Rome BURNS: Berlusconi, Putin and a Natural Gas Pipeline

Robert Rand, BURN Editor

In Sochi, Russia, on a warm summer evening in August, 2005, Vladimir Putin, the Kremlin leader, stood on a pier overlooking the Black Sea with his friend, Silvio Berlusconi, the Italian Prime Minister. Their wives were with them, and the group had just enjoyed a sunset walk along the beach. The previous day, according to The Moscow Times newspaper, Putin had shown Berlusconi his new pony, which the Italian, casually dressed in rolled up sleeves and a sweater tossed over his shoulders, leaned over and petted as a smiling Putin stood nearby.

The two men liked each other, and their relationship reflected a longstanding bond between Italy and Russia. In the 15th century, Moscow claimed the title “Third Rome” after the fall of Constantinople. Peter the Great built St. Petersburg with the help of Italian architects. Myriad Russian writers found inspiration on the banks of the rivers Tiber and Arno. During a visit to Rome in 2000, Putin dedicated a monument to Alexander Pushkin, the great Russian poet.  “The level of our relations, including personal ones, is such that interstate problems just don’t exist,” Putin told Berlusconi, the Moscow Times reports.

south stream pipeline

The South Stream pipeline on its way through Bulgaria. (Photo: Gazprom)

Putin invited his friend to Sochi to talk about energy, in particular natural gas. The Russian presided over a resource rich country and wanted to increase his reach into European markets. The Italian wanted a reliable source of gas and contracts for energy companies back home. Negotiations ensued. Four years later, in 2009, Berlusconi returned to Sochi. Putin, seated behind the wheel of a black limo, picked Berlusconi up at the airport. Russia’s Channel One says Putin whisked him to a meeting where Italy joined a consortium of countries building a pipeline to the West that now runs more than 300 miles under the Black Sea.

Dubbed the “South Stream”, the pipeline, which is slated to start up next year, will bring Russian natural gas directly to Italy and elsewhere in southern and central Europe. It bypasses Ukraine, the transit state for a different Russian pipeline that currently provides the EU with much of its natural gas. Pricing disputes between Moscow and Kiev in 2006 and 2009 led Gazprom, the Russian state energy giant, to shut down that line, causing serious energy shortfalls in Europe.

If Putin was in the driver’s seat in Sochi in 2009, his control over EU gas exports looms even larger now in the wake of the crisis in Ukraine. The concern is that Moscow might manipulate EU and Ukrainian access to Russian gas if the West punishes Putin for his move into Crimea. The New York Times reported today that to offset Putin the U.S. wants to reduce Russia’s energy grip by exporting American shale gas to Europe, which would decrease EU dependence on Russian supplies. However, the New York Times says implementation is several years down the road since U.S. export terminals are still under construction.

The Russians charge EU countries a lot of money for natural gas. European gas prices are three times higher than in America, where, in contrast to Europe, there is a natural gas bounty thanks to fracking.  Fracking, or hydraulic fracturing, is the technology that injects a highly pressurized cocktail of fluids and substances into the ground to extract gas from shale formations.

Poland is set to become the first European country to start commercial shale gas production, according to Bloomberg. Britain, Romania and Ukraine are also interested, as is Italy. But environmental concerns have slowed the move towards fracking in Europe. Opponents, and there are many, say fracking’s mix of water and chemicals is toxic. France and Bulgaria have banned the technology, and Germany has a moratorium in place.

The Ukraine problem has made the debate over shale gas extraction more urgent. Europe must either “embrace shale gas or embrace Russia,” warned Paolo Scaroni, CEO of Eni, the Italian energy conglomerate that has partnered with Gazprom in the South Stream pipeline project.

Eni is collaborating with a Ukrainian company to explore and develop natural gas formations in Ukraine, which is thought to have some of Europe’s most promising shale deposits. Ousted Ukrainian President Viktor Yanukovych supported fracking, but some politicians in the movement that deposed him think differently, citing environmental concerns and corruption.

A few months before Yanukovych’s fall from power Berlusconi suffered his own high stakes drama. Last November, he was forced off the central stage of Italian politics when the Italian senate expelled him following a conviction for tax fraud.

