APPENDIX 51
Memorandum Ambassador Keith C Smith (Retired),
Center for Strategic and International Studies, Washington DC
EXECUTIVE SUMMARY
Developments in Russian energy and
foreign policy have highlighted the need for caution on the part
of all Western countries when negotiating long-term agreements
with Russian energy companies. These energy companies are being
used as foreign policy instruments of a government that is more
authoritarian than at any time since 1991.
Part of Moscow's geopolitical strategy
is to increase European dependency on Russian oil and gas resources,
therefore maximizing the Kremlin's political influence, a goal
of at least equal importance to revenue earning.
Gazprom's monopoly practices in West
and East Central Europe, as well as in Central Asia are in direct
conflict with the competition policies of the EU and those of
the UK Government.
The recent "gas war" between
Ukraine and Russia does not reflect a policy change in Moscow.
Since 1990 Russia has used its energy resources in an attempt
to affect the foreign and security policies of its neighbours.
The EU and the United States have
been slow to recognise that the energy policies of the Kremlin
pose risks to Europe and particularly to economic independence
of the Central European states. These policies are also not in
the long-term interest of Russia itself.
The British Government and the EU
should require Russia to adhere to the Energy Charter and to World
Trade Organization (WTO) principles by making its energy policies
and actions more transparent and based on competitive business
practices.
Any increase in the share of UK gas
imports originating in Russia should be contingent on Russian
companies adhering to Western competition practices in energy
production and transportation, and on the Russian Government granting
access to UK and other foreign energy investors on a reciprocal
basis.
1. A DELAYED
WAKE-UP
CALL
1.1 Russia's tough stance toward Ukraine
on natural gas prices was viewed by too many in Europe and the
United States as raising new issues concerning Russia's foreign
economic policies and of the growing European and US dependency
on energy imports. For many new EU member states and for countries
such as Ukraine, Georgia, and Moldova, however, this is an old
problem. Central European attempts to flag the issue in Western
capitals have until now been brushed aside. The rapid approval
by the EU Commission of the Russian-German undersea gas pipeline
project without an in depth review of its significance for the
rest of Europe was a serious mistake. The concerns of the Central
Europeans should have been examined in more detail. The pipeline
agreement and attached protocols between Germany and Russia will
result in increased Gazprom control over Germany's gas companies
and can negatively affect neighboring countries' ability to diversify
their energy sources. The UK Government would be wise to analyse
closely the political and security implications of Russia's non-transparent
and monopolistic foreign energy policies.
2. RUSSIA'S
USE OF
ITS "ENERGY
WEAPON" HAS
BEEN IGNORED
FOR TOO
LONG
2.1 There is much more at stake for Europe
than its own energy supplies. Moscow's increasing control of the
energy infrastructure and markets in Central Europe has long-term
implications for the security, and not only energy security, of
all of Europe. The comments of former Kremlin economic adviser,
Andrei Illarionov, citing Russia's increasing tendency to use
energy as a weapon in its relations with other countries should
act as a wake-up call to Western governments, and particularly
members of the EU. [119]They
can no longer afford to be complacent regarding Russia's willingness
to use its considerable energy resources for political influence,
a situation that dates back to 1990, when Moscow cut energy supplies
to the Baltic States in a futile attempt to stifle the independence
movement. The "energy weapon" was again used against
the Baltic States in 1992, in retaliation for Baltic demands that
Russia remove its remaining military forces from the region.
2.2 In 1993 and 1994, Russia reduced gas
supplies to Ukraine, in part, to force Kiev to pay for previous
gas supplies, but also in an attempt to pressure Ukraine into
ceding to Russia more of the Black Sea Fleet, and to gain control
over Ukraine's energy infrastructure. [120]Belarus,
Poland and Lithuania, suffered supply disruptions in 2004 from
the Kremlin's politically motivated attempt to take over Belarus'
gas pipeline system. As recently as 1998-2000, in an attempt to
stop the sale of Lithuania's refinery, port facility, and pipeline
to a US company, Transneft stopped the flow of oil to Lithuania
nine times. None of these examples of Moscow's using oil and gas
shipments to strong-arm its neighbors resulted in complaints from
Brussels or Washington.
