Calling Putin’s energy bluff

Calling Putin’s energy bluff

New European energy commissioner Maros Sefcovic was treated to a blunt and rude welcoming in Moscow. No more gas through Ukraine for Europe, he was told by Gazprom boss Alexey Miller. Is the Russian energy capo serious?  After all, Russia’s President, Mr. Vladimir Putin, not so long ago introduced the idea of a Russo-Turkish energy alliance. Compounded with the conflict in Ukraine, sanctions and a falling ruble, this latest Russian ultimatum may be more a call from a position of desperation rather than strength.

Let’s consider what the Russians are actually saying. They are saying that they will no longer sell natural gas to Europe through Ukraine. They are also saying that if Europe wants Russian gas, they have to pick it up at the Turkey-Greece border. They are further saying if Europe doesn’t agree to these conditions, they’ll sell their gas to someone else. A tall order of demands, and surely, Mr. Sefcovic was not inspired by his first meeting in Moscow, and let’s hope that he was also not too impressed by these empty Russian threats. Yes, empty!

For starters, the Russian economy, in total freefall from the decline in oil prices and the fall in the value of the ruble, is insanely dependent on gas and oil exports. Oil and gas revenues make up more than 50 percent of the Russian government’s total revenue. And most of it comes from Europe. In numbers it looks like this: Russia’s 2013 GDP was $2.1 trillion, of which 50 percent is $1.05 trillion. The Russian National Stabilization fund was $88 billion before they spent at least $10 billion on pointlessly defending the ruble. The $70 billion or so that is left is a far cry from what the Russian state would need to cover the fall in revenue if they were to stop exporting gas to the European Union.

The second question is: to whom would they sell all this extra gas if not to Europe? Certainly not Turkey, it doesn’t need all this gas, and the gas infrastructure out of Turkey is insufficient to place such volumes onto the global market. China? There are no existing routes that can deliver this gas to the Chinese and even if constructed, China will not pay European prices for gas. Russia, even if they won’t admit it, is comfortable in its dependency on European consumers because the long-term contracts Gazprom has with the Europeans are well above what the current spot market price is for gas. If Russia is to negotiate new contracts with China, Turkey, or anyone else now, the price will be lower.

The third problem with Miller’s threat is the infrastructure from Russia to Turkey. The so-called Turk Stream is not built yet, Gazprom doesn’t have nearly enough cash on the books to finance it and because of Western sanctions, obtaining long-term loans on the private market is not an option. So here too, the big unknown is who is going to finance this pipeline, under what terms and how this will impact the profit margin on Russia’s gas exports. In all likelihood, this project is no more based in commercial reality than its South Stream predecessor was.

Bottom line, the Russians can’t afford not to sell gas to the Europeans unless they are prepared to deal with a 50 percent contraction in their economy.

Accordingly, the Europeans have some maneuvering room. For one, they should insist on Russia honoring its contracts and continuing its deliveries through Ukraine. If Ukraine is an unstable transit state, it is because Moscow made it so and Putin holds all the necessary keys to reestablish stability in Ukraine. Europeans, with enough gas reserves to last throughout the winter, can afford to tell Putin enough with the bullying, and call his bluff. Abandoning Ukraine in its hour of need would be catastrophic for stability on Europe’s eastern periphery, and not least, a bad move for Europe’s overall energy security.

The last thing Europe should agree to is buying Russian gas at the Greece-Turkey border. This idea undermines Europe’s direct access to alternative gas supplies from the Caspian Sea, Iran and Iraq. The southern gas corridor, which is designed to take full advantage of the gas available from these zones, is a declared strategic energy interest of the EU. By increasing access to non-Russian gas, Brussels will increase competition on the European gas market, thus lowering the energy price for consumers and increasing overall energy security. Why on earth would Europe build a pipeline to the Turkish-Greek border just so it can pick up more Russian gas, especially when it already get this same gas through Ukraine? By agreeing to this most recent proposal from Moscow, Europe would in essence be agreeing to finance the pipeline infrastructure for which Russia has a large political appetite but can’t afford. In essence, what Miller is proposing to the EU is South Stream in disguise, and asking the EU to pay for it.
Finally, Europe needs to press on Ankara. By hugging so tightly with the Russian president, the Turkish president, Mr. Recep Tayyip Erdoğan, may feel he has found a political soul-mate, but his short-term feel-good politics are further compromising Turkey’s role in playing a stable and reliable energy bridge for Europe and the Caspian, and more importantly, he and his team are now undermining the viability of the southern gas corridor, a strategic project for the widening of the EU’s energy security.

Europe doesn’t need this bullying coming out of Russia. The message from Brussels to Moscow should be clear and succinct: Europe experts you to honor your gas delivery contracts, and that means we continue to count on you delivering your gas to Europe through Ukraine.

Borut Grgic is the founder of the TransCaspian Project.