The EU and Russia are no longer strategic partners, why?

A former Italian Foreign Minister Federica Mogherini appointed as EU’s foreign policy chief on 30 August 2014 stated publicly about it. This official statement regarding one of the important areas of international relations, obviously, will determine the foreign policy of a new team of the European Commission.

However, the question arises whether such a change is necessary for Europe? Will it be for the benefit of Europeans, and could it help reducing the risks of new shocks of the European economy, which only began to recover after the recent crisis years?

And answers here may be different. That, Gentlemen, depends on how to look at it. If we have a look from a policy making point of view, then there exists a great deal of experience in dramatic changes of inter-state relations often based on flimsy political grounds. That periodically occurs. But for business activities this kind of sharp curves in international relations are fraught with serious consequences, and in fact they should be avoided as much as possible.

Some of you are probably far from business and cannot realize fairly well both complexity and significance of this situation. Then let us imagine that you are sailing a boat and suddenly try to make a drastic turn in the direction of your movement. This maneuver creates a high risk that you will lose your balance and overturn. In the same way, similar rash acts in international relations can turn upside down even a successful and stable business that will suffer an undeserved damage.

Therefore, for many people in Europe and for me as well it is very doubtful of that the EU is losing Russia as a strategic partner and that it is a realistic statement, because we see it far otherwise both in theory and in everyday life.

As to theory, almost any university student in Europe should learn from courses of "Business Administration" or "Corporate Governance" that in business a strategic partnership means a mutually beneficial and long-term commitment between organizations. This partnership is accompanied by investment process, exchange of various assets, joint work to strengthen their market position. And all that is going on for many years.

Meanwhile in practice, we are witnessing now a serious undermining of strategic business relationships, imposing of economic sanctions as a tool of political pressure that, I would like to emphasize, creates significant problems for business partners.

In this case, we are talking about our European Union and Russia. Currently, our politicians' activities, especially in Brussels, cause a great concern and displeasure in European business circles. It happens because European business for its part sees no reasons to freeze its long-term partnerships in Russia. And the more so as European business dealing with Russia is against such rash political acts and sanctions that endanger to turn "upside down" many strategic projects that have been developed with mutual benefit for many years.

An outstanding example is the position of the Association of European Businesses (AEB), which brings together hundreds of European companies working with and in Russia. There are many well-known international energy companies among AEB members, including Dutch companies Gasunie and Shell E & P, French GDF SUEZ, German companies Wintershall and E.ON, Italian companies Eni and Enel and others In September the AEB sent official letters to all 28 Heads of States and Governments of the EU, as well as of Russia and Ukraine with request to protect foreign investors from both sides from any further restrictive measures.

It is stated in the letter in particular that there are members in AEB with businesses in sectors, which would be directly affected by these measures. Further on the letter read as follows “the introduction of such measures could lead to a serious decline in production volume and the number of workplaces, affecting not only the manufacturers themselves, but also suppliers and retailers working in these sectors. All this would harm not only the business of the companies concerned, but also fiscal revenues through the loss of tax and duty payments. The AEB strongly requests EU and Russian authorities to protect foreign investors from both sides from any further retaliatory measures”.

In other words, to protect against those forces that are stubbornly trying to cause troubles between the European Union and Russia and to undermine mutual economic relations, which was built for the last decades. Therefore, it is a matter of urgency to realise the importance of this situation and as a result to demonstrate on the contrary a political goodwill by supporting strategic partnerships of European Businesses in Russia.

Now you can see that currently such pressure on international business partnerships are rather illustrative of the energy sector, where the EU and Russia have reached significant results. Due to a high share of Russian gas in the total EU consumption as it was mentioned in previous articles Russia holds the first place among gas suppliers, although only slightly ahead of Norway. In Brussels, it is commonly known, this fact is indicated as something containing a threat to our energy security. However, it is beyond our doubts that in previous decades the imports of energy products from Russia went up entirely under conditions of mutual economic interests. That was correct for energy prices too.
For example, the official report on statistical analysis of EU trade in energy products, with focus on trade with Russia says the unit values for Russian imports of the two most important products - crude oil and natural gas in gaseous state - were of a similar size to those for the EU’s other trade partners in these products.

It's interesting to note that the relative importance of the EU in Russian exports of energy products decreased over the period 2005 - 2012, the same report points out. This means that Russia is also diversifying the geography of export deliveries of energy products, including natural gas. It reminds us how several years ago European energy companies enthusiastically discussed their participation in the project devoted to the Shtokman gas field development in the Barents Sea with subsequent deliveries to Europe. But later on Russia changed the geographical priorities in further development of production and exports of gas commencing new projects far to the east of the country.

But we see this process of gas flows relocation not only on the east. Expansion of energy supplies especially routes aimed to South and South-East Europe now provides for a real opportunity of obtaining a reliable gas flow from Russia thanks to construction of South Stream gas pipeline, which is being built to bypass a very unstable region of Ukraine.