3. THE EU HAS
FOR TOO
LONG IGNORED
NONTRANSPARENT ENERGY
POLICIES
3.1 The EU, and particularly the large gas
importers like Germany, Holland, and France, have ignored the
lack of transparency and competition in Russia's energy sector.
The Russian pipeline monopolies of Gazprom (natural gas) and Transneft
(oil) have been allowed to flout the open-market requirements
of the WTO and the EU's own Energy Charter. The EU's agreement
with Russia on WTO in effect gave Moscow's increasingly monopolistic
pipeline and production companies carte blanche. Russia will be
able to increase its market power and its political leverage in
Europe through the construction of the expensive Northern Europe
Gas Pipeline, which will go under the Baltic Sea from Russia to
Germany. The construction of the Yamal II pipeline would have
been a much cheaper alternative and would have given both Central
and Western European consumers greater energy security. [121]
3.2 The West ignored Gazprom's takeover,
with Ruhrgas' help, of domestic gas facilities and markets in
all three Baltic States. It disregarded Transneft's recent warning
to Kazakhstan that it would not be allowed to supply oil to Lithuania's
Mazeikai Refinery through the Russian pipeline system, even though
Astana has the legal right to do so, based on the transit agreement
from last fall. [122]Russia
has stopped all piped shipments of oil to Latvia for the past
two years in an effort to gain control over the oil port at Ventspils.
Now, Moscow is again attempting to keep non-Russian companies
from buying Lithuania's Mazeikai Nafta Refinery and the port at
Butinge. Should this use of raw energy power not be a subject
for discussion within the EU and between the EU and other importing
countries such as the United States and Japan? EU member governments
need to take the initiative and examine the effects of becoming
more energy reliant on an increasingly authoritarian Russian government
that has no compunction about using its energy leverage to achieve
political goals.
4. THE WEST
DOES HAVE
LEVERAGE WITH
RUSSIA
4.1 It is a mistake for governments in the
West to believe that they need Russian energy supplies more than
Russia needs the oil and gas revenue that comes from Western markets.
Russia cannot develop its vast energy fields without Western capital
or advanced technology. Unfortunately, to date, there has been
little inclination by either European Governments or the United
States to use their considerable leverage to encourage Russia
to play by transparent, competitive rules that guide business
in the West. The pipeline monopolies of Transneft and Gazprom
are contrary to the Energy Charter signed by the EU and Russia.
Where is the pressure on Russia to ratify and implement the chartereven
the transit protocol section of the Charter? [123]Following
the destruction of Yukos, Russian officials declared that private
companies would not be allowed to build pipelines in the country.
[124]Yukos
had planned to build, with other private Russian energy companies,
pipelines to China and to supply Europe through an oil line to
Murmansk. The Putin Government has taken the issue of private
pipelines off the agenda.
5. FORMER INTELLIGENCE
OFFICERS MAKING
ENERGY POLICY
5.1 Russian energy policy is increasing
formed by former intelligence officers (siloviki) in the Putin
administration and in Russia's energy companies. The head of Rosneft
and a former KGB associate of President Vladimir Putin, helped
engineer the breakup of Yukos and his company's seizure of the
most valuable assets of Yukos. [125]Former
KGB and GRU officers sit on the boards of almost all the country's
major energy companies. In 1999, Moscow even sent out a former
KGB/FSB officer as ambassador to Lithuania, in an attempt to provide
behind-the-scenes support to Lukoil's negotiating position. Before
assuming the job, the ambassador had been the FSB's official liaison
officer with Lukoil. The siloviki generally oppose any weakening
of the state through the growth of a transparent private sector.
Putin's use of a former East German Stasi officer, and now Dresdner
Bank official, to direct the financing of the undersea Baltic
pipeline system only added, perhaps unfairly, to suspicion that
the project is more politically than commercially motivated. [126]The
increasing influence of the intelligence community is setting
back Russia's own development as a democracy and as a market economy
providing long-term benefits to Russia's own population.
