Nord Stream pipeline gives Russia edge in European gas wars

Moscow has a new trump card in its recurring conflict with Ukraine over the price of gas and transit fees for using Ukrainian pipelines, which has caused two crippling shutdowns of Russian gas to customers in western Europe over the past decade.

It's called Nord Stream, a $12 billion pipeline under the Baltic Sea, that began this week delivering Russian gas directly to Moscow's primary customer, Germany. The new route threatens to render obsolete the vast Soviet-era pipeline networks owned by unpredictable "transit states" like Ukraine and Belarus, and potentially multiplies Moscow's leverage in future dealings with them.

Prime Minister Vladimir Putin threw the switch at a pumping station in Vyborg, Russia, on Tuesday, to send the first gas surging into the system. He couldn't resist taking a crack at Ukraine, which is currently disputing a 2009 contract with the Russian state-run gas giant Gazprom that makes it pay European prices, and at Belarus, which has also played pipeline politics against Moscow in a bid for cheaper gas.

"Any transit country has always the temptation to take advantage of its transit status," Mr. Putin said. "But that exclusivity is now disappearing." In a political meeting earlier, Putin railed against the "dictate of the transit states."

Pipeline politics

The Russian plan is to eventually send all of its gas to Europe via a triple-threaded Nord Stream, which is as yet far from completed, and a second major pipeline under the Black Sea, South Stream, which is still on the drawing boards. Until the new routes are completed, Russia will remain dependent on the old pipelines to maintain its lucrative gas contracts with European countries, which add up to about a quarter of the EU's entire gas supply.

"All the political rhetoric aside, Gazprom cannot do without Ukraine and Belarus for the time being, so the situation isn't as lopsided as it might appear," says Mikhail Krutikhin, an expert with Russian Energy Weekly, a Moscow-based trade publication. "The Ukrainians don't want another gas war with Russia, but they're angry over having to pay extremely high prices for Russian gas. Just like many other customers, they want to renegotiate the rate."

Ukraine currently transports about 80 percent of Russian gas exports to Europe, and even when completed next year, Nord Stream will only be able to cut that amount by about a third.

Ukraine also remains dependent on Russia for about two-thirds of its own natural gas supplies. Under a controversial 2009 deal between Putin and then-Ukrainian Prime Minister Yulia Tymoshenko, Ukraine now pays prices that Ukrainian officials claim are higher than those paid by Germany – and they are locked in for nearly a decade.

Ms. Tymoshenko is currently facing a criminal trial in Kiev on charges that she colluded with Putin in striking a bargain that was detrimental to her country's interests.

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