No wonder many of us who are following the situation would like to join the call of European business for reducing a political rhetoric of Brussels politicians on cancellation of strategic partnership with Russia, which is being alleged in support of Ukraine. The ratification of the EU-Ukraine association agreement by comparison with a political impulse of reducing the strategic partnership with Russia in energy sector now looks like as an exchange of Russian gas for Ukrainian schnapps. We could hardly imagine that anybody does not understand the irrationality and the disparity of such an exchange for Europe.

I am confident that just as business consumers of gas so too owners of households in our countries do realize that if the EU energy market would be at least partially "liberated" from the so-called Russian gas dependence, a vacant place will be occupied by other energy supplies mostly imported at new prices well above the former prices.

Meanwhile, EU Trade Commissioner Karel De Gucht has recently stated once again that he would want to see oil and natural gas exports from the US to Europe included in the forthcoming transatlantic trade free trade zone and that allegedly Europe wants US oil and gas to help offset its dependence on Russian energy. And what is more the high level representative of Brussels pointed out that it should generate a pressure on Russia due to a downturn in world energy prices. But to expect a decrease in world prices as the phrase goes, indulge in wishful thinking. A prevailing majority of experts argue against anticipated downturn trends of world prices of energy in a near future.

In conclusion, I would like to quote the words of the well-known American economist Michael Porter: “The essence of strategy is choosing what not to do”.
The question remains: why to be exact does not do it?

I cannot ignore the remarkable event near Slovakia–Ukraine border. Why?

It is a Grand Opening of gas supplies from Slovakia to Ukraine.
Prime Minister of Ukraine Arseniy Yatsenyuk, Prime Minister of Slovakia Robert Fico and Director for Internal Energy Market of the European Commission Klaus-Dieter Borchardt opened the commercial Vojany-Uzhgorod pipeline in Veľké Kapušany in Slovakia that was really an important event, a very important ... for Ukraine!

It is no wonder that Prime Minister Yatsenyuk was quoted as saying that “we replaced 40% of gas, which we had previously bought in from Russian Gazprom, due to the opening of the reverse from Slovakia and opened opportunities for Ukraine to buy gas in Europe”.

The nominated volume of a reverse supply of gas from the territory of Slovakia to Ukraine amounts to 27 mcm a day, or about 10 bcm per year.

However as far as Europe is concerned, how is this event important for us? From the point of view of solidarity and other political incentives, everything is clear.
And how is it important for us in view of coming winter?

And also what does it matter in view of the dispute between Ukraine and Gazprom?
And especially, how it is important under the conditions when there is not enough gas in the Ukrainian UGS in order technically to provide transit to Europe in winter season?

But particularly interesting question is that whether our gas consumers in Europe understand what the gas reverse really means on the occasion of which this Grand Celebration was arranged?
Sometimes the reverse is called "virtual". Why?

Let's clear up in case of reverse whether the gas from Europe is transported in the direction of Ukrainian consumers physically in the literal sense of the word?
I'll start with the most important - such a reverse can exist only when there are supplies of gas from Russia to Europe. And no other way!

That is because just a part of the Russian gas after crossing the border between Ukraine and Slovakia then is rotated 180 degrees and is transported by the other pipe back to Ukraine. But upon arrival back on the territory of Ukraine, this gas is returned again into the transit pipeline directed to Slovakia. And by such a way this so-called reverse gas is pumped through a relatively small circle made with pipes and other equipment. It should be mentioned that the construction of "gas roundabout" cost 20 million Euro.

It is noteworthy for us that European and Ukrainian policy makers call now these operations of whirling gas from Russia around the boarder as "diversification of supply."
It is important that gas meters measure the volume of gas both on the way from Ukraine to Europe and on return way when it is coming back into the Ukrainian territory.

In this situation the same physically gas can be taken into metering records of volumes of reverse and transit gas many times. But this gas only is circulating around the ring of pipelines and is not sent back to consumers in Ukraine, for whom it is allegedly intended. In fact, the reverse gas is impossible to transport technically in eastern direction further back to Ukraine, because there is no any gas transmittal pipeline in Ukraine running in this direction opposite from Europe. There is only a transit long distance transmittal pipeline delivering gas in one direction - to the west!

You would ask how in this case the reverse gas is reaching consumers in Ukraine? It's very easy to explain since it is no means the same reverse gas. As a matter of fact instead of it another gas is taken out of the volume of TRANSIT GAS (!) in any place in Ukraine convenient to meet local needs.
Thus, the "virtual reverse" in fact turns into legalized SIPHONING OFF transit gas intended for European consumers.

This scheme reminds us how we transfer cash over long distances, for example, using Western Union services. Then it looks like as we put cash in one "pocket" of this company in order to get them back somewhere far away out of "another pocket." We mostly trust such a virtual cash transfer service as reliable but nobody expects to get back remitting cash out of "another pocket" more than a send amount.

In contrast with financial services, the virtual reverse gas scheme in Ukraine causes a great concern. Properly speaking, this is exactly what today all of us are afraid of. Moreover, before now we felt ourselves the same, and there are certain reasons for it. Why?

