Putin is Losing Eastern European Energy Gamble

OilPrice.com

By Daniel J. Graeber | Thu, 17 April 2014

Russian President Vladimir Putin said he doesn't think the European community can do without the natural gas it gets from energy monopoly Gazprom.  With a Russian economy starting to decline, however, it may be Gazprom that's too strongly interconnected to the European market to break free.

The narrative over European energy security reaches at least back to 2006 when Gazprom first cut gas supplies through Ukraine. The fallout from the latest disruption in 2009 put opposition darling and former Prime Minister Yulia Tymoshenko in prison, but now the tables have turned for a Ukraine tilting more strongly toward the European Union.

Last week, Putin warned European leaders that gas supplies through Ukraine may be cut if Kiev didn't settle its $2.2 billion gas debt to Gazprom. With European allies mulling the best way to break Russia's grip on the region's energy sector, Putin said there are few alternatives to Russian natural gas.

"Can they stop buying Russian gas?" he asked in a question-and-answer session this week. "In my opinion it is impossible."

Russia sends about 15 percent of its natural gas supplies bound for the European community through the Soviet-era transit network in Ukraine. The European energy market has options in Caspian gas waiting in the wings, and potentially liquefied natural gas deliveries, though those alternatives provide little short-term relief.

U.S. State Department spokeswoman Marie Harf warned Putin against using energy as a geopolitical tool in a crisis that's re-opened old Cold War wounds.

"We’ve said very clearly that Russia should not use this as a weapon and that, actually, Russia has a lot to lose if they try to do so," she said.

Before the situation erupted into one of the most severe Eastern European crises since the 1990s, the Kremlin had expected 2.5 percent growth in gross domestic product.  Now, Economic Development Minister Alexei Ulyukayev said GDP growth should be "near zero" and the Ukrainian row may be to blame.

Trade in oil and natural gas nets Russia about 70 percent of the estimated $515 billion in export revenue and accounts for more than half its federal budget. Though Gazprom has sought entry to a growing Asian economy, most of its natural gas heads to the European market, meaning Putin's Russia may be as strongly linked to the EU as the EU is linked to the Kremlin.

Russian First Deputy Prime Minister Igor Shuvalov said the economic situation in the country in part depends on how the Ukrainian crisis plays out. The World Bank, he said, expects 1 percent economic growth for Russia this year. The view from the Kremlin, however, is much more pessimistic. With both Russia and the European community interconnected by natural gas, the relationship may remain intact despite the rhetoric from both sides of the lowering Iron Curtain.

By. Daniel J. Graeber of Oilprice.com