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  • The Energy Weapon Back To Security: Can Europe Be Taken Hostage By R

    THE ENERGY WEAPON BACK TO SECURITY: CAN EUROPE BE TAKEN HOSTAGE BY RUSSIA'S NATURAL GAS SUPPLY?
    by Ariel Cohen, Ph.D. and Owen Graham

    The Cutting Edge
    http://www.thecuttingedgenews.com/index.php?a rticle=1071&pageid=20&pagename=Security
    Fe b 2 2009
    DC

    On January 1, 2009, Russia's state monopoly OAO Gazprom began reducing
    gas supplies to Ukraine. Moscow and Kiev had failed to negotiate
    the price for natural gas, and the initial reduction affected six
    additional countries: Czech Republic, Turkey, Poland, Hungary,
    Romania, and Bulgaria. As problematic as this was, the crisis has
    extended beyond these initial victims.

    Not surprisingly, Russia is losing its reputation as a reliable
    supplier of gas to Europe. Motives for the Russian action include
    sending a signal to Europe that Ukraine should not be integrated
    into the Euro-Atlantic zone, but remain within the Russian sphere
    of influence. The crisis demonstrates Europe's strategic dependence
    on Russian gas and highlights the necessity to change this situation
    quickly in order to prevent Europe from being taken hostage by Russia.

    Failed Negotiations Russia began halting supplies after Ukraine
    rejected a proposal to raise gas prices in 2009 to $250 per 1,000
    cubic meters from the 2008 price of $179.50. This was considerably
    below European market price, and Russia claims that Kiev owes more
    than $600 million in late fees and fines.

    Subsequently, Gazprom escalated tensions, saying that it initially
    wanted Ukraine to pay $418 per cubic meters, and then $450.

    On Monday January 5, four days into the dispute, Prime Minister
    Vladimir Putin appeared on Russian television with Gazprom chief
    executive Alexei Miller and ordered supply to be cut by about 20
    percent, withholding 65.3 million cubic meters of gas. Russia alleges
    that Ukraine is siphoning off an equivalent amount without paying
    for it.

    As of January 6, 11 European countries had been affected by this
    disruption: Greece, Macedonia, Serbia, Poland, Slovakia, Romania,
    Hungary, Czech Republic, Italy, Turkey, and Croatia. Amidst
    temperatures as low as 0 Fahrenheit, the demand for heating is
    growing. Most countries have some gas storage to outlast a short
    disruption, but if the crisis continues for weeks, these supplies
    will run out.

    It is clear that Russia has not ceased its efforts to use energy as
    a weapon, while Europe and particularly Ukraine have made themselves
    vulnerable by failing to diversify their energy baskets to expand the
    role of nuclear energy and coal, to modernize their energy-intensive
    industrial base to make it more efficient, and above all, to develop
    a coherent policy toward their Russian supplier. Europe has clearly
    made itself vulnerable by relying too much on Russian energy, while
    the national governments and the European Union failed to develop,
    coordinate, and implement effective policy which could have prevented
    the current predicament.

    Energy Transit and European Dependence Many Europeans look to Russia
    because Europe's own domestic gas production is in decline, while
    demand is likely to rise for another decade. Demand is projected
    to increase dramatically. In 2007, European demand for gas was 500
    billion cubic meters (bcm) a year and is expected to rise to 800 bcm
    within the next decade, according to most forecasts.

    With the largest proven natural gas reserves on the planet and a
    massive pipeline network built mostly in the Soviet era, Russia has
    a natural leverage in supplying energy to Europe. Gazprom currently
    provides EU members with one-quarter of its gas--about 160 bcm per
    year; Gazprom officials hope that this number will climb to 250 bcm
    per year by 2020.

    Ukraine is a key energy transit state for producers in Russia and
    Central Asia to European consumers. Around 80 percent of Europe's gas
    imports from Russia travel through Ukrainian pipelines: approximately
    120 bcm per year. In turn, Gazprom receives around two-thirds of its
    revenue from gas that passes through these pipelines, representing
    20 percent of European demand.

    Germany is dependent on Russia for close to 40 percent of its gas
    and this number is expected to rise to 60 percent by 2020. Some
    European countries areentirely dependent on Russian gas, as high
    as 80 to 100 percent, such as Slovakia, Finland, Bulgaria, Greece,
    Serbia, Montenegro, and Macedonia. Many of the Baltic States and the
    Commonwealth of Independent States are also 80 to 100 percent dependent
    on Russian gas, such as Belarus, Lithuania, Armenia, and Georgia.

    The Kremlin uses this dependence as a foreign policy tool to apply
    pressure against states that would adopt policies that go against
    Russia's national interests. Moscow has cut off supplies to numerous
    countries over the last seven years with Ukraine as the primary target.

    Undermining Ukraine Russia is escalating the gas crisis in order
    to prove to the Ukrainian people that President Victor Yushchenko
    and Prime Minister Yulia Timoshenko are discredited leaders, who
    caused energy shortages in the middle of a harsh winter. This is the
    price Ukrainians must pay, some in the Russian leadership imply, for
    pursuing a pro-Western path toward NATO membership. Russia demands
    that Ukraine abandon its road to NATO and the EU, and allow Moscow
    to base its Black Sea Fleet in the Crimea after the current agreement
    expires in 2017. If Ukraine runs out of gas reserves, this is a lesson
    many Ukrainians will not forget quickly.

    Gazprom has pressured Ukraine to pay higher prices since the
    election of the pro-Western Victor Yushchenko. Some experts view the
    current price war as outright economic warfare against Ukrainian
    independence. Shutting off the gas to Ukraine denies the country
    valuable transit revenue and undermines the government's reputation
    as an energy transit state.