The point is that at present there are all prerequisites that the dispute between Ukraine and Russian Gazprom will not be solved in the near future. In this case, on the one hand, Gazprom will not resume gas supplies to Ukraine. On the other hand, Ukrainian UGS are not filled with gas at a volume that is necessary for simultaneous support of both domestic consumption, and transit to Europe.
It means that in December Ukraine will proceed siphoning off the transit gas for its own needs deeper and deeper getting into a "virtual pocket" of the transit gas. In previous times it was illegal and was regarded as theft. Now the European Union has legalized this scheme and officially inaugurated a reverse gas supplies from Slovakia!
Of course, the first thought is that we could stop the reverse. Only the question arises whether is it possible?
Let's see what do we know about the contracts?
It was stated by the Slovak company Eustream that "according to Open Season procedure (binding of volume commitments for interstate transportation service of the reverse to Ukraine - Ed.) several European firms have provided binding bids for pumping gas through the pipe ...". However company Eustream refused to name these firms referring to a confidentiality of commercial transactions and only stated that their approximate number was from 5 to 10.
In other words supposedly they did not know anything …

It causes a big concern and a keen disappointment with that at present time, trying to please our Atlantic allies, we are deleting previous great efforts of our European business to establish long term relations with Russian companies, put off indefinitely conclusion of many prospective contracts, impeached the existing contracts in the energy sector, and in addition, as a backward result, created serious problems for our agriculture.

And how much would it cost us to make one more effort in this direction of shutting down relations and to opt out of energy supplies at all?
Why not?

PS. As an epilogue, when this article had been already completed, it was reported that the volume of daily gas supplies from Russia to Europe reduced. Information from different sources is very controversial. Some sources have reported about a decline in gas supplies, and others said that everything is fine. But it is important that just those companies and countries which are dealing with the reverse gas to Ukraine have stated about gas supplies reductions.
I have ventured to suggest that this problem, as mentioned above, is the result of the "legitimate" gas offtake from transit pipeline in Ukraine for their own needs in the volume exceeding the amount of reverse gas circulating at the border.

Fitch: Europe can’t reduce its dependence on Russian gas. Why? 

Despite frequent statements by European politicians regarding the need of reducing dependence on Russian gas, the chances to do it are few, says Fitch Ratings report "How to live without Russian gas." Gas consumption in the EU will increase and there is no substitute for Russian gas, taking into consideration weak prospects for shale gas production, lack of facilities available to import LNG and the absence of significant non-Russian pipeline projects in Europe.

We could theoretically lower our dependence on Russian gas, reducing consumption, but Fitch's analysis shows that in the long term demand for gas in the EU will only increase - an average of 1.3% per year over the next 15 years. In 2013, the European demand for gas was 530 billion cubic meters and Russia has supplied 145 billion, 27% of this volume.

Gas could be replaced by oil, coal or nuclear power, but all of these alternatives involve "economic, political or environmental costs." In addition, Russia is not only significant supplier of natural gas, but also oil, coal and nuclear fuel. In the past year, Russia has covered 36% of the needs of European nuclear power plants in enriched uranium, and Bulgaria, Czech Republic, Slovakia and Hungary depend on Russian nuclear fuel supplies by 100%. Renewable energy projects are very expensive and without significant government subsidies cannot compete with conventional energy resources, said Fitch.

In the long term, Russia will remain the dominant supplier of gas to Europe, as alternative sources are insufficient, the report said. Conventional gas production in Europe has been steadily declining, and "shale revolution" like in the US is not possible in Europe. Shale gas can only make up the reduction of conventional gas production. Concerning the technology of hydraulic fracturing, overruns of water, use of chemicals,  risk of seismic activity as a result of drilling have led to "social restraint, or even resistance" towards the prospects of shale gas production in Europe, says Fitch report. As for high expectations for LNG imports, the growth of global liquefaction capacity, according to Fitch, will not be enough to compete with Russian gas in Europe.

A similar view on the future of European gas security shares International Energy Agency (IEA). "In the short term, Europe has very few opportunities for diversification of gas supply. In the foreseeable future Russia will be a vital need for Europeans ", - said the director of the IEA Maria van der Hoeven at the energy conference in Norway. Quick change of energy supplier is unlikely for several reasons.

Firstly, the gas consumption in Europe is growing steadily and domestic production is decreasing. According to 2013 IEA report, the annual gas import to the EU will rise by a third and will be 450 billion cubic meters by 2035. "Diversification takes time, - said Maria van der Hoeven. - It is necessary to invest in infrastructure and improve relations with potential suppliers".

The IEA report also predicts that LNG export from the US will be about 50 billion cubic meters by 2035. Therefore, US supplies cannot fully meet European market demand. "Billions of cubic meters of LNG won’t solve the issue as European gas production falls to similar volumes," - stated Maria van der Hoeven. She also noted that now the center of gas consumption is shifting to Asia where gas prices are higher, and Brussels should not count on the entire volume of American LNG export.

Thus, we have to pursue very smart and balanced energy policy with sustaining strong relationships with current suppliers and developing new opportunities to secure energy supplies for the future.

Why Brussels and Washington boost pressures on Bulgaria to halt construction of the pipeline South Stream attempting to create near Ukraine another Bulgarian bastion against energy supplies to a number of countries in South and South East Europe?

