The chairman of Ukrainian state energy company Naftogaz, Andriy Kobolev, declared today that Ukraine will continue to buy natural gas exclusively from Europe in the near future. Just a few years ago, it would have been unimaginable for Ukraine to go through winter without buying gas from its eastern neighbor, Russia. In fact, as late as a year ago, any analysis of the relationship between Russia and Europe would have inevitably focused on pipeline infrastructure and pricing negotiations between Russian energy giant Gazprom and its European customers. Nevertheless, European Union policies promoting greater competition and connectivity in the energy sector, combined with falling world energy prices, have greatly reduced the role of energy in Eurasian geopolitics.
One of Russia’s strategic goals is to maintain influence in the border states of Central and Eastern Europe. Of these, the most important for Moscow are Ukraine, Belarus and the Baltics, which border Russia and have historically constituted a buffer between Russia and powerful European states like Germany and France. Countries throughout this region have traditionally depended heavily on Russia for natural gas. In 2013, the three Baltic states, as well as Armenia, Belarus and Bulgaria, depended on Russia for 100 percent of their natural gas imports. Ukraine, the Czech Republic and Slovakia were among the countries that relied on Russia for over half of their natural gas supplies that year.
This high degree of dependency allowed Russia to charge exorbitant prices in Central and Eastern Europe. The region’s customers paid much higher rates than their Western counterparts for Russian natural gas. In 2013, the estimated price of imported Russian natural gas in Lithuania and Bulgaria was about $500 per thousand cubic meters, compared to an estimated price of $379 in Germany and $166 in Belarus during that same time. The Kremlin used the high prices as a way to pursue geopolitical goals in the region, as countries were periodically offered discounts, in exchange for implementing policies favored by the Kremlin.
In an era of high natural gas prices and relatively high levels of dependency on Russian energy, much of the competition between the West and Russia for influence in the borderlands revolved around competing pipeline projects. The European Union and the U.S. sought to reduce the region’s dependency on expensive Russian natural gas, with the hope of thus also reducing the Kremlin’s leverage in Central and Eastern Europe. Proposed projects such as the Nabucco West Pipeline and the Trans-Anatolian pipeline were discussed with the aim of bringing natural gas from countries such as Azerbaijan and Iraq to European markets. Russia, in turn, worked to safeguard energy deals with the region’s governments and create infrastructure that would solidify Gazprom’s hold on the region’s energy markets. The Russian-backed proposed South Stream pipeline, which would have run across the Black Sea to Bulgaria and onward into Central Europe, was designed as a way to undercut plans for pipelines such as Nabucco and avoid having to use Ukraine as a transit country. Later, the Russian-backed Turkish Stream project was proposed with a similar goal.
Two factors have transformed this dynamic and undermined the importance of energy in the region’s geopolitical competition. First, the implementation of the EU’s Third Energy Package boosted competition within the European energy market. New interconnectors allowed natural gas from countries like Norway to reach the Central European market. Countries that had previously relied heavily on long-term contracts with Gazprom could buy more natural gas from regional spot markets. At the same time, as world energy prices declined, the Kremlin’s traditional negotiating tactic of offering discounts was no longer effective, since countries like Ukraine now have access to cheap European natural gas markets. Moreover, with prices so low and Russia experiencing a budgetary crisis, the Kremlin cannot afford to charge even lower prices. And faced with low revenues, Russian companies can no longer pay for many vast pipeline projects. While tensions between Russia and Turkey have played a role in the formal suspension of work on Turkish Stream, the pipeline will not be built primary due to financial considerations and the new realities of the natural gas market. Gazprom, along with a consortium of Western companies, is now touting a Nord Stream 2 project, which would boost the amount of natural gas Russia can export to Germany. Even if built, however, the pipeline will do little to shift the new realities of European energy markets.
Russia is weakening and one of the elements reducing the Kremlin’s ability to compete for influence in Central and Eastern Europe is the erosion of natural gas and pipeline politics as strategic tools. This erosion, however, is not only impacting Russia: countries like Azerbaijan and Turkmenistan, wooed over the years by the West both due to their potential as alternative sources of energy and geographic position, have weakened greatly economically. Russia is still an important provider of natural gas to Europe, but the country’s ability to use its energy exports to its benefit has been undermined. In the years after the fall of the Soviet Union, being a major energy exporter was increasingly an economic and political boon for Russia. However, now, and for the next few years, being a commodity exporter represents a significant economic vulnerability. Russia cannot weather the storm, as demographic, economic and strategic problems are already underway. Russia’s strategic goals remain the same, but with the demise of pipeline politics and the end of the era of high energy prices, the country’s ability to fulfill its strategic goals is eroding.