The Russian Factor in Europe’s Energy Security

The Russian Factor in Europe’s Energy Security

By Andreas Andrianopoulos
Public Policy Scholar, Woodrow Wilson Center
Conference on Black Sea Security Issues

A Russian Comeback and The Process of Consolidation in the Energy Sector

Rising from the shambles of its post-Soviet decay Russia relied upon its vast natural resources to re-emerge as a dominant power in world affairs. Oil, natural gas and valuable metals constitute the underground wealth that enabled Russia to reverse its fortunes. From the deep economic slump of the Yeltsin years, highlighted by the questionable privatizations of the country’s wealth and the almost total economic collapse of the central state, Russia managed to rise back achieving admirable levels of development. In the process the Russian people felt their self – esteem returning and their life plans restored in meaningful way.

The manner of restoring Russia’s economic environment did not adhere to the pure principles of a liberal minded market economy. While paying lip service to the ideas of free enterprise, free market and free competition the government of Vladimir Putin aimed at restorig the state to the top of the commanding heights of the economy. Relying upon the only government structure that had remained relatively intact during the abrupt collapse of the soviet political system, the secret service (named now FSB), President Putin rallied all efforts to build an efficient state administration.

Putin’s aim was of a dual essentially nature. To institute political stability and to safeguard a major control by the state over the country’s subsoil wealth, and especially oil and gas. In pursuing these objectives the Putin government came head to head with powerful economic interests. The so-called oligarchs, (Russian business echelons dominating the energy and minerals sectors of the economy with assets they had acquired under questionable procedures) were up to this point heavily engaged in the political process. They had every reason to oppose the government’s plans which appear to affect their fortunes on both levels – the political and the economic.

The government made it absolutely clear that it had no intention of upsetting their enterpreneurial endeavors. Provided they would not get involved in the political process. This was the basis of the government’s collision with the oil major’s Yukos owner Mikhail Khodorkovsky. The egotistical oligarch antagonized directly the President disclosing his goal to overthrow him by controlling Parliament. Claiming enormous back taxes due to the state and accusing Mr. Khondorkovsky for fraud, the government struck back. Mr. Khondorkovsky was imprisoned and the state owned Rosneft was enabled to acquire major Yukos assets, becoming thus the largest Russian oil conglomerate.

At the same time, gas giant Gazprom amassed smaller private gas companies, utilizing its monopoly status over the produce’s transport, and purchased from millionaire Abramovich the Siberian oil company Sibneft. The overall result is that the Kremlin presides, in all respects and purposes, over Russia’s energy policy. Only Lukoil, and some smaller oil and gas companies, do not adhere directly to the wishes of the Kremlin. They are obliged, however, to fall usually in line due to the size of the conglomerates that are directly influenced by government policy objectives.

Energy Realities, Pipeline Strategies and the Countries of Central Asia

Russia has found itself rather unexpectedly in control of wealth which is of paramount importance to global wellbeing. This inevitably influenced the country’s stance towards the outside world. The big industrial nations of the West and Japan along with the fast upcoming economies of South and East Asia are in desperate need of constant energy flows. And Russia appears to be in a position to guarantee, for some years to come at least, their stable supply. For the Russian Federation the pragmatic issue at hand is the actual availability of the required energy provisions.

Oil production has stopped increasing. After growing by just 2 percent in 2007, it has been sinking since the start of the year as oil firms face heavy taxes while trying to develop untapped fields in Russia's most difficult regions without the proper technology.. The needs, however, of domestic as well as foreign customers are rising. Although Russian oil per se is not such an indispensable item for European energy security, the curtailing of its production rates and the effort to control oil routes from all former Soviet Central Asia countries is worrisome. Russia is also in a position to create problems for nations of its close periphery (the so-called Near Abroad) by either halting the supply of oil or by diverting routes to other directions.

The problem of the availability of Russian energy supplies is real. And is looming threateningly above the security potential of Russia’s future gas supplies. Gazprom is dealing temporarily with the issue by the utilization of Central Asian resources and with the forceful acquisition of smaller private gas producing companies inside Russia itself. It forced ITERA to merge with her and gained a majority stake in the Vorkuta plant of TNK_BP. As a matter of fact, shortly after Gazprom became the majority shareholder of this last venture there was a ruling to divert the company’s gas supplies to Russia instead of to China as it had originally been planned.

For the Central Asian gas to become part of Gazprom’s supply arsenal some important steps are indispensable Safeguarding the acquiescence of their leadership to sign long term agreements with Gazprom for the transport and exploitation of their produce is one. The second relates to the difficult and expensive task of building pipeline networks for the transport of gas from Central Asian resource centers to and through Russia territory.

On both these objectives plans have been announced, thwarted and re-introduced again. It appears that Central Asians have been engagingly awakened to the worth and political significance of their resources. And they henceforth bargain sternly with Russia, China, India and the West as to the future fate of their gas reserves. Gazprom appears confident of having ascertained the amounts she needs from Turkmenistan and Kazakhstan. Simultaneously, however, Europe appears confident of having obtained from the same countries initial agreements for the supply of gas through alternative routes. China has come into the picture lately, along, very recently, with India claiming deals that would allow them to accept volumes of gas, after the construction of pipelines of course, from Turkmenistan mainly.

