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once it makes landfall. However, that is a route festooned with the risks of deepening the bitter ongoing fight with Russia, which either way will remain Europe’s largest gas supplier for the coming decades at the very least, and overcoming German support.
The European Commission’s surprising recent détente with Gazprom hints at hopes Moscow will hoist itself by its own petard.
As the EU and US launched sanctions against Russia in 2014, Moscow boasted that it would simply turn to the east instead. Gazprom finally signed a gas deal with China after over a decade of trying, but it was limited, and little has been heard of the Asian tilt since.
Instead, the company has become excited again that the prime target recipients of Nord Stream 2 gas are finally raising consumption. Export data provided by Gazprom shows first quarter exports to Austria rose 67.9% y/y, with Hungary, Germany and France also buying larger volumes. Overall, Gazprom supplies to foreign countries not part of the former Soviet Union grew by 15% to 51bn cm.
The rise follows a surge in demand from EU countries last year, albeit from previous lows. That helped push Gazprom’s net profit for 2016 21% higher. The company increased sales to Europe by 12.5% to account for 34% of the EU market. The gas giant says it is targeting double-digit growth again in 2017.
However, while the rise in exports was driven by the economic rebound in Europe, Gazprom is also pushing hard to help the recovery of demand; the Russian company dropped prices to 12-year lows in 2016.
The fall in prices stems from weak global energy markets, but it can also be seen as part of a longer term effort by Gazprom to see off the development in the EU of more expensive alternative supplies.
However, the EU clearly holds significant power in the relationship, and appears to be starting to understand just how much. In the 2016 State of the Energy Union report, Russia gets just one mention.
The world’s leading proponent of soft power rarely wields its status as the largest trading bloc on the planet effectively. The awkwardness of the CEE states help perpetuate that failure. Brussels’ job is now to convince them to jump on board the Energy Union and create that leverage.
Sacrifice
However, the fact that the Energy Union was originally proposed by former Polish prime minister and current president of the European Council Donald Tusk makes that a very hard sell in Poland. The country’s current leader Jaroslaw Kaczynski is a bitter enemy who recently humiliated the country in a failed attempt to oust him.
Yet giving up on efforts to block Nord Stream 2 would sacrifice Ukraine’s role in transiting Russian gas to Europe. Gazprom claims that Nord Stream 2 will allow it to drop transit through Ukraine from around 60bn cm to as little as 10bn cm by 2020.
Again, Moscow is playing the commercial card, citing Ukraine’s lack of reliability as a transit partner as the reason for the switch. Yet the annexation of Crimea and the Russian orchestrated conflict in the east of the country clearly make the goal geopolitical also.
“Nord Stream 2 needs European political agreement on decreasing gas transit through Ukraine, and that’s what makes it a political project,” notes Polish energy analyst Wojciech Jakobik. “Decreasing Ukrainian transit will mean serious losses for Ukraine’s budget and stability.”
While the EU could offer Ukraine some compensation for the $2bn or so Kyiv claims it will lose annually should it lose its role carrying gas from Central Europe to the Balkans - potentially as part of Slovakia’s “Eastring” project - it would not make many of the losses up. Still, Kyiv signed off on a
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