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The Oil and Gas Needle

October 30, 2017
How European Reliance on Russian Fuel Enables Manipulation from Moscow

By Owen Voutsinas-Klose and Zachary Falber

Background

When the Soviet Union collapsed unexpectedly in 1991, several new sovereign nations formed, including Ukraine, Latvia, Estonia and Lithuania. For decades these countries had been integrated into the communist, Moscow-centric Soviet economy, complete with state run businesses that encompassed sectors from energy to services.

These deep economic ties to Moscow have survived to the modern day, and present a strategic conundrum to western policymakers as Russia leverages market dominance to manipulate political outcomes and garner influence over Europe. The energy industry offers a potent mechanism for the expression of Russian expansionist tendencies and should be countered to ensure efficient economic outcomes and Western investment. 

A recent study, entitled The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe, conducted by the Center for the Study of Democracy, found that Russia’s economic footprint constitutes somewhere between 11 percent (Hungary and Slovakia) to 22 percent (Bulgaria) of the national economies over the last decade. In certain cases, Russia attempts to conceal the reach and penetration of its economic interests through shell companies and offshore accounts which have the potential to affect the economic data that is collected in this field [1].

Where Gas and Politics Intertwine

Eastern European dependence on Russia is especially striking when considered in the context of the oil and gas industry. The aforementioned study concluded that, “the share of Russian gas in the domestic consumption of the five countries included in the study has never fallen below 60 percent, and since 2004 has usually remained above 80 percent.” An example of this dependence can be observed in an incident that occurred around New Year’s Eve of 2009, when a price dispute broke out between Russia and Ukraine. This ultimately led to an embargo in which 18 countries found themselves cut off from oil and gas in middle of winter [3]. Most of the pipelines that carry Russian oil and gas into Europe run through Ukraine, where Russia has maintained an interest in maintaining and exerting control. Ukraine is perhaps the best case study of dependence. Ukraine’s economy has suffered from its political struggles with Russia; Ukrainian GDP shrunk by 6.5% in 2014 and 9% in 2015 [4]

Russia has also used gas prices as a part of its attempts to manipulate elections. In 2014, Russia aided pro-Russian Hungarian PM Viktor Orban by dropping gas prices a week before his reelection. Russian economic power does not only impact Eastern Europe but reaches into the heart of the European Union. For example, former German Chancellor Gerhard Schröder stepped down to become the head of Gazprom, the Russian state owned gas company. Russia has pushed to exploit economic weaknesses in Southern European countries, such as Greece, through proposals for new pipelines and projects, and European and American officials have accused Russia of surreptitiously financing anti-fracking and green political movements, in the hopes of stopping domestic production and energy independence [5]

The Response

Russia’s economic influence on Eastern Europe may pose a threat to American and European geopolitical interests and stability. Not only does Russia exercise strong economic clout over the former Eastern Bloc nations, but it is the largest supplier of natural gas to the EU, which affords it considerable impact over western EU nations such as Germany and France. In an effort to counteract Russia’s economic control, American officials have sought to increase American exports of natural gas to Eastern Europe to diversify the region’s energy reliance. Energy Secretary Rick Perry helped facilitate the first U.S shipment of coal to Ukraine in the country’s history, which included a $3 billion deal that would offer a “secure and reliable energy source” to Ukraine [6]. The first U.S. shipments of natural gas to Lithuania and Poland arrived during the summer of 2017 with the intended goal of breaking Russia’s monopoly of the market. Although these shipments are an important first step, American exports of energy supplies to Eastern Europe are unlikely to make a significant dent in the near future on Russian economic leverage, but rather represent an inaugural challenge to Russian clout. Predictably, Russia has reacted aggressively to American attempts to break its energy hegemony. Russia has lowered prices and Gazprom (the state-owned Russian gas company) has shifted its business model from long-term contracts tied to oil prices to short-term auctions. In turn, European Commission leaders have responded to Russian influence by imposing regulations on Russia’s gas infrastructure and ownership [7].

(Image: Proposed route of the Nord Stream 2 Pipeline Source: Wikimedia Commons)

(Image: Proposed route of the Nord Stream 2 Pipeline
Source: Wikimedia Commons)

Russia’s energy market dominance maintains Russian pressure on Eastern Europe despite an inability to exert direct territorial control over the area.  Russia already has an inherent advantage over other potential suppliers, given that it is advantageously located in relation to its market; making it far cheaper to liquefy natural gas and transport via pipeline from Russia than to transport energy products from the United States on transatlantic ships. A survey from Germany validates this view among potential consumers, concluding that only 6% of Germans thought that the country should import less gas from Russia and more from the United States. [8] Meanwhile, Russia is expanding its gas export capacity; Gazprom has proposed a pipeline known as the Nord Stream 2 that would export gas to Europe through a 750-mile pipeline under the Baltic sea. In August, President Trump signed a bill authorizing him to impose sanctions on companies working on the Nord Stream 2 (many of whom are German), and although Germany expressed prior support for Russian sanctions, the bill was opposed by the German government [9]

Conclusion

Approximately 75% of Russia’s gas exports is transported to European states, and nearly 40% of the Russian government’s revenue comes from the sale of energy products [10] Russia is therefore just as dependent on European consumption as Europe is on Russian exports. The European Union can counter Moscow’s market dominance through structural policies, including the active promotion of open markets in former Eastern European countries. Market liberalization, pursued by cooperation with the European Union and Eastern European countries, would also expedite economic integration, and promote European investment opportunities in the Russian-dominated economies. The approach could prove impactful in the energy sector, where increased imports of non-Russian gas could deny Gazprom a monopolistic market share and encourage competition in the energy sector. Adopting a strategic interest in reducing Russian economic influence, particularly in energy, will reap geopolitical benefits for the United States and Europe. This market approach will benefit European consumers by opening the gas sector to Western competition and thus prevent Russian manipulation of energy supply and gas prices.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1] http://www.csd.bg/artShow.php?id=17805 (page 10)

  [2] https://csis-prod.s3.amazonaws.com/s3fs-public/publication/1601017_Conley_KremlinPlaybook_Web.pdf

  [3] http://time.com/2828086/europe-oil-gas-russia-g7/

  [4] https://www.nordeatrade.com/en/explore-new-market/ukraine/economical-context

  [5] https://www.nytimes.com/2015/06/08/world/europe/russia-fights-wests-ukraine-sanctions-with-aid-and-ideology.html?_r=0

  [6] http://www.washingtonexaminer.com/trump-officials-celebrate-first-coal-shipment-to-ukraine/article/2632173 

  [7] https://www.wsj.com/articles/russia-readies-for-u-s-gas-competition-in-europe-1503140402

  [8] https://www.wintershall.com/fileadmin/07_Reference_Data/01_Factsheets/01.1_English/01_All/Factsheet_Forsa_USA-Russland_en.pdf

  [9] https://www.rferl.org/a/germany-urges-eu-fight-back-against-us-russian-sanctions-bill-brigitte-zypries-economy-minister/28651923.html

  [10] https://www.cnbc.com/2017/08/23/us-pressures-russias-stranglehold-over-europes-gas-market.html

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