Gas row risks long-term damage to Russia's reputation

16:14, 09 January 2009
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EU will now be thinking more how to diversify away from Russian gas

Disruption of Russian gas supply to Europe seems certain to accelerate the EU`S pursuit of alternative suppliers and could further weaken Moscow`s position on a market vital to its political and economic future.

Analysts say quick resolution to the Russian-Ukrainian gas price row would allow the Kremlin to brush aside damage to its reputation in a Europe that has few short-term alternatives to Russian gas. But the longer term picture may be different,

"The EU will now be thinking more than ever that, whoever is to blame, the relationship between Russia and Ukraine over gas is very problematic and puts gas supply to the EU at risk," said Tanya Costello, a director at Eurasia Group in London.

"That will strengthen the political will to further projects that would allow the EU to diversify away from Russian gas."

Real diversification cannot happen in the near future, as alternative pipelines such as Nabucco -- which aims to ship up to 31 billion cubic meters of Caspian Sea gas annually to Europe by 2020 -- do not yet have enough gas to fill them.

The matter may not become pressing in the current presidential term of Dmitry Medvedev ending in 2012, but could haunt the next president. Some believe that year could see the return to the Kremlin of current prime minister Vladimir Putin.

Putin, addressing Western reporters on Thursday, blamed Ukraine for the conflict but acknowledged the risks to Russia`s reputation. "Of course it creates problems for us," he said.

Russian gas export monopoly Gazprom severed supply to Ukraine on New Year`s Day as a result of a dispute over debts and pricing. On Wednesday, all gas flows to Europe via its neighbor`s pipeline network were shut down.

"You couldn`t invent a bigger present to those in Europe who say you have to find other sources, diversify, at any price," said Fyodr Lukyanov, editor of the journal Russia in Global Affairs.


A similar dispute three years ago briefly cut gas to Europe and this year`s row has revived consumer concerns that Russia, the world`s largest gas producer and supplier of a quarter of Europe`s needs, would use energy as a tool for political gain.

The EU was likely to accelerate plans for a coherent energy policy, a process that has made little progress, said Katinka Barysch, deputy director of the Centre for European Reform.

"If they needed a reminder it is necessary to have a unified European gas grid, to have more gas storage and build alternative pipeline routes, then Gazprom has just given them that reminder," she said.

The dispute also carries economic risk. Under EU pressure to resolve the row, Gazprom may need to compromise on price at a time when Russia needs higher energy prices to withstand threats posed by the global financial crisis, analysts said.

"The fact that the Russian economy was not restructured during the good times means it is more exposed to the bad times. This is now more the case than ever," said James Nixey of the Royal Institute of International Affairs in London.

Russia`s economy contracted by 1.1 percent year-on-year in December, the first decline in nearly a decade, VTB bank`s latest gross domestic product (GDP) indicator showed on January 7.


Chris Weafer, strategist at Russian bank UralSib, said a quick resumption of gas flows to Europe would limit any damage.

"If this is done relatively quickly ... then Gazprom can easily shrug off any short-term reputational damage and emerge in a better position," he said.

Julian Lee, senior analyst at the Centre for Global Energy Studies, said Gazprom might also hope the dispute could bolster support for the Nord Stream and South Stream pipelines and make it easier to build or buy gas storage in western Europe.

"That`s their only real positive out of this," he said. "The one thing they will seek to exploit through this is European fear of a disruption to gas supplies, which Moscow is already blaming on Ukraine."

Nord Stream would bypass Ukraine by pumping 55 billion cubic meters of Russian gas under the Baltic Sea to Germany annually, while South Stream could ship 30 billion cubic meters under the Black Sea.

But some European consumers have expressed concern these routes, by eliminating Ukraine, would also serve to tighten Russia`s direct control over gas supplies to the continent.

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