Energy trade between Russia and the EU is not a zero-sum game but rather includes many variables, according to proponents of the concept that resource dependence between countries leads to a certain degree of ‘interdependence.’ In trade, 75 percent of total foreign investments in, as well as 47 percent of total imports from the Russian Federation come from the 28 EU countries. Therefore, cooperation and partnership in energy as well as in trade have created what, the Stockholm Institute of Transition Economics’ expert Marcus Svedberg calls, ‘the dependency game’ between the EU and Russia.
It would not be in Russia’s interest to forego the benefits of the lucrative European market. Therefore, any gas supply cuts instigated by Russia would certainly result in significant revenue declines given Russia’s budget dependency which accounts for 20 percent of the overall budget income for the government. Although gas interruptions occurred in previous years, especially in Eastern Europe, there has not been any evidence that Russia cut gas supplies to Western European countries, given the greater quantity of gas consumed in this market.
Russia’s Gazprom applies a dual gas pricing policy, in which domestic gas prices in Russia are nowhere close to export gas prices. The reason behind this policy is to subsidize the Russian economy and stimulate gas consumption. For this reason natural gas prices in Russia are not determined according to supply and demand conditions but rather are regulated directly by the Federal Energy Commission. Consequently, gas prices have remained much lower than market prices.
Another reason why Russia is dependent on gas importing countries, mostly in the EU, is to do with the possibility of physical disruption due to Russia’s inefficient and obsolete pipeline infrastructure both of which could threaten Russia’s natural gas income.
Similarly, “the threat to European gas supply does not lie in geopolitics, but rather in a lack of investment in the Russian upstream sector”, according to Andreas Goldthau, an associate at Harvard's Belfer Center, who supports the idea that Russia is unable to exert its political agenda over the EU countries since they are equally dependent on the health of Russia’s upstream infrastructure.
Structural problems, increasing production costs, aging fields and obsolete as well as inadequate infrastructure have been the main reasons why Gazprom has been losing its ground as one of the major players in the natural gas business. Consequently these problems give Europe more leverage in the gas sector with Russia than Russia comprehends, especially considering the fact that Gazprom’s target of keeping its EU market share is linked to attracting investment capital from its partners in the EU.
According to Gazprom’s 2013 statistics, the company earned US$24 billion domestically, whereas net sales from overseas reached $66 billion. Russia is producing approximately 600 billion cubic meters (bcm) of gas annually, of which domestic consumption is roughly equal to 400 bcm. Although domestic consumption equals two-thirds of overall production, only around one-third of the profits were collected domestically and the remainder was received from the export market. Gazprom’s domestic gas market sales are not profitable for the company, and therefore it is in Gazprom’s interests to increase the export volume towards the more profitable EU market.
Due to previously signed long-term export commitments and despite the fact that Russia has cut gas supplies in the past, it is not in the country’s interest to continue its strategy of threatening cuts with its European customers. Additionally, from an interdependency perspective, not only does the EU’s dependency on Russia for its energy demand make the Union particularly susceptible, but the EU should consider that Russia is very vulnerable to external price shocks in the global energy market.
Russia’s economy is fragile and heavily reliant on revenue from energy. The country has only a few internationally competitive manufactured goods and has been dependent on its oil and natural gas sales, which accounted for 68 percent of its revenue from exports, and 50 percent of the federal budget revenue in 2013, according to EIA. As Fiona Hill, a senior fellow at the Brookings Institution puts it, “Europe and Russia have an interestingly co-dependent relationship in energy not just a one way dependency. Europe enables Russia to get its ‘revenue fix’; Russia gives Europe its ‘energy fix.’”