by Derek Davison

While the world’s attention has largely shifted to events in Iraq following last week’s capture of Mosul by the Islamic State of Iraq and Syria (ISIS), the crisis in Ukraine continues unabated. Ukraine’s relations with Russia are deteriorating, and recent events may have pushed the country closer than [...]]]> via LobeLog

by Derek Davison

While the world’s attention has largely shifted to events in Iraq following last week’s capture of Mosul by the Islamic State of Iraq and Syria (ISIS), the crisis in Ukraine continues unabated. Ukraine’s relations with Russia are deteriorating, and recent events may have pushed the country closer than ever to a civil war.

The latest military salvo in the growing conflict between Kiev and separatist, pro-Russian militias in the eastern part of the country occurred on June 14, when separatists using shoulder-fired anti-aircraft missiles brought down a Ukrainian military plane that was attempting to land in the eastern city of Luhansk. All 49 people aboard the flight were killed and the ordinance it was carrying exploded. The self-proclaimed “Luhansk People’s Republic” claimed responsibility for the attack. New Ukrainian President Petro Poroshenko vowed retribution. A day earlier, on June 13, Ukrainian government forces took control of the port city of Mariupol, in Donetsk Province.

On June 16, Poroshenko called for a cease-fire with separatists that could be the first step toward a negotiated peace settlement, but said that it would be conditioned on Ukrainian troops regaining control of the country’s 2000 km (1240 mile) land border with Russia. That could take a while; there has been active fighting in the border region between the Ukrainian army and separatist fighters, but according to Poroshenko, the government has only regained control of around 250 km of the border. Meanwhile, the Organization for Security and Cooperation in Europe (OSCE) declared that as many as four million people in the Donetsk region are now at risk of losing their access to fresh water, since a pumping station near the city of Slaviansk had been damaged and repairs are being interrupted by sporadic outbreaks of fighting. On June 17, a reporter and sound engineer for the Russian state TV outlet Rossiya were killed by mortar fire outside of Luhansk, leading the OSCE to call for an investigation into the circumstances of their deaths.

Although the separatists who downed the plane claim that their anti-aircraft arms were taken from Ukrainian arsenals, the Ukrainian government, the United States, and NATO are accusing Russia of supplying advanced weaponry to the separatists, which Russia has denied. These accusations included the charge that three Soviet-era T-64 tanks crossed the Russian border and were later observed being operated by separatist forces, although there is a great deal of uncertainty surrounding this claim. Images taken from civilian satellites and released by NATO over the weekend appear to show three tanks being loaded onto a trailer at a Russian military staging area near the Ukrainian border on June 11, and videos posted to YouTube later that day show T-64 tanks on the streets of two pro-Russian cities in eastern Ukraine, accompanied by a truck waving the Russian flag. This is a circumstantial case at best; T-64 tanks are still operated by the Ukrainian military, and the tanks seen in the YouTube videos could have been taken from the Ukrainian army by the separatists, although they do not appear to display the typical Ukrainian military markings and camouflage pattern. It must also be noted that previous supposed visual evidence of Russian military assets in Ukraine has been proven inaccurate.

Kiev’s relationship with Moscow also continues to fray on economic and diplomatic fronts. The most recent demonstration of this occurred on Monday when Russian energy corporation Gazprom announced it has cut all natural gas shipments to Ukraine. Negotiations over Ukraine’s total debt to the Russian firm, estimated at just under $4.5 billion, reached another impasse when the two sides could not agree on the settlement of $1.95 billion in immediately outstanding charges before the June 16 deadline. Gazprom has filed a suit against Ukraine’s gas firm Naftogaz over the debt in a Stockholm court, but Naftogaz has countersued, seeking $6 billion in repayment for what it calls “overpayments” since 2010 and a ruling that will force Gazprom to offer Ukraine substantially reduced gas prices. Ukrainian Prime Minister Arseny Yatseniuk meanwhile accused Russia of manipulating the gas situation to “destroy Ukraine,” while his Russian counterpart, Dimitri Medvedev, suggested that Ukraine’s government is not up to the task of running the country.

While there is no immediate risk to Ukrainian citizens from Gazprom’s decision to shut the gas off, since relatively little gas is used during the warm summer months, the country is well short of the amount of gas it would need to stockpile to get through the winter; so an extended dispute could have a very damaging impact. Also at possible risk are Russian gas shipments to the rest of Europe, half of which flow through Ukraine; Gazprom will continue to supply enough gas through Ukraine’s pipelines to meet European demand, but warned Ukrainians not to tap into that supply. An explosion hit the West Siberian gas pipeline today in the central Ukrainian Poltova Province, but it is not yet clear how much damage the explosion caused, and there is no indication as to its cause.

Tensions in Kiev have also boiled over. On June 14, after the downing of a jet in Luhansk, a crowd of anti-Russia demonstrators attacked the Russian embassy, shattering windows and briefly raising the Ukrainian flag over the building. Russia formally protested the attack, and the United States called on the Ukrainian government to provide adequate security for the Russian embassy. Ukraine’s interim foreign minister, Andrii Deshchytsia, while speaking to the crowd of demonstrators in an effort to halt the attack, reportedly used an anatomical slur in reference to Russian President Vladimir Putin, which drew further condemnation from Russian leaders.

Despite the deserved attention on Iraq’s growing crisis, the situation in Ukraine continues to develop and should not be overlooked. Its ramifications for European stability and world energy markets are too important to ignore.

