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Better Pipes

Putin has made the system bigger and smarter.

Some of the new pipelines lead to Europe, but, unlike older lines, they skirt troublesome countries. Other new lines run eastward, directly to growing, energy-hungry markets across Asia and to feed Russia's existing or planned LNG plants.

For many years, most Russian gas heading toward Europe flowed through a 930-mile-long, 40-inch pipe buried in Ukrainian soil. The original deal paid Ukraine a modest fee for allowing the gas to pass beneath the country's fields and plains, and as a sweetener, Russia sold gas to Ukraine for local use at below-market prices.

Many countries could have made such a win-win arrangement work nicely for both parties, but not that pair. Things quickly soured. Russia raised its prices. Ukraine stopped paying for the gas it used and started just helping itself to as much as it wanted. Russia pressed its neighbor to cede parts of its pipeline infrastructure as payment for what it owed.

The matter became so contentious that three times—in January 2006, March 2008, and January 2009—Russia slowed or stopped pumping gas into the pipelines running through Ukraine. On each occasion, Ukraine, along with 18 other European countries, suffered painful shortages in the dead of winter.

Putin tired of the headache of dealing with an antagonistic country. It has taken time, but Russia has come far in developing alternatives that work around the Ukraine problem.

"We are at the beginning of a long road of redirecting transit gas volumes from Ukrainian territory to our subsidiary Beltransgaz and our new undersea export routes," Gazprom spokesman Sergei Kupriyanov said in 2012 after Gazprom slashed export volumes through Ukraine by 50 percent for a day, in a stark warning to Kiev.

Beltransgaz owns a pipeline running from the gas fields of northwest Siberia through Belarus and on to Western Europe. Russia gained control of the pipeline in 2013 by buying Beltransgaz for $2.5 billion from the government of Belarus. (The bankrupt state had sought help from the International Monetary Fund and had just been turned away.) Russia is also financing a $10 billion nuclear power plant in Belarus, and it is selling gas to the country at less than half the standard price for European deliveries.

Putin traded reliance on Ukraine for reliance on Belarus. It was a trade up, because the latter isn't a troublemaker. There is no historical baggage of the kind that still burdens Russia's relationship with Ukraine. And Belarus is tied to Russia in ways that Ukraine is not. In particular, being a charter member of the CES customs union discussed in Chapter 4, Belarus is Russia's partner.

The new undersea route that Kupriyanov referred to is the Nord Stream pipeline. Nord Stream takes gas from Russia to Germany via a 759-mile segment along the floor of the Baltic Sea (the longest undersea pipeline in the world). It cost $20 billion to build and went fully operational in late 2012. It moves just under 1 Tcf of gas annually to Russia's European customers.

With Nord Stream completed and Beltransgaz in Russian hands, Putin had realized his dream of a secure, untroubled path for delivering Russian gas to Europe. It was time to get on with things in Asia. Pipelines and LNG ports to the east would enable Russia to enroll all the energy-hungry nations of Asia as paying customers and eventually as dependent customers.

The long arm for the planned reach into Asia was the proposed Altai pipeline, which would run from western Siberia through Russia's Far East and into China. The plan was stalled for years while the two countries dickered over details. The negotiations ended in a mammoth gas agreement in May 2014 (more about that later). The infrastructure build-out to move gas from Russia to China and money from China to Russia is now running at full speed.

Altai will link up with the Sakhalin-Khabarovsk-Vladivostok gas pipeline that Putin commissioned in 2011. And there's another possible linkup at Altai's eastern end: a spur through North Korea to deliver gas to South Korea. While the Korean line is just in the concept stage, North Korea seems open to the idea and to the $100 million per year it could earn in transit fees. Getting a big check can be more fun than pretending to be crazy.

 
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