The crisis in Ukraine has renewed the call for the United States government to boost natural gas exports in order to aid allies in need and lessen Europe’s reliance on Russian gas. Gas exports, the argument goes, could even accord the United States potent leverage in a crisis like the one in Ukraine. Yet Ukraine is also a reminder of the limits of energy diplomacy: a review of Russia’s effort to cajole and punish Ukraine through gas since 2006 should serve as a playbook to avoid not a blueprint to follow. The United States should learn the limits of energy “weapons” rather than renew its dedication to yield them.
The gas relationship between Russia and Ukraine has been bitter and complicated, but broadly speaking, Russia has linked the price that Ukraine pays for gas to Ukraine’s relationship with Russia. As energy prices rose in the 2000s, the gap between what Europe paid for Russian gas and what the Former Soviet Union (FSU) countries paid for Russian gas widened—by 2005, Russia charged Europe three times more than the FSU. The Orange Revolution in late 2004–early 2005, and the subsequent deterioration in relations between Russia and Ukraine, made the discount for Ukraine more untenable, and so Russia raised prices. It was in support of these hikes, and other disputes from this opaque trade, that Gazprom, Russia’s state-owned gas giant, cut off gas to Ukraine in 2006 and 2009.
Such a price revision was bound to hurt Ukraine since gas accounted for 11 percent of the country’s import bill in 2005. When GDP was growing by 7.5 percent in 2006—2007, the increased burden was manageable, but when the economy contracted by 15 percent in 2009, the ability to afford pricier gas weakened. Cross-subsidization came under even more pressure by the International Monetary Fund (IMF), which made energy price reform a core goal of its $16.5 billion loan to Ukraine in late 2008. It was in this context, and after Viktor Yanukovych returned to power in 2010, that Russia and Ukraine agreed in April 2010 to a price discount in exchange for Ukraine extending to the lease for the naval base in Sevastopol that hosts the Russian Black Sea Fleet. Then again, in December 2013, Russia announced a further discount in prices for Ukraine, but the evolving crisis has led Russia to pull back this new discount.
How are we to judge this history? Much has been written about the “Ukraine Gas Wars.” Vice President Dick Cheney opined in 2006 that, “No legitimate interest is served when oil and gas become tools of intimidation or blackmail.” The Economist, in an April 2008 article called “Think pipes not rockets,” noted that, “The intricate economics of the gas business may seem less exciting than the Star Wars technology of missile defence. But for Europe's unity and security, they matter more.” Such diagnoses—that gas is a potent weapon that Russia could leverage against both the FSU and even Western Europe—was never seriously questioned.
In retrospect, the hyperbole of that syllogism becomes apparent, particularly after Russia has used hard power (rockets, not pipes) against Georgia and Ukraine. Yet the crisis in Ukraine shows also the limits of “pipes” as policy tools. Russia tried much of the toolkit: raising prices when politics went awry, lowering prices to solidify ties, exchanging gas for access to Sevastopol, cutting off gas during negotiations, arguing over the nonpayment of debts or offering loans to help pay for these debts, and using price discounts as a carrot to gain ownership of Ukraine’s pipeline network. These squabbles shifted money from Ukrainians to Russians, but Russia’s clearest success—cheaper gas for extending the Sevastopol lease—was a product of trade, not coercion, and gas was merely a convenient currency for the trade. It is hard to show what else Russia gained from this energy “blackmail.”
The Ukraine story shows the supremacy of politics after all. Pundits may claim that energy drives politics, but it is often the other way around—energy is caught in the crossfire. Gas is a perfect barometer of the relationship between Russia and Ukraine, but gas has been unable to alter that relationship. After all, the amount of Russian gas that transits Ukraine has declined by 29 percent since 2005, and so Ukraine is a much less important gas corridor due to the additional infrastructure that Gazprom has built over the years. Yet it is hard to see how this mattered for Russia’s response—Ukraine’s strategic importance cannot be measured in Russian gas transited through its territory.
The same is true for Europe’s (muted) response, as countries weigh how much they would like to antagonize Russia. But is the willingness to do so driven by the level of dependence on Russian gas—as pundits often either state or imply? From an energy perspective, this would be a good time to pick a fight with Russia—the winter is almost over and Europe’s gas stocks are fuller than normal for this time of year, while the ability to transport gas to markets in need has been enhanced dramatically in recent years, thus lessening the pain of any shortage. Yet it is hard to see how this calculation matters—there is much more to this story than natural gas.
What does this all mean for the United States? In recent years, policymakers have struggled to adjust from a mindset of energy scarcity to a mindset of abundance, but they have also been tempted by the promise of the energy weapon. Analysts extol the recent sanctions against Iran, which were only possible because the boom in US oil supply alleviated fears of a price spike in response to sanctions. Even those more modest are tempted by the potential to leverage energy for political gain; Alaska Senator Lisa Murkowski noted that, “I’m not saying that we need to go just go out there and start throwing some sharp elbows, but I do think we need to be aware of what we have, and how important a tool diplomatically an energy asset can be.”
Yet there is a sharp difference between exploiting a favorable market environment to advance a political objective (e.g. sanctions against Iran) versus leveraging oil or gas directly for political gain. In Iran’s case, the US government did not need to do anything directly. In fact, the boost in oil supply that made sanctions more palpable did not even have to originate in the United States. This is a difference worth noting—the United States could do more to add energy to the market, and these additions may (or may not) simplify the pursuit of certain political objectives. But this is a far cry from either engaging in a quid pro quo or, worse still, of promising or withholding oil and gas based on politics. This is precisely the nonmarket approach that Russia tried for years in Ukraine with little to show for except a damaged reputation and a lot of ill will. The United States should learn from Russia’s mistakes rather than rush to make its own.
Nikos Tsafos is a founding partner at enalytica and is currently advising the Alaska State Legislature on gas commercialization issues. He was previously a Director with PFC Energy with a portfolio that included overseeing research and gas fundamentals and leading the firm’s global gas consulting practice.
Image: Michael Trolove/CC BY-SA 2.0.