On January 14, Vladimir Putin ordered Russia’s natural gas monopoly, Gazprom, to cut back by 60% the natural gas delivered to Europe through Ukraine. His ostensible reason: Ukraine was illegally siphoning off gas for its own use—a charge Ukraine denies. Overall Europe depends on Russia for 30% of its gas supplies, and some 80% of Europe’s Russian natural gas comes via Ukraine. Putin’s order would leave six countries in eastern and southeastern Europe totally without gas.
Gazprom announced that it will instead ship gas previously transiting Ukraine to the Greek-Turkish border via a Black-Sea underwater pipeline. Gazprom’s CEO brushed off European objections that it has no infrastructure to handle such shipments, stating that “We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border.” In other words, Europe must undertake a massive infrastructure investment to replace a well-functioning transmission system, just for Putin’s convenience.
European Energy officials issued the following angry statement: “Without prior warning and in clear contradiction with the reassurances given by the highest Russian and Ukrainian authorities to the European Union, gas supplies to some EU member states have been substantially cut.”
Putin’s out-of-the-blue order went largely unnoticed due to the tragic events in Paris and Switzerland’s sudden decision to float its currency, but it prompted emergency negotiations between Gazprom and European energy officials.
The initial reaction from those paying attention was that Putin was bluffing. As the European Commission’s vice president for energy union told reporters, “The decision makes no economic sense.” Russia’s European natural gas sales were already plummeting before Putin’s dramatic announcement. Russia is desperate for hard currency earnings as sanctions exclude it from credit markets; its major companies face huge debt refinancing; Russia’s currency reserves are collapsing; the economy is heading towards a deep recession; and the ruble is hitting new lows.
So far, however, Putin is making good on his bluff. Ukraine’s Naftogas reports that it has been completely shut off along with six countries of eastern and southeastern Europe. Among them, Bulgaria claims it has only a few days’ supply.
Why is Vladimir Putin committing what many would think is economic suicide? By arbitrarily cutting gas supplies to six European countries and threatening the rest with severe cutbacks, he is surely destroying what was once Gazprom’s monopoly over the European gas market. As Europe’s chief negotiator declared in frustration, “We don’t work like this.” The loss of the European natural gas market would be a financial blow from which Russia could scarcely recover, and it almost insures the issuance of a charge of monopoly behavior against Gazprom, when the European anti-monopoly commission reports in June.
The only possible economic rationale for Putin’s move is that it creates so much economic uncertainty that the prices of oil and natural gas rise. If this is his plan, it would have only a short-term effect that cannot offset the long term of losing the European market. Moreover, greater uncertainty will accelerate the capital flow from Russia and cause further losses in the ruble exchange rate. If uncertainty is Putin’s game, he will lose.
The most likely explanation is the “rat trapped in a corner” theory that Putin always is most dangerous when he is trapped. Low oil prices, sanctions, the collapsing economy, the fall in the ruble, the snub at the G20 in Australia, and the failure of his Novorossiya crusade have combined to motivate him to lash out with whatever weapons remain in his hands. Russia’s more sober minds within the ruling elite have to consider whether Russia can tolerate such erratic behavior from the man who sits atop the power vertical that he has created.