Gas wars

Jan 8th 2009
From The Economist print edition

The dispute between Russia and Ukraine shows that Europe must reduce its energy vulnerability

A GAS row between Russia and Ukraine has become a Christmas ritual. That may explain why, until this week, the European Union seemed to pay the latest tiff so little heed. Indeed, the people in Brussels talked of it as a normal bilateral commercial dispute in which the EU should neither interfere nor take sides. Yet Russia’s abrupt decision on January 5th to cut off almost all the gas it supplies to EU countries via Ukraine has sharply raised the stakes, inviting the Europeans to intervene more directly. The shutdown should force a rethink of the EU’s overall energy policy as well.

Neither side is blameless. Ukraine should be paying higher market prices for its gas; and it should neither have reneged on the gas-transit deal it has with Russia nor pinched gas destined for the EU. But equally Gazprom, Russia’s state-controlled energy giant, should not be engaged in overt political bullying just because the Kremlin wants to punish Ukraine’s political leaders for leaning towards the West. And both countries should do a lot more to eliminate the shady intermediaries that have made the business of gas supply so opaque—and rife with corruption.

As so often, the two sides’ positions have become dangerously entrenched. Even so, precisely because the gas cut-off is damaging the reputations of both Russia and Ukraine, it is unlikely to last long (see article). Yet it would be wrong to forget quickly the stark reminder, in the depths of a bitterly cold winter, that the EU depends on Russia for a quarter of its gas (some 80% of which flows through pipelines across Ukraine). All EU countries should now urgently look for ways to make themselves less exposed to supply disruptions.

Gazprom, which has been on a charm offensive this week, suggests that the answer is to speed up the building of new pipelines to the north and south of Ukraine, enabling Russia to supply western Europe directly. This appeals particularly to the Germans, the keenest supporters of the planned Nord Stream pipeline. Yet the commercial and strategic case for either pipeline is weak. Worse, they would make it easier for Russia to cut off gas to the eastern European countries through which existing pipelines pass. The real need is for Europe to reduce its dependence on Russia—which would point instead to persisting with Nabucco, a pipeline intended one day to supply gas from Azerbaijan and (perhaps) Central Asia via Turkey, bypassing Russian territory altogether.

Pipelines or pipedreams?
In practice, pipelines are hugely expensive, environmentally risky and take years to construct. So other measures are needed in the meantime. One is to press Russia and Ukraine to sign long-term contracts, with accepted pricing formulae, similar to those that Gazprom already has with most EU countries. The EU must also continue to object forcefully to the gas cut-off, making clear that it undermines Russia’s credibility as a reliable energy supplier. And it must stress that it will not allow the Russians to pick off individual EU countries through cosy bilateral deals.

Beyond this, Europe needs to work harder to diversify its sources of energy, something that it must do anyway if it is to meet its ambitious climate-change targets. And it cannot be repeated too often that a fully liberalised energy market, with better linkages between countries, offers all of Europe not only a more efficient energy future but also a more secure one.