Report

Russia Cuts Gas to Ukraine

Moscow's cancellation of natural gas exports to Kiev ratchets up the pressure on Ukraine -- and is making European leaders nervous about energy supplies.  

 

Note: This article was updated Monday afternoon to include State Dept. comments and more.

With tensions between Russia and Ukraine at fever pitch, Moscow unsheathed its energy weapon Monday, cutting off natural gas supplies to Ukraine amidst a dispute over billions of dollars in unpaid bills. The gas cutoff, Russia's third in less than a decade, raises concern in Europe that one of its main sources of imported energy could be affected, with few realistic alternatives on the horizon.

A last-ditch effort by the European Union to broker a compromise between Russia and Ukraine broke down Sunday night. Monday morning, Gazprom, the big Russian gas firm, said it halted gas flows to Ukraine and that it won't ship any more until Kiev pays its hefty arrears and then prepays thereafter.

Gazprom said that Ukraine was guilty of "persistent nonpayment," and said Kiev owes it about $4.5 billion. Russian officials said they would only be willing to go back to negotiations if Ukraine settles its outstanding debt. Russian Prime Minister Dmitry Medvedev blamed Ukraine for the crisis after it rejected "very beneficial, very preferential proposals" from Gazprom.

Ukrainian leaders sounded a defiant note after the shut-off, saying the energy fight was part of a broader offensive by Moscow against the beleaguered country.

"This is not about gas. This is part of the general plan of Russia to destroy Ukraine," said Arseniy Yatseniuk, Ukraine's prime minister, according to the Financial Times. "Ukrainians will not pull $5 billion out of their pockets a year so that Russia can use this money to buy arms, tanks and planes and bomb Ukrainian territory."

European officials, led by European Energy Commissioner Günther Oettinger, remained hopeful that the two sides could reach a deal. Europe and Ukraine suggested that Kiev partially pay off its overdue bills and that Gazprom lower its rate. But Gazprom insisted on a higher price for gas deliveries. A spokesperson for Oettinger said he offered Monday to continue mediating the dispute.

State Department spokeswoman Jen Psaki called the EU proposal "fair and reasonable" and urged Russia to resume talks with Ukraine over the gas dispute. 

The gas cutoff comes on the heels of heightened tension between the two countries, after pro-Russian separatists shot down a Ukrainian military transport plane Saturday, killing 49 people. In response, protesters attacked the Russian embassy in Kiev, sparking outrage in Moscow.

For Europe, the gas cutoff is a reminder of the continent's reliance on Russian energy -- and the risk of supply shortages. In the winter of 2006, and again in 2009, Russia cut off gas exports to Ukraine, which affected European customers as well. About 15 percent of Europe's natural gas comes through Ukraine.

The shut-off is a reminder of Russia's willingness to flex its energy muscles to cow other nations. At the same time, after decades of relying largely on Europe as an export market for natural gas, Russia is increasingly looking east. In May, it inked a massive deal with China, and Russian officials hope to land a second big contract. That could give Moscow even more leverage in dealing with European gas buyers.

For now, the Russian shut-off hasn't affected flows to Europe, European Union officials said. But natural gas prices spiked in London and Holland on the news of the cutoff.

One big difference from previous gas interruptions is the time of year: Gas demand is much lower in summer than in winter. And storage levels in Ukraine and Europe could keep them running for months. But the energy problem will be acute later this year if the dispute continues and European countries can't replenish their stocks.

"If there's going to be a gas fight, now's the time for it, from Ukraine's perspective," said Steven Pifer, a former U.S. ambassador to Ukraine who is now at the Brookings Institution. But Russia's tactics will only redouble Europe's efforts to find other sources of energy.

"To the extent that Russia raises questions about its reliability as a gas provider, the more it raises interest in Europe in finding alternate sources" of gas, Pifer said.

In the short term, Kiev's energy options are limited. It can get gas from other European countries, such as Hungary, Poland, and Slovakia, but that would meet less than half its annual demand. And there are few other alternatives: Plans to build a terminal to import liquefied natural gas via tanker were revived after the energy fight with Moscow heated up earlier this year, but the country can't import LNG until it is finished.

Many U.S. lawmakers have touted the prospects of tapping the U.S. energy boom to supply friends in Europe and Asia with cheap energy. "This act of aggression further escalates the need for the U.S. to increase its exports of liquefied natural gas to our NATO and European allies," said Rep. Michael Turner (R.-Ohio).

But the United States won't be able to export meaningful volumes of gas until close to the end of the decade. And even if it can ship out enough, LNG is more expensive than Russian gas sent to Europe by pipeline.

Dmitry Serebryakov - AFP - Getty

Report

Revenge of the Kurds

As ISIS rolls toward Baghdad, the Kurds are gaining oil, ground, and power.

Amid the rubble left in Iraq by the rampage of Islamist insurgents, one group seems poised to benefit: the Kurds. Baghdad's flailing response to the offensive launched by the Islamic State of Iraq and al-Sham opens the door to greater geographical reach for the Kurdish region, greater leverage over the central government, and a stronger possibility of becoming a big energy exporter in its own right.

