Russia’s next front: Energy

TBILISI, Georgia – Russia exerts its aggressive, ever-growing confidence on the global stage in many ways. The starkest example has been its relentless campaign of bombing raids and troop incursions into its tiny southern neighbor, U.S.-allied Georgia.

But at a time when its relations with the West are at their iciest in years, the Kremlin is increasingly flexing its geopolitical might with another weapon few could have imagined during the decades-long Cold War: pipelines, conduits of energy and clout that Russia is deftly maneuvering in pincerlike fashion around Europe.

Emboldened by sky-high oil prices and its renewed status as a force to be reckoned with on the world stage, Russia wants a stranglehold on Europe’s energy market, analysts say, and is pursuing that aim through a cordon of natural gas and oil pipelines that would make America’s NATO allies heavily dependent on the Kremlin for hydrocarbons.

That dependence worries U.S. allies in Europe because Russia has shown its willingness in the past to use its energy wealth as a political weapon.

Russia’s actions last week in Georgia loom as a potential threat to the West’s reliance on the small Caucasus nation’s role as a transit point for Caspian Sea energy heading to the U.S. and European Union countries.

Georgian authorities claim Russian bombing raids have targeted the BTC pipeline that carries oil from Azerbaijan through Georgia before it is shipped by tankers at the Turkish port of Ceyhan. As a result, the pipeline remains shut down by British Petroleum, its operator. Russian officials have denied Georgia’s charge.

Corridor concerns

And analysts say the conflict in Georgia may jeopardize the West’s hopes of establishing a new energy corridor from Azerbaijan and through Georgia that would carry natural gas to European markets.

“This conflict doesn’t bode well for the West in terms of energy supply diversification,” said Valery Nesterov, an energy analyst at the Moscow-based Troika Dialog investment bank. “Potential suppliers now will more seriously consider the risks of Georgia as a transit nation for energy.”

Well before violence erupted in Georgia, the Kremlin had been engineering a chokehold on Caspian Sea and Central Asian energy through its aggressive push to establish a pipeline monopoly around Europe.

In recent months, Russian leaders and executives with the country’s state-owned natural gas monopoly, Gazprom, have made a flurry of visits to North Africa and energy-rich Caspian Sea countries to stake out new claims on oil and natural gas destined for Europe.

In Libya, Gazprom leaders have discussed buying all of that country’s future oil, natural gas and liquefied natural gas designated for export, and talked about teaming up to build a new natural gas pipeline to Europe.

In the Central Asian nations of Kazakhstan and Turkmenistan, and in U.S. ally Azerbaijan, Russian leaders have dangled the prospect of paying market, rather than heavily subsidized prices, for natural gas, a move that would ensure Russia’s role as middleman in the sale of the region’s energy resources to Europe. Russia has been paying subsidized prices for Central Asian gas because of its deep ties with Central Asian nations that were once Soviet republics.

“While the Europeans have been trying to figure out how to proceed, the Russians have been cutting deals,” Zeyno Baran, director of the Hudson Institute’s Center for Eurasian Policy, said in an interview.

“The question for Europe and America is, do we want a Russian monopoly to have that much control … We can’t ignore that there’s a symbiotic relationship between Gazprom and the Kremlin. Gazprom is more than a commercial entity – it’s directly related to Kremlin foreign policy.”

Political bludgeon

Underlying Europe’s wariness of being too dependent on Russia for energy supplies is the Kremlin’s history of using its natural resources wealth as a political bludgeon when consumer nations rankle Moscow. Europeans still remember the row between Ukraine and Russia over natural gas prices that resulted in a plunge in natural gas supplies to European countries in 2006.

More recently, Czech leaders accused the Kremlin of deliberately curtailing Russian oil supplies to the Czech Republic in July, in retaliation for Czech support of the proposed U.S. missile defense system in Eastern Europe, a system Russia vehemently opposes.

“Gazprom’s monopoly-seeking activities cannot be explained by economic motives alone,” U.S. Sen. Richard Lugar, R-Ind., wrote in an opening statement submitted to a Senate Foreign Relations Committee hearing this summer. “Clearly Gazprom has sacrificed profits and needed domestic infrastructure investments to achieve foreign policy goals. The Kremlin and Gazprom have shut off energy supplies to six different countries during the last several years.”

Even more vital to Russia’s blueprint for cornering the European energy market is a project called South Stream, a natural gas pipeline Russia is racing to build that will head in the same direction as the proposed Nabucco pipeline, a 2,050-mile project led by a consortium of European energy companies. South Stream would feature a spur ending at the same terminal that Nabucco would reach – the Baumgarten gas distribution hub in Austria.

Pipeline push

Last summer, Gazprom announced it would team up with Italy’s energy giant, Eni, to build South Stream, a pipeline that would run under the Black Sea from Russia to the Bulgarian port of Varna. From there, one spur would head to Italy, the other to Austria. Earlier this year, Russian leaders went on a blitz through European capitals to persuade nations along the route of South Stream to sign on.

Within a span of six weeks, then-Russian President Vladimir Putin had secured approval from Bulgaria, Serbia and Hungary. Bulgaria and Hungary are members of the European Union, and Serbia aspires to join the bloc.

For his part, Putin belittled the proposed Nabucco pipeline as a waste of time and money.

The decisive edge that South Stream enjoys, analysts say, is that unlike Nabucco, it essentially is a Kremlin venture rather than a commercial project.

Gazprom is state-owned and can afford “to finance projects that do not make commercial sense, so long as they support the strategic goals of Moscow,” Baran said at a Senate Foreign Relations Committee hearing this summer. “Unlike Western companies, Gazprom is willing to use pipelines at minimum capacity. It loses money in the short term, but in the long term, thanks to having killed all the competition, it will end up with a web of pipelines under its control.”

The conflict in Georgia has further clouded the future of Nabucco, analysts say. “International oil majors who were going to invest in Nabucco will certainly take a second look when time comes to invest,” said George Lilis, chief analyst and MDM Bank in Moscow.