6. CEDING TOO
MUCH CONTROL
TO GAZPROM
6.1 For too long, Europe's energy relationship
with Russia has been directed by only a few member states, particularly
Germany, France and Italy. Former German Chancellor Gerhard Schroeder
personally directed negotiations with President Putin over the
Baltic Pipeline and is now a Chairman of the pipeline company.
But the United States and its Western allies have also been more
eager to secure additional energy supplies from Russia than to
pressure the Kremlin into reforming its economy. The EU and the
United States have for too long ignored the noncompetitive and
political aspects of Russia's energy export policies. This is
due in part to competition by Western companies for exploration
and production rights in Russia.
6.2 How much thought has been given in Berlin,
London and Brussels to the potential power of Gazprom to control
the gas markets in Central Europe following the completion of
the Baltic pipeline system? Under the German-Russian agreement,
Gazprom will be able to buy significant shares in Germany's gas
companies. Will this allow Gazprom to veto shipments of gas from
Germany to Poland if the Poles have a dispute with Gazprom over
price or availability? Could the increased power of Gazprom be
used to stop liquid natural gas (LNG) receiving plants from being
constructed in Poland, Latvia, or even in Germany? If the EU decides
to implement its long-awaited requirement for member states to
have more gas storage, will this be possible now that the EU has
blessed the Baltic pipeline system designed to bypass Poland and
the Baltic States? What about Russian purchases of gas from Turkmenistan,
Uzbekistan, and Kazakhstan that are clearly designed to deny the
West the ability to buy directly or at prices negotiated between
producer and consumer, rather than working through Gazprom? [127]Are
these moves by the Kremlin compatible with WTO membership or the
EU's own competition policies? It is hard to imagine that they
are.
6.3 Gazprom is now attempting to pressure
Bulgaria into breaking a binding agreement on gas price and availability
that is in force until 2010. [128]A
test for the EU will be whether it backs up this soon-to-be Member
State with political support. So far, there is no sign that Brussels
will intervene. Poland, understandably, has proposed that NATO
should put the issue of energy security on its agenda. Energy
security is certainly more than a national security issue. It
can effect the strength of the entire Alliance. The Atlantic Council
and NATO foreign and defence ministers should examine the issues
surrounding Russia's aggressive energy policies.

7. NO BIG
WINNERS IN
THE "GAS
WAR"
7.1 That brings us to the Russia-Ukraine
"gas war" that was allegedly resolved to the satisfaction
of both sides on 4 January. Russia's political agenda in using
gas prices to punish the pro-Western Yushchenko government is
clear from statements made by Russian supporters of Gazprom's
hard line, and from remarks by Russia's few remaining reformers.
Few people familiar with political and economic relations between
Russia and Ukraine believe that this agreement will last very
long. [129]Moscow's
requirement that all gas to Ukraine be contracted through the
nontransparent company RosUkrEnergo, the direct successor to the
even less-transparent EuralTransGas, raises questions about the
reliability of future European gas supplies that originate in
Central Asia. It is not a good omen that most of the bilateral
agreements signed on January 4 remain secret. In light of past
actions, no one should have been surprised by Moscow's tough approach
to Kiev, and the Kremlin has succeeded in weakening public support
in Ukraine for President Yushchenko as a result of the agreement.
The agreement also increased the likelihood that Ukraine's gas
pipeline will fall under Gazprom control within the next year.
7.2 One can certainly make a good case that
Russia has the right to charge world market prices for its exports.
