With Alexei Miller, the
CEO of Russian state owned energy company Gazprom, demanding on
Monday that Ukraine pay its $3.5bn of bills as well Junes
gas supply upfront by May 31 or be cut off, fears are growing
about central and western Europes own energy supplies
and the impact on the economy.
Fitch Ratings has
warned that an escalation of the crisis, leading to a cut to
Russian gas supplies to Europe which the ratings agency
calls a low-probability, high-impact scenario
could derail the nascent economic recovery in CEE and
the eurozone. A rise in the gas prices might lower the
competitiveness of energy-dependent industries and weaken
Russia supplies around
27% of Europes annual gas demand, and 40% of this is
delivered through Ukrainian pipelines, and any disruption to
supply could have a knock-on effect for other countries in the
region. Bulgaria and the Czech Republic rely on Russia for 85%
and 80% of their gas, respectively. Hungary, Poland and
Slovakia are also heavily dependent on Russian
impact is the psychological impact, says Harald Heubaum,
an energy security expert at the Centre for International
Studies and Diplomacy in London. The uncertainty in
itself could lead to price developments that would be negative
for recovering economies across Europe.
Russia used the same
premise to turn off the taps to Ukraine in 2006 and 2009, and
has a history of using discounted gas prices to exert leverage
on Kiev. Then-president Viktor Yanukovych rejected a trade deal
with the EU in 2013 in part due to Russias promise to
supply gas at well below the market rate. With a new, pro-EU
government in place in Ukraine, that discount has ended,
sparking the latest argument over energy bills.
Unions long term ambition to break its dependence on
Russian energy has been revived by the Ukraine crisis. However,
the share of Russian gas in the European supply mix has
actually increased over the past three years, as indigenous
production declined. Investments in alternative supply routes
have had mixed success.
The Nabucco pipeline
from Turkey to Austria was abandoned in July 2013, and the
capacity of the remaining completed and proposed infrastructure
represents less than 20% of the supply coming from Russia. To
break the link would require huge investments in liquefied
natural gas terminals and energy efficiency.
cant reduce Russias share of its gas imports
through business as usual, says Laurent Ruseckas, an
energy analyst at IHS Global Insight. The steps that
would need to be taken would have to be dramatic, and far
beyond what has been considered since 2009.
The Russian government
has also begun searching for alternative markets for its gas,
with president Vladimir Putin due in Beijing next week to
finalise a deal between Gazprom and China.
make a lot of economic sense either, when you have two major
pipelines to Europe and youre planning another one,
said Marcus Svedberg, chief economist at East Capital.
Trying to get a good price out of China is obviously less
likely than trying to sell to small European countries... My
guess is that once the situation in Ukraine calms down,
youre going to hear a lot less about diversifying on both