Russia, the West, and Recent Geoeconomics in Europe’s Gas Wars

by Gordon M. Hahn

Russia has advanced forward in something of a tactical and potential strategic victory in the Russo-Western gas war. This is a three-party war, with the US, EU, and Russia each promoting separate interests. It is one sphere where a united West has failed to ‘isolate Russia.’ The US seeks move in on the European energy market with LNG supplies and replace Russian pipeline-delivered natural gas supplies to Europe. Washington is using the risks of dependence on Russian gas and Russia’s ‘bad behavior’ as leverage in attempting to convince Europeans to reject Russia’s Nord Stream 2 pipeline. Russia is said to be unreliable and prone to shut off gas supplies to Europe.

Due to past Russian-Ukrainian gas crises, the Ukrainian crisis, and general Russian-Western tensions, Europe has decided on a gas diversification policy in which each EU member should have at least three sources of natural gas supply. One additional option that could facilitate this diversification policy is US liquified natural gas (LNG), but the US is still unable to supply enough LNG to offset Russian gas supplies that might be rejected by Europe. In the process, Washington is looking less like a ‘team West’ player and more like a solely self-interested power maximizer in European eyes and therefore no more reliable than Moscow. As a result, Europeans are deciding to stick with the Russians while finding new options in the east, such as Turkey and Azerbaijan. This is creating competition if not tensions in present and potential gas transit countries in southeastern and eastern Europe, for example.

The Battle Over Re-Sale: No Victors

One recent battle was largely inconclusive, but if a victor has to be designated it may be Moscow. In May, the European Commssion concluded a settlement with Russia’s Gazprom in May ending a seven-year anti-trust dispute. In return for the EU dropping billions of dollars in penalty fees, GazProm agreed to end limitations on the use of gas purchased by EU members, allow them to re-sell the gas. Some EU members, such as Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia have re-sold or wanted to re-sell gas. Moscow frowned, for example, on Slovakia’s resale of natural gas to Ukraine at cheaper prices than Moscow sought to charge Kiev. The agreement will also restrict Moscow’s ability to charge different countries different prices. So EU members in central and eastern Europe can get a price close to that paid by Germany and appeal to an arbitration court in case of a dispute. The agreement guarantees Russia’s presence on the European gas market at a time when the latter’s reliance on the former has peaked.

The Northern Front: Nord Stream 2

At the same time, the battle over Russia’ Nord Stream 2 natural gas pipeline has heated up. When it comes on line in 2019, the 759-mile pipeline will carry GazProm natural gas along the bed of the Baltic Sea to Germany and double the supply Nord Stream pipeline’s current annual capacity of 55 billion cubic meters (bcm). The Trump administration has threatened yet more sanctions on third-party companies, this time with those that work on the pipeline. The US sanctions threat is an attempt to promote American LNG interests as well as to protect Ukrainian interests, though it contradicts the view that Ukraine should eschew its dependence on Russian gas.

US officials have been hammering home to Europeans the ‘Russian threat’ in tandem with the risk of reliance on Russian gas may pose, which will increase with Nord tream 2, but to no avail. Public opinion is not working in the US favor, with Germans trusting Moscow more than Washington, despite all the crimes laid at the Kremlin’s door by the West. A recent ZDF Television opinion survey found that only 14 percent of Germans regard the U.S. as a reliable partner, while 36 percent view Russia as reliable (www.bloomberg.com/news/articles/2018-05-17/trump-s-global-disruption-pushes-merkel-closer-to-putin-s-orbit). Thus, notwithstanding Ukraine, Syria and alleged chemical attacks, Russiagate, and the Skrypals, GazProm’s supplies to Europe have risen to hold nearly 40 percent of its gas market, growing last year by 8.1 percent last year to a record level of 193.9 billion cubic metres (bcm).

Nevertheless, with the EU decision, the U.S., Poland, Ukraine, Lithuania and others have stepped up their pressure on Germany, the Netherlands, Denmark and other western Eureopean EU members to abandon the Nord Stream 2 project. Germans and other western Europeans are unlikely to give up the short-term gain of energy security for the US LNG given the higher price and unproven nature of Washington’s numerous allegations against the Kremlin. German officials say they still have no proof from 10 Downing on Russia’s culpability for the Skrypal poisoning so loudly trumpeted by British PM Theresa May.

One motivation for the Russians in building Nord Stream 2 is to obviate the need to transport gas through Ukraine, which will hurt Ukraine’s own energy supply – given Ukrainian skimming — and overall economy beyond the present non-sale of Russian gas to Ukraine. Another Russian motivation is to avert the unreliable Ukrainians, who have failed to make payments according to contract in the past causing Russian gas cutoffs to Ukraine and thus Europe with the resulting crises blamed solely on Moscow. The Trump sanctions threat has put Germany and the other Nord Stream 2 supporting countries between a rock and a hard place, between Russia and the US. Therefore, German Chancellor Angela Merkel, while supporting Nord Stream 2, has called for guarantees from Russia that Ukraine will remain a gas transit country. Ukraine’s current contract with Russia ends in 2019 at the very time Nord Stream 2 is to go on line and the EU has urged re-starting EU-mediated negotiatons now in order to avoid another gas crisis. Putin agreed to do this at his meeting with Germany’s merkel in late May. Nord Stream 2 significantly strengthens Putin’s hand in any such talks.

The Southern Front: Turkish Stream, SGC and the Azeri and Bulgarian Factors

Russia is strengtheining its position on the European gas war’s southern front by building the Turkish Stream (TS) gas pipeline to Europe. TS consists of a sea and a land leg. The former runs under the Black Sea from Russia to Turkey and is built, with Russo-Turkish talks on the land leg ongoing.

