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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

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Expanding Russia Issues Europe An Ultimatum

Expanding Russia Issues Europe An Ultimatum

Don’t tell the West, but Vladimir Putin isn’t changing. The Russian President has skipped their little ‘lesson’ on 21st century politics in favor of his own, unadulterated, version. In what we’ve come to expect, Putin is set to formally absorb South Ossetia – Georgia’s breakaway republic – and Gazprom is prepared to deny Europe up to one-quarter of its annual exports to the continent. What’s more, the conflict continues in Ukraine and allegations of Russian financing are growing louder.

As we remarked earlier, Russia has enjoyed a less than ideal start to 2015. In line with crude prices, the ruble has tumbled nearly 60 percent since its high last June. The country is hemorrhaging its foreign exchange reserves and desperately trying to rein in capital flight, which hit record levels in 2014 and is on track for more of the same this year. On Friday, Moody’s Investors Service slashed Russia’s credit rating to the lowest investment grade, with a cut to junk looming. The ratings cuts – which also targeted oil and gas companies Gazprom, Gazprom Neft, and LUKoil – represent serious stumbling blocks, but Western sanctions remain the primary source of Russia’s financing woes.

Related: Ukraine Will Have Russian Gas, For Now

What about those sanctions? Well, more may soon be on the way as the Kremlin is preparing to finalize an “alliance and integration” treaty with South Ossetia, which will place the renegade republic under Russia’s umbrella. Specifically, the agreement will begin to integrate the ostensibly Georgian territory with Russia assuming control of the borders, customs enforcement, and internal security. The standard of living in Russia and even the North Caucasus marks an improvement for South Ossetia, but the motive for Russia is less clear. At the very least, it’s a nominal attempt to assert dominance over a CIS – and larger post-Soviet region – that has increasingly more in common with the West than the Motherland.

The “fresh wrench” from Moscow will certainly kill EU momentum to significantly scale back Ukraine-related sanctions, where the situation remains confrontational. A bus attack near Donetsk recently killed 12 civilians and new allegations have emerged of Russian-backed violence. Ukraine’s Security Service has accused LUKoil and Ukrainian businessman Sergei Kurchenko of smuggling petroleum products and laundering as much as $2 billion in illicit proceeds to fund both the Donetsk and Lugansk People’s Republic, charges both parties deny. With no end in sight to the finger pointing, the saga looks to continue to define Russia’s radical movements on the periphery – recent gas ultimatum included.

Related: How Much Punishment Can Russia’s Oil Industry Take?

Last week, Russia and Gazprom announced plans to shift natural gas flows through Ukraine to a new route in Turkey. Seen as an unnecessary risk, Gazprom plans to cut exports to Europe via Ukraine within the next two years and is offering little consolation to its most established clients. In 2013, Russia met approximately 30 percent of Europe’s gas demand – more than 50 percent of which traveled through Ukraine. The EU has been tasked with constructing adequate infrastructure to market the gas to its consumers – the alternative, Gazprom says, is no gas. For its part, Gazprom will otherwise market the unused gas at an as of now non-existent Turkish hub in an “if you build it, they will come” approach that leaves much to be desired. Vice President of the European Commission’s Energy Union Maros Sefcovic believes a solution will be found, but underlined the bloc’s prioritization of transiting to a low-carbon economy sooner rather than later.

In the early goings, 2015 looks to bring little respite to what is truly an unfortunate collapse of diplomacy. It’s a symbiotic relationship gone wrong – the problem for Russia is Europe can afford to stand alone.

By Colin Chilcoat of Oilprice.com

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  • John Penney on January 20 2015 said:
    I remember reading a long time ago an article related to Putin's time as a KGB officer in East Germany. Putin reported something like, " The Stasi is really Orwellian, even by our standards. "
    I can not get rid of the impression that Putin is actually in some manner guiding the exact fall in petroleum prices. Every one's designating culpability towards the oil shieks, although I have been carrying out a large amount of researching.
    This kind of report, for instance:

    Plus I do think Vladimir definitely has a little something rather sinister up his pretty KGB sleeve.
  • Nik Nazarevsky on January 21 2015 said:
    I'm glad to read the information and analysis on the site. I think it will be interesting to read the additional info, but not propaganda:
    Russia's external debt for 2014 has decreased by 18% to $599.5 billion, as of January 1, 2015, according to Bank of Russia's 's preliminary assessment.
    On January 1 2014, Russia's external debt totaled $728.86 billion.
    The report suggests that state administration's debt is $41.5 billion. The new Russian national debt as of January 1, 2015 is $39.2 billion, down by 33.6% to the previous year . The Soviet-era debt has decreased by 11.5% to $1.77 billion.
    The Central Bank's debt has decreased by 37.5% to $10.4 billion, while the banking sector debt has gone down by 20% to $171.1 billion; other sectors total debt is estimated at $376.5 billion - http://itar-tass.com/en/economy/772063
  • Colin Chilcoat on January 21 2015 said:

    The external debt numbers are promising and certainly lower than several, more developed, nations. They will aid growth when the oil situation makes a turn for the better. The fact remains however, that Russia's economy is entirely too dependent on commodities' prices. As such, it is seriously contracting. Their revenue and financing streams from outside are severely hobbled and domestic money is running abroad faster than ever.
  • Franco DeGiovanni on January 23 2015 said:
    Talk about oil prices and credit ratings reminds me of the time when staid newspapers used to broadcast the number of Vietnamese or "Communist" dead with the inference that the Americans were winning handsomely.

    As a Western European my concern is for Europe and dislike intensely the way the American governments has forced our politicians to adopt sanctions against Russia.

    No wonder we'll be throwing out this lot, starting with Greece. And in the midst of all this misery up comes Soros insisting (as if he anyone's representative) that EU countries should give $51 billion to the Oligarchs in Ukraine. There is an unholy alliance between Mrs Nuland, the Oligarchs and Soros. When half of the youth of Southern Europe are unemployed our, when our countries are being invaded by multitudes from overseas, when our industries are being prohibited from exporting to a large market , a clique of very rich men, are asking that we give $51 billion for "Ukraine"

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