The latest round in the gas battle between Russia and Moldova appears to be at an end. At the eleventh hour, the two sides signed a protocol and a new contract that will see Russia’s Gazprom continue to supply Moldova with gas for another five years. Yet if the post-Soviet history of relations between the two countries is anything to go by, it’s unlikely to be the last energy-related skirmish between Moscow and Chisinau.
The recent gas standoff between the two countries should not have come as a surprise to anyone. After systemic corruption, the energy sector is one of Moldova’s greatest vulnerabilities. Corruption and energy dependence often go hand in hand.
Gazprom plays a dual role in Moldova’s gas sector, as both supplier and gatekeeper. Russia covers almost 100 percent of Moldova’s gas needs. In addition, Gazprom is the main shareholder in Moldovagaz (a stake of 50 percent plus one share), which imports and distributes gas in Moldova. The Russian gas giant also manages a 13.4 percent share of Moldovagaz that belongs to the separatist region of Transnistria via a company called Tiraspoltransgaz. In this way, Gazprom indirectly controls a large chunk of Moldova’s distribution network. Under existing legislation, Moldovagaz is required to give access to its pipelines to other market players, but that has yet to become well-established practice.
Moldova’s energy dependence on Russia also extends to its electricity supplies. The Russian company Inter RAO controls Moldova’s main power plant, Cuciurgan, in Transnistria. Cuciurgan supplies up to 70 percent of the electricity needs of residents on the right bank of the Dniester River (the territory controlled by Chisinau), making Moldova vulnerable to power cuts.
Gas dependence and electricity dependence are intertwined issues. Cuciurgan can generate electricity from coal, oil, and gas. Inter RAO prefers Russian gas, which it gets in Transnistria at a lower price than economic agents operating on territory controlled by Chisinau. Cheap gas underwrites abundant electricity not only for consumers on the right bank, but also for the booming crypto-mining industry on the left bank (Transnistria). This, in turn, pushes up Moldovagaz’s gas imports from Gazprom and swells its debt: despite collecting payment from local consumers, Transnistria stopped transferring them to Moldova in 2006. Moldovagaz today owes over $7 billion for gas consumed by Transnistria.
Moldova has done too little in recent decades to cut this Gordian knot. What attempts there were turned out to be inconsistent and hamstrung by bad governance and high-level corruption. For example, after the Moldovan tycoon Vlad Plahotniuc left the country in 2019 (before then, he had informally controlled the ruling coalition), media outlets revealed a network of intermediaries linked to his offshore companies that were involved in the electricity trade with Transnistria. That was only the tip of the iceberg.
Energy dependence gives Russia a powerful diplomatic tool that it has never hesitated to use, particularly from November through January. Although negotiations were framed as a purely economic issue, politics was always lurking in the background. In this way, the 2021 Russia-Moldova gas standoff was not an aberration, but the latest iteration of a recurrent phenomenon.
Shock and Awe
The gas contract between Moldovagaz and Gazprom was extended in 2020 until September of this year. Talks on another extension took place over the summer and continued into September. Moldovagaz did not signal that there were any major problems. Indeed, the company’s CEO gave the impression that a September deal was within reach, forecasting Moldova would pay $240 per thousand cubic meters (mcm) of gas in the fourth quarter. It is not yet clear whether this statement was wishful thinking, or overt sabotage.
Less than two days before the deadline, Gazprom pulled the plug. At the same time as announcing it was willing to prolong the contract for a month to give the parties more time to talk, Gazprom charged the spot price of $790/mcm—and framed it as a take-it-or-leave-it offer. At a stroke, the Russian gas monopoly had unilaterally changed the price formula for Moldova. At the insistence of Moldovagaz, and after lengthy negotiations, a spot price had been introduced into the 2020 contract, but only for the warmer months (April through September), when prices for gas in Europe usually go down. For the winter season, the price in the contract remained linked to the price of oil. This was unceremonious treatment of both its own subsidiary and a client with whom Gazprom had worked for twenty years. At the very least, Moldovagaz deserved advanced warning of the price hike, if not a negotiation window. Instead, Gazprom’s shock and awe tactics significantly strengthened its bargaining power. Moldova was caught off guard (though it should not have been), agreed to pay the spot price in October, and kept talking to Gazprom.
Gazprom had at least three objectives. The first was to convert Moldovagaz’s debt (about $709 million, although the sum is contested by Chisinau) accumulated by consumers on the right bank into government debt and get it repaid within three years. The second was to retain its position as Moldova’s main gas supplier and introduce a new gas price formula (in which spot market prices are prevalent for the entire year) into the new contract. The third was to delay the energy sector unbundling to which Moldova has committed as part of the EU’s Third Energy Package, and thus protect Moldovagaz’s quasi-monopoly on gas import and distribution.
In addition, Russian officials were pursuing two other objectives unrelated to the gas sector. Based on a combination of publicly available information and insights from behind closed doors, it is clear that these were linked to Moldova’s trade relations with the EU and the settlement of the Transnistrian conflict.
The Russian side tried to get a say in EU-Moldova trade, which is regulated by the Deep and Comprehensive Free Trade Area, by pushing for trilateral consultations (EU-Russia-Moldova) on the issue. While Moldova’s former president Igor Dodon made this proposal several times in meetings with EU officials (as they themselves told this author), it now looks as if trilateral consultations were not entirely Dodon’s initiative. Back then, the Europeans said they politely declined the proposal, offering instead to mediate between Russia and Moldova to help restore normal trading.
Sources in the Moldovan government have indicated that Russia also tried to push through a resolution of the Transnistrian conflict that was likely designed to exclude other international players. Given the situation in Moldova in October, it’s clear on whose terms the conflict would have been “settled.” It’s also difficult to imagine how such a complex problem—involving about 3 million people and the functionality of what would, in effect, be a reintegrated state—could have been solved in months, or even within a year.
Moldovan officials have implied that nonfinancial conditions were advanced as a part of the gas contract negotiations, but have not specified exactly which ones.
Emergency Mode
To drive its point home, Gazprom began to reduce gas supplies in October to just 67 percent of Moldova’s needs, forcing the country to reduce its gas consumption. Gazprom explained that it had not reserved all the necessary Ukraine pipeline capacity to provide Moldova with its contracted gas. To some extent, Moldova was able to fall back on extra gas in the system (known as “technical gas,” this is used to distribute “real” gas to consumers). But the reality was that in a matter of days it would have been impossible to pump the “real” gas received from Russia. In effect, Chisinau had considerably less than a month to find a solution: agree to the Russian terms or find alternative gas sources.
Chisinau rebuffed the political conditions on EU trade and the Transnistrian conflict, drawing a red line. It also refused to convert the gas debt, insisting instead on an audit of the debt.
To buy time and shore up its weak negotiating position, Chisinau engaged in a round of frantic energy diplomacy with EU member states, EU institutions, Eastern Partnership states, Turkey, and the U.S. government. At the same time, it declared a state of emergency, which gave it more options and allowed it to operate more rapidly. When the gas system was blinking red and close to shutting down, the economic diplomacy finally paid off: Romania (via the Iasi-Ungheni interconnector) and Ukraine injected just enough “real” and “technical” gas to keep things afloat. This was the third time Ukraine had come to Moldova’s rescue (it also did so in 2006 and 2009). It actually helped out twice in one month: when Cuciurgan announced electricity supply reductions in October, Ukraine began delivering more electricity, despite the absence of a contract for extra supplies. Still, there was a limit to how much Romania and Ukraine could do. The Iasi-Ungheni interconnector is not yet functioning at full capacity, and Romania did not have significant reserves of stored gas. Ukraine was happy to help, but also had to keep an eye on its own energy security in the midst of volatility on the gas market. Moldova needed more options, and fast.
First, Poland agreed to provide extra gas. Then the EU offered invaluable expertise, issuing a 60 million euro grant to offset the price hike for the Moldovan population. In a matter of days, Chisinau was able to prepare the relevant documentation and financing for the country’s first ever tender to buy gas from the market. In the end, Moldova organized several such acquisitions. The first tender was won by Poland’s PGNiG. The fifth was the biggest yet, for 12 million cubic meters. Although the gas Moldova bought was entirely based on the spot price, the move was designed to signal to Moscow that Moldova would like to conclude a deal, but—if talks dragged on for too long—it had some gas in store and was able to buy more.
