Russia Needs Ukraine, Too

Russia’s incursions into Ukraine and its seizure of Crimea threw a spotlight on Gazprom’s stranglehold on Europe’s gas market, and sent many policymakers into a tizzy worrying over how to reduce dependence on Russian supplies. For years Moscow has wielded its enormous oil and gas reserves as a geopolitical lever in Europe, and the tug-of-war over Ukraine seemed a perfect illustration of the strategic disadvantage Europe’s reliance produced.

But that energy weapon cuts both ways: Russia depends on Gazprom for a large part of its budget revenue, and Gazprom in turn relies on its European customers. It doesn’t take a logician to work out that the Kremlin has a strategic interest in keeping those gas flows flowing.

Kiev and Moscow have been butting heads over the terms of their gas supply deal, haggling over the price at which Ukraine is buying its energy. Roughly a third of Europe’s Russian gas supplies transit Ukraine, which makes the looming threat of a shut-off to the eastern European country an issue of continental importance. For reasons stated above, Moscow doesn’t want to see European supplies disrupted if talks with Ukraine break down, so it’s actively working on pipeline alternatives. But as Reuters reports, Gazprom already has a mountain of sunk costs in the status quo:

Billions of euros will be needed to build and expand alternative routes, and the route of the existing pipeline means transit fees to Slovakia and Bulgaria will have to be paid by Gazprom even if Russia manages to bypass Ukraine by 2020.

Under the contracts with the two countries, which ship gas on to western and southern Europe respectively, Gazprom will have to pay Slovakia until 2028 and Bulgaria until 2030 regardless of whether they actually ship any gas through them.

There’s no small amount of irony in the fact that Gazprom will have to pay Slovakia and Bulgaria transit fees regardless of whether it actually ships the gas—a similar “take-or-pay” clause has frustrated its European customers who are accordingly on the hook for a certain amount of gas regardless of whether they end up consuming it.

In addition to the money Gazprom will owe its current pipeline providers, the company will also have to invest tens of billions of dollars into alternatives (these aren’t cheap projects). Putin has enjoyed wielding Russia’s energy weapon in Europe, but recently he’s learning that that’s a double-edged sword.

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