Out Of Gas: Gazprom Cuts Off Ukraine, Will Turkey Be Next?

Last month in “Pipeline Politics: Russia, Turkey Clash Over Energy As Syria Rift Shifts Focus To German Line,” we revisited Russia’s recent deal with Shell, E.On and OMV to double the capacity of the Nord Stream pipeline, the shortest route from Russian gas fields to Europe.  

The MOU, signed earlier this year, angered the likes of Ukraine and Slovakia. In short, the more gas that can transported via the Nord Stream, the less needs to go through Eastern Europe and that means less revenue for the countries through which the pipelines are built. “They are making idiots of us. You can’t talk for months about how to stabilize the situation and then take a decision that puts Ukraine and Slovakia into an unenviable situation,” Slovak PM Robert Fico exclaimed a few months back. 

For those who may need a refresher, here, coutesy of Bloomberg, is a look at the routes by which Russian gas reaches end customers:

Obviously, the conflict in Ukraine has made for a rather awkward situation when it comes to Russian gas supplies. Long story short, Ukraine wants to cut its dependence on Russian gas and if everyone’s telling the truth, Gazprom would probably just as soon not deal with a country that, i) owes Moscow $3 billion on a defaulted bond, and ii) is effectively at war with Russia. 

Nevertheless, a couple of months ago the two countries signed an deal ensuring supplies through Q1 of 2016 and guaranteeing Ukraine comparable prices to its neighbors. Well, that looks to have fallen apart, because on Wednesday, Gazprom decided to stop shipments to Ukraine citing a lack of prepayments. Optically, that looks bad for Kiev and so, in the energy equivalent of “you can’t fire me because I quit“, Ukraine announced today that it would stop buying Russian gas. 

“The government has decided to order (state energy firm) Naftogaz to stop buying Russian gas. It is not that they are not delivering us gas, it is that we are not buying any,” Prime Minister Arseny Yatseniuk said. 

Kiev says it can get cheaper prices elsewhere. “Gazprom CEO Alexei Miller on Wednesday warned Ukraine and Europe of possible gas disruptions following the cut-off,” AP notes, adding that “Russia uses Ukraine’s pipelines to transport a part of its gas deliveries to other European countries.”

“Ukraine’s refusal to buy Russian gas threatens a safe gas transit to Europe through Ukraine and gas supplies to Ukraine consumers in the coming winter,” Miller said.

But the pettiness didn’t stop there. Yatsenyuk went on to announce that Ukraine will be closing its airspace to the Russians due to “security concerns.”

Importantly, it’s not just Eastern European that will suffer because of strained relations with Moscow and the expanded capacity of the Nord Stream. The deal with Shell, E.On and OMV has also put Moscow in a better bargaining position vis-a-vis Turkey, which is the second largest consumer of Russian gas and which paid Gazprom some $10 billion last year.

Prior to the Nord Stream deal and before Russia got directly involved in Syria, Ankara and Moscow were enjoying a burgeoning trade relationship. However, once Russia began flying combat missions from Latakia, relations between Putin and Erogan began to sour. Turkey is a key player in the effort to supply training, guns, and money to the various rebel groups fighting for control of Syria. Indeed, there’s plenty of evidence to suggest that despite Ankara’s conveniently timed “crackdown” on ISIS (which began in late July and just happened to coincide with an AKP election setback), Turkey is perhaps the number one state sponsor of Islamic State (see here for more). Indeed, on Tuesday Putin accused Turkey of facilitating the group’s black market oil trade. 

Needless to say, once Russia began to conduct airstrikes on anti-Assad elements, Erdogan was not pleased and it was clear from the beginning that it would only be a matter of time before the border disputes began. Sure enough, Turkey shot down a Russian drone last month and subsequently began to complain loudly about alleged Russian incursions into Turkish airspace. Those complaints led directly to a declaration by Erdogan that Turkey may seek to source its gas from someone else. As Sijbren de Jong, an energy security analyst at the Hague Centre for Strategic Studies told Bloomberg, “Putin is betting on Nord Stream, but that bet is risky.” 

