Gazprom, Russia's state gas monopoly, is as much a policy arm of the Kremlin as it is a company. Russian President Dmitry Medvedev is its former chairman. It owns a big Russian media company and operates it as a government propaganda arm. It is the largest extractor of natural gas in the world and accounts for a quarter of Russia's budget. The government controls a majority of its board, and though Gazprom's management decision-making structure is murky, most analysts believe the man who really calls the shots is Russian Prime Minister Vladimir V. Putin, who once argued in a scholarly paper that Russia's energy resources were the key to promoting its national interests.
Indeed, it doesn't take a conspiracy theorist to find connections between Gazprom and many of the Kremlin's most aggressive foreign policy moves, including the summer invasion of Georgia by Russian troops. Gazprom supplies a quarter of Europe's gas -- a key fuel for home heating and electricity generation -- but its dominance could be threatened by a proposed pipeline that would transport gas from Central Asian countries such as Turkmenistan through Georgia to Turkey and southern Europe. The invasion rattled investors' nerves and demonstrated that Russia is capable of toppling Georgia's Western-leaning government any time it chooses, putting the project in jeopardy.
In the aftermath, the Bush administration sought to begin the process for Ukraine and Georgia to become members of NATO, a proposal that was swiftly quashed by European leaders, headed by German Chancellor Angela Merkel. Perhaps it's coincidental that Germany is Gazprom's biggest customer, but probably not.
All this serves as a backdrop to the current dispute, which started Jan. 1 when Gazprom and the Ukrainian government failed to agree on the terms of a 2009 contract. Though most of Europe pays the market price for gas, Ukraine negotiates annual contracts at a deep discount; Gazprom also pays a transit fee for the gas it ships to Europe through Ukrainian pipelines. After Russia shut off the gas it sends to Ukraine for domestic use, it accused Kiev of stealing gas intended for Europe, so it shut off that flow too.
The reaction in Europe is very different from what it was during a similar cutoff in 2006. With Ukraine fresh off its Orange Revolution and looking westward for support, most Europeans blamed Russia then. Now, they're not sure who's to blame -- and for good reason. Ukraine's energy sector is deeply corrupt, so there's every possibility that it has been siphoning off gas meant for Europe. Moreover, Russia is justified in demanding that the country move toward paying market price, though Gazprom's contract demands are so excessive that meeting them would leave Ukraine's struggling economy in tatters. European Union officials, meanwhile, have been slow to act, though they're hoping the Russians will turn on their gas again if they can set up an EU mission to monitor the flow through Ukraine to ensure that it isn't being diverted.
Europe's response to the dispute is important because it will guide future pipeline decisions that would have big repercussions for Gazprom and for Eastern Europe. With heavy support from Berlin, Gazprom is backing a pipeline under the Baltic Sea that would pump gas directly from Russia to Germany, bypassing the countries in between as well as Ukraine. It's also proposing a pipeline that would send gas directly to southern Europe under the Black Sea. If Russia is seen as an unreliable supplier, it could halt both these projects. Yet if they're built, it would leave Moscow free to use gas as a cudgel to force Western-leaning countries such as Poland and Ukraine into line because it would be able to shut off their gas without interrupting the flow to Europe, whose money it needs to keep the Russian economy afloat.
The dangers in Europe's over-reliance on Russian gas have been apparent for some time, leading to frequent calls for more diversity of supply. Cost and political factors continue to stand in the way; what's more, in the strategic game of petro-diplomacy, Putin seems to be a far cleverer player than most of his counterparts. All the more reason for Europe -- and the United States, which has energy supply problems of its own, given its reliance on hostile countries such as Venezuela for its oil -- to speed their transition to nonfossil energy sources and dramatically greater energy efficiency.