The Kremlin plans to use… gas to destroy the EU

Using Nord Stream 2 project, Russia wants to divide Europe and create a situation where it will get to control the gas supply. It is not an additional pipeline, it is an attempt to destroy existing supply routes and establish Russian dominance. This runs completely contrary to European energy and antitrust legislation, thinks Alan Riley, a British international lawyer, expert on energy issues and market competition, and the author of the report “Ukraine vs. Russia and the Kleptocrats.”

Riley also covered the legal aspects associated with Nord Stream 2 (NS2) during a recent debate in the European Parliament. He went on to present the results of his study in Kyiv in mid-October.

He discussed what and why should Ukraine know about Russia’s gas dealings with the EU in an exclusive interview with The Day, which is offered below.

You have done a thorough research on Russia’s domination of the EU gas market, as exemplified by Nord Stream 2. Can you provide a concise overview of your conclusions to our readers: how exactly Russia wants to control Europe through the Nord Stream 2 pipeline?

“The point about it is where you stop with this. Are you realizing what is really going on.

“I mean one of the aims of it is to divide Europe, which it is doing quite successfully, dividing Germany from Central and Eastern European States.

“What Putin is now looking at is developing Turkish Stream as well and possibly an extension of South Stream. Of course the end scenario is basically to get Balkan states to divide Europe further, to create different reliance in Bulgaria to break the Union.

“The EU does not really recognize that it is being manipulated, or they do recognize to be manipulated but think there would be benefits that worth it. So it sticks to that and Germany is participating in this as well.”

In your opinion, what lobbying channels are used by Putin in the EU at present?

“It is usual story: it’s corruption; there is obviously Russian energy influence gas, which is deployed. There is usual pressure like media disinformation. They have major networks deployed to get where they want it.

“The former Germany’s Chancellor is acting as a Chair in gas in NS1 and NS2, and then in addition to which the pipeline [NS2] goes to the electoral district of Angela Merkel. So do you sense the situation that former Germany’s Chancellor Chairs the pipeline and the current pipeline goes to the electoral district of the current Chancellor?

“Difficult things… And people should know that.”

The key message of the European media is that Nord Stream 2 is a business project, and not a political one. But it is obviously untrue... What EU members are politically interested in increasing Russian influence in Europe?

“Beyond Germany… I mean there’s the political pressure on Germany and the Netherlands. The Netherlands have their interests because they are panicking because they are running out of gas. Probably panic is too strong, they are concerned that their gas is declining and there are reasons for that. And one of the problems that Nord Stream is perceived as being commercial is in playing games about like ‘Europe is running out of gas, Russian can help us!’

“But the truth is that shell revolution has changed all energy dynamics. We have no problem with gas. We can get endless amount of gas from LNG from around the world. Already the UK and Spain have 110 billion cubic meters of LNG capacity. If you expand the LNG through the connecting pipeline from Spain to France from 7 billion cubic meters to 35 billion cubic meters, Britain and Spain alone can provide 60 billion cubic meters of gas into the EU.”

So, Europe faces no shortage of gas?

“There is no problem. We can do it relatively easily, there is so much liquidity and it could be more liquidity.”

Still, you tell us that the political situation looks hopeless... Is this really so? In your opinion, who can oppose the Kremlin, and with what means, to stop the scenario of which you just spoke?

“Well, the thing is I’m giving you all bad news, but I’ve got also good news. While all of this is very bad, there are two things that could change the situation, both results of Russian miscalculations.

“One is attacks of Syria. That is contaminating Russia. So the problem is that the ability to proceed on something like North Stream 2 is much more difficult because of this behavior and makes it much more difficult for future work.

“The other thing which I think really significant is US presidential election. What Russians have done by getting involved in US presidential elections and hacking databases – they are interfering. When you’re basically third ranking power with a serious economic problem, and facing economic division and potential bankruptcy, you shouldn’t be seriously interfering in the elections of the most powerful nation on Earth. And I think they have completely miscalculated their own power and potential American response. But from Americans perspective the Russians are not important. From American perspective, sitting in Washington DC, the position is simply that the Russians are irritant, and the Chinese are significant.

“One of the other issues is that US is more likely to take much tougher line with the Russians in the next few years.”

And it will affect the EU’s policy towards Russia...

“Yes, I think so. I think it’s much more difficult. Russians are massively miscalculated. President Clinton will have very firm line.”

So what European nations can counter the Russian-German political pressure, and with what means, then? Poland said “no” to it. Ukraine has repeatedly stated that it sees this project not only as a threat to its own interests because it will effectively rob the country of gas transit revenues, but also as a threat to Europe’s energy security, because it does not contribute to the diversification of gas supplies to the EU. But this is not enough. The project is gradually progressing. Who else may come out against it?

“I think one of things that may happen because of the Syrian situation, it may well be that Germany will need to reconsider its position. Germany cannot support Russian project simply because of the effect: it cannot be both, imposing sanctions for what they are doing in Syria and at the same time promoting Nord Stream 2.”

How do you think, what are Russia’s objectives in the fighting it started in Ukraine? Why did they invade?

“They are fighting in Ukraine for several reasons. Because the Parliament is to do with the Russian state and the fear that Ukraine is moving far too close to the West and this is seen by Vladimir Putin as a threat to the Russian Federation. And there is no recognition in this Kremlin-wall view, that the reason why Baltic States, for example, joined the European Union was the fear of Russia.

