Russian President Vladimir Putin penned a long letter to 18 European leaders today, accusing them of shedding responsibility for Ukrainian debt and threatening to cut off Ukraine's gas supply — which in turn could lead to gas shortages in Europe. This issue is why the crisis in Crimea, is much more than just a local territorial dispute.
Gas has long served as an effective political bargaining chip for Russia, which is the source of more than half of Ukraine's natural gas, and roughly 30 percent of Europe's. In the winters of 2005-2006 and 2008-2009, Russia's state-run energy company, Gazprom, cut off gas supplies to Ukraine, which led to a squeeze in Europe and global wariness to poke the Kremlin. Now, Russia has made explicit the implicit threat that it will stem that oil flow once again if they don't get their way. In his letter, Putin says Russia is not the one that should be blamed for Ukraine's current economic crisis:
To a large extent, the crisis in Ukraine's economy has been precipitated by the unbalanced trade with the EU member states, and this, in turn has had a sharply negative impact on Ukraine's fulfillment of its contractual obligations to pay for deliveries of natural gas supplied by Russia.
He adds that Ukraine's delinquency means Gazprom might have to shut off their spigot, unless Kiev starts paying for its shipments in advance. By Gazprom's count, Ukraine owes the company $2.7 billion in outstanding monthly bills since last year.
The letter follows Ukraine's repeated refusal to pay Gazprom's newly-steep prices. Earlier this week, Ukrainian officials said they would refuse to pay any more until a dispute over the previously negotiated discount owed to Ukraine is resolved. The problem there — aside from the simple fact that Ukraine is in a major recession — is that some of the discounts are tied to future leasing of Crimean ports for use by Russia's Black Sea Fleet. According to Russia, Crimea (and those ports) now belong to them. The Kyiv Post reports:
The so-called 2010 Kharkiv Accords introduced a discount in exchange for an extension of the Russian Black Sea Fleet in Crimea until 2042. But now that Russia has seized Crimea by military force and annexed the territory -- nearly 5 percent of Ukraine's land mass and population -- Kremlin leaders have decided to cancel the discount.
In this way, the letter highlights another reason Crimea is so important to Russia, and why Western leaders, fearing another gas shortage or higher prices, want things back the way they were. Since 2009, European countries have attempted to reduce their reliance on Russian gas, with limited success. This strategy was banking, in part, on closer ties between Ukraine and the West, a move that could have both boosted the Ukrainian economy and shifted a much-needed energy source to friendlier hands. As Reuters explained back in March, pre-annexation:
Ukraine's Black Sea push has attracted energy majors as investors, including Exxon Mobil, Royal Dutch Shell, ENI and OMV... As Ukraine is a member of the EU's energy community, the European Commission also supports Kiev's efforts to develop its fuel resources and storage. In the event Crimea does join Russia, analysts said Ukraine's Black Sea gas could end up in Russian hands though be connected to Ukraine's gas infrastructure. They say Ukraine would then likely cut off supplies to Crimea.
In other words, Russia has not just upset the balance of political power in Eastern Europe, they've potentially disrupted the entire global oil market — a market where battle lines are not drawn along international borders. The friendly relationship between Gazprom and major U.S. gas companies is the reason sanctions against Russia over the annexation have been basically toothless. As the New York Times explains:
Oil and petroleum products represent more than two-thirds of Russian export earnings, and they finance just over half of the federal budget. But the rub is that the interests of the Russian companies — many led by powerful allies of President Vladimir V. Putin — are increasingly entwined with those of American and European corporations, with which they share critical projects.
As long as the world needs Gazprom, Russia can comfortably resist pressure to get out of Crimea, and prevent the U.S. and Europe from stepping on its toes in any meaningful way.