Wednesday, December 11, 2019
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EU and US need to develop options to Russian gas

American and European attempts to punish Russia for its Ukrainian policy have so far only dealt a smack on the wrist by imposing visa restrictions and banking sanctions, but no economic measures. That is because the latter course will immediately affect Europe’s imports of gas from Russia as there is no alternative now.

The EU is now concentrating on the future where it is trying to delay the Russian South Stream gas pipeline project, though millions of dollars have been sunk so far to provide gas from Russia to Europe. The problem is that Russia already has agreements with the individual countries through which the pipeline is going, and some of them are hesitant to transfer their rights to the EU commission.

The six countries en-route can be sued by Russia for not abiding by the agreements signed. The former Bulgarian President Georgi Parvanov said recently that nobody had entitled the EU commissioner to negotiate on behalf of the countries along the route of the new gas artery.

The Russians are unlikely to reduce supplies to Europe, claiming that they are most reliable supplier and the only times Russian supplies were curtailed were through actions or inactions of the Ukrainian government, as had happened in 2006 and 2009.

Recently, the European Commission president, Herman Van Rompuy, announced that EU leaders had decided to reduce energy dependency, “especially with Russia”, by reducing energy demand, diversifying supply routes and expanding “indigenous” energy sources, particularly renewables. But these will take a long time to materialise, and if they do will cost Europe dearly because Russian supplies are the cheapest they can get.

However, all this may accelerate Russian oil and gas exports eastwards especially to China. The oil pipeline route is already established and its expansion is far easier than before. Any gas pipeline is likely to follow the same route, thereby reducing cost and speeding completion.

China is indeed in favour of such developments and is financing development in Russia for future oil deliveries. They already have a stake in developing the Russian Arctic resources. Other Asian economies are just as thirsty for energy as China and they will welcome such developments in a region that is already the fastest growing in oil and gas demand.

Russia itself wants to diversify its exports and it may have already invested too much in the direction of Europe. In 2012 Russia exported about $160 billion (Dh587.2 billion) worth of hydrocarbons to the US and Europe, meeting 32 per cent of European demand, and about 168 million barrels of crude oil and products of US imports.

In oil, the alternatives to Russia for both the US and Europe could be a combination of dirty Canadian sands and Middle Eastern oil and Opec (Organisation of Petroleum Exporting Countries). The US, so happy after the shale boom, is unlikely to welcome increasing its imports again from these available sources. It also remains to be seen how much Opec can increase its production in such an eventuality.

In gas, the alternative to Europe is pricier LNG from the Middle East or Africa, and may be the US if and when liquefaction facilities are completed and export restrictions are removed. Even the talked about shale gas in Poland is yet to be produced as initial results were not so encouraging.

Commercial companies are unlikely to be supportive of any additional sanctions on Russia, given the expectations they have built over the years on the Russian market. For example, Siemens chief executive Joe Kaeser recently said that his company supported a “trusting relationship” with Russian companies. And that Siemens wanted to honour long-standing business contracts and did not pay too much attention to “short-term turbulences” in its business planning.

He was referring to Siemens’ supply of high-speed trains to Russian Railways. German Chancellor Angela Merkel is not opposing Siemens’ approach as she said business contacts with Russia are still in place and hoped sanctions would not have to move to the next level.

Other German companies’ officials criticised the strategy of the West in dealing with Russia as they are concerned about the consequences. ThyssenKrupp’s chief executive Heinrich Hiesinger said a “great change could be achieved if the West cooperated with Russia rather than being confrontational”.

Governments may force the hand of companies if they go ahead with further sanctions. But given how much is really at stake and the fact that the European economy is not really at its best, we can expect that no further sanctions against Russia are eminent.

In the long run however, both the West and Russia will seek alternatives for their trading partners in energy and other things. Only Ukraine will pay a higher price than anybody else.