What Happened

In a bitter natural gas price and payment dispute in early January, Russia's state-owned gas company, Gazprom, turned off its taps to neighboring Ukraine. The Russian monopoly had complained about its counterpart's, Naftogaz, overdue fees and refusal to pay market rates. Moscow also accused Kiev of siphoning off gas and shutting down pipelines bound for the European Union (EU). Ukraine, meanwhile, denied all charges and believed higher transit fees were in order. Within a week, gas shipments from Russia to the EU had ceased.

The EU leans on Russia for a quarter of its gas, 80% of which runs through Ukraine. The Balkan nations were the most seriously impacted, as supply fell far below Gazprom contract levels. With a bitter cold spell sweeping the region, many EU members were forced to call upon alternative supplies. Gas shortages still spread rather quickly and had economies bracing for emergency mode.

In 2006, a similar impasse took place between the former Soviet allies that left a number of European countries scrambling for energy. Fortunately, much of the EU was better prepared this go around and able to utilize stockpiled reserves. Europe's economic downturn, additionally, had lowered demand. Both episodes, however, expose ingrained energy security issues in Europe.

Why It Happened

Russian gas battles give credence to Ronald Reagan's forewarning that Moscow wants to use energy as a political weapon. Russia, in the most recent standoff, was taking a clear stance against Ukraine's effort to integrate with Western institutions, such as the EU and North Atlantic Treaty Organization (NATO). Kiev's alignment with Georgia in the August war had further peeved the Kremlin.

Viktor Yushchenko's administration has exhibited an interest in pursuing closer ties with the West since it emerged from the Orange Revolution of 2004. Moscow now aims to exploit public discontent, however, as polls show the majority of Ukrainians stand against joining NATO. There are powerful forces within Ukraine, in opposition to the current administration, that prefer advancing relations with Russia over the West.

With parliamentary elections approaching, Moscow's hope is that a pro-Russian government could soon take power in Kiev. In fact, Russia realizes its substantial energy resources offer leverage to weaken those nations in its sphere of influence and create divisions within Europe. Many experts have been warning this Cold War mentality has been brewing in Moscow since the former KGB agent, Vladimir Putin, became president in 2000.

Further, Gazprom, the largest gas company in the world and the jewel of Russian business, is facing rapidly dwindling revenues. Falling energy prices have caused company shares to plummet 76% since September. Ukraine, like other former Soviet republics, receives Russian gas at a subsidized rate. The majority of that gas, in fact, actually comes from the Central Asian state of Turkmenistan.

When the price of gas was high, Russia locked itself into long-term contracts with a number of energy-rich republics in Central Asia in return for exclusive transport and marketing rights. Gazprom has agreed to pay the Turkmens an estimated $340 per thousand cubic meters of gas – nearly double the $179.50 that Ukraine paid Russia in 2008. Gazprom decided it was high time to bully Ukraine into paying market rates.

Suffering from a lack of transparency, Ukraine deserves its share of the blame in the deadlock. The country silently siphoned gas in the 2006 dispute and economic struggles have it waiting on a $500 million loan from the World Bank. The energy sector is riddled with shady officials and businessmen only chasing excessive profits. Balmaceda (2008) concludes: "Energy corruption and energy companies more generally played a very important role in all Ukrainian national elections since 1994."

Glenn Simpson, a financial crime writer at The Wall Street Journal, has reported the clout an opaque middleman organization, RosUkrEnergo, has on Russian/Ukrainian energy relations. This Swiss-registered venture company, which is owned by Gazprom and two unidentified Ukrainian businessmen, is said to have deep criminal connections and hold untold power over the distribution of gas in Ukraine.

What Was Learned

The Council on Foreign Relations reports gas jumped from supplying 9% of Europe's energy needs in 1965 to supplying 35% in 2007. Figure 1 illustrates the imperative to deploy strategies to loosen Moscow's grip on a continent increasingly dependent on gas.