Nicknamed Il Cavaliere (“The Knight”), Berlusconi left public service with a reputation for sexual indiscretion, corruption and wily political governance. Berlusconi’s sleight of hand allegedly involved the Kremlin. In December, 2010, Wikileaks published a cable from the U.S. embassy in Rome citing allegations by Italian politicians that “Berlusconi and his cronies are profiting personally and handsomely from many of the energy deals between Italy and Russia.”

Berlusconi denied these allegations, stating the U.S. clearly knows “that I have absolutely no interest in any other country; that there are absolutely no personal interests, and that I only look after the interests of the Italians and my country.”

In the weeks following Berlusconi’s ouster, The Times of London said Italian media reported that Putin thought about making his old friend the Russian Ambassador to the Vatican, a move that would have allowed Berlusconi to keep a diplomatic passport.

Interestingly, the crisis in Ukraine has boosted Berlusconi’s profile in Italy. In a move that generated publicity, the leader of Berlusconi’s political party, as well as the party’s newspaper, said that the current Italian government should dispatch Berlusconi to negotiate with Putin to defuse the Ukraine crisis. And Italian press reports said the U.S. Ambassador to Italy, John Phillips, lunched with Berlusconi earlier this week.

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Rome BURNS: Russia to raise Ukranian natural gas prices

Robert Rand, BURN Editor

Just around lunchtime today, Dmitry Medvedev, the Russian Prime Minister, sat down to chat with Aleksei Miller, the head of Gazprom, the Russian state gas monopoly.

“So how’s it going?” Medvedev began, according to a transcript of the conversation released by the Russian government. “Anything interesting happening? Anything good going on?”

“We’re exporting 162 billion cubic meters of gas to Europe,” Miller said, adding that in 2013 more than half of that volume flowed through pipelines that transit Ukraine.

The transcript didn’t say whether the men were smiling.

Moscow shut down those pipelines during a pricing dispute with Kiev in January, 2009, causing widespread wintertime fuel shortages in Europe during a time of peak demand.

Miller’s statement seemed designed to remind the European Community that it could happen again if the West, in response to Russia’s seizure of Crimea, leveled sanctions against the Kremlin.

The EU imports nearly a third of its natural gas requirements from Russia.

After a bit more chit chat from Miller, Medvedev got to the point of the meeting.

“So let’s talk about current events,”  Medvedev said. With theatrical understatement he continued: “How are relations with Ukraine? Are there any new problems going on, or is everything as it was in the past?”

Following the revolution in Maidan square, of course, very little between Ukraine and Russia remains the same except for the fact that the Kremlin supplies Kiev with some 70 percent of its natural gas requirements. Russian President Vladimir Putin cut the price of that gas by nearly one-third late last year in a deal that convinced the deposed Ukrainian president, Viktor Yanukovych, to step back from establishing closer economic and political ties with the EU. That move triggered the political revolt that sent Yanukovych fleeing to Russia, where he remains.

Miller went on to tell Medvedev that Ukraine, whose economy is crashing, is 1 billion 529 million dollars behind in its natural gas payments to Russia.  “Ukraine hasn’t fulfilled its obligations,” Miller said. “Gazprom has decided not to extend the subsidy beginning the first of next month.”

Medvedev was ready with a reply.

“He who doesn’t pay his bills must understand that there will be negative consequences,” he said.

The Russian prime minister and Gazprom chief executive met in a town called Gorky, outside Moscow. Gorky means “bitter” in Russian. It’s not clear whether the venue was intended deliberately to underline the Kremlin’s mood regarding developments in Kiev.

Afterwards, the Russian government’s Twitter feed reported the news:

pravitelstvo_logo

Правительство России ‏@Pravitelstvo_RF  5h

«Газпром» с апреля отменит льготы на газ для Украины в связи с неисполнением Киевом обязательств по контракту http://bit.ly/1eQpHeU

 

“From April Gazprom will curtail favorable gas pricing for Ukraine in connection with Kiev’s failure to fulfill contractual obligations,”  the tweet said.

Just as this registered on social media, U.S. Secretary of State John Kerry was in Kiev, voicing Washington’s support for the new Ukrainian government and, as the saying goes, putting money where his mouth is. Kerry offered 1 billion dollars in loan guarantees to help offset the price rise in Russian gas.

