Russia currently supplies as much as one-third of the European Union’s gas imports. For many new EU member states in Central and Eastern European Countries (CEEC), the share is much higher. For these countries, the loss of a significant portion of their energy supply overnight in a crisis entails serious social problems. In addition, the long-term implications of being dependent on monopolist, single-supply routes and on natural gas as a dominant energy form can be detrimental to a country’s welfare and independent policymaking. Russia’s relationship with Ukraine is a clear example of these security threats. Many countries consider their one-sided dependency on Russian gas a top security problem and a significant element in their relations with Russia. The Russian gas monopolist, Gazprom, often seeks bilateral agreements, setting prices based on what market position and political relations allow in each case. At the same time, Gazprom and Russia also face their own security-of-demand challenge, with few export routes to the West, resulting in the building of Nordstream in the Baltic Sea and possible Turkstream across the Black Sea, to circumvent Ukrainian bottlenecks.
East-West natural gas trade in Europe today is largely based on investments made during the Cold War, when the former Soviet Union emerged as a main petroleum producer. Under the Soviet system, petroleum management was guided by extensive investments to fulfill production targets in all sectors of the economy. The Unified Gas Supply System (UGSS) connected producing fields across the major industrial centers of the Soviet republics. Owned by the Soviet Ministry of Gas, the UGSS exercised vertical control over all aspects of the Soviet gas industry, from production and transportation to storage. After the breakup of the Soviet Union, the state company Gazprom took over control and management of all enterprises in the industry. Gazprom currently controls the majority of Russian gas production and processing units and owns all high-pressure transmission pipelines. It also has sole rights to export gas to Europe. Hence, the structure of the Russian gas industry and the logic of its organization have not changed much since Soviet times.
After the breakup of the Soviet Union, Russia lost control over its republics and satellite states. Meanwhile, all of the CEEC and the Baltic states became members of both the EU and NATO. Gazprom continued to subsidize gas both domestically and to Russian allies. Conversely, countries considered less friendly, especially those that became EU and NATO members, had to enter negotiations where hard currency prices replaced the symbolic prices of the past. Gas to the West which was previously sold at the East-West border now had to transit through a number of independent former Soviet republics and satellite states. Beginning in the 1990s, disputes over prices, supplies, transmission tariffs, debts, and political relations arose. Most notable are the tensions between the Ukrainian oil and gas company, Naftogaz, and Gazprom. These disputes have grown beyond simple business discussions into transnational political issues involving several countries. They stem from their importance to both Ukraine and Russia’s energy, economic, and political interests, and from Ukraine’s role as a dominant transit country to the West. In January 2009, as many as eighteen EU countries lost their Russian gas supplies because of transit problems in Ukraine. Economic activities came to a halt, and many people froze to death in these countries. Another climax occurred in 2014 when supplies to Ukraine were cut following the Russian annexation of Crimea. The controversies over this conflict have not yet ended, and the outcome is unclear.
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