Europe's New Cold War

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Europe's New Cold War

Why doesn't the European Union have a unified energy policy?
By Anne Applebaum
Posted Monday, Jan. 12, 2009, at 8:27 PM ET

Like every continent, Europe has its rituals. In the spring, the storks return to the Low Countries from their winter nests in Africa. In the autumn, the French return to Paris from their beaches in the south. And in the winter, the Russians threaten to cut off the natural gas supplies to Ukraine.

OK, they don't do it every winter. But they did it in the winter of 2005-06, they did it in 2006-07, and when they once again switched off the taps this New Year's Day, it was impossible not to feel a wearisome sense of déjÃ* vu. This year, as in previous years, the negotiations are almost too complicated to explain, involving not only Gazprom, the Russian gas behemoth, but also various shady intermediaries, dubious deals, and differing price mechanisms. This year, as in previous years, the Russians are claiming that the conflict is purely commercial, not political; that Ukraine is stealing Europe's gas; that Ukraine is not paying a fair price. But this year, unlike in some previous years, those claims are looking exceptionally hollow.

For one, it was Russian Prime Minister Vladimir Putin who openly made the decision to switch off the gas, not the Gazprom CEO. More important, the Ukrainians, who have engaged in plenty of pipeline hanky-panky in the past, have this time around readily agreed to let Europeans and Russians monitor their transit pipelines. They have also paid their (very large) Gazprom debt and have asked—at last—for a more transparent system of price-setting, one similar to those used in Western Europe (an algorithm that relates the price of gas to the price of oil). Over the weekend, they even negotiated a deal with Russia, belatedly brokered by EU negotiators. The Russians then refused to sign it for two more days before agreeing—at least in principle—to turn on the taps late Monday night—though as of the time I am writing, they aren't on yet.

But why the delay? And why the cut off the gas for so long in the first place? This being Putin's Russia, theories abound. Perhaps the Russians thought the Ukrainians, in the throes of an economic and financial meltdown, weren't going to be able to pay that very large Gazprom debt. Perhaps they hoped to discredit the Ukrainian leadership in the eyes of the European Union. Perhaps they wanted the lights to start going out in Bratislava or Brindisi, just to give everyone a scare. Or perhaps, as some believe, Putin was trying to distract Russians from their own pending economic and financial meltdown.

For once, it almost doesn't matter. In fact, the most important story here is not the one about Russia and Ukraine but the one about the European Union. Europe, a Hungarian friend said to me last week, "occupies itself with unnecessary things and ignores everything that is important." There is something to this. There are EU sausage-making regulations, EU intercultural dialogues, even EU attempts to broker peace in Gaza. But although most of Europe—from Italy and France to Bulgaria and Slovakia—gets at least some of its gas from Russia, there still isn't a true, unified EU energy policy; and there isn't a true, unified EU Russia policy, either.

Instead, Gazprom—no longer pretending to be anything but a tool of Russian foreign policy—still does deals with European gas concerns one country at time, picking them off one by one. Putin still deploys "divide and rule" tactics to deal with Europe, making special arrangements for Italy, buying politicians in Germany, and cutting off the gas to Ukraine. And it works: In 2006, when Western Europeans suddenly felt the pressure drop in their pipelines, they protested, loudly. This year, as kindergartens in Bulgaria briefly went dark, no one in Brussels seemed especially bothered. Knowing that the Russians are unreliable, everyone now builds up their reserves, turns to other sources (the Norwegians have been pumping gas like mad), and keeps their fingers crossed, hoping that the Russians and Ukrainians will come to their senses in time.

Instead of sending their best and brightest to create a genuinely secure system—through expanded use of liquefied natural gas, more nuclear plants, clean coal—most European countries have settled for makeshift arrangements. Instead of using their collective bargaining power, they act as if they are dependent on Gazprom, when the reverse is equally true: After all, the Russians need the money they get from European sales almost as much as the Europeans need their gas. Instead of sending in crisis negotiators every Jan. 1, Europe's leaders could focus on this problem and solve it. I would love to describe this week's events as a "wake-up call," but there have been so many "wake-up calls" already. When will Europe heed them?

