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Eastern European energy security: what is the Russian factor?

By JOSEPH CANTU, with PATRICK STEPHENSON

BRUSSELS – Recently, Eastern European reliance on Russian natural gas has dominated security discussions as a way Russia could extend its influence into the EU. While US liquid natural gas (LNG) imports pour into the new Polish LNG terminal at Świnoujście, the US Senate in June threatened to impose sanctions against the proposed Nord Stream II gas pipeline expansion, which would transit Russian gas under the Baltic Sea to German consumers.

Many German politicians denounced the proposed sanctions, which have yet to be approved by the US House of Representatives. Donald Tusk, president of the European Council, has also criticised Nord Stream II, saying it does not serve “the best European interest”. Maroš Šefčovič, European Commission for energy policy, agreed. Nord Stream II has the “potential to have a negative effect on Central and Eastern Europe… and it could have a devastating effect on Ukraine.”

Getting a clear picture of the issue is not easy, given all the rhetoric: is there a real Russian threat or is it just hype?

To help interpret the mess, SECURITY EUROPE spoke to Marco Giuli, energy analyst at the European Policy Centre (EPC) on 4 July about how vulnerable its reliance on Russian gas really makes Europe – and whether Eastern Europe’s fears are justified or simply reflect post-Cold War anxiety.

Describing the current gas market as a “buyer’s market” due to the glut in global supply, Giuli said Russia knows “Europe is their clear market, [and] it’s leading them to invest in the Turkish and Nord Stream II pipelines”.

Despite Russian attempts to diversify away from Europe – the country is now building a pipeline to China for gas from its eastern fields – Russia has been unable to find a viable alternative market for the western Siberian fields servicing Europe. “Russia wants to be seen as a reliable seller” to help them maintain market share and keep countries from diversifying away to other sources of energy, said Giuli.

Were Russia to lose Europe, it would lose its primary market, drastically cutting revenue. While cutting off the gas could be a useful geopolitical tool, it wouldn’t be an economically feasible one. With major pipelines already built into Europe, Giuli argues that “Russia’s comparative advantage is in Europe” because of the high costs of new infrastructure development.

Given the EU’s push to de-carbonise its economy, he said “the future of gas demand is unclear [because] the European carbon market hasn’t signalled clearly that gas will replace coal instead of true green measures. Each country follows different methods for reducing their carbon emissions.”

Gas demand is highly dependant on government policy. The UK uses a heavy carbon tax to reduce demand for all fossil fuels, while Germany has banned coal which has prompted rising demand in the country for gas. Describing the gas market as “not entirely natural”, Giuli said government and environmental regulations make it hard to predict what the market will look like down the line.

As more LNG ports are built and a Bulgaria-to-Greece pipeline completed, he said more supply should mean lower prices: “But we need to see an increase in supply to really force this”, adding that sometimes a greater diversity of sources can lead to lower prices even without greater supply. For example, after Lithuania built an LNG terminal in 2014, Russia lowered its selling price to that country.

Giuli believes the backlash to Nord Stream II is overhyped, particularly by Poland. “The current Polish government is a nationalist government promoting the old idea of encirclement. So any conversation between Germany and Russia is seen as threatening,” he said. “In terms of real threat though it’s very minimal in the Polish energy mix”.

Giuli admitted that outside the EU there was a danger, however, with Ukraine being the “main potential victim”. Moscow’s ability to cut off gas to Ukraine without severely disrupting the flow to Europe will ensure “Russia’s foreign policy options are expanded,” he said.

As for the future of Nord Stream II, Giuli said Germany’s elites are divided.

“The big reason for the current [German] government to allow this to happen is the presence of the SPD [Socialist Democratic Party] in government,” he said, pointing to the results of upcoming elections as the clearest indicator of whether Nord Stream II will continue. “If the Greens are in the next coalition we could then see resistance from the central government,” he said, adding that regardless of whether Polish or Baltic complaints are warranted, the Germans could sour on the pipeline depending on who forms the next government.

     THE UPSHOT: Despite all the hullabaloo, Giuli’s argument for Russia not being willing to cut off its nose to spite its face is compelling. While diversification is still useful for reducing gas prices, it may be wiser for EU lawmakers to focus their attention on other vulnerabilities when discussing security concerns, be they “old” military ones or hybrid and other new forms of warfare.
     As for Nord Stream II, we’ll have to wait for the German elections to determine its fate. While Poland’s nationalist government is exaggerating the issue, the potential threat to Ukraine posed by the pipeline shouldn’t be taken lightly. Reason dictates that Russia would refrain from cutting of Ukraine’s gas supply again for fear of spooking the Europeans into giving favourable deals to competitors to drive down Russia’s share of the EU gas market. But reason doesn’t reliably guide politics in Moscow where geopolitical calculations may spur more aggressive action.

     jvc219@lehigh.edu
     ps@securityeurope.info

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