Gas Attack?

Markets are spiking because of fears Putin will use energy as a weapon. Here's why he won't.

European energy markets are worried about the impact Russia's invasion of the Crimean peninsula, and the threat it poses to the rest of Ukraine, could have on the continent's supply of natural gas. But past is not always prologue -- and while Russia has used natural gas as a cudgel scores of times since the end of the Soviet Union, its ability to cow Europe by withholding energy exports is not what it used to be. In fact, Russia and gas giant Gazprom depend as much on Europe as Europe does on them.

Natural gas prices in Europe rocketed Monday as the military and diplomatic standoff in Ukraine escalated. Officials from Ukraine's gas company said Monday that there have been no physical supply disruptions since the Russian military incursion into Crimea, but gas prices jumped 10 percent in trading in the U.K. and the Netherlands, and more than 8 percent in Germany. Traders focused on a pair of simple facts: Russia's gas exports to Europe reached record highs in 2013, and about half of that was shipped through transit pipelines that crisscross Ukraine.

Worries over the fate of those natural gas supplies are certainly understandable. Russia has shown in the past twenty years how eager it is to use energy exports as a weapon, cutting off gas supplies at one time or another more than 40 times. Russian neighbors such as Belarus, Lithuania, Moldova, and Azerbaijan have all faced threats of Russian energy cutoffs as they flirted with pro-European policies in the past few years. Lithuania's prime minister accused Russia of waging "economic war" last September after Moscow threatened gas supplies and interfered with cross-border trade, apparently to punish the Baltic country for seeking closer ties with other EU countries.

Ukraine itself suffered a pair of painful gas shutoffs in 2006 and 2009 because of contract disputes with Russia, both of which affected downstream European customers. Ukraine has dramatically increased the amount of gas it is buying from Russia in recent days, but that seems motivated less by a desire to fill gas storage facilities and more by the fear that Moscow will make good on threats to jack up gas prices for Ukraine in the second quarter of this year. Moscow slashed gas prices for Ukraine in December as part of its effort to woo then-President Viktor Yanukovych away from Europe and toward Russia

Still, Russia would almost certainly lose more in an energy war with Europe than it would gain. Fundamentally, energy trade between Russia and Europe is a two-way street. As much as European policymakers fret about dependence on Russian gas, Gazprom frets about dependence on the European market, which accounts for fully three-quarters of its export sales. More broadly, Moscow relies on oil and gas exports for one half of its federal budget. That makes a prolonged shut off of gas exports to Ukraine and the rest of Europe a dangerous proposition for Russian President Vladimir Putin.

"There are always costs to Russia playing the energy card, but I think those costs now are higher than they were a couple of years ago," Jeffrey Mankoff of the Center for Strategic and International Studies told Foreign Policy.

The other reason Russia might think twice about using energy as a weapon this time around is that Europe has improved its defenses and isn't as vulnerable to Russian energy blackmail as it was just a few years -- or even a few months -- ago.

First, spring is nearly here. In 2006 and 2009, Russia cut off gas supplies to Ukraine, and by extension to the rest of Europe, in January, the coldest part of the winter. The current crisis is taking place in the spring, when natural gas supplies drop dramatically because of lower levels of residential heating. Forecasters expect unseasonably warm temperatures to continue across Europe until at least summer.

Second, that warm spring is coming after an unusually mild winter in Europe, though certainly not in North America. Natural gas stocks across the continent at are their highest levels in years: inventories on hand could supply central European countries such as Germany, Austria, Hungary and Poland for two to three months, Reuters noted Monday. While that wouldn't provide insulation against a long-term gas supply crisis with Russia, it gives European countries the ability to hold out against short-term threats.

At the same time, Europe has more alternate sources of supply than it did in 2006 or 2009, though they're not cheaper. The global trade in liquefied natural gas has grown in recent years, with more shipments from big exporters such as Qatar and Australia. The U.S. energy boom, which turned the United States from prospective natural gas importer to hopeful natural gas exporter, has also freed up LNG volumes that have landed in Western Europe. Some lawmakers in the United States want to go even further and are pressing for the Obama administration to use the country's natural gas bounty to bolster allies overseas.

