On energy, Russia has Europe over the barrel


How much does the Russian military intervention in Ukraine “cost” the Kremlin? Both President Barack Obama and Secretary of State John Kerry have made clear that “there will be costs” to Russia, but so far, there only seem to be benefits, subsidies and the promise of a higher financial return to Russia.

During the first few days of the Russian military action, the ruble and the Moscow stock market took a brief tumble. With approximately $60 billion in value lost during those first few days, it looked as if there was going to be at least a financial cost, if not a political or military cost, for Vladimir Putin’s brash flaunting of international law. That was so February 2014.

The facts on the ground have not yet changed much in Crimea, but the initial shock has passed, Putin has struck a briefly conciliatory note for public consumption, and liberal democracies and allies are still struggling to find a united voice and unified course of substantive action to punish the Russians.

Instead of punishing bad behavior, however, the world has both financially rewarded Putin and shown him new incentives to continue his aggression — both at home and in Ukraine.

How? From the profits flowing into Russia through its energy exports and market position. Russia’s dominant income stream comes from oil and gas — 52 percent of Russia’s federal budget revenues and more than 70 percent of total exports in 2012, according to the U.S. statistics. The Crimean crisis sent energy prices up and crude prices spiking.

While no rational leader plays with political fire and military action to make markets in energy, the result of Russia’s actions in Ukraine — and previously in Syria — have affected the “geopolitical risk premium,” causing a boon for Russia’s oil and gas revenues.

Reward as punishment fits perfectly into a Russian reality where, as U.S. Ambassador to the United Nations Samantha Power says, “Up is down and black is white.”

Energy market realities belong in Alice’s Wonderland, because it gets even “curiouser and curiouser.” The United States and the European Union just collectively promised Ukraine more than $16 billion in aid, a large part of which will help the new Kiev government pay its energy bills to Russia!

It is not an Obama administration failure that Russia has an energy stranglehold on Ukraine and the rest of the EU. This has been long in the making and spanned multiple U.S. administrations. American efforts to help the Europeans diversify their energy dependencies have been countered by clever Russian energy cost manipulations over time.

For years, Americans advocated for the Nabucco alternative gas pipeline to Europe in an effort to bypass Russia’s near monopoly. But last year, the Europeans dropped Nabucco in favor of Russian Gazprom’s preferred South Stream pipeline, creating greater, not less, dependency on Putin’s play for power.

Nuclear energy is another area where Russia has profited. Following Japan’s Fukushima nuclear plant disaster in 2011, Germany’s Angela Merkel ordered the shutting down of nuclear power plants. While environmentally laudable, the unalterable policy path creates even greater Russian dependencies.

For some European countries still committed to nuclear energy, the chance to move from legacy Soviet nuclear plants has had mixed results. In the Czech Republic, following Secretary of State Hillary Clinton’s direct lobbying efforts, a leadership wary of Russia looked to Westinghouse for nuclear solutions. In Hungary, however, Prime Minister Viktor Orban recently shook hands with Putin to get a Russian financed and built plant to supplement the current Paks plant. The Russian company supplying the new plant is a safer successor to the one that brought Ukraine the Chernobyl disaster.

An EU that is increasingly dependent (currently about 30 percent) on Russia to fuel its economies and warm its people is an EU that has little leverage against Russia’s cavalier intransigence. The threat of a gas cutoff is very real, as when Russia shut off deliveries to Ukraine and slowed gas flows to downstream European clients in both 2006 and 2009. If might is right, then leverage is law.

Putin has a lot of leverage.

The long-term solution is for the United States to safely develop its newfound and vast energy resources and release them into the international marketplace. It will also take a reawakened and reeling Europe to recognize that paying off Putin for his energy shakedowns is a crude and cynical form of modern appeasement.

Russia looks to its energy resources as a geopolitically strategic asset; it is time for America to do the same. House Speaker John Boehner wants to “dramatically expedite the approval of U.S. exports of natural gas.” This needs to be the bipartisan national security policy that stops rewarding Vladimir Putin.

Markos Kounalakis is a research fellow at Central European University. He is currently a visiting fellow at the Hoover Institution. Readers may send him email at markos@stanford.edu. He wrote this for the Sacramento Bee.

©2014 The Sacramento Bee

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