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Economist: A Bear at the Throat

A major article on European energy security in this week’s Economist:

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Art by Kevin Kallaugher, Economist

The Soviet Union relied on its military machine for geopolitical power: its oil and gas were just a way to pay for it. In today’s Russia, energy is itself the tool of influence. To use it the Kremlin needs three things: control over Russian energy reserves and production, control over the pipelines snaking across its territory and that of its neighbours, and long-term contracts with European customers that are hard to break. All three are in place. For all the talk of a common strategy towards Russia, the EU is divided and stuck for an answer. Gazprom, Russia’s energy giant, cherished by Mr Putin as a “powerful lever of economic and political influence in the world”, has long-term supply contracts with most European countries, including France, Germany, Italy and Austria. It also has direct access to these countries’ domestic markets. The EU reckons that half its gas imports now come from Russia. Newer EU members, such as Hungary and the Czech Republic, are almost entirely dependent on Russian gas. Moreover, a pipeline network that it inherited from the Soviet Union gives Russia control over gas imported from Central Asia. The EU has few ideas for how to deal with its chief energy supplier. “We know we should do something about Russia, but we don’t know what,” one Brussels official says. “In the EU we negotiate on the rules, whereas Russia wants to do deals.” The deals are coming thick and fast. Last month, Russia secured one to build an oil pipeline from Bulgaria to Greece that will bypass the Bosporus. Symbolically, it will be the first Russian-controlled pipeline on EU territory. The pipeline will carry Russian and Central Asian oil straight to the EU, avoiding Turkey. … The European Commission has been urging EU members to break up their vertically integrated energy companies, but France and Germany are resisting. The problem, says the commission, is that national governments do not understand the link between liberalisation and greater energy security. “New member states equate security with nationalism. But the only alternative to integration is isolation,” says one senior EU official. At the most recent EU summit in Brussels, heads of governments pledged to separate their energy supply and production activities from transport networks, which will be managed independently. This falls short of an ownership break-up but it should increase competition. EU leaders accepted the need to link their energy networks, allowing more cross-border trade and thus both boosting competition and reducing Gazprom’s power. Europe is also talking of building more LNG terminals that can be stocked by other suppliers. … As Mr Putin contemplates a gas OPEC, he should remember that although the 1973 OPEC oil shock extended the life of the Soviet regime, it also left a Russian economy trailing behind its Western peers. “Basing national power and prosperity on an inadequate monoculture is as risky as basing them on rockets in the cold war,” argues Sir Rodric Braithwaite. Still, Russia’s ability to cause harm to itself and to others in the cause of proving its greatness should never be underestimated.