Anne Applebaum is a Washington Post and Slate columnist. Her most recent book is Gulag: A History.

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Russia's Putin Shows His True Colors

INVESTOR'S BUSINESS DAILY

Posted 1/12/2009

Energy: Russia signed off on a new agreement for fuel deliveries to Europe, resolving its gas cutoff crisis with Ukraine. But much of what it did this weekend should warn Europe it's time to look for another supplier.

Until Monday, Russia's case against Ukraine looked credible. The latter was a $1.5 billion deadbeat, refused to pay its $600 million in contractual fines, overconfidently insisted on reduced rates in new contracts, and may have been siphoning Russian gas from its pipelines that it was contractually obliged to pay for. There's little doubt Ukraine's actions hurt Gazprom, the Russian energy giant, which was in bad fiscal shape and needed income from reliable customers downstream who paid retail.

What's more, Gazprom didn't appear to have political motives in demanding Ukraine payment — it was trying to boost gas deliveries to Europe through the Ukrainian pipeline to meet its obligations.

Elsewhere, Gazprom was delivering gas to Georgia, a nation Russia made war on last year, because its bills were paid. Conversely, it also nearly cut off Belarus in 2007, another deadbeat, even though it was Russia's cozy ally. (Crisis was averted when Venezuela's Hugo Chavez paid the $500 million bill.)

But the political outlines of the Kremlin's gas game began to show up over the weekend. The European Union brokered a swift deal to install gas monitors to get Europe's gas flowing.

Instead of getting that going as fast as possible, Russia started finding legal technicalities in the pact that delayed resumption of gas.

First, Prime Minister Vladimir Putin said there'd be no gas until Russia got an official copy of the deal it had signed.

Another delay came when Ukraine's leaders foolishly scribbled into the margins of the agreement that they had already paid their bill, an unauthorized addition that whatever else it was, wouldn't have been recognized in any court as binding. But it left Europe to freeze another day, until the contract could be redone.

With it signed, Prime Minister Vladimir Putin (and not President Dmitri Medvedev, who was distancing himself from Putin) could claim victory and reassert that Russia is a reliable energy supplier.

It didn't take long for Putin to reveal his hand. He let on that what he really wanted was actual control of Ukraine's pipelines.

Out of the blue, he dredged up an old proposal about how Ukraine could "privatize," with Putin buying the pipelines. While privatization is not a bad idea, coming from the leader who effectively nationalized Russia's energy and was now letting Europe freeze, it suggested a power grab. "Ukraine regards its gas pipelines as a fetish and a national treasure provided by Lord," Putin told German television network ARD, trying to make Ukraine look irrational.

Obviously, he was trying to discredit Ukraine to Germany, the European nation he's closest to, perhaps to set the stage for some sort of regime change.

It ought to be unmasked for the manipulation it is. How do we know? Well, the most significant sign of Putin using energy as a weapon came in the size of loss Gazprom reported as Putin delayed a deal on technicalities: $800 million, or, as Novosti reported, $120 million a day. That amount exceeds the $600 million Russia says Ukraine owes in fines.

No credible business would let losses like that pile up just to collect a far smaller amount from Ukraine. A petrotyrant, however, would, because it's less about getting paid than getting even.

For Europe, this is important to understand.

Europe needs a reliable energy supplier. Russia has shown it has other priorities. That raises the case for diversifying suppliers away from Russia and moving to alternative sources.

Instead of investing in new Russian pipelines, such as the North and South streams currently on the table, Europe should give serious thought to Algeria and Turkey as alternative gas suppliers.

Other natural gas pipelines from the Mideast may warrant a second look. Liquified natural gas terminals will make gas accessible from places other than Russia and also deserve investment. And finally, the development of other fuels, like nuclear energy and coal that will lessen Europe's dependency on just one tyrannically inclined supplier.