Rep. Michael Turner (R.-Ohio) on Monday repeated calls for the Congress to pass legislation that would fast-track government approval for gas exports to countries in the North Atlantic Treaty Organization.

"As we have seen before, Russia's actions in Ukraine demonstrate its willingness to use the threat of military force and energy dominance as political weapons to expand its sphere of influence," Turner told FP. "Increasing natural gas exports would provide our allies with an alternative and reliable source of natural gas," he said.

Given gas storage and warm weather ahead, energy experts figure that Gazprom is actually in the weaker position. "Unlike Ukraine and European importers, the state-controlled Russian giant cannot afford losing a third of its monthly export revenue even for one month," Mikhail Korchemkin, head of consultancy East European Gas Analysis, wrote Monday. While markets were nervous about the price of gas, they also hammered Gazprom stock on Monday, sending shares down more than 13 percent in Moscow and London.

Ironically, Russian efforts to play hardball with Europe over Ukraine could actually make it even more difficult to find new customers for Russian energy that could make the European market less important. For more than a decade, Moscow and Beijing have been trying to come to terms on what seems like a natural deal: Energy-rich Russia could export more oil and gas to energy-hungry China.

However, the two sides have yet to agree on a price for Russian gas. The deal that was meant to be wrapped up by the beginning of the year was pushed back to February, and finally to a summit meeting slated for May. The more time passes, especially if there's trouble in Gazprom's main market, the better negotiating position the Chinese will have.

"If they have problems in Europe, that will only make the Chinese intransigent in terms of their position on the price issue," Mankoff said.

Alexander Nemenov - AFP - Getty


Hack Attack

Russia's first targets in Ukraine: its cell phones and Internet lines. 

This story was updated at 8:12 PM. 

The Russian forces occupying Crimea are jamming cell phones and severing Internet connections between the peninsula and the rest of Ukraine. Moscow hasn't succeeded in imposing an information blackout, but the attacks could be sign that Russia is looking to escalate its military operations against the new government in Kiev without firing a shot.

Russia has a history of launching cyber attacks on its neighbors with the aim of disrupting the countries' ability to communicate to their citizens and with the outside world. One attack in 2008, during Russia's war with Georgia, accompanied a ground-based military assault and was intended to disrupt government and media communications.

Although the efforts in Crimea so far have failed to choke the region's communications lines, experts are concerned that the strikes could be a precursor to damaging Russian cyber attacks on communications infrastructure elsewhere in Ukraine, particularly if tensions escalate or Russian military forces push beyond Crimea. Disrupting Internet service or knocking out Ukrainian government websites would allow Russia to flex its muscle without necessarily drawing a military response from Kiev or its Western allies.

The new strikes appear to have been conducted mostly by hand rather than by hackers, but they have the same goal. On Monday, Reuters reported that Russian military forces were blocking mobile telephone services in some parts of Crimea. Russian naval vessels were seen moving into and around the port at Sevastopol. Russian navy ships are known to carry jamming equipment that can block phone and radio signals. Two Crimean government web portals were also offline; it was unclear whether they'd been taken down by government officials or had been hit with a malicious cyber attack.

The attacks have been escalating for days. On Friday, Ukrtelecom, the state-owned telecommunications service provider, reported that several of its offices in Crimea had been seized by unidentified individuals who cut phone and Internet cables. As a result, customers across nearly the entire region lost phone and Internet service, and the company said it was no longer able to provide a link between the peninsula and the rest of Ukraine.

Two days later, armed commandos reportedly cut off power lines at the Ukrainian navy headquarters in the port city of Sevastopol. Hours later, Ukraine's UNIAN news agency said other teams of commandos broke into several Ukrainian navy communications stations and sabotaged communications lines in an attack similar to the one on Ukrtelecom.

