Trade between Europe and Russia has faced difficulties after Ukrainian crisis because the West opposed trade sanctions and travel bans for Russia. As a counter measure, Russia opposed sanctions against the West, which hurt especially the food industry, hence, western food producers had to search for alternative markets or to increase productions in Russia in order to avoid trade sanctions.
Before the Ukrainian crisis the market situation was different because western companies were excited of the Russian market and Russia’s energy sector was able to increase its market shares in the West. It was business as usual. Russia was integrating to the global economy with a rapid speed and cooperation was booming and blossoming. Russia was becoming the Saudi Arabia of Europe, an oil rich country. Russia’s global influence was growing around the world. Especially in its neighbouring countries, which were able to exploit Russia’s large business markets. However, an optimistic future was replaced with a bitter one.
After the Ukrainian crisis Russia’s energy exports have been in a negative light in different European countries because some countries do not want to be too dependent of Russia because of security of supply issues. Russia’s gas pipeline projects have faced setbacks. South Stream and Nabucco gas pipelines have faced difficulties. Therefore, Russia proposed to build Turkish Stream. Construction began in 2017 and the new pipeline would be finished in 2019. Turkish Stream would be continued with Tesla pipeline, which would go through the Balkans all the way to Austria. At the same time Russia is pushing Nord Stream 2 forward, which would increase the capacity of the pipeline, which goes under the Baltic Sea. Denmark, Estonia, Latvia, Lithuania and Poland have been opposing the new pipeline but Sweden has been silent. Germany and Finland sees the project as an economic issue. The European Parliament and The European Commission are critical towards the project. However, there is a growing demand for gas in Europe and Russia has an advantage.
What is the problem? South Stream, which was announced in 2007, and Nord Stream, which was announced in 1997, were ordinary energy projects before the Ukrainian crisis. Currently, new projects such as Nord Stream 2 and Turkish Stream have been seen as a strategy to bypass Soyuz and Brotherhood pipelines, which pass through Ukraine, and Jamal pipeline, which passes Poland. Eastern European countries such as Ukraine and Poland see this situation as an objective to weaponise the gas pipeline network against Europe. Network of energy chaos. Eastern European countries would also lose economically because they would lose transit fees.
However, diplomatic tensions between the West and Russia has enhanced the upcoming energy revolution. Many countries have also decided to deepen energy cooperation with other countries, also, domestic energy production has increased its popularity. This is an unwanted situation for Russia because this would mean decreasing energy cooperation with European countries. Russia’s major energy companies such as Gazprom, Lukoil and Rosneft would hurt their revenue streams. There are also dark clouds over the global nuclear power industry. Rosatom has 42 nuclear power plant projects in 12 countries, including in Hungary and Finland, which are members of the EU. Rosatom’s Deputy Chief Executive Kirill Komarov said to Financial Times that its industry rivals comes from coal, gas and renewables, not from its nuclear competitors. However, the energy revolution is quite far away, which means that nuclear, gas, oil and coal can be seen as quite reliable energy sources.
Russia’s economy is also heavily depended on gas exports because its oil industry have been hurt by low oil prices. In 2014 oil price was over 100 dollars (USD). In contrast, in 2017 the price has been around 50 dollars. In order to drill Arctic oil with decent profits, oil price should be around 90 dollars. Russia’s oil industry is also in a decline because it requires western technology in order to succeed. Professor Pekka Sutela from Lappeenranta University of Technology has said that Russia’s oil exports might event collapse in the future if the situation stays unchanged. Russia’s growth estimates will be between 1-2 percent, which means basically a stagnating economy.
Therefore, it would be foolish from Russia to use its energy exports as a tool to destabilise Europe because this would only push European countries away from energy cooperation with Russia. Russia has also severe domestic challenges with its banking sector because bad loans have spiked and the central bank have had to bailout couple banks. Contagion risk is on the rise in the financial sector.
Russia’s economy is not only about gloom and doom. Russia is a world leader in diamond mine production. Alrosa has over 90 percent of Russia’s diamond extraction. It has the world’s second largest aluminium company Rusal, which is lead by Oleg Deripaska. Uranium, coal, nickel, steel and chemical productions play also vital roles in Russia. However, Russia’s main earnings comes from the energy sector. Therefore, Russia should diversify its economy but this has been a tough challenge because entrepreneurship is not a popular topic among business graduates. After the Ukrainian crisis many foreigners have left the country, and this was a setback for entrepreneurship. The overall business environment includes also major risks.
From a larger perspective Nord Stream 2 does not posses major risks because Russia needs desperately steady earnings but it is understandable that The European Union and The United States do not want to give any tools for Russia to use its gas pipelines against European countries in order to divide and conquer. On 21st of September Russia’s Prime Minister Dmitry Medvedev, one of the strongest supporters of Russia’s modernisation and international trade, thanked Finland’s Prime Minister Juha Sipilä of Finland’s constructive approach concerning the project because The United States wants to replace Russia’s gas exports with its own shale gas in Europe. Finland has close ties with Germany, and both countries see the new pipeline as an economic issue.
Finland would finance Nord Stream 2 if Fortum, a Finnish energy company, would takeover Uniper, a German energy company, which is one of the owners in the pipeline project. Uniper has invested 950 million euros into Nord Stream 2. State of Finland owns 51.7 percent of Fortum, and therefore, Finland would become one of the owners.
Russia has already weakened its position by increasing distrust in the West, which does not enhance energy cooperation. Russia has to ask herself a one question. How to build trust and how to maintain it with the West? This would also solve questions around its energy projects in Europe, and to enhance economic growth in Russia. Therefore, Nord Stream 2 should be only an economic project.