Russia Moves to Re-Gain Energy Leverage Over Europe, Declares It Will Cease Natural Gas Exports through Ukraine by 2020

During a visit to Russia on Wednesday by the EU‘s Commissioner for Energy Union, Maros Sefcovic, the CEO of Gazprom, Alexey Miller, announced that Russia would be ending its use of Ukraine as a transit country for delivery of natural gas to Europe by 2020.  Mr. Miller declared that all natural gas destined for Europe would now be directed through its pending ‘‘‘Turkish Stream‘ pipeline ‘‘‘ after its completion, presumably by 2020 ‘‘‘ and that the European Union should start developing infrastructure to take delivery of its natural gas at a new hub to be constructed, in connection with this new pipeline project, at the Turkish-Greek border.

It has previously been assumed that any construction of a new pipeline from Russia to Europe to circumvent Ukraine (previously in the form of the now-cancelled South Stream pipeline and, more recently, in the form of the Turkish Stream pipeline) would be in addition to the existing transit pathways through Ukraine, not as a replacement of them.

Even prior to the collapse of oil prices, the imposition of sanctions and other of Russia‘s current economic and financial woes, Moscow has bridled at Europe‘s efforts to neutralize the strategic leverage it has long had as a result of the continent‘s inordinate dependency on its energy exports.  Russia had built up extensive control of this industry, not just as the dominant supplier, but also as the preeminent owner of much of Europe‘s distribution, transmission and storage infrastructure.  The EU‘s ‘‘‘Third Energy Package,‘ passed in 2009, sought to roll this back by forcing requirements on its member states to extricate themselves from this kind of multi-layered dependency on Gazprom.  These policies have led to a number of forced exits of Gazprom from member state energy sectors and, most disturbingly to Russia, the blocking of its South Stream pipeline project, meant to remove Ukraine as an obstacle to its supplier routes to Europe.  The net result has been Moscow‘s diminishing leverage in this critical area.

This recent announcement that Europe would be forced to develop infrastructure around an inconvenient and economically incoherent delivery location is an effort to bend Europe to Russia‘s will and re-gain negotiating leverage in the energy relationship between it and the EU.  Mr. Sefcovic expressed his surprise and correctly indicated that the move made no economic sense, underscoring its strategic nature and, again, demonstrating the reality that Gazprom and other of Russia‘s state-owned enterprises are not primarily motivated in their decision-making by commercial factors, but, rather, by strategic ones.

Mr. Miller stated that South Stream pipeline was ‘‘‘closed‘ and that ‘‘‘The Turkish Stream pipeline is the only route along which [the] 63 bcm of Russian gas that is currently delivered in transit via Ukraine can be supplied.  There are no other variants.  Our European partners have been informed of this and their task is now to put the necessary infrastructure in place from the border between Turkey and Greece‘‘_They have, at the most, a few years for this.  It’s a very, very tight schedule.  In order to meet the deadlines, efforts to build new trunk pipelines in EU countries must begin right now, otherwise that gas will end up on other markets.”  Russian Energy Minister Alexander Novak added, ‘‘‘The decision has been made.  We are diversifying and eliminating the risks of unreliable countries that caused problems in past years, including for European consumers.‘

Mr. Sefcovic was visiting Moscow to discuss development of gas cooperation in Southeastern Europe when the announcement was made.  He stated, ‘‘‘Today we learned that the gas which is delivered in transit via Ukraine will be diverted to a new pipeline.  We’re talking about fairly large volumes of gas that probably won’t be needed either in Turkey or Southeastern Europe.”  He further stated that a working group of high-level representatives from Southeastern European countries would be formed to consider what infrastructure is needed, the volume of consumption and what amount of financing needs to be raised potentially to expand existing gas pipeline capacity from Turkey to Europe.

The strategic implications for Europe would be significant, not the least of which would be forced capital expenditures on infrastructure that is otherwise unnecessary to accommodate the large-scale flow of gas to a new part of Europe and distribute it appropriately from there.  It also introduces the possibility of new transit countries for Russia, in place of Ukraine, in Southeastern Europe, whose disposition could be more favorable than the decidedly westward leaning inclinations of Kiev.