EU-Russia energy relations at lowest point since Cold War

EU-Russia energy relations at lowest point since Cold War

It has been one year since the controversial referendum on Crimean independency took place under the protection of Russian arms and the factual annexation of the strategically important peninsula in March 2014. Relations between the West and Russia are at the lowest point since the end of the Cold War, and the energy sector is no exception.

The sanctions imposed by the EU and the US strongly affect the Russian energy sector primarily by denying the Russian companies the financial, technological and know-how support.

At the same time, the Russian energy giants’ operations in Europe are suffering on several fronts. This is primarily related to Russia’s gas business and Gazprom’s operations, but also Russia’s investments in Europe’s energy sector.

The first blow to the gas giant came with the antitrust investigation initiated by the European Commission in 2011, which is still ongoing and could result in a hefty fine being imposed on the company. This would undoubtedly be seen in Moscow as a purely politically motivated decision, and another hit to Russian economic and political interests.

The conflict in Ukraine followed, with its potential to halt or severely disrupt gas deliveries to Europe. Finally, in December 2014, Russian leadership announced that the company is giving up its plans to build South Stream pipeline due to political and legislative difficulties related to disagreements with the EU authorities, and open opposition coming from the United States. Instead, Gazprom decided to build the key gas hub for Southern Europe on the Turkish-Greek border.

At the same time, as relations with Russia over its role in Ukraine deteriorated, the EU made significant steps to diversify its dependence on Russian gas. This primarily includes the construction of a network of LNG terminals across Europe, and the interconnector pipeline system that would ensure secure gas deliveries to all parts of the EU, and in particular the most vulnerable eastern parts of the Union.

Russian investments in the EU energy sector were also affected, with the last victims involving the construction of the Russian-backed nuclear plant in Hungary and the British government’s decision to block the purchase of the North Sea gas fields by the Russian billionaire Mikhail Fridman.

In the face of further deterioration of political and economic relations with the West, and the threat of losing its share in the European markets, Moscow has intensified its plans to lessen its energy reliance on Europe.

In May 2014 China and Russia signed a $400 billion deal on Russian natural gas exports to China from Eastern Siberia, followed by the November announcement of another major deal that involves the annual delivery of 30 million cubic meters of natural gas to China through the Altai pipeline from Western Siberia.

In addition, China is planning a major investment in the Russian oil and gas sector, and it seems that the Ukrainian crisis helped to ease the barriers that previously prevented the establishment of stronger energy links between the two countries.

Russia is currently considering the option of allowing Chinese companies to take stakes of more than 50% in the country’s strategic oil and gas fields, which not only represents a major breakthrough in the Russian energy security doctrine, but also reveals the need to compensate for the obvious lack of cheap credits and modern technology, caused by Western sanctions.

Although limited in its scope, the Ukrainian crisis caused a seismic shift in the economic and political relations between the West and Russia, and the energy flows from Europe to East Asia.

Russia will continue to be Europe’s major gas supplier for years to come, but the trend of energy diversification is likely to continue both in Brussels and in Moscow.

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.