The Republic of Moldova is aiming its energy policy towards the West. The Russian Federation, which is Moldova’s only natural gas supplier, seems irritated that its partner wants to obtain different energy sources in order to be more independent and not fully rely on Gazprom.

To better understand the energy challenges Moldova faces, reporter Valeriu Gonta conducted an interview with Emmet Tuohy, research fellow at International Centre for Defense Studies based in Tallinn, Estonia.

Mr. Tuohy is in charge of regional defense issues, energy policy and cyber security. He covers the issues of the Black Sea countries, particularly Moldova, Ukraine and Georgia.

Moldova.ORG: Moldova and Romania have agreed to start building a joint pipeline on August 27, 2013. As Romanian President Traian Băsescu said in Chișinău this week, the two countries are expected to be interconnected by the beginning of winter 2014. Why is such a project important for Moldova?

Emmet Tuohy: This pipeline project is tremendously important to Moldova above all because it represents a real possibility of ending the country’s complete dependence on Russia—currently the source of 100% of its natural gas imports. It is a welcoming sign to see Moldova’s leaders taking this step—in close cooperation with their EU and Romanian counterparts, of course—because continued energy supply dependence brings with it three key areas of risk.

First is the physical risk of supply interruption, which in Moldova’s case is not simply hypothetical: for example, in the winter of 2005/06, Gazprom cut off supplies, forcing municipal heating systems to shut down due to the lack of alternative fuel sources.

Second is the economic risk of higher long-term prices. Gazprom claims that its long-term contracts are fair, and provide “stability,” but considering the unresolved Transnistrian debt issue, stability is certainly not a factor in the two sides’ energy relationship. Moreover, not only are Gazprom’s prices relatively high—Moldova paid $392 per thousand cubic meters in 2012, more than the average paid by (far wealthier!) European countries—but its business model locks countries into paying oil-indexed prices at a time when the long-term trend lines for gas point downward thanks to increased LNG exports from the Persian Gulf and the United States, and to expected shale gas supplies from countries as close as Romania and Ukraine.

Third is the political risk. Gazprom and its associated entities are not traditional commercial enterprises operating according to the dictates of the market. Instead, they play a defined role as an instrument of the Kremlin’s geo-economic and geopolitical policy, as evidenced by Gazprom’s decision to continue making massive capital investments in expensive bypass pipelines like Nord Stream II and South Stream in the face of significant (foreign) shareholder opposition.

In Moldova’s case, we see the politicization of energy in the conflict over Transnistria, where Moscow has insisted that the separatist region’s estimated $4 billion gas debt be paid by Chișinău before any final settlement can be reached.

If used prudently, the pipeline—which will supply up to 1.5 billion cubic meters (bcm) per year, an amount roughly equivalent to right-bank Moldova’s annual consumption—will reduce these risks. At the same time, it will also deprive Moscow of valuable leverage it has sought to use both in the conflict-resolution process and in the broader effort to dissuade Chișinău from choosing a Euro-Atlantic foreign policy orientation rather than the so-called “Eurasian vector” that would bring the country closer to Russia.

Moldova.ORG: Could Russia’s Gazprom ask for certain fees given that the gas transported from Romania would use the same pipeline network of Moldova which is currently owned by Russia? Would the gas price be affected?

Emmet Tuohy: When we speak of Gazprom in Moldova, there are two dimensions to consider.

First, on a domestic level, the Russian firm does own a controlling stake in MoldovaGaz, operator of the pipeline transport and distribution network. Certainly, this is a potential obstacle: here in the Nordic-Baltic region, Gazprom-owned or -controlled network operators have vigorously sought—without success—to prevent supply diversification, whether for example by suing to block new legal measures (as in Lithuania) or co-opting new infrastructure projects (as in Finland).

Although it remains possible, it is not likely that such efforts to interfere with diversification will be made in Moldova. There, as in other members of the Energy Community (which the country joined in 2010), gas distributors must operate on a market basis. This does not mean that they have to lose money: as Energy Minister Valeriu Lazăr noted last month, gas sales from the Iaşi-Ungheni pipeline can be attractive, “including for MoldovaGaz.” In the unlikely event that the company does try to block or raise the prices of such sales, the government would of course have the ability to ensure that it complies with the law.

Second, on an international level, Gazprom itself could raise objections; it has analogously labeled Ukraine’s reverse-flow imports of (originally Russian) gas from neighboring EU countries as “a fraudulent scheme.” Yet, even if Romania ends up re-exporting gas from Russia (on which it depends for 20-25 percent of its consumption) to Moldova, there is no legal reason why Gazprom would be able to interfere—Romania has clear title to the gas.

