From today’s Wall Street Journal Europe
The latest natural-gas spat between Russia and Ukraine reveals at least two things: that Gazprom learns from its mistakes, and that Europe does not. The result is not good for Europe’s energy security.
Russia’s state-owned gas monopoly turned off the taps to Ukraine on New Year’s Day, as it did three years ago. In doing so, Moscow complained about its neighbor’s overdue payments and refusal to pay market rates for gas, as it did three years ago. Yet the real reasons for the cutoff were political: punishing Kiev for siding with Georgia in
August’s war and exploiting a fight among Ukraine’s pro-Western politicians.
Here’s where Gazprom’s lesson comes in. Whereas the 2006 cutoff sparked a debate about security of supply in Europe, which gets about 20% of its total gas supply from Russia via Ukraine, Gazprom was careful this time to reassure the Continentals. Its executives toured key EU capitals to insist that their gas supplies wouldn’t be affected. To make good on its promise, Gazprom is pumping extra gas through Belarus and Turkey.
Now, instead of objecting to Russia’s pipeline politics, Europe says it is a “commercial dispute [that] has to be solved by the two parties,” as an EU spokesman put it yesterday. Gazprom couldn’t have said it better. Europe apparently prefers not to notice that Russia’s issues with Ukraine, gas included, are political.
There’s a big potential problem here. Viewing Moscow as the reliable partner, hindered only by a capricious Kiev, may lead Europeans to believe that what they really need are more direct gas links to Russia. The chief options mooted are the Nord Stream pipeline across the Baltic Sea to Germany and the South Stream pipeline across the Black Sea to Bulgaria.
But Nord Stream, which is designed to circumvent Poland, Estonia, Latvia and Lithuania, is Moscow’s energy version of dividing and conquering Central and Eastern Europe. As for South Stream, it has eroded EU resolve to complete the Nabucco pipeline that would cross Turkey and the Balkans, routing Central Asian gas around Russia rather than through it.
As the Europeans weigh these projects, the Kremlin has been striking deals with the very Central Asian countries that could supply Nabucco or other non-Russian pipelines. Diversifying Europe’s gas sources is more important than varying the transit countries between the EU and Gazprom’s fields. That’s a lesson Europe still doesn’t appear to understand.
None of this is to say that Ukraine is innocent in the current gas dispute. With the government in disarray, it’s entirely conceivable that it may have fallen behind on payments, as Moscow charges. Its “energy sector” consists largely of murky middlemen.
Ukraine’s foibles are part and parcel of a state and economy that have failed to become much more democratic and transparent since the 2004 Orange Revolution. Much of the blame for that lack of progress lies at the feet of the country’s biggest political personalities — President Viktor Yushchenko, Prime Minister Yulia Tymoshenko and opposition leader Viktor Yanukovych — who constantly bicker.
But Europe bears some responsibility as well for its lukewarm approach to a country that has tried unmistakably to move toward the West. Europe could be far more active than it has been over the past four years in fostering democratic accountability, the rule of law and transparency in Ukraine. A Ukraine that wasn’t susceptible to the accusations that Gazprom has made about it in recent weeks would bring more clarity to Europe’s energy picture — and Russia’s place in it.
Europe’s energy security is also threatened by Gazprom’s failure to invest adequately in its production capacity, which is widely forecast to begin falling next year. Natural gas prices are linked with oil prices, and the windfall of the past couple of years is coming to an end now that crude prices have fallen back to earth. The credit crunch, along with Russia’s unpredictability for foreign investors, means money won’t necessarily pour in from the outside as it did over the past decade.
Gazprom, whose CEO was predicting as recently as last summer that it would become the world’s largest company by market capitalization, could find itself short of cash at exactly the wrong time. The government is burning through its foreign reserves to prop up the ruble and watching its revenues fall with the oil price, so it may not be able to step in.
Europe cannot, and shouldn’t try to, become independent of Russian gas. The goal is to avoid depending too heavily on Russia. Gazprom’s strong-arming of Ukraine is more evidence of the need to diversify.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved