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The Times: Putin wins the hearths and minds of Europe

December 27, 2006
Tony Halpin: Analysis

Vladimir Putin is entitled to take immense satisfaction from 2006. The year opened with Russia cast as the great gas ogre, embroiled in a bruising “cold war” over supplies to Ukraine that also threatened to dim the lights from Poznan to Paris.

As 2006 closes, the state monopoly Gazprom has become the energy giant that ate Europe, extending the Kremlin’s influence from the corridors of power to the kitchens of consumers. Add in his success in forcing Shell to hand control to Gazprom of Sakhalin-2, the world’s largest private oil and gas project, and Mr Putin can reflect on a year well spent. 
 
Europe depends on Russia for a quarter of its gas supplies, so Mr Putin can fairly claim to be responsible for warming the homes of millions of citizens across the continent. Hence his tone of injured surprise at international criticism of Moscow’s energy strategy, which he argues is based on mutual self-interest. Russia needs the markets, Europe needs the gas.

In reality, it isn’t that simple. Collectively, Europe has a chance of negotiating with Russia on equal terms. Individually, Russia holds the upper hand — Moscow can always find another buyer.

Russia’s closest neighbours know this very well. The row with Ukraine exposed how far Gazprom was prepared to go to enforce its terms — the sound of the taps being turned off reverberated across the European Union. This was the wake-up call that prompted the EU to regard Russia in a different light.

Belarus’s President Lukashenko imagined that he enjoyed a special relationship with Russia through his much-postponed plan for a union state. Mr Putin has disabused him of that notion by having Gazprom demand a fourfold increase in gas prices next year to $200 per 1,000 cubic metres.

The “incentive” — more a ransom — on offer is to cede ownership of half of Belarus’s network of pipes in return for a price reduction. Mr Lukashenko is said to be deeply offended at this betrayal of his loyalty.

But he cannot claim to have been surprised. At last month’s summit of former Soviet republics hosted by Mr Lukashenko in Minsk, Mr Putin made plain that Russia now sought “market-based relations in our dealings with all of our partners, without exception”.

Georgia’s difficulties with Russia run much deeper than energy, but Gazprom has adopted the same strategy: turn over your gas network or face a massive price increase, in Georgia’s case up from $110 to $235 per 1,000 cubic metres. This is about the same price paid in EU states, but by a country where the average income is $120 a month.

Georgia talked tough, insisting that it would seek alternative supplies, principally from neighbouring Azerbaijan, rather than submit to “blackmail”. But submit it did, agreeing last week to meet Russia’s price for this winter when it became clear that Azerbaijan could not meet Georgia’s needs.

Neighbouring Armenia buckled without a fight. It handed Gazprom control of a vital supply pipeline from Iran in return for holding down the price of gas until after Armenia’s next presidential elections in 2008. Thus, Russia strengthened its presence in the strategically important Caucasus while controlling Iran’s route to Europe as a potential gas competitor.

For Kiev, Minsk and Tbilisi today, read Berlin, Rome and Paris tomorrow. Turkey is even more dependent, relying on Russia for two thirds of its gas supplies.

Gazprom is awash with cash, making profits before tax of £8.9 billion in the first six months of this year alone. It aims to bolster earnings still further by using its market strength and financial muscle to gain direct access to western Europe’s consumers.

Gaz de France signed a new contract last week to extend Russian supplies from 2015 until 2030 in return for allowing Gazprom immediate access to homes and business consumers. Gazprom aims to sell 1.5 billion cubic metres a year, about 10 per cent of the gas it supplies to France.

A similar deal was signed in November with Italy, which relies on Russia for a third of its gas. Gazprom extended the supply contract from 2017 to 2035 in return for the right to sell 3 billion cubic metres directly to Italian consumers.

And what about Britain? Gazprom sparked a flurry of stock market activity earlier this year with rumours of a takeover bid for Centrica, owner of British Gas. That came to nothing, but deputy chairman Alexander Medvedev fanned the flames again last month by admitting that he would “never say no” to a bid as part of Gazprom’s acquisition strategy.

He set a target of gaining 10 per cent of the UK gas market by the end of the decade. An audacious swoop for Centrica’s 16 million customers, however, would be likely to draw a sharp political reaction from the British Government.

However strongly Mr Putin protests to the contrary, it is impossible to separate Kremlin strategy from Gazprom’s activities, now and in the future. The chairman of Gazprom’s board of directors is Dmitri Medvedev, first deputy prime minister and a leading contender to succeed Mr Putin as President in 2008.

Europe may be forced into uncomfortable compromises with the Kremlin on democratic reform and human rights by too close an embrace of the Russian bear over energy. Russia argues that what’s good for Gazprom will be good for Europe by ensuring stability of supplies in an unpredictable world.

Nervousness over the future in gas-rich Turkmenistan after the death last week of “Turkmenbashi”, the eccentric dictator Saparmurat Niyazov, illustrates how dependent Europe now is on far-away places to keep the lights burning at home.

The gamble across the continent is that Russian gas will prove the safest bet for Europe’s energy security, and not a political weapon with which to extract concessions.
 
http://www.timesonline.co.uk/article/0,,630-2519556.html

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