As the tension continued to build, many began to wonder about the fate of the proposed Turkish Stream pipeline and now that Turkey has shot down a Russian warplane, everyone wants to know whether Russia may decide to retailiate by simply cutting Ankara off, leaving Erdogan to figure out where to source some 53% of his country’s energy needs.

Of course you can expect the Western media to say that Putin can’t afford to cut Turkey off, but even if the coverage is biased towards the NATO member in the equation, it’s still worth taking a look at the commentary. Here’s what Bloomberg had to say today: 

Turkey relies on Russia for about half its natural gas supplies, paying state-controlled Gazprom PJSC as much as $10 billion last year. That makes their energy ties an unattractive target for retaliation.

With so much at stake for both sides, Russia may look elsewhere in its response to the downing of its warplane by

Turkey on Tuesday. Russian Deputy Energy Minister Anatoly Yanovsky said that supplies to Turkey would continue in line with the contract. Longer term, Turkey could reduce its dependence on Russian gas through alternative supplies.

The relationship between Turkey and Russia was already strained before Russia’s warplane was shot down, and talks over a new gas pipeline had stalled, according to Alexander Kornilov, an Alfa Bank analyst in Moscow.

Turkish Stream is redundant because there is already existing transfer capacity to Turkey and the rest of Europe, Sberbank PJSC’s investment bank unit said Wednesday in a report to clients.

While Turkey can’t turn away from Russian supplies right away, it still has leverage to fight retaliatory moves, including if Russia takes a hard line on prices or threatens cuts, according to Sijbren de Jong, an analyst at the Centre for Strategic Studies in The Hague.

The sales volume from Turkey is equivalent of 17 percent of Gazprom’s total exports outside the former Soviet Union, according to company data. 

“The bottom line is militarily, strategically they may want to draw a line and say this has gone too far, but it wouldn’t be wise,” said De Jong. “Essentially if you’ve put so much effort into coveting this burgeoning partnership with Turkey from an energy perspective, that’s all going to be for nothing.”

Perhaps, but it’s not clear that Turkey has as much leverage here as analysts claim. Consider this for instance: 

“Turkey will probably not want to halt any existing energy arrangements, but it almost certainly means Turkey will start a renewed look at what alternative energy relations it can have,” said John Roberts, an energy security specialist at Methinks Ltd. in Jedburgh, Scotland. “Two obvious choices are becoming a customer for U.S. LNG; the other is Iran.”

Here’s a look at the breakdown by country in terms of where Ankara sources its gas:

What analysts seem to be discounting here is that ties between Russia and Iran have strengthened materially over the past six months. Russia’s intervention in Syria will not be forgotten in Tehran. As we’ve detailed exhaustively, ensuring that Damascus doesn’t fall to a puppet government of the Saudis is perhaps the most important geopolitical concern for the Iranians. Losing Syria would cut off a supply route to Hezbollah and rollback Iran’s Shiite crescent. It’s probably not an understatement to say that Tehran will be eternally grateful to Moscow for Russia’s participation in Syria on behalf of the government and as we saw when Assad rejected the Qatar-Turkey line but approved the Iran-Iraq-Syria line, these are countries that will, when they feel the situation calls for it, subjegate energy concerns to geopolitics.

Throw in the fact that Russia and Iran are already in talks on a number of energy projects and it seems reasonable to suspect that if Iran believes Turkey is becoming too much of an impediment to the campaign in Syria, Tehran may just decide to drive a harder bargain when it comes to gas supplies. In short: if you’re Turkey, you don’t really want to put yourself in a position where your fallback plan in the event you anger your biggest energy supplier is to try and negotiate for more trade with that supplier’s closest geopolitical ally, especially when you are actively seeking to subvert both of their goals in a strategically important country. As WSJ put it on Wednesday, “diverting the energy trade wouldn’t be easy.”

No, it most certainly would not “be easy”, and the big question going forward is this: is it realistic to believe, given what’s going on in Syria, that Iran will be willing to make it any easier?