Putin’s gas prob­lem

Financial Mirror (Cyprus) - - FRONT PAGE - By Paul R. Gre­gory

Rus­sia watch­ers are rightly fo­cus­ing on the lat­est brittle cease­fire in Ukraine, seek­ing to dis­cern Pres­i­dent Vladimir Putin’s in­ten­tions there. But they would be wise not to over­look an­other un­fold­ing strug­gle – one that will have pro­found long-term con­se­quences for Europe and for Putin’s abil­ity to ex­ert pres­sure on the con­ti­nent.

Last De­cem­ber, Rus­sian’s gi­ant gas firm, Gazprom, and a Turk­ish pipe­line com­pany signed a mem­o­ran­dum of un­der­stand­ing to con­struct a pipe­line from Rus­sia to Turkey un­der the Black Sea. This new “Turk­ish Stream” is an al­ter­na­tive to the “South Stream” Black Sea pipe­line from Rus­sia to Bul­garia – a project that the Krem­lin aban­doned in De­cem­ber, in re­sponse to the sanc­tions im­posed by the Euro­pean Union af­ter Rus­sia’s in­va­sion of Ukraine and an­nex­a­tion of Crimea.

The South Stream project failed to com­ply with EU com­pe­ti­tion and en­ergy di­rec­tives, and the an­nounce­ment of the $12 bln Turk­ish Stream is likely to re­in­force Rus­sia’s rep­u­ta­tion as an un­re­li­able part­ner, thus ac­cel­er­at­ing Europe’s search for al­ter­nate sup­ply sources. In­deed, in risk­ing his most lu­cra­tive mar­ket, Putin is ex­hibit­ing an al­most sui­ci­dal dis­re­gard for the Rus­sian econ­omy – ap­par­ently for no other rea­son than to ce­ment en­mity with Ukraine.

The Krem­lin in­tends to re­move Ukraine from a gas-de­liv­ery sys­tem that has been in place since the 1980s, rout­ing sup­plies in­stead through a new and un­tried net­work to a mar­ket that may not even ex­ist. In Jan­uary, Gazprom an­nounced its in­ten­tion to cease ship­ments through Ukraine when the con­tracts with the coun­try’s gas pipe­line com­pany, Naftogaz, ex­pire in 2019. Gas from the Turk­ish Stream will be de­liv­ered to the Greek bor­der on a take-it-or-leave-it ba­sis. Gazprom ex­pects per­mis­sion to carry out de­sign and sur­vey work “soon,” with its first de­liv­ery to Turkey to ar­rive in 2017.

Gazprom’s er­ratic be­hav­iour is not a mat­ter of mi­nor con­cern for Europe. The con­ti­nent re­lies on Rus­sia for some 30% of its nat­u­ral gas, 80% of which is trans­ported through Ukraine. And the con­ti­nent has been left out in the cold once be­fore. In Jan­uary 2009, Gazprom or­dered cut­backs of de­liv­er­ies through Ukraine, caus­ing se­vere short­ages in six coun­tries in eastern and south­east­ern Europe.

In late 2014, Rus­sia cut off Ukraine com­pletely, again sig­nal­ing its readi­ness to use gas sup­plies as a weapon of for­eign pol­icy. The EU rushed in to bro­ker a set­tle­ment that some con­tend was against Ukraine’s in­ter­ests.

But, con­trary to what Putin seems to be­lieve, nei­ther Europe nor Ukraine is likely to be the big­gest loser in Rus­sia’s ef­fort to re­di­rect its gas ex­ports. Gazprom re­ceives twothirds of its hard-cur­rency rev­enues from Europe, and a pe­riod of fall­ing ex­ports and do­mes­tic eco­nomic cri­sis is not the ideal time to play games with your best cus­tomer.

In­deed, the Euro­pean mar­ket is al­ready slip­ping away. Gazprom’s Euro­pean sales plum­meted in the third quar­ter of last year and fell by 25% in the fourth quar­rt­terr.. The ss­llump iin de­mand iiss comi­ing att a time when Rus­sia is des­per­ate for hard cur­rency, ow­ing to sanc­tions that ex­clude it from credit mar­kets. Its ma­jor com­pa­nies are fac­ing huge debt re­fi­nanc­ing needs, its cur­rency re­serves are col­laps­ing, its econ­omy is head­ing to­ward a deep re­ces­sion, and the rou­ble is plumb­ing new lows.

In redi­rect­ing its ex­ports, Rus­sia is in ef­fect de­mand­ing that Europe spend bil­lions of eu­ros on new in­fra­struc­ture to re­place a per­fectly good pipe­line, only to sat­isfy Putin’s de­sire to cause trou­ble in Ukraine. In Jan­uary, Gazprom’s CEO, Alexey Miller, im­pe­ri­ously brushed off Euro­pean con­cerns, stat­ing, “We have in­formed our Euro­pean part­ners, and now it is up to them to put in place the nec­es­sary in­fra­struc­ture start­ing from the Turk­ish-Greek bor­der.”

The ini­tial re­ac­tion in Europe was that Putin ei­ther was bluff­ing or had taken leave of his senses. “The de­ci­sion makes no eco­nomic sense,” was how Maros Se­f­covic, the Euro­pean Com­mis­sion’s vice pres­i­dent for en­ergy union, put it. “We’re good cus­tomers. We’re pay­ing a lot of money. We’re pay­ing on time, and we’re pay­ing in hard cur­rency. So I think we should be treated ac­cord­ingly.”

Putin’s er­ratic and eco­nom­i­cally obliv­i­ous poli­cies are frit­ter­ing away the last rem­nants of what was once Gazprom’s mo­nop­oly po­si­tion in the Euro­pean gas mar­ket. Clearly, if Europe is to spend bil­lions on pipe­lines, it would be bet­ter off do­ing so as part of an ef­fort to di­ver­sify its sources of nat­u­ral gas, rather than deepen its de­pen­dence on Rus­sia. Af­ter all, mem­o­ries are long, es­pe­cially when it comes to frigid win­ters of un­heated homes and closed fac­to­ries.

When one of Joseph Stalin’s chief plan­ners was asked why he was will­ing to de­fend a se­ries of lu­di­crous pro­pos­als, he fa­mously replied, “I’d rather stand for un­re­al­is­tic plans than sit [in jail] for re­al­is­tic ones.” One can imag­ine that Gazprom of­fi­cials are think­ing along the same lines.

If so, they should start think­ing dif­fer­ently. Rus­sia can­not af­ford more eco­nomic pain and suf­fer­ing. But that is what it will get un­less sober heads pre­vail.

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