Energy 1,570 views
Russia Can't Afford To Turn Off The Gas
Over the last few days, talking heads from Washington to
Moscow have repeatedly pointed out how little the U.S. has to work with
when dealing with pressure from Russia and what a strong hand Putin and
company currently hold when it comes to their presence in Ukraine.
However, upon closer inspection, one of Russia’s most effective
diplomatic weapons has turned out to be not just weaker than first
thought, but would have them ‘shooting themselves in the foot’,
according to Temuri Yakobashvili, a Senior Transatlantic Fellow at the
German Marshall Fund.
What is this exactly? Energy – specifically Russia’s oil and natural gas exports to Ukraine and the greater European market.
As this column touched on earlier this week, Russia has had no problem wielding their reserves in times of trouble, most effectively in 2009 when Moscow halted imports to Ukraine amid a pricing disputes. Implemented during the frigid days of January, the move gave Russia the advantage and highlighted Europe’s delicate dependence on Russian reserves.
However, the 2009 shutdown also spurred a new approach to meeting energy needs across Europe.
A series of infrastructure investments, increased storage
efforts and new import agreements allowed Ukraine, Germany and the rest
of those countries affected by a potential Russian shutdown to grow less
dependent on Moscow. While Europe still looks to Russia for about 30
percent of its natural gas demand, with about half of that amount
delivered through Ukrainian pipelines, the current energy landscape also
leaves Moscow increasingly dependent on the EU for vital energy
revenue.
According to the U.S. Energy Information Administration, 84% of Russia’s oil exports and 80% of its natural gas exports went to European Union
consumers. Any delay or halt in that amount would leave Russia with a
“massive hole in the country’s budget”. Further, the move would pack far
less punch than it did in 2009 as Germany and the rest of Europe have
more choices for alternatives than ever before, including Norway and
Algeria. Finally, forward thinking and a mild winter have allowed those
countries would be most affected to build significant reserves that
could last them months. Even Ukraine boasts some storage reserves and
has recently signed a new agreement with Germany to import natural gas,
according to Yakobashvili.
Coupled with proposed sanctions from the U.S., the move
would prove a significant fiscal challenge to Moscow and one unlikely
for Putin to pursue under current conditions.
“From an economics perspective I think there is no rationale for Russia to contemplate shutting off exports and we don’t think it is at all in their interest to do so for any amount of time,” said Will Person, Director, Global Energy and Natural Resources. “Especially as that would reinforce European efforts to diversify.”
In addition to lending more support for ongoing diversification efforts in Norway and North Africa, the current tension has produced increased calls for easing U.S. rules on exports to allow Europe easier access to shale gas output.
“You have to remember the (oil and gas giant) Gazprom is one of the backbones of the Russian economy and the gas industry is a very fragile business,” Yakobashvili said on Tuesday, adding that Russia was facing a very different environment than 2009. “You don’t do stupid things more than once.”
This is not to suggest that Europe would not suffer if Russian imports were halted or delayed in any way. Uncertainty about the Ukraine has already caused prices to rise amid worries that the situation could restrict global supply. According to a Bloomberg report from March 2nd, U.K. prices for next month gas deliveries “surged the most in more than 17 months, rising as much as 10.3 percent” as a result of regional concerns.
The current uncertainty could be preferable if Russia decides to expand its presence into Ukraine and armed conflict breaks out.
“Then all bets about economic rationality are off,” Pearson said on Tuesday. “We don’t think this will happen but it’s clearly tenuous and would be game-changing.”
However, with an estimated $100 million in lost revenue a day, any impact would be felt in Moscow as well – a fact that Putin would find difficult to ignore.
Link to source: http://www.forbes.com/sites/christophercoats/2014/03/05/russia-cant-afford-to-use-natural-gas-as-a-weapon/
