#15 - JRL 2006-159 - JRL Home
Russia Profile
July 14, 2006
Russia Profile Experts Panel: Energy Security and the G8 Summit
Introduced by Vladimir Frolov

Contributors: Yury Fyodorov, Andrei Lebedev, Sergei Shishkarev, Andrei Zagorski

Russia has proposed energy security as one of the three central issues for the G8 summit’s agenda in St. Petersburg, and this topic has easily taken priority over the other two issues, education and infectious diseases.

The issue was carefully chosen for its apparent advantages for Russia as a major energy supplier. The hope was to get the G8 to endorse Russia’s vision of energy security as a two-way street: Suppliers accept their responsibility to ensure the stability of supply only if consumers guarantee stable long-term access to their markets in return for the reliable supplies.

The issue became more salient at the beginning of this year when Russia cut off gas supplies to Ukraine for failure to reach a long-term transit-fees agreement. This dispute prompted Western consumers to question Russia’s ability to be a reliable energy supplier, raising fears in the United States and Western Europe that Moscow was prepared to use energy as a political weapon to intimidate its neighbors and even Western Europe.

The EU has been wary both of Russia’s monopoly in gas exports to Western Europe from Central Asia and of the country’s attempts to buy downstream gas distribution assets in Europe. In light of these concerns, many Western European nations, as well as the United States, have been pressing Moscow to ratify the European Energy Charter, which would oblige Russia to open its export pipelines to foreign energy producers, mostly from Central Asia and Azerbaijan, as well as liberalize the investment regime to grant Western energy companies more access to Russia’ oil and gas reserves.

Moscow naturally saw this charter as an encroachment on its sovereignty in one of its most sensitive areas and quickly moved to block the agreement. The Duma promptly passed a bill making state-owned Gazprom the only company eligible to export gas, thus making ratification of the Energy Charter virtually illegal.

In a further set back for Russia, last week the Bush administration indicated that the G8 statement on energy security probably would not contain Russia’s favorite principle ­ stability of supply and stability of demand.

Instead the United States will push for a set of core energy security principles that reflect the U.S. perspective. These include: the importance of transparency, open and competitive markets and investment environments, and a dependable and predictable regulatory environment.

The United States did offer Russia a carrot, however, in the form of a formal civil nuclear cooperation agreement with Russia. Presidents Vladimir Putin and George W. Bush will issue a special statement to this effect at their bilateral meeting on the eve of the summit, and the G8 energy statement will strongly endorse nuclear power as an alternative source of energy.

The civil nuclear cooperation agreement opens the way for Russia to earn billions of dollars in reprocessing U.S.-supplied nuclear fuel from many countries. But negotiating the agreement will take time and needs authorization from the U.S. Congress, which is far from certain. Additionally, the Bush administration does not hide its hope that the agreement will serve as leverage to ensure Moscow’s cooperation on Iran and North Korea.

So, in the end, what will Russia gain from raising energy security as one of the central issues for the G8 summit? Was it a mistake for Moscow to push for the G8 endorsement of its energy policies and the desire to gain significant market share in downstream assets in Europe? Is it a blatant display of double standards on the part of the West to push for almost unrestricted access to Russia’ energy sector while refusing to open up their own downstream energy markets to Russian companies, particularly Gazprom? What will Russia gain from the proposed nuclear cooperation agreement with the US?

Andrei Zagorski, Associate Professor, MGIMO University, Moscow:

President Putin’s priorities for the Russian G8 presidency appeared rather sensible. None of the three themes was supposed to cause controversy, thus guaranteeing smooth proceedings at the all-important summit. Furthermore, putting energy security on the agenda seemed to benefit Russia as a reliable energy supplier to the three out of seven other members of the group.

But things went wrong in 2006. The Ukrainian theft coupled with the reduction of gas supplies due to increased consumption in the unusually harsh winter tarnished the image of Moscow as a reliable supplier. Furthermore, the demonstrated determination of Moscow to use gas prices as a political weapon against unfriendly neighbors has triggered a debate in Europe over the need to lower dependence on Russia. In this context, the statements of Gazprom CEO Alexei Miller encouraged speculation that Moscow could intimidate Europe by threatening to redirect gas towards China. Only after that did Moscow seek to limit the damage by linking the issues of reliability of supply and consumption.

Secondly, Gazprom has no reason to complain about the lack of access to the downstream assets in Europe. For many years, it has benefited from downstream assets in Germany through a joint venture with its long term partner, Wintershall. Through this partnership, it is expanding its participation in the gas markets in the UK and Austria. Additionally, Gazprom is expanding its downstream capacity in Belgium, the Netherlands, France and Italy. And the participation in upstream assets in Algeria, the second biggest gas supplier to Europe, gives Gazprom even greater share in the EU market.

Indeed, this expansion has caused hesitance in Europe over the past years albeit for different reasons. Downstream participation was an issue of controversy with E.ON-Ruhrgas, which pursued a different policy from Wintershall and opted for buying shares in Gazprom then selling its downstream assets in Hungary to the company.

