After a first-round draw in the high-stakes energy poker game between Russia, Ukraine and the EU, Vladimir Putin has the highest hand. The Russian premier avoided two energy conferences in Bulgaria and Turkmenistan knowing all too well that the key energy issues would be discussed in Russia's bilateral talks with Bulgarian Prime Minister Sergei Stanishev, Ukrainian Prime Minister Yulia Tymoshenkoand EU Energy Commissioner Andris Piebalgs last week in Moscow.
A master of energy politics, Putin knows that there are a number of substantive issues between the EU and Russia - Nord Stream, South Stream, Nabucco, Ukraine, the EU energy charter to name but a few - that need resolution.
Russia and Bulgaria on April 27-28 bridged their differences over the planned South Stream gas pipeline after intensive high-level diplomacy, moving toward a joint venture on the project. On April 29, Tymoshenko came to Moscow, offering Russia a role in the proposed upgrade of the Ukraine gas pipeline. The proposal is to spend USD 350 million to add an additional capacity of 30 billion cubic metres of gas annually. "They want EU to put money into upgrading the pipeline and Russia to agree to put the extra gas into it," Chris Weafer, chief strategist at Moscow's Uralsibbank, told New Europe. "Frankly, the chances of Russia agreeing to put extra gas in the Ukrainian pipeline are absolutely minimal.
At this point, I'd say it's not going to happen," he said. The only way Ukraine will get extra gas for its pipeline is to take Azerbaijan gas - from the 2nd phase of its north Caspian gas project - via Georgia and the Black Sea into the EU. Weafer noted that this option, with some credibility, ranks low in Moscow's priorities. "If you look at it this way, Russia's priorities are number one - Nord Stream; number two - South Stream; number three - Nabucco; and absolutely number four - last - would be an upgrading of the Ukrainian pipeline system,"Weafer said. The Nord Stream pipeline, despite environmental woes, is moving ahead and will have a capacity of 55 billion cubic metres by 2015 or 2016. To cover South and Central Europe's needs, Moscow is vouching for the 30-40 billion-cubic-metre South Stream pipeline while the EU and the US are pushing for the 30- billion-cubic-metre Nabucco pipeline.
This is Ukraine's window of opportunity. "Kiev is playing its Ace," Weafer wrote in a note to investors, following the Putin- Tymoshenko meeting. "For purely pragmatic, and risk management reasons, the EU favours a route other than yet another with Russian sourced gas via a Russian controlled pipeline. The problem with Nabucco is that either it transits Turkey to either Iran and/or Turkmenistan or, it relies on being able to build a trans- Caspian pipeline direct from Turkmenistan. There are obvious problems with both. Meantime, step up Ukraine. Their proposal could satisfy both Russia and the EU, albeit reluctantly for both. Russia would have some say in the pipeline and the EU gets gas from Azerbaijan," he wrote.
Tymoshenko realises that Ukraine would benefit from transit fees. Moreover, Ukraine would become an even more critical part of the EU's energy security. "Certainly, Ukraine's neighbours would prefer Nabucco but given Turkey's desire to use whatever leverage it can to push for EU membership and the lack of a Caspian Sea deal,"Weafer wrote.
When it comes to energy in Russia there is a very thin line between politics and economics. The important energy decisions have a very distinct political overlay. We know that and nothing has changed. The cold question of pipelines and upgrading the energy relationship with Europe is absolutely critical for Russia and Putin has a royal flush while Ukraine is indeed holding black Aces and Eights, the Dead Man's Hand.