Bloomberg View

Europe's Risky Russian Energy Habit


Europe's Risky Russian Energy Habit

Illustration by 731

After the bogus referendum in Crimea, Russian President Vladimir Putin can be increasingly confident that his annexation of Ukrainian sovereign territory will stand. The main questions now are whether a line can be drawn at Crimea and how big a price Russia will pay for its land grab.

The short-term response turns on sanctions and diplomatic pressure. The calculations here are unavoidably complicated, especially for the European Union, because its economy is so interconnected with Russia’s. If Putin gets away with annexing Crimea, Russia should be made to pay, and Europe is in the best position to extract a price. For the longer term, the U.S. and (especially) the EU need to fundamentally rethink their economic relations with Russia. There’s no need to cast the country as an implacable Cold War enemy to understand with new clarity that it isn’t a reliable friend. That means changing any policies based on the misconception that Russia is a good global citizen.

Russia is the EU’s main supplier of natural gas, accounting for about 30 percent of the total. In Germany, where successive governments have strengthened economic ties with Russia, the figure is about 40 percent. Putin has been more than willing to enable this dependence. Russia and Germany cooperated in building a direct pipeline under the Baltic Sea, for example, bypassing Ukraine’s pipeline system (and allowing Russia to tighten the economic screws on its neighbor). Many EU companies are heavily invested in Russian energy businesses.

A patient strategy to diversify from Russian energy supplies is long overdue. It should have four parts: a stronger negotiating approach toward existing supplies; new regional sources for natural gas; new infrastructure to allow delivery and distribution of natural gas in liquefied form; and alternative domestic sources of energy. EU members currently negotiate gas prices with Russia bilaterally. Russia increases its market power by dividing its customers and discriminating among them—bigger countries get lower prices, an advantage they won’t wish to surrender. At a meeting last week, Polish Prime Minister Donald Tusk told German Chancellor Angela Merkel that the EU should negotiate with Russia as a bloc. It’s a good idea.

Next comes new sources of supply. The Caspian Sea region, Central Asia, and North Africa are capable of providing far more natural gas than they do now. Heavy investment, including in pipelines, will be needed to tap their potential. Europe’s economic and geopolitical interests lie in supporting those efforts.

In recent years, Europe has increased its imports of liquefied natural gas, largely from North Africa—but there’s scope for much more. Thanks to its shale gas boom, the U.S. could play a central role in supplying Europe with LNG, while Europe should develop the shale gas assets it has. Europe’s energy policies have taken cheap Russian gas for granted. The events of the last month make it clear: Russian gas isn’t as cheap as it looks.

To read A. Gary Shilling on emerging markets and Alfred R. Hunt on conservatives’ differences, go to: Bloomberg.com/view.


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