European View (2014) 13:73–78 DOI 10.1007/s12290-014-0303-9 ARTICLE
The power of energy politics Marek Hannibal
Published online: 29 May 2014 Ó Wilfried Martens Centre for European Studies 2014
Abstract This article provides an overview of Russia’s energy policy in the past decade. The Russian administration, through the state-owned Gazprom, is using the country’s vast energy resources as a foreign-policy tool. The exportation of energy does not necessarily follow the economic interests of the country. The EU is dependent on imports of natural gas from Russia and Russia is dependent on its exportation to European markets. The way out of this mutual dependency lies in the EU’s willingness to diversify its energy sources, focus on increasing energy efficiency and develop renewables. Keywords Energy supplies Natural gas Oil Energy dependency Price policy
Introduction The current crisis in Ukraine has revealed the weakness of the EU in terms of energy security. For a long time European leaders have discussed plans for diversifying the energy supplies coming to Europe; achieving the creation of an internal energy market by 2014; and reducing the dependence, especially of the eastern member states of the EU, on gas and oil imports from the Russian Federation. At its meeting in March 2014, after the Crimean crisis, the European Council (2014) highlighted the need to end the isolation of member states from European gas and electricity networks and thus reduce the Union’s dependency on Russia. The current crisis in Ukraine should provide an opportunity for the EU M. Hannibal (&) European Parliament, Rue Wiertz 60, 1047 Brussels, Belgium e-mail:
[email protected]
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to accelerate the process of increasing Europe’s independence from Russia and its energy policy.
The EU and Russia: bound together The Russian Federation holds approximately one-quarter of the proved reserves of natural gas in the world. Russia is the EU’s main supplier as its exports of natural gas into the EU account for about one-quarter of the EU’s supplies (Ratner et al. 2013). Regarding oil, it holds approximately 4 % of the world’s reserves, in ninth place globally (De Micco et al. 2013). Energy security in the countries of Eastern Europe depends heavily on the supplies transported from Russia. This is a remnant of the Communist era and the times of the former Warsaw Pact. The energy infrastructure built in the era of the Soviet Union survived the fall of the Iron Curtain and still serves its purpose. The European integration of the Central European states and the Baltic states in 2004 and 2007 has not changed much in terms of these countries’ energy dependency on Russia. The gas consumption of European households and industry is gradually increasing. The European Commission forecasts that the EU will import more than 80 % of the gas required to cover its needs by 2030 (Ratner et al. 2013). The reasons for this are the reduction in the use of nuclear energy in some EU member states and the possible ban on shale gas exploration in some states. Data provided by Eurostat (2013) shows that between 2001 and 2011 imports of natural gas into the EU increased by 46 %. In 2011, Russia was the principal supplier, with a 30 % share of total natural gas imports, followed by Norway with a 27 % share. Imports of natural gas from Russia, Norway and Algeria represent three-quarters of all gas imports into the EU. Other importers of natural gas into the EU are Qatar, Nigeria and Libya. For Russia, the European markets represent the largest share of its gas exports. Russia’s Energy Strategy (2003), adopted by the Russian government in 2003, clearly states that the markets of Central and Western Europe represent one of the greatest markets in the forthcoming 20 years for Russian exports. As a consequence, exports to the EU generate an important source of income for Gazprom and the Russian state budget. According to a 2013 report by the US Congressional Research Service, the state-owned Gazprom controls all natural gas exports from Russia. The revenues from oil and natural gas taxes represent about half of total Russian revenues (Ratner et al. 2013). Russia’s goal in the long term will be to reduce its dependency on Europe by diversifying its customer base. The Russian government plans to increase exports of gas to China, South Korea and Japan from 7 % in 2011 to some 20 % in 2030 (Ratner et al. 2013). However, the current investments in the Nordstream and the South Stream, to reroute gas to Europe avoiding Ukraine and other Eastern European states, make the diversification of the customer base a distant goal as it has come at the expense of the development of other markets in Asia. These new Europe–Russia infrastructures further increase Russia’s dependency on
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Europe (De Micco et al. 2013). The EU and the Russian Federation are therefore mutually dependent trading partners in gas, and this is also true for oil. While Russia’s oil and gas are vital commodities for its European trading partners, the revenues from gas and oil are vital for Russia.
