Russia’s continued support for Ukrainian separatists and the downing of Malaysian Airlines Flight MH17 over Eastern Ukraine are likely to escalate the conflict. It will only prop up Western determination to isolate Russia. Energy will again be at the forefront of the conflict.
The tragedy of Malaysian Airlines Flight MH17 will most certainly have wider negative implications for Russian-Western relations. The recent US decision to impose an additional round of sanctions against Russia and cut off access to US financial markets for Russian energy giants Rosneft and Novatek, along with Gazprom’s financial arm Gazprombank, has been reinforced by the EU’s decision to block the European Investment Bank and the European Bank for Reconstruction and Development from financing new projects in Russia. These moves will have serious implications for Russia’s plans to expand its energy projects in Europe.
Russia’s energy influence in Europe is not restricted only to gas supplies. According to the EU Commission’s report on EU’s energy security, Russian companies such as Lukoil and Gazprom control a great share of the European refinery sector. Moreover, most East-European countries rely heavily on the Russian nuclear fuel to power their Soviet-designed reactors which supply 42% of electricity production in Bulgaria, Czech Republic, Hungary, Slovakia, and Ukraine.
Gazprom’s sponsored South Stream project could be a major victim of the revived energy conflict in Europe. The project, aimed at bringing 63 billion cubic meters of Russian gas to Europe every year, has been in trouble ever since the European Commission started to target Gazprom for breaching the EU Third Package anti-monopolistic regulations two years ago. The Ukrainian crisis added a strong political dimension and turned the situation into geopolitical warfare between Moscow, Brussels, and Washington.
It seems, however, that US activities more than EU legislation will create a major headache for the Russian energy giant. Since the beginning of the Ukrainian crisis, the US has stepped up efforts to reduce Russia’s energy influence in Europe. At the beginning of June, both Bulgarian and Serbian authorities came under heavy pressure from both Brussels and Washington to suspend their South Stream activities. Moreover, a new set of sanctions that aim at increasing the cost of Russian companies doing business and raising the cost of financing in international markets will likely have a direct impact on the company’s ability to finance the $50 billion project.
From an economic point of view, Europe would undoubtedly benefit from another source of energy. However, in the face of recent events in Ukraine and the deterioration of relations with Moscow, the question that many opponents of the project are asking is whether South Stream would not only increase Europe’s energy dependency on Russia, but also prevent the development of other energy security solutions. This is primarily related to the development of renewable resources, shale gas, and nuclear options, as well as establishing alternative routes for natural gas supplies, such as building the LNG terminals network and the development of the Southern Corridor project.
In the past 25 years, the world economy has gone through a remarkable process of globalisation and economic integration, primarily as a consequence of post-Cold War unipolarity and US hegemony established after the collapse of the Soviet Union. Consequently, humankind has experienced a historically rare time period without major political upheavals constraining the global economy.
One has to wonder whether the events in Ukraine, and the obvious revival of the Russian geopolitical ambitions, are a sign that we are nearing the end of this cycle. Energy was always closely related to the uncertainties of politics and the recent events in Ukraine are a good sign that Europe cannot afford to be an idle observer to the events that so significantly and directly affect its future. Russia will remain and must remain Europe’s energy partner. However, this relationship will inevitably have to be renegotiated in line with the new geopolitical realities.