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Russian energy lever against European political systems

Mykola Volkivskyi

Government Relations expert

Ukrainian political scientist 

A Lane Kirkland Scholarship Program Fellow 2021/2022

Russian gas supply has traditionally been one of the pillars of economic cooperation between the U.S.S.R and inheriting Russia and the collective West by trading fossils to machinery products, equipment and technologies. Given the extended investment cycle in gas industry, gas supply contracts historically have been linked to oil price (or oil-indexed) and containing the so-called ‘take-or-pay’ clause ensuring predictable return of multibillion investments made in natural gas exploration, extraction and long-haul gas shipping infrastructure.

Since 2000s the situation with gas supply contracts had changed drastically under Europe’s reshaping of the single gas market to a competitive model that imply establishment of the competitive landscape where the price of natural gas supplies is driven by demand and supply forces on daily basis on trade hubs linking major suppliers and buyers of natural gas. Over time, the hub gas trading gained more and more popularity and major EU gas hubs (as the Dutch Title Transfer Facility – TTF – in Northwest Europe), inter-alia, became the well-established price benchmarks gradually replacing the oil indexation even in the long-term contracts. As of the 9 months of 2019 about 40 per cent of Russian long-term gas supplies were made under purely hub-indexed contracts, 11 per cent – under quasi oil-indexed contracts that may contain hub-linked elements, such as corridors linked to the Dutch TTF, and another 8 per cent were traded through Gazprom electronic sales platform. Therefore, the pricing of almost 60 per cent of Russian gas supply to Europe is linked to spot markets that are volatile to demand / supply fluctuations.

One could only rejoice in more transparent prices on Europe when market forces push gas prices to fair levels, but in the meantime the whole EU gas market became more vulnerable to price shocks given the exclusive position of Russian Gazprom as a gas supplier for Europe (securing more than 50% of EU import gas supplies in 2020). As the current gas crisis demonstrates, Russian ability to restrain gas supply under favorable circumstances (e.g., unexpected temperatures and Asian demand on LNG) could adversely hit the equilibrium on the European gas market, therefore, making Russian gas equal to ‘marginal CH4 molecules’ that will dictate the spot gas prices in Europe. 

However, apart from enjoying the pretty commercial lucrative supply margin, Gazprom deliberately uses its market power for pushing through the new gas pipelines projects that would cement its dominance at key sales markets (like Nord Stream 2 in Germany) as well as renewal its long-term supply contracts in Eastern Europe under specific conditions that are supportive to geopolitical dominance of Russia in this region. In this context Russia uses old but still striking principle of Russian policy principle to its gas buyers in CEE region: ‘if you wouldn’t be left alone against the enormous price of our gas and angry citizens, you would be trading off a reasonable discount by providing to us concessions that we need’. Such concessions could be not necessarily related to gas business (e.g., receiving control under gas transportation assets or exclusive rights on national gas markets) but often they tend to strengthen of Russia’s position in a variety of political and economic issues. 

That is the case for natural gas supply to Czech Republic giving the chance to Kremlin to revitalize political connections that were badly broken due to diplomatic scandal with Prague in April 2021 on suspected participation of the Russian secret agents into the deadly arms depot blast near Vrbetice on October 20, 2014 that resulted in expulsion of 18 Russian diplomats after investigation from the Czech intelligence and security services. Possible resignation of acting Czech President Miloš Zeman – a devoted ally of Vladimir Putin in the country – due to exacerbation of his chronic disease, may also undermine the recent efforts of Kremlin to lock Czechs on Russian gas supplies.

Possible forthcoming launch of Nord Stream 2 gives Russia a perfect chance to win the situation back by switching gas supplies to Czech Republic by offering to Prague an alternative (to the traditional one through Ukraine and Slovakia) route via pipelines Nord Stream 2 (Russia) – EUGAL (Germany) – Capacity4Gas (Czech Republic). It will be even a double win for Russia as the linkage to new shipping route would not be only guarantee the loyalty of Czech ruling elites but also deprive any economic sense for Slovakia to organize reverse gas supplies towards Ukraine.

