Russia and Ukraine: The Energy Angle Part 2

Prior to Russia’s invasion of the Crimea, the United States tried to re-engage Russia as a strategic partner in the Middle East. Moscow has at least one concrete interest that is the same as Washington: radical Islamic jihadism is a national security threat in Moscow. This fact created at least a modest synergy on outcomes in Syria to dismantle chemical weapons and was the basis for some of the optimism the Obama administration had about the Kremlin. As Michael Doran notes in an excellent analysis of the Obama administration’s initial approach to the reset with Vladimir Putin as a possible global partner, “In the dawning new era, Syria was seen by the White House as a prototype: a model for stabilizing the Middle East and containing its worse pathologies.” However, as Doran also notes, Putin exploited the opening to his advantage, leaving the White House now in a bind with its allies across the Middle East.

 In analyzing the future geopolitical aspects of the path forward for US foreign policy vis-a-vis the “Sambo-trained” Putin, the White House might be well advised to revisit the energy geopolitical aspects to the complex set of chess moves now required by Russia’s most recent actions. Russia has two material national security interests that relate to its internal stability that apply to the current geopolitical conflicts: thwarting Islamic Sunni jihadism near or inside its borders and keeping oil and gas prices high. The close US relationship with Saudi Arabia and Qatar have thus posed a large threat to the Kremlin, as either or both US allies could throw Moscow a knock-out punch and have in the past used these two levers. A sudden oil price collapse would most certainly be a dire blow to Moscow which depends on oil and gas revenues for over 50 percent of its budget and is already in a $20 billion debt repayment bind to China. Thus, it was in Putin’s interests to use the Syrian (and Iranian) negotiations to drive a wedge between the United States and its Gulf allies to try to remove any chance of a US-led Saudi-Qatari jihadist and/or oil price threat now and potentially forever. The United States, on the other hand, similarly needed to ensure that the oil-rich kingdom didn’t create a new energy coalition with Russia. The rise of America’s own prolific oil and gas resources is complicated that messaging.

It is probably no coincidence that President Putin picked up the telephone to call President Obama while the US leader was on a state visit to Saudi Arabia. A Saudi decision to temporarily flood the oil market to put Mr. Putin under pressure at the negotiating table would be something the Russian leader would certainly want to avoid. And presumably Qatar could debottleneck at its liquefied natural gas (LNG) facilities over time to add to that pressure on the natural gas side to make it harder for Russia to negotiate new contracts with China and others. Qatar was already negotiating with Croatia and Hungary about new LNG contracts prior to the Ukraine conflict.  And, Already, the recent landmark, natural gas-linked contract for Azeri natural gas exports to France’s GDF Suez based on European natural gas market prices instead of oil-linked terms has put Russian gas-giant Gazprom under increased pressure.  

A temporary drop in global oil prices would give the United States and its allies in Europe and the Middle East some tailwinds on the global chess board with Russia, both in Ukraine and in the Mideast. Both Moscow and Iran would find an easing in oil prices far more difficult to manage than the Gulf producers. US environmental supporters of President Obama might be unhappy but truly low oil prices this year would be unlikely throw off the US clean tech boom. The US emphasis on clean tech is even more important now as a long term strategy in the face of the threat of an energy weapon from Russia and growing instability in Venezuela and elsewhere. But the tech boom is likely to keep momentum, regardless of the price of oil. Energy efficient technologies in transport and electricity are already at an “inflection point,” as Hal Harvey so aptly notes, and President Putin has created a self-fulfilling prophesy to the benefits of alternative energy. Moscow single-handedly has demonstrated to the world that heavy reliance on petroleum supplies from Russia (and any other dictatorial regime that might have hostile interests to American and European consumers) is a mistake, no matter what the short term oil and gas price trend.

In the United States, virtually no oil is used to produce electricity and solar and distributed energy systems are already competing well, even in the face of low US natural gas prices. A drop in gasoline prices could, perhaps, hit hybrid car sales temporarily but consumers will not likely trust any short term reprieve at the pump when making a long term car purchasing decision. Also, gasoline taxes (used commonly by states to plug budget deficits) could be utilized to make advanced engine technologies remain desirable.

The United States needs to work with our allies in the Middle East and Europe to creatively tap energy geopolitics to rebalance an upper hand with Russia. It is certainly not in Saudi interests to have an emboldened Russia set the agenda in energy markets, Syria, Iran’s nuclear negotiations and the future of Europe. And, Brussels is smartly shuttling around to find means to alleviate the natural gas supply pressures in Ukraine and beyond. Washington should support those efforts and push for market liberalization. Finland and Estonia’s recent commitment to a new LNG import terminal at Inkoo and Paldiski is also likely a sign of things to come in diversifying Europe’s natural gas sources. Putin’s moves might also be just the driver needed to get more easily deployed floating storage and regasification units (FSRUs) off the ground. At least 2 to 4 FSRUs might be accessible this year and nine additional units are under construction. Europe also has high natural gas stocks to lean on in the short term from lower than expected demand this year.

Much ink has been spilled to highlight Europe’s lack of short term options but Moscow would be wise to remember the lessons of both 1973 and 2006. Markets have a way of correcting for politization and new technologies and trading patterns, once deployed, tend to stay in place.