May 6, 2015
When the Kremlin Makes An Offer You Can't Refuse
By Stephen Blank
Moscow uses energy as a weapon to influence and coerce its customers. As soon as Russia's "little green men" occupied Crimea, they seized every Ukrainian energy platform in the Black Sea. But Moscow's game of pipeline politics is not new. Its South Stream project aimed to isolate Ukraine from Europe while cementing Balkan dependence on Russia. It would have given Russia leverage over key customers like Italy, too. When the European Commission torpedoed South Stream for violating European Union (EU) rules, Moscow unilaterally canceled South Stream, leaving the Balkans in the lurch, and announced a new proposal for a pipeline through Turkey called Turk Stream. Turk Stream, like South Stream, was designed to isolate Ukraine from European markets and perpetuate its energy dependence on Russia while also evading EU regulations since it will conveniently end at the Turkish-Greek border. Turkey is not an EU member, so the EU's cumbersome rules won't apply to Turk Stream.
Even though Turkish Stream is only a proposal at this stage, Moscow is already using it to impose ultimatums on its customers, threatening them with cutoffs if they do not conform to Russia's demands. In January, it cut off gas to the Balkans and has issued ultimatums to Moldova in the past.
Russia's bullying isn't limited to hydrocarbons. The Kremlin told Hungary its economy would suffer if it turned down the agreement on a Paks nuclear reactor with Rosatom, Russia's national nuclear corporation. Similarly in Serbia, Moscow bought Srbijgas, Serbia's national company, in 2007 for $400 million, which was approximately 15 percent of its net worth. But Serbia doesn't get any special treatment now and pays market price of $400 per TCM. These thuggish tactics justify diplomats' description of Russia as a mafia state and show how little Slavic and Orthodox fraternity count for in Russia's world.
Russia is playing hardball in other areas as well. Russia dropped its gas price for private Turkish companies to $216 per TCM, while refusing to ratify the agreements it made with Turkey's national energy company. It had agreed to sell gas at $415 per TCM—a price that is burdensome to Botas and the Turkish government. Russia's actions are meant to compel Turkey to make concessions on Turk Stream.
Meanwhile, in the Baltic Sea, the Russian Navy entered Lithuania's territorial waters to chase away Swedish ships and construction crews laying the NordBalt cable linking Sweden and Lithuania to minimize Russian power exports to Lithuania. This is obvious retaliation for Lithuania's defiance of Russia. Vilnius built an LNG terminal that will minimize its exposure to Gazprom, the Russian energy giant. It's also a warning to stop construction of the forthcoming Lithuania-Poland cable. Moscow is also supporting anti-shale protesters throughout Eastern Europe and has sought to control not only upstream gas and other energy exports to European customers but downstream distributors to control domestic distribution in European countries, actions for which the European Commission has taken Gazprom to court.
Russia's actions against Ukraine in the energy sphere are not some sort of aberration. They reflect a pattern of predatory and coercive behavior that it has reproduced all over Eastern Europe to compel other countries to comply. Moscow's energy policy conforms to the classic mafia protection racket: buy my product or else bad things will happen to you. Moscow believes it has unlimited license to encroach upon or even curtail other governments' sovereignty, territory, and economic rights to suit its interests.
But sometimes Russia overplays its hand. South Stream lies in ruins and Ukraine is successfully turning to other customers who are, thanks to energy market trends, increasingly able to defy Moscow. But it is necessary to accelerate the process by which other exporters, including the United States, deliver oil and gas to Europe.
Russia's aggressive, coercive, and predatory behaviors, the purpose of which goes beyond economics, must be curtailed through economic and political means. The issue is not that Moscow sells gas to Europe. Russia's geographical proximity makes that inevitable. Russia uses its gas supplies not as a pure business proposition that are bought and sold at market prices globally but as a weapon to achieve strategic political objectives that are often at the customer's expense. But to ensure European security and peace, the United States and the EU must work to make the energy market one where the consumer is in command.
Dr. Stephen Blank is a Senior Fellow at the American Foreign Policy Council.