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Europe must face the terrifying reality of Putin’s energy blackmail

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As Europe looks on in disbelief as gas prices spiral out of control amid growing suspicions of Russian energy extortion, the Kremlin appears to have targeted two coveted geopolitical prices.

The first received extensive coverage in mainstream media and focuses on Moscow’s efforts to pressure EU officials to approve the controversial Nord Stream 2 pipeline by restricting supplies to Europe.

Many of those who initially doubted the Kremlin’s intentions have now puzzled when President Vladimir Putin himself recently proposed that his country could send 10% more gas to Europe once Nord Stream 2 is approved.

The second prize was much less discussed, but it goes straight to the heart of the fundamental disagreement between Russia and the liberal foundations of Europe.

When gas prices followed days of chaotic volatility throughout the summer, Putin criticized “Smart Alecs” in the European Commission for pushing through gas market reform and failing to sign long-term supply contracts.

Putin’s derogatory remarks brought nothing new. In fact, they merely echoed Russia’s old displeasure with the gas market liberalization of the EU, which former Gazprom chairman Dmitry Medvedev described as “the stupidest idea in modern economic history” back in 2006.

What is important is that Russia has now taken up the European energy crisis in order to put pressure on Brussels to rethink the structure of its energy markets, which were based on the same ideological pillars that underpin the whole bloc, namely free trade, competition and transparency.

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Moscow also found a similar opportunity in Moldova to force its pro-EU government and president to abandon the application of EU rules by limiting gas supplies just as temperatures begin to drop.

Moldova’s will to reform has been causing a stir for some time. As early as the summer of 2021, some European officials pointed out in private conversations that the country’s desire to integrate with neighboring Romania and Ukraine via market mechanisms was not well received in Moscow.

The disagreements culminated at the start of the heating season when Moldova was unable to sign a one-year supply contract with Gazprom and only received a one-month extension of the previous agreement that expired at the end of September. Within a few days, it was found that Gazprom covered only 67% of the estimated 90 million cubic meters of Moldova’s needs that month.

In public, officials said disagreements over the price of gas demanded by Gazprom, which Moldova refused to pay, and the settlement of debts and fines, which, according to Gazprom, amount to $ 709 million.

In the private sphere, however, Moldovan officials said Gazprom was also conditional on approving the unbundling of transfer activities from the vertically integrated incumbent, in which it has a majority stake to repay debt. Since Moldova is currently economically troubled, it is uncertain whether it will be able to repay the debt, let alone settle it by December.

The examples of the EU and Moldova show how Russia is now trying to reverse reforms that have lasted for years. This includes pushing for the reintroduction of long-term contracts for European consumers, seeking exemptions from competition rules for its own pipelines, including Nord Stream 2, and pressure on countries like Moldova to abandon EU-backed reforms.

Contrary to Putin’s assumption that Europe should secure natural gas better with long-term contracts than in the European spot markets, since the former would be four times cheaper, there is no guarantee that the price embedded in long-term contracts will always be lower than that on the spot markets. In fact, the exact opposite happened in 2020, when oil-indexed prices in long-term contracts, including Russian contracts, were higher than spot values, which had fallen to record levels.

Long-term contracts do not guarantee that buyers will always benefit from lower prices. However, they secure market share to manufacturers like Gazprom and at the same time prevent consumers from reacting quickly to market volatility. If anything, geopolitical risk, which in some cases has contributed to sharp price fluctuations from record lows in 2020 to record highs in 2021, should encourage companies to use the flexibility afforded by the markets to react quickly and efficiently.

In the past, long-term contracts such as the Ukraine agreement of 2010, according to which Gazprom granted a hefty price discount in return for the extension of the lease agreement for the Russian naval base in Crimea by Kiev until 2042, served to make buyers more vulnerable and dependent on Russia.

Russia’s insistence on exempting Nord Stream 2 from EU rules on competition, unbundling and transparency would have the same effect of securing control over delivery routes while denying the creation of competition or access to critical information that the exact incoming quantities follow European markets.

The latest developments make it clear that the energy crisis in the EU and Moldova is far from over. It is difficult to predict at the moment whether European politics will hold up and not give in to Russian pressure. If the coming winter is particularly cold, no politician wants to risk his career by giving up access to natural gas as a matter of principle.

However, what has happened recently in both Moldova and the EU shows that rather than deepening reliance on Russian gas, the European authorities should try to protect the current market structure and encourage further diversification of suppliers and fuels . Brussels must also immediately launch an investigation into the causes of the energy crisis and ensure that sanctions are imposed on all parties who may have contributed to it.

In the case of Moldova, the current crisis could prove to be a hidden blessing as it shocked policymakers into considering the possibility of buying gas from the Ukrainian and Romanian gas markets in accordance with European rules and practices. Putin did not intend that, but the spirit is already out of the bottle.

Dr. Aura Sabadus is a senior energy journalist writing for Independent Commodity Intelligence Services (ICIS), a London-based global news and market data provider for energy and petrochemicals, covering Eastern Europe, Turkey and Ukraine. You can follow her on Twitter @ASabadus.

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Image: Russian President Vladimir Putin speaks at a plenary session of the Forum of Russian Energy Week 2021 in Moscow’s Manezh Central Exhibition Hall. (Mikhail Metzel / TASS via REUTERS)

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