Potentials and limits of natural gas exports as an instrument of Russia’s foreign EU policy

By Carl Johannes Muth

In the last decade and particularly amidst the backdrop of the current crisis in Ukraine, Russia has increasingly been labeled with numerous unflattering terms such as “evil empire” (Voltaire 01/14/2006) or the “enemy number one” (Foreign Policy 6/24/2013). Nowadays the Russian Federation is widely seen as a state ruled by Vladimir “Dr. No” Putin, the real-life James Bond villain (Goldman 2009: 3), who uses Russia´s natural gas export as a political weapon in order to enhance the state´s interests. Despite the fact that every nation is essentially trying to use its economic relations, political connections, military power and other available capabilities to strengthen its own position in the international system, public opinion remains that no other country is as strongly linked to energy supply cutoffs as Russia. However, a closer look at the potential and limits of natural gas as an instrument of Russian foreign policy towards the EU might change the widespread image of Russia as “a grim soldier, sitting on a pipeline, cutting off gas supplies to Europe.” (Huotari 2011: 121)

Russia’s strong focus on its natural resources is easily explained by the fact that the country constitutes a 2% share of the world’s population, less than 3% of the global economy and 4% of global military expenditure, all of which provides little foundation from which any position of power can be derived (Liuhto 2010: 5-6). Admittedly, the possession of hundreds of nuclear weapons cannot be overlooked; nevertheless they can hardly be used in order to enhance Russia’s (economic) interests in the international system. Hence, since Putin took office, Russia has turned to its energy – the only possibility to solve the financial crisis that had been ongoing since the 1990’s

This development is not coincidental; it resembles Putin’s long-term strategy (to return Russia to its former strength) of making Russia a powerful player in global politics again. This plan of action was already a part of President Putin’s dissertation“Strategic Planning of the Reduction of the Mineral Resource Base of a Region Under Conditions of the Formation of Market Relations” where he underlines the importance of Russia’s abundant resources and raw materials for the country’s economy and emphasizes the state control of them. Benefiting from external developments, this strategy was proven to be extremely successful only a few years later. Based on a significant increase in price for gas and oil, Russia doubled its GDP, eliminated all state debts and became the world´s second largest natural gas producer. Furthermore, the increased natural gas consumption combined with the limited transportability of gas via pipelines (currently Liquefied natural gas – LNG still plays a minor role in the EU´s gas imports) has only served to substantially weaken the negotiating power of the purchasing countries. In fact, all these developments led to a significantly enhanced supplier’s position, enabling Russia to nearly dictate the price especially for its most strongly dependent customers in Eastern Europe. Ultimately, this serves as a powerful instrument to enhance Russia’s economic and political interests in the international system, while the main other power factors such as military capacity or economic power were absent.

“Russia enjoys vast energy and mineral resources which serve as a basis to develop its economy; as an instrument to implement domestic and foreign policy.”

– Vladimir Putin – (Ghaleb 2011: ix)

The flipside of the coin however, is that Russia also became strongly dependent on its own natural resource export revenues. Although the share has significantly declined over the past 15 years, in 2014 Russia’s energy sector still contributed 20-25% of the state’s GDP, 65% of its total exports and 30% of government budget revenue (Trading Economics 2015). This in fact leads to the complex situation of mutual dependency – or so called interdependence. Interdependence is neither good nor bad, but is usually characterized by an imbalance which causes an asymmetry in costs of interdependence (sensitivity and vulnerability) of specific countries towards another state. In terms of energy, especially natural gas exports, the cost of interdependence (sensitivity and vulnerability) is defined by the exporter’s share of natural gas on the state’s primary energy consumption, the alternatives to imported gas and the cost of switching to possible alternatives as a consequence of unilateral change by exporting countries.

EU energy consumption of Russian natural gas (%)

Country Natural gas from Russia Share on primary Energy consumption
Lithuania 100% 50%
Latvia 100% 31%
Finland 100% 10,60%
Estonia 100% 10%
Bulgaria 100% 13,60%
Czech Republic 80,50% 14,20%
Slovakia 63,30% 20,30%
Slovenia 57,40% 6,30%
Greece 54,80% 7,20%
Poland 54,20% 8,30%
Austria 52,20% 12,80%
Hungary 49,50% 19,70%
Belgium 43,20% 10,90%
Germany 39,90% 8,70%
Croatia 37,10% 9,40%
Luxembourg 27,90% 6,10%
Romania 24,20% 8,80%
Italy 19,80% 7,50%
France 17,20% 2,70%
Netherlands 5,80% 2,10%