And this "why" is a particularly acute issue amid the civil war- struck "Ukrainian Energy bastion", which threatens not only to default of Europe's energy security, but also causes a significant profits loss for national economy of several countries in South and South East Europe.
Maybe there is no more need to remind you that Ukraine is standing in the midst of events extremely aggravating the problems of European energy security. However, regardless of the public opinion of Europe's majority with the political support from Brussels and our Atlantic allies there was a change of political administration in Ukraine, which recently resulted in erection of like-kind the "Ukrainian energy bastion" in this country. Its goal is a gas-blackmail by threatening to block the channels of Russian gas supplies to Europe that have been properly functioning for many decades.

It stands to mention about the negotiations between the Ukrainian authorities and potential western investors, which, according to the law adopted by the Verkhovna Rada, can join a newly created company - a gas transport operator to be established for managing the Ukrainian gas transportation system. There is American company Chevron among these potential investors, so you can expect to see the star-spangled American banner above the "Ukrainian gas bastion" soon.

What is the Europe's reaction on obtaining control over the transit of Russian gas by an American company? Most of all, obviously, it should raise discontent of Europeans… But in Brussels politicians are still telling us about a monopoly position of Russian gas supplies to Europe and apparently underestimate the consequences of the Ukrainian crisis.

The Ukrainian crisis has provoked an interchange of European economic sanctions against Russia and the Russian counter sanctions. Many European companies has already suffered from these responses of Russia.
Furthermore any of us has to think hard finding out that in Ukraine the law on sanctions also was adopted providing Kiev for a possibility to stop transit of Russian gas to Europe. A great deal of people do not believe that Ukraine will apply anti-gas sanctions in practice. But taking into account the current political situation in Ukraine we cannot exclude any even the most unexpected and inappropriate actions. After all, if the current Ukrainian government unleashed an internecine civil war to assassinate their own people, it is unlikely possible to hope they will take care of people in other countries.

There is a high probability of upcoming severe scenarios of deterioration in Ukraine and expanding scales of heavy consequences too, which are unlikely anyone can adequately anticipate or much less take an effective control over them. Moreover, even if gas transit via Ukraine is not blocked all the same nobody gives assurances of preventing an illegal uptake of Russian gas intended for Europe in winter season.
It seems to be like a natural disaster with almost unpredictable scenario, like the one that is brewing in Iceland, where about thousand recorded recently episodes of earthquake denotes that an eruption is maturing in depths of Bardarbunga volcano. The principal point is the same - if it can happen, how to limit the effects.

There is a discussion about paradox of the Ukrainian crisis, which, on the one hand, overflows with horror of huge economic and human losses, but on the other, although it sounds cynical, the crisis could also result in a beneficial effect. It means that the crisis in Ukraine gives an important signal to our politicians about the threats related with the "Ukrainian gas bastion", is not it? In fact this signal would have to convince our politicians that at least in the current decade, while a real alternative to Russian gas is still absent, it is necessary to use the opportunity to diversify gas supply routes through the construction of the gas pipeline South Stream bypassing half-demolished and soon sinking into a bitter cold Ukraine.

However, our hopes of even such a partly positive outcome are not really justified. There is nothing that can encourage our optimism, since actually we see that a real direction of policy makers in Brussels and Washington has almost nothing to do with our expectations of rational choice, the choice in favor of Europeans! On the contrary, there is an urge over there to use along all possible excuses to prevent the implementation of the South Stream project, despite the fact that its construction was agreed on the level of bilateral intergovernmental agreements a long time ago in 2008.

Bulgaria happens to be in the center of the Brussels-Moscow confrontation over Ukraine. Representatives of the European Commission and even rare visitors - US Senators have repeatedly visited Bulgaria to make Bulgarian government freeze construction of the South Stream gas pipeline, thereby creating another "Bulgarian energy bastion" in the way of gas supplies from Russia.

It's disappointing to see that political pressure from outside is put upon the country - one of equal members of our overall economically powerful European Union, but which, meanwhile, is still very much inferior to other member states in economic development. According to Eurostat figures published in July the level of GDP per capita in Bulgaria is 45% below the average at 28 countries of the EU, while, for example, in Austria it is by 29% higher than the average. And in terms of actual individual consumption per capita in 2013, Bulgaria was in last place behind all 28 EU states.

Appealing to common sense there should be a double larger economic aid for Bulgaria instead of attempts to push this country under even more difficult economic situation.
Besides other countries where alongside with Bulgaria the South Stream gas pipeline is to be laid are not distinct from Bulgaria in economic development and also remain at the level below the average with the exception of Austria and Italy.

Let's imagine for a moment how much all of these countries are interested in gas supplies and new gas infrastructure development and how they worry and with what concern and sympathy they look at political disputes in Bulgaria against the construction of the South Stream pipeline, triggered by the efforts of politicians from Brussels and Washington. It turns out that Bulgaria and all these countries happen to be on the edge of losses of these future economic and social benefits. Initially Brussels dictates their terms to South and South East countries, but there is nothing adequate offered by Brussels politicians to them as a reasonable reimbursement. I doubt that it is a surprise for European business especially working in agricultural sector because they have already tried to get reimbursements to cover the consequences resulted from Russian counter-sanctions.