These shifts are urgent matters for Europe, because so much is at stake. Without something as basic as a reliable energy supply, Europe will lose more in output and investment than Ukraine's fine.

Ultimately, that will hit America's economy, too.

If there's anything to be learned, it's that Russia will use gas as a political weapon to settle old scores. Even if its best customers are left in the cold.

Copyright 2000-2009 Investor's Business Daily, Inc.

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Russian Gas Deal Unravels

JANUARY 13, 2009, 3:15 P.M. ET

Supply to EU Stalled as Kiev and Moscow Blame Each Other

By ANDREW OSBORN in Moscow and JOHN W. MILLER in Brussels

Large swaths of the European Union were left without Russian gas supplies for a seventh straight day, as a pact designed to kick-start Russian exports via Ukraine unraveled on Tuesday and Moscow and Kiev blamed each other.

The collapse of the deal, brokered only the day before by the EU, risked further undermining Russia's credentials as a reliable energy supplier and encouraging the 27-nation bloc to turn its rhetoric on the need to find alternate energy supplies into action. It also exposed, again, how vulnerable the EU is to such quarrels.

On Monday, the EU struck what it thought was a breakthrough deal, allowing Russia to restart shipments that had been suspended since a contract dispute between Moscow and Kiev led to a total shutdown on Jan. 7. Under terms of the deal, EU monitors were to track the pipelines to ensure gas flowed. The bloc gets a quarter of its gas imports from Russia, the vast majority of that via Ukraine.

But by midday on Tuesday, Ukraine's transit network contained no new Russian gas. Russian gas monopoly OAO Gazprom said it had resumed flows as agreed, but complained that Ukraine had refused to open its transit network.

"If the system is closed we can't deliver," Gazprom Deputy Chairman Alexander Medvedev told reporters. He called Ukraine's actions "unbelievable."

In a sign that Moscow's patience is wearing thin and that the dispute is becoming increasingly political, Mr. Medvedev alluded to U.S. involvement in the row. It looked like Ukraine was "dancing" to Washington's music, he said. The U.S. State Department dismissed the comment as "baseless."

Ukraine confirmed that it had failed to reopen its transit system, but blamed Gazprom for sending gas on a route that would have forced Kiev to shut down supplies to its own consumers. Therefore, Ukraine said, it couldn't accept the gas.

"We couldn't open the tap because we don't have that possibility," Oleh Dubina, chief executive of state gas company Naftogaz Ukrainy, said, according to Russian news agency Interfax.

Independent gas analyst Mikhail Korchemkin, who is based in Pennsylvania, said Ukraine was right. "Russia is deliberately complicating the situation," he said in a phone interview. "They sent the gas to the wrong terminal." Gazprom denies that, saying it was the right terminal and one earmarked specially for export flows.

Late Tuesday, Ukraine President Viktor Yushchenko accused Moscow of "blackmail" and called on Russia to sign a technical agreement to get gas flowing again.

In Moscow, Prime Minister Vladimir Putin joined EU monitors and Gazprom CEO Alexei Miller in the company's control room. Standing in front of a giant map of Gazprom's gas flows across Europe, Mr. Putin said on Russian state television that the two sides needed to work out how to resume supplies. Russian officials were shown telling him it was all Ukraine's fault. "There are no reasons for the gas not flowing," Mr. Miller said during the broadcast.

In Brussels, one EU official said the dispute was like mediating "a schoolyard fight between first graders." EU officials said they weren't assigning blame because their monitors weren't allowed by either side into the right parts of the gas terminals.

Their frustration was audible. "We don't see any justification for gas not being in the pipelines," EU spokesman Ferran Tarradellas Espuny said.

In a move that suggested the crisis may encourage EU states to reduce their reliance on Russian gas, Poland said it would press ahead with plans to build one or two nuclear power plants by 2020. Bulgaria and Slovakia have already said that they want to restart nuclear reactors that they closed down in 2004 in order to meet EU membership criteria.

