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. Last Updated: 07/27/2016

'Gas Diplomacy': Economic or Political Tool?

Russia's use of "gas diplomacy" - switching off gas supplies to clients like Estonia or Ukraine at sensitive moments - is largely motivated by economic factors even if the timing is political.


Russian and Western analysts believe Moscow chose to cut off gas supplies to Estonia this week as a means of reminding the former Soviet republic at a critical moment of its continuing dependence on Russian energy.


But they also said that it was only a question of when Russia's state gas monopoly, Gazprom, would decide to turn off the gas and demand payment - not whether they would do so.


"There is a political element to this, of course", said a Western diplomat who follows Russia's gas industry. "But there is a very strong economic element because the gas industry is trying to redirect its exports to the West and to charge world prices for gas from the former Soviet republics".


Russia possesses about 40 percent of the world's natural gas reserves and it supplies Western Europe with about 25 percent of its expanding needs. That makes Gazprom a potential hard-currency cash cow that Russia has no interest in squandering on non-paying or subsidized clients.


Gazprom has raised the price of gas to its former Soviet customers by more than 200 times in the past two years, bringing it close to the world price of about $85 per 1, 000 cubic meters.


The former Soviet republics, whose economies are in as bad a shape as Russia's, have struggled to pay their gas bills and now owe Russia 460 billion rubles ($434 million), according to Fuel and Energy Minister Yury Shafranik.


"Given the economic situation it is clear that Gazprom has to collect this money", said Larisa Vdovichenko, deputy director of Moscow's Institute for Sociological Economics.


Gazprom cut off Estonia's supplies only days after the tiny Baltic state had passed the Law on Aliens that appeared to threaten its large Russian-speaking minority with discrimination.


"Of course there was a political element to Russia's decision", said Vdovichenko. "Estonia gave Russia little choice by refusing to listen to Russians living there when they passed this citizenship law".


Gazprom maintains there was no political motivation for the cut at all, saying that Estonia owed it 10. 1 billion rubles. The tiny Baltic state has now begun making payments on that debt and its gas supplies have resumed.


Supplies to the other two Baltic states of Lithuania and Latvia were also cut a few days later, but the Lithuanian government described the move as purely economic.


The Estonian case is not unique, however. Many analysts believed in February that Russian threats to cut off gas supplies to Ukraine were politically motivated, one element in a dispute ranging from debt repayments to control over the Black Sea Fleet.


Those threats were never carried out. But last October, Russia reduced gas supplies to Ukraine by 50 percent, leading Kiev to play its trump card in the gas wars - it siphoned off the gas that Russia sends by pipeline through Ukraine to sell to Western Europe.


More recently, 10 days after President Boris Yeltsin and Ukrainian President Leonid Kravchuk held a Kremlin meeting that was heralded as a major thaw in relations and brought compromise on a range of issues, a deal was reached on gas payments too.


Last Saturday, Shafranik announced that Ukraine - which owes 221 billion rubles to Gazprom - would get a special concession. Until Jan. 1, 1994, Ukraine will have to pay only half the world price.