Russia’s Turkish Stream is being challenged by the Southern Gas Corridor (SGC) backed by Western powers, including the EU (along with Turkey and Azerbaijan), which sees the SGC as a means of diversifying from dependence on Russia. Not just Turkey, but Azerbaijan is emerging as a major player on the EU gas market, with a shift in policy accenting gas supplies to Europe as well as oil supplies as in the past. The SGC consists of three components: an expanded South Caucasus Pipeline and the to be constructed Trans-Anatolian Natural Gas Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP). TANAP is 51 percent Azerbaijani owned, 37 percent Turkish, and 12 percent belonging to British Petroleum. The SGC will carry Azerbaijani gas through Turkey to Europe and will be able to supply up to one-third of the gas consumed by Bulgaria, Greece and Italy (https://en.trend.az/business/energy/2910573.html). However, the source of the gas supplying the pipeline demonstrates the limits of Western attempts to isolate Russia (and Iran). Azerbaijan’s Shah-Deniz gas field is co-owned by British Petroleum (29 percent), Turkey’s Turkish Petroleum (19 percent), Azerbaijan’s SOCAR (17 percent), Malaysia’s Petronas (15 percent), Russia’s LukOil (10 percent), and Iran’s NICO (10 percent). Moreover, Russia’s LukOil is negotiating with SOCAR a stake in Azerbaijan’s second-largest gas field, Umid-Babek, which also includes Britain’s Nobel Upstream (https://newsbase.com/topstories/lukoil-talks-join-umid-babek-project?utm_campaign=466286_GERD%2031%20May%202018&utm_medium=email&utm_source=NewsBase%20LTD&dm_i=4NTN,9ZSE,2Q5R2D,13DVS,1).

Again the Ukrainian issue is part of the picture here, as a good portion of GasProm supplies to Bulgaria go through Ukraine. Turkish Stream can replace at least some of that supply should Moscow decide to entirely avert Ukraine’s pipeline system. It is of interest that no one in the West has offered to include in any of these projects or attempted to fashion a pipeline or pipeline extension that could link up with the Ukrainian network.

During Bulgarian President Rumen Radev’s late may visit to Moscow, Putin reported to Radev that during his meetings with Turkish President Recip Tayyip Erdogan, the latter said he would pose no oppsotion to extending the Turkish Stream gas pipeline to Bulgaria. In response, Radev seemed to suggest making Bulgaria a “a gas redistribution center, a hub” for the Turkish Stream’s supplies further into Europe (http://kremlin.ru/events/president/news/57608). Moreover, one gets the impression that Bulgaria is wary more about its dependence on Turkey and Ankara’s new offensive energy policy in Europe than on Russia and might help Moscow detour Ukraine. In 2015, Erdogan declared a major policy initiative of making Turkey a, if not the major energy transit hub for supplies heading from the east to Europe. Russia’s annexation of Crimea could help Russia in its talks both with Erdogan over the Turkish Stream and pose the threat of undermining the SGC. It may also help Putin deal with Merkel, Kiev and the EU over the Ukraine pipeline system’s future role. Bulgarian President Radev also said in Moscow that Sofia supports building a direct gas pipeline under the Black Sea to bring Russian gas to Bulgaria (https://echo.msk.ru/news/2206394-echo.html). The Bulgarian option could be used by Putin to threaten Erdogan with reducing the Turkish Stream’s supplies or abandoning it altogether in favor of a Black Sea Russian-Bulgarian Stream and to reduce Russia’s dependence on Ukraine as well.

Implications

Thus, EU energy diversification policies are transforming Turkey, Azerbaijan and perhaps even Bulgaria into key players on the southern gas transit front, while Ukraine falters to Germany, and eastern Europe to Western Europe on the northern front. Tensions between Ankara and Sofia on these grounds cannot be excluded, and they could draw in Turkey’s semi-all Azerbaijan. US, EU, Russian and Ukrainian energy diplomacy is likely not only to be focused on each other, therefore, but also on Ankara, Baku, and Sofia over the next year. Unless, the US can rapidly reduce the cost of extracting and shipping LNG to Europe, it is unlikely to be able to become a major alternative to these players, and Russia will continue to dominate the European gas market, with a balance of competition and cooperation with Azerbaijan.

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About the Author – Gordon M. Hahn, Ph.D., Expert Analyst at Corr Analytics, http://www.canalyt.com and a Senior Researcher at the Center for Terrorism and Intelligence Studies (CETIS), Akribis Group, San Jose, California, www.cetisresearch.org.

Dr. Hahn is the author of Ukraine Over the Edge: Russia, the West, and the ‘New Cold War (McFarland Publishers, 2017) and three previously and well-received books: Russia’s Revolution From Above: Reform, Transition and Revolution in the Fall of the Soviet Communist Regime, 1985-2000 (Transaction Publishers, 2002);  Russia’s Islamic Threat (Yale University Press, 2007); and The Caucasus Emirate Mujahedin: Global Jihadism in Russia’s North Caucasus and Beyond (McFarland Publishers, 2014). He has published numerous think tank reports, academic articles, analyses, and commentaries in both English and Russian language media and has served as a consultant and provided expert testimony to the U.S. government.

Dr. Hahn also has taught at Boston, American, Stanford, San Jose State, and San Francisco State Universities and as a Fulbright Scholar at Saint Petersburg State University, Russia. He has been a senior associate and visiting fellow at the Center for Strategic and International Studies and the Kennan Institute in Washington DC as well as the Hoover Institution at Stanford University.

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About Gordon M. Hahn