Gas as a tool When Vladimir Putin became president of the Russian Federation in 2000, he stabilised Russia following an uncertain era under Yeltsin. Putin has led his country with the goal of reinstating its significance in the global arena—under Putin Russia has had a resurgence on the world stage. Centralising its grip over the oil and gas sector in Russia and over the energy infrastructure has allowed the Kremlin to use Russia’s energy commodities as a tool of Russian foreign policy. The 2003 Russian energy strategy The goals of the Putin administration can be traced in the country’s 2003 Energy Strategy, which outlines the main priorities to be achieved and lays out the tasks and main trends of a long-term state energy policy due to last until 2020, including energy safety, energy effectiveness, ways to reduce environmental impacts, ecological energy security and budget effectiveness. One of its main challenges was to ensure that Russian energy policy would be based on a change from its role as a supplier of raw resources to one as a substantive member of the world energy market (Russia 2003). Putin’s administration was about to take control of Russia’s natural resources as they were considered too important to be left to private businesses. This brought about a gradual shift in perception from the resources being seen as a trading commodity to them being a tool to boost the geopolitical strength of the Russian Federation. Edward Lucas (2008) in his book The New Cold War summarised the four aims of the 2003 Energy Strategy: (1) to prevent European countries from diversifying their energy supplies, (2) to strengthen the Russian grip over the international gas market, (3) to acquire distribution and storage facilities in European countries, and (4) to use energy as a tool to exert Russian political influence. It is not by chance that the adoption of the energy strategy coincided with a crusade by the Kremlin leadership against YUKOS Oil Company and the main person behind it, Mikhail Khodorkovsky. Khodorkovsky was found guilty of fraud and tax evasion and spent nine years in prison. The state’s action against YUKOS led to the forced sale of its assets at auction; later on the assets were given to the state oil company Rosneft. YUKOS eventually declared bankruptcy in 2006. The neutralisation of YUKOS led to the unification of the Russian energy sector in companies obedient to the state. The steps taken against the liberalisation of the Russian energy market turned the EU–Russia energy dialogue launched in 2000 into a conversation in two different languages.
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Preferential prices for gas: the case of Ukraine Russia controls the flow of the exported gas and oil. While the revenues from Western European states correspond to the market prices for energy commodities, Russia can at the same time subsidise certain states by offering them gas at discounted prices, thus safeguarding the ‘stability’ of friendly governments. The use of sticks and carrots has been well demonstrated in the case of Ukraine. Ukraine plays a major role in connecting Russia with the rest of Europe. Together with Belarus, the country enjoys a privileged ‘negotiating’ position, compared to Moldova with its ‘less fortunate’ geographical location. Despite this, Ukraine is not spared from changes in attitude in the Kremlin. The last decade has offered various examples of the preferential behaviour of the Kremlin-ruled Gazprom towards Ukraine. Under Leonid Kuchma until 2005, Ukraine enjoyed subsidised prices for natural gas, frozen at around $50 per thousand cubic metres. In reality, the price was even lower than that as some of the supplies to Ukraine were part of the transit fees for the gas routed to Western Europe. The economic arguments fell behind the policy of rewards for the Russian-leaning government. The 2004 Orange Revolution, which led to the formation of a Western-oriented government in Ukraine, brought a change of attitude from the Kremlin and a business-oriented price policy. In 2005, Gazprom began talks with the Ukrainian leadership on increasing the price of gas. Gazprom’s demands rose to $230 per thousand cubic metres by the end of 2005. When Ukraine rejected the offer, and a proposal to take a loan from Russia, a reaction from the Kremlin followed. Russia accused Ukraine of taking the stocks intended for the European market and, for a few days at the beginning of 2006, stopped deliveries to Ukraine. A solution was later found with regard to getting supplies to Ukraine: an intermediary firm—RosUkrEnergo, which was getting its gas from Central Asia at lower prices and from Russia at higher prices, delivered gas to Ukraine at an average price of $95 per thousand cubic metres (Nichol et al. 2006). Little attention was paid to the fact that RosUkrEnergo was half-owned by Gazprom and that it was Russia which had the tools to measure the flow of natural gas in and out of Ukraine (Smith 2010). The 2006 gas crisis revealed that the Russian administration was using Gazprom to achieve its foreign policy goals by influencing the price policy for natural gas. The crisis coincided with Ukrainian preparations for the March 2006 parliamentary elections. A dispute between Russia and Ukraine emerged again in 2009, when both governments failed to reach an agreement on the price of gas and the settlement of the alleged Ukrainian debt. In reaction, Gazprom stopped natural gas supplies from transiting Ukraine for almost three weeks. The move hit not only Ukraine hard, but also several eastern states of the EU. Gas was also part of the deal between Vladimir Putin and Viktor Yanukovych in 2013 that led to the decision of the former president of Ukraine not to go ahead with the planned signature of the Association Agreement between the EU and Ukraine at the Eastern Partnership Summit in Vilnius. The planned deal would have secured Ukraine a price of $268 per thousand cubic metres. However, the victory of the pro-Western forces in Ukraine meant the end of the deal and an immediate increase in the price by 44 %.
