The Chimera of Russia’s Gas Power

Russia began 2006 by cutting off natural gas exports to Ukraine after its government refused to pay a fourfold increase in the subsidized price. The crisis in Ukraine, many of whose Soviet-era industries depend on cheap Russian gas, soon spread to Europe, which consumes 80% of Russian gas exports, when Ukraine began to divert gas from the pipeline that crosses its territory.

Ironically, 2006 is also the year that Russia takes over the chair of the Group of Eight industrialized countries, which is set to meet in Moscow this spring. The improbable theme that Russian President Vladimir Putin chose for the conference is energy security.

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Even though it is no longer a global superpower, Russia’s vast oil and gas reserves make it an energy superpower, and Putin seems intent on playing that card. Oil provides somewhat less economic power than gas because it is a fungible commodity, and interruptions of supply can be made up by purchases on world markets. But gas is expensive to transport, for it depends on costly pipelines or gas liquefaction facilities that cannot be replaced quickly when flows are interrupted.

Gas provides a tempting form of leverage, and Russia had already used it against Georgia, Latvia, Lithuania, and Moldova. But when Gazprom, the Russian state gas monopoly, followed Putin’s instructions to turn off the spigot to Ukraine, Russia crossed a new threshold.

At first glance, this looks like a classic case of a large country bullying a small country into submission. As Thucydides put it in his history of the Peloponnesian War, “The strong do as they will and the weak suffer what they must.”

Russia had supported the losing side in Ukraine’s “Orange Revolution” a year ago, and it was time for payback. But, as it turned out, Putin miscalculed. He underestimated both Ukraine’s leverage as the primary conduit for Russian gas exports to Europe and Europe’s influence as the major consumer of Russian gas. In the process, he damaged Russia’s reputation as a reliable supplier of natural gas.

The result was a hastily patched together deal in which Russia and Ukraine each gave ground on price, and a shadowy Swiss-based company half-owned by Gazprom rolled supplies of cheap gas from Turkmenistan into the equation. Some analysts, as well as former Ukrainian prime minister Yuliya Tymoshenko, raised accusations of corruption against the company, RosUkrEnergo.

But, charges of corruption aside, this outcome indicates that gas is not such an easy source of hard economic power as it would first appear. Some economists argue that there is little power in relationships where buyers and sellers consent to a price that clears a market. However, in cases where buyers and sellers are not equally dependent upon the relationship, the greater vulnerability of the more dependent party can be used as a source of coercive power by the less dependent party. Russia thought it was less dependent than Ukraine, and decided to exercise that power.

But it is one thing to hold the high hand in a game that you play only once. For the game to go on indefinitely, you must maintain the trust of the other players. In other words, the shadow of the future suggests that a moderate strategy is best.

Russia quickly discovered that its threats against Ukraine were too costly to its reputation as a reliable supplier for Europe. When considered in this wider European context, there was more symmetry in the Russia-Ukraine energy relationship than the simple numbers on energy dependence implied at first glance.

Where does this leave Europe’s energy security? Germany’s Economics Minister, Michael Glos, has said that Russia’s questionable dependability means that the time has come to explore other energy sources . That will not be easy. Gas provides nearly a quarter of Europe’s energy, compared to 14% for nuclear power. Even if governments rethink their ban on new nuclear plants, accelerate development of windmills and solar panels, and search for new gas supplies, Europe will remain dependent on Russian gas for more than a decade.

At the same time, as Europe’s largest consumer of Russian gas, Germany has built its hopes for energy security on developing a rich web of economic ties with Russia. Former Chancellor Gerhard Schroeder even became chair of a Russian-German consortium to build a new gas pipeline from Russia to Germany. But, as the Ukraine episode indicates, pipelines dedicated to a single country may be less reliable than those that run through several countries.

If Russia is going to throw its weight around, it is better to have allies among those affected. The key to energy security is diversity – of pipelines as well as sources of supply. Small neighbors without options will suffer, but Europe may not.

In the end, the next decade will be marked by a delicate balance in which Europe remains dependent on Russian gas, but Russia’s need for export revenues will also make it dependent on Europe. The lesson from the Ukraine episode is that while Russia is less of a gas superpower than it would appear, Europe would be wise for to start building greater diversity into the energy relationship.