Comment: Europe cannot cling to Russian profits with security at stake

Europe must stop hoping that Russia will adjust its strategy according to an economic rationale. EU leaders have to realize that, after Crimea, Putin’s business is no longer business. Dealing with a potentially consistent aggressor will entail not only political will but also considerable economic costs to EU members if democratic values and institutions are to be upheld.

Across Europe, national corporations – such as banks, energy companies, and major law firms – are strongly lobbying against any further second and third-tier sanctions against Moscow as short-term profits would be undermined. UK utilities still want cheap Russian gas; the first imports could begin by October this year, as companies move to substitute falling indigenous output with external gas. Germany’s Chancellor Angela Merkel, who bears no illusions about the nature of Putin’s regime, has said that more sanctions would be imposed only if the situation worsens, with Germany’s main trade body warning that more than 6,000 German businesses with €76 billion of turnover are interlinked with Russia.

Despite two major gas transit crises instigated by Gazprom in Ukraine in 2006 and 2009, the EU has been slow in reducing the dependency of eastern European countries on Russian gas supply. As a recent analysis by Russian newspaper Kommersant shows, in 2013 Bulgaria and Slovakia remained more than 90% dependent in their imports on Gazprom’s flows via Ukraine while most of their neighbours are more than 60% dependent. Although the European Commission has assisted with a limited development of interconnectors and storages that would help reduce dependence, these states feel this is not enough. This vulnerability allowed Gazprom to prevail in bilateral negotiations with each state at the expense of pan-European market liberalizing policies.

The most striking manifestation of this trend is the ongoing development of the South Stream pipeline. While intervention in Ukraine continues, the EU should halt development of South Stream (as well as review other business with Russian energy companies). But the EU has only responded with vague promises of diversification. Notably, Stroitransgaz, owned by Gennady Timchenko, a businessman subject to the recent US sanctions, will reportedly win a €3.5bn deal to build a section of the South Stream pipeline across Bulgaria. Slovakia is claiming it needs an extra €20 million to build a gas station in order to implement a major gas reverse plan for Ukraine. This ‘divide and rule’ policy has allowed Gazprom’s CEO to write in his blog a few days ago that ‘the South Stream project is steadily progressing’ with plans to start the construction of the first offshore line to Bulgaria in the next six months.

A contact at a London-based energy company that works both in Russia and Ukraine has argued that South Stream will be definitely built and probably ahead of timetable, as individual corporate and country economic interests will prevail just as Putin’s calculation about a ‘shallow and divided Europe’ predicted. However, I believe that a red line has been crossed and the project will be eventually halted this year. As in the case of Iran aiming to go nuclear six years ago, there is finally a sea change in expectations about Russia’s next steps, a grudging understanding in major EU capitals that business as usual with Moscow is no longer possible. The idea may be difficult to digest, and even more to admit and act upon, but mentally the watershed has taken place. Iran’s South Pars project was not put under full scale sanctions overnight, but gradually it was completely cut off from Western participation (and still is).

As for next winter in southeast Europe, at least gas storages in Europe are now being filled at higher than usual pace, which is a strategically responsible first step. One can only hope that over the next few weeks instead of giving the green light to South Stream, the US and its major counterparts in Europe will instead back Ukraine with concrete contracts on more reverse gas flows and enough cash to pay Gazprom for gas imports over the summer, so that Ukraine can create its own strategic reserve. As the Russian monopoly has just confirmed it is removing its previous price discount for Ukraine, timely Western financial assistance is vital for the survival of the new government in Kyiv.

With Russia now assuming a more assertive stance, European politicians need to switch from thinking about short-term economic gain to what is needed to protect democracy and national security.

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