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Replacing Russia with Russia It would have been good if the Western governments had responded appropriately to the disputes in 2006 and 2007 by adopting the right strategy. Instead of a united response to Russia’s political demands, the diversification of the European markets continued. The Russian motto of dividing the markets and maintaining competition between buyers led to the construction of new gas routes that bypass Ukraine and Belarus. The Nordstream project, solemnly approved by Germany and Russia in 2005, sparked controversies, mainly in Poland and the Baltic states, which were concerned about their omission from the deals done by Germany and Russia. Prior to the opening of part of the Nordstream in 2011, around 80 % of Russian exports of natural gas were transported through Ukrainian pipelines (Ratner et al. 2013). The construction of the Nordstream pipeline gave Russia the powerful ability to cut off Ukraine while still exporting gas to its main export destination, Europe. Russian efforts have also included the construction of a southern pipeline network, the South Stream, which was designed to become an alternative route for natural gas supply to Germany and the southern part of Europe. The European Commission, however, has declared the bilateral agreements for the construction of the South Stream gas pipeline concluded between Russia, Austria, Bulgaria, Croatia, Greece, Hungary and Slovenia to be in violation of EU law and the finalisation of the project is currently on hold.
Conclusion The EU needs to perceive Russia as a global player prepared to use its energy resources to exert its political weight in the world arena. Russian energy policy is driven by the pursuit of political goals with a geopolitical impact rather than economic benefits. The Russian leadership is enhancing the country’s influence and importance as a major supplier to Europe, be it by exerting its share in European energy companies or aligning with the Central Asian republics to benefit from their resources and reroute them to Europe through Russia (Smith 2007). In 2012, 84 % of the total oil exported from Russia and 81 % of its exported gas were destined for the European markets (De Micco and Hannaoui-Saulais 2014). Investments in new networks such as the Nordstream pipeline have made Russia heavily dependent on the European market. Russia concluded these projects at the expense of exploring new routes for deliveries into China and Japan. While Russia has the potential desire to diversify its exports, this is not straightforward in the case of gas since it cannot simply be rerouted, as this would require the building of additional pipelines, additional investment and stable political relations. The current plans to build the ‘Power of Siberia’ pipeline, which will take gas eastwards to the plants in Vladivostok, is expected to be complete by 2017. In any case it will have no capacity to completely replace the pipeline network leading to Europe (De Micco and Hannaoui-Saulais 2014).
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The EU must focus on diversifying its energy supplies and finding alternatives to Russia’s exports. The alternatives include increasing the energy efficiency of the European networks, further developing renewable energy and developing interconnections on the pipeline network that would safeguard several member states from isolation in case of cuts to deliveries from Russia. The creation of the fully functioning Energy Community must be in European leaders’ minds. The European Commission is due to prepare a comprehensive plan for the reduction of energy dependence by June 2014 (European Council 2014). All these matters, if duly implemented, will reduce the mutual dependency and make Russia more dependent on the EU. Hence, the current Crimean crisis might serve as momentum for true European independence in the energy field.
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