In related economic news, the ruble fell to a record low against the dollar yesterday in reaction to developments in Ukraine.  With more value for the American currency, it would be a good time to visit Russia if you were inclined to do so.

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Rome BURNS: The Ukraine-Russia Conflict Flows out of an Energy Pipeline

Pipeline mapRobert Rand, BURN Editor

In Europe, during the sub-zero winter of 2009, a nasty energy pricing dispute between Moscow and Kiev prompted Vladimir Putin, the Kremlin leader, to cut off natural gas exports to Ukraine, which receives 70 percent of its gas from Russia.

On the sidelines of that quarrel stood the rest of Europe, which depends on Moscow for nearly a third of its natural gas requirements. Since 80 percent of that gas flows through pipelines in Ukraine — pipelines that were decommissioned by Putin’s action — much of central Europe was affected, with supplies either reduced or completely cut off at a time of peak demand. It was the European Union’s worst ever energy crisis.

“It’s freezing cold outside,” one resident of Sarajevo, Bosnia-Hercegovina, told the BBC at the time. “Our gas heating stopped working…. We wear as many clothes as we can and wrap ourselves in blankets.”

“We are beginning to feel the effects of the gas cut-off,” said a man in Budapest, Hungary. “Now it’s cold inside as well as outside….  Last night we called a repairman about the heating but he said that he is getting calls from everyone and there’s nothing he can do about it.”

Now, five years later, Moscow and Kiev are at it again, this time with loaded pistols.  The revolution that toppled Ukraine’s pro-Russian leadership ostensibly caused the faceoff. But behind the current conflict — behind the rapidly breaking news of troop movements and threats of war — is an energy security problem that could again entangle all of Europe if the Kremlin decides to lash out.

The reason: Russia remains a Goliath-like provider of natural gas to Ukraine, and to a lesser extent, to the West. In other words, Vladimir Putin controls a rather large on/off energy button. If so inclined he could use it.

Here in a nutshell is what’s at stake, neatly articulated by Edward Goldberg, a professor at Baruch College, in an interview with thefiscaltimes.com:

“The reality today is that Russia supplies 31 percent of EU gas imports, 27 percent of crude oil imports, 24 percent of EU coal imports, 30 percent of total EU uranium imports, and is the EU’s third-largest supplier of electricity. In turn, the EU is not only easily Russia’s largest trading partner, but it is the market for 88 percent of Russia’s oil exports, 70 percent of its gas exports, and 50 percent of its coal exports.”

It’s worth remembering that energy was the point man in the ongoing Russia-Ukraine affair. Late last year, Kiev was prepared to move closer to the EU, economically and politically. That was a popular idea in much of  Ukraine. But Russia, whose interests in Ukraine go back many centuries, objected. Putin wooed Kiev by promising to reduce the price of natural gas by a hefty one-third. Ex-Ukrainian president Viktor Yanukovych agreed and pivoted away from the EU. That’s when the revolution found its footing and Maidan rose to the level of Tiananmen as one of history’s most famous squares. Within two months, the pro-Russian Yanukovych was gone. And the EU was voicing support for the government that replaced him.

The Kremlin has accused the EU of seeking a sphere of influence in Ukraine.  As of this writing, nobody in Putin’s camp has publicly threatened to retaliate by cutting off EU energy access. But over the weekend, as Moscow seized control of Ukraine’s Crimean peninsula, a spokesman for Gazprom, Russia’s state gas company, warned that Kiev is likely to lose the gas discount promised by Putin. Another Russian energy official said it would be “stupid” to extend the discount under current conditions.

If developments in Ukraine continue to escalate and the EU and U.S. respond with sanctions against Russia, it’s possible that Moscow could shut down the pipeline of energy exports to Europe as it did in 2009. Since that time, however, thanks in part to the growth of U.S. shale gas production, there are alternate gas suppliers around, and a Russian cutoff probably wouldn’t sting as much.  But if Vladimir Putin does use the energy weapon against the West, memories of that cold winter five years ago will fade in the face of something that will look more like another Cold War.

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