Not so long ago, Russia could bend Ukraine to its will
by threatening to cut off natural gas supplies. Now, Russia is offering
discounts, but Ukraine is not interested because it's getting plenty of gas in
Europe. This change reflects developments in the European gas market that
don't augur well for one of Russia's biggest sources of export revenue.
The decline in Ukraine's imports of Russian gas is
partly the result of economic stagnation under former President Viktor
Yanukovych, a huge drop in output after the 2014 "Revolution of
Dignity" and Russia's annexation of Crimea. Ukraine's gross domestic
product has shrunk around 19 percent since 2013, and its industrial sector
needs less fuel.
That, however, is not the most important reason for the decline in Ukrainian
imports. The government is determined to end its dependence on Russia as
the two countries are in a semi-official state of war. More than once, Russian
threats to stop supplies or raise prices as winter approached forced Ukrainian
governments to accept political concessions that slowed the country's drift
toward the European Union. In response, Ukraine sought "reverse
supplies" from Slovakia in 2014.
It was a good year to experiment: The winter of 2014 was warm in Europe,
and there was a surfeit of gas. In Slovakia, the gas was Russian, delivered by
the state-owned monopoly Gazprom through the Ukrainian pipeline system. Gazprom
had tried to ban resale, but those conditions were in violation of European
rules. In April 2015, the European Commission cited such stipulations as an example of Gazprom's abuse of its
dominance in eastern and central European gas markets. Gazprom, which is trying
to avoid steep fines and arrive at a settlement with the commission, could do
nothing to prevent its customers from supplying Ukraine.
In the fall of 2014, Gazprom tried to cut exports to Europe to
eliminate "reverse supplies," but, according to a Ukrainian estimate, that cost $5.5 billion in lost revenue and another $400 million in
discounts to customers as compensation for failing to meet contractual
obligations. In March 2015, Russian exports resumed in full.
Europe has been diversifying its gas supplies for many of the same
reasons as Ukraine -- to deprive Russia of its energy weapon and to keep prices
down. In the third quarter of 2015 -- according to the most recent European
Commission gas market report available -- EU gas imports from Russia increased by 18 percent
from a year earlier. Supplies from Norway and Algeria grew 26 percent and 35
percent, respectively.
Nonetheless, Russia remains Europe's top gas supplier, with a 41 percent
share of the market:
Russia's monopoly status in eastern Europe is disappearing, however, as
its former captive customers open liquefied natural gas terminals. Lithuania,
for example, has built one and made a deal to import gas from the U.S., where
prices are about half those in Europe. That should soon lower the gas price
there from $263 per thousand cubic meters, the highest level in Europe. Thanks
to LNG, growing supplies from Norway and North Africa, and the antitrust
proceedings against Gazprom, the EU is much better protected from price gouging
than it was even two years ago. The Russian company cannot attempt to
manipulate with supplies to Europe for fear of losing share in a market that
provides 52 percent of its revenue. That threat is all the more potent as
Europe's gas consumption is falling, in part thanks to advances in sustainable energy.
Gazprom is trying to negotiate the construction of a new pipeline
to Germany, Nord Stream 2, which would bypass Ukraine, but the project faces
political resistance in the EU. And its estimated cost of 9.9 billion euros ($10.7 billion) may be too high given current gas
prices. If it is built, it will be for political reasons: Russia wants to take
away Ukraine's role as a gas transit route. Europe doesn't really need the pipeline,
though; given Gazprom's record, it probably wouldn't decrease prices much.
The net effect is that Gazprom has lost much of its leverage on
Europe, and Ukraine can afford to be combative. On Sunday, Prime Minister
Arseniy Yatsenyuk said his government wouldn't buy Russian gas at the offered price of
$212 per thousand cubic meters because supplies from Europe were available at
$200. In 2015, Ukraine doubled gas imports from Europe to 10.3 billion cubic
meters, and it now gets 50 percent more from the EU than it does from Russia.
Low energy prices have diminished Russia's ability to use its status
as an "energy superpower" to exert influence on its western
neighbors. The efforts of Europeans to liberalize and diversify their gas
market, however, have been at least as effective in curbing President Vladimir
Putin and making it easier for Ukraine to break out of Russia's grip. It's too
early, however, for Ukrainians to cry victory. If Ukraine's economy
rebounds strongly, they will probably have to negotiate with Moscow from a
position of weakness again. Local production and European imports will not be
enough to meet the needs of a rebuilt industrial sector, at least in the next
two or three years.
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