Op-ed by Paul Roderick Gregory
On October 16, the European Energy Commission published its European Energy Security Strategy on how to limit the potential disruption of reductions of Russian gas supplies to European countries as a consequence of the Russian-Ukrainian War. The European Commission “gas stress tests” show that the damage from a complete halt of Russian gas imports or from a lesser disruption of the Ukrainian transit route can be managed if Europe follows a cooperative approach of free sales of natural gas across borders, infrastructure development, rational storage and other measures. Emergency measures need kick in only in the case of shortfalls in market supplies.
The European Commission study suggests that Europe is in a position to call Mr. Putin’s bluff. Europe can ignore his threats to cut off countries, like Slovakia, Norway or Poland, which supply Ukraine with gas. Market forces will transfer gas to those most dependent on Russian gas under the market solution.
If Putin is not satisfied with the behavior of his European buyers, let him cut them off and see what happens. One thing is clear: He cannot afford the loss of revenues from even a minor reduction in sales. Once Putin fully or partially cuts off Europe, his actions will only accelerate the switch to different suppliers, alternate fuels and new markets. Once he loses the European market, he can enter it again with the reputation of an unreliable supplier limited to bargain-basement spot market sales.
European Commissioner for Energy Guenther Oettinger listens to questions from journalist during a media conference at Brussel.
Reducing dependence to withstand shutdown
The European Commission concludes that Europe can withstand even a complete shutdown of Russian gas if it allows the free flow of natural gas among countries, maximizes the use of storage capacities, allows higher prices to encourage the switch to alternative fuels (including LNG), and completes infrastructure projects on time. Under this market approach, gas will naturally flow to countries most dependent on Russian gas, such as in the Baltics and Balkans. It works if countries do not impede sales across national boundaries.
Europe has been quietly developing programs and infrastructure to reduce dependence on Russian gas since the supply disruption of 2009 associated with an earlier Russian-Ukraine dispute. These counter measures are bearing fruit, and will bear even more by 2015. The 2009 supply disruption, minor compared to current threats, should have taught Mr. Putin a lesson against using energy as a political weapon. Given the intensity of the current threat, Putin perhaps has sealed the fate of Russia’s energy sector, on which his regime rests. Europe now understands it has no choice, despite all of Putin’s machinations, but to turn to alternative energy sources for its survival. If it does not do so today, it must do so tomorrow at a higher price.
Putin’s high-risk game
Without the European gas price of $304 per thousand cubic meter, Gazprom would have no choice but to remove the subsidies from domestic sales gas (at $107) and on sales to former Soviet republics (at $224). Restive Russian consumers would have to pay closer to world prices for their heating bills, and Putin would lose his hold over its “satellites” who no longer rely on Russia for cheap energy.
Russia would be hard pressed to survive the loss of the European gas market. Gazprom’s European revenues have already fallen from $60 billion to $55 billion, and European sales account for one third of Gazprom’s revenue. If deprived of this revenue, Gazprom would run a loss of $25 billion and not a profit of $33 billion. Rather than contributing profits to a federal budget, 55 percent reliant on energy taxes, Gazprom would require subsidies. Its once-proud share price would collapse, and it would be hard pressed to obtain funding from any sources including China, with or without sanctions.
Putin understands that he is playing the highest of risks game. If Europe decides to call his bluff, he will engage in a frantic campaign to divide Europe. He will offer countries bargain gas if they do not cooperate with the rest of Europe. He will increase his propaganda and lobbying efforts to drive wedges between European countries. He will realize this is a fight to the death, and there is no measure that he would not deploy. He is probably confident he will win. Let’s see if Europe’s leaders in Germany, France, the U.K. and Brussels are up to the task.
Europe’s ultimate test
Europe’s willingness to stand up to Russia in a tight cooperative venture is the ultimate test for the European project. The United States must pitch and show its own political backbone, such as approving the Keystone pipeline, ramping up energy export infrastructure and granting export licenses.
Europe and the United States have the means to stop Putin’s aggression and expansionism in its tracks by depriving him of his energy weapon once and for all. The European gas stress tests prove this point. Does Europe have the resolve? If Europe wants to be at the mercy of an erratic dictator bent on expansion and control, then it should choose each country for itself. Or does Europe want to be in charge of its own fate and stick together? Let’s see who is up to the test. Mr. Putin is sure the West is not.
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