Konstantin Kosachev, a senior Russian lawmaker, said his country had a lot to lose. "Russia is starting to look like an unreliable energy supplier," he said in an interview with Ekho Moskvy radio late Monday. He said EU countries didn't care whose fault the supply crunch was: They had contracted with Gazprom and expected the energy behemoth to resolve its own delivery issues.

Underlining those risks, Gazprom said on Tuesday that it had declared force majeure, telling European clients that circumstances beyond its control meant it couldn't honor contracts. That may help the company stave off lawsuits, analysts say.

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Eastern Europe Faces Freezing Temperatures and Russian Gas Cut-Off

By Stefan Bos
Budapest
15 January 2009

With freezing temperatures across most of Europe, there was heated anger, especially in Eastern Europe on Wednesday, about the suspension in natural gas deliveries from Russia through Ukraine. The gas crisis comes at a difficult time for leading politicians, especially in Bulgaria, where some 2,000 people demanded the government's resignation on Wednesday over allegations of corruption.

The shortages of natural gas from Russia added to anger of protesters who braved the cold in Bulgaria's capital, Sofia, to demand the resignation of the country's Socialist-led government.

They were upset that Bulgaria remains one of the poorest countries in Europe, despite being a member of the European Union.

What began as a peaceful protest of students, farmers and medical workers in front of the parliament building, turned violent when masked youths threw snow and rocks at police, and vandalized several police vehicles.

Officials say several people were injured, including six police officers. Dozens of protesters were detained.

Bulgarians are not the only East Europeans frustrated during this unseasonable cold winter. There have been reports of people freezing to death across the region, which is heavily dependent on Russian gas via Ukraine.

Russia says neighboring Ukraine is holding up the transport of Russian natural gas to Europe. Moscow cut all gas supplies to the West last week in a pricing dispute with Ukraine. Kyiv blames Moscow for the supply disruption.

In Hungary, where reserves are running low, officials say some 40 people have died this month from frigid temperatures, often because heating systems do not work properly due to a lack of natural gas pressure.

More deaths have been reported across Eastern Europe, where many people are now searching forests for wood to use as heating fuel.

Fearing more deaths, Hungary's government has ordered municipalities and energy companies not to cut off people who do not pay their gas bills.

In Slovakia's capital, Bratislava, people expressed their frustration with their leaders on Slovak television. "They have to give the natural gas to us," one middle aged bus driver said. "Because it is too cold. A lot of people can freeze to death."

Slovakia's Prime Minister, Robert Fico, who visited Moscow on Wednesday, has not ruled out restarting a Soviet-era nuclear reactor despite European Union protests as gas reserves are expected to run out by the end of the month.

People in Bratislava told Slovak television they need energy -- nuclear, if necessary. "We need to have normal temperatures at home this winter," one man said. "So if they want to restart the nuclear reactor and keep the operation within international rules, I think it's okay," he added.

Slovakia, which depends on Russia for nearly all of its natural gas imports, has already declared a state of energy emergency to conserve its gas reserves. That has forced several companies including French and South Korean car makers, to suspend production.

Similar measures have been introduced in Hungary and other East European countries.

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Russia and Ukraine reach deal on gas prices

By Andrew E. Kramer
Monday, January 19, 2009

MOSCOW: The prime ministers of Russia and Ukraine agreed Sunday to resolve their gas dispute, with an understanding that prices would be pegged to the price of oil, but with a discount for 2009 that means Ukraine could pay little more than it did last year.

The deal, expected to be signed Monday, came after a din of criticism from officials in Europe, where more than 20 countries have been affected since a Jan. 6 cutoff of natural gas and at least 12 people have frozen to death in a dispute that is ostensibly over prices and transit fees, but that is also deeply entwined in post-Soviet politics.

If the agreement holds — and previous deals have not — the gas dispute would essentially end where it started in terms of prices, in what would be a baffling result considering the hardship caused by the embargo. It was unclear after the announcement when gas would start flowing back to Europe.

