Crimea and the European Energy Market

Recent events in Crimea are probably the most discussed topic in the last couple of years. Many analysts and economists have analyzed the issue from different perspectives, but one important side of the issue seems to stay overlooked and rarely touched upon – the implications on international trade. As the tension between Russia and the West escalates, important economic and trade issues will start emerging. Will Europe take steps to diversify its energy supplies? Will the US remove the ban on oil export and help reduce Russian economic influence on the Old Continent? Who is going to do business with Russia, given that the West imposes more serious economic sanctions? All these are questions which will be shaping the geopolitics in the decades to come.

When Vladimir Putin was trying to convince Viktor Yanukovych, then the president of Ukraine, to turn down a trade deal with the European Union last year, one of the incentives he used was cheap gas for Ukraine. Despite that, on April 1st, the price of Ukraine’s gas went up by 44% and threatened to financially destabilize the country, which already owes over $1.7 billion to Gazprom.  Europe currently gets 24% of its gas from Russia, and around half of it passes through Ukraine. The following graph shows how depended Europe, especially Eastern Europe, is to Russian supply of natural gas:Image


Source: The Economist

The Baltic countries of Lithuania, Estonia, and Latvia have a particular problem – they are not connected to any other source of gas rather than Russia. Some of these countries, Latvia for example, have significant storage (more than a years’ worth), but this is no long-term solution to the problem. Many of those states are looking for ways to diversify their supplies, including building interconnectors between them, allowing for some flexibility in gas flows. Another observable trend is the emergence of projects for liquefied natural gas (LNG) terminals throughout Europe and the US. Several of those terminals are under construction in the US and couple of them will break ground in Europe throughout the next couple of years. However, the US ban on energy exports and the long construction time for such plants make the process extremely slow. Each LNG terminal in the US has to be approved by the president, while other countries are not rushing to build terminals for import when there is no guaranteed supply (from the US). In the end, Europe stays heavily dependent on Russian oil and gas, and it seems that nothing of this can change in the near 5 to 10 years.  

It is interesting to think about the Russian response to potential economic sanctions on oil and gas exports. Many analysts believe that Russia will do anything to avoid disruptions in its gas exports simply because there is no other market for it. Many people look at China as a potential buyer of Russian energy, but such a deal has failed in the past. Gazprom hopes to pump 38 billion cubic meters of gas per year to China from 2018 via the first-ever pipeline between the two giants. However, the two countries are still negotiating prices, with China demanding significantly lower prices than Europe. China overtook Germany as the largest buyer of Russian oil and some economists expect a similar trend for natural gas in the upcoming years.

The current geopolitical picture is extremely interesting and unpredictable. Major political and economic powers are tied in a complicated game with constantly-changing odds. Economic interests connected to oil and gas are a powerful driving force for political decisions and the shale gas revolution in the US seems to have reshaped the status quo. The way in which countries adapt and the rationale behind policy making in the area will be crucial in shaping the future of the modern world.


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