Russia’s decision on January 5, 2009 to cut gas supplies to European consumers via pipelines in Ukraine has sent shockwaves throughout the European energy community. The dispute between the two countries, centering upon geopolitical issues on Russia’s western border, has plunged some European nations into a new discussion about the safety and security of Europe’s energy policy of relying on Russia for natural gas. Russia’s President Dmitry Medvedev and Prime Minister Vladimir Putin are still trying to test the West’s resolve against a somewhat resurgent Russia and are acting more aggressively now that some spots of protest has risen against their rule at home in light of the current economic problems facing the world.
Russia and Ukraine now seem to have reached a tentative deal on resuming gas supplies to Europe, with international monitors coming in to ensure that Ukraine does not siphon off Europe’s gas supply. However, there remain many conflicts that are not solved by the latest dispute, namely what Europe should do to secure a better energy future and how Ukraine will resolve its gas dispute with Russia.
This brief will explain some background on why Russia shut off gas to European consumers, what issues it brings up for Europe, and how it puts Ukraine is a very uncompromising position with Russia.
Shut Off
The decision made by Russia to shut down European gas supplies arose from its current fight with Ukraine over the pricing of natural gas supplies. Ukraine’s heating system is very inefficient, built on Soviet infrastructure, and the country relies heavily on Russian natural gas supplies. Since 2004, Russia has been wanting Ukraine to begin paying market prices for its natural gas because currently, Ukraine receives subsidized pricing for its gas supplies. The Russian state energy giant Gazprom has become more vocal in forcing the dysfunctional Ukrainian government of Victor Yushenko to agree to a new pricing mechanism. Gazprom desires for Ukraine to start paying the same amounts as European consumers at market prices. Ukraine currently pays $179.5 for 1,000 cubic meters of gas. Ukraine has said that it is willing to pay $210, but Gazprom wants $450.
Energy experts argue that the reason Gazprom desires this price increase is because it needs to find a way out of its debts. Under Vladimir Putin, Gazprom grew it size as it went on a controversial shopping spree of purchasing the other major power suppliers in Russia. However, these acquisitions ate into the Gazprom balance sheet and its current net debts are calculated at $25 billion. Despite this, though, all of the major credit agencies in the world from Standard & Poor’s to Moody’s all give Gazprom a stable credit rating.
Also, there is the idea that Russia is trying to punish Ukraine over its political and foreign policy endeavors. Russia remains hostile to the idea of Ukraine joining NATO, fearing that the alliance gets closer and closer to its borders each year. Also, Putin, who still plays a major influence in Russia’s government, still smarts over how the 2004 presidential election that put Yushenko in power over Russia’s preferred candidate Victor Yanukovich. Foreign policy analysts have wondered whether Russia’s movements in Georgia last year could one day be translated to Ukraine, where the eastern and southern parts of the country still have Russian sympathies.
After failing to agree on a new price schedule on January 1, 2009, Russia shut off gas supplies to Ukraine. Russia has done this with other countries in the area who have not agreed with it on prices or political issues. Experienced extempers might recall that Russia played hardball with gas supplies with Belarus in early 2007, angry that the country was turning its back on closer integration with Russia. Following the shut off, Ukraine was then accused the next day by Russia of siphoning gas off that was intended for European consumers. What is important for extempers to know here is that members of the European Union (EU) get twenty percent of their collective gas supplies from Russia and that eighty percent of those supplies come from pipelines that are in Ukraine. Making the decision that they would prefer to put Ukraine in a tighter spot, Russia ended natural gas supplies to the EU on January 5th, prompting outrage in EU member countries such as Bulgaria who rely on Russia for 100% of their natural gas supplies.
Issues on the Table
The gas shutdown has made Europe reconsider its energy policy. Russia’s willingness to use energy as a weapon has the potential to be a headache for the European Union both from a foreign policy standpoint and as a stable and unified organization.
In foreign policy, the EU does not want to be beholden to Russian interests in regards to expansion. However, if Eastern European nations continue to be targeted by Russia and bullied by Gazprom, the chances of these nations taking a chance under the EU umbrella are slim. Also, the EU looks inept when it can merely suggest that Russia and Ukraine reach a new deal on gas in the early days of the crisis, but cannot properly intervene when its members gas supplies are shut down. If the EU cannot find a way to find more secure energy supplies, its foreign policy and its security will be made to look foolish in front of prospective members and before the international community.
Also, the EU has to make sure that in its dealings with Russia in the future that it is more forceful. In the past, Russia has been more than willing to play up internal tensions in the EU and to play a divide and conquer strategy to fracture a strong stance by Europe. Following the latest crisis, it is imperative that the EU speak with one voice and warn Russia in the future in regards to its use of energy supplies as a weapon. The EU must also avoid being split up over controversial issues such as Slovakia’s willingness to put an environmental unfriendly nuclear reactor back online to account for the lack of gas supplies it was receiving for Russia. The decommissioning of this nuclear power plant was important for Austria to allow Slovakia into the organization, but it is clear that Russia’s tactics have the potential to blow up tensions that already exist below the surface in the EU. If the EU is divided, Russia will be more than happy to keep playing sides against each other to get what it wants in the form of higher prices or political concessions.
Finally, the EU has to seriously look at alternative energy supplies that do not involve Russia. Russia has tried to pick apart some EU members by claiming that it would be more than happy to supply natural gas in the form of pipelines that would go around Ukraine. Russia’s argument is that these pipelines would allow Europe not to be held hostage by Ukraine’s “theft” of natural gas supplies. However, as global observers note, this would simply re-entrench Russia’s position as a major supplier of Europe’s natural gas. Instead, Europe needs to seriously consider putting more investment into the Nabucco pipeline, a twelve billion dollar project, that would provide gas to Europe from Turkey via Bulgaria, Romania, and Hungary. This would diversify Europe’s natural gas supply and be a more politically reliable ally.
Ukraine’s Situation
With the recent deal to allow for monitors into Ukraine to check to make sure that gas intended for European consumers is not siphoned off, Ukraine has lost a major bargaining chip against Russia. Since the pipelines go through Ukraine, it is entirely plausible that the Ukrainian government could have easily lost a standoff with Russia, thinking that Russia would not want to anger the EU by cutting off gas supplies. However, it is clear that Russia was willing to take that risk, despite 90% of gas flows to Austria and 100% to Bosnia, Bulgaria, Croatia, Germany, Greece, Hungary, Macedonia, Moldova, Romania, Slovakia, and Slovenia being shut down in light of the current crisis. Ukraine will not be able to siphon gas to meet its current supply problems, nor will it be able to try to interject itself in the equation any longer by trying to shut down the transfer of gas. This has made Ukraine lost one of its biggest bargaining chips against Russia.
Due to the current dysfunction in Ukraine, the latest dispute will provide more political rows for Victor Yushenko. December elections that were scheduled for parliament in a country worn weary by political conflict were shelved due to the global economic meltdown. Yushenko’s government appears to have lost yet another battle with Russia and if Ukraine is forced to accept higher energy prices, which looks like an inevitable scenario, it will only squeeze the Ukrainian economy further. Also, the lack of western help to get better terms for Ukraine could have the potential to dampen pro-Western sentiment in the country, thus hurting the EU’s image in a strategically valuable territory.