In the long term, without importing Russian gas ultimately some European countries will have either to start production of shale gas, or to buy LNG or pipe gas from other sources at higher prices. And the coming months unfortunately rather many Europeans may spend in uncomfortable cold homes and offices under the conditions of tightening electricity savings.

Of course not the whole Europe will freeze. Most of the EU will continue getting electricity, gas and heat. These problems will affect the population in South and South East Europe, by other words in countries beyond the "Bulgarian gas bastion", including countries outside the EU. The situation might turn up a real disaster for the region located "beyond the bastion".
The current Ukrainian route provides 60-70% of the needs of the South and South-Eastern region of Europe in gas. In 2013 the EU obtained 69 bcm of gas via Ukraine, including Bulgaria - 2.5 bcm. Turkey imported 13 bcm, Serbia and other Balkan countries outside the EU - about 2 bcm of gas, Moldova together with the Transnistria - about 2 bcm.

Russia covers via the Ukrainian route 84% of Bulgaria's requirements in gas, 34% of Turkey and 100% of Serbia and Moldova. Slovakia and Slovenia is 100% dependent on Russian gas transit via Ukraine. Austria, Greece, Czech Republic and Croatia - on 50%, Italy - on more than 40%.

As you can see, Bulgaria is one of the most dependent on Ukrainian transit countries in the EU and currently consumes 3.4 million cubic meters per day. In case of deteriorating of the situation caused by transit shutdown Bulgaria would be forced to start a gas withdrawal from the only one in the country UGSF "Chiren". But it is filled with gas only by 75%, and these stocks are not enough for the whole winter season. It would be also difficult to ensure the gas supplies to Greece. Therefore, Bulgaria, Turkey and Greece could face with the most severe gas shortages even before Christmas.
It doesn't take too much time to see what will happen.

Feeling better when see that so many people in so many European countries look forward to the results of the negotiations of the European Union, Russia and Ukraine to be commenced again for searching a way out of these "gas bastions." Then why not?

The price for GAS Future started to raise long before winter this year. Why?

According to Bloomberg, gas future for September delivery rose in London at 21% over the past six weeks.

Usually in summer, Russian or Norwegian long-term contract gas is more expensive than spot market gas at average of 100 euros. However, when it gets colder gas price in the spot market begins to grow, and in winter, it is higher than long-term contract price. But this year at least two months before the heating season prices on the spot market have already started to grow. What is the reason?

The fact is that last month there was still a hope that the issue with Ukraine's gas debt to Gazprom would be solved by September. However, ongoing tensions between two countries do not leave us a chance that the gas crisis can be resolved before winter. Fears on gas crisis that can stop gas supplies from Russia to South-Eastern Europe make prices go up. If the gas crisis repeats in winter 2014-2015, spot market gas price can climb to unprecedented heights.

Unfortunately, Ukraine has been destructive in solving gas issue. Recently, Ukrainian parliament adopted a law on sanctions against Russia giving the government a right to stop the transit of Russian gas to Europe at any time.

Instead of taking a step forward to solve the gas crisis, Kiev is committed to escalate the conflict. When the European Commission is trying to develop mutual understanding between Ukraine and Russia, Kiev passes the law about the sanctions that makes ​​it clear that the conflict with Russia is getting even worse. This means that the likelihood of another gas crisis this winter is very high.

In case of gas transit problems Bulgaria and Greece will be seriously hurt. We in Austria, and people from Slovenia, Italy, Croatia and Hungary would also feel gas hunger. Slovakia and Czech Republic, by the way, are on a safer side as the get supply of Russian gas via "Nord Stream". But for countries in South-Eastern Europe there is no other way to get gas, except through Ukraine.

The existing threat of disruption of gas transit will continue to exert upward pressure on prices. Now, Ukraine gas storage facilities are only half filled. A country torn by internal conflicts, in August has already begun to limit the consumption of natural gas. We can only guess what will happen when the heating season starts.

Under these conditions, our European leaders should be more active in convincing all parties to negotiate. It is evident that the consequences of Ukrainian energy crisis are quite dangerous for some European countries. But we still hear our Euro politicians’ statements that repeat statements of US Department of State. It seems that it would be Americans to suffer without gas this winter and not Bulgarians or Greeks, for example.

Why?

Why do we find ourselves in the position of the gas hostages of Ukraine?

Only a short time ago many of us wandered what will happen in Ukraine, if Russia decides to shut off gas supplies to Europe through the Ukrainian gas transportation system, as in 2009. Mostly now the Ukrainian crisis is presented to Europeans as an outcome of the aggressive policy of Russia. So for us before now, there were more or less sound reasons for considering this further possible turn in gas disputes as an unfriendly action from Russia.

