Russia, Europe, China, and Energy

On June 4, at the Center for the National Interest, Edward C. Chow, Senior Fellow in Energy and National Security for Center for Strategic and International Studies, and Andreas Goldthau, Visiting Scholar at Harvard University, shared their perspectives on European energy security after the Ukraine crisis. Paul Saunders, the Center’s Executive Director, moderated the event.

Event Summary

At the Center for the National Interest on June 4, two leading energy experts expressed skepticism that the United States could substantially assist Europe in reducing its energy dependence on Russia through increased U.S. exports of natural gas. Edward Chow, Senior Fellow at the Center for Strategic and International Studies, and Andreas Goldthau, a Visiting Scholar at Harvard University’s Belfer Center for Science and International Affairs, each argued that America was unlikely to provide gas to Europe in sufficient quantities to fundamentally change its energy relations with Russia. Paul Saunders, the Center’s Executive Director, moderated the event.

After describing Europe’s reliance on Russia for 30% of its gas supply, Chow added that Russia depends on Europe for more than 80% of its gas exports. As a result, he said, the relationship is one of mutual dependence that will be difficult for either side to escape. Eventual U.S. exports of natural gas are unlikely to reach levels that would significantly change this relationship. Moreover, Chow explained, American exporters would likely be more interested in sending natural gas to Asia—where prices are higher and profits will be greater—than to Europe. Chow was doubtful that planned terminals to unload and re-gasify imported liquefied natural gas (LNG) would be a worthwhile investment for Poland and other governments considering them; Europe already has considerable unused LNG import capacity. Goldthau agreed, further stating that many of the European nations most dependent on Russian gas (such as Bulgaria and Hungary) remain so because they are unattractive to foreign investors.

Russia and Ukraine are also interdependent, Chow continued, because notwithstanding Ukraine’s heavy reliance on Russian gas, Russia transits a large share of its energy exports to Europe through Ukrainian pipelines. Thus, even as Moscow has sought to use energy prices as leverage in dealing with Kiev, Kiev has attempted to employ its geography as leverage vis-à-vis Russia. Russia’s gas monopoly Gazprom has sought to reduce this reliance on Ukraine’s pipelines by developing alternative pipeline routes, such as the Nord Stream pipeline that connects Russia directly to Germany under the Baltic Sea. Chow argued that the most important steps for Ukraine in reducing its energy dependence on Russia are pricing reforms (domestic natural gas prices are heavily subsidized), improvements in energy efficiency, and efforts to combat corruption in Ukraine’s energy sector.

Goldthau supported Chow’s analysis of European energy markets, adding that the European Union can be far more effective in reducing Russia’s energy leverage through internal EU policies, including the construction of interconnector pipelines to unify the continent’s fragmented national natural gas markets and adaptations to allow for reverse flow in some of the pipelines (for example, so that Ukraine could receive gas deliveries from the west in a crisis). Even more important, Goldthau said, would be the EU’s competition policy—the so-called “third energy package”—which could be a powerful instrument in dealing with Gazprom. [The third energy package would prevent Gazprom from both producing and transporting natural gas, thereby weakening its market power.]

Goldthau stated that the European Union would be extremely unlikely to support U.S. “sectoral sanctions” targeting the Russian energy sector because of Europe’s heavy dependence on Russia’s energy and the potentially high economic costs of disrupting the EU-Russia trading relationship. EU-Russia trade is over ten times greater than U.S.-Russia trade, he said, which gives Washington limited influence and credibility in calling for tough European action. The most effective sanctions would probably focus on Western oilfield services companies, he said, because over 40% of Russia’s federal government budget revenue comes from the oil sector, while only about 8% comes from natural gas. This could slow Russia’s extraction of oil but not stop it, however, and would serve primarily to “increase the cost of doing business” for Russia and decreasing the “rents” that Russia’s elites can extract from the energy sector. Saunders pointed out the dangers of attempting to shut down Russia’s energy sector, recalling that the United States last attempted to collapse another major power’s energy sector in the summer of 1941 in an effort to stop Imperial Japan’s aggression in east and southeast Asia. The policy did not succeed and, Saunders said, Moscow would likely view any similar approach today as an act of war.