EU:While Europe looks to Russia for oil and gas, the Kremlin needs our money and know-how, writes Daniel McLaughlin
THE EUROPEAN Union fought shy yesterday of slapping sanctions on Russia, the country that provides the bloc with about one-third of its oil and 40 per cent of its gas, but the economic repercussions of the Georgia conflict worry Moscow as well as the West.
After a brief flurry of sanctions talk last week, EU leaders made clear before their Brussels summit that it would be counter-productive, if not impossible, to economically isolate the world's largest gas exporter and second-biggest oil exporter.
But amid EU fears that the dispute over Moscow's intervention in Georgia could prompt a cut in energy supplies, Russia also knows that it needs western partners to sustain its economic boom.
The Kremlin has a fierce grip on the provision of fuel to the EU, most of which arrives through Ukraine and Belarus, where recent disputes with Russia quickly translated into reductions in energy supply.
During a row over fuel prices, Russia cut oil deliveries to Belarus for three days in January 2007 along the Druzhba pipeline, with knock-on effects in Germany and Poland.
Russia's state-controlled energy giant Gazprom, which holds one-quarter of the world's gas reserves, has threatened to cut gas supplies to Belarus. Druzhba - named after "friendship" in Russian - is the longest oil pipeline in the world, and passes through both Belarus and Ukraine.
The latter suffered a complete halt in gas flow from Gazprom during another price row in January 2006. Onward supplies to Italy, France, Croatia, Poland, Hungary, Germany and Romania fell sharply, but were restored within days.
Druzhba was built in the 1960s and 1970s, and plumbed eastern Europe into a network connecting with Siberia's vast oil fields.
Seventeen years after the Soviet Union was consigned to history, new members of the EU and Nato from the Baltic to the Black Sea still rely on fuel from that same pipeline system, despite often-fractious relations with the Kremlin.
Poland takes 95 per cent of its oil and almost half its gas from Russia, and has been warned by Moscow to expect more than just diplomatic protests against its recent deal to host a US missile base.
Russian oil supplies to the Czech Republic have fluctuated since it agreed in July to the construction of a radar base as part of the same US project.
Countries like Slovakia, Finland and Bulgaria depend on Russia for over 90 per cent of their gas, and Germany, the EU's biggest economy, receives more than one-third of its oil and gas from Russia.
The 2006 Ukraine fuel crisis gave impetus to EU efforts to wean itself off Russian oil, find new suppliers and build its own pipelines. The Georgia conflict will add more urgency, but many analysts doubt the bloc's ability to end reliance on the Kremlin.
While EU nations have dithered over the planned Nabucco pipeline (which should bring gas from Azerbaijan and Central Asia to Europe through Turkey), Moscow has signed up states - including EU members - to the rival South Stream project, which is well-ahead of Nabucco in preparation.
Furthermore, German and Italian firms have struck major individual deals with Gazprom which critics say undermine EU efforts to forge a united front in energy talks with Russia.
The conflict in Georgia has also cast doubt on the country's suitability as an energy transit alternative to Russia, amid fears for the security of the Baku-Tbilisi-Ceyhan oil link and the Baku-Tbilisi-Erzerum gas pipeline, both of which carry fuel from Azerbaijan across Georgia to Turkey, for onward shipment to western markets.
Some member states are urging the EU to leave it no longer to firms involved in Nabucco to negotiate terms with potential gas suppliers in ex-Soviet Central Asia, but to engage governments directly, as Moscow has always done.
Many industry experts also emphasise the interdependence of the global energy market: the Kremlin relies on sales of fuel to the EU - which accounts for 60 per cent of Russian oil and gas exports - and it has a growing need for western energy expertise.
Russian oil output is flat or falling and it is increasingly costly and difficult for Russian firms to exploit new fields.
Most of the technical know-how and funding for such projects come from European and US specialists and banks, which are now wary of working with Kremlin-controlled companies.
Russia's once-buoyant stock market also plunged when the Georgia crisis erupted, as investors pulled their money away from perceived risk.
Finance minister Alexei Kudrin said €4.7 billion in capital had already been taken out of Russia due to the conflict - a drain not even an energy giant could tolerate for long.