-16 winter even though it had negotiated a winter package with Gazprom through the trilateral negotiating framework.

Now that these changes are largely in place, negotiations between Naftogaz and Gazprom will mostly be financially motivated, even pragmatic, although the political relationship between Moscow and Kiev remains extremely tense. Naftogaz may even have the upper hand because it does not need a gas deal, it merely prefers it. But negotiations are not necessarily going to be smooth. The two companies have a number of outstanding claims, counterclaims, lawsuits and countersuits pending against one another over past dealings. These include most recently Gazprom's threats to sue Naftogaz over increasing natural gas transit fees in January 2016.

Naftogaz HQ (Photo: Naftogaz)

Nord Stream II: Still Divided

Though Europe is entirely on board with initiatives promoting one common energy market, Russia's proposed Nord Stream II pipeline project is driving a wedge between its supporters (Germany being the strongest) and its Eastern European detractors, such as Poland and Slovakia. The project envisions routing a 55 bcm natural gas pipeline through the Baltic Sea directly from Russia to Germany, circumventing Ukraine and Eastern Europe. Germany has chosen to view the project in purely economic and business terms, while the project's detractors regard it as Berlin selling out on the Energy Union concept and directly negotiating deals with Russia — possibly allowing Russia to still politicize natural gas supplies.

From the point of view of Eastern Europe, Nord Stream II makes it more likely for Russia to implement natural gas cutoffs again than without the pipeline. Historically, most Russian natural gas flowed through Eastern European countries such as Poland or Ukraine to Central European markets such as Germany, and despite this, Russia was twice willing to cut off natural gas to all of Europe to punish Ukraine for going against its wishes. To the project's detractors, adding even more infrastructure to directly deliver natural gas to Germany eases the constraints on Moscow's ability to cut off supplies to Eastern Europe, specifically. Previously, cutting off gas to Eastern Europe also meant cutting off gas to Germany. Though these Eastern European countries have built up considerable infrastructure for trading, it is not perfect, and they would still feel considerable shortages in the event of a substantial cutoff.

It is for this reason that Eastern European officials, including Slovakia's Maros Sefcovic, the European commissioner for the Energy Union, have been strong advocates of aggressive interpretations of EU law if the pipeline is built. EU law, however, is not clear on this particular pipeline. Germany has taken the view that key aspects of the offshore part of the pipeline do not need to adhere to all of the Third Energy Package, whereas Sefcovic has argued that the Third Energy Package should extend to the exclusive economic zone of Europe, not just its territories. The European Commission has not officially ruled on the issue, but it is currently discussing an interpretation. Should Brussels interpret the application of the Third Energy Package offshore, the pipeline project may be in jeopardy over its economic viability. Such a ruling would require the stripping of the pipeline's ownership — which is now supposed to be more than 50 percent Gazprom's — from the supplier of the gas, which is of course Gazprom.

In the midst of this process, Germany has been trying to ease the concerns of its neighbors, and Wednesday, German Economy Minister Sigmar Gabriel outlined three conditions for Berlin's approval. Those are that the pipeline must adhere to German regulations, must not affect Ukraine's pipelines and must not limit Eastern European natural gas supplies. Though Berlin may be trying to ease tension over the divisive pipeline, the problem from the perspective of Eastern Europe is that enforcing the latter two conditions once the pipeline is built would be difficult.

Though the concerns over pipelines and natural gas supplies have eased, the issues remain at the center of most political debate in Europe over energy security and will continue to do so. Despite the European Union's single market policy, Russia will inevitably remain the region's most significant natural gas supplier. In 2015, Russia exported 160 bcm of natural gas to Europe in addition to the 24 bcm it exported to Belarus and Ukraine. Only five countries — none in Europe — produced that much natural gas that year. The best Europe can do is limit Russia's ability to manipulate gas supplies for political aims.

None of this, however, detracts from the reality that the utility of using natural gas as a political lever is far less potent and that Ukraine and others have made significant progress in developing natural gas supply options. Indeed, Russia's increased pragmatism and its business-minded approach to its energy negotiations with Europe — and now Ukraine — are indicative of the shift in Moscow's thinking on the relationship between energy exports and its foreign policy.

Natural Gas Europe is pleased to provide this article in cooperation with Stratfor, a Natural Gas Europe Knowledge Partner.  For more visit www.stratfor.com Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook