Written evidence submitted by David Clark,
Chairman, The Russia Foundation[44]
RUSSIAN ENERGY POLICY AND EUROPEAN SECURITY
INTRODUCTION
Of all the issues affecting EU-Russia
relations none is more significant than the perception of Russia
as an "energy superpower" in the making. Sharp rises
in oil and gas prices, dwindling European reserves of hydrocarbons
and a consequent rise in import dependence have boosted Russian
growth and self-confidence while at the same time making European
leaders more reluctant to adopt positions that complicate bilateral
relations with Moscow. President Putin's ability to use energy
ties to incentivise friendly behaviour, or punish what he deems
to be unfriendly behaviour, has enabled him to frustrate efforts
within the European Union to develop a common approach towards
Russia and added to the impression that Moscow is calling the
shots.
Energy exports have certainly contributed
to a remarkable turnaround in Russia's economic fortunes since
the end of the 1990s. High commodity prices have fuelled impressive
annual growth rates of 6-7%, with energy revenues now accounting
for approximately half the federal budget and around a quarter
of Russian GDP. The Russian state has used energy earnings to
accumulate a stabilisation fund currently totalling $108 billion
and pay off its Paris Club debt ahead of schedule. These developments
are a welcome sign of Russia's recovery after a long period of
economic stagnation and collapse. Unfortunately, they have also
been accompanied by rising currents of authoritarianism and nationalism
in the direction of Russian policy that pose significant foreign
policy challenges for Europe and the United Kingdom. Russian energy
policy has consequently become heavily politicised in both its
internal and external dimensions.
The centrality of energy to EU-Russia
relations means that European policy makers need a fuller appreciation
of Russian strategy and intentions as they relate to the use of
natural resources. Russia holds the world's largest known gas
reserves (27% of the total) and the second largest reserves of
coal. It is also the world's second largest producer and exporter
of oil. European dependence on Russian gas is particularly significant
because of its increasing importance in the energy mix and the
current lack of infrastructure needed to access alternative supplies.
Russian imports account for 25% of current EU gas consumption,
a figure that has been predicted to rise to 60% by 2030. These
are considerable resources that could be deployed in a variety
of ways, both positive and negative. Europe's overwhelming interest
is to ensure that its energy relationship with Russia is balanced
and constructive. That cannot be taken for granted. Achieving
it will require a proper awareness of how the current Russian
political elite views energy policy, along with policy responses
designed to influence Russian behaviour in a positive direction.
TRENDS IN
RUSSIAN ENERGY
POLICY
The dominant trend in Russian energy
policy since 2003 has been a reassertion of state control and
the subordination of private sector companies, both foreign and
domestic. Russia's largest private oil company, Yukos, was forcibly
dismantled and its main assets seized by the state; the export
monopoly of state-controlled Gazprom has been enshrined in law;
new regulations are being drawn up to limit the involvement of
foreign investors in "strategic" energy projects; and
Shell was effectively forced to relinquish its licence to develop
the Sakhalin-2 project and hand a controlling stake to Gazprom.
As with Sakhalin-2, environmental regulators are now threatening
to revoke BP's licence to develop the Kovykta field through its
joint venture with TNK in what many see as another attempt to
secure a controlling stake for the state by coercive means. In
every respect the state is now in a dominant position.
There is no doubt that a strong case
can be made that the energy policies and agreements Russia adopted
during its period of weakness in the 1990s did not serve it well.
Assets were privatised too cheaply and foreign energy companies
were granted production-sharing agreements that were too generous.
It was probably inevitable that as Russia recovered it would want
to revisit some of these decisions in order to get a better deal.
But issues of method and motive were always going to be critical.
Instead of seeking redress through transparent and legal means—by
imposing a windfall tax on excess profits or seeking to renegotiate
production-sharing agreements, for example—the Russian state
has resorted to arbitrary expropriation and major violations of
the rule of law. The motives behind this policy shift are also
questionable. Instead of a systematic attempt to correct the perceived
injustices of the privatisation programme, oligarchs have been
selectively prosecuted and dispossessed, apparently according
to political criteria and their relationship to the Kremlin.
We can certainly say that if the reassertion
of state control over the energy sector was intended to serve
traditional economic or energy policy goals, it must be considered
a failure. One consequence has been a significant decline in the
efficiency of the Russian energy sector and rising doubts about
its ability to sustain production at levels needed to meet foreign
and domestic demand. Yukos and Sibneft were achieving returns
on total assets of more than 30% as Russia's leading private energy
companies. By contrast, the state-owned companies that subsumed
them, Rosneft and Gazprom, are achieving returns on total assets
of less than 10%.[45]
There has already been a serious tailing off in output growth
in the Russian oil sector since the shift back towards state dominance.
[46]An
even bigger problem appears to be looming in the gas sector. Several
analysts now predict that Gazprom's failure to invest in the new
production needed to replace its existing, mature fields could
lead to a gas deficit against existing commitments of as much
as 126 billion cubic metres a year by 2010. [47]That
figure is equivalent to 84% of the gas Russia currently supplies
to Europe.
The direction of Russian energy policy
only makes sense if we consider the underlying political motives
driving it. The first is the role that the energy sector plays
in Putin's push to consolidate state power and establish a more
authoritarian model of governance at home. In part, this reflects
a desire to eliminate rival centres of power, in particular oligarchic
interests centred on control of the natural resources sector.
More importantly, it fulfils the strategic objective of turning
the energy sector into a central component of the state's "power
vertical". In short, energy assets have become a source of
revenue, patronage, personal enrichment, economic power and political
control in the hands of the state. It is significant, for example,
that the first serious moves to curtail media freedom were initiated
by a Gazprom subsidiary—Gazprom-Media—which seized
control of the independent television station NTV in 2001. The
station has since become known for its heavy pro-government bias.
Gazprom-Media has also taken control of a number of other media
outlets, including leading newspapers such as Izvestiya and Komsomolskaya
Pravda.
The second aim of Putin's approach is
to use energy resources to restore Russia's international standing
and buttress a more assertive foreign policy. Key members of his
inner circle, such as his chief ideologue Vladislav Surkov, have
talked of their desire for Russia to assume the role of an "energy
superpower".[48]
Although Putin has distanced himself from the term, the idea of
energy dominance as a means of reviving Russia's national greatness,
and in particular compensating for its relative lack of military
power, is clearly a major element of his foreign policy outlook.
PUTIN'S
ENERGY NATIONALISM
Vladimir Putin formed his opinions about
the political function of energy policy in the 1990s, before he
became Director of the state security service, the FSB. They were
set out in a thesis he submitted as part of a Candidate of Sciences
degree in economics at the State Mining Institute in 1997, an
abstract of which was published in the Institute's journal two
years later. [49]In
Putin's vision "Russia's mineral raw materials complex plays
an important role in all spheres of the life of the state"
(emphasis added). Among the specific examples given, he offered
the following thought: "It constitutes the basis for the
country's military might. A developed raw materials base is an
essential condition for modernising the military industrial complex
and makes it possible to develop needed strategic reserves and
potential".
Broader objectives were set out in a
passage dealing with "the strategic goal of state policy"
in relation to natural resources. This should include "a
high degree of responsibility in taking various decisions about
domestic and foreign economic policy, aimed at furthering the
geopolitical interests and maintaining the national security of
Russia." In conclusion, Putin argued that "the natural
resources complex" would be the decisive factor in "the
strategy for Russia's exit from its deep crisis and restoration
of its former might on a qualitatively new basis". The means
by which this would be achieved were also discussed. Natural resources
should be brought under the supervision of the state through the
construction of strong, vertically integrated companies answerable
to the centre.
The key to interpreting this document
is Putin's reference to the geopolitical dimensions of energy
policy. Geopolitics is a distinct school of foreign policy thought
concerned with the spatial and material aspects of international
relations as expressed in the competition for strategically important
territories and resources. The father of modern geopolitics, Sir
Halford Mackinder, considered the Eurasian "heartland"
to be the "geographical pivot of history", control over
which would determine the contest for world leadership. [50]According
to Mackinder, improvements in communications would enable a dominant
Eurasian land power to mobilise its vast natural resources and
eclipse the maritime powers of the periphery.
This suggested that Russia was capable
of achieving a position of sustained world leadership, but also
that its territory would be the focus of international rivalry
and foreign intrigue. The effect has been to encourage in Russian
foreign policy makers a strategic outlook that has remained remarkably
consistent since Tsarist times. According to Dr Bobo Lo, Director
of the Russia and Eurasia programme at Chatham House, this consists
of "a Hobbesian understanding of the world as an essentially
hostile and `anarchic' place; the fear of encirclement by outside
forces; and a strategic culture dominated by the geopolitical
triad of zero-sum calculus, the balance of power and spheres of
influence".[51]
Many of these elements are clearly apparent
in Putin's approach to foreign policy. Chief among them is a belief
that Russia should dominate the "post-Soviet space"
as its legitimate sphere of influence. Putin himself has remarked
that "the collapse of the Soviet Union was a major geopolitical
disaster of the [twentieth] century".[52]
Although no one imagines that an attempt will be made to recreate
it in its old form, there is no doubt that Russian policy makers
aspire to reintegrate its constituent parts into a new alignment
under their own leadership. Hence Putin's view that the "restoration
of [Russia's] former might" should proceed "on a qualitatively
new basis"—in other words, through economic power and
the control of material resources.
A corollary of this is acute anxiety
about western encroachment on Russia's borders, often tinged with
paranoia. This has been intensified by NATO enlargement, the "colour"
revolutions in Georgia and Ukraine and the basing of American
troops in Central Asia. The zero-sum mentality means that any
diplomatic convergence between Russia's neighbours and the West
must necessarily constitute a hostile act. One consequence of
this outlook is that Russia's "sovereign democracy"
can only be defended by making the sovereignty of its neighbours
conditional on serving Russia's interests. In short, Putin and
his advisers do not accept that countries within what they regard
as their sphere of influence have the right to choose their own
foreign policy alignments.
This has significant implications for
the way Russia deploys its energy resources, not least because
of the linkage Putin makes with the promotion of Russia's geopolitical
interests. Soviet era infrastructure networks and patterns of
supply dependency, combined with relative military weakness, mean
that energy is Russia's main asset in sustaining a hegemonic position
in its "near abroad". While Putin would prefer this
to work through the "soft power" effect of peaceful
commercial ties, he is perfectly willing to deploy energy assets
coercively as a form of "hard power" when necessary.
The Ukrainian gas crisis of 2005-06, for example, occurred as
part of a strategy to roll back the Orange revolution and can
be seen to have been partially successful with the election of
a more Moscow-friendly government a few months later.
The Ukrainian gas crisis was far from
being the exception many assumed. A report by the Swedish Defence
Research Agency has detailed more than fifty examples of energy
being used as a lever since 1991: "The immediate reasons
for Russia's coercive policy appear to be to coerce political
concession in ongoing negotiations, commandeer infrastructure
take-over, and execute economically favourable deals or to make
political statements. There are economic underpinnings in the
majority of the cases and Russian demands for payments of debts
are legitimate. However, there are also political underpinnings
in more than half of the incidents, and in a few cases explicit
political demands are evident".[53]
As well as Ukraine, targets have included
all the Baltic States along with Georgia, Moldova and most recently
Belarus. Russia has used coercive energy tactics against Georgia
over several years, but tensions have been particularly high since
2004 when the newly elected president, Mikheil Saakashvili, signalled
his intention to move his country in a Euro-Atlantic direction.
[54]Georgia
is particularly significant as a non-sian transit route for energy
supplies to Europe from the Caspian basin and Central Asia. Pressure
to keep Georgia within its sphere of influence is therefore a
classic geopolitical move designed, in part, to maintain Russia's
transit monopoly.
Nor is the EU entirely immune to this
sort of behaviour. Lithuania has become another target with Russian
oil supplies to its Mazeikiu Nafta refinery effectively blockaded
since July 2006. The Russian pipeline operator, Transneft, claims
that the cut-off is due to a major leak in its Druzhba pipeline,
yet oil supplies continue to flow to Belarus, through the same
pipeline. The interruption started shortly after it was announced
that Mazeikiu Nafta's owners had reached an agreement to sell
it to the Polish company, PKN, in preference to two Russian bids.
Many observers interpret this as an attempt at coercive infrastructure
takeover.
THE RISKS
FOR EUROPE
So far the coercive use of energy policy
has been limited to countries that were formerly part of the Soviet
Union and there are good reasons for believing that Russia would
prefer it to stay that way. It would certainly hesitate to threaten
its largest and most predictable revenue stream by cutting off
oil and gas supplies to most of the EU. Yet it would be rash to
discount the possibility of serious difficulties arising at some
point in the future. To some extent this risk is inherent in the
tension between radically different strategic cultures.
To the extent that the EU provides a
pole of attraction for states that were part of the Soviet bloc,
there is the basis for considerable geopolitical tension whether
the EU invites it or not. As long as countries within Russia's
"near abroad" aspire to follow a European path, the
current Russian leadership will tend to see the EU as a normative
threat simply by virtue of its existence. As we saw during the
Orange Revolution, even a willingness to respect the democratic
wishes of a sovereign people can draw accusations of interference.
That is because, in the geopolitical worldview of Putin and his
supporters, Ukraine and the other former Soviet countries are
an extension of Russian sovereignty rather than sovereign actors
in their own right. Russian security concerns trump the right
to self-determination of the countries on its borders.
The EU could diminish tension, but only
at the cost of denying its own fundamental principles and accepting
a new continental order that recognised a Russian sphere of influence.
There has already been some slippage in that direction with Jaques
Chirac and Gerhard Schrder attempting to resurrect the great power
diplomacy of old in the form of regular trilateral summits with
the Russian President. This is an unwelcome reversion to the Europe
of Yalta and Versailles when the fates of entire nations were
decided over their heads with the stroke of a diplomat's pen.
It has also failed as a strategy for establishing a more cooperative
relationship with Russia because it has emboldened Putin to believe
he can divide European opinion and maintain the upper hand.
Although the EU (with the exception of
the Baltic states and possibly Poland) is unlikely to become the
direct target of politically motivated supply interruptions, energy
is still the central element of Putin's strategy for containing
EU influence along Russia's borders. Through the construction
of new pipelines that increase Russia's points of entry into Europe,
an elaborate network of bilateral energy agreements and the aggressive
acquisition of downstream energy assets, Putin is seeking to deepen
European dependency and entrench Russia's monopoly in ways that
will increase its diplomatic leverage. The idea is that through
a growing awareness of Russia's importance as an energy supplier,
EU foreign policy will become self-policing and European leaders
will refrain from doing anything that might encroach on Russian
interests.
During the Cold War, this process was
known as Finlandisation. In this model, relations remain peaceful
and formal sovereignty is maintained, but the context is a power
relationship in which an implied threat is the determining factor.
Putin raised the prospect of a similar dynamic in the EU-Russia
relationship when he suggested that energy supplies might be diverted
to Asia if Russian ambitions in the European market are thwarted.
[55]The
question for Europe is whether it is willing to accept the bargain
Putin is implicitly offering, to meet Europe's energy needs in
exchange for a free hand in the post-Soviet space, or whether
it wishes to work for a relationship that is more balanced and
more faithful to democratic principles.
POLICY OPTIONS
The objective of UK and EU policy must
be to put energy relations with Russia on a more balanced and
constructive footing. This implies a number of things: that energy
relations are depoliticised and separated from geopolitical ambitions;
that current monopolistic practices relating to ownership and
transit rights are renounced; that international treaty obligations
are respected; and that Russia adheres to a multilateral rules-based
regime covering trade and investment in energy that is fair, reciprocal,
transparent and legally binding.
To achieve this the EU needs to alter
Russia's perceptions of where its real interests lie by countering
the political use of energy supplies and making it clear that
Russia is more likely to achieve its legitimate national goals
by observing normal commercial practices. The EU has a much greater
ability to influence Russian behaviour than is commonly believed,
but only if its member states are willing to act in a united and
concerted fashion. Priorities should include the following:
EU internal energy policy
The EU needs to frame its internal energy
policies with a view to minimising excessive dependency and its
vulnerability to monopolistic pressure from external suppliers.
Consumption should be reduced through efficiency savings and the
energy mix should be diversified with more emphasis given to non-carbon
energy sources, whether nuclear or renewable. The creation of
a genuine single market in energy would reduce Russia's ability
to play divide and rule by segmenting the EU politically or commercially.
Heavy investment in interconnectors and other infrastructure is
needed to ensure that individual member states experiencing supply
interruptions are able to turn elsewhere. The Commission needs
to use its competition powers to address monopolistic abuses upstream
as well as downstream. European case law has already established
the extra-territorial effect of EU competition rules.
The Energy Charter Treaty
Many of the elements needed to bind Russia
to a rules-based energy relationship, such as reciprocal investment
rights, are already set out in the ECT. Moreover, Russia has been
legally bound by its provisions since it signed in 1994. Ratification
is therefore not the issue. The real issue is one of non-compliance
by Russia and the extent to which the EU is willing to insist
that Russia accepts its obligations. The EU should make it clear
that it isn't prepared to sign new agreements with Russia until
Russia is willing to respect the agreements it has already signed.
