Russia Losing Leverage in Energy Sector

Wednesday, August 19, 2015
Moscow — For years, Russia’s ability to choke off energy shipments any time tensions spiked with the West was a potent threat, one that could force much of Europe to shiver during the wintertime. But with energy prices swooning, the Kremlin’s pipeline politics are looking a lot less threatening.

Russian energy giant Gazprom, which has long been accused of working as the Kremlin’s bludgeon, has seen demand for its natural gas drop to the lowest level in its post-Soviet history. Nations that were once fully dependent on its gas now have other options. And the company must decide by next month whether to contest an antitrust case brought by the European Union that could force it to give up its hardball tactics in Europe for good.

Gazprom’s new weakness has empowered the West to push Russia hard for its role in stoking conflict in Ukraine without fretting about the consequences of a vengeful gas cutoff in return. With the Iran nuclear deal likely to send a wave of Persian oil and gas to Europe, Gazprom may soon lose even more leverage. It is a stark reversal for a company that twice cut winter gas flows to Europe in the past decade during moments of political disputes with Ukraine. Eastern Europe took the collateral damage and had to turn down thermostats for days because of dwindling supplies of crucial natural gas for heating that normally flow through Ukraine’s pipelines.

“Gazprom is in a very precarious position,” said Mikhail Krutikhin, an energy analyst at the Moscow-based RusEnergy consulting firm. The company is flailing for cash — and it no longer has a captive market to fill its coffers.

By now, Gazprom was supposed to have been the biggest publicly traded company in the world. That was what Chairman AlexeyMiller boasted to a French news agency in 2008, when he said that it would be worth $1 trillion by the middle of this decade. Instead, it has shriveled to a seventh of its 2008 market valuation. In Western Europe, it has even been surpassed as a supplier by Norway, a Nordic rival with a far less expansionist agenda.

The newly sour prospects are yet another consequence of a sharp decline in energy prices that has upended alliances and assumptions from Caracas to Tokyo. But a host of challenges have conspired against Gazprom all at once. Even during the Soviet era, Europe bought much of its natural gas from its energy-rich neighbor to the east. The Soviet Union collapsed, but the old arteries of its energy network remained, keeping Eastern Europe deeply dependent on Russia for the crucial fuel.

But after Russian cutoffs in 2006 and 2009 that coincided with moments of geopolitical tension, Europe became increasingly skeptical of the old model — particularly since Gazprom’s high prices made even expensive alternatives attractive. Frightened by the constant threat to its energy supply, Europe sparked a boom of construction to make it easier to get gas from other suppliers and to ship gas from one European nation to another.

“The Russians have reaped what they sowed,” said Dieter Helm, of Oxford University.

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