How Putin is playing gas geopolitics

Source: Shutterstock/MurzilA

-Kremlin led Gas Geopolitics will continue to be the name of the game as each EU country tries to secure favorable contracts

-Economics self-interest will govern each EU countries priorities in dealing with the Kremlin

-EU high dependence on Russia energy sources will continue to undermine multilateralism and EU policies

With the winter approaching, with high energy prices, a partial failure of the UN Climate COP26 summit, and the demand for natural gas increasing, Russia, is squeezing its highly dependent European consumers. As Russia seeks approval from the European Union to operationalize North Stream 2, the new Russian gas pipeline (controlled by Russia State Owned Gazpron) that bypasses Ukraine and Poland continues to cause tension within the EU and with the White House. The pipeline is a smart tool that Russia will use to continue playing gas geopolitics to expand its foreign policy objectives through the creation of long-term bilateral gas deals. This real politics tactic is not new and continues to undermine the EU’s energy security, while threatening the fragile regional balance of power.

Nord Stream 2 is an under-sea twin pipeline that would carry natural gas from Russia directly to Germany. It will run for 1,230 kilometres and will follow the path of the current Nord Stream twin pipeline beneath the Baltic Sea. The project is primarily owned by Gazprom, but the stakes are held in part by French Engie, Austrian OMV AG, Anglo-Dutch Royal Dutch Shell and German Uniper and Wintershall. The Nord Stream 2 pipeline has faced intense resistance on both sides of the Atlantic since its inception. The pipeline has elicited fierce criticisms from the White House (which sanctioned it under President Trump) and from several Central European nations such as Poland which believe that Nord Stream 2 will cement Russia’s grip on regional energy markets and increase Putin’s capacity to influence his neighbors’ policies. Germany has however been a strong backer of Nord Stream (and lobbied aggressively the White House during the Trump Administration not to sanction Nordstream 2) as this project is of long-term strategic importance as it helps diversify Germany away from nuclear and coal.

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The pipeline is expected to obtain certification from a German regulator by Q1 of 2022 to begin commercial sales of natural gas. When the German regulator gives its clearance (lobbied by former German Chancellor Gerard Schroder who joined the Russia led consortium a few weeks after leaving the presidency in 2005) an additional 17.5 billion cubic meters will start flowing to the EU market via Germany. With natural gas costs at an all-time high (they have quadrupled over the last 6 months), and inflation rate at 30 years high in Germany and Europe more reliant on Russia imports than ever, the Kremlin has numerous means to utilize its gas resources as a political and economic weapon. In a regular economy, the gas market thrives when driven by economic incentives. It would be foolhardy for a rational trader to lock up transit capacities just to keep pipelines empty. However, if a market player aims to achieve geopolitical objectives, such as restricting market access and isolating a country from supply sources, it is quite straightforward. Conveniently, while the energy crisis has pushed up prices and reducing supply, it has simultaneously fuelled Nord Stream 2’s approval process.

The Nord Stream 2 pipeline is also heavily criticized by Ukraine, the Kremlin number one regional enemy, as it deprives Ukraine of a stable source of revenue which comes from transit fees (of about US$ 2.5 billion dollar a year) for natural gas passing through its territory. The EU itself has also criticized the pipeline because it does not follow the EU bloc transparent and accountable regulations and undermines the EU common energy policy. In Russia’s defence, the Ukrainian pipeline that the Kremlin is bypassing via Nordstream 2, is decrepit and insecure requiring over US$ 8 billion to upgraded it. As an alternative, the Nord Stream pipelines, which together have cost US$ 20 billion, uses cutting edge technology reducing supply risk interruption and supply regional shocks.

EU Regional Dependance on Russia Gas: Today, the EU receives 45% of its natural gas from Russia, this dependency is increasing given that in 2017 the gas import from Russia was 35% of total. Since Gazprom does not have much competition, Gazprom can charge high end user prices and influence European energy policy. That is why countries such as Poland, Lithuania, and Ukraine lobbied the European Union (EU) for third party access to existing pipelines. These countries want to be able to receive Russian gas via pipeline without having to pay higher rates. Lately however, these efforts have been blocked by EU members who benefit from cheap Russian gas and oppose the diversification of supplies. Countries such as France and Hungary fear that allowing other countries access may weaken Gazprom’s grip on supply terms and lead it into demanding stricter conditions elsewhere.

Final Thoughts: Germany driven by self-interest, will help secure the Nordstream 2 deal for the Kremlin, undermining any progress in breaking Russia’s monopoly on Central and Eastern European gas supplies. Energy deals will continue to be governed by bilateral long term gas contracts with the Kremlin as opposed to embracing the EU clumsy common energy policies. The weaponization of Nord Stream 2 is no longer a theoretical problem as it is supported by strong arguments of cheaper supply with less political hassles. Furthermore, the Kremlin will continue to use economic crisis such as the one caused by the Covid Pandemic, and geopolitics division to broker advantageous bilateral deals.

As I remember my time at the World Bank in 2010, helping Easter Europe move away from its dependency to Russia’s gas, I realize that the politics of natural gas have gotten worse and continue to divide Europeans. The Kremlin in the meantime, as it did back then, celebrates bringing to market new gas infrastructure which increases the long-term demand for its energy sources. This happens as over 140 World leaders digest the disappointing results of the UK COP26 failing to convince the world to move away from fossil fuels.

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