Russia Just Made A Bold Move To Keep Its Gas Leverage On Europe

On Wednesday Russia's announced that it will shift all its natural gas flows to Europe via Turkey, instead of Ukraine, reports Bloomberg News.

"...the Turkish Stream us the only route along which 63 billion cubic metres of Russian gas can be supplied, which at present transit Ukraine. There is no other way," the head of Gazprom Alexei Miller said.

The European Union's energy chief said that this would hurt Russia's reputation as a supplier, and the European Commission's VP for energy union said that the decision makes no economic sense, according to Bloomberg.

However, the move makes sense when considering that Russia has been increasingly losing its control over the European gas market after changes in European policy and warmer winters.

Basically, Europe will be forced to link up to Russia's planned energy pipeline to Turkey - or it will lose Russian gas. 

 "Our European partners have been informed of this and now their task is to create the necessary gas transport infrastructure from the Greek and Turkish border," Miller added in a Gazprom statement.

It unclear what the project will cost Russia (or Europe), although the new deal includes terms stating that Turkey will receive a 6% discount on gas imports for 2015.

Kremlin-funded RT says Moscow will use funds and materials intended for the original South Stream project to build the new Black Sea pipeline.

Europe Forced The Hand

Back in 2009 the European Union passed the Third Energy Package, which said Russia could not both own and control pipelines on the EU territory. (Russia filed a lawsuit with the World Trade Organization against the EU over this in April, after the first rounds of Western sanctions.)

Additionally, the EU has been putting taxpayers' money into new inter-connectors, so if Russia decides to cut off supplies, the affected countries can still get gas from somewhere else, according to The Economist. 

This is a major move because in the past Russia punished countries by cutting off gas.

Ukraine's gas was shut off for six months in 2014, as well as at times in 2006 and in 2009, and Latvia and Lithuania were punished by Moscow "for their alleged mistreatment of Russian minorities or for awarding refinery or construction contracts to European rather than Russian companies."

The Economist also cites the following changes in Europe: 

• Lithuania started importing liquefied natural gas from Norway.
• Ukraine is importing more gas from the West.
• The EU has brokered a deal on debts and prices between Ukraine and Russia, which will keep gas going to Ukraine at least for the first quarter of 2015.

To cap things off, in December lack of funds forced Russia to cancel the South Stream pipeline to supply gas to Europe without crossing Ukraine.

Russia's Hegemonic Control Over Gas In The Past

Back in late November, Putin coolly noted that "winter is coming," and thus he was "sure the market will come into balance again in the first quarter or toward the middle of next year."

What he meant by that was that cold weather is great news for the Russian economy because Europeans would have to import more oil and natural gas.

"It is the power of colder weather that allows Russia, as the key supplier of energy to Europe, to apply leverage. That leverage can take the form of higher prices, restricted volumes, a combination of both, or negotiations that directly or indirectly affect these additional costs," Cumberland Advisors Chair David Kotok wrote in August.

Russia provided one-third of the natural gas that European countries relied on both for heating their homes and running industries. Because Russia played such a huge role in the gas market, it was able to command high prices.

But the European winter is pretty mild this year, The Economist notes, so "even if Russia did try to interrupt supplies, the effect would be modest."

Russia's Future Game Plan Outside Of Europe

Russia has been publically exploring energy (and military) relationships with countries outside of Europe - most notably China and India.

In May, Russia's Gazprom and China National Petroleum Corp. (CNPC) signed a historic 30-year contract to supply natural gas to China.

Putin met with India's Prime Minister Narendra Modi near the end of 2014, and they agreed to several energy deals. Russia invited India to "work on projects" in the Arctic. 

"Rosneft and Gazprom, our biggest companies, together with their Indian colleagues, are preparing projects for the development of Russian-Arctic [and] the expansion of liquefied gas," Putin said. 

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