Slovakia will be the next destination of Russian expansion in the region as a gas recipient dependent on import supplies. Coupling with acting gas supply contract signed between Slovak gas major ‘Slovenský plynárenský priemysel’ (SPP) and Gazprom in 2008, Slovak TSO “Eustream a.s.” has also signed a gas transit contract granting access to Gazprom to Slovak gas transportation system until October 1, 2050, therefore, untying hands to Gazprom for price manipulations of all possible kinds. 

Bratislava has also demonstrated the signs of energy surrender to broad Russian interests in Slovak energy sector. In particular, “Society of the Slovak-Russian Commonwealth” announced the possible visit by Minister of Foreign and European Affairs Ivan Korčok to Moscow and a meeting with Russian Foreign Minister Sergey Lavrov to discuss energy issues (gas, nuclear fuel for Slovak reactors, etc.) as well as it has already been agreed to hold a bilateral intergovernmental commission on economic cooperation in Bratislava in November 2021. Among other issues, Russia is trying to impede the acting agreement between Ukraine and Slovakia on mutual assistance in electricity supply, signed between Ukrainian NEC “Ukrenergo” and Slovak “SEPS”. If the Kremlin gains influence over the energy companies of Slovakia, it will actively use this as leverage over the country’s domestic policy.

Even more prominent case of Russian gas blackmailing is evolving right now in Moldova. On September 30, 2021, the gas supply contract of Russian gas to Moldova signed in 2006 has expired and extended only for one month under the price of $ 790 per thousand cubic meter (tcm) as before the price was arranged at $ 127 per tcm. Remarkably that even before the current contract expiration, after change of power in Chisinau and coming to power of Maia Sandu pro-EU Government, Kremlin unilaterally raised the prices for gas shipped to “Moldovagaz” JSC to $ 440 per tcm in August and $ 550 per tcm in September using contract’s regulatory provisions.

The ultimate target of Russia is to impede Moldova European integration efforts and diversification of gas imports by imposing the gas price shock for Sandu government (undermining its electoral support) and simultaneous strengthening a position of its ally – unrecognized Pridnestrovian Moldavian Republic (PMR). Bargaining for 1-year gas supply contract for Moldova under acceptable prices (for Moldova economy and population), Kremlin calls for all PMR debts redemption and setting up gas supply intermediary in PMR, namely, “Moldavskaya GRES” CJSC (located in Dnestrovsk, PMR) that is owned by Russian Inter RAO Group and buy gas from “Tiraspoltransgaz-Pridnestrovye” CJSC. It would obviously strengthen the role of PMR as the sole electricity supplier to Moldova but also give the republic dangerous leverage of manipulating of gas prices for mainland Moldova.

As a response emergency measure, Moldova requested support from the EU and Romania. The latter may be the chance for Moldova to go away from Russian gas supplies after completion of the new gas pipeline “Iasi-Ugeni-Chisinau” with a capacity of 2.2 billion cubic meters that requires rapid mutual actions of Moldova, EU and Romania. The immediate remedy for this heating season may be providing the debt leverage to Moldova by the EU side with a purpose to purchase the missing gas supply from international markets and then transport it via the existing pipeline from Romania.

To sum up, the recent actions on Russia on Europe’s East flank send the very warning signs of unprecedented interference of Kremlin into the functionality of EU gas market and provoked a full-fledged gas price crisis in Europe using it for beaching the EU energy security and blackmailing the most dependent from Russian gas supplies CEE countries. It is the high time for Brussels to remember about the background solidarity principle of the Union, support the affected EU MS and allies, and impose a serious anti-trust investigation against abuse of market power by Russian Gazprom in pursue of geopolitical and economic interests of Russia in Europe.

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