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Russia, West ‘doomed to agree’ on gas supply issues

Tensions between Russia and the West have flared once again—this time over gas supplies, as Moscow demands billions of dollars from Ukraine over what it says is a now invalid gas deal.

This friction has led to growing concerns about the possibility of Iran-style sanctions being imposed on Russia, but Russia's credibility and Europe's need for gas means this drastic move looks unlikely, fund managers told CNBC.

(Read more: EU expands Russia sanctions over Ukraine by 12 names)

A drilling rig stands at OAO Gazprom's Bovanenkovo gas field
Alexander Zemlianichenko Jr. | Bloomberg | Getty Images
A drilling rig stands at OAO Gazprom's Bovanenkovo gas field

On Friday, Russian news agencies reported that Prime Minister Dmitry Medvedev said Ukraine owed Moscow a total of $16 billion—some $11 billion for a now-invalid deal providing Ukraine with discounted gas, $3 billion from a recent bond-buying program and a further $2 billion owed to Russian state-controlled gas company Gazprom.

Meanwhile, Ukraine signed an agreement with European Union leaders, initiating closer economic and political ties after Russia's annexation of the Crimea region.

(Read more: Russia retaliates to sanctions, bars 9 US officials)

Ukrainian Prime Minister Arseniy Yatsenyuk said the deal could be worth around 490 million euros ($676 million) to the country, adding, "We all need to pay the price for peace."

Europe gets nearly a third of its gas from Russia, and about half of the gas that is imported from Russia comes through Ukraine—raising questions about the possibility of higher natural gas prices as result of the ongoing tensions between the countries.

But fund managers said these concerns are largely unfounded, arguing that both sides have too much to lose.

"The U.S., Europe and Russia are trading partners, with very strong ramifications on the banking side and the energy side," Daniel Lacalle, senior portfolio manager at investment management firm Ecofin, told CNBC. "Everybody has too much to lose."

"It simply cannot become an environment of isolation and Iran-type of sanctions. I think that both sides are ultimately doomed to agree to something," he said.

Russia's reputation

On Thursday, U.S. President Barack Obama signed an order to impose sanctions on more segments of Russia's economy in response to Moscow's annexation of Crimea. Russia responded by imposing entry bans on nine U.S. lawmakers and officials.

But Jonathan Waghorn, global energy fund manager at Guinness Asset Management, said Russia would not go as far as limiting its gas supply, because it would threaten its reputation—which was especially important given ongoing talks with China.

(Read more: Europe 'held hostage' by Russian nat gas: Hamm)

"There is far too much too lose, if you think of Russia wanting to be seen as a credible supplier of hydrocarbons," he told CNBC.

Waghorn said negotiations with the Chinese about getting natural gas to the country would be at risk if Russia withheld supply into Europe.

No other option for Europe?

Whereas in Europe, it is demand—rather than reputation—that is the issue. The region is heavily reliant on Russian gas, and alternative suppliers look unfeasible.

Supply of liquid natural gas (LNG) from Qatar, Algeria and Norway—which has been suggested as a potential alternative to Russian gas—could not be tapped because of import infrastructure, Waghorn said.

"If the Europeans take a moral stance, gas prices are probably going to go up about 40 percent and I don't think that is going to happen," he added. "We don't have the LNG import terminals, so physically it can't happen anyway—but from a pricing point of view it would be a disaster."

South Stream

Another potential gas supply issue is the future South Stream pipeline project—a new pipeline that will move Russian gas to Europe, avoiding the Ukraine.

The chief executive of Italian oil major Eni said Thursday that the project had been called into question.

Speaking at a parliamentary hearing in Rome, Eni CEO Paolo Scaroni said the future of the pipeline was "somewhat gloomy," as the dispute between the West and Russia escalated.

(Read more: Think US natgas canthreaten Russia? Think again)

Gazprom, Eni, France's EDF and Germany's Wintershall are all shareholders in the pipeline project, which will pass through countries including Bulgaria, southern Italy, Greece and Serbia.

However Waghorn said that—if anything—the events in the Ukraine made the project "more likely" to be completed.

"The South Stream agreement timeline has been in talks since 2008, so it has been some time in the making," he added.

"All the countries involved will get good access to gas and they get a tariff for transporting gas," he said, and as such they would be unlikely to let the project fall through.

—By CNBC's Jenny Cosgrave. Follow us on Twitter: @CNBCWorld and follow her on Twitter @jenny_cosgrave

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