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COHEN: Russia’s gas war

- The Washington Times - Tuesday, January 13, 2009

COMMENTARY:

Despite feverish negotiations with participation of the European Union, Russia and Ukraine failed to agree on resolution of the gas dispute between them. Mutual disdain escalated haggling and acrimony between leaders in Moscow and Kiev to hysterical pitch.

With 11 people frozen to death, and tens of thousands shivering, this is a humanitarian disaster caused by the worst energy crisis in Europe since the 1973 Arab oil embargo. Whole towns in Eastern Europe remain without heat. Not surprisingly, Russia is losing its reputation as a reliable supplier of gas, and Europeans are hopping mad.

The clash is over the price of natural gas as well as over geopolitics. Russia, a major exporter, wants top dollar. Ukraine, an importer - but also the site of a key pipeline delivering Russian gas to the rest of Europe - wants bargain prices and higher fees for transit.

On Jan. 1, 2009, things turned ugly. According to the Russian state-owned monopoly Gazprom, Ukraine owed more than $600 million in penalties for late payments. That's when Russia began reducing gas supplies to Ukraine amidst frigid temperatures: 10 degrees Celsius lower than average. The initial reduction affected six countries. Today, the crisis extends to 13 countries from the Balkans to the Baltics.

With temperatures as low as zero Fahrenheit, the demand for heating is growing, mitigated only by declining industrial production. Ukraine used to pay for gas way below Europe's market prices, while Kiev is trying to deny Russian accusations of siphoning off gas earmarked for the Europeans. But Moscow's demands go beyond greed.

The crisis is about more than gas, though. Ukraine is a key energy transit state. Moscow is also signaling the Ukrainians, Europe and the United States that Ukraine should remain within the Russian sphere of influence, and NATO is a no-no.

The crisis demonstrates Europe's strategic dependence on Russian gas. In the long term, the situation must change, to keep Europe from falling hostage to Russia.

Russia has long used energy as a geopolitical weapon. And Ukraine left itself vulnerable by failing to diversify its energy basket away from the cheap Russian gas, clean up corruption, and modernize its own energy sector. Today, Ukraine consumes as much energy as Germany, but produces only 10 percent of German GDP.

Worse, Kiev failed to develop a coherent policy toward its Russian supplier. This is because shady intermediaries, like Swiss-based RosUkrEnergo, in charge of sales of the Russian and Turkmen gas, allegedly greased palms of senior officials in both countries until October of 2008.

The Ukrainian state-owned energy sector remains corrupt, overly politicized, and mismanaged, regardless of who's in power in Kiev.

Europe has left itself vulnerable by relying too much on Russian energy. The European Union and individual capitals have failed to develop, coordinate and implement effective policy that could have prevented the current predicament.

While Europe's domestic gas production is in decline, the demand is likely to rise for the next two decades. Gazprom provides EU members with more than a quarter of its gas.

Around 80 percent of Europe's gas imports from Russia travel through Ukrainian pipelines. And some European countries are entirely dependent on Russian gas.

The Kremlin uses this dependence as a foreign policy tool to apply pressure against states that would adopt policies counter to Russia's national interests. Moscow has threatened or cut off supplies to a number of countries over the last seven years.

With Ukrainian presidential elections slated for 2010, Russia is escalating the gas crisis to discredit President Viktor Yushchenko and Prime Minister Yulia Timoshenko in the eyes of the voters. Russian leaders want Ukraine to lose its leverage over Gazprom as a transit country and make Ukraine appear an unreliable partner to the Europeans, thereby justifying expensive, Russian-proposed gas pipe lines that would bypass Ukraine.

The pipelines, like Nord Stream, chaired by former German Chancellor Gerhardt Schroeder, and South Stream, would only increase Europe's dependence on Russia. And they would cost a fortune - more than $30 billion. Moreover, the more Europeans rely on Russian gas, the less they will be inclined to stand up to Russia over any foreign policy excesses.

Europe's dependence on Russian (and Middle Eastern) oil and gas forces America's European allies to choose between a cheap energy supply and siding with the United States and NATO on key strategic issues, such as missile defense or opposing Russia's treatment of Georgia. This also explains why Europe goes wobbly on Iran or is trying to bail out Hamas.

Though it's primarily a European crisis, the United States can help. Washington can support Europe's diversification of pipeline routes in Eurasia, specifically, construction of the Nabucco pipeline from the Caspian via Turkey. The United States should also encourage EU members to coordinate their energy policy dealings with Moscow.

The next administration should encourage Europe to construct more liquefied natural gas (LNG) terminals and to develop coal, nuclear and competitive renewables as sources of affordable electricity. Finally, the United States should support Ukraine's efforts to modernize its energy sector, including reforms to make it more efficient and transparent.

As frigid Arctic winds blow across Europe, it is time to face the cold facts. Dependence on Russian gas undermines European security. Russia is likely to use its energy muscle to impose its geopolitical agenda on its neighbors, today and in the future. To change this situation, Europe, including Ukraine, must work with the United States to diversify sources of energy and stand up to Russian bullying.

Ariel Cohen is senior research fellow in Russian and Eurasian Studies and International Energy Security at the Katherine and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation.