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11/30/2019

"Europe must stand up to Russia in the gas dispute."

Negotiations on an end to the gas dispute between Russia and Ukraine are stalling. Time is pressing. The contract for the transport of Russian gas through Ukraine to Europe expires this year. The Europeans are dependent on natural gas as long as the new Russian gas pipeline Nord Stream 2 has not yet been built. Negotiation expert René Schumann, Managing Director of Kerkhoff Negotiations, explains how game theory helps to solve the conflict.

WirtschaftsWoche: Mr. Schumann, the rifts between Russia and Ukraine are deep. The round of negotiations on a new transit agreement for Russian gas through Ukraine has failed. How can this conflict be resolved?

René Schumann: Game theory helps in such a complex situation. It can be used to analyse such difficult negotiation situations very well: What does the playing field on which the players find themselves look like? Who brings what to the negotiating table? Who has what negotiating power? This conflict shows that Ukraine has had a very high bargaining power in the past. Russia was dependent on Ukrainians having Russian natural gas transported over their soil. This situation has changed with the construction of the new Nord Stream 2 gas pipeline for Ukraine. Ukraine must therefore change the playing field and make it bigger in order to strengthen its negotiating power. For example, by bringing in additional players.

What new players could that be to strengthen Ukraine's bargaining power?

That could be the USA, for example. Ukraine could look to the US as an ally in this dispute to strengthen its negotiating power vis-à-vis Russia. But it does not. This is its only chance if it does not want to lose out in this power game. Ukraine would have to decide who it wants to get closer to: Europe or the US. But Ukraine is deciding neither in one direction nor the other. So it's difficult to win over the US as an ally against Russia. The risk for Ukraine of selling itself too cheaply is very high.

So the Russians are in a better negotiating position?

Russia has been very professional in this dispute and has consistently considered how it can reduce its dependence on Ukraine. The Russians succeeded with the construction of the new Nord Stream 2 gas pipeline. But this new pipeline is not yet finished. And Ukraine must take advantage of this window of opportunity. But it is not doing so, it is playing for time and thereby squandering its remaining negotiating power.

What role does the EU play in this conflict? And what should it do to settle the gas dispute?

The EU sits at the negotiating table and is in a good negotiating position: it is the customer. It could call on both partners to be prudent. But it does not manage to coordinate. In this negotiating situation the EU does not speak with one voice, it does not negotiate stringently and thus weakens its negotiating position. But it must also be the EU's responsibility to find a solution to this conflict: in the short term, Europe's gas supply is secured. Until the new Nord Stream 2 pipeline is built, supplies will last. But the EU must also secure itself. And it doesn't seem to see that. The European countries are making themselves completely dependent on Russia with Nord Stream 2. The EU could therefore strengthen Ukraine in the negotiations on the new transit agreement with Russia - out of pure self-interest, so that in the long term it is not dependent on the Russians for gas supplies. But the EU is not seizing this opportunity. The Americans are not jumping to the Europeans' side. They do not interfere in this conflict.

The USA is using every means at its disposal to torpedo the Russians' new gas pipeline. In this respect, they are interfering very well.

That is right. But the Americans have no discernible negotiating strategy. Nor is it clear what joint strategy Ukraine has with the USA. The USA should have an interest in Ukraine remaining a transit country. Just rumbling against Nord Stream 2 is not a solution. The pipeline will be built. The question is, what comes next? The USA and Ukraine are only playing for time, but have no long-term strategy.

Can the EU still mediate between Russia and Ukraine?

The EU must do its homework. And that means it has to clarify what its negotiating team looks like: Who is talking to the other parties? It must take the emotions out of the game. There is no one EU voice vis-à-vis the other actors in this game. You can go to the weak point of the Russians: And that is Russia's dependence on the EU. The Russians need the EU as a customer for the purchase of their natural gas. But the EU obviously does not recognise this.

If the EU stands up to the Russians, relations with the country will be even more strained.

The more difficult and complex a negotiating situation is, the more difficult it is to prepare for it. The playing field in this conflict has been arbitrarily complex for years. The EU must send a dedicated negotiating team. The question is: do we want to become dependent on one partner? It is clear that it is ideal not to become dependent on one. The EU is not ready yet. Russia has done this very professionally. We speak with one voice here.

Once Nord Stream 2 has been completed, the EU will actually be negotiating only with Russia. What are the consequences for Europe?

This is a classic monopolist situation. The EU and Russia are dependent on each other. That is the positive thing. The negative thing is that Russia negotiates better and more professionally than the EU. In other words, the EU has a tactical disadvantage over Russia. The EU could change the playing field to strengthen its position by bringing in third-party gas suppliers. The EU must be prepared to enter into controversial discussions with Russia, for example on price negotiations, and to make it clear to Russia that there are alternatives, for example to liquid gas suppliers. The US, which is very interested in selling more of its LPG in Europe, could be part of the solution.

Is Ukraine the long-term loser in this gas dispute?

Definitely. Russia has bypassed all blackmail attempts. Ukraine is being systematically driven up against the wall.

Author: Angela Hennersdorf
WirtschaftsWoche

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