The Ruler of the Pipeline

Jörg Himmelreich
Internationale Politik
March 2007

It used to be tanks and missiles but now it is oil and gas that matter. The Kremlin is deliberately using its energy resources and the dependency of the importing countries as a tool of a new great power policy. The EU can no longer allow itself to be treated in this manner. It should use its power of demand to create a new foundation for future cooperation.
There is no doubt now: EU-Russia relations have soured. Russia's conflict with Belarus, the difficulties to start negotiations towards a new Partnership and Cooperation Agreement and Putin's final refusal to ratify the Energy Charter Treaty reflects the latest differences between the EU and Russia. It is precisely because Russia is a significant trading partner, and the most important energy supplier of the EU-and Europe's energy dependency on Russia will continue to grow in the years to come- that as a result, the developments in Russia are inevitably going to affect Europe. That is why the EU should be especially interested in fostering cooperation with its most important political and military partner. "Cooperation before confrontation" as the common set diplomatic phrase goes in the end describes very little. Needless to say, that the EU cannot possibly be interested in a confrontation with Russia.
The real challenge of a new European Russia policy consists rather in finding a way how to deal with a country, whose authoritarian democracy, limitations of fundamental rights and the re-nationalization of the energy economy, contradicts both European values and numerous contractual commitments that Russia has with Europe (commitments within the framework of the Council of Europe, Partnership and Cooperation Agreement, Energy Charter Treaty etc.). At the same time, a constructive collaboration of Russia and the EU is crucial for the stabilization of the East European Neighborhood, the South Caucasus and the Central Asia vis-à-vis Iran and Iraq in the so called Near East quartet. Finally, this cooperation is of great importance in the global context of terrorism abatement and the global energy security policy. Both the European and the American Russia policies are facing this dilemma. The Russian energy policy and the EU Neighborhood Policy towards Eastern Europe and the South Caucasus are expressively preferential topics for the Germany's Presidency of the Council of the EU. At the same time they represent divergent interests between Russia and the EU. The oil conflict between Russia and Belarus, as a result of which Germany had for a short time been cut off from Russia's oil supply, demonstrated once again after the Russian-Ukrainian gas crisis that Russia's policy towards the neighboring countries has a direct impact both on Germany and the EU. It would be naïve to assume that Russia increased energy prices for Belarus and the Ukraine only to introduce the future WTO regulations and to raise prices to the international market level, thus ending the subsidization of national economies in the neighboring countries. The doubling of the existing tariffs overnight and the reckless way of enforcing new ones contradict all international commercial and diplomatic rules. The increase of oil prices for Belarus was accompanied by the introduction of import duties for the formerly duty free goods that are not marketable in Europe because of their low quality. The Russian-Belarus project of an Economic Union once favored by Boris Jeltsin and expected to serve as a foundation for political integration has now been terminated by the Kremlin. This has put pressure on president Lukashenko within his own country. Moreover, no longer enjoying the support of Putin the "last dictator in Europe" is now externally completely isolated. The Kremlin is trying to apply political and economic pressure to weaken Lukashenko's domestic position. The purpose of this policy is to bring a suitable pro-Kremlin successor to power who would carry out what Lukashenko so far has refused to, namely integrate Belarus into Russia.
The rigid enforcement of the increased gas prices two month before the parliamentary elections to the Verkhavna Rada in March 2006 also put a strain on president Juschenko's governance. From the Russian perspective this raising of prices was a success story. After all, it boosted the position of the Prime Minister Janukovich and his party, who managed to repudiate the Ukrainian President's policy on integration into the EU and NATO in favor of a more Russia-friendly foreign policy. The recent forced resignation of the Ukrainian foreign Minister Boris Tarasyuk, who is a vehement advocate of the country's orientation towards the West, is only one of the latest indications of this development. These examples clearly demonstrate that Russia's motives behind the raising of energy prices for the so called "near abroad" countries are far from being purely economic. The introduction of import protection on Georgian goods and entry denial for Georgian citizens into Russia conceal similar intentions.
In the case of Belarus, Beltransneft - the state energy network operator and owner - can only pay the doubled prices by selling some of its shares to the Russian state network operator Transneft. By this means Transneft is going to obtain the controlling interest in the Belarusian transmission network. It is, therefore, quite obvious that another goal of the Russian energy policy is to allow Transneft and Gazprom to obtain a major if not a complete share of the respective transmission networks in the post-soviet neighboring states. The one who owns the pipeline can determine the price and quantity of oil and gas. That is why foreign investment from western energy companies is welcome in the spheres of energy production (upstream), but not in Russian transmission networks (downstream). During the presidency of Boris Jeltsin western companies did receive access to transmission networks within production sharing agreements in some cases. These Western companies such as Shell and Sakhalin are now, however, forced to sell off their majority shares to Gazprom. Securing the transit monopoly for Gazprom is the leverage for Russia's neohegemonic foreign policy towards its neighboring countries as well as its great power pose towards the EU. This foreign policy strategy underlying the energy and trade policy under Putin has long been misconceived both in Germany and in other western European countries due to a short sighted assumption that "energy supply is only a matter of economics". In this connection an argument is brought forward that Russia is also dependent on the EU for energy export revenues from the EU account for over 20 per cent of Russia's total national budget. At the end of the day, the Russian government is going to have it easier, however, making their people refrain from some 100 million Euro revenues than the European heads of states having to deal with a cold, unheated winter.
