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The true price of Russian gas

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After Sunday’s bogus referendum in Crimea, Russian President Vladimir Putin can be increasingly confident that his annexation of Ukrainian sovereign territory will stand: The European Union and the United States lack the will and the means to stop it. The main questions now are whether a line can be drawn at Crimea and how big a price Russia will pay for its land grab.

The short-term response turns on sanctions and diplomatic pressure. The calculations here are unavoidably complicated, especially for the EU, because its economy is now so interconnected with Russia’s. Too bad. If Putin gets away with Crimea, Russia should be made to pay, and Europe is in the best position to extract a price. Otherwise Putin will be encouraged to go further.

For the longer term, the U.S. and (especially) the EU need to fundamentally rethink their economic relations with Russia - not to pile on the punishment but as a matter of simple prudence. There’s no need to cast Russia as an implacable Cold War enemy to understand with new clarity that it is not a reliable friend. That means changing any policies based on the misconception that Russia is a good global citizen.

Energy policy is especially crucial. Europe’s economies are far too dependent on Russian supplies of natural gas. Russia is the EU’s main supplier of natural gas, accounting for roughly 30 per cent of the total. In Germany, where successive governments have made stronger economic ties with Russia, the figure is about 40 per cent.

Putin has been more than willing to enable this dependence. Russia and Germany co-operated in building a direct pipeline under the Baltic Sea, for example, bypassing Ukraine’s pipeline system (and allowing Russia to tighten the economic screws on its neighbor). Many EU businesses are heavily invested, literally and figuratively, in the Russian energy business.

Breaking these links can’t be done cheaply, easily or all at once, but a patient strategy to diversify from Russian energy supplies is long overdue. It should have four parts: a stronger negotiating approach over existing supplies; new regional sources for natural gas; new infrastructure to allow delivery and distribution of natural gas in liquefied form; and alternative domestic sources of energy.

EU members currently negotiate gas prices with Russia bilaterally. Bigger countries get lower prices, an advantage they won’t wish to surrender — but Russia increases its market power by dividing its customers and discriminating among them. At a meeting last week, Polish Prime Minister Donald Tusk told German Chancellor Angela Merkel that the EU should negotiate with Russia as a bloc. It’s a good idea.

Next comes new sources of supply. The Caspian Sea region, central Asia and north Africa are capable of providing far more natural gas than they do now. Heavy investment, including in pipelines, will be needed to tap this potential. Europe’s economic and geopolitical interests lie in supporting those efforts.

In recent years, Europe has increased its imports of liquefied natural gas, mainly from north Africa — but there’s scope for much more. Thanks to its shale-gas boom, the U.S. could play a central role in supplying Europe with LNG. The U.S. is now the world’s biggest producer of natural gas, but the approvals process for exports and their supporting facilities is slow and costly. The economic case for speeding and simplifying this system was already compelling. Putin’s master class in intimidation makes the geopolitical case equally strong.

Europe has shale gas of its own — maybe a 25-year supply at the current rate of gas consumption — but it has been in no hurry to exploit it. A U.S.-style boom may be unlikely for reasons of geology and population density, but that’s no excuse for failing to examine the possibilities. And there are other paths to energy diversification. If the annexation of Crimea makes Merkel regret her country’s dependence on Russian gas, it should also make her wonder about her decision to close Germany’s nuclear power plants years ahead of schedule.

In a way, it all comes down to price. Europe’s energy policies have taken cheap Russian gas for granted. Among many other things, the events of the last month make it clear: Russian gas isn’t as cheap as it looks.



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