David Clark: don’t bet against a winter gas crisis in Europe

Marcos Sefcovic, the new European Commission vice-president responsible for energy, was in optimistic mood last week when he predicted a winter without any disruption to gas supplies from Russia. In truth, the trilateral agreement on gas signed by Russia, Ukraine and the European Union in Brussels five weeks ago has yet to be tested and the underlying tensions that made the agreement necessary are far from resolved. Ukraine and Russia remain in a state of undeclared war and this week’s manoeuverings over th

In the Putin world-view, energy has always been about politics rather than economics. In 1999, when he was still Russia’s intelligence chief, he published a thesis in an obscure academic journal calling for an energy policy “aimed at furthering the geopolitical interests and maintaining the national security of Russia.” He has pursued that vision ever since, shaping energy policy with two clear goals in mind. The first has been to reintegrate the post-Soviet space under Russian leadership using the supply and pricing of energy to reward or punish neighbouring countries accordingly. The second has been to use Russia’s advantage as a dominant energy provider in the wider European market to deter the EU from adopting common positions that might conflict with its interests.

Ukraine is where these two objectives come together. It is simultaneously the most prized target in Putin’s search for Eurasian hegemony and a key link in the supply chain bringing Russian gas to Europe. Indeed, the leverage that comes from being a transit country partly explains how Ukraine has managed to maintain its independence in the face of Russian pressure for so long. This is what Putin wants to end. His two immediate priorities are to keep Ukraine off balance and to drive a wedge between it and its European allies in order to block or slow down the country’s integration with the EU. In the longer term, he wants to remove Ukraine as factor in energy relations with Europe in order to strengthen his hand with both.

South Stream, along with the already completed Nordstream pipeline, was part of the strategy Putin devised to bypass Ukraine after the 2006 and 2009 gas wars. Unfortunately for him, the EU developed its own avoidance plan under the banner of market integration: building new gas interconnectors to switch supplies across borders and adopting its Third Energy Package requiring pipeline operators to make capacity available to rival suppliers. The challenge to Gazprom’s monopoly posed by this new approach is the reason why Putin has threatened to cancel South Stream or re-route it through Turkey. He wants EU leaders to see the error of their ways and give Gazprom’s pipelines an exemption from EU competition rules.

The future of South Stream is now in doubt but Putin’s determination to bypass Ukraine and disrupt its relations with the EU is not. He wants to claw the country back into Russia’s sphere of influence and needs Europe to reject Ukraine as a failed state and an unreliable transit country. What better way to achieve that objective than to turn off the taps on the pretext that Ukraine is siphoning off gas destined for EU customers? New monitoring procedures would give the lie to that claim but the truth is no deterrent in Russia’s new informational war. Shivering Europeans would probably be inclined to blame both sides, allowing Putin to argue that new pipelines are needed for Europe’s benefit as much as Russia’s. As if to rub it in, the countries most directly affected would be those in south east Europe slated to benefit from South Stream.

Given that Putin has both motive and means to play politics with gas supplies in the coming weeks, the European Commission is placing a sizeable bet on his self-restraint. It’s an avoidable risk. Additional volumes of reverse-flow gas from Slovakia could cover Ukraine’s winter needs as well as guaranteeing security of supply to countries like Romania, Hungary, Serbia and Bulgaria that depend on gas delivered through the Ukrainian transit system. Pipelines between the two countries have an annual capacity of 100bn cubic metres, all of which could be used for reverse flow. That’s more than twice Ukraine’s total consumption. But Gazprom has pre-booked 80 per cent of it and within that is allowing 30 per cent to sit idle and closed to other suppliers in defiance of European law.

All the Commission needs to do is enforce the rules and compel Gazprom to release that capacity to alternative providers. It wouldn’t even require the physical movement of any additional gas. By using agreements common in the rest of Europe on virtual reverse-flow, or backhaul, Ukraine would be able to offset gas purchased in the EU against the Russian gas it is piping from east to west. It would get a large discount on the price Russia is demanding in the process. Gazprom has put a block on that, too. Brussels could use its competition powers to push these obstacles aside but it needs to act fast. Each day lost reduces the time Ukraine has to build up its stocks and increases Europe’s vulnerability to any supply interruption. The risk of confrontation is raised because Putin always sees weakness as a provocation.

Threats from Russia to reduce gas flows to Slovakia and any other country facilitating reverse-flow require a robust response. Russian officials due to meet the Commission next week should be told that any country treated in this way will be offered replacement supplies from its EU partners. They should also be told that there will be no exemptions from the Third Energy Package for any Russian pipelines, even if it means the final end of South Stream. Europe doesn’t need more pipelines to import gas from Russia. What it needs is enforcement of the rules required to complete its internal energy market and a Russia willing to behave as a normal and responsible supplier. The more forcefully it does the former, the more likely it is to get the latter.

David Clark is chair of the Russia Foundation

Financial Times



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