Nord Stream pipeline gives Russia edge in European gas wars

Moscow has a new trump card in its recurring conflict with Ukraine over the price of gas and transit fees for using Ukrainian pipelines, which has caused two crippling shutdowns of Russian gas to customers in western Europe over the past decade.

It's called Nord Stream, a $12 billion pipeline under the Baltic Sea, that began this week delivering Russian gas directly to Moscow's primary customer, Germany. The new route threatens to render obsolete the vast Soviet-era pipeline networks owned by unpredictable "transit states" like Ukraine and Belarus, and potentially multiplies Moscow's leverage in future dealings with them.

Prime Minister Vladimir Putin threw the switch at a pumping station in Vyborg, Russia, on Tuesday, to send the first gas surging into the system. He couldn't resist taking a crack at Ukraine, which is currently disputing a 2009 contract with the Russian state-run gas giant Gazprom that makes it pay European prices, and at Belarus, which has also played pipeline politics against Moscow in a bid for cheaper gas.

"Any transit country has always the temptation to take advantage of its transit status," Mr. Putin said. "But that exclusivity is now disappearing." In a political meeting earlier, Putin railed against the "dictate of the transit states."

Pipeline politics

The Russian plan is to eventually send all of its gas to Europe via a triple-threaded Nord Stream, which is as yet far from completed, and a second major pipeline under the Black Sea, South Stream, which is still on the drawing boards. Until the new routes are completed, Russia will remain dependent on the old pipelines to maintain its lucrative gas contracts with European countries, which add up to about a quarter of the EU's entire gas supply.

"All the political rhetoric aside, Gazprom cannot do without Ukraine and Belarus for the time being, so the situation isn't as lopsided as it might appear," says Mikhail Krutikhin, an expert with Russian Energy Weekly, a Moscow-based trade publication. "The Ukrainians don't want another gas war with Russia, but they're angry over having to pay extremely high prices for Russian gas. Just like many other customers, they want to renegotiate the rate."

Ukraine currently transports about 80 percent of Russian gas exports to Europe, and even when completed next year, Nord Stream will only be able to cut that amount by about a third.

Ukraine also remains dependent on Russia for about two-thirds of its own natural gas supplies. Under a controversial 2009 deal between Putin and then-Ukrainian Prime Minister Yulia Tymoshenko, Ukraine now pays prices that Ukrainian officials claim are higher than those paid by Germany – and they are locked in for nearly a decade.

Ms. Tymoshenko is currently facing a criminal trial in Kiev on charges that she colluded with Putin in striking a bargain that was detrimental to her country's interests.

Ukrainian President Viktor Yanukovych has vowed to renegotiate the contract, but Kremlin leaders insist they will not do so unless Ukraine offers major economic concessions, such as joining a Russian-led customs union or selling the state-owned Naftogaz gas company to Russia's Gazprom.

"Passions are running very high in Ukrainian-Russian gas relations, and now that Nord Stream has started up it looks like a big advantage for Gazprom and Russia," says Andrei Polishchuk, an analyst with the Moscow-based financial brokerage Broker Credit Service. "In the first stage, Ukraine could lose a quarter of the gas it pumps to Europe via its pipelines, which means a considerable loss of transit fees."

But, he adds, Russia's conditions for price relief will probably be unacceptable in Kiev. "If Gazprom is granted access to Ukraine's pipeline system, there is a fear that Russian political and economic leverage over Ukraine will grow. If Ukraine joins the Russian customs union, it will rule out integration with the EU, which is Ukraine's strategic goal. So, if there's no compromise with Russia, Ukraine will likely launch legal procedures in international courts."

In an interview with Kiev's Kommersant-Ukraine daily Monday, Mr. Yanukovych complained that Russian gas prices threaten to bankrupt his country. "We would like to understand what we are being punished for," Yanukovych said. "We are overpaying about $5 billion to $6 billion annually. About 20 percent of our national budget is spent on Russian gas. We think that's not fair, and our economy can't sustain that price for long."

But Gazprom chief Alexei Miller dismissed Yanukovych's argument in an interview with Russian state TV the next day. "We have the impression that our Ukrainian partners got on a train called 'Cheap Russian Gas' and don't know what station to get off at, they don't know that they might be heading for a dead end," Mr. Miller said. "All that is in the contract has to be fulfilled right until it expires at the end of 2019."

Political panic in Kiev

The startup of Nord Stream has introduced a hint of political panic in Kiev. On Wednesday, Ukrainian Prime Minister Mykola Azarov warned that every Ukrainian household would have to participate in a crash energy-saving program to wean the country from the "curse" of Russian gas.

"We are asking our citizens to do their best to save energy," Mr. Azarov said. "Because in conditions this enslaving contract [with Russia], closed windows, draft-proof doors and the economical use of gas stoves have become a matter of patriotism and survival."

Some Ukrainian experts say the crisis could spell political doom for Yanukovych, who came to power pledging to repair relations with Russia after a long period of acrimonious ties under pro-Western former President Viktor Yushchenko.

"I know it's not very patriotic of me to say so, but Nord Stream is a great success for Putin. Russia's hands have been untied" in its dealings with Ukraine, says Oleksiy Kolomiyets, president of the independent Center for European and Transatlantic Studies in Kiev.

"Now there is near hysteria in Kiev, Yanukovych and his circle are in a very gloomy mood," he says. "All their levers of influence [with Russia] are disappearing. Yanukovych is increasingly isolated, and the political ground is shaking under his feet."