Gas Crisis Will Have Consequences for Russia – Varenov

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A host of European countries have now felt the effects of Russia’s natural gas dispute with Ukraine, propelling a troubled European Union to step into negotiations. Executives from Russian gas monopoly Gazprom and the Ukrainian Naftogaz will meet with EU officials Thursday, as a complete shut-off of Russian gas shipments threatens to affect consumers across Europe (see a country-by-country breakdown from Reuters).

Writing for the online newspaper, Nikita Varenov examines Russia’s position in the talks, arguing that Russia may ultimately pay for the consequences of the energy scare.

Frost and War Bosses
Nikita Varenov

There is so much politics in the contractual relationships of Russia, Ukraine and the European Union on the issue of [natural] gas deliveries, that the emerging crisis can’t be understood as an argument between two business entities. Nonetheless, its resolution lies precisely there– there are national laws and international agreements, there are signed contracts. And one needs to read them to understand who is formally correct in the current situation. The different sides will do just that during negotiations this Thursday.

But a newly formalized gas transport reality isn’t the only result of the current conflict. The European Union, where factories have stopped working, schools have closed, and the heating supply has been interrupted as result of gas shortages, will not forgive one of the sides, it stands to reason. The likelihood that this will be Russia is fairly great.

The point is that as a consumer, the European Union is indifferent to the underlying reasons for the conflict. The restoration of uninterrupted gas deliveries is important for the EU, especially as a cold winter sets in. Ukraine can likely be charged for dishonest transit, especially if it is proven that gas theft actually took place. But Russia’s fault before the European Union is much greater: a producer and first order supplier cut shipments after failing to settle differences with a intermediary.

Map of gas pipelines and affected countries.  Source: BBC
Map of gas pipelines and affected countries. Source: BBC

One cannot say that Gazprom is completely unprepared for the situation that arose. Reserves have been pumped into underground storage tanks on the territory of Europe. Additional volume is moving by alternate routes – through Belarus and the floor of the Black Sea. But in the end, this does not take the blame off Russia: shipments to ten friendly European countries have stopped completely; [shipments] to the rest have been cut by more than half.

Everything has been done tactically right at Gazprom, but the corporate group in principle lacks a strategy to diversify its distribution channels. A year ago, Russian humorists were already joking about a Ukrainian New Year’s [holiday] with gas-free champagne. But in 2008, nothing was done to ensure that in 2009, Europeans would have gas bubbles in their champagne.

Why it wasn’t done is a separate question. Relations with the Baltic countries have been built on discussing the results of the Second World War for decades. On the Belarussian front, Russia was more concerned in 2008 with twisting Lukashenko’s arms, so that he would finally recognize the independence of two semi-criminal enclaves in the Caucasus. In the last case, a reduced price for gas, by the way, was one of the levers of pressure (and this lever didn’t work largely because of Ukraine’s intractability –Moscow didn’t go for a conflict with two intermediaries at the same time.) In the Caucasus, finally, Russia managed to destabilize the situation to such an extent in the past year, that projects for a direct gas line from Turkmenistan are no longer being discussed (whether they bypassed Russia or not is already unimportant).

Of course, most problems in international relations go outside the realm of Gazprom’s authority as a commercial entity, but the point is that the gas group is not simply a commercial entity in the Russian economy and in Russian foreign policy. Russia (and Gazprom as a de facto government ministry) doesn’t tire of swinging its baton, trying to force its will on its neighbors without considering the costs. The start of Dmitri Medvedev’s presidency has been marked by this path, and it no longer matters how liberal he is on the inside.

The conflict in Georgia raised a boisterous reaction from Europe, but nonetheless had only peripheral meaning for it. Neither the severe Angela Merkel, nor the pragmatic leaders of Eastern Europe, nor the accommodating Nicolas Sarkozy, and especially not the ultra-loyal Silvio Berlusconi, initiated any real steps to pressure Russia then. Partly because of that infamous energy-dependence, however cynical that may sound. Today, when it’ll be the European voters freezing, and not the Georgian ones, their leaders will clearly be firmer.

The energy dependence, of course, won’t go anywhere. For now. And the European Union’s strategy to get rid of this dependence will definitely not go anywhere either. One of the possible steps to take when failures happen in the supply chain is to get rid of the middleman. How could the EU get rid of the Ukraine in its present guise? Accepting it into its group, for instance. Would the Russian authorities have the gall to eternally scare an EU member country with frost?

Not to mention that Russia needs a great deal from Europe. Europe isn’t just a market for Russian gas, but for countless other types of raw commodities and goods. And in many cases, unlike gas, they can be substituted, especially if there were a united political will for it.

Finally, that same gas is only valuable when it is being bought. Side by side with oil it is one of the major sources that replenish the Russian [currency] reserves, whose amount in times of crisis is especially important for the authorities. That being said, the prices for gas, unlike those for oil, don’t bounce by 5 percent a day. Taking into account the losses from January’s forced down time, even an insignificant reduction in the volume of future purchases is capable of reflecting critically on Gazprom’s incomes.

The parties will already start discussing new volumes, conditions and prices tomorrow. The EU has joined in the negotiations between Russia and Ukraine in a directive capacity. And Russia’s position at these negotiations doesn’t look quite so strong as it seems at first glance.

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