When he passed through Brussels recently, Russian researcher Andrei Belyi gave Energy Post his analysis of the crisis between Moscow and Brussels. For him, it’s a lose-lose situation, because he doubts the European sanctions will make Russia change tack on Ukraine, even if they are costing Moscow influence at international level, especially in negotiations with China. At the same time he questions whether European are prepared to pay for alternative sources of gas. Hughes Belin reports
The EU is still going full steam ahead on sanctions against Russia. The latest round, which kicked in on Friday 12 September, restrict the access to capital of three Russian oil firms (Rosneft, Transneft and Gazprom Neft) and forbid EU companies from supplying certain key services for Russian deep water, Arctic and shale oil exploration and production. The sanctions may be amended, suspended or repealed following an end-of-the-month assessment of the implementation of a peace plan agreed between Russia and Ukraine, but for now it’s all systems go.
To get a handle on what effect these sanctions might have, Energy Post’s Brussels Correspondent Hughes Belin spoke to Andrei Belyi, Associate Professor at the Centre for EU-Russia Studies at the University of Tartu, Estonia. Belyi doubts the sanctions will achieve their goal – to stop Russian interference in Ukraine – but neither does he see Russia switching off the gas tap to Europe any time soon.
His critique comes as the next round of trilateral gas talks between Russia, Ukraine and the EU takes place this Friday (26 September) in Berlin. And as the European Commission proposes delaying – until 31 December 2015 – the trade-related provisions of the EU-Ukraine Association Agreement ratified by both parliaments last week. Apparently, despite the sanctions, the European Commission appears keen to avoid any further escalation.
Q: How did two trade partners as close as the EU and Russia end up in this situation?
A: The Russian action in Ukraine is based on political considerations: to keep Ukraine out of the Atlantic Alliance [NATO] and to stop Kiev from getting closer to the West. These actions continue despite the deterioration of the investment climate in Russia, the flight of capital out of the country, and emerging budgetary issues.
On top of that, the incorporation of Crimea into Russia has de facto removed the reason why Kiev benefited from a discount on its gas imports – for “renting” out its port of Sebastopol on the Black Sea to the Russian fleet. This has provoked a new interruption of Russian gas supplies to Ukraine and constitutes a potential risk for gas transit via the country. And the risks will rise with the coming of winter from November. Today, Ukraine sticks to its guns in the negotiations over gas prices, because its stocks are high. But a deficit could be on its way.
Q: Who is right in this conflict about Ukraine’s gas debt to Gazprom?
A: If the gas price goes to arbitration at the Stockholm [International] Court [of Arbitration], Gazprom could lose. Nobody recognises the cancellation of the Black Sea’s [Sebastopol] fleet agreement following the events of last March. Hence Ukraine is pretty sure about its position. That’s why Kiev maintains a rather hard stance in its negotiations on a new gas price.
Q: How will Ukrainians manage this winter?
A: Ukraine expects to buy its gas from Europe via Slovakia. But in winter, gas prices in Europe will be rising. Some experts don’t exclude a role for the Ukrainian company Ostchem Holding AG, which belongs to Ukrainian businessman Dimitri Firtash (even if he is currently in jail). It’s a possible route to duck the moratorium on Gazprom’s supplies, because these only affect Ukrainian company Naftogaz.
Q: Was the EU reaching out to Ukraine felt as a provocation by Russia?
A: For some Russian politicians, yes. The EU-Ukraine association is seen as too high a price for Russia to pay. Even if the economic cost of this arm wrestling contest is very high. The former Russian Minister of Finance Alexei Kudrin estimates that the flight of capital will amount to US$200 billion in the short term. But even he acknowledges that Russian politicians are ready to pay the price.
Q: Did Brussels not see it coming?
A: The EU underestimated Putin’s reaction. Yet he had warned that if part of Ukraine became closer to the EU, he would consider it an issue “of national interest”. Russia overreacted, fearing the possibility of Ukraine becoming part of the EU in the long term. Although the declared partnership between the EU and Ukraine in fact has little impact on the latter’s relationship with Russia.
Q: Will Europe’s sanctions against Russia be effective?
A: The sanctions have no visible impact on policy. The Kremlin very probably won’t change its policy towards Ukraine, in spite of the sanctions. This is the position of Russian politicians and President Putin, as well as a large part of public opinion. Putin is ready for escalation, even if it bears a cost.
Q: What is the cost of the sanctions for Russia?
A: They pose a series of difficulties for Russian companies, for example the higher cost of access to capital for the oil industry, even if Russia has big financial reserves. The government wanted to sell part of Rosneft to minority shareholders to get some cash. Now, it has a budgetary hole of some ten billion dollars or more, because there can be no well-priced sale due to the European sanctions. In the current situation therefore, the pain for Russia is high, but not so in the long term. Equipment for oil and gas exploration can be obtained from third countries; there is a way out.
Q: Russia is looking eastward, to compensate for its crumbling relationship with the West…
A: Exactly. But we can see an economic isolation of Russia: access to capital becomes more difficult and more expensive, which strengthens the dependence of Russia on China. Moreover, Moscow is giving China access to its resources, as Rosneft just did. Russia has lost influence in its negotiations. It is clear that, at international level, Russia is having to play with a weaker hand.
Q: Do you envisage a deterioration of the relationship between the EU and Russia in the longer term?
A: It remains to be seen, because if this European Commission is not in favour of escalation, we don’t yet know the position of the future leaders of the European executive, which will take up office soon [1 November]. European leaders will consult on their gas policy and the result is difficult to predict, but the positions should not change much. In the longer term, if we can expect consequences on the relationship between the EU and Russia, I don’t believe in a disruption of Russian gas imports into the EU. Europeans won’t go and buy their gas from the US if prices are unfavourable. Everything depends on how much more Europeans are ready to pay for alternative sources of gas. As things stand, they are not ready to reduce their dependence on Russian gas.
BOX: Andrei Belyi is Associate Professor at the Centre for EU-Russia Studies at the University of Tartu, Estonia, since August 2012. He is also a visiting honorary lecturer at the Centre for Energy, Petroleum, Mineral Law and Policy (CEPMLP) at the University of Dundee (UK) and he is associated with the Higher School of Economics in Moscow, where he was based from 2007 to 2012. He regularly teaches at the Global Energy Programme of the Warwick Business School (UK) and at the University of Eastern Finland. Dr Belyi has written several papers related to energy security, the EU’s external energy policy, EU-Russia energy relations, Russia’s energy policy dynamics, and international energy governance, including the Energy Charter process. He is a Member of the Editorial Board of the Journal for World Energy Law and Business (Oxford University Press), and as a consultant, also advises the EU institutions, Russian governmental agencies, and companies. He is a graduate from the Free University of Brussels.