However, different states in Europe have different levels of dependency on Russian gas. The Baltic States, inter alia, are highly vulnerable due to the lack of alternative natural gas suppliers and Russia’s share of the countries’ primary energy consumption of up to 50%, which does not include other Russian energy supplies such as coal or crude oil (Ratner et al 2013: 8). In addition, the quantity of the exported natural gas to the Baltic countries constitutes only a tiny fraction of Russia’s energy revenues and can be covered by the Russian state. The situation of Poland, Slovakia and other Eastern European countries seems to be slightly better, but these countries still show an increased dependency on Russian natural gas exports compared to the EU’s average with a simultaneous lack of alternative suppliers and energy sources. Germany and Austria, in contrast, benefit from their geopolitical location in the heart of Europe and therefore have recourse on a limited number of alternative suppliers, such as Norway. Moreover, the amount of natural gas exported to Germany represents a considerable share of Russia’s energy revenues that cannot be abandoned easily without major costs for the Russian state. The same goes for the German state which is dependent on the gas imports to satisfy the huge demand for gas of its own economy. Not surprisingly the strong economic ties have significantly affected both states’ political bilateral relations. Germany has been promoting Russia’s integration into the European economy, and in return has received a massive discount on its natural gas imports. Therefore unilateral changes, such as supply interruptions, are highly unlikely due to high costs expected for both states.

Russia’s share on France’s and the Netherlands’ primary energy consumption is relatively low. While France was able to diversify its gas supplies due to its favorable geopolitical location and by implementing an LNG terminal, the Netherlands could compensate sudden gas cutoffs by an increased production of its own natural gas resources. The most westerly points in Europe – Spain and Portugal – do not receive any natural gas imports from Russia, but instead from North African countries such as Algeria or Qatar (LNG) in the Middle East. In general it can be said that the specific asymmetric costs of interdependence increase proportionally the further east a country is located.

Looking at the high vulnerability of some Eastern European countries, one might think that the Russian state could play the energy card (cutting off supplies) for political and economic purposes. Arguably, this is not likely. Russia is heavily dependent on its energy export revenues whether natural gas, crude oil or coal to further restructure its ailing economy. It is in Russia’s vital interest to maintain its status as a reliable energy supplier much as it had been at the peak of the Cold War. Gas cutoffs to its highly vulnerable customers in Eastern Europe would only mean a slight loss of revenue whilst simultaneously achieving specific objectives in the short run. However, from a long-term perspective Russia will suffer a big loss of political reputation and future energy export revenues. In particular there is no question that such action would lead to a further increase of the EU’s ambitions to diversify its energy mix and suppliers by promoting its own gas pipeline projects such as TANAP and TAP (connecting the Shah Deniz II gas field in Azerbaijan with Europe), focusing on renewable energy (20-20-20 targets) and constructing further LNG regasification plants.

The EU’s intention to prevent a greater dependence on Russian gas was clearly demonstrated in the introduction of the Third Energy Package (TEP) in 2011. Core elements of this legislative package include ownership unbundling of vertical integrated companies (separation of generation and sale operations from their transmission networks), and Third Party Access (TPA) to pipeline capacity based on published tariffs approved by newly established National Regulatory Authorities (NRA). While the Nord Stream pipeline -but not its onshore extensions (OPAL and NEL) – could receive an exemption from TEP approved by the European Commission, the cancellation of South Stream can be seen as a result of the legislative package and the EU’s pressure on Bulgaria. This has led Russia to perceive TEP as clearly politically motivated, targeting the Russian state and Gazprom’s export monopoly that needs to be further legally investigated by the WTO (euractiv 05/02/2014). Although geopolitical components cannot be fully denied, the package’s aim to increase competition within the EU’s gas market by preventing any abuse of dominant market positions is rather merely technical.

In summary, it can be said that cutting off the gas might be easy from the technical viewpoint, but ignores the resulting significant long-term costs of such an action. Russia needs the political reputation of a reliable supplier as well as sustainable revenues from its energy and gas exports respectively in order to restructure the economy and enforce its political and economic interests in the international system. Thus, Russia’s potential use of natural gas as a foreign EU policy instrument is clearly limited, specifically towards its highly dependent customers in Eastern Europe.

This article was first published in August 2015 on Politheor.


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