Legacy of Rus­sia’s con­trol over east Euro­pean en­ergy lingers on

The National - News - - BUSINESS IN DEPTH - ROBIN MILLS

The Ber­lin­ers and tourists en­joy­ing a cool but dry and sunny au­tumn day in the shadow of the Bran­den­burg Gate were com­mem­o­rat­ing the down­fall of Com­mu­nism and Soviet dom­i­na­tion 30 years ago this past Satur­day. Along with the Ber­lin Wall, an­other bar­rier di­vided the con­ti­nent: be­tween two sys­tems of en­ergy. The dis­man­tling of that legacy con­tin­ues even to­day.

The Soviet em­pire within east­ern Europe was eco­nomic as well as mil­i­tary and po­lit­i­cal. Its satel­lites were grouped into the Coun­cil for Mu­tual Eco­nomic As­sis­tance (Come­con), in­tended to co­or­di­nate eco­nomic plan­ning and con­trol trade. The Soviet Union pro­vided oil and gas to the mem­bers at be­low-mar­ket prices, which be­came com­par­a­tively cheap when world prices of oil quadru­pled in the mid-1970s.

The USSR also be­gan sell­ing gas to Aus­tria in 1968, and gi­ant dis­cov­er­ies in west­ern Siberia al­lowed it to ramp up sup­plies to Ger­many, Italy and else­where dur­ing the 1970s. This cre­ated a mas­sive web of costly in­fra­struc­ture, in­clud­ing the world’s then-long­est oil pipe­line, Druzhba (“Friend­ship”), run­ning into Hun­gary, Cze­choslo­vakia and East Ger­many.

While the Euro­peans needed gas to re­place ex­pen­sive oil and dirty coal, the Sovi­ets re­quired high-spec com­pres­sors and steel pipe­lines. Fol­low­ing the dec­la­ra­tion of mar­tial law in re­sponse to trade union ac­tivism in Poland in 1981 – the har­bin­ger of Com­mu­nism’s col­lapse eight years later – US pres­i­dent Ron­ald Rea­gan at­tempted to sanc­tion sup­plies of tech­nol­ogy to a new pipe­line from the gi­ant Uren­goy field, but the Euro­peans pressed ahead re­gard­less.

Con­trary to Amer­i­can fears, the gas rev­enues did not save the Soviet econ­omy in the 1980s as en­ergy prices plunged, nor did the Euro­peans be­come po­lit­i­cally sub­servient to Moscow. In­stead, Mikhail Gor­bachev’s pro­gramme of re­struc­tur­ing failed in the face of dwin­dling oil rev­enues, and its east­ern Euro­pean em­pire be­came an un­sus­tain­able bur­den.

Come­con was dis­banded in 1991, only six months be­fore the Soviet Union it­self dis­in­te­grated. From then on within east­ern Europe, there was a sharp di­vide be­tween those coun­tries that moved to a mar­ket-based sys­tem and even­tu­ally joined the Euro­pean Union, and those that did not – Be­larus, Ukraine and Rus­sia.

In the last two of these, most state en­ergy as­sets were seized by “oli­garchs” in the 1990s in a chaotic process of pri­vati­sa­tion and as­set-strip­ping. Vladimir Putin’s Rus­sia then re­took most of them from 2003 on­wards. Gov­ern­ment con­trol over Gazprom was re­asserted and the gas ex­port mo­nop­oly be­came an in­stru­ment of state power and geopo­lit­i­cal pol­icy.

But in Ukraine, al­though state op­er­a­tor Nafto­haz re­tained con­trol over the key gas pipe­line sys­tem that tran­sited Rus­sian gas to Europe, var­i­ous well-con­nected busi­ness fig­ures reaped huge prof­its from re­selling gas.

In a game of chicken, if politi­cians in Kiev failed to toe the line, Rus­sia could threaten Ukraine with rais­ing its gas prices and ru­in­ing its en­ergy-in­ten­sive, in­ef­fi­cient econ­omy. But con­versely Ukraine could refuse to pay, forc­ing Gazprom to cut sup­plies through its ter­ri­tory to the EU. This led to a ma­jor cri­sis in the win­ter of 2008-09, when sup­plies to sev­eral east Euro­pean states were cut off en­tirely.

Since then, the EU has en­sured gas can flow into Ukraine from the West, re­mov­ing its de­pen­dence on Rus­sia, and has en­cour­aged grad­ual re­form of en­ergy prices and im­prove­ments in ef­fi­ciency. The En­ergy Com­mu­nity has ex­tended EU law into Ukraine, Ge­or­gia and the Balkans, cut­ting pol­lu­tion, boost­ing re­new­ables, and lib­er­al­is­ing elec­tric­ity and gas mar­kets.

Gazprom, mean­while, has con­structed two pipe­lines, Nord Stream 1 and 2, un­der the Baltic Sea, and an­other, Turk Stream un­der the Black Sea to Turkey and on to the Balkans, to elim­i­nate most of its re­liance on the Ukrainian route. This would cut the $3 bil­lion it pays in tran­sit fees to Kiev each year.

As in 1981, these pipe­lines have at­tracted Amer­i­can op­pro­brium, with at­tempts to sanc­tion Nord Stream 2, partly to clear the way for more US sales of liq­ue­fied nat­u­ral gas. Oddly at the same time, in a sub­plot to the cur­rent im­peach­ment hear­ings, var­i­ous shady as­so­ci­ates of Don­ald Trump’s re­port­edly at­tempted to push Ukraine into in­sert­ing them into Nafto­haz’s man­age­ment.

And vi­tal ne­go­ti­a­tions are on­go­ing to ex­tend Gazprom’s tran­sit con­tract through Ukraine, which ex­pires this win­ter. The EU has been host­ing the talks, aim­ing to avoid an­other in­ter­rup­tion in win­ter gas sup­plies. But with Euro­pean gas stor­age at record lev­els, Rus­sia’s po­si­tion is much weaker than in 2009.

East­ern Euro­pean en­ergy in­fra­struc­ture re­mains one of the most en­dur­ing le­ga­cies of the Soviet sys­tem, even 30 years on. Gas trade re­la­tions have se­ri­ously dis­torted Ukrainian pol­i­tics. The EU’s ne­go­ti­at­ing power, and its pur­suit of a com­mon en­ergy mar­ket, have been cru­cial for re­form. It was easy to tear down the Ber­lin Wall, but im­pos­si­ble to rip out Rus­sian pipe­lines. East Euro­pean en­ergy se­cu­rity is far from per­fect. But the move from com­mu­nist em­pire to mar­ket com­mu­nity is bet­ter not just for Ber­lin and Kiev, but Rus­sia too.

Robin Mills is CEO of Qa­mar En­ergy, and author of The Myth of the Oil Cri­sis

Con­trary to Amer­i­can fears, the gas rev­enues did not save the Soviet econ­omy in the 1980s as en­ergy prices plunged

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