Russia’s energy leverage on Europe: declining but still troubling

Russia is an energy superpower, President Vladimir Putin is fond of declaring. For years, Europeans have focused on the threat of Russia’s “energy weapon” – the prospect that the Kremlin might cut off gas supplies, forcing them to toe the Russian line on diplomatic and security questions. But how much political leverage does Russia’s gas and oil really give the Kremlin? The reality is the political relevance of Russia’s energy has fallen sharply. It looks likely to decline further over the coming decade.

Countries in Central and Eastern Europe are right to be concerned about excessive dependence on Russian energy. Due to the legacy of Soviet gas pipelines, several countries, including Estonia, Finland, and Latvia, rely on Russia for nearly 100% of gas imports. For many other countries in the region, including Bulgaria, Slovakia, and the Czech Republic, Russian imports constitute over half of gas consumption. Russia has cut off European gas supplies before over price disputes; most notably when it stopped exporting gas to Ukraine in 2009 for 13 days. Because other countries, such as Bulgaria and Slovakia, receive Russian gas via pipelines that run through Ukraine, they too found their gas supplies cut.

Gas dependence on Russia has negative consequences across the region. One is corruption, as the Kremlin and its proxies buy the political support of foreign leaders in order to maintain Russia’s predominant market position in their countries. In Ukraine, for example, a group of pro-Russian oligarchs grew rich off of gas deals as they subverted the effectiveness of Ukraine’s democracy. At the same time, even just the need for low, or at least affordable, energy prices encourages some central and Eastern European countries to follow the Kremlin’s line on foreign policy. In private, for example, Hungarian officials admit that a major factor behind the country’s pro-Russian statements and public declarations against sanctions on Russia is related to energy. Hungary hopes that its pro-Russian stance will win it lower gas prices, but the cost is to degrade the European Union’s cohesion.

The political ramifications of Russia’s energy influence are thus broadly negative from a European perspective. But three factors are sharply degrading the Kremlin’s ability to use energy as a political tool.

The first factor is new energy infrastructure. New pipelines and, more importantly, new platforms for importing liquefied natural gas, are beginning to change Europe’s energy landscape. Lithuania, for example, used to be entirely dependent on Russia for gas supplies, and as a result paid far higher prices than countries with more diversified supplies. Yet it recently opened an LNG terminal, which lets it import gas from Norway, the United States, and elsewhere. Since then, the risk of a Russian gas cut off has fallen sharply, as have the prices the Kremlin charges for gas deliveries.

The second factor reducing Russia’s energy influence is the global supply glut, which has driven down both gas and oil prices worldwide. The combination of China’s slowing growth, American shale oil and gas boom, and increasing production in countries such as Iran – which, with the nuclear deal signed, can now more freely be traded — has created a large surplus in oil markets. The gas market has traditionally been linked to oil prices, so the fall in oil has reduced the price of gas supplied to Europe, too. World gas supply has also been strong, with a large increase in liquefied natural gas, notably in Australia, Qatar, and the United States.

The result of this supply glut has been to decrease Russia’s pricing power, and Eastern and Central European importers have benefited from lower prices as a result. Indeed, the prospect of liquefied natural gas imports from outside of Europe, even on a small scale, will likely put a cap on the prices Russia can charge on gas for the next decade. People close to Gazprom, Russia’s state-owned gas monopoly, have suggested that the company many need to initiate a “price war”, cutting prices in order to retain market share. But given the supply glut, it will be far harder for Russia to use its energy supplies as a tool of political influence going forward.

The third factor limiting Russia’s ‘energy weapon’ is European Union regulation. The EU has initiated a tough anti-trust case against Gazprom in September 2012, alleging that the firm has used its market power to charge higher prices. Indeed, the fact that countries with higher import dependence on Russia had to pay more for gas suggests that Gazprom used its monopoly position to unfairly hike prices. The European Commission is pushing Gazprom to change its pricing mechanisms in a way that should increase transparency and decrease prices.

The combination of these trends mean that the political influence of Russian energy in European politics is declining. Europe still faces serious challenges. The most notable is the Nord Stream pipeline project in the Baltic Sea, a dubious deal designed to move Russian gas to Europe bypassing Ukraine. If the pipeline is implemented, Russia’s gas leverage over Ukraine will increase sharply, because it would give Russia the power to cut off supply to Ukraine while continuing to ship gas to the rest of Europe.

The European Commission may quash the pipeline on regulatory grounds – something that would actually be in Europe’s collective interest. There are still more ways that European Union competition rules can be strengthened. But even in the absence of such changes, the glut in gas supply and the expansion of Europe’s gas infrastructure means that political influence of Russian energy is on the wane.