Drawing lessons from Moldova on EU energy security and the Russian monopoly. Analysis by Dionis Cenușa

Op-Ed
	The experience of Moldova shows that energy interconnection, access to cross-border gas transmission infrastructure, but also European solidarity, can reduce the negative impact of the Russian monopoly...
Dionis Cenuşa, Senior Contributor

Moldova has managed to overcome one of the worst energy crises since the declaration of independence from the USSR in 1991. Although the problem of gas is well known in the country, due to excessive dependence on imports of energy resources, the alert level has never been so high. up. big. Previously, gas shocks were due to a considerable increase in natural gas prices since 2004. This was preceded by the refusal of President Vladimir Voronin to sign the "Kozak Memorandum" in 2003, shattering Russia's attempt to federalize Moldova. Later on, the country faced a gas supply disruption in 2009, becoming a collateral victim of the gas disputes between Russia and Ukraine. However, the source of the energy crisis in the Republic of Moldova in 2021 was Russia's unwillingness to extend the old contract due to disagreements about the price formula and non-payment of historical debts (about $700 million) by the new government of the Republic of Moldova. Another reason for Moscow's rigidity could be the withdrawal of economic preferences previously granted to pro-Russian forces, which Russia does not want to extend to the new leadership in Chisinau due to its pro-EU orientation and the subsequent cooling of the dialogue with Russia (3DCFTA, October 2021).

The interconnection with the EU through Romania and free access to Ukraine's transport infrastructure, which completed the implementation of European legislation in the field of natural gas market liberalization (before Moldova), strengthened the positions of Moldova in negotiations with Gazprom. These efforts have resulted in the extension of the contract between Moldova and Gazprom until 2026. The extended contract has imperfections, as it indirectly allows the Transnistrian region to accumulate debt. At the same time, the same contract offers the Chisinau government a five-year term for the liberalization, efficiency and interconnection of the internal energy market with the European system.

The current precarious energy situation in Moldova should serve as a reminder to the EU and the Member States that energy dependence on Russia always comes at a cost. The diversification of natural gas import sources, the rationalization of interconnection routes within the EU, the acceleration of the transition to renewable resources (including hydrogen-based energy production) and the rationalization of energy consumption should take priority over the construction of new gas pipelines in the EU supplying as from Russia. However, the latter carries security risks in the medium and long term. At the same time, the multiplication of pipelines from the same sources discourages the reorientation of the energy sector towards sustainable solutions and the increase of energy autonomy and resistance to destabilizing external factors.

Moldova's energy crisis and the avoidance of negative scenarios

Unlike the energy complications experienced by the country in the past, the energy crisis of autumn 2021 is based on two unfavorable characteristics for Moldova, which have aggravated the situation. On the one hand, the country is struggling to recover from the economic crisis (IMF, October 2021), and the pandemic still continues due to the low vaccination rate (as of October 30: 871,564 people fully vaccinated or 33% of the population). The new wave of infections (more than a thousand new cases a day in October 2021) can significantly reduce the economic recovery momentum anticipated by the government with foreign aid from the EU and the IMF (€600 million and $564 million, respectively ), which amounts to more than one billion euros in the next 3-4 years.

On the other hand, if the contract with Gazprom were not extended, the payment of exorbitant prices (€800-1,000 per 1,000 m3) for gas purchased in European markets would have been practically unavoidable. Moldova paid European prices for Russian gas purchased in October ($ 790 per 1,000 m3). The extreme volatility of gas prices, registered in recent months in world energy markets, would have put enormous pressure on the national budget in the middle of winter. The €60 million of financial aid from the EU (Reuters, October 2021) could not cover other costs than paying compensation to vulnerable groups, who will have to be helped because the new price will be relatively high anyway (some $450 per 1,000 m3). Instead of guaranteeing the economic growth envisioned by the IMF, Moldova could have been the victim of stagnation (stagnation and inflation), with all the corresponding socio-economic consequences.

The effects caused by the escalation of the energy crisis could generate socioeconomic consequences, increasing the energy poverty rate in the country. The interruption of gas supply in Russia and the inevitable rise in gas prices, respectively, would have had a destabilizing effect on the settlement of the Transnistrian conflict, where Russian gas plays an important role in the survival of the separatist regime. Therefore, the extension of the contract is a success in itself and a way to avoid negative scenarios.

The cards played by Chisinau

During the negotiations with Gazprom, which took place in the last days of October (Riddle, October 2021), the government of Chisinau put into play two important cards that ensured a certain psychological comfort: taking advantage of the interconnections with neighboring states (Romania and Ukraine) and benefit from the solidarity of the EU.

First, the opening up of Romania and Ukraine was vital to supply natural gas to maintain pressure in the Moldovan gas system. In both cases, although gas volumes were negligible, neighboring states reacted operationally to Chisinau's efforts. In addition, through the Ukrainian transportation system, Moldova received gas purchased from European markets (Poland, etc.).

