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Derek Brower: Checkmate Gazprom

An article published in Prospect magazine’s July issue. Click here to download the full PDF of the article. After Russia cut supplies to Ukraine in 2006, the EU decided it needed to reduce its dependence on Russian gas. But since then, a series of shrewd moves by Gazprom, the Russian state-owned gas monopoly, has left the EU’s diversification strategy in tatters By Derek Brower In the global contest for control over oil and gas distribution over the last 18 months, one side has offered the world a masterclass in strategic planning and execution. Gazprom, the Russian natural gas monopoly that controls over a third of the world’s reserves, has run rings around its main rivals: the natural gas consumers of the EU. This is a problem for the EU and one of its main foreign policy goals: diversifying energy supply away from Russia and putting relations between Moscow and Brussels on a more even keel. Moreover, Russia’s domination of EU energy supply coincides with a reassertion of Moscow’s influence on issues from nuclear missiles to the middle east. The two sides in this conflict, Gazprom and Brussels, first became enemies in January 2006, when Russia briefly interrupted gas supplies to Ukraine. Western governments and commentators said Moscow had ordered gas supplies to Ukraine to be stopped as punishment for Kiev’s orange revolution. Gazprom was unfairly demanding its poor neighbour pay twice as much as it had previously done for gas: a naked attempt to wreck Ukraine’s embrace of democracy and keep the country inside Russia’s zone of influence. Moscow, on the other hand, said the conflict was just business. Ukraine, said Gazprom, had been stealing Russian gas that it was being paid to transit to Europe. And hadn’t the EU and Washington been pressing Moscow to increase domestic gas prices as a pre-condition for joining the WTO? Why, then, should Russia be subsidising Ukraine’s gas? The truth was somewhere in between. But the lessons each side drew from the spat were fundamentally different. The brief drop in supplies to EU countries that resulted from the Ukraine shutdown helped convince Brussels that despite 40 years of uninterrupted Russian exports to Europe, its most important supplier had become unreliable. Imports of natural gas, almost half of which come from Russia, accounted for almost 15 per cent of the EU’s energy needs—and dependence on Russian gas was only likely to increase if no action was taken. Diversification of the continent’s energy sources was essential if the EU was not to be increasingly beholden to the whims of Moscow. The Kremlin and Gazprom drew a different lesson. The gas war proved that transit countries like Ukraine—through which some three quarters of Russian exports to Europe pass—could not be relied on. If Gazprom were to increase its share of Europe’s growing gas market beyond the 35 per cent it already controls, it would need new pipelines and allies in Europe. It would also need to prevent Brussels from executing its energy diversification plan. For Europe, the issue was security of supply. For Gazprom, it was security of demand. Eighteen months later, the Russian company is triumphant […]. To keep reading, go to the article, here (subscription only), or download the PDF here.