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S&P weighs in on Russia-Ukraine crisis

Don Stowers  

Last month's Editor's Comment column was about the Russian seizure of the Crimean Peninsula from Ukraine and the impact this could have on energy consumers in Europe. This month, we'll provide an update on that issue and will examine several related topics as well.

After Russian troops entered Crimea, ostensibly to protect Russian interests there, the provincial government staged a hurried election in which 91% of the population supposedly voted to leave Ukraine and join Mother Russia. The election wasn't recognized by the United Nations or more than a handful of pro-Russian nations around the world. However, a weak Ukrainian government was in no position to do anything about it.

Crimea is now occupied by 25,000 well-equipped Russian soldiers, and another 40,000 troops are massed along Ukraine's eastern border. If Russia does enter Ukraine and attempt to seize additional territory or occupy the entire nation, it is unlikely Europe or the United States will do anymore more than verbally object. Most Ukrainians and the government in Kiev want to be part of the European Community, but unlike Poland or the Czech Republic, the country is not a NATO ally, so there will be no retaliatory military action by the West in case of an outright Russian invasion.

Standard & Poor's recently drew some conclusions about the unfolding Russia-Ukraine crisis in a report issued March 28. Although S&P says there is much "uncertainty and unpredictability," the report drew several conclusions:

  • S&P assumes a steady de-intensification of the crisis. Under this scenario, the ratings agency says Russia's growth will decelerate modestly to 1.2% in 2014 and improve gradually to 2.2% in 2015. They expect the ruble to stabilize at current levels.
  • Any renewed tensions, such as Russian military incursions into eastern "Russian-speaking" regions of Ukraine could lead to a new wave of sell-offs by foreign investors and capital flight out of Russia. The ruble could lose another 10% of its value against the US dollar.
  • S&P doesn't believe further EU and US sanctions against Russia will be severe. Therefore, the agency doesn't anticipate major gas and oil supply disruptions.
  • Additionally, the agency doesn't expect the West will apply onerous financial sanctions against Russia that would impact the banking and corporate sectors in Russia unless the crisis intensifies.

So there you have it. Russia's Putin has pulled off a land grab in Eastern Europe, and he gets a stern lecture on why he is wrong from the West. Makes you wonder if this success will inspire him to make similar moves elsewhere along the Russian border.

European dependency on Russian gas

Hans van Cleef, a senior energy economist with ABN AMRO Bank in Amsterdam, recently commented regarding the call for less dependency on Russian energy by Europe. "There are enough alternatives for Russian gas," he said. "However, all alternatives come with a burden. There is a price tag attached to that. It is expensive, dirty, or risky. It seems that Europe is stuck in a marriage of convenience when it comes to an important part of our energy supply."

ABN AMRO believes that LNG's limited availability at this time makes it too expensive. On top of that, there is a lack of infrastructure. "Coal supplies are immense, making coal a cheap alternative," said Van Cleef. "Expanding nuclear energy is possible, but from a social perspective undesirable." He added that expanding the capacity of renewables further in the near term is "not possible." His conclusion: that Europeans should focus on energy efficiency and invest more in innovation of renewable energy.

Other views on US gas exports to Europe

Russia's stranglehold on energy supplies to Europe has been accentuated by the situation in Ukraine. Here are some views from European and American leaders regarding the prospect of LNG exports to Europe:

  • German Chancellor Angela Merkel on whether US shale gas could help diversify European energy sources: "Many people think that this could be one component, if the United States decided to export shale gas."
  • Senator Mark Udall (D-Colo.): "The Ukrainian crisis provides a clear example of why the US Energy Department needs to quickly approve more liquefied natural gas facilities and cut through the red tape slowing LNG exports."
  • Jaroslav Neverovic, minister of energy of Lithuania: "The United States, with your enormous natural gas resources and highly developed infrastructure, has the kind of liquid market that Europe is trying mightily to achieve."
  • Condoleezza Rice, former US Secretary of State, said, "Soon, North Americans bounty of oil and gas will swamp Moscow's capacity. Authorizing the Keystone XL Pipeline and championing natural gas exports would signal that we need to do precisely that. And Europe should diversify its energy supply and develop pipelines that do not run through Russia."
  • Markos Kounalakis, research fellow at Central European University, commented: "The long-term solution is for the United States to safely develop its newfound and vast energy resources and release them into the international marketplace. It will also take a reawakened and reeling Europe to recognize that paying off Putin for his energy shakedowns is a crude and cynical form of modern appeasement. "

Bill Cooper, president of the Center for Liquefied Natural Gas in Washington, was favorably disposed after hearing testimony at a recent hearing of the Senate Energy and Natural Resources Committee titled, "Importing Energy, Exporting Jobs: Can it be Reversed?"

"Abundant US natural gas supplies allow us to export a small percentage while maintaining affordable domestic natural gas prices," said Cooper. "There is no reason for further delay. We welcome the actions of the House and Senate that support accelerating pending LNG export applications."

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