Russian Gas Crisis Seeps into Europe

Russia cuts off natural gas supplies to Europe as its conflict with Ukraine goes on, leaving energy-dependent EU countries out in the cold

By Mark Scott

As the dispute between Russia and Ukraine over natural gas enters its second week, European countries are being left out in the cold—literally. On Jan. 7, Russian energy giant Gazprom (GAZP.RTS) shut down all supplies to Europe through Ukrainian pipelines, cutting off gas imports just as snowstorms hit and temperatures plummet below freezing across the region. Both sides continue to accuse each other of dragging out the disagreement.

Whoever is to blame, the fact remains that Russia's natural gas supply to Europe—about two-fifths of the European Union's total imports—has been turned off. That's especially bad news for Eastern European countries highly dependent on Russian imports; 10 of the 12 new member states rely on Russia for at least 60% of their natural gas.

The crisis also raises questions over Europe's supposed push toward greater energy independence. Despite talk from EU policymakers about finding alternatives to Russian gas, the most recent Russian-Ukrainian standoff demonstrates Europe is no nearer to resolving its energy security problems than it was the last time gas imports were shut off for three days in 2006 during another Russia-Ukraine spat.

"The situation in Ukraine illustrates the need for countries in Europe to develop a broad energy policy," says Arthur Hanna, global energy lead at consultants Accenture (ACN).

Dwindling Reserves

Even as policymakers search for long-term solutions, Eastern European countries—many already hit by the economic crisis—are suffering acute shortages now. On Jan. 7, Slovakia declared a state of emergency due to dwindling gas reserves. Hungary has limited gas consumption for industrial users, including a car manufacturing plant owned by Japan's Suzuki (7269.T). Others, including Croatia, Slovenia, and Turkey, have also had their supplies either severely reduced or shut off completely.

The EU's response is furious but largely toothless. "The European Commission demand[s] that gas supplies be immediately restored to the EU and that the two parties resume at once negotiations," the Brussels-based EU executive said in a statement. Russian and Ukrainian leaders are set to meet again on Jan. 8 to try to negotiate a solution.

One roadblock to a coordinated European response is that the 27 member states are affected very differently by the gas cutoff. According to Pierre Noël, a researcher at the European Council on Foreign Relations, the countries most at risk are Hungary, Latvia, Lithuania, and Slovakia. All are highly dependent on Russian imports, although natural gas overall constitutes less than 40% of their total domestic energy mix. "Russian gas supplies a particularly high share of total energy in the four countries," he says.

In Western Europe, by comparison, most countries have a more diversified energy mix, so Russian gas constitutes a smaller percentage of overall consumption. Indeed, Noël says, only 5% of Western Europe's primary energy needs are met by Russian gas, compared with 15% for the EU's Eastern countries.

Few Fuel Alternatives

To address the current gas shortfall, the most vulnerable countries are now scrambling to switch to other fuels. But alternatives such as oil or coal are less energy-efficient, and the changeover can take two days or longer.