Syed Rashid Husain Energy riches have long served Moscow as an effective political bargaining chip. And with President Putin threatening to stop the flow of gas to Ukraine, its energy riches are once again under spotlight. Ukraine is dependent on Russia. In 2012, it consumed approximately 1.8 trillion cubic feet (Tcf) of natural gas — (EIA). And of it, almost 1.1 Tcf was supplied by Moscow - at less than market prices. Additionally, Ukraine's geographic position and proximity to Russia explain its importance as a natural gas and petroleum liquids transit country. Approximately 3.0 trillion cubic feet (Tcf) of natural gas flowed through Ukraine in 2013 to Austria, Bosnia Herzegovina, Bulgaria, Croatia, Czech Republic, Germany, Greece, Hungary, Moldova, Poland, Romania, Slovakia, and Turkey. Europe, including all EU members plus Turkey, Norway, Switzerland, and the non-EU Balkan states, consumed 18.7 trillion cubic feet (Tcf) of natural gas in 2013. Russia supplied 30 percent (5.7 Tcf) of this volume, with a significant amount flowing through Ukraine. Based on data reported by Gazprom and Eastern Bloc Energy EIA estimates that 16 percent (3.0 Tcf) of the total natural gas consumed in Europe passed through Ukraine's pipeline network. Eversince the toppling of the Ukraine's pro-Moscow president Victor Yanukovych, Moscow has embarked upon an economic, military and political offensive against the pro-west government of acting president Oleksandr Turchynov. While the drama on political front continues to evolve, the emerging energy kaleidoscope is also turning out to be interesting and absorbing. On April 6, Russia's state-controlled company Gazprom announced almost doubling the price of gas for Ukraine, from $268.50 to $485.50 per 1,000 cubic meters, making it by far the highest price paid in Europe. And then like a professional salesman, tightening the squeeze further, in a stark letter to 18 world leaders, Putin threatened the "extreme measure" of cutting off Russian gas to Ukraine unless the country pays in advance for all its supplies, as its debt continues to mount. The letter follows Ukraine's refusal to pay Gazprom's at the new prices, describing these an act of economic aggression and warning it would take Russia to the arbitration court in Stockholm if the prices are not reduced. Kiev however clarified, it was ready to make "all payments" for previous gas supplies from Russia, yet emphasizing, increased prices were unacceptable. By Gazprom's count, Ukraine owed the company $2.7 billion since last year. However, as per Putin, Ukraine owed Russia $17 billion due to the termination of gas discounts and potentially another $18.4 billion as a take-or-pay fine under their 2009 gas contract. He added that on top of that $35.4 billion, Russia also holds $3 billion in Ukrainian government bonds. Putin also underlined, rather subtly, that a shutdown of Russian gas supplies to Kiev could increase the risk of Ukraine siphoning off gas intended for the rest of Europe, making it difficult for Moscow to accumulate sufficient reserves to guarantee uninterrupted delivery to European customers next winter. The perception gap stays! And the war theater is heating up, sucking regional and global stake holders into the conflict. The US State Department condemned what it called "Russia's efforts to use energy as a tool of coercion against Ukraine." President Obama also spoke to the German Chancellor Angela Merkel, telling her that the US and its allies should prepare for fresh sanctions against Russia if the crisis escalates. Russia supplies about 37 percent of Germany's gas, yet, Merkel has lately been portraying Germany's energy dependence on Russia as limited, saying the EU shouldn't fear punishing Russia if it encroaches further on Ukraine. Could Moscow use the gas leverage to its ultimate benefit? A big question indeed! EU as a group today is far less vulnerable to the gas weapon. And then the timing of the move also reduces Putin's leverage. In summer, the EU buys very little gas from Russia. And with EU being the biggest single buyer of Russia's oil and gas, any stoppage would cause Moscow to lose billions of dollars. Russia would be the biggest loser of all, Commerzbank said. "A voluntary suspension of Russia's deliveries or EU sanctions in the form of commodity export limitations would be disastrous for the Russian economy above all — and would far exceed the potential damage for the Western world," its analysts wrote. A senior, well respected, gas pundit is of the view that in case sanctions are levied against Russian gas supplies to Europe, as being discussed in Washington and major European capitals, Gazprom would lose some $90 million per day of income. Already due to the US sanctions against Russia, all American banks have withdrawn their credit lines to Gazprom Marketing and Trading, headquartered in London. Consequently, the activities of the company have been severely curtailed, the senior industry consultant — speaking on condition of anonymity —underlined. The company was responsible for the supply of some 30 BCM of gas to European customers last year on top of the 110 BCM of gas supplies delivered by Gazprom Export under long term supply agreements. Russia probably wouldn't cut off gas and oil exports even if the European Union imposes sanctions aimed at the Russian economy, Germany's leading economic research institutes projected. Putin's government derives about half its revenue from oil and gas exports, and, Moscow's dependence on energy exports for meeting budgetary obligations is a restraint on Putin, the forecasters said. Putin also has a “great interest” in sabotaging any effort by Germany to diversify away its energy imports from Russia, the group led by the IWH, Ifo, RWI and DIW institutes said. And any blockage would definitely push Germany to look for other options. In the longer run, that goes against the strategic interests of Moscow. Neil Shearing, head of emerging-markets research at the London-based Capital Economics believes Russia “stands to lose more” than Europe, as the country's oil and gas shipments to Europe are worth about 10 percent of its gross domestic product of Russia. Russia's economy was already struggling before the conflict with Ukraine intensified this year, Liza Ermolenko, an analyst at Capital, wrote. Gross domestic product may have grown at a 0.5 percent annual pace in the first quarter, slowing from 2 percent in the last three months of 2013 and may “easily” slide into recession this year, she wrote. The ruble has weakened 7.7 percent against the dollar this year, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg after the Argentine's peso. The dollar-denominated RTS Index fell 16 percent this year, compared with the MSCI Emerging Market Index's advance of 1.1 percent. The world is interdependent. Despite political objectives, Moscow needs to remember; not all wishes come true. This is what this world is all about!
