Markets are spiking because of fears Putin will use energy as a weapon. Here's why he won't.
European energy markets are worried about the impact Russia’s invasion of the Crimean peninsula, and the threat it poses to the rest of Ukraine, could have on the continent’s supply of natural gas. But past is not always prologue — and while Russia has used natural gas as a cudgel scores of times since the end of the Soviet Union, its ability to cow Europe by withholding energy exports is not what it used to be. In fact, Russia and gas giant Gazprom depend as much on Europe as Europe does on them.
Natural gas prices in Europe rocketed Monday as the military and diplomatic standoff in Ukraine escalated. Officials from Ukraine’s gas company said Monday that there have been no physical supply disruptions since the Russian military incursion into Crimea, but gas prices jumped 10 percent in trading in the U.K. and the Netherlands, and more than 8 percent in Germany. Traders focused on a pair of simple facts: Russia’s gas exports to Europe reached record highs in 2013, and about half of that was shipped through transit pipelines that crisscross Ukraine.
Worries over the fate of those natural gas supplies are certainly understandable. Russia has shown in the past twenty years how eager it is to use energy exports as a weapon, cutting off gas supplies at one time or another more than 40 times. Russian neighbors such as Belarus, Lithuania, Moldova, and Azerbaijan have all faced threats of Russian energy cutoffs as they flirted with pro-European policies in the past few years. Lithuania’s prime minister accused Russia of waging "economic war" last September after Moscow threatened gas supplies and interfered with cross-border trade, apparently to punish the Baltic country for seeking closer ties with other EU countries.
Ukraine itself suffered a pair of painful gas shutoffs in 2006 and 2009 because of contract disputes with Russia, both of which affected downstream European customers. Ukraine has dramatically increased the amount of gas it is buying from Russia in recent days, but that seems motivated less by a desire to fill gas storage facilities and more by the fear that Moscow will make good on threats to jack up gas prices for Ukraine in the second quarter of this year. Moscow slashed gas prices for Ukraine in December as part of its effort to woo then-President Viktor Yanukovych away from Europe and toward Russia
Still, Russia would almost certainly lose more in an energy war with Europe than it would gain. Fundamentally, energy trade between Russia and Europe is a two-way street. As much as European policymakers fret about dependence on Russian gas, Gazprom frets about dependence on the European market, which accounts for fully three-quarters of its export sales. More broadly, Moscow relies on oil and gas exports for one half of its federal budget. That makes a prolonged shut off of gas exports to Ukraine and the rest of Europe a dangerous proposition for Russian President Vladimir Putin.
"There are always costs to Russia playing the energy card, but I think those costs now are higher than they were a couple of years ago," Jeffrey Mankoff of the Center for Strategic and International Studies told Foreign Policy.
The other reason Russia might think twice about using energy as a weapon this time around is that Europe has improved its defenses and isn’t as vulnerable to Russian energy blackmail as it was just a few years — or even a few months — ago.
First, spring is nearly here. In 2006 and 2009, Russia cut off gas supplies to Ukraine, and by extension to the rest of Europe, in January, the coldest part of the winter. The current crisis is taking place in the spring, when natural gas supplies drop dramatically because of lower levels of residential heating. Forecasters expect unseasonably warm temperatures to continue across Europe until at least summer.
Second, that warm spring is coming after an unusually mild winter in Europe, though certainly not in North America. Natural gas stocks across the continent at are their highest levels in years: inventories on hand could supply central European countries such as Germany, Austria, Hungary and Poland for two to three months, Reuters noted Monday. While that wouldn’t provide insulation against a long-term gas supply crisis with Russia, it gives European countries the ability to hold out against short-term threats.
At the same time, Europe has more alternate sources of supply than it did in 2006 or 2009, though they’re not cheaper. The global trade in liquefied natural gas has grown in recent years, with more shipments from big exporters such as Qatar and Australia. The U.S. energy boom, which turned the United States from prospective natural gas importer to hopeful natural gas exporter, has also freed up LNG volumes that have landed in Western Europe. Some lawmakers in the United States want to go even further and are pressing for the Obama administration to use the country’s natural gas bounty to bolster allies overseas.
Rep. Michael Turner (R.-Ohio) on Monday repeated calls for the Congress to pass legislation that would fast-track government approval for gas exports to countries in the North Atlantic Treaty Organization.
"As we have seen before, Russia’s actions in Ukraine demonstrate its willingness to use the threat of military force and energy dominance as political weapons to expand its sphere of influence," Turner told FP. "Increasing natural gas exports would provide our allies with an alternative and reliable source of natural gas," he said.
Given gas storage and warm weather ahead, energy experts figure that Gazprom is actually in the weaker position. "Unlike Ukraine and European importers, the state-controlled Russian giant cannot afford losing a third of its monthly export revenue even for one month," Mikhail Korchemkin, head of consultancy East European Gas Analysis, wrote Monday. While markets were nervous about the price of gas, they also hammered Gazprom stock on Monday, sending shares down more than 13 percent in Moscow and London.
Ironically, Russian efforts to play hardball with Europe over Ukraine could actually make it even more difficult to find new customers for Russian energy that could make the European market less important. For more than a decade, Moscow and Beijing have been trying to come to terms on what seems like a natural deal: Energy-rich Russia could export more oil and gas to energy-hungry China.
However, the two sides have yet to agree on a price for Russian gas. The deal that was meant to be wrapped up by the beginning of the year was pushed back to February, and finally to a summit meeting slated for May. The more time passes, especially if there’s trouble in Gazprom’s main market, the better negotiating position the Chinese will have.
"If they have problems in Europe, that will only make the Chinese intransigent in terms of their position on the price issue," Mankoff said.