[NGW Magazine] Editorial: The EU and Moscow
Russia’s 2018 presidential elections are now over and Vladimir Putin is looking forward to another six years of autocratic rule. Sergei Lavrov, his foreign minister since 2004, will also likely remain in place, while his US counterpart Rex Tillerson, the former ExxonMobil CEO, has just been given the push, in favour of a spymaster. Putin's popularity would have strengthened further in the run-up to polling day, thanks to his trial and conviction in his absence by Western politicians as the man ultimately responsible for the nerve agent attack in the UK on Sergei Skripal. No evidence that the Kremlin wanted the double agent dead has been provided yet, although no other organisation has been plausibly identified either.
Putin’s new objectives are unlikely to differ much: he somehow has to keep playing Russia's different factions off against each other. Against that distracting background, economic growth is likely to remain weak while there is more spending on means of influence abroad. This will be financed partly by record export volumes of gas over the past few years. But Russia’s gas export revenues are a shadow of their pre-2014 crash levels and Gazprom is a shadow of its former self, falling from $369bn in May 2008 to $58bn today, according to Swedish economist Anders Aslund.
Russia’s new Tsar will continue to promote prestigious projects such as Yamal LNG. The second LNG project nearby in western Siberia, Arctic LNG 2, is likely to go ahead for the same strategic reason as the first: to shift the centre of gravity for Russia’s energy policy decisively eastwards, giving it economic leverage where it is presently weak. Plans to build more nuclear ice-breakers to cut through Arctic ice show that economic rules are only a minor consideration for Moscow.
Government involvement in gas will also continue. Gazprom CEO Alexei Miller told his prime minister Dmitry Medvedev March 13 that the surge in sales this year and last proves the need for new export routes to carry Russian gas: Nord Stream 2 (55bn m³/yr) and TurkStream (15.75bn m³/yr) are both aimed at Baumgarten in Austria from different directions. The conversation also covered Ukraine and the disastrous arbitration outcome for Gazprom.
However, buyers might not be so keen in the future to ignore the political baggage that can weigh down projects like these. Nord Stream 2 in particular could find even stiffer resistance than so far, as Germany’s newly-reinstated chancellor Angela Merkel and French president Emmanuel Macron have both condemned the attempted Skripal murder. The Danish government too still holds a veto over the existing NS2 subsea route, though has yet to play it. The four leaders, including those from the UK and US, condemned Russia for "the first offensive use of a nerve agent in Europe since the Second World War," saying its actions "threaten the security of us all." Two German companies and one French are each financing a tenth of Nord Stream 2. EDF, which owns Edison, is in talks with Gazprom about extending TurkStream pipelines to carry more Russian gas into southern Europe.
A fourth Nord Stream backer, OMV, seemed keen to throw off the yokes of history and geography with plans to move both away from oil and into Australasia, which will reduce its 50-year role of middleman between Russian gas and the West. It may also capture some of the benefits from Asian LNG trade that have so hit its investments in European LNG import capacity. However, Austria’s hard-right Freedom Party, now a junior partner in government, enjoys good relations with the Kremlin.
European countries have been more hostile towards Russia than now of course, and during the Cold War gas still flowed under Warsaw Pact Nations to industry and households in the west. But with the demise of the powerful state-run or quasi-monopolistic enterprises that once dominated Europe, there is nobody so willing to take up the cudgels on the Kremlin’s behalf and many, including EDF, are diversifying their intake of pipeline gas in favour of LNG where a multiplicity of suppliers exists.
Other changes include the falling costs and policy initiatives that have benefited renewables, eating away at, but not replacing gas demand. And an expanded EU is not short of vocal opposition to Russia, even if alternatives to its gas are going to be expensive, perhaps prohibitively so. And there is now the European Commission, which is trying all possible means to impose restrictions over import pipelines in general. But still, Europe must tread carefully.
Shale gas has not yet proved itself and indeed its exploration and production have been banned in almost all countries, except Poland where it is not commercially viable; and the UK, where Cuadrilla is yet to hydraulically fracture the two wells it has drilled.
Another hope is the Black Sea, whose western half is gas-rich, with few figures yet public. Obviously though these two potential sources cannot possibly replace the loss of Russian gas that Nord Stream 2 and TurkStream would carry, even though they would greatly improve security of supply in the UK and Balkans respectively. And Russia exports not only its gas, but also oil and coal as well to Europe. So constructive dialogue is going to have to happen, whatever diplomatic measures are adopted, or Europe could look foolish and Russia’s economy ever more constricted.
NGW