But recent events have surpassed my intention to consider how Russia shuts off supplies of the Siberian gas to Europe.
Ukraine turned out to be ahead of what I could expect as well as probably many others who with concern and often with a growing disapproval evaluate the situation related to the supply of gas to Europe.
Although to be obvious, a new move in the gas disputes was directed by the Atlantic patrons of Ukraine. However, it is not always… Instead of cutting off gas supplies Russia had reacted for Western sanctions and imposed a ban for imports of Finnish and Lithuanian milk, as well as vast majority of other agricultural products from the EU for one year. And after that instead of Russia now Ukraine is declaring its readiness to cut off gas transit!

Ukraine's parliament has recently adopted a new law with a package of sanctions that includes about 30 measures. Although the law doesn't mention Russia as its target, the Ukrainian Prime Minister Arseniy Yatsenyuk said earlier it would open the way to impose sanctions against Russia. One of them is intended for legalizing a ban on transit of Russian natural gas and other energy resources through Ukraine territory!
It is noteworthy that this law transfers the right to impose sanctions to the Ukraine's National Security and Defense Council as if the Board of Ministers of Ukraine would not to be willing itself to take a full responsibility for consequences of its future application.

Now, Ladies and Gentlemen, please feel yourselves comfortable near your computers and tablets and prepare for the news that you are being threatened with blackmail and that it will be a racketeering activity of the Ukrainian authorities!

Assuming that your attention to the political crisis in Ukraine and a related war of economic sanctions against Russia largely (sorry for my cynical viewpoint) has been associated with your curiosity as of a detached observer. But now everything has changed dramatically because that the present action of the Ukrainian authorities obviously poses a direct threat to our well-being.

So far, our politicians have argued about a potential threat of stopping supplies on Russia's initiative, reasoning in this regard that it proves a vital need to reduce as soon as possible "dependence on Russian gas." Although I already mentioned previously that Russian share in an annual gas imports to EU actually is not higher than Norwegian.

But as a matter of fact it turns out that now there is a necessity urgently to discuss the problem of how to reduce dependence on a transit monopolist that is Ukraine. Because in accordance with contractual obligations Ukraine has to provide transportation through its territory of more than 60% of Russian gas supplied to Europe.

So ultimately Ukraine does not care of losing confidence of international business that, as a common rule, should be the most important attribute of any country.

Moreover, the Ukrainian government recognized the fact that shutting off Russian gas transit to Europe would result in a huge loss of about three billion dollars which Ukraine annually earns on providing gas transmission services.

However, Mr. Yatsenyuk is quoted as saying that by such a way Ukraine is going to bring to an end gas dependency from Russia. At the same time, he noted that Ukraine expects that financial aid will be granted by international financial institutions, including the World Bank.

Here I would like to remind you that the full name of the World Bank - the International Bank for Reconstruction and Development. For most of us it is very questionable whether this respected international organization established in order to promote global development, would compensate the huge losses caused by conflicting actions of the Ukrainian authorities, thereby recognizing and by certain way encouraging this attempt of Ukrainian state racketeering aimed at Europe.

Ukraine is eager for depriving Russia of income on gas exports but at the same time as a result Ukraine will block gas supplies to consumers in Austria and in all the countries of South and South-East Europe. That looks like a double strike, is not it?

At the moment I would rather not to sink further into geography of deliveries, let's consider later on how it reflects primary reasons of gas confrontation.

Meanwhile I would not be surprised if some our politicians will continue to remind us the main characters from the popular sci-fi thriller "Men in Black" who did not take off their black glasses in process of manipulating a public awareness. In our real situation political leaders first of all in Brussels also are able to release an information flow which brightly blows up in front of our faces and in our minds, erasing memory. And then, as if nothing had happened, they could start arguing that we have to blame Russians for everything and for disrupted gas supplies for sure. In politicians' opinion allegedly the Ukrainian threat of shutting down gas transit to Europe only more confirms that this is Russia - an unreliable supplier…

It's time to remind ourselves that ultimately it is no matter at all what kind of glasses "men in black" wear and what kind of "flashlights" are in use for promoting a contradictory information. Anyway, it is impossible to ignore the fact that since 2008 after signing the relevant international agreements, for six years Russia has been implementing an ambitious in terms of international scope and a technologically advanced gas pipeline project South Stream, bypassing the Ukrainian gas transport system in order to secure a number of European countries from newly appeared Ukrainian gas blackmailers.

It would look as if nobody realizes in Ukraine that they are going to block gas to Europe, and what the implications will be for Europe. Even though Mr. Yatsenyuk is quoted as saying "We understand the price should been paid by Ukraine (but it is not only those 3 billion USD - Ed.). But we are willing to pay for their independence".
Here you are, there are reasonable questions then. What about us, Europeans? Are we, European citizens willing to continue further to pay for the independence of Ukraine? And what do we expect to get in return? Answer with grim humor might be that in upcoming winter it would not be possible to get anything instead of gas from half-collapsed and half-plundered Ukraine, even neither gorilka nor salt pork which according to their habits could facilitate our stay in unheated homes. And before the winter comes, field rations of NATO soldiers sent together with humanitarian aid to Ukraine will be on the wane.

