Russia Diversifies Energy Customers, Will Europe Diversify Energy Suppliers?

May 2014

Each country in the map above is labeled with its share of GDP as a percentage of Euro Area GDP. The countries are color coded based on the percentage of each country’s gas supply that comes from Russia. The darkest countries have the highest dependency on Russian gas. Not surprisingly, the countries closest to Russia (Finland, Poland, Slovakia, Hungary, Romania) are often the ones getting the majority of their natural gas from Russia. On the other hand, countries like Spain, Portugal, and the United Kingdom aren’t importing any Russian gas. Still, many of the largest EU economies, such as those of Germany, Italy, and France are highly dependent on Russian energy supplies. 

Recent actions by Russia in response to political developments in Ukraine have cast a shadow of doubt over the future of Europe’s energy supply. According to the Eurogas Statistical Report 2013, European countries received approximately 24 percent of their natural gas from Russian sources in 2012. The rising possibility of conflict in estern Ukraine presents a serious concern to European policy makers. Europe’s dependence on Russian gas makes international sanctions much more difficult to implement when leaders are confronted with Russian antagonism. Ultimately, though, this map suggests to us that due to the widespread use of and dependence on Russian gas, the economic fates of these countries are, if anything, inextricable.

It is not only Europe that is concerned over the large share of Russian gas being exported west. The Russian budget relies on oil and gas exports for more than half of its revenue. Just as Europe has a political and economic interest in diversifying its suppliers, Russia has a political and economic interest in diversifying its customers. Not surprisingly, Reuters recently reported a $400 billion dollar gas deal between Russia's Gazprom, and China National Petroleum Corporation. Now that Gazprom has some breathing room, it will fall on European leaders to diversify their energy suppliers if they want to maintain political bargaining power.

The business community, particularly those in Europe, ought to take heed of these developments and prepare for the possibilty of rising volatility in European natural gas prices. Whether the pressure is political (sanctions) or economic (rising demand from China increasing prices), the result is that geopolitics may have a destabilizing effect on the European energy markets in the near term. Prudent management will require taking steps to mitigate exposure to rapid and unanticipated changes in the price of European pipeline gas.

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