Russia Poised to Use Energy as a Hammer, Again

There's hardly been a honeymoon with the new, Sochi 2014-inspired Russia.  Events in Ukraine have brought back an old Russia that we know very well, using military force to maintain influence and ignore sovereignty rights.

But perhaps even more than the soldiers that Moscow sends into the Crimea, it is the flow of natural gas to the Ukraine republic that might deliver an even more stunning blow. 

That's because Russia is a major supplier of natural gas, not only to Ukraine, but also to Europe, with the largest pipeline for that gas running through Ukraine itself. Recent history has shown Russia as willing to use the iron fist of energy to achieve its political aims as it is willing to use its military might. 

One need only look at the Cyprus bank bailout to see the influence of Russian gas. While Westerners looked on in dismay, the IMF made bankrupted Cypriot banks that contained much of the hidden wealth of Russian commodity oligarchs solvent in early 2013. It was natural gas flows that forced the Europeans' hand then. With new pipelines to the Black Sea carrying Russian gas supplies for Greece and Italy running through Cyprus in the balance, the EU had little choice. In Europe, as elsewhere in the world, morality usually takes a back seat to keeping warm. 

And Russia is using its natural gas supplies in Ukraine today just as handily.  Gazprom, the largest Russian gas company with contracts in Ukraine, threatened to end its discounting and demand an immediate payment of the $1.55 billion it is already owed for fuel  As the financial crisis was a major cause of the disruptions in the west of the country, an immediate payment is not only difficult, it is impossible. But it is the implied cutoff of supplies without payments that is actually threatened. Ukraine gets half of its natural gas from Russia and Gazprom. This is a weapon of even greater force than the Russian army. 

That's because it is not only Ukraine that is threatened by a slowdown of Russian gas supply, it is Europe itself. 

And as Russia uses every old-fashioned trick in its book to regain control of the Ukraine government in Kiev, it is also sending a very old-fashioned message to the Europeans and the U.S., who are trying to both slow down the Russians and craft a financial package for the nearly bankrupted country: stay out of this. 

While supplies running through Ukraine to Europe are still well stockpiled and good for at least another 4-5 months, the message of the Russians could not be more clear: We still control Eastern Europe and will continue to use everything in our old-school arsenal to remain in charge. There are, of course, the most obvious and old-school tactics of an invasion by Russian troops. But that isn't all that they possess to get the rest of the world to respect thier iron fist.

There is also energy. 

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 25 years of oil trading experience. He is a licensed commodities trade adviser.

Dan is currently President of MercBloc LLC, a wealth management firm and is the author of "Oil's Endless Bid," published in March of 2011 by John Wiley and Sons.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts on CNBC, Bloomberg US and UK and CNNfn.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.

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