    While Gazprom has raised the price of gas to most of the customers
    in the former Soviet Union in recent years, allies such as Armenia
    continue to pay lower rates, while "problem" states like Georgia pay
    full price.

    The New Pipeline Network to Bypass Ukraine?

    The Russian leadership wants Ukraine to lose its leverage over
    Gazprom as a transit country. Moscow is hoping to make Ukraine
    appear an unreliable partner to the Europeans, which it believes
    will justify building expensive Russian-proposed gas pipe lines to
    Europe bypassing Ukraine. Some European governments, notably those of
    Germany and Italy, would now support these "direct" pipelines which
    bypass Ukraine, such as Nord Stream, chaired by the former German
    Chancellor Gerhardt Schroeder, and the South Stream along the Black
    Sea bottom. Yet, concerns over excess dependence on Russian energy,
    the current economic crisis, and high costs of these projects raise
    questions about the timetables and affordability of the new pipelines
    from Russia.

    The astronomic price tag for both projects, over $30 billion, makes
    them seem less feasible today than even a year ago. Furthermore,
    the pipelines proposed by the Russians would only increase Europe's
    dependence on Russia. The more Germany and Italy's dependence on
    Russian gas increases, the less they would be inclined to stand up
    to Russia over any foreign policy excesses.

    Ukraine's Inefficient Energy Sector Ukraine is not without blemish,
    as its leaders have made it vulnerable to Russian tactics and
    pressures. Ukraine's manufacturing sector is notoriously inefficient,
    producing a mere 10 percent of Germany's output, while consuming as
    much energy as Germany does. Ukraine's energy sector suffers from
    lack of transparency and from corruption, regardless of who is in
    power in Kiev.

    Swiss-registered RosUkrEnergo, for example, was in charge of marketing
    gas from Russia and Turkmenistan until October 2008. This company is
    a shady entity with allegedly illicit ties, and is an intermediary
    that benefits businessmen and government officials who prefer
    anonymity. RosUkrEnergo, like a number of other middleman companies
    Russia has set up in Europe, is a gas-trading company that does not
    own any gas fields or pipelines. It is also not the first middleman
    company in the Russian-Ukrainian gas trade.

    RosUkrEnergo was created in 2004 and is owned jointly by Gazprom
    and two unknown Ukrainian businessmen for the benefit of themselves
    and unnamed government officials. Experts have pointed out that
    the company appears to have links to organized crime. Despite the
    lack of transparency, Gazprom has insisted on the continuing role
    of RosUkrEnergo in the Russian-Ukrainian gas trade. In October 2008,
    Ukraine and Russia agreed that their government-owned gas companies,
    Naftogaz and Gazprom, will deal directly with each other.

    The Ukrainian state-owned energy sector remains overly politicized,
    mismanaged, and laden with conflicts of interests. By now, Ukraine
    should have taken steps to modernize its energy sector, including
    privatization and getting rid of the shady middlemen.

    Recommendations for the Obama Administration The Kremlin derives
    leverage from its control of gas production and supply networks. It
    uses its energy supplies to divide Europe on key issues, thus weakening
    Europe's bargaining power in economic and geopolitical relations
    with Russia. This dependence increases Europe's "continental drift"
    from the U.S. by limiting the foreign policy options available to
    America's European allies, and forcing them to choose between an
    affordable energy supply and siding with the U.S. and NATO on key
    strategic issues, such as missile defense or opposing Russia's
    treatment of Georgia.

    U.S.interests lie in strengthening its European allies in their dealing
    with Russia, promoting transparency and energy security in Ukraine,
    and supporting Ukraine's course for Euro-Atlantic integration.

    In light of these circumstances, the U.S should:

    Support European diversification of energy transporta¬tion routes in
    Eurasia. Specifically, the U.S. should support the construc¬tion of
    the Nabucco pipe¬line which would bring gas from the Caspian basin,
    via Azerbaijan and Georgia, to Europe. The U.S. should oppose any
    excessive dependence of its allies on Russian energy exports and
    should encourage application of the European anti-trust legislation
    against Gazprom.It will also be necessary to encourage EU members to
    establish and implement a joint policy on their dealing with Moscow
    in the energy sector.

    Encourage Europe to construct more liquefied natural gas (LNG)
    terminals, importing gas from Qatar, Algeria, and Nigeria, thus
    diversifying the sources of gas. Moreover, Germany, Italy, and other
    countries in Europe should be encouraged to develop coal, nuclear
    power, and competitive renewables as sources of affordable electricity.

    Support Ukraine's efforts to modernize its energy sector, including
    reforms to increase transparency and energy efficiency, privatize
    and liberalize oil and gas sectors, depoliticize management, and
    decisively remove middlemen in energy transactions.

    Time to Face the Cold Facts As frigid Arctic winds blow across
    Europe, it is time to face the cold facts: Dependence on Russian
    gas is undermining European security. Russia is likely to use its
    energy muscle to impose its geopolitical agenda on its neighbors,
    today and in the future. To change this situation, European countries,
    including Ukraine, need to work with the United States to diversify
    sources of energy and stand up to Russian bullying.

    Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian
    Studies and International Energy Security at the Katherine and Shelby
    Cullom Davis Institute for International Studies at The Heritage
    Foundation. Owen Graham is Research Assistant at the Davis Institute.

    --Boundary_(ID_pFamDaQcwiRY49vEOqcviQ) --
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