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 imports.
The biggest 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
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.
RUSSIAN SUPPLY INCREASES
The European 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.
Europe simply 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.
That doesnt 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 sides.