Russia's Energy Market Heft Leaves Neighbors Unsettled

Moscow has long used its energy exports to win political concessions from its neighbors. In the last decade, Russia has twice threatened to cut off its natural gas supplies to Ukraine.

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The crisis in Ukraine is raising new questions about Russia's role in the energy markets. Moscow has long used exports of oil and natural gas to win political concessions from countries on its borders. Europe gets a quarter of its natural gas from Russia.

As NPR's Jim Zarroli reports, that's making a lot of people there nervous.

JIM ZARROLI, BYLINE: Russia's oil and gas supplies are a huge part of what keeps its economy going. It gets much of its foreign reserves by heating homes and running factories in places such as Germany, Italy and the Czech Republic. That gives Russia a certain leverage over its neighbors.

DAVID GOLDWYN: Russia uses its market power to try and attract either political concessions or to coerce economic concessions out of its neighbors.

ZARROLI: David Goldwyn is a former Energy Department official who now runs his own consulting firm. He says Russia has often used a carrot and stick approach with for Soviet Republics such as Belarus, Lithuania and Ukraine.

GOLDWYN: Periodically, Russia will offer a subsidized price to Ukraine and then hike that price rapidly to market in order to pressure Ukraine into a political concession like joining its customs union or selling a part of its assets.

ZARROLI: Twice in the past decade this has provoked acrimonious disputes between the countries, prompting Russia to shut off natural gas shipments. The more recent shutoff happened in January 2009. Jeffrey Woodruff is senior director at Fitch Oil and Gas.

JEFFREY WOODRUFF: On the surface it was a commercial dispute where Gazprom, which is Russia's gas company, and Naftogaz, which is Ukraine's gas company, couldn't agree on a gas price. But some would say there were deeper geopolitical motivations that were responsible for that pricing dispute.

ZARROLI: At the time, Moscow and Ukraine were arguing about leases for Russian military bases on the Crimean peninsula. And Ukraine was making noises about trying to join NATO. Steven Pifer is a former U.S. ambassador to Ukraine. By shutting off natural gas to its neighbor, he says, Russia was trying to undermine Ukraine's leader.

STEVEN PIFER: But the problem for Gazprom is that the same pipeline system that moves gas into Ukraine is also Gazprom's main transit route to move gas through Ukraine, into Europe. And very quickly, the gas supplies going to Europe were affected.

ZARROLI: Ukraine responded by intercepting gas shipments meant for Europe. Suddenly, countries such as Hungary and Slovakia faced sharply reduced gas supplies. It was big news in Europe.

(SOUNDBITE OF NEWSCAST)

UNIDENTIFIED WOMAN: A natural gas crisis looming over Europe has taken a sharp turn for the worse. A contract dispute between Russia and Ukraine...

ZARROLI: The dispute was eventually resolved. And at least until the current crisis, Russia was again shipping fuel to Ukraine at below market prices. That might seem like a good thing. But Steven Pifer argues that it's hurt the country's economy. He says, Ukraine has become addicted to cheap energy.

PIFER: And as such, they don't create many incentives for domestic production, which has remained largely stagnant over the last 20 years.

ZARROLI: The 2009 shut-off still had repercussions in Europe.

PIFER: This episode made clear that they could be vulnerable to potential cutoffs when there was dispute between Russia and Ukraine that was quite beyond their control or ability to affect.

ZARROLI: Today, Europe is a lot less dependent on gas that's rooted through Ukraine. It buys more of its energy from alternative sources such as North Africa. Pifer says this actually worries Russian officials a lot.

PIFER: And they have to worry that if they do that kind of cutoff, does Europe then begin to look seriously for long-term solutions other than Gazprom?

ZARROLI: Russia has also helped build a second pipeline running to Germany through the Baltic Sea, enabling it to bypass Ukraine's pipeline if necessary. And until recently, it was in talks to build another under the Black Sea. The European market remains vitally important to Moscow however much the relationship between Russia and the West may have soured in other ways. Jim Zarroli, NPR News.

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