Not long ago in June in Brussels, the Ukrainian heads and leadership of 28 European countries signed the Association Agreement between Ukraine and the European Union. Under the Agreement, Ukraine should move along the path of deepening political, economic and trade relations with the EU Member States as well as develop cooperation in the fields of justice and security. Two months ago, many of us still were sure that Ukraine really want to be a partner of the EU. However, now our expectations have vanished.
Whether is it possible to consider partnership in case, when, instead of efforts for promoting cooperation Ukraine deliberately jeopardizes an energy security of its strategic partner?

There is another strange assumption that by imposing anti-Russian sanctions Ukraine is trying to support the policy of prohibitions against Russia carried out by the EU and Western allies. But it seems that taking part in this political game on the EU side, Ukraine scores a goal against their own — not the opposing — team, in other words plays against our Western European team. Meanwhile, it is not unlikely that Ukrainian politicians allegedly act in favor of our Western European team, but, in fact, they perform what suggested from behind the Atlantic, as it happened more than once.
Moreover, shutdown of transit pipelines obviously would create not less favorable impacts than new problems. So, for instance, it is hardly possible for Europe to get penalties for the gas contracts infringement from Russia in case of violating gas supply, since such disruptions must be classified as results of force majeure.
At the same time such a threatening precedent would raise the conclusion that there is a vital need in seeking gas detours around both technically and also politically unreliable Ukraine. In this context, it is even more convincing what Russia is making now a significant positive input into the problem of diversification of gas supplies by increasing up to a full capacity of the Nord Stream gas pipeline and by constructing a new South Stream gas pipeline.
Besides another consequence of switching gas supplies from Russia to Europe at new directions a commercial value of the Ukrainian GTS estimated by Ukrainians to 25-35 billion USD, will fall by half.
Therefore, open questions with a multi-billion-Euro cost for all taxpayers. How will Ukraine and EU together with the Atlantic allies raise such large financial resources? What countries, what international financial institutions, and of the topmost importance - at whose expense are they going to reimburse a collapse of the Ukrainian GTS and everything else?
In summary, it remains to say that despite all the political turmoil, Ukraine obviously has to solve gas disputes with Russia on a mutually acceptable basis not using GTS as a monopoly tool for suppressing consumers of transit services both in the West and in the East.

Ukraine will face huge challenges painstakingly seeking reasonable ways of modernizing its gas transport system. It will take years and for all that time ultimately European consumers should mostly rely on gas supplies from existing proven suppliers, including Russia too and Russian pipelines - so-called Streams from the north and from the south bypassing Ukraine with its long-running political, economic and technical problems.

And then, in some years, when at last a stable recovery and expected growth of the European economy will require new gas resources, we all look forward to the long-term results of implementation of the European Commission strategy for expanding the sources of energy supply.

Why Ukraine attempts to put us into a corner as gas hostages?

Why is a basic redundancy rule ignored in some managerial and technical systems although it should be of vital importance?

Car drivers all over the world continue a discussion regarding a necessity of keeping a spare wheel in a car. There are many drivers among us who suppose that, if they have a compressor, a tire repair glue as well as a mobile connection and smooth road up to the nearest service station then it is possible to drive without a spare wheel.

However, there are many opponents in this discussion who were unlucky being in pitch without above mentioned technical aid opportunities. As to long-haul trucking professional drivers they don't debate the topic at all - it is out of question for them that there should be a certain number of spare tires en route. Often we are able to see on highways how they are carrying them over.

Therefore, it is common requirement of providing for redundancy solutions to enhance security in different modes of transportation as well as in technical systems of all sorts. The safety of flights of aircrafts is ensured by means of even triple redundant systems well known in engineering as Triple Modular Redundancy (TMR). A main feature of TMR is that if one component fails then its mistake always has to be blocked by two others. In such a triply redundant system, all three components must fail before it entirely fails to function.
It is not difficult to imagine that in fact a redundancy is a basic universal rule of ensuring security widely used in engineering and technology, which has always existed in nature and continue spreading within different spheres of human life.

Now let’s take a look at the context of redundancy rule on the problem of increasing security of energy supplies to the EU, which the European Commission is currently paying a particular attention. European Energy Security Strategy presented by the European Commission in May, points out that "For the winter ahead, the Commission will work together with Member States, regulators, Transmission Systems Operators and operators to improve the Union's immediate preparedness in respect of possible disruptions (supplies)”.
We can see that the European Commission proposed decisions on this important issue taking into account a redundancy rule in general. The Strategy determines in particular that "investments in back-up infrastructure are now obligatory".

As for natural gas the Strategy gives a great deal of attention to diversification of infrastructure - 27 projects in gas were identified as critical for EU's energy security in the short and medium terms. Their implementation ultimately is expected to enhance diversification of supply possibilities. It obviously complies with a basic redundancy rule since that envisages a usage of several gas pipelines acting as back-up transport capacities relative to each other.

However, it raises significant worries and doubts that dozens of the projects listed in the Strategy are very far yet from commencement of operation. While implementation of some part of the projects has only commenced the other part is on even more earlier stage of pre-feasibility, permitting and financing issues yet. It means that the Strategy implementation might contribute to increasing diversification of gas supplies but it could happen only after 2017.