Europe stepped up its high-level diplomacy with the Kremlin, which helped to nudge talks in a more constructive direction, one European official told this author last month. The topic itself became the subject of media scrutiny, with international media outlets writing near-daily stories, like dispatches from the front. All of this combined to undercut Russia’s shock and awe approach and went some way to balancing the positions of the two sides. It became clear that the face-off would last longer than Moscow had expected.
At this stage, it is hard to assess why the Kremlin decided to back off. One possible explanation is that Moscow judged that too much pressure would lead to Moldova decoupling from Russian energy, and the loss of important leverage. Perhaps an imperfect deal was deemed the better option, helping to keep Moldova attached and providing time to figure out how to exploit existing advantages.
Who Got What?
The timeframe of the new contract works to Russia’s favor. The last time a five-year contract was signed was 2006. Over the last decade, however, contracts have usually been for one or three years, giving Moldova more flexibility and room for maneuver (something it failed to use).
Gazprom managed to include a price formula based on the spot market not only for the warmer months of April through September, but also for the heating season (October through March). However, the proportions (70 percent linked to the price of oil and 30 percent to the spot market in the heating season, and vice versa for summer) is more to Moldova’s advantage. This formula helps to reduce the gas price for Moldova from almost $800/mcm in October to an estimated $450 in November.
Moldova was able to fend off proposals to convert its gas debt into state debt, and got the green light from Gazprom for an independent audit and an extension for eventual repayment by Moldovagaz from three to five years. At the same time, however, it pledged not to restructure Moldovagaz until both sides reach an agreement in 2022 about how to repay the debt. Thus, Moldova will hold off from implementing certain aspects of the Third Energy Package for at least a year, and in reality, perhaps even longer. This is a win for Gazprom. In addition, the bilateral agreement on energy relations that the parties pledged to negotiate and sign next year may further restrict Moldova’s freedom of action. And if Moscow and Chisinau fail to agree on debt and reach an intergovernmental agreement in 2022, the entire gas deal may unravel and become a pretext for a new gas crisis.
More importantly, on a strategic level Moldova managed to preserve its sovereignty, successfully deflecting political conditions related to the Transnistria conflict and trade relations with the EU. It seems Moscow did not understand that for Moldova, letting Russia have a say on its trade with the EU (the destination of 67 percent of Moldovan exports) or engaging in talks on Transnistria without having a broad societal consensus on the issue are simply political suicide. Any Chisinau government acting in this way risks triggering a powerful social backlash, and Moldovan society has repeatedly shown that it is not a mere political bystander. Perhaps the Kremlin does understand this, and was simply testing the limits. If so, the outcome for Moscow is unsatisfactory.
Looking to the Future
Russia overestimated the power of its energy leverage vis-à-vis Moldova. This was not because Chisinau has been working to diversify its energy imports and build powerful institutions: Moldova’s performance on this front in recent decades (with the exception of the construction of an interconnector with Romania) has been pretty lousy. Instead, Moscow failed to take into account how the energy market has changed since the Russian-Ukrainian gas dispute of 2008–2009. That conflict actually spurred a liberalization of the European gas market, and led to a host of interconnection projects, making pipeline gas more mobile and amenable to cross-border transfers. To some extent, therefore, Russia was—albeit inadvertently—the reason why Moldova was able to obtain alternative gas during the October standoff. Moscow still has significant energy leverage in Moldova, but it is in a much weaker position than ten or twenty years ago.
Russia’s gains in 2021 might prove ephemeral, just like in 2009. And this could be a moment of truth for Chisinau, which has an opportunity to take energy security more seriously, root out energy sector corruption, implement energy efficiency projects, complete gas and electricity interconnections with Romania, use EU expertise to build capacity to operate on the European gas market, and enhance energy cooperation with Ukraine. Achieving all this would not exclude Russia, but it would make energy a market issue rather than a geopolitical one. Thus, the effect of the 2021 crisis in the medium term might be the opposite of what Moscow wants.
Still, the transformation of Moldova’s energy sector is by no means certain. Chisinau may fail to heed the warnings, just as it has before. It risks stepping on the same rake over and over again.
This material is part of the Russia-EU: Promoting Informed Dialogue project, supported by the EU Delegation to Russia. Stanislav Secrieru is one of the EU-Russia Expert Network on Foreign Policy (EUREN) core group members. More info: http://eu-russia-expertnetwork.eu/