Europe scrambles to break gas dependence on Russia, offers Ukraine military tie

The Telegraph (UK): 22. 03 2014.

Europe scrambles to break gas dependence on Russia, offers Ukraine military tie
By Ambrose Evans-Pritchard

South Stream pipeline intended to link the EU to Russia through the Black Sea by 2018 is now “dead”

European leaders have rushed through plans aimed at breaking the Kremlin’s grip on gas and energy supplies, marking a fresh escalation in the emerging Cold War between Russia and the West.

The move came as the EU slapped sanctions on 12 leading Russians in President Vladimir Putin’s inner circle, and vowed “additional and far-reaching” action if he intervenes in eastern Ukraine or further destabilises the region. The European Commission has been told to cock the gun by preparing “targeted measures” immediately.

The South Stream pipeline intended to link the EU to Russia through the Black Sea by 2018 is now “dead”, according to sources in Brussels, hitting contractors close to Mr Putin. EU staff are to come up with plans to shield Europe from energy blackmail by Russia within 90 days, finding ways to prevent frontline states being picked off one by one. Ukraine’s premier, Arseniy Yatsenyuk, said in Brussels that the West must stop Russia deploying energy as a “new nuclear weapon".

The radical shift in EU energy policy comes as Russia feels the chill of US sanctions imposed on Thursday. The share prices of companies linked to oligarchs on the US blacklist plummeted on the Moscow bourse.

Gas group Novatek, owned by Putin-ally Gennady Timchenko, has dropped 16pc since he was named. He has had to sell his 43pc stake in Gunvor to his partner in order to save the firm, the world’s fourth largest oil trader.

Visa and Mastercard halted transactions for Rossiya bank. Mr Putin said defiantly that he would make sure his salary was transferred to a new account at Rossiya “first thing Monday morning”.

They also cut off SMP bank, co-owned by Mr Putin’s judo partner Arkady Rotenberg, though the bank itself was not named – evidence that US firms will not take any risks with US regulators.

Aluminium group Rusal is in talks with lenders to delay rolling over some of its $10bn debt, a sign that Russian companies with $650bn of debt may struggle to refinance loans. An estimated $155bn must be rolled over this year.

“Until yesterday people thought there would two months of shouting and then we get back to business, but nobody is quite sure anymore,” said one Moscow banker. “What’s worrying the markets is that there will be more US sanctions. Russian companies are extremely vulnerable. The real fragility is whether they can roll over their debts.”

Tim Ash, from Standard Bank, said Washington is determined to make Mr Putin pay for changing Europe’s borders by force, and will ratchet up “stealth sanctions” by regulatory muscle. “Foreign companies will have to be very careful who their partners in Russia are,” he said.

American agencies will probe deeper into the origin of funds, using money-laundering codes to tighten the noose. Mr Ash said the US will step up sanctions even if there is no direct Russian incursion into mainland Ukraine. Any attempt to destabilise the Ukrainian government will be punished. “The Kremlin has misread the Americans badly,” he said.

German Chancellor Angela Merkel – emerging as Europe’s dominant figure in the crisis – said there had been an “unbelievable loss of trust in Russia” since the seizure of Crimea. She called for measures to ensure that gas flows can be reversed to supply the most exposed states in eastern Europe.

Professor Alan Riley, from City University, called the comments a “solidarity statement”, pledging that Germany will funnel some of its own gas from the Nord Stream pipeline to Poland, Slovakia and others if need be. “Putin would not dare cut off Germany itself,” he said.

Mr Riley said the EU had spent €1.3bn building inter-connector links across Europe since 2009. All new pipelines have reversible flows. “The EU could probably withstand a cut-off in Russian gas. Putin is far less dangerous today than he was in 2009,” he said.

The pan-EU group Gas Infrastructure Europe said Europe is currently well-stocked with 37bn cubic metres of gas – 47pc of storage capacity – as a result of a mild winter. “Most of the European transmission systems currently can withstand a disruption of Russian gas through Ukraine. The pipeline network is available for diverting gas flows in case of supply problems from Russia, from storage and LNG (liquefied natural gas),” said the group.

Eight EU states have LNG hubs, the largest in Britain and Spain. Poland’s new facility will come on stream this year. Deutsche Bank said gas reliance on Russia is 93pc in Slovakia, 83pc in Poland, 81pc in Hungary, 66pc in the Czech Republic and 61pc in Austria.

Germany's dependence is 35pc, falling to 29pc for oil and 19pc for coal. Very little of the country’s industry relies on power from gas.

The one island of vulnerability is the Baltic region, where Finland, Estonia, Latvia and Lithuania rely 100pc on Russian gas. There are plans afoot to send a “regas ship” to the area capable of supplying liquefied natural gas to a port in Lithuania. “President Barack Obama could commandeer all US regas ships in an emergency and send them to harbours in the Baltics,” said Mr Riley.

The new energy plans were tucked away in the so-called climate dossier of the EU summit but experts said there should be no doubt that the real aim is to confront Mr Putin.

Britain’s prime minister, David Cameron, said there is no symmetry in the economic damage that each side can do to the other, arguing that Russia’s reliance on Gazprom sales matters far more than Europe’s reliance on Gazprom. "Russia needs Europe more than Europe needs Russia," he said.

Yet how the clash between Russia and the West goes is not really driven by economic calculation, and may escalate regardless of sanctions. Mr Putin’s core demand is that Ukraine remains “politically neutral”, certainly outside the Western military camp. The EU swept this grievance aside on Friday by signing an Association Agreement that includes a clause calling for the “gradual convergence between the EU and the Ukraine in the areas of foreign and security policy, including the Common Security and Defence Policy”.

Mr Yatsenyuk played up the military angle, describing the main thrust of the accord as “security and defence cooperation”. Diplomats said this was a red rag to a bull.

“This Association Agreement cuts right across Russia’s geopolitical orbit and I wonder if it’s entirely wise,” said Mats Persson, from Open Europe. “It was a mistake to make Ukraine choose between the EU and Russia. Now they risk repeating that mistake.”

Ian Bond, from the Centre for European Reform, said the military tie is mostly low-key cooperation on tactical issues. “This is not NATO by the back-door, and we are not going to see EU divisions lining up on the Russian border,” he said.

The question is whether Mr Putin sees it that way. Mrs Merkel said last week that he had “lost touch with reality”.