Incorporating ECT principles into a new Partnership and Cooperation
Agreement would make sense, but only if Russia acknowledged its
existing Treaty obligations. Anything less risks diluting their
binding effect. Likewise, negotiations on a new EU-Russia Free
Trade Agreement should be conditional on a change in Russia's
attitude to the ECT.
Supply infrastructure
Nothing would do more to change the strategic
equation of EU-Russia energy relations than the opening of a new
energy transit corridor to the Caspian and Central Asia. Russia
has refused to sign the Transit Protocol of the ECT and uses its
pipeline monopoly to block European access to cheaper supplies
from energy rich countries on its southern border. Both European
consumers and Central Asian producers are being exploited as a
result. At the moment, the most significant energy supply projects
(such as Nordstream and Blue Stream) are designed to increase
Russia's points of access to European markets. Instead, the EU
should fast track projects designed to increase its points of
supply from non-Russian sources. The Nabucco gas pipeline and
an extension to the Odessa-Brody oil pipeline should be immediate
priorities, but the EU needs a comprehensive strategy embracing
new infrastructure projects and active engagement with countries
in the region. The EU's failure to take part in the recent summit
of energy transit and supplier countries in Krakow was an illustration
of how far it still has to go.
Reciprocity of investment rights
State-owned Russian energy companies
are extending their ownership of downstream energy distribution
and supply networks in Europe at a time when the climate for foreign
energy investors in Russia is becoming more hostile. Shell has
already been forced to relinquish its controlling stake in Sakhalin-2
and BP is coming under similar pressure over its own Russian investments.
It is time that European countries used market access and investment
rights to insist on reciprocal treatment for its own companies.
The recent comment by the Trade and Industry Secretary, Alistair
Darling, suggesting a toughening in the UK's position is a good
start. What is now required is a clear statement of intent and
a willingness to back it up with decisive action if necessary.
Achieving a balanced and cooperative
energy relationship that works for both Russia and the EU must
be the objective. But it will require the EU to be as tough in
defence of its own interests as Putin has been in Russia's. Fundamentally
it comes down to a question of political leadership and will.
With a clutch of new leaders taking over in the larger member
states, the possibility for a new and more hardheaded approach
to dealing with Russia is certainly exists. Turning that opportunity
into more effective common European policy should rank as one
of the UK's most important international priorities.
http://kremlin.ru/eng/speeches/2005/04/25/2031_type70029type82912_87086.shtml
44 The views expressed in submission do not necessarily
reflect those of the Russia Foundation or individual members of
its Advisory Council. Back
45
Vladimir Milov, The Power of Oil and Energy Security, Institute
for Energy Policy, January 2002. Back
46
Professor Philip Hanson, Kremlin Oil & Gas: The Russian Investment
Climate and the Prospects for the Russian Energy Sector, Russia
Foundation Energy Forum Discussion Paper No.1, November 2006. Back
47
Dr Alan Riley, The Coming Russian Gas Deficit: Consequences and
Solutions, CEPS Policy Brief No.116, October 2006. Back
48
"Putin Aid Sees `Color Revolutions' As Threat To Russian
Sovereignty", Radio Free Europe/Radio Liberty, 6/3/2006-http://rferl.com/newsline/2006/03/1-RUS/rus-060306.asp Back
49
English translation published in Problems of Post-Communism, vol
53, no 1, January-February 2006. Back
50
Milan Hauser, What Is Asia To Us?: Russia's Asian Heartland Yesterday
and Today, pp 135-45. Back
51
Bobo Lo, Evolution or Regression?: Russian Foreign Policy in Putin's
Second Term, in Helge Blakkisrud (ed.), Towards a Post-Putin Russia,
pp57-77-http://www.chathamhouse.org.uk/pdf/research/rep/R0506Lo.pdf Back
52
Address to the Federal Assembly, 25 April 2005 Back
53
Robert L Larsson, Russia's Energy Policy: Security Dimensions
and Russia's Reliability as an Energy Supplier, p 4, Swedish Defence
Research Agency, 2006-http://www2.foi.se/rapp/foir1934.pdf Back
54
Larsson, pp 227-35. Back
55
"Putin threatens to divert oil to Far East", The
Times, 27 April 2006. Back
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