Russian-Ukrainian-EU gas conflict: who stands to lose most?

The Ukrainian conflict and Russia’s annexation of Crimea is ultimately not about energy, but about power. However the crisis encompasses major and often overlooked energy dimensions of Russia’s destabilisation strategy.



In April, Russian President Vladimir Putin declared in an open letter to European leaders that Europe faces an increasing risk of a new gas supply crisis. Moscow threatened to cut gas supplies to Ukraine (for the third time since 2006) if Russia receives no energy prepayment from Ukraine. More than 86 billion cubic meters (bcm) of the gas exported to Europe by Gazprom passed through Ukraine’s pipeline network in 2013 – about half of the total. The EU response to the Kremlin highlighted that fossil energy exports account for about 50 per cent of Russia’s revenues.

Gazprom has already increased Ukraine’s gas price by 81 per cent from US$268.5 per thousand cubic meters (Mcm) in late 2013 to US$485 Mcm in April. Ukraine considers this new tariff - Russia’s highest gas price in Europe - as unfair and unsustainable. It has said it is willing to pay its US$2.2 billion Russian gas debts when the contracted gas price of US$268.5 Mcm of last December is reinstalled. The European Commission also rejected Moscow’s gas price policies as another game of ‘divide et impera’. It has called for a uniform Russian gas price in the common European energy market.



Kiev’s response to these energy challenges faces significant difficulties. Domestically, the problem is largely with its gas diversification efforts. In Europe, some companies and governments appear ready to sacrifice common EU energy policies and Ukraine’s energy security on the altar of cheaper Russian gas contracts. In the US, companies like ExxonMobil may feel that they have a lot to lose in Russia (which has some of the world’s biggest untapped oil and gas reserves) by helping Ukraine modernise its energy infrastructure and diversify its gas import supplies.

This leads to the following questions; to what extent are the EU and Ukraine able to cope with new gas supply cuts from Russia; can Russia afford longer gas cuts to Ukraine which would affect Europe; and, crucially, who stands to lose most?

Is Russia tied to “mutual interdependence” ?

For the Kremlin, Russia’s energy sector is the most important commercial asset and economic pillar of its domestic stability and foreign policy leverage. Between 2000 and 2012, the government’s dependence on oil and gas sector revenues increased from 47 to 50 per cent of its state budget, and accounts for roughly 25 per cent of Russia’s GDP.



Russia’s energy strategy abroad has always aimed to maintain and deepen Europe’s dependence on Russian energy supplies. This would help increase its economic and geopolitical influence, as well as decrease risks to its national security.

Even before the Ukrainian conflict, Russia had a clear interest in diversifying its gas exports - particularly to Asia. Any sanctions on its energy sector and gas businesses from Europe cannot compensate it by Russia by re-directing its gas exports to China, due to a lack of gas transport infrastructure.

Western economic and energy experts have often claimed a mutual interdependence between the EU and Russia: the EU is dependent on Russian gas and other energy exports; Russia is dependent on the EU as its most important gas export market, European investments and technologies.

But Russian siloviki (officials from the security sector) have always called this an “asymmetric interdependency”. This is because, while Russia can live at least one year without any European/Western investments and technologies, Europe cannot survive even 30 days without Russian gas.

EU gas supply security

Europe gets 30 per cent of its gas imports from Russia, paying around US$250 billion in annual energy bills. In recent years, the EU has enhanced its energy security through a variety of gas diversification projects. The situation today is very different from the last Russian-Ukrainian gas crisis in 2009. And here’s why:

  • The Southern Gas Corridor project will open in a few years importing gas from the Caspian region and - for the first time - circumventing Russia, which will lose its gas export monopoly from the region to Europe.

  • Today much more LNG (liquid natural gas) can be imported as a short-term measure, as there are more LNG gas terminals with more new terminals opening in Poland and Lithuania in 2015 and other countries (i.e. Croatia) through 2020. This will lead to new import options from countries like the US and Israel.

  • The EU can also import much more LNG as its terminals did not use 73 per cent of their regasification capacity in 2013. Over the past two years, Europe has decreased its LNG imports by 45 per cent. However, European LNG imports will be expensive, as they have to compete with Asian LNG import prices two to three times higher than in Europe.

  • New gas interconnectors between Central and East European countries have interconnected “EU energy islands” and allow a much better crisis supply of gas, together with new reverse-flow capacities. However, not all of the “energy islands” have been interconnected. The EU’s short-term measures are still constrained at least for some member states, though this will change over the next two to three years.

  • The EU gas supply situation has also changed. Russia transports only 53 per cent of its gas exports to Europe - in comparison to 80 per cent in 2009 - through the Ukrainian pipeline network, due to the opening of the Nord Stream pipeline.

  • This is not the best time of the year for Russia to invoke any gas supply cuts. Europe experienced a largely mild winter time, leaving gas storage stocks relatively full. The continent consumes much less gas in the spring and early summer than in winter, when any supply cuts would have a much larger impact on Europe’s energy supply security.

  • A European supply deficit for 90 days could be met for most of the EU member states through a combination of alternative supplies, with gas storage stocks being the most important element. Even the Baltic states, which are still up to 100 per cent dependent on Gazprom’s gas supplies, have developed a range of countermeasures for any new Russian gas supply cuts.



The major question now is whether the EU will really live up to its declared policy of increasing its gas import diversification. Or whether it will maintain (or even increase) its gas dependence on Russia.

The support by countries like Bulgaria, Austria, Italy and others of the South Stream pipeline highlights the gap between EU declarations and the concrete outcome of its common energy policies. The South Stream pipeline is the area’s most expensive gas import project, which will further increase the EU’s already high gas prices (three times higher than in the US). This will come at a time when the EU has declared it intends to decrease energy and gas prices to maintain its economic competitiveness. And when many other cheaper gas supply options are available.

The South Stream pipeline may ultimately actually increase the EU’s gas dependence on Russia. It could also undermine the economic rationale of all other gas diversification projects in South Eastern Europe, as the regional gas demand is rather low and the regional gas dependence on Gazprom high. If instead Romania, Bulgaria, Greece, Cyprus and Croatia developed their own offshore conventional and onshore shale gas projects, it would increase their gas production, create many more sustainable jobs and offer export gas via much shorter and cheaper pipelines than Russia’s to other European countries.

The strategic question is no longer whether Europe has alternative gas import diversification options. It is rather whether European member states have the political will and strategic vision to oppose Russian pressure; formulate coherent national strategies; and bring national interests and strategies in compliance with the declared common EU energy and gas diversification policies.