Moreover, there is only one new pipeline within the list presented in the Strategy - Trans-Anatolian Natural Gas Pipe bringing about 10 bcm of Caspian gas to the EU via Turkey and opening the Southern Gas Corridor that is to be put into operation in 2019 at the earliest.

Meanwhile the question is what energy are we going to obtain until then? In addition, what is the state of play in diversification of gas transport infrastructure and fulfilment of redundancy rule now, "for the winter ahead"?
Nevertheless, you could choose your answer yourself from this range: bad, very bad or worse than ever.
We have to return to the problem related to the Russia–Ukraine gas disputes. In 2013 supplies from Russia in the volume of 136, 2 bcm amounted to about one third of EU natural gas imports. 86 bcm of those gas supplies or more than 60% is pumped by transit through pipelines across Ukrainian territory prior to arriving in the EU, especially to the countries of South and South-East Europe.

It is common knowledge that Ukraine has gone into deep political crisis that has a disastrous influence on economic situation within the country. Kiev is in arrears for gas supplied already from Russia more than $ 5 billion and refuses to pay the debt. For this reason on June 16 Russian company Gazprom switched to advance payment from Ukraine's Naftogaz on deliveries of natural gas in accordance with the contract and completely cut  gas to Ukraine. Since then only gas for Europe has been transmitted via Ukraine in volume of 185 mln cm per a day. The talks on the gas dispute probably will be resumed only August 29.
I already wrote a month ago about technical condition of the Ukrainian gas transport system (GTS). Despite current condition of gas pipes and other equipment has deteriorated beyond the limits caused also by lack of proper repairs since Soviet times the Ukrainian parliament now is trying to pass a bill allowing EU and US companies to lease up to 49 percent of GTS, which is totally owned by Naftogaz Ukraine. In the beginning of June the Ukrainian parliament passed the first reading of this bill but further the process come to standstill because a number of Ukrainian MPs demanded to include additional clause regarding approval of structure of shareholders at the company - GTS operator that means a battle for controlling over the Ukrainian GTS is still continuing.

Whether Western companies really would like to take on lease such high risk assets taking into account its technical condition and chaos in Ukrainian economy it is really a doubtful question.
However, in an extended run it does not matter for us what will happen with a new Ukrainian law because all risks of applying the GTS for gas transit from Russia to our countries would still exist since it is impossible shortly to improve dramatically its technical condition. Besides the lack of operating reserves of gas, necessary for the upcoming winter will drag Ukraine to illegally siphoning off gas supplies intended for Europe how it happened in 2009. There are also risks posed by politicians who are interested in enlarging the conflict between Ukraine and Russia and who are willing to use the problem with the Ukrainian GTS and the gas disputes for escalating tension in the region.

However, what will happen if because of these risks Russia shuts off gas valves for supplies to Europe via the Ukrainian GTS?

In accordance with the Strategy, the European Commission is launching energy security stress tests in light of partial or complete disruption of gas supplies via Ukraine in the upcoming winter. This is correct action but obviously, it is not enough!
By analogy to a wheel story above referring to the case of the Ukrainian GTS one would be sure that even a less experienced driver would unlikely take a risk of performing stress tests in order to find out what will happen with his car if an old, many-times-patched tire fails on the road...
According to the redundancy rule, we must use reliable tires ensuring road safety and so the same for security of gas supplies there is a necessity in developing the transport infrastructure including extension of modern fail-safe gas transmission routes.

You could be aware yourself and by reading my previous posts that the international project of South Stream gas pipeline now is one of few realistic opportunities of strengthening security of gas supplies. Siberian gas having been already familiar to a half of Europeans for many years should come via the South Stream to Europe in autumn next year bypassing politically, economically and technically unstable Ukraine.
But actually now there is an intention of getting European companies and indirectly all of us into a mess named the Ukrainian GTS since it is proposed to use it further as an old, rusted wheel instead of replacing it by a new one - by a new gas pipeline, by a new route and by many other "news". They are arguing that substitution for a new modern pipeline will cause an increase in dependency on a certain supplier of gas up to a critical level. Nevertheless, it does admit of doubt why it might happen only because of shifting from one gas transmission route to another.

In fact, we are speaking about the change of transport routes of existing volumes of gas supplies. Originally, under the contracts with Russian Gazprom the Ukrainian GTS was obliged to pump 120 bcm of natural gas. After putting the Nord Stream pipeline into operation and shifting the gas supplies route to Germany via Baltic Sea the transit via Ukraine decreased down to 86 bcm last year. Moreover, it will shrink again by 60 bcm because of the South Stream.

Reportedly, it causes a drastic reduction of the commercial value of the Ukrainian GTS.

Why should we worry? European gas consumers should not care about the commercial value of the Ukrainian GTS, should they?

Ultimately, it doubles troubles for Ukrainian authorities and their foreign principals. Nevertheless, neither in Brussels no in Ukraine they would like to see deeply an economic impact of scenario if Russia really would be pushed for the decision of turning off the gas valves on transit supplies to Europe via Ukraine, as it took place in 2009. However, it would be another story.