Putin should think twice about using Gazprom as a weapon against Turkey

Share

Russia's intervention in Syria was intended by President Vladimir Putin to be a stunning diplomatic manoeuvre. At a stroke, he would divert attention away from Ukraine, bring Russia into an anti-terrorist alliance with America and its allies, shore up the Assad regime in Syria and, most importantly, end Russia's diplomatic isolation.

Instead, we have another plane falling out of the sky in flames; accusations and counterallegations, threats of retaliation and, once again, Russia's biggest export earner Gazprom finds itself on the front line, dodging diplomatic missiles.

Mr. Putin accused Turkey of a "stab in the back." He promised that there would be "serious consequences" for the shooting down of the Russian fighter jet on Tuesday that Turkey's armed forces claimed was violating Turkish airspace. If the Russian President really is serious, we can exclude a military response (which would be reckless). Instead, Mr. Putin is likely to wave an economic stick. Turkey is Russia's second-largest natural gas customer after Germany. Blue Stream, a pipeline beneath the Black Sea, typically supplies about two-thirds of Turkey's gas requirement, a trade worth some $10-billion (U.S.) to Russia.

Unfortunately, when you push economic levers, they have a tendency to spring back in your face. At Gazprom headquarters in Moscow, there will be zero appetite for a gas war with Turkey. Demand for Russian gas is weakening – Gazprom supplied only 57 per cent of Turkey's gas in the first nine months of this year. Iran is supplying gas from the east, coal is at rock-bottom prices and liquefied natural gas is becoming competitive. Turkey is importing more cargoes from Algeria and Nigeria. Emboldened by a more competitive market, Botas, the Turkish utility, is demanding a 10-per-cent price discount, using the arbitration clause in its long-term contract.

Even so, you might think that Gazprom will dig in its heels, using its muscle as the biggest gas supplier to punish the Turks for their arrogance. Ten years ago, that might have worked but Mr. Putin needs to be reminded that Turkey is not just a big customer but a key player in Russia's new gas export strategy.

For many years, Gazprom has been desperate to find export routes to Central Europe that avoid Ukraine. A pipeline through the Baltic Sea has secured direct access to Germany but a plan to link Russia directly to southern European gas networks with a pipeline across the Black Sea to Bulgaria has been scuppered. The invasion of Crimea has put an end to European Union co-operation with Gazprom's ambition.

Into this row stepped Turkey, a country that is anxious to become an energy hub linking Europe to gas and oil fields in the Middle East and Central Asia. A second Black Sea pipeline, Turkish Stream, could provide Gazprom with a new southern route, bringing Russian gas into Turkey's network, traversing the Bosphorus and arriving in Southern Europe via the Balkans.

The grand plan was that by 2019, no Russian gas destined for Europe would pass through Ukraine. The transit contract would be allowed to lapse, ending Gazprom's dependence on the troublesome southern neighbour. For Mr. Putin, it also offered the delicious prospect of Ukraine becoming just a little bit more vulnerable to the will of the Kremlin.

All that is now in the balance, and instead of diverting attention, the world is once again looking at Ukraine. Is the Russian President really prepared to put Gazprom's grand economic strategy at risk for the sake of his diplomatic offensive in Syria? If he is sensible, Mr. Putin will bluster, swallow his pride and tell his pilots to be more careful. He may even consider arming Kurdish rebels in Turkey but that too carries huge diplomatic risks.

In the long run, butter matters more than guns but the President will pay the price in public opinion as Russians count the bodies returning from the Levant.

Carl Mortished is a Canadian financial journalist based in London.