Gazprom’s business strategy appears to be the negotiation of long term contracts with prospective customers. In this way, the firm can extract higher prices for the supplied volumes while, at the same time, persuade Central Asian producers to seal almost monopsony contracts with the company on the basis of better guaranteed client agreements ('(We) first want to create a market for long-term contracts and make long-term forecasts based on the real situation on that market,' Alexei Medvedev, Gazprom’s vice-President was quoted as saying, with CEO Alexei Miller agreeing, in a recent gas summit). Russia, therefore, by means of Gazprom reaches to the West as a bargaining chip for its dealings with Central Asia as well as an effort to exert influence because of the energy needs it can allegedly satisfy.
Targeting European Unity and the South

Russia targets Europe in its effort to promote its novel global energy significance. Numerous projects have been announced, negotiated and planned focusing on Europe as the recipient of Russian energy. Kremlin glamours itself to be the guarantor of european energy security. Russia claims to be in a position to supply Europe with the gas energy she needs as well as play a major role in producing oil volumes that, according to circumstances, can safely satisfy the continent’s needs in periods of severe shortages.

The Soviet Union, during the Cold War years, did not fail even once to fulfill its gas supply obligations to the capitalist European West. This is constantly the argument that the Kremlin leaders today cast when confronted with the possible peril of depending almost totally to one supplier, and particularly Russia, for European energy needs. The memories of the crisis with Ukraine and the loss of gas supplies for a couple of days springs immediately to the mind. The Russians insist that it was all due to observing market rules and that, at any rate, it was Kiev and not Moscow that abruptly cut off supplies. Irrespective of where the right lies many western european capitals are uncomfortable with Russia holding the key to their warmth during the cold and long winter months.

Western commentators proclaim the emergence of a new Cold War atmosphere with the fastidious emergence of an autocracy. Russia, they claim, imposes a new form of modern political regime. Proclaiming nationalism, reflected in the country’s assertive use of its national resources, and taking pride upon its positive economic results – the product essentially of an international surge in energy prices – autocracy is projected as the most recent alternative to the democratic values of the west. There is a new political rivalry in the making. Which is quite acutely ideological. Democracy versus Autocracy. This is what is at stake for the future.

From the Kremlin’s point of view developments on the energy front are forcing Russia to react than to act. Although both sides declare their trust in friendship and cordial relations the Russians discerned from very early initiatives by the US to strike deals with nations at Moscow’s periphery for the construction of new pipelines. These plans referred to the establishment of new export routes for oil and gas supplies from the lands of Central Asia. The common characteristic of all those plans was the aim to bypass Russian territory in carrying energy products to the West.

Irrespective of Moscow’s capability to realize those multiple schemes, due primarily to its production shortages and to the high costs involved, it has nevertheless struck quite hard at the heart of western camaraderie. Russians do not hesitate to show their affection for selected European capitals. In a clear sign of an ongoing special relationship President Dmitry Medvedev, shortly after his inauguration, welcomed German Foreign Minister Frank-Walter Steinmeier as the first prominent foreign guest to the Kremlin. It was also announced that Medvedev would visit Germany. He did not shy his words when referring to his trip: 'Given the privileged nature of our relationship, my first visit to Europe in early June (2008) will be to Germany,' he said, according to an Interfax report (15 May, 2008) (Germany is by far Russia’s single biggest trading partner, with a record $52.8 billion in bilateral trade last year. German firms invested $3.4 billion into Russia last year and have major investments in the energy sector). The appointment likewise of former German Chancellor Gerhard Schroeder at the head of the Norde Stream project and the repeated overtures to former Italian Prime Minister and European Commission President Romano Prodi to become Chairman of the South Stream demonstrates the slickness of the Kremlin maneuvering.

A Double Bluff?
The real issue is whether these inimical initiatives have any substance and a foothold in reality. For Russia, to exploit energy as a tool of diplomacy requires a great gamble. With large chunks of the population still well below the poverty line (see “20 Million Live in Poverty in Russia”, The Washington Post, May 15, 2008) and oil and gas money – through the Stabilization Fund - tied mostly to programs of social support and renewal, stoppage of energy supplies to the West is not realistically an option. Likewise, Brussels, and the West in general, tacitly recognize that besides Russia there is no other viable choice for Europe to guarantee adequate supplies of energy – gas mainly. The Central Asia card is still extremely precarious and insecure. The countries in the region are not entirely reliable, the promise their supplies to almost everyone who comes with a proposal and for their product to reach western markets needs time, heavy investment and a lot of construction work.

It is becoming obvious that irrespective of rhetoric, reality commands cooperation. And cooperation is going to be. There will be competition, especially for the markets in Turkmenistan, Kazakhstan and Uzbekistan. But both sides will be forced, by the course of events and economic necessity, to withdraw their bluffs. Good faith and upright good sense will have to be established. For everybody’s welfare.