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Mainstream, VOL LII, No 17, April 19, 2014

Ukraine: Threat to Europe’s Energy Security

Sunday 20 April 2014, by Amitava Mukherjee

The crisis over Ukraine, by far the gravest one Europe has faced after the end of the Cold War, now opens the prospect of an energy crisis in the continent. Even if military conflicts do not escalate any more, Russia and the United States, the two big powers, may confront each other on the strategic issue of energy supply to Europe. Tensions have been mounting. Already Russia has been suspended from the G-8 group of countries and Barack Obama, the US President, has described Russia as a regional power only which cannot compete with America’s global influence. In retaliation, Gazprom, the Russian state controlled energy supply firm, has withdrawn subsidy on natural gas supply to Ukraine and its cost has now nearly doubled.

In spite of an unusually warm last winter and the resultant storage of 40 billion cubic metres of natural gas which is ten per cent of its annual consumption, Europe stands vulnerable in the face of a probable Russian supply cut off. But the bulk of the storage is in Germany and Hungary and it is open to conjecture as to what extent these two countries would agree to share the resources with other European nations. More serious will be the condition of Ukraine whose storage of gas can run up to four months from now. But Russian exports account for sixty per cent of Ukraine’s and one third of Europe’s total gas consumption. Vladimir Putin, the Russian President, under-stands this and has left enough indication that Russian oil and gas might turn out to be potent weapons in his hand.

Perhaps this has also tempered reactions from the Western bloc to some extent. Till now the US and the European Union have let loose a barrage of verbal threats in addition to some economic sanctions on companies and individuals they consider instrumental behind the secession of Crimea from Ukraine. But not much has really come out of it. The West appears to be wordly wise. It cannot brush aside the fact that Russia is world’s second biggest oil supplier and the biggest exporter of natural gas and particularly the Central and East European countries depend on them to a great extent.

Import-export figures point out that Russia has an advantage. Moscow exports ninety per cent of its natural gas and eighty per cent of its crude oil to Europe whose thirty per cent of total gas consumption comes from Russia. Of the East European countries, Hungary and the Slovac Republic are nearly totally dependent on Russian oil and in 2010 more than 90 per cent of imported gas in Poland, the Czech Republic and Slovakia was supplied by Russia. For Hungary this figure stood at seventy per cent and for Germany forty per cent of its gas supply came from Russia.

Conversely it also establishes that the Russian economy is heavily dependent on the European energy market. In fact fifty per cent of the Russian budget is financed by revenues from oil and gas sales in Europe in which Ukraine serves as the most important transit country. After Crimea’s integration with Russia, the focus now shifts to the western part of Ukraine through which passes much of the oil and gas pipelines. Most strategic experts are of the view that Russia would not jeopardise its European energy market where Ukraine is also a customer though a defaulter in recent times. Natural gas forms forty per cent of its total energy consumption and sixty per cent of it is supplied by Russia which also enjoys a monopolistic control over Ukraine’s import of crude oil.

THERE are several possibilities now. First, Russia can starve Ukraine of oil and gas supply. Already, as mentioned earlier, natural gas subsidy to Ukraine has been withdrawn. Gazprom says that Ukraine owes $ 2.2 billion to Russia as unpaid bill for gas supply. Now the country’s economy stands destroyed and it has no other way but to agonisingly wait for a $ 1 billion loan from the USA for tiding over the crisis. Over the years Moscow has gradually lessened the amount of oil and gas—from eighty per cent a couple of years back to less than fifty per cent now—it sends to Europe through pipe-lines in Ukraine. There are other routes through Belarus and under the Baltic and Black Sea.

Secondly, Russia can stop supply of energy to Europe which is unlikely given Moscow’s reliance on European money. More than sixty per cent of the Russian state income comes from oil and gas. Moscow may never try to jeopardise its booming trade relations with Germany which is the major supplier of precision machinery, chemicals and cars to Russia.

Thirdly, the EU countries may plough back to Ukraine a significant amount of gas from their reserve. This may save the battered country from imminent disaster for some time. Europe is now looking towards the United States for a bail out from this logjam. Already the ambassadors of Poland, Hungary, the Czech Republic and Slovakia have sent letters to the US for easing bureaucratic norms there standing in the way of gas exports. Obviously they have pinned their hopes on the fact that in 2013 the United States had come out as the biggest producer of oil and gas. But right now there is no facility for gas exports in the US which may ease the situation in Central and Eastern Europe in case of a Russian embargo.