With Energy as the Weapon

Russia has weaponized energy, something that is now at the forefront of tensions with its European neighbours. Uttryck’s Pär Nyrén explains why it is time for EU countries to take action and join the arms race by liberalizing their energy markets.
Being a petro state, Russia exerts immense influence as a supplier of energy. Paradoxically, this is also its Achilles’ heel, as we have been reminded of as the falling price of oil has high-lighted the downsides of not having a diversified economy. Although Europe’s response has been largely unreflective of this simple fact, energy has been at the centre of Russia’s pressure on Ukraine since the very first days of the annexation of Crimea.

Case in point: Kremlin had barely swallowed Crimea whole before they nationalized natural gas facilities on the peninsula that had been owned by a Ukrainian state-owned company prior to the annexation, which conveniently ended up in the Russian state-owned Gazprom’s hands not long after. Gazprom, in turn, looked over the price for natural gas exports to Ukraine, all of a sudden they were 81 percent higher in April than they had been before the annexation, a much higher rate than what other countries had to pay. Unsurprisingly, Ukraine was unable to get their hands on that kind of money. It did not take long before they ran up a huge debt, which motivated Gazprom to cut its supply of natural gas in June 2014.

Sure enough, the dispute was solved, and in the material sense no long-term damage had been done. But the fear that Russia might turn off the tap at any moment still looms, not only over Ukraine but many other countries including multiple EU member states who rely on Russia for all – or almost all – of their natural gas imports.

This puts the EU in an awkward position: we are imposing sanctions on Russia to keep their fingers away from Ukrainian soil, but we cannot antagonize them so much that they might bite back (that is, more than they already do). Moreover, it limits the scope of which entities we can impose sanctions on. Gazprom was completely absent from the first round of sanctions, only to have a peripheral unit of it included in the subsequent ones. This did not stop them from receiving loans of several hundred thousand Euros from an Italian bank in December 2014 and doing business on the continent. As long as they are excluded, the sanctions policy will not reach its full potential.

While Brussels has shown none of the urgency the issue deserves, it is taking some steps in the right direction. On April 22, the Commission charged Gazprom for breaching anti-trust rules, in part by including territorial restrictions on sales. That is, what Latvia buys is contractually forbidden from being resold to the Czech Republic, and the same goes for other countries, in blatant violation of the Union’s free movement of goods. But this is hardly news, and similar probes in 2011 and 2012 turned out to be political cosmetics, what was called ”a matter of priority” at the time amounted to little more than statements of dislike, but no real punishment. However, the Commission’s long-term solution is pushing for the next step of creating an “ever closer union” – as the treaties suggest we should strive for – by what they, creative as they are, call the “Energy Union.” Among other things, this entails making a common effort of ensuring energy security by connecting grids, simplifying rules, and increasing transparency.

This idea is not new either, and there are major obstacles. Above all, much like natural gas, European solidarity too is in short supply. Take for example the British Labour leader Ed Miliband’s pre-election promise of freezing electricity prices “within months.” This of course spells price-controls, a harmful kind of populism. Firstly, it lays the ground for adverse effects such as energy companies raising prices when they anticipate that prices soon might have to stagnate more than they otherwise would. Secondly, eventually it will keep prices down. To say that prices affect supply is too obvious to make a point of, but what we should remind ourselves of is what the Ukraine case has shown: supply matters.

Unfortunately, Mr Miliband is not alone. More than half of all EU member states have put in place some sort of measure controlling end-user prices, including all of the East European countries affected by dependence on Russia. The not-too-invisible hand of the government reaches longer, not only dabbling with the rules of the game, but participating in it too. Many of the players in the energy market are state-owned, and they have a vested interest in the status-quo. Connecting energy grids and unifying regulation is not in their interest, but it is vital for Europe.

We have to rethink our approach to energy, bearing in mind how our national policies affect not only domestic prices but Europe-wide supply. The perks are obvious, but we have to burn a few holy cows to get there. The price of inaction, the vulnerability of being dependent on Russia, cannot be capped.

By: Pär Nyrén