Power of the Network
The countries aligned with the transportation network from the Soviet times, Russia's neighboring states and the EU States which were former members of the Council of Mutual Economic Assistance (Hungary, Romania and Bulgaria), are still today almost exclusively associated with Gazprom because the individual states can not afford the investment of building an alternative pipeline. This network structure is the base for Russia's political influence in Central Asia, where Gazprom maintains an export and transportation monopoly in Turkmenistan and Kazakhstan. Two projects have already begun: the Baku-Tbilisi-Ceyhan oil pipeline running from Azerbaijan through Georgia to Turkey's Ceyhan port in the Mediterranean and an expansion of a parallel running pipeline. These projects are being completed with the purpose of Western diversification and their routes make Russia's energy foreign policies particularly meaningful. These routes strategically open the possibility for Turkmenistan and Kazakhstan to become independent of the transportation monopoly by circumventing Russian territory by passing via the Caspian Sea. Recent trips made by German Foreign Secretary Steinmeier emphasize the interests of the federal government to promote the diversification of energy resources in the EU.
The future security of European energy supply will depend upon the extent to which the EU member states succeed in putting their national individual interests on the political back burner and present a united and uniform stance towards Russia, even if such a foreign policy is not an exact element of EU competencies. European endeavors for a common European energy policy approach are currently being hampered by existing bilateral agreements between individual member states and Russia, which weakens the EU negotiating position. Germany has the unique opportunity to strengthen the EU position, by using their influence through their relationship with Russian to present a united European energy security policy.
Foreign and security policy interests have always been the priority for the energy economy, taking precedence over pure energy business interests. The privatization of previously state-owned European energy corporations and the liberalization of the European energy market encourages competition and further promotes efficiency among business. Both efficiency and competition is favorable for consumers. However, this does not release the EU from its obligations of concerning themselves with energy security. They must conceptualize how to preserve the prevailing foreign and security policy interests despite the necessary energy industry privatization; much like how the EU protects higher-ranking public interest in other domains such as restricting monopolies and cartels of through environment protection acts. Therefore it is pertinent that the EU Energy Commission receives coordination and controlling authorization from member states in order to monitor the energy business of private European energy companies who work with third party states and their state-owned corporations. The latter is the best way to enable the EU to preserve energy foreign policy interests.
Reaching for Europe
European energy politics seem to be particularly essential now, ever since Russia refused to ratify the Energy Treaty Charter. It still remains unclear if and when Russia will be ready to accept the binding commitments of reciprocity and transparency in the energy sector in the Partnership and Cooperation Agreements (PCA). As long as western private corporations are denied access to shares in the Russian transport network, the same should apply to Gazprom's investments in the European distribution system, particularly since Gazprom is currently striving towards access to European customers through the acquisition of the corresponding networks. Such a European response to Russia's refusal of reciprocity can only be assured through corresponding regulatory and coordination authority by the EU Commission. The EU cannot watch from the sidelines as private German energy firms compete for investments in Russian gas production, with the contract awarded to the firm who can guarantee Gazprom a greater share in the German distribution network. The EU also cannot look on as state and private operators of the Nabucco Pipeline - which is being planned in southeast Europe to reduce the dependency of Romania, Bulgaria, and Hungary on Gazprom and is therefore partly financed by the EBRD - tender once again Gazprom shareholding on this pipeline. These examples show how urgent it is to integrate Europe's private energy companies into a harmonized EU foreign energy policy.
It is up to the EU to limit Moscow's political instrumentalization of the distribution networks of Gazprom and Transneft. This should be accomplished through politically and financially supporting European corporations that invest in such transport networks in the immediate and extended European neighborhood in order to reduce the dependency on Russia as well as directly affect the Russian energy exploration and production. A coordinated European foreign energy policy cannot be limited to the EU, but due to the integration of the networks, must also include the European neighborhood as a transit region. In that way it would constitute a fundamental element in an active European Neighborhood Policy (ENP).
Ever since the European Commission included Belarus, Ukraine, Moldova, Georgia, Armenia, and Azerbaijan in the ENP in May 2004, Russia has recognized that the EU and its soft powers are in competition for attracting their common neighbors. Europe has intensified their attempts to attract states away from Moscow and towards Brussels. Since the EU cannot offer these neighbor countries any prospect of membership at this time, the best preparation for a functional and eventually complete integration of these states within the EU is promoting regional cooperation. Energy provision - as well as environmental protection and the offer of a free trade agreement - are ideal topics for functional integration.
The history of European unification, which began with the European Coal and Steel Community (ECSC) and the collectivization of coal, is a tale of the progressive functional integration of increasingly wider policy areas. Brussels's foreign energy policy for the EU region, as well as for the neighboring areas, is an important aspect of a much more complex Russo-European relationship. It shows how beyond the noble dreams of a "strategic partnership" in concrete policy areas, cooperation with Russia can be offered, as well as how the EU could react in order to overcome obstacles to strive towards cooperation. At the same time, the crucial determinant is that the 27 EU member states muster the political will to agree on a common foreign energy policy and set their national self-interests aside. The best precondition for cooperation with Russia would be such a concerted foreign energy policy through which the EU could use its entire economic and political weight in the PCA negotiations with Moscow.