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A gas transfer station, Volovets, western Ukraine, Oct. 7, 2015 (AP photo by Pavlo Palamarchuk).

How the EU Can Use Russia Energy Ties to Keep Ukraine Tensions in Check

Wednesday, Sept. 28, 2016

Following meetings with Ukrainian officials in Kiev early this month, the vice president of the European Commission, Maros Sefcovic, who holds the energy portfolio for the EU as a whole, laid out his vision for how the often contentious relationship between Ukraine, Russia and the EU ought to be structured. “Russia as an exporter, Ukraine as a transit country and the EU as the main importer,” he said. This pithy formulation also sums up Europe’s geo-economic approach for managing the Ukraine conflict.

Geopolitical strategies to keep the peace appear to be breaking down in Ukraine. An uptick in clashes and recriminations last month, along with yet another unannounced Russian military “snap exercise” on the Ukrainian border, raised fears that a new round of large-scale fighting was imminent. After Russian President Vladimir Putin accused the Ukrainian government of attempting to infiltrate “saboteurs” into Crimea, which Russia annexed in 2014, he announced that he would no longer meet within the framework of talks with Ukraine, France and Germany over eastern Ukraine—a diplomatic arrangement known as the Normandy format. But he did end up having bilateral meetings on Ukraine with German Chancellor Angela Merkel, French President Francois Hollande and U.S. President Barack Obama on the sidelines of the G-20 summit in Hangzhou, China. The Minsk Accords, which were supposed to provide a roadmap for a political settlement of the crisis, appear to be stuck in neutral.

Yet the conflict has remained limited in scope. While Western sanctions on Russia have had an unwelcome impact, they do not appear to be the primary deterrent to further Russian action. Instead, some European countries conclude that what keeps the conflict under control and relatively frozen are geo-economic realities.

Despite some degree of diversification, approximately half of Russia’s natural gas exports to Europe still flow through Ukraine. In turn, Ukraine depends on that gas flow for revenue, for its own domestic consumption—even if now it is resold and sent back from European sources—and for making Ukraine relevant to European energy security. This ties Ukraine and Russia together in a web of mutual dependence that acts as a brake on escalation.

Russia has supported separatists in eastern Ukraine, but only in areas far from the main pipeline routes, allowing the conflict to be localized to parts of the southeast and limiting the eruption of violence in any part of Ukraine that might negatively impact the flow of gas. That means Ukraine has a type of nuclear option: the threat to shut off Russian access to its pipeline network, or even to destroy it altogether. To prevent that from happening, the European Union has, on several occasions, been required to broker delicate negotiations to keep the routes open, extracting compromises from both Moscow and Kiev in the process.

Gas binds Ukraine and Russia together in a web of mutual dependence that acts as a brake on escalation.

Moscow has made no secret of its desire to end the use of Ukraine as a transit country for Russian gas by 2019. It has found support from a number of European countries and companies that do not want their energy supplies to be held hostage by the need to regulate Russian-Ukrainian relations. Two proposals are on the table. The first, known as Nord Stream 2, would double the current capacity of the existing Nord Stream pipeline in the Baltic Sea that directly connects Russia to Germany. The second would involve opening a new southern pipeline route, either the South Stream project linking Russia to Bulgaria or Turkish Stream linking Russia to Turkey, via the Black Sea. The EU views both proposals with extreme skepticism.

Whatever degree Russia has been held in check in Ukraine by the need to preserve its energy routes would evaporate if one of these proposals got off the ground. The loss of the transit routes would put Ukraine under further economic stress, not to mention create real difficulties for other fragile Central European economies that also serve as transit states for Russian gas crossing Ukrainian soil.

Despite the past risks of supply interruptions from spats between Ukraine and Russia, notably over pricing and payment, forcing Russia to continue using the Ukrainian export route is one of the few tools the EU has to influence Moscow’s behavior. For European states that see Ukraine’s westward shift as important to their own national security, it is also important to maintain a plausible reason why Ukraine matters to Europe as a whole. An appeal to shared values only goes so far; but a Ukraine that is vital to European economies ensures that its fate cannot be ignored.

It is not surprising, then, that the European Commission has warned about legal barriers to all the pipeline proposals, which would prevent their approval or cast doubt on the ability of European firms to participate and—most critically, given Russia’s diminished currency reserves as a result of continually low energy prices—finance one of them. Last month, Poland’s state anti-monopoly regulator issued a preliminary ruling that Nord Stream 2 would violate the common EU energy policy. European energy corporations that were planning to form a joint venture with Russia’s Gazprom to build Nord Stream 2 subsequently withdrew from the project.

The European Commission has also raised flags about whether South Stream or Turkish Stream fall within the parameters of the EU’s own energy market rules. The laws governing those rules, known as the EU’s third energy package, include “ownership unbundling” provisions that require that the supplier of energy cannot also control the means of its transport and delivery. Without EU approval, a direct South Stream line cannot be built. And while Turkish President Recep Tayyip Erdogan is not bound by any EU regulation, Brussels can control the transit points that would get Russian gas from Turkey into the EU. A smaller Turkish Stream line that would simply meet Turkey’s own energy demands could be built without any EU involvement, but it would not have sufficient supply volume to be profitable. Alternatively, the EU might seek a solution in which excess Russian gas sent to Turkey would be used to make up any shortfalls in the gas sent by Azerbaijan via the Southern Energy Corridor. But that would still do little to reduce Russia’s dependence on Ukraine as a transit state.

European states appear to lack a long-term source of leverage on Russian behavior in Ukraine, since they remain divided over whether to provide arms to Kiev and whether to suspend or modify economic sanctions on Moscow. But in fact they have one: energy. For all the talk of Europe’s dependence on Russian gas, the energy relationship is not so one-sided, with Russia the exporter, Europe the importer and Ukraine the connector, according to Sefcovic’s formulation. Based on that geo-economic logic, the need to transport energy will force moderation on all parties when other tools have proven ineffective.

Nikolas K. Gvosdev is the Jerome E. Levy Chair for Economic Geography and National Security at the U.S. Naval War College. The opinions expressed here are his own.