Life – Terror. Ecstasy. Fight. Denial. Flight. Failure. PAIN. Forgiveness. Reconciliation. Hope. Love. Peace – Death.
Russian Gas and Putin’s Power
Under Putin’s stewardship, Russia is rapidly reverting to its old authoritarian ways (minus the communist ideology): power has been centralized, energy and media companies have been nationalized, Kremlin critics have been assassinated, and opposition party members have been arrested and excluded from what many consider rigged elections. There is no sign that Putin is willing to relinquish control anytime soon. He completed a carefully choreographed transition from president to prime minister, essentially handing over the presidency to his trusted understudy Dmitry Medvedev while, by all accounts, still holding tightly onto the reins of power from his new perch.
The most notable example of so-called “pipeline diplomacy” occurred in January 2006: Ensnarled in a pricing dispute with Ukraine, Russia’s natural gas company and sole gas exporter, Gazprom (of which then-Deputy Prime Minister Medvedev was chairman), stopped sending gas to Ukraine to starve the country of needed energy and hasten a favorable conclusion. Ukraine responded by siphoning off Russian gas destined for consumers situated further west, leaving several downstream European countries with an average of 30 percent less Russian gas for three days in the dead of winter. Russia has had similar pricing disputes with Moldova, Georgia, and Belarus.
In light of Russia’s historical disputes with these transit countries, many observers think these new pipelines will allow Russia to act like a boa constrictor, surrounding these states, ready to squeeze them when it seems expedient. (Gazprom has not indicated, however, that it plans to cease using current lines, and in fact is looking to enhance the capacity of the Yamal-Europe pipeline that runs from Russia to Western European markets through Belarus and Poland.)
2022 – The two new pipelines have now solidified Western Europe’s dependence on Russian gas, putting it in the same vulnerable position in which much of Eastern Europe now finds itself. The South Stream pipeline has the added value of presenting a direct challenge to the U.S.- and E.U.-backed Nabucco pipeline, a proposed Russia-free route from the Caspian Sea to Europe.
War in Ukraine is a game-changer.
Several European political leaders were already fretting about whether Russia is a reliable energy partner. Based upon recent events their anxiety is justified. Natural gas currently makes up about one quarter of Europe’s energy consumption, and Russia — endowed with the greatest known gas reserves in the world — supplies 29 percent. In the coming years, according to a European Commission report, Europe’s demand for gas will grow substantially faster than its domestic production, meaning that its dependence on Russian gas will likely increase.
Some in Europe (and beyond) are concerned that Russia will exploit this energy relationship to manipulate gas prices even further (unlike oil, there is no global price for gas since gas is difficult to transport) to strengthen its hand in political disagreements, like the accession of Eastern European countries to NATO (Ukraine), Kosovo independence, and a U.S.-sponsored missile defense program on its borders.
Conventional wisdom suggests that Russia has Europe bent over the proverbial barrel.
But this is certainly not the whole picture. Catch 22 – Russia is also heavily dependent on revenues generated from its energy sector to keep its own economy afloat. Gazprom alone is responsible for some 25 percent of Russia’s tax revenues and, as reported by the U.S. government’s Energy Information Administration, the energy sector provides 20 percent of Russia’s gross domestic product (GDP). Europe has historically played a disproportionate role in expanding Gazprom’s — and by extension Russia’s — booty.
According to Gazprom’s own data, at the beginning of the decade, Europe consumed about one-third of Gazprom’s production, yet was responsible for 60 percent of the firm’s total revenues. This imbalance was the result of greatly subsidized gas prices to former Soviet states and Russia’s domestic market.
Russia’s energy sector is a crutch on which the rest of the country leans.
While Russia is using its energy policy to raise its profile on the global stage, it has up until now been more interested in using the revenues generated to prop up its domestic economy. Essentially, Russia is a real life Wizard of Oz — a superficially powerful giant, that needs to keep its taps open and the gas flowing not only to maintain its global status as a superpower, but arguably to survive.
It is worth revisiting the Russia-Ukraine gas dispute (2007). Since the dissolution of the Soviet Union, Russia’s pipelines have acted like a “steel umbilical cord” — they have kept the infant Caucasus and Central Asian countries producing energy and Eastern European countries transporting energy as de facto parts of the motherland. As part of this arrangement, Eastern Europe received discounted gas in a barter agreement that allowed Russian and Central Asian energy resources to flow through to the west.
At the time of the 2007 Russia-Ukraine dispute, the relationship between the two was seriously strained. Ukraine was slouching westward, having recently gone through the Orange Revolution and the rise of pro-Western President Viktor Yushchenko. As such, it is difficult not to see Russia’s hardball tactics through a political lens and as a natural extension of the previous relationship, with Russia acting like a possessive mother punishing a child who dares to act against her will.
Around the same time Russia was “renegotiating” energy contracts with Moldova, Georgia, and Belarus. The case of Belarus is interesting, because the country has remained closely aligned with Russia since the fall of the Soviet Union. But this allegiance did not save it from experiencing Russia’s stern bargaining techniques — Transneft, Russia’s state-owned pipeline company, ceased sending oil to Belarus for three days in January 2007.
Following the Belarus dispute, Medvedev, then deputy chairman of Gazprom, stated that Russia’s gas company was merely “shifting all our relations with customers to a market basis.” While rhetoric from a Russian official should rarely be taken at face value, Medvedev may have been speaking truthfully in this instance. Since bringing Eastern Europe gas prices closer to market rates in 2007, Russia saw its revenues from these countries increase by 93.5 percent per year. By 2011, these countries started to pay the same prices for Russian gas as does Western Europe. Up until the invasion of Ukraine, Russia appeared to prefer the benefits of energy revenues to those of regional dominance.
Ukraine today, but where next?
Russia most certainly still has aspirations to be a prominent actor outside its borders, and will likely continue attempting to influence regional and global developments, contrary to the West’s desires. It should also be stressed that Russia’s capacity to diversify its pipelines to Europe puts Russia in a position to divide and conquer the continent in the future. Acting like a heart, Russia pumps gas and oil through an expanding number of arteries. The more alternatives it has, the more it can shut down one line without significantly affecting other countries or its petroleum revenues. Putin has steered Russia, into a stronger Russia (again), currently the most powerful atomic power and this time with the addition of another weapon, an energy weapon, in its arsenal. This is not a comforting thought.
Russia’s aggression in Ukraine and subsequent the reported global freezing of it’s $650 Billion War Chest (international currency reserves) and other friendly assets, might be further, backing Putin into a corner that he might only be able to continue to fight. Ironically, Gas Diplomacy may ultimately put him in a weaker position, as has forced Europe to consider alternative sources for energy.
Unless? Putin believes it to be the perfect timing to enact his master plan. If so we are all in deeper shit than we thought? The world must do everything possible, passively and aggressively if necessary, to sue for peace. However, we must also allow him a way out. Alternatively, we must go all in and defeat him. Medium term, Europe must now unify its energy policy and diversify its supply sources — two immensely challenging tasks — if successful, Russia may find itself without the energy arrow in its diplomatic quiver.
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