Kurdish oil, South Stream, and Ukraine

The South Stream epic is still on. As it was expected, Moscow’s fiasco in this endeavor has been declared a victory. Accordingly, Europe is called an aggrieved party – it will be hard up for fuel to heat its houses. It remains a puzzle what makes the Gazprom boss think so, taking into account that European gas storages are filled to capacity.

Gazprom chairman Aleksei Miller has said that closing such a highly-publicized project is a step towards a changed work pattern on Europe’s market.

From now on, stubborn EU states will be buying gas not in Russia but in Turkey on its border with Greece. Tellingly, Moscow does not even want to hear about something of the kind with Ukraine.

The oil price slump was caused by various factors, not in the least because supply far exceeds demand in the world. Building a pipeline across Turkey, Gazprom is creating a similar situation with gas in southern Europe.

Indeed, Nord Stream has been running at half capacity for several years, and no prospects are in sight that it will be filled to the brim. A pipeline, now under construction, is to transport gas from Azerbaijan to southern Europe. It will in fact fully meet the consumption needs of the Balkan and neighboring countries. The market is rather small here – about 19 billion cu.m. of gas. Besides, Rumania produces 11 billion cu.m. and consumes a little more. Croatia stopped buying gas from Russia several years ago. A project is being drawn up to supply gas from the eastern Mediterranean to Greece and Italy.

Where will the Turkey-bound Russian gas go if there is a glut of it on the market? The only way out is to cut the price, but why then all the fuss about this pipeline if it only brings losses instead of profits? Yet there still is “a flaming passion” – to reduce Ukraine’s transit potential to naught. This will justify spending billions of either rubles or dollars.

Oil continues to create major problems for the Kremlin. The media published a piece of news the other day, the importance of which the pro-Kremlin experts have not yet duly appraised.

The government of Iraq has settled a dispute with the Kurdish autonomy about oil sales and budgetary expenditures. It will also furnish Erbil (the capital of the Kurdish Region) with some of the US-supplied weapons. Some important oil centers are located in northern Iraq. What is more, the Kurds control Kirkuk, from which oil is delivered to the Mediterranean coast across Turkey. When the Kurdish authorities had problems with Iraq’s central government, they did not increase the extraction of oil due to somewhat uncertain legal status. Now that this problem has been solved, nothing stands in the way of production growth. But even in those conditions, the Kurds annually supplied about 35 million tons of oil onto the world market, which accounts for 24 percent of Iraq’s total production. Experts forecast an early enlargement of this figure. Moreover, this can also be a route for oil from the south-western regions of Iraq. On the whole, the oil sea continues to overflow, and nobody intend to reduce the extraction, but it is not Russia’s case.

The point is that 80 percent of new oil wells are being drilled by foreign companies. There are only three of them left, and they are subject to sanctions. In all probability, they will have to drastically reduce the scope of work and, hence, inevitably cut down the extraction of oil. Even if the price jumps up again, which is unlikely, Moscow will not benefit from this. Export will still go down, as will Russian budget revenues.

When Moscow was turning gas and, to some extent, oil into a political instrument, it was hardly thinking that it would eventually fall hostage to this process. And this explains why the Kremlin has stepped up its political maneuvering.

For ideological reasons, Putin preferred not to use the term “Novorossia” in his message. He thus signaled the West his readiness to make a deal. Although propaganda remains almost the same on federal TV channels and Moscow continues to follow a hard line, the reality forces it to at least simulate peacefulness. It is no accident that Donbas terrorists were told frankly that they should not even dream of the Russian ruble’s circulation in the so-called “DNR” and “LNR.” Moscow is short of money for Crimea and is supposedly going to levy a special Crimean tax. So, they do not need more spongers. Can’t give enough to their own folks, you know…

The Ukrainian delegation must take a firm stand at the upcoming Minsk negotiations. At first, the previous Minsk Protocols should be fulfilled completely and only then financial problems can be discussed.

Moscow has clearly got into dire straits – even sooner than the Kremlin forecast. They thought Ukraine would run short of gas and see an acute energy crisis. The situation is really very serious, but there are several ways to solve the problem. Keeping coal-loaded trains waiting on the border, Russia is trying to change the situation in the next round of talks.

The second, equally important, goal for Moscow’s diplomacy is to force Kyiv to directly negotiate with terrorist leaders and thus recognize them as a party to the future agreement. The proof of this is never-ending delays of the Minsk talks and demands, in particular by Pushylin, that US and EU representatives should be barred from them. Naturally, the Ukrainian diplomacy will never accept this. This does not matter much to Moscow, even though this is a pretext, albeit a small one, to accuse Ukraine of torpedoing or dragging out the talks. It is not ruled out that separatist leaders will sign something in Minsk but then, in line with a well-known pattern, they will say that, as they have not been recognized, they will not fulfill anything – to the accompaniment of tall stories about genocide and other salvos of Russian propaganda.

At first glance, if we consider this fact in isolation, the deal between the Kurds and the central government of Iraq has nothing to do with the Donbas. But in reality there is a direct relationship in the shape of increased oil supplies onto the world market and Gazprom’s shenanigans with South Stream. Moscow is more and more driven into a tight diplomatic and economic corner. The oil and gas price slump, a progressing devaluation of the ruble, and sanctions are assuming a more and more menacing shape. The entire Russian society is shouldering a heavy burden of the risky venture in Ukraine.

In these conditions, the Kremlin is trying to show, one way or another, its constructiveness on the eve of the likely imposition of new EU sanctions. We must take advantage of this as effectively as possible. If the Ukrainian side takes a firm and resolute approach, the Minsk negotiators will be able to reach an agreement which separatists will have to carry out. This may bring a fragile peace to the Donbas – at least for the time being.