Publication: Eurasia Daily Monitor Volume: 3 Issue: 163

The Gazprom building in Moscow.

Russia’s challenge to Western energy security has grown almost explosively in recent months along seven dimensions:

1. Seemingly unchecked growth of the European market share captured by Russia’s state-connected energy companies. Largely driven or assisted by the Kremlin, this process is fraught with manifold economic and political risks to Europe and the Euro-Atlantic community.

2. Moscow’s ability to manipulate the flow of supplies en route to recipient countries. This ability was demonstrated during Ukraine’s gas crisis of January-February 2006, with ripple effects on European countries farther downstream. In July of this year, Moscow cut off the oil supplies to Lithuania and also blocked oil supplies from Kazakhstan to that country, so as to thwart the sale of Lithuania’s refinery and oil-transport system to Poland’s PKN Orlen. (It also continues to block Kazakhstan’s access to Latvia’s Ventspils oil terminal.) Under the guise of commercial and debt arrangements, in Ukraine’s case, and technical problems, in Lithuania’s case, Moscow plans to set the stage for takeovers of Ukraine’s gas pipelines and Lithuania’s oil sector.

3. Disruption of energy export flows even before they leave Russian territory. Thus, in January and February this year, below-average winter temperatures in Russia (certainly not an unpredictable occurrence) reduced the gas volume available for Europe. A well-organized although never-explained sabotage of three energy supply lines on a single day (January 22) in Russia’s North Caucasus had a devastating impact on Western-oriented Georgia, with collateral effects on Moscow’s ally Armenia. And a relatively minor oil spill from a pipeline in western Russia in July provided the excuse for cutting off supplies to Lithuania (though not to Belarus from the same spur).

4. Moscow’s monopoly on the transit of eastern Caspian oil and gas to consumer markets in the industrialized democracies. The transit monopoly constitutes a novel type of economic and political leverage, usable against producer countries as well as against consumer countries. It is also an instrument of choice in the economic and political penetration of the countries of Europe’s East. The South Caucasus-Black Sea transit corridor is the only option that can protect the interests of consumer and producer countries alike.

5. Rapid inroads by Russian state-connected energy companies, particularly Gazprom, into downstream infrastructure and distribution systems in Europe. Such arrangements include long-term exclusive contracts to lock Russian companies in and lock competitors out, leading eventually to price dictation and political leverage on consumer countries. In the case of gas, the success of Moscow’s strategy significantly depends on control over Central Asia’s gas reserves. Moscow uses a mix of political pressure and corruption to foil the construction of trans-Caspian oil and gas pipelines via the Black Sea region to Europe.

6. Inroads into some of Europe’s traditional supply sources of oil and gas, such as Algeria and Libya. In Algeria’s case, Russia has successfully offered multibillion-dollar arms deliveries as well as debt write-offs in return for starting “joint” extraction projects in Algeria and “joint” marketing of the fuel in Europe. With Europe no longer in full control of its few remaining oil and gas provinces, it must refocus its attention toward Caspian-Black Sea energy transit

7. An incipient, yet already massive, transfer of financial resources from Western capital markets to fund extractive projects in Russia that operate under discretionary control of Russian state-connected companies and the Kremlin. Thus, the initial public offerings just held “successfully” in London for Rosneft and Gazprom have opened a drain on Western financial markets toward Russia, discounting considerations of energy security, let alone common policies on energy or foreign policy altogether.

To this succinct enumeration of recent challenges one must add the collateral political damage in some European countries from non-transparent, monopolistic agreements with Kremlin-linked companies. Gazprom’s massive entry into Turkey, Austria, Italy, and Germany, for example, has involved certain top-level politicians, business figures, and banks and brought them into highly questionable arrangements. These include protecting Gazprom against competition from other supply sources, such as those from the Caspian-Black Sea region, on European markets.

The convergence of these trends has highlighted the long-neglected, but now rapidly mounting, risks to the energy security of the enlarged West and its partners in Europe’s East. At last, Brussels and Washington are beginning to acknowledge some aspects of this manifold challenge. But they have yet to focus on the dangerous nexus now forming between disruptions by Russia or in Russia and growing dependence upon Russia.