Is Russia Strong Enough to Bully the European Oil and Gas Industry?

Don’t tell the West, but Vladimir Putin isn’t changing. The Russian president has skipped a little “lesson” on 21st century politics in favor of his own, unadulterated, version.

Sean Gallup/Getty Images

Sean Gallup/Getty Images

In what we’ve come to expect, Putin is set to formally absorb South Ossetia – Georgia’s breakaway republic – and Gazprom is prepared to deny Europe up to one-quarter of its annual exports to the continent. What’s more, the conflict continues in Ukraine and allegations of Russian financing are growing louder.

As we remarked earlier, Russia has enjoyed a less than ideal start to 2015. In line with crude prices, the ruble has tumbled nearly 60% since its high last June. The country is hemorrhaging its foreign exchange reserves and desperately trying to rein in capital flight, which hit record levels in 2014 and is on track for more of the same this year. On Friday, Moody’s Investors Service slashed Russia’s credit rating to the lowest investment grade, with a cut to junk looming. The ratings cuts – which also targeted oil and gas companies Gazprom, Gazprom Neft, and LUKoil – represent serious stumbling blocks, but Western sanctions remain the primary source of Russia’s financing woes.

What about those sanctions? Well, more may soon be on the way as the Kremlin is preparing to finalize an “alliance and integration” treaty with South Ossetia, which will place the renegade republic under Russia’s umbrella. Specifically, the agreement will begin to integrate the ostensibly Georgian territory with Russia assuming control of the borders, customs enforcement, and internal security. The standard of living in Russia and even the North Caucasus marks an improvement for South Ossetia, but the motive for Russia is less clear. At the very least, it’s a nominal attempt to assert dominance over a CIS – and larger post-Soviet region – that has increasingly more in common with the West than the Motherland.

The “fresh wrench” from Moscow will certainly kill EU momentum to significantly scale back Ukraine-related sanctions, where the situation remains confrontational. A bus attack near Donetsk recently killed 12 civilians and new allegations have emerged of Russian-backed violence. Ukraine’s Security Service has accused LUKoil and Ukrainian businessman Sergei Kurchenko of smuggling petroleum products and laundering as much as $2 billion in illicit proceeds to fund both the Donetsk and Lugansk People’s Republic, charges both parties deny. With no end in sight to the finger pointing, the saga looks to continue to define Russia’s radical movements on the periphery – recent gas ultimatum included.

Last week, Russia and Gazprom announced plans to shift natural gas flows through Ukraine to a new route in Turkey. Seen as an unnecessary risk, Gazprom plans to cut exports to Europe via Ukraine within the next two years and is offering little consolation to its most established clients. In 2013, Russia met approximately 30% of Europe’s gas demand – more than 50% of which traveled through Ukraine. The EU has been tasked with constructing adequate infrastructure to market the gas to its consumers – the alternative, Gazprom says, is no gas. For its part, Gazprom will otherwise market the unused gas at an as-of-now non-existent Turkish hub in an “if you build it, they will come” approach that leaves much to be desired. Vice President of the European Commission’s Energy Union Maros Sefcovic believes a solution will be found, but underlined the bloc’s prioritization of transiting to a low-carbon economy sooner rather than later.

In the early goings, 2015 looks to bring little respite to what is truly an unfortunate collapse of diplomacy. It’s a symbiotic relationship gone wrong – the problem for Russia is Europe can afford to stand alone.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world. 

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