How Russia is leveraging the Greek debt crisis

The Greek debt crisis is sowing divisions in Europe, Nick Cunningham writes, and that could be to Russia's advantage.

With Greece’s debt situation spiraling downwards, the European project is showing some cracks. The July 5 referendum could amount to a vote on whether or not Greece stays in the euro.

In the meantime, the turmoil offers an opportunity for Russia to advance its interests. Of course, the EU is an absolutely critical trading partner for Russia, so if the bloc starts to fray at the seams, that presents financial risks to an already struggling Russian economy. Russia’s central bank governor Elvira Nabiulllina warned in June of the brewing threat that a Greek default would have on Russia.

“We do consider that scenario as one of possible risks which would increase turbulence in the financial markets in the European market, bearing in mind the fact the European Union is one of major trading partners, and we are definitely worried by it,” she said in an interview with CNBC.

With the economic fallout in mind, Russia does see strategic opportunities in growing discord within Europe. First, Russia is pushing its Turkish Stream Pipeline, a natural gas pipeline that it has proposed that would run from Russia through Turkey and link up in Greece. From there, Russian gas would travel on to the rest of Europe. Russia is vying against a separate pipeline project that would send natural gas from the Caspian Sea through Turkey and on to Europe. (Related: Current Oil Price Slump Far From Over)

In mid-June, Alexis Tsipras met with Russian President Vladimir Putin at the St. Petersburg International Economic Forum. Russia and Greece signed a memorandum following the meeting to push the project forward. Russia’s energy minister Alexander Novak emphasized that Gazprom would not own the section of the pipeline on Greek territory, a crucial fact that avoids heavy antitrust scrutiny from EU regulators.

With an eye on the looming default, Russia agreed to finance the project, and Greek officials portrayed the project as economic assistance amidst its ongoing debt crisis.

 

The pipeline remains in limbo. Despite Russian insistence that construction could begin in 2016 and be completed by 2019, the 2 billion euro project does not have firm commitments from Turkey, and it also still faces opposition within Europe, which is trying to wean itself off of Russian gas.

But with Greece’s debt crisis hitting new lows, there remains the possibility that Russia could come to Greece’s aid if the latter starts to pull away from Europe. And Greece has tried to use a potential turn towards Russia as leverage in talks with Europe. (Related: Top Shale Takeover Targets)

To be sure, a Russian bailout for Greece is probably not in the cards, given Russia’s own financial troubles. And both Russian and Greek officials stressed that they did not discuss direct financial assistance when they met in June. Still, there are mutual benefits for both Russia and Greece in highlighting their relationship.

Another way that Russia may be benefitting from the unravelling of Greece is the fact that the attention of European officials and the media have been diverted away from Gazprom’s latest maneuver in Ukraine. The Russian company cut off gas supplies to Ukraine, citing a pricing dispute. Gazprom slashed the discount that it provided to Ukraine for importing its gas, and without prepayment upfront from Ukraine, the Russian company has stated it will not supply gas.

That is not the first instance in which Russia has turned off the taps, having done so in 2006 and 2008 as well. Russia cited pricing disputes in those cases as well. But those prior events also took place during a brutally cold winter, leaving parts of Eastern Europe to freeze. The message was clear: fall in line, or we will cut off your energy supplies. (Related: Oil Faces Steep Downside Risk From China’s Stock Market)

Of course, that sparked outrage in European capitals, leading to calls for greater European energy security. But after years of little progress, the conflict in Ukraine in 2014 kicked of a new era of icy relations between Russia and Europe, and renewed calls for energy independence from Russia.

One would think that Russia once again cutting of gas flows to Ukraine would certainly raise howls across Europe, but the Greek crisis is sucking all of the air out of the room and crowding out media attention. The fact that the latest incident took place during summer and not winter helped damp down a European reaction, and Russia was careful to insist that Europe would not be affected. But the incident has passed with much less of a reaction than one might have thought.

There are huge financial risks to Russia from chaos in the Eurozone, and the longer the crisis drags out the more likely there could be economic fallout for Russia. But Putin no doubt sees a silver lining in collapsing European unity.

By Nick Cunningham of Oilprice.com

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