The Islamist insurgents, known variously as ISIS and ISIL, continued their drive south toward the Iraqi capital on Thursday after having captured key northern cities, including Mosul. No less vigorous has been the Kurdish response: In sharp contrast to the Iraqi military forces, which evaporated despite outnumbering ISIS fighters, Kurdish military forces on Thursday took Kirkuk, an important city straddling the Arab and Kurdish parts of Iraq and the centerpiece of the northern oil industry. The Kurdish occupation, in a matter of hours, of a city that has been a bone of contention between Arabs and Kurds for centuries -- and especially during Saddam Hussein's rule of Iraq -- underscores how dramatically the ISIS offensive is redrawing the map of Iraq.

"This may be the end of Iraq as it was. The chances that Iraq can return to the centralized state that [Prime Minister Nouri] al-Maliki was trying to restore are minimal at this point," said Marina Ottaway, a Middle East specialist at the Wilson Center.

The contrast between robust security in Kurdish-ruled parts of the country and the security vacuum left by fleeing Iraqi troops could ultimately roll back decades of Iraqi history and put Kurdish leaders in Erbil in the catbird seat, especially when it comes to a contentious tug of war over energy resources.

"The strategic failure of Iraqi forces has really shifted the entire balance of power between the Kurdish Regional Government and Baghdad," said Ayham Kamel, Middle East director at the Eurasia Group, a risk consultancy. "It really allows the KRG to negotiate with Baghdad on entirely different terms" when it comes to a fight over the Kurds' right to export oil directly.

For years, Kurds in northern Iraq sought to benefit more from the region's abundant oil and gas resources, but energy exports were centralized in Baghdad, with export revenues shared among Iraq's regions. Kurdish leaders argued that the deal shortchanged them because they never got the 17 percent of revenues they were promised.

As a result, the Kurds decided -- in the face of a barrage of threats and intimidation from Baghdad -- to build their own energy-export infrastructure, enabling them to transport oil directly to nearby Turkey. That pipeline opened this year and energy firms operating in the region say that it will be fully operational later this year. Getting the export pipeline up to cruising speed is important for the Kurdish government. It needs to export about 450,000 barrels of oil a day to earn what it received from the central government. By the end of next year, the KRG hopes to be exporting as many as 1 million barrels a day.

But just recently, Baghdad seemed capable of crushing Kurdish energy dreams. Only hours before the ISIS offensive began, Iraqi officials were vowing to take the dispute to the United Nations. The legal uncertainties surrounding Kurdish oil kept it from flowing easily to new buyers. For example, a pair of tankers loaded with Kurdish crude wandered around in search of a port in May and June. U.S. officials long sought to push Erbil and Baghdad into an agreement over how to divvy up the nation's energy wealth and tried to discourage the Kurdish government's go-it-alone stance.

All that looks like history now. Turkey, the main market for Kurdish oil, is both eager to lock up new sources of energy and to promote some pocket of stability on a troubled frontier. Given that ISIS rebels, for now, have not launched any attacks inside Kurdish-ruled areas is a comfort to officials in both Erbil and Ankara.

"Economics is totally on the side of independent Kurdish exports. And politics is shifting as well," said Ottaway. "Things are definitely going in the right direction for Kurdistan, as long as ISIS leaves them alone."

Kurdish officials hope the contrast between the ineffective and often sectarian Iraqi forces and Kurdish-governed areas' relative security and stability will enhance the region's appeal and boost export potential.

"The events in Iraq have proven to the international community who can be reliable and competent partners, and a source of energy," said Karwan Zebari, the director of the Kurdish Regional Government's representation in Washington, D.C. He said the KRG is committed to a unified Iraq and doesn't seek independence.

The Kurdish occupation of Kirkuk, to forestall an attack by ISIS in the absence of any Iraqi military units, could further shift both the political dynamics inside Iraq and change the shape of the country's energy sector. That's because, given Baghdad's other pressing priorities, it may well prove difficult for the central government to reassert control there.

"They're capitalizing on a moment of weakness to create facts on the ground," said Kristian Coates Ulrichsen, a Middle East specialist at Rice University's Baker Institute. He said the fluid situation could revive the decade-old idea of partitioning Iraq into separate ethnic and political spheres. "This carve-up may just happen on the ground, as different groups take advantage of the vacuum of authority."

Kurdish control over Kirkuk, and the massive oil fields found nearby, could have a ripple effect on the rest of Iraq's oil industry, Eurasia Group's Kamel said. That is, the Kurdish-style oil contracts, which offer foreign firms a share of the oil, could displace the less attractive Iraqi-style contracts at those mammoth fields.

"The KRG could actually push its interests and dictate terms for future contracts at the Kirkuk field; it wouldn't just be the central government dealing with that," he said.

Whether the Kurds come out stronger from Iraq's harrowing battle against extremists depends on how well they insulate themselves from violence and instability.

"The question now is whether Kurdistan can remain an oasis of stability despite the turmoil around it. If it does, its oil future is huge -- it now controls Kirkuk and its fields and oil exports could increase immediately," said the Wilson Center's Ottaway.

Marwan Ibrahim - AFP - Getty