Energy Underpins Russia-Ukraine Standoff

March 2014, Vol. 241 No. 3

International tension resulting from Russia’s occupation of Crimea, territory universally recognized as belonging to Ukraine, has many facets, but Russia’s dominance of the energy market in Europe and Ukraine informs the dynamic.

Europe got approximately 30% of its natural gas from Russia last year, according to Michael Stoppard, Managing Director, of IHS CERA’s Energy Research Council. Meanwhile, despite the Nordstream and other “bypass pipelines,” 50% of Russia’s gas exports to the west still travel through Ukraine and the troubled country has an outstanding debt to Russia for gas delivered late last year, part of a “penurious state of public finance” in Ukraine, as described by Matthew Sagers, Senior Director for Russia and Caspian Energy for IHS.

Liberalized gas trade in Europe’s Third Energy Package legislation, which moves the region to a more American-style market with non-oil-linked spot prices for gas and unbundling to allow third-party access to pipelines, has also affected the trade relationship between Russia and the European Union. According to IHS Senior Director of Russian and Caspian Energy Thane Gustafson, before this episode the two sides were making progress.

Germany, one of Russia’s largest gas buyers, has stepped away from U.S. calls for economic sanctions, although Europe is not immediately at risk of shortage if gas supplies from Russia are cut off. “Because of the importance of that gas trade we are going to see a very cautious approach,” from European leaders, Sagers said. Policymakers have not been “asleep at the wheel,” however. Sagers said that European nations had invested in significant new gas storage and that the mild Western European winter meant that storage levels were “pretty healthy”; in fact, Europe could reverse pipeline flow to send limited amounts of gas east if necessary.

Sagers and Stoppard spoke to a session of IHS’s CERAWeek conference, where a panel of people who study the region took a slot originally scheduled for the Ukrainian-born Russian minister of energy, Alexander Novak.

The situation emphasizes the way Russia has used its energy resources to achieve its policy goals, said Senator Lisa Murkowski, speaking on Monday to encourage American exports of crude and condensate. Although the clash between the two countries was unpredictable, it will lead to a conversation about how countries are using their resources for leverage, she said, perhaps leading to a shift in perception domestically. “We need to view our energy resources as an asset for global relations and greater stability within the world market.” As it is, Murkowski said, greater U.S. energy production has cushioned the global economic impact of unrest involving a major producer.

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