Publication: Eurasia Daily Monitor Volume: 3 Issue: 79

Armenia targeted by Kremlin gas diplomacy

The unprecedented exchange of public demarches between Gazprom and the EU last week left both sides dissatisfied and the issues muddled rather than clarified. The firm message issued by the European Commission last Thursday, April 20, with the emphasis on the need to diversify energy-supply sources and the reminder that Gazprom was expected to deliver fully on its contractual obligations was entirely predictable (EDM, April 21). The harsh tone adopted by Gazprom’s CEO Alexei Miller at the April 17 meeting with EU ambassadors was, however, much less so. His rather awkward statement that the attempts to block his company’s activities in Europe and to politicize the economic problems “will make no good results” triggered a landslide of alarmist commentary about Gazprom’s “ultimatum” (Kommersant, April 20; Financial Times, April 21). The contrast with the previous persistent attempts to rebuild the company’s damaged reputation as a reliable supplier after the “gas war” with Ukraine at the start of this year can hardly be sharper. Why this sudden and clearly counter-productive shift from generous incentives to barely hidden threats?

Among analysts, the leading explanation for the shift is Russian President Vladimir Putin’s promises to China to begin large-scale exports of natural gas was the main one, particularly since Miller made a direct reference to this market. These promises are, however, still vague after years of discussions and the prospects for constructing the pipelines and developing the basic infrastructure towards the penciled date of 2011 are optimistic at best. Gazprom has effectively blocked the BP-TNK project for developing the Kovykta gas field was the best opportunity to make a real deal with China (Nezavisimaya gazeta, April 4).

Other possible reasons include the electoral defeat of Italian Prime Minister Silvio Berlusconi, which reduces Putin’s ability to lobby for Gazprom’s interests, and the signals from the UK that Miller’s interest in purchasing the Centrica distribution company was not welcome (, April 17; Kommersant, April 20). These setbacks are, however, just manifestations of a larger problem: Gazprom seeks to operate on the European markets like a “normal” company, while in fact it constitutes a key part of the Russian state. The “liberalization” of trade in its shares that has brought the colossal increase in its market capitalization (from $19 billion in February 2003 to $225 billion as of last week) has only increased the deep interpenetration between Gazprom and the Kremlin (, April 17).

Russia’s gas strategy in Europe is based on the fundamentally anti-market principles of fixed quotas and guaranteed long-term contracts that would eliminate any competition; it also implies a “divide-and-deliver” maneuvering between major European consumers. The attempts to pit the companies short-listed as prospective partners for developing the huge Shtokman gas filed against each other while linking the final choice with Russia’s entry into the WTO makes a perfect example of this tactic (Kommersant, April 20). It is by no means certain that the EU would be able to overcome the “economic patriotism” displayed by its member-states and get its energy act together. There have been, nevertheless, some significant shifts in this direction guided by Energy Commissioner Andris Piebalgs, and the so-called “Green Paper” presented in March emphasized the need in liberalizing and diversifying the energy market.

The last thing Putin wants to see at the G-8 summit in St. Petersburg this July is this paper forming the basis for a discussion of “energy security.” He has very different ideas about securing Russia’s status as an “energy superpower” but if these ideas are placed on the table, the summit would hardly make any sense at all, which might indeed signify the end of the G-8 as Andrei Illarionov, former presidential economic adviser, has suggested (Vedomosti, April 18). Seeking to break through this web of contradictions, Putin, apparently, has resorted to a rather unsophisticated bluff (, April 20). The gambit had slim chance of succeeding, since Gazprom is in fact more dependent upon Europe, which now imports about 45% of its gas consumption, than Europe is upon Gazprom, even if it covers 90% of consumption in Hungary and Poland and 100% in Finland (, April 21). Growing internal demand remains unprofitable for the gas monopolist, exports to other post-Soviet states remain politically problematic with a new conflict with Ukraine looming already this summer, export to Asian markets is a proposition for mid-term future, so the EU is its only immediate source of badly needed income.

The only thing that could possibly make Gazprom’s bluff half-plausible is the new spike in oil prices, since they continue to determine the prices of natural gas through a rather artificial system of calculations. The real macro-economic impact of breaking the symbolic $75 per barrel ceiling is, nevertheless, surprisingly small, which essentially means that the whole topic of “energy security” that dominates the financial G-7 meeting in Washington this past weekend, is seriously overblown (, April 22). While experts now confidently predict oil prices will stay high for indefinite future, it is essential to remember that such predictions have a remarkably poor record of accuracy. The current unstoppable rise is driven by the simultaneously developing crises in two major producers, Iran and Iraq. It is entirely within the realm of the possible that three years from now these conflicts would de-escalate, new oilfields would be open for investment, and the prices would drop to half of the present-day heights.

Gazprom’s behavior, nevertheless, is driven by more immediate problems than the possibility of a plunge in prices or a certain production decline in the mid-term. Its tight alliance with the Kremlin means that the so-called “problem 2008,” focused on the handover of power from Putin to a successor acceptable to key interest groups in his court, is Gazprom’s problem as well. Any new “boss” would aspire to take real power in his hands – and that would involve taking control over Gazprom. He would also need to establish his credentials in Europe, which could only be done by showing a “responsible” attitude toward energy exports. Hence the desperate bluffing and bribing aimed at securing market positions now, before the “lame-duck” president is elbowed aside by his loyal lieutenants.