An equally good case can be made that it is in the long-term interest
of Ukraine and other importers to move in the direction of paying
world prices. Once market prices are reached, Moscow's political
leverage will decrease. A four-fold overnight increase in price
from $50-$230 per 1,000 cubic meters, however, is not justified,
particularly in light of the 2004 agreement between the Kuchma
government and Gazprom, which locked prices in until 2010. [130]
7.3 More importantly, no one knows what
the real market price of Russian gas and oil would be if a transparent
situation existed within Russia's exporting companies. If Russian
consumers were forced to pay prices that were significantly more
than one-tenth of what Moscow claims to be the world market price,
domestic demand would drop and additional Russian oil and gas
would be placed on the international market. Does the $47 per
1,000 cubic meters charged to Belarus have any relationship to
the market, or does the Kremlin consider it an "internal
price?" These are all questions that need greater discussion
in London, Brussels and Washington.
8. THE WEST
SHOULD HOLD
RUSSIA AND
ITS COMPANIES
TO HIGHER
STANDARDS
8.1 Western acceptance of Russia's "neo-colonial"
policies in Eastern Europe, the Caucasus and Central Asia are
not in the long-term interest of Russia itself. Acquiescing to
Moscow's more "robust" regional policies has only contributed
to greater tension in Russian-East European relations and slowed
the development of democratic governments in the Caucasus and
Central Asia. This in turn strengthens non-democratic elements
in Russia that believe that the country's strength depends on
control of the neighbourhooda rather large neighbourhood
at that.
8.2 The UK, other EU member governments
and the United States need to quickly rethink their energy and
non-energy policies with Russia. The two cannot be separated.
The world does Russia no favour by ignoring the monopoly and uncompetitive
nature of this energy relationship. The West does have the economic
and political leverage to force Russia to become more transparent
and commercial in its foreign energy policies. It cannot allow
Moscow to threaten the security of Europe, particularly the new
democracies of Central Europe, through neglect or unwillingness
to face down the new increasingly imperial mindset in the Kremlin.
(Note: The views expressed in this paper
are those of the author and do not necessarily represent those
of the Center for Strategic and International Studies)
Biographical Note: Ambassador Keith C. Smith
is the author of Russian Energy Politics in the Baltic States,
Poland and Ukraine (CSIS December 2004), and is currently Senior
Associate in the Europe Program at the Center for Strategic and
International Studies in Washington DC. From 2000 to 2002, he
was a consultant on international energy affairs to the Williams
Company, one of America's largest integrated energy companies.
Mr. Smith retired from the US Department of State in 2000, where
his career focused primarily on European affairs. From 1997-2000,
he was US ambassador to Lithuania. His additional posts in Europe
include Hungary (twice), Norway, and Estonia.
16 March 2006
119 "Russia: Putin's ex-aide says he quits because
he could no longer speak out," BBC Monitoring, 30 December
2005. Back
120
Paul J D'Anieri, Economic Interdependence In Ukrainian-Russian
Relations (Albany: State University of New York Press, 1999),
78. Back
121
"Poland Wants Expanded Yamal-Europe Pipe", Russia
& CIS Oil and Gas Weekly, 1 December 2005. Back
122
Valeria Korchagina, "Kazakhs Fume Over Lithuanian Oil Deal,"
Moscow Times, 21 November 2005. Back
123
http://europa.eu.int/scadplus/leg/en/lvb/l27028.htm> Last
updated: 13.8.2001. Back
124
"Putin may allow private companies to build pipelines in
Russia," Prime-Tass, 29 April 2004. Back
125
Alexei Polukhin, "1.1 The Gas Secrets Non-disclosure Agreement,"
Novaya Gazeta, No 94, 15 December 2005, p 3. Back
126
Sally Bogle, "Gazprom, E.ON, BASF Begin Construction Work
on NEGP, May Offer 9% to New Investor," World Markets Analysis,
World Markets Research Centre, 12 December 2005. Back
127
"Gazprom Established Control Over All Gas Resources of
Three Asian Republics", The Russian Oil and Gas Report, 14
November 2005. Back
128
"Bulgaria Refuses to Review Gas Contract with Russia's
Gazprom," Agence France Presse, 6 January 2006. Back
129
Fred Weir, "Russia-Ukraine Gas Standoff," Christian
Science Monitor, 3 January 2006. Back
130
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European Approach to Ukraine's Gas Dilemma: Road map to solve
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