Ukraine to UK – the impact of the crisis hits gas supplies

You will, no doubt, have read the stories – and seen the news – about the worrying, worsening crisis in Crimea.  This strategically important region – currently part of the Ukraine – has pitted the political wills of the West against those of Russia, in a stand-off rarely seen since the icy chills of the Cold War.  However, there is another, more business-oriented aspect to this conflict… and it might have an impact on your business.  Energy.

Russia is Europe’s largest supplier of natural gas, oil and coal… all of which are essential for heating and powering homes and businesses here in the UK.  We are now is a situation where Russia is the source of 25% of the gas requirement in Europe.  50% of that goes through Ukraine.  So what might be the impact of Russia deciding to turn off the tap?  Well, it wouldn’t be the first time.  Back in 2009 Russia turned off the supply to the Ukraine, arguing that the country had been tapping into supplies meant for Europe.   In that instance, the shortage quickly spread across the continent and had an upward effect on energy prices.

This current crisis has already seen an impact on energy markets.  Oil and gas prices are on the up (2% for oil alone), whilst in terms of the industry sector itself, gas futures have risen by 10%.

So, how will this current crisis play out?  Well at the moment the Russian energy giant Gazprom say that it’s very much business as usual.  Equally, the current economic (rather than political – or even seasonal) climate – might not suit a turn off.  The Russian economy enjoyed a modest 1.3% growth in 2013 and is not expected to see much better growth for the next few years.  The rouble is also at a record low against the dollar, and interest rates are also on the up, all set against the fact the energy business accounts for 3% of Russian economic output, or £60m… every day.  Simply put… they need our bucks as much as we need their gas.

So the battle might be fought not on the battlefield but at the UN… a war of words, rather than a playground tussle of who has the best toys.  However the current indecision is undoubtedly having an impact on industry confidence, and Gazprom has admittedly made noises about price increases.  However Europe already has several factors in its own favour.  Ironically, a warmer winter means demand has recently been low, and gas stocks are therefore well resourced.  Secondly, although our demand for Russian gas is high, Europe has been successfully weaning itself off this supply and using alternative routes, which would ensure continuation of supply in the event Russia does indeed turn off the tap.  Gas can now be carried through Belarus and Poland, or else under the Baltic Sea to Germany.  Another underwater pipeline, operational by 2016, will also bypass Ukraine.

Cold war disputes with Russia?  An energy crisis?  Saber rattling at high levels?  Underwater energy pipelines?  Hmmm, where’s James Bond when his country needs him?