This article was first published by LobeLog and was reprinted here with permission.

A pro-Russian protestor yells at Ukrainian riot police outside the regional administration building in the eastern Ukrainian city of Donetsk on March 22, 2014. Credit: Zack Baddorf/IPS.

by Sara Vakhshouri

The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of [...]]]> via LobeLog

by Sara Vakhshouri

The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of income for Russia. On the other hand, its massive energy resources and supply dominance in the EU have deterred the EU and US from sanctioning the Russian energy sector.

More than 90 percent of Russian natural gas, and 80 percent of its crude oil exports, go to the EU. Taken together, this accounts for about 50 percent of Russia’s federal budget. Russia supplies about 30 percent of the EU’s natural gas and, crucially, more than half of this is transported via Ukraine. Russian natural gas also plays an important role in Ukraine’s energy basket. Natural gas accounts for 40 percent of Ukraine’s overall energy consumption — more than half of this comes from Russia. Before the Crimean crisis, Ukraine was receiving more than a 30 percent discount on Russian gas, and was also heavily dependent upon Russian crude oil.

Russia’s calculus

The EU and Ukraine’s energy dependency has so far played in Russia’s favor. During the March 25 Nuclear Security Summit in The Hague, US President Barack Obama and EU leaders warned that they would enact broader sanctions against Russia in order to check its expansionist ambition in Ukraine. They mentioned that sanctions could expand to cover whole sectors in Russia including, crucially, its defense and energy industries. However, Moscow knows that in the short-term there is no substitute for its energy supplies, particularly to the EU.

Indeed, the first American liquefied natural gas (LNG) cargo delivery will not be available until late 2015 or early 2016. Some countries in Eastern Europe are also highly dependent on Russian gas transferred via pipeline — as they lack substantial LNG facilities. Yet US crude oil stockpiles in its Strategic Petroleum Reserve (SPR) are also a factor. In 2013, the SPR held 695.9 million barrels of crude oil. At this rate the US could supply 4 million barrels of oil per day (mb/d) for 90 days. This could, conceivably, help offset any fluctuations in prices in the event of an interruption of Russia’s 7.2 mb/d in exports of crude oil.

Regardless, in the medium-term Russia’s moves in Ukraine are going to hurt its interests in European and global energy markets. Gazprom, the Russian giant gas company with ownership of one-fifth of global natural gas reserves, hasn’t yet threatened to cut off its natural gas. But the Crimea crisis has damaged European trust in Russia as a reliable supplier.

The issue of reliable supply, coupled with diversification, is also a crucial factor in any country’s overall energy security. As Winston Churchill said, “safety and certainty in oil lies in variety and variety alone.” European countries have already started rethinking their strategies to diversify their energy suppliers. Russia was planning to increase its natural gas market in Europe by 23 percent in the next two decades, but its annexation of Crimea seems to have strongly damaged its future market share in Europe, particularly when one considers possible imports of American Shale Gas.

Coupled with energy sanctions on Iran, the Ukraine crisis has increased US awareness that their massive shale oil and gas resources could be converted into a strategic weapon and diplomatic tool. Debates on removing the ban on US energy exports have recently spiked and taken on a new intensity. US oil and gas supplies are not going to scare Russian President Vladimir Putin right now, but in the long-term Moscow will need to seriously consider the competition from US exports, which will require new market planning and strategic shifts from Moscow, some of which may be very uncomfortable for the Kremlin.

Still, not everything is bleak for Russia. Asia’s energy market, and particularly China, has always been a long-term objective. In fact, China could be a substitute for possible future European market losses. Last month, Chinese imports of Russian crude oil reached their highest in 7 years: 2.72 million metric tones. This was three times more than the average of Chinese oil imports over the past decade, and made up 12 percent of overall Chinese oil imports. The decline of Iranian imports for China has also shaped this calculus. Historically the third largest supplier of crude oil to China, Iran’s market share there has dropped from 11 percent of China’s oil needs in 2011 to 8 percent this past year. With China facing continued restrictions in importing Iranian crude, it may now see Russia as a reliable source of supply diversification.

Indeed, the tensions between Russia and European countries over Crimea could change the dynamics of global energy flows. Europe is in search of new suppliers; Russia is seeking new energy markets. This changes the traditional suppliers and consumers in the global energy market; it would bring China and Russia closer together, with the effect of solidifying strategic ties and the alliance between Europe and the US. This will also have profound implications for global energy markets and energy security.

Advantage Iran?

Perhaps ironically, Iran could also benefit from these changing dynamics. Europe faces possible energy supply interruptions and high-energy prices in the short-term. With the nuclear-focused negotiations between Iran and world powers known as the P5+1 moving along, some European countries could once again rethink their bans on Iranian oil imports. In other words, any energy supply interruption from Russia due to US and EU sanctions could have the unintended effect of undermining the regime of global sanctions against Iran.

In the short-term, Iran’s massive domestic consumption doesn’t leave much capacity for Iranian exports to Europe to substitute an offset of Russian supplies. But because Iran has the second largest natural gas reserves in the world after Russia, it has always seen Europe as a huge potential market. If Iran succeeds in overcoming sanctions through a constructive nuclear deal with the P5+1, European companies will be more inclined to invest in the Iranian energy industry than ever before. Losing some of its shares in the Asian and Chinese energy market, combined with weaning Russian energy influence in Europe, could give Iran a chance to once again strengthen its energy ties with the West and find a new market for natural gas exports.