Russia can be expected to flex its energy muscles for years to come. The targeting of Georgian pipelines in August and the resistance to the EU mission in Kosovo demonstrate Moscow's willingness to use energy resources as its leverage, weapon, and recourse on the international stage. Gazprom dangerously holds a virtual pipeline monopoly to Europe -- even for non-Russian gas. As a scheme to consolidate its power, Moscow is now seeking to create a gas equivalent of the Organization of Petroleum Exporting Countries. The troika -- Russia, Qatar, and Iran -- gas alliance has been established and gas swaps are set to commence.

Gazprom's failure to invest adequately in energy capacity is also threatening EU energy security. Gas production is expected to drop next year for a company already facing a drastic decline in oil revenues. The growing link between oil and gas prices could erase the energy windfalls of recent years and hinder investment. The incident with Ukraine has further damaged Gazprom's reputation as a reliable energy supplier – a concept the EU seems unable to comprehend.

Moscow has been able to convince the Europeans that all they really need is transit routes that bypass Ukraine and create direct links with Gazprom fields. The options put forth are the Nord Stream pipeline, across the Baltic Sea to Germany, and the South Stream pipeline, across the Black Sea to Bulgaria. Both projects, however, might weaken EU resolve to complete the Nabucco pipeline that would rout Central Asian gas around, not through, Russia to Turkey and the Balkans. While Europe has sluggishly pondered its options, Moscow has been inking long-term deals with those Central Asian nations capable of feeding Nabucco or other non-Russian pipelines. Further, the Blue Stream, a pipeline connecting Russia and Turkey, is expected to be running at full capacity in 2010.

What To Do

Enhancing EU energy security is largely contingent on diversifying energy sources, not on varying transit routes between member states and Russia. It is becoming increasingly more apparent the fixation on mandating global warming policies in Europe came at the expense of instituting real world energy security measures.

The most vocal environmental groups have admitted the positive role renewable sources, such as wind and solar, can play is basically reserved for the longer run. Even if one considers hydrocarbons short- and mid-term energy resources, their contribution and necessity cannot simply be ignored. Immediate solutions in the EU are needed to realistically attack the Russian dependence problem that has somehow continually evaded the response to its energy security discourse.

To diversify, the EU must fully engage the countries of North and West Africa and the Caspian region. Similar to China's heightened awareness, the EU should grasp its expanding interests in the stability of the Middle East and the development of resources in major energy-exporting nations. To better exchange supplies, Europe requires an infrastructure overhaul and a single internal energy market. Integrated markets would create solidarity between consumers, marginalize risky bilateral dependencies, and make supply disruptions less destructive. Similar to oil, EU nations should have laws on stocking gas.

Long-term investments are necessary to extend energy resources in the EU. Most member states have failed to develop other energy options, such as liquefied natural gas (LNG) terminals, that would allow them to circumvent Russia's energy dominance in the region. LNG terminals, for instance, help improve the energy mix and offer alternative suppliers by allowing sea shipments of a commodity that is increasingly becoming more global.

Greater investment is required for large-scale coal and nuclear power plants to adequately satisfy the substantial demand increases that are expected in the EU. France, which receives 80% of its electricity from nuclear power, was largely unaffected by Russia's recent strong-arming of Ukraine. Because Russia's energy resources are too vast to be completely displaced, the EU goal is to reduce, not eliminate, dependence. Europe has the advantage of knowing Gazprom's profitability hinges on access to its market.

Cross-region transmission projects of oil, coal, electricity, and gas ought to become a top priority for a continent far too centered on the breakneck speed adoption of renewable energy. Positions or policies supporting moratoriums or phase out mandates on baseload electrical sources, such as nuclear and coal, erode, not enhance, energy security. The gas standoff in Eastern Europe is an indication that energy wars and energy security crises could rapidly realign the geopolitical climate of Asia, Europe, and elsewhere. Energy security in the EU begins with learning from previous blunders.

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