Second, EU solidarity took the form of direct budget support of €60 million to support the compensation mechanism for those in need in Moldova. The new financial aid from the EU is the third in number since the Action and Solidarity Party (PAS) took office in July 2021. In addition, the EU has firmly sided with Moldova in its struggles to extend the contract for gas with Russia. The chief of EU diplomacy Josep Borrell has openly spoken out against the use of natural gas as a geopolitical weapon and has condemned Russia for allegedly exerting political pressure on the government in Chisinau (EEAS, October 2021). In the same context, Brussels agreed with the idea of ​​launching a "High-Level Dialogue" in the field of energy with the Moldovan side, along with other similar dialogues on foreign policy and security. In Chisinau's view, the Energy Dialogue with the EU would be aimed, among other things, at preventing similar energy crises in the future (Gov.md, October 2021).

Lessons from Moldova for the EU, Russia's Energy Dependence and Nord Stream 2

Moldova's energy crisis is a miniature of the possible crises that the EU could go through if it does not change its attitude towards its acute energy dependence on Russia. In 2020 alone, the EU imported 43% of the necessary natural gas from Russia, and dependence at the country level is even more problematic. Through long-term contracts, Gazprom and its subsidiary Gazprom Export can exert enormous influence on the energy stability of consuming countries if geopolitical interests suddenly (or deliberately) prevail over commercial ones. Of the 19 EU countries that buy Russian gas, the absolute majority is more than 60% dependent on Russian gas. Only Romania, the Netherlands and France import less than 30% of the gas consumed domestically from Russia. At the same time, in the case of eight states, the contracts last longer than 2030. Although they offer some predictability of gas purchase prices, on the flipside, this also prolongs dependence on Russia (see Table below).

Table. Dependence of EU states on gas imports from Russia and the duration of gas contracts

Source: Author's compilation based on data from Gazprom Export and Statista.com. Information for Denmark, Estonia, Latvia, Lithuania and the Netherlands is not complete.

Instead of critically evaluating the Nord Stream 2 gas pipeline from the perspective of European energy security, the German Ministry of Economy approved the pipeline, referring mainly to the security of gas supply. Such estimates omit situations of insecurity, such as the one Moldova has faced recently, which involves the Russian factor. By ruling out a rigorous safety risk assessment, Nord Stream 2 has every chance of being certified soon and operational in 2022. To speed up procedures, Russia is banking on gas shortages and high prices for European consumers to highlight the utility of the gas pipeline among the European companies and the national governments of the EU Member States. Like the Turkish Stream, Nord Stream 2 can be used to divert or significantly reduce gas flows through Ukrainian territory, which also has pronounced security connotations. Such a scenario materialized in the case of the new contract for the supply of gas to Hungary through the Black Sea and Turkey, bypassing Ukraine (TheMoscowTimes, September 2021).

Based on the substantial dependence of more than half of the EU countries on Russian gas, the diversification of gas supply sources, the interconnection of the European gas market or the transition to green energy are strategic solutions. At the same time, it is of utmost importance to ensure the joint acquisition of natural gas (already examined by the EU) and its storage on European territory, on an annual basis, to guarantee the energy security of the EU states in emergency situations. To avoid gas shortages and excessive price increases, the EU has also proposed to amend energy legislation, as early as December 2021, to facilitate cross-border access to gas deposits at the European level (State of the Energy Union in 2021).

In lieu of conclusions…

Moldova's experience shows that energy interconnection, access to cross-border gas transportation infrastructure, but also European solidarity, can reduce the negative impact of the Russian monopoly. At the same time, the influence of the Russian factor could be anticipated, if the Chisinau authorities had addressed the risks related to Russia's energy dependence, based on an updated security strategy. The latter could have been drawn up and adopted by the country's presidency in the first half of the year, subsequently assumed by the new government, elected after the early elections in July 2021.

The EU has all the necessary tools to reduce the influence of the Russian monopoly on the European gas market. This can be done by forgoing the new gas pipelines (Nord Stream 2), which amplifies their dependence. This could also enhance the EU's energy autonomy as an essential and integral part of ongoing efforts to build the Union's "strategic autonomy". Sustainability and energy resilience depend on the transition to green energy, including hydrogen. Finally, joint purchases of natural gas and its storage in warehouses in the EU or in the eastern neighborhood (Ukraine) can provide more security during energy crisis situations. Strengthening its energy capacity will allow the EU to show even more solidarity with the energy-vulnerable states of the Eastern Partnership.

This analysis is published for the German Hanns Seidel Foundation and the IPN News Agency.

IPN publishes in the Op-Ed rubric opinion pieces submitted by authors not affiliated with our editorial board. The opinions expressed in these articles do not necessarily coincide with the opinions of our editorial board.