Politically, Russia appeared to have made gains in influencing internal Ukrainian affairs ahead of an election scheduled there next year, but at the cost of alienating officials in European countries in a standoff that was as much geopolitical as commercial.

Russia has sought to divide the pro-Western coalition in Ukraine that came to power after the Orange Revolution in 2004. It had striven to negotiate with and strengthen the Ukrainian prime minister, Yulia Tymoshenko, who is seen as more conciliatory toward Russia than the Ukrainian president, Viktor Yushchenko.

In this sense, the deal served at least one of the political goals analysts of post-Soviet politics had ascribed to Russia's actions in the gas dispute. Russia had also, some analysts said, sought to intimidate new members of NATO, like Bulgaria, which are heavily dependent on Russia for energy. Within Ukraine, critics of Yushchenko said his pre-election posturing of taking a hard line against Russia exacerbated the dispute.

Before the agreement was reached, European Union officials had characterized the talks between Prime Minister Vladimir Putin of Russia and Tymoshenko as a last chance for Ukraine and Russia to resolve their dispute or risk suffering irreparable damage to their reputations as reliable partners in the energy business.

Some analysts noted that Russia might lose market share for its energy in Europe, where countries may turn to alternative forms of energy, like liquefied natural gas.

The European Commission issued a cautious statement on Sunday. "We have seen many false dawns," it said. "The test in this case is whether or not gas flows to European customers."

Some experts said that Russia had not achieved one of its objectives — to cause a split between Ukraine and Europe.

"I would still say, the big losers, in the long run, are the Russians," Zbigniew Brzezinski, co-chairman of the Center for Strategic and International Studies and the national security adviser under Jimmy Carter, said in an interview from Washington.

"The key point is that what Russia did was not aimed at Europe as such, but aimed at Ukraine, in the hope that the Europeans would gang up on Ukraine," he said. "I think the key issue is strategic, not the money involved. They were hoping the Europeans would put a lot of pressure on Ukraine, and convey to the Ukrainians that they are dispensable in this relationship.

"I think that this did not work out as well as hoped" for authorities in Moscow, he said.

In a meeting that extended into the early hours of Sunday in Moscow, Putin and Tymoshenko agreed that Ukraine would buy gas from Russia at a 20 percent discount to prices paid in Europe, which are expected to fall sharply this year.

Gazprom, the Russian gas monopoly, has projected the average price in Europe next year to be between $260 and $300 for 1,000 cubic meters of natural gas. The prices are pegged to oil prices with a delay of six months. Thus Ukraine would pay between $208 and $240.

Talks had broken off late last month with Ukraine offering a fixed price of $201, and later raising its offer to $235, after Russia embargoed supplies. The country had paid $179.50 in 2008. Russia had asked for a fixed price of $250, then halted deliveries to Ukraine and asked for a flexible price pegged to oil and starting at $450, but with the understanding it would decline through the year.

Still, the agreement pegged Ukrainian prices to those in Europe, a formula Russia had sought throughout the dispute.

Russia cut supplies to Ukraine's domestic market on Jan. 1, saying Ukraine had no contract for 2009. A week later, Russia halted shipments to Europe after accusing Ukraine of withdrawing gas from the export pipelines. Ukraine said it took gas only to run pumping stations used to pressurize the pipelines.

While previous agreements have collapsed, Sunday's deal addressed the pivotal issue of the prices Gazprom was willing to pay to use Ukraine's natural gas pipeline network, which the company relies on to carry about 80 percent of its exports to higher-paying customers in Europe.

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Iran reduces oil supplies to Asian, European customers

By Andrea Coombes
Last update: 3:07 p.m. EST Jan. 18, 2009
Comments: 51

SAN FRANCISCO (MarketWatch) -- Iran has started putting into place planned output cuts agreed to by the Organization of Petroleum Exporting Countries, reducing supplies to Asian and European customers, according to an Associated Press report citing Iran's Mehr News Agency. The customers had been informed of the reduction, the report said. Crude oil futures closed at about $36.51 on Friday, down about 75% from July.