In any case, the Russian firm is unlikely to try to do so, both because of the small leverage Moldova has as a transit state (some 20 bcm per year of Russian gas crosses Moldova en route to the Balkans), and because of the possibility that Iaşi-Ungheni could actually benefit it in the future, according to some sources, by being used in the reverse direction.

Moldova.ORG: Moldova’s breakaway region of Transnistria has a huge debt for Russian gas consumption. Russia claims it is Moldova’s responsibility to cover the costs. How should all three parties (Moldova, Transnistria and Russia) handle this situation?

Emmet Tuohy: For Moldova, first and foremost it needs to develop alternative sources of gas supply—as it is doing with the Iaşi-Ungheni pipeline—so as to reduce the ability of the Russian side to use the debt, or any other such pretext, as a political weapon. Beyond that, the Moldovan government needs to be aware and to make clear that the gas debt has continued to be an issue for reasons having nothing to do either with gas or with debt; instead, it’s been a manifestation of the larger divide over the future status of Transnistria itself.

Statements that portray the debt as purely economic—such as former Prime Minister Filat’s argument that the payment should be “settled by consumers,” i.e., the Transnistrian companies such as the MMZ steel plant in Rîbniţa that have actually consumed the gas—are precisely what is not needed.

Due to their own interests in greater trade with the EU and the outside world, the major economic players on the left bank of the Nistru (another key example is the Sheriff conglomerate) are likely to be a key constituency pushing Transnistria towards closer integration with the rest of Moldova; it does not therefore make sense to place the burden of a fundamentally political dispute on these companies’ shoulders.

For Transnistria, continuing the theme above, it has to recognize that the continuing presence of the debt—even if it is a political issue—creates a climate of economic uncertainty that clouds the future of commercial enterprises crucial to the region’s future development and progress. In order to attract more foreign investment and build on its existing steps towards economic integration—it now exports more to the EU and the West than it does to the countries of the CIS—Transnistria’s leaders have to work to ensure that the costs its businesses face for inputs like energy are both transparent and predictable.

Ultimately, as the “creditor,” Russia has the most room to operate in solving this issue quickly. It should recognize that its goal of creating a broader Eurasian economic space that includes Moldova is not furthered by the outstanding climate of uncertainty surrounding its energy relations with both sides of the Nistru.

Moreover, its official position on the gas debt—that it is all the responsibility of the Moldovan state, the only government it recognizes as sovereign on the left bank—is neither consistent with its actual practice when it comes to, say, military or political relations with Tiraspol, nor is it realistic.

Since full repayment by the Moldovan government is unlikely, especially in the short term, Russia should recognize the realities on the ground. It can do so by, for example, offering a full or partial cancellation of the debt in exchange for guarantees that its legitimate economic interests (e.g., the investments made by Russian citizens) in the region will be respected by all parties to an eventual conflict settlement.

Moldova.ORG: The “5+2” talks on Transnistrian conflict resolution process seem to bring sterile outcome. Moreover, the situation in the Security Zone has become tenser lately. What improvements should be made in order to make the negotiations more productive, with better results?

Emmet Tuohy: In the immediate recent period, the situation has indeed become more tense in the Security Zone—the decision by the Transnistrian authorities in April to set up new checkpoints around the city of Tighina (Bender, in Russian) being particularly unhelpful—but it would also be unfair to call the 5+2 process “sterile.”

While an agreement on final status is clearly some way off, the process has brought real results, especially on the working group level. For examples, we can point to the resumption of rail transport on the Chișinău-Tiraspol-Odesa route; the construction of the Gura Bîcului bridge; the restoration of landline telephone links, and other progress on customs, legal, and technical issues of considerable importance to the everyday lives of citizens on either side of the conflict line.

In the near-term future, both conflict parties should strive to avoid instinctive, knee-jerk responses to moves taken by the other side, taking into account the domestic and international contexts. Transnistria, for example, elected a new president in 2011 at the same time it moved to a semi-presidential system, weakening the role of the office while strengthening that of the Supreme Soviet, the region’s legislature.

Clearly, this is a recipe for political maneuvering and tension between the two branches of government. Accordingly, the Chișinău side should understand moves such as Transnistrian leader Evgeni Shevchuk’s decision to move Parliament to Tighina (thereby disrupting its operations and temporarily weakening its capacity) in this light, rather than reflexively taking it as an act of aggression.

Such was also the response of the Transnistrian leadership to the recent Moldovan government decision to erect passport-control points along its side of the internal “border” with the separatist region. Yet, this move was not intended to exacerbate the conflict or to change the situation on the ground, but is simply a logical part of the broader Moldovan effort to demonstrate its capacity to secure the country’s eastern border in the run-up to the critical EU summit in November.