Energy will be more explosive than territory in Ukraine’s crisis

The apparent truce between Ukraine and Russia does not address the issue of how to secure energy supplies being sent from Russia to western and central Europe, writes Adrian Pabst.

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Last week France hosted the commemorations of the 70th anniversary of D-Day, the allied landing in Normandy that marked the beginning of the end of the Second World War. On the margins of the ceremonies, Vladimir Putin, the Russian president, shook hands with the newly elected Ukrainian leader Petro Poroshenko. After months of bloody fighting in the eastern border regions that took Ukraine and Russia to the brink of an all-out war, this has done more for de-escalating the conflict than the desperate diplomacy of the US and the European Union.

During their 15-minute meeting, Mr Putin and Mr Poroshenko discussed a ceasefire and negotiations for a peaceful settlement of the crisis that has plunged east-west relations to their lowest point since the Cold War. None of this solves the sheer hostility between Moscow and Kiev or the battle that pits Ukraine’s pro-western leadership against pro-Russian separatists who enjoy the Kremlin’s backing.

But the handshake suggests that Russia recognises the legitimacy of the new Ukrainian president, which removes the single greatest obstacle to resuming meaningful bilateral relations. So the risk of an all-out war is rapidly receding.

In reality, however, the next phase of the conflict has already begun, as new threats to regional and global stability are coming to the fore. In the next weeks and months, the focus will shift from territorial quarrels to the energy disputes that have the potential to derail the European and world economic recovery.

Indeed, Russia and Ukraine have been waging gas wars since 2005 when the so-called Orange Revolution brought to power the pro-western leader Victor Yushchenko, who declared Ukraine a market economy. In response, the Kremlin demanded changes to the long-term contracts that included vastly preferential prices for Moscow’s gas deliveries to Kiev – de facto subsidies to the tune of several billions dollars a year.

When Mr Yushchenko refused to accept higher prices, Russia’s state-owned giant Gazprom turned off the tap. But since Ukraine is a transit country for Russian energy supply to the rest of Europe, this quickly turned into a pan-European crisis. Kiev was accused of diverting gas for domestic consumption, which should have gone to other countries. There was a repeat of the gas war in the winter of 2009, which left hundreds of thousands of households across Europe without sufficient energy. Some elderly people died of hypothermia in their own homes.

In the absence of a Russian military incursion into eastern Ukraine, energy is now much more explosive than territory. The euphemism of global interdependence does not begin to capture the depth and breadth of oil and gas ties that bind Europe to Russia. The bulk of Russian energy flows through an intricate network of pipelines, starting with Ukraine. If Mr Putin and Mr Poroshenko can’t strike a deal (including over Kiev’s late payments that Moscow wants to receive in cash), then the Ukrainian economy will collapse and the new leadership will lose legitimacy. Similarly, economic turmoil will weaken popular support for Russia’s ruling regime.

US shale gas has been hailed as a revolution that will decrease dependency on Moscow and reduce global energy prices, thus threatening the economic foundations of Mr Putin’s authoritarian system. However, the costs will by far exceed the price charged by the Kremlin. The US would dearly love to replace Russia as Europe’s main supplier but this is many decades away, if it ever happens.

Much the same goes for Russia’s Asia-Pacific pivot: the recently signed mega-deal with China worth more than US$400 billion (Dh1,469bn) does not start until 2018, with Siberian gas transports building up gradually to 38bn cubic metres a year. Beijing has already struck separate deals with Central Asian countries such as Kazakhstan and Turkmenistan that are Russia’s rivals.

The EU’s desire to diversify energy supply away from Russia is understandable but unrealistic, as the alternatives – from parts of the Middle East and North Africa – are hardly more reliable. A number of European countries want direct ties with Russia that circumvent volatile transit states such as Ukraine. One such example is Nord Stream, a pipeline that has supplied Germany with Russian gas since 2011 while also bypassing countries that are hostile to Moscow like the Baltic States and Poland.

Other European countries are keen on South Stream, an ambitious pipeline project that will connect Russia to the wider European south from 2018 onwards without passing through Ukraine. Beneficiaries include Bulgaria, Serbia, Croatia, Hungary, Slovenia, Austria and Italy.

The current crisis has led the US and some EU allies to call for the suspension of South Stream in order to loosen the Kremlin’s grip on Europe.

But this clashes with the mutual economic interests and the close cultural ties between Russia and countries like Bulgaria or Serbia that are almost entirely dependent on Moscow’s energy supplies. They can’t afford another cut-off. While Mr Putin is less concerned about Russia’s reputation, he needs western money and technology to open up new supply lines in the Arctic.

Even if the threat of military confrontation between Russia, Ukraine and the West is waning, energy and trade wars could hit all sides hard, raising prices and political uncertainty.

The repercussions for global political and economic stability are hard to overstate.

Just when the World Cup is about to kick off in Brazil, old-style Cold War thinking has turned gas into a political football game in which all sides are losers.

Adrian Pabst is senior lecturer in Politics at Britain’s University of Kent and visiting professor at the Institut d’Etudes Politiques de Lille (Sciences Po), France