Asked whether the administration was tracking any cyber attacks by Russian forces against Ukraine or in the Crimea, White House spokesperson Caitlin Hayden said, "The United States is concerned with all aggressive actions in Ukraine and expects all parties to abide by recognized international norms that apply online as well as offline. We are closely monitoring the situation in Ukraine, including reports that the Internet and telecommunications have been disrputed in the Crimea."

A spokesperson for the National Security Agency and U.S. Cyber Command declined to comment about what steps the United States might take to defend Ukraine's computer networks.

Still, there are clear parallels between the Crimea attacks and those in Georgia and Estonia in 2007, which were widely attributed to hackers working at the unofficial behest of the Russian government. Those attacks knocked government and media websites offline, blocked Internet access, and in Estonia disabled ATMs. "Russia wants to degrade the ability of Ukraine to communicate inside and outside the country," said Adam Segal, a senior fellow at the Council on Foreign Relations who tracks countries offensive cyber capabilities. "If there is military conflict, cyber attacks will be used to degrade the ability of conventional forces to operate," Segal said.

If history is a guide, any cyber attacks from Russia might not come directly from military or intelligence services, but through mercenaries or so-called "patriotic hackers" Moscow quietly encouraged to strike Estonia and Georgia. This would give the Russian government the ability to deny that it was behind any offensive.

"The U.S. president, NATO secretary general and European leaders could call [Russian President Vladimir] Putin to warn that they are not fooled by his use of nationalist proxies and will hold him to account," Jason Healey, the director of the Cyber Statecraft Initiative at the Atlantic Council, wrote in a blog post Monday. "Since warnings won't sway Putin, they should be backed with harder options. The U.S. Department of Defense could order its muscular Cyber Command to prepare to disrupt the attacks if asked to do so by Ukraine's government."

Healey said "the technical means and proxies used this time are likely to be similar" as in past conflicts. He added that Western governments should make clear to Russia that significant cyber attacks on Ukraine would cross a line and be regarded just like a physical strike. "There is no excuse for surprise: the Kremlin's habit of routinely resorting to them in the past -- and in situations with far less existential danger for Putin's plans -- are well known," Healey wrote.

Were Russia to launch a cyber attack on Ukraine, the country would not be without defenses or the ability to strike back. As early as 2002, Ukraine's government began to build up its cyber defenses to combat fraud and online crime, according to a report by the Center for Strategic and International Studies. Under existing military doctrine, Ukraine's government considers cyber attacks on vital infrastructure -- including nuclear facilities, chemical and defense industries, military facilities, and "economic and information entities" -- as grounds for armed retaliation, according to the report. A national government agency guards against attempts to penetrate or disable official computer networks and government communications systems.

"Ukraine has a strong and diverse Internet frontier," according to a recent analysis by Renesys, a computer intelligence company that monitors Internet service around the world. "The roads and railways of Ukraine are densely threaded with tens of thousands of miles of fiberoptic cable, connecting their neighbors to the south and east (including Russia) with European Internet markets. The country has a well-developed set of at least eight regional Internet exchanges, as well as direct connections over diverse physical paths to the major Western European exchanges. At this level of maturity, our model predicts that the chances of a successful single-event Internet shutdown are extremely low."

For the moment, the defenses seem to be holding, with the attacks on communications lines and mobile phone networks in Crimea causing only limited damage. Ukrtelecom reported that it was able to restore service five hours after the intruders cut its lines. Renesys reported that as of last Friday, traffic routes in Crimea appeared to be functioning normally. The company doesn't track whether individual websites have come under attack, nor does it monitor whether telephone systems are working.

Most Internet service providers in Crimea route traffic through Russia, rather than countries in Europe, said Doug Madory, a senior analyst at Renesys. That could give Russian forces easier access to computer networks. But Crimea is not entirely dependent on one provider for its connections to the Internet. Some traffic is also routed through carriers in Europe. The dispersed nature of the networks would make it more difficult for Russia to knock large swaths of the country offline for long. "In that environment, it's very hard to have a national outage," Madory said.

Sergei Spuinsky / AFP