“We should look at Ukraine and what the Russian state and the guys in the USSR did in the 1930s, you have to read Timothy Snyder’s book Bloodlands about what happened. Why do you think they want to escape? If you do all these things over time then you will get a reaction – that is what is going on. But there is lack of willingness to recognize that at some level. If you compare the German reaction to what they did in the past – the great picture seeing Willy Brandt kneeling before the statue to the victims of the Warsaw Ghetto in 1970 – that has never ever appeared in Moscow… I mean, can we imagine a Russian president turning up in Kyiv and kneeling before the Holodomor monument?”

In your opinion, how well do the Europeans understand peculiar features of the Russian attitude to Ukraine? Let us look into the case of Russia’s 2009 gas attack against Ukraine, which prompted EU pressure on Ukraine and resulted in Yulia Tymoshenko signing a disadvantageous contract... What do you think, was Europe right to pressure Ukraine then?

“There are number of questions which are significant, and the Europeans are always deeply concerned.

“You have to realize that the Europeans did not know much about it. And the truth is that back in 2009 there was a lack of recognition and understanding of what was really going on. So we can’t criticize the Europeans so much, because the inner, the genuine Ukrainian energy network, energy system, and energy market of Ukraine are so epic and also oligarchs doing deals with one another, or shooting one another or basically arguing with one another – all this effected the ability to know what was happening and whether it was a good deal or not.”

And the last question is more philosophical in character... Do you think that Ukraine should try to join the EU despite it all, or will it do better by staying alone and trying to form its own voice? Or is it better to join the EU and become involved in all that?

“Well. I’m British. My country is trying to leave the European Union; perhaps it would be easiest if Ukraine could have our place.”

The Day’s FACT FILE

Alan Riley is an associate senior research fellow of the Institute for Statecraft (London) and a non-resident senior fellow with the Atlantic Council (Washington, DC). He has done numerous studies on the subjects including the EU and Russian energy markets, liberalization of energy industry, security of supply, energy regulation and the impact of shale gas. His most recent work focuses on the development of energy markets in the EU and the Energy Community nations as well as the legality of Nord Stream 2 and the antitrust case against Gazprom.

THE ISSUE’S BACKGROUND

• The Nord Stream (NS) project was implemented despite the opposition of the EU, but it enjoyed an unprecedented level of support in Germany. From 2006 on, the project’s chief manager was Gerhard Schroeder, who had served as chancellor of Germany in 1998-2005. A majority in the European Parliament voted against the NS in July 2008, but its first line was still commissioned on November 8, 2011.

• The NS pipeline’s construction started in April 2010. The first of its two lines received first gas in September 2011, and the project was commissioned and made its first deliveries on November 8, 2011. Its sister project, the NS2 main gas pipeline, will link Russia and the EU across the Baltic; it will run through Russia, Sweden, Denmark, and Germany. The pipeline’s length will total about 1,200 kilometers.

• Similarly to the NS, the NS2 will consist of two lines with total capacity of 55 billion cubic meters of gas per year. The pipeline will transport Russian gas to Germany and farther afield to other EU countries, with large volumes likely to be delivered to the Baumgarten hub. Commissioning of the pipeline is scheduled for 2019 and fits Russia’s plans to simultaneously stop transit of Russian gas through Ukraine.

THREATS TO UKRAINE

• A reduction of transit through Ukraine to 10-15 billion cubic meters of gas per year, i.e., fourfold to sixfold.

• Very soon (in 2019 at the latest), the mechanism for implementing common European rules on setting gas prices in contracts on the basis of price quotations of leading trading platforms (so-called hubs of Germany and the Netherlands) will see its scope expanded. Construction of the NS2 will create a situation where Gazprom will be able to stop transit through Ukraine and nations of Central and Eastern Europe (CEE) and offer them to set gas prices using the formula “hub plus transmission costs.” Should the NS2 project fail to be implemented, Gazprom will have to apply the formula of “hub less transportation costs,” making for a significant price reduction, for example for Ukraine. Were this formula implemented today, the price of gas in Ukraine would be set at about 80-90 dollars per 1,000 cubic meters.

• Absence of fair pricing for natural gas in Ukraine and Europe (the fair price should be calculated based on the price set on a liquid marketplace minus transmission costs).

• Absence of fair rates for transit of natural gas through Ukraine.

• Inability to use standard European mechanisms of natural gas trade at Ukraine’s border with EU countries, including virtual reverse flows of natural gas.

• Inability to efficiently use Ukrainian underground storage facilities.

THREATS TO EUROPE

• The NS2 will not contribute to the diversification of gas supplies to the EU, since the pipeline will not provide access to new sources of gas and will not create a new supply route. This will cause a significant drop in gas volumes transported along other available routes to CEE and will lead to a rapid decline of these routes and their infrastructure, including the pipelines running through Ukraine, and will thus make the Baltic route, which is totally controlled by the Russian Federation, the only one.

• Through creating an artificial gas shortage in CEE, forcing demand upwards and subsequently obtaining excessive profits and political influence, Russia will be able to use the energy weapon (hydrocarbons and supply infrastructure) in the future to gain political concessions from the leadership of these countries, strengthen its geopolitical influence and engage in other manipulations.

• The NS2 goes against the provisions of EU energy legislation (including the 3rd Energy Package) and its antitrust legislation, namely by non-compliance with the requirements to separate transmission and distribution of gas, establishing of a dominant market position, causing market fragmentation, etc.

• Setting an unwanted precedent of some nations ignoring the interests of a majority of the EU for the sake of Russia and purely corporate interests of the project’s lobbyists.

• Creating a threat to the unity of the EU for reasons including a fundamental disagreement between individual countries on the NS2, a likely transfer of key European oil and gas assets to Russian ownership, negation of major EU priorities and development strategies, and a reduction of energy independence.