The first energy crisis of 2006 was brief, but it may be telling.
Russia, flexing its muscles as the biggest source of energy exports outside of the Middle East, put the kibosh on New Year’s celebrations in Ukraine by shutting off the tap for natural gas to this former province of the Soviet Union. After a bit of stop-and-go negotiations, Moscow has relented, turning the gas back on, but not without casting aspersions on any good will that’s accrued in recent years regarding Mother Russia’s reliability as an exporter of crude and natural gas.

The new 800-pound gorilla

Source: Energy Information Administration

On both counts, Russia is a heavyweight, regardless of how it exercises that power in the years ahead. A close rival to Saudi Arabia as the world’s leading exporter of crude, Russia enjoys the status of harboring the most reserves of natural gas. The combination insures that the land of Tolstoy and Pushkin will be central in the global economy’s energy strategy in the 21st century. If the latest news of Russia’s heavy-handed tactics is any indication of things to come, energy consumers should postpone any expectations of export bliss in the Russia-connected strategy for a while longer. Indeed, it was only a few short years ago that Americans were touting Russia’s emergence as an oil-rich democracy of late, suggesting a solution to Opec was just over the horizon. That may yet prove accurate, but for the moment caution is the new watchword.
The trouble du jour centers on the Kremlin-controlled Gazprom, and its decision to effectively abandon the 2004 deal to sell Ukraine natural gas at greatly reduced prices. Suddenly, Gazprom wants Ukraine to pay market prices. Nothing wrong with that, although the details are a bit messy when it comes to the Gazprom-Ukraine energy soap opera.
For starters, the 2004 gas deal was originally scheduled to run through 2009. And while Russia has decided to get tough with Ukraine, the sweetheart deals of deeply discounted gas are still in force with other former slices of the Soviet Union, including Georgia and Azerbaijan. Although Russia is intent on eventually charging market rates for all its customers, it’s given some a grace period of transition, as opposed to the cold-turkey deal imposed on Ukraine. So much for consistency.
Perhaps we can simply say that Moscow suffered a momentary lapse of judgment, if that’s what it turns out to be. There is precedent, after all, for temporary stumbles when it comes to the history of energy exports. The general consistency of the Saudi export machine has been known to stagger at times, the episode of cutting off oil exports to the West in October 1973 being the shining ignominious example. The political catalyst all those years ago was the October War, when Egypt and Syria attacked Israel in an effort to retake territory lost in the 1967 conflict. Politics, in short, was lurking just below the surface in the oil business of 1973, thereby suggesting a rephrasing of Clausewitz’s famous dictum to: oil is a continuation of politics by means. Is it time to brush off that revised dictum for fresh duty in the booming natural gas trade of the 21st century?
Not so fast, at least not yet. Compared with the Saudis’ 1973 goals for its oil embargo, Russia’s reported political ambitions may be somewhat less spectacular when it comes to the Ukraine. Still, the global economy may not be in a mood to parse such distinctions, given the recent bull market in energy of late. In any case, politics is thick and heavy in the latest Russia-Ukraine flare-up.
The offending event was the election of Victor Yushchenko as Ukraine’s president last year, which reportedly irritated his Russian counterpart, Vladimir Putin to no end. Yuschenko, you’ll recall, talks of democracy, free markets, and all the trimmings that accompany such a state of liberal political affairs. All of which clashes with the autocratic inclinations of the former KGB man, otherwise known as the Russian president presiding over an alleged democracy.
Alas, Putin has been no slouch when it comes to reseeding the government’s influence in such industries as media and energy. It pales by the standards of the old Soviet Union, although the trend in recent years has somewhat sullied the former bright expectations for Russia’s alleged return to the fold of democracy. To wit, Gazprom, to cite the operative company of the moment, produces more than 90% of Russia’s natural gas and the government just happens to own a majority share of the firm, according to Hoover’s.
Is it any wonder that Ukraine, which is trying to reinvent itself in a manner that evokes if not mimics Western democracy, has fallen out of favor with Russian political bent of late?
It remains to be seen if turning off the natural-gas spigot will work for or against Moscow and its grander schemes. For the moment, the Continent should worry, since Germany and others in Europe currently rely on Russian natural gas exports to a degree, and one that seems fated to only rise.
Lest anyone think the lessons dispensed a generation ago in wielding the oil weapon will keep comparable intentions from infecting the coming boom in natural gas exports, we’re not so sure. Consider that a certain South American president who goes by the name of Hugo Chavez (the self-proclaimed leader of the so-called Bolivarian Revolution in Venezuela) has been nothing if not ambitious in forging a new template for brandishing the oil weapon in a political context in recent years. From offering deeply discounted fuel oil supplies to New Yorkers last year to buying influence via buying Argentine bonds with Venezuelan petrodollars, Chavez has arguably been successful in creating an oil-soaked regime that’s anti-American, among other things. Of course, one could simply chalk it all up to generosity. Then again, maybe not.
In any case, the stakes are larger for Russia regarding its role on the world stage compared to Venezuela, and presumably that’s why Putin, who’s clearly calling the shots for Gazprom, reversed course and turned the gas back on. Germany, it seems, was more than a little upset that the Russia-Ukraine spat was reportedly affecting gas flows to the Fatherland, which is at once one of Russia’s key political allies and a major fuel customer.
Economics still has the upper hand when it comes to the fast-growing natural gas market, which is in the early stages of evolving into a global exporting business on par with crude. But economics, as the lessons of 1973 suggest, can give way to politics in the blink of an eye. Yes, the blink may be brief, but as we learned in the 1970s, brevity can also be brutal.