In mid-November the Ukrainian government, led by Viktor Yanukovych, announced that it was to abandon an agreement to strengthen ties with the EU and would seek closer cooperation with Russia. As a result, protests and demonstrations centred in Kiev’s Independence Square.
In mid-December Russia agreed to purchase $15 billion of the Ukraine’s debt and to reduce the price of natural gas by one third, providing a much needed economic lifeline for Ukraine. This further inflamed protesters who became violent in January.
On the 20th of February the two sides (the Yanukovych government and protesters) agreed to a new unity government in a deal that was brokered by France, Germany and Poland. A day after this agreement was signed, protestors took control of the government buildings in Kiev and Yanukovych fled the capital. Soon after, unmarked troops then began taking control of the Crimea’s vital infrastructure.
Reasons for the importance of the region to Russia are the deep rooted historical connections, the Russian naval base located at Sevastopol. Furthermore, the population of Crimea and eastern Ukraine are ethnic Russians.
No economic sanctions have been enforced by the US or EU and sanctions are unlikely due to the difficulty to implement them. The EU is highly dependent upon both Russian natural gas and oil as we can see in the map above. Over 30% of Natural Gas is imported from Russia by the EU, it was worse in 2003 where 45% of natural gas was imported from Russia.
Europe’s vulnerability to Russian gas was highlighted in 2009 when Russia cut supplies to Ukraine over a pricing dispute. Now Europe is prepared for any gas taps being shut. Gas storage facilities have been improved, a milder winter and lower demand has left the EU block in a far stronger position with some countries holding over 90 days of supplies. The diversification of EU gas supplies have also increased with LNG being the main new supply source from the likes of Qatar and soon the US.
The reality is; Europe is now fully interlinked with Russia in terms of energy supplies for it to impose any economic pressures. This reality has been reflected in the markets with the price of oil continuing its downward trend alongside power and gas prices. However, should any situation escalate, we can expect price spikes and drops to follow the news cycle.
