As tensions keep growing in Eastern Ukraine and along the Russian border, so do possible threats on energy supplies and a stable diplomacy between Russia and the West. The G7’s leaders have now invited Putin to stay on this club’s doorstep. It has been a while since the Kremlin had been so staunchly ostracized in diplomatic circles. Evidently, GazPutin could not care less and he has got strong reasons to think so.
First, Gazprom is no longer dependent on Ukraine for transiting gas to Europe. The North Stream pipelines now help transporting Russian gas all the way to Germany across a 1,224-kilometer infrastructure running under the Baltic Sea. The Ukrainian transit network remains essential for gas supplies to south-eastern Europe, but the European Union also financed the North Stream pipelines in order to strengthen its energy security at the cost of a higher dependence on Putin and his oligarchs’ Russia Inc.’s gas. Putin now holds Germany and a number of major EU economies under the dependence of Gazprom’s natural resources.
He knows that a rise in Russian gas prices will increase manufacturing costs and slow down the Union’s competiveness. In the Ukrainian context, what could be a better message than threatening to throw a costly spanner in Europe’s economic engines so as to deter any meaningful anti-Russian sanctions? No wonder that Merkel is furious.
Next, Vova is a lawyer and certainly enjoys contract law. In his recent reply to Putin, Europe’s Barroso felt obliged to remind Russia’s leader that Europe “expect[s] commercial operators on all sides to continue respecting their contractual obligations and commitments”. Putin could not agree more.
When considering the Ukrainian gas debt, he is happy to show Europe and Russia’s business counterparts, how GazPutin can enjoy making his partners feel the strangling ties of his gas contracts. With Ukraine he found the provisions on default and payment particularly helpful. In article five, the 2009 gas supply contract between Gazprom and Nafotgaz allows the Russians to request prepayments of all future deliveries, should Naftogaz fail to meet its standard payment deadlines. In March 2014, Naftogaz failed to foot its USD 500 million Russian bill thus adding to the Ukrainian crisis and the country’s multi-billion energy debt. Vova’s ice-cold message to Naftogaz and Ukraine could not therefore be any clearer. Russia will shift to prepayment and Ukraine will have to pay ahead of deliveries if it wants to see more Russian gas shipments. Yet, Putin-the-lawyer must have also reflected on his contract’s force majeure provisions and their impact on payment obligations. Now, the good news is that the IMF is throwing USD 17.1 billon on Ukraine, with USD 3.2 billion being made available immediately.
Thirdly, the assault on Ukraine confirms that the West has yet to come to terms with its energy and defense priorities. This crisis shows once more how Europe remains split in terms of diplomatic action and external leadership. France and Germany have been leading the dance under US and NATO collaboration while the UK and other historical EU members are holding their breath damning the risk of shaking business and commercial relationships with Russia. Ultimately, this diplomacy over a “fait accompli” looks like a League of Nations’ kerfuffle with an unprecedented risk of Syria-style suffocation. If GazPutin needs to strangle Europe by causing a surge in gas prices he will do it in order to get a free-hand on the future of Ukraine. Unlike what some commentators seem to suggest, Gazprom can suffer a bit of a strain on its balance sheet and the popular support for Vova at home is no myth. Putin is determined to win this game, whatever the outcome, and the western economies will have no choice but to accept a compromise on Ukraine just as they know they cannot do without Russian gas in the short, medium or even longer term.
Neither the gas markets nor the infrastructures are flexible enough in Europe to swiftly shift supply or demand streams to other energy exporters or resources. As Barroso candidly confessed to Putin, supply contracts are in place and must be performed. And Russia has the lion’s share in this game where it and can play with prices. Despite recent spikes in coal imports, Europe is now entrenched in a costly energy transition that has yet to deliver and must be led to completion through policies which include notably a reliance on natural gas from Russia, Norway and a few others. The German “EnergyWende” also includes a complete phasing out of nuclear and makes Russian gas vital to meet demand. Poland, Ukraine and others have all talked about major initiatives to develop shale gas but have so far left foreign e&p investors disgruntled with governments incapable of swiftly reforming their investment, tax and regulatory frameworks to give a sense to this industry’s exploration attempts. US shale gas is an option but is certainly not ready for shipment.
Now, the 2014 shale gas deals with Shell and Chevron in Ukraine look like Yanoukovych’s final bow, his final attempt to send Russia Inc. a sign that Ukraine could seek some relief from the Russian bill’s pressure by encouraging the development of onshore Ukrainian gas resources. Yet, Vova hates being tickled by former Soviet Union territories. The European shale gas revolution is also an American dream that still has as a long way to go if this continent truly wants to enhance its energy security while trying to support a costly low-carbon energy transition.
Recommended for you