Gazprom’s visible expansion on European markets and the allegations ­ legitimate or not ­ that it could misuse its role for political purposes, served to entrench political hesitation, particularly in the UK. This dispute, however, could also have a solution. Since Gazprom already enjoys the benefits of the liberalized European gas market, it would be logical to suggest that, in order to further encourage such a policy, Moscow should reciprocate and implement its long term promise to liberalize its own gas market by admitting competition in the gas sector and granting foreign companies access to the Russian market, similar to what Gazprom already enjoys in Europe.

Since Moscow appears to be moving in the opposite direction and seeks to consolidate both Gazprom’s monopoly and tight government control over it, the G8 summit in Petersburg is highly unlikely to achieve any progress in overcoming this dispute.

Andrei Lebedev, Senior Associate, the State Club Foundation:

Double standards are the name of the game. Or, in other words: what’s mine is mine, what’s yours is negotiable.

If Europe pushes to gain access to Russian energy production and transportation infrastructure, it has to give something back in return. The prolongation of Gazprom’s existing bilateral contracts with its European consumers seems to be a natural quid pro quo. Otherwise, it would be a unilateral concession ­ an option already ruled out by Putin. Still, the EU insists that Russia ratify the European Energy Charter without giving up on some clauses unacceptable to Russia. Bargaining for better terms? Yes, but with political overtones. After all, Norway, as well as Russia, hopes to conclude long-term contracts for energy resources it supplies to the EU. But no attempt has been made by the EU to apply political pressure on Oslo, while after Gazprom’s April rejection of the offer to sell Russian gas at the Russian border, EU chairman Jose Manuel Barroso appealed to the U.S. State Department for support, noting that “energy resources are gradually being turned into instruments of political pressure.”

All kinds of unbalanced treaties have been imposed on countries considered weak by Moscow, but when the balance of power changes, nobody should wonder at their attempt to restore equilibrium, if not justice. The Russian attempt to change the Charter by signing a transit protocol is an example.

But if restoring equilibrium is perceived as “political pressure,” we obviously witness double standards. Of course, waiting until your partner blinks is a normal trade bluff practice. But energy security is too important to bluff. After all, this is a two-way street. OPEC officials share this point of view. According to Adnan Shihab-Eldin, an official from OPEC's Secretariat: “energy security has two sides. It's not just the upstream. Downstream has to be addressed with the same vigor.”

So one has at once to agree and disagree with Andrew C. Kuchins, Senior Associate at the Carnegie Endowment for International Peace. In his open letter to President Putin, Dr. Kuchins states: “double standards exist in all foreign policy.” But he doesn’t use this argument to deplore double standards. Instead, he calls them a bore, effectively blocking usage of the “double standards” argument: “Constantly complaining about U.S. so-called double standards is tiresome and makes Russia look weak and insecure.” It appears that using double standards is OK, fighting against them is wrong. Amazing.

Yury Fedorov, Senior Researcher, Chatham House, London:

One of the core responsibilities of the foreign ministry of any country ­ as well as one of the basic skills of professional diplomats ­ is foreseeing the reaction of foreign partners to proposals and initiatives advanced on behalf of their own country. In order to do this it is necessary to look at these proposals and initiatives through a partner’s lenses. Most probably, Russia’s Foreign Ministry has not enough abilities or professional skills to fulfill this responsibility. Actually, it was not difficult to foresee what the Western response would be to Moscow’s plan to discuss energy security at G8 Summit in light of the gas war between Russia and Ukraine. As such, Russia’s agencies responsible for preparations for the G8 Summit in St. Petersburg, the Foreign Ministry in particular, should not have proposed this extremely hot issue for the G8 Summit.

Even if Gazprom’s decision to raise gas prices for Ukraine was purely economically motivated, Western states would inevitably consider it as a politically motivated move. Comments coming from many Russian political operatives close to the Kremlin have strengthened that perception. And under these circumstances, it was absolutely logical for the G7 to accept the Russian initiative with the hope of imposing their own interpretation of energy security.

The gas war highlighted contradictions between Russia and Europe resulting from their roles of exporter and importer of energy resources. Russia, or to be more accurate Gazprom, would like to maximize profits and strengthen its position as a major energy supplier to Europe. This is the actual meaning of Russian’s supply and demand stability approach; and this is the basic motive for Gazprom’s desire to buy distribution companies in Europe. Europe hopes to diversity their supply of gas, which sets up a natural and hardly avoidable conflict of interests.

Yet there is another aspect of the problem. Moscow is trying to consolidate the state monopoly on gas production ­ especially on exports ­ in an attempt to minimize the activities of foreign companies in the Russian gas industry. Of course any country has the sovereign right to encourage or restrict foreign activities on their soil, but in this case, it is naive to expect that Europeans will allow Gazprom to buy assets in Europe. The next point is even more important: Europeans are not quite sure that Gazprom will be able to both fulfill its external obligations and to satisfy growing domestic demand because of bad management and the depletion of gas fields in western Siberia.

This is another incentive for Europe to insist on the transparency of Gazprom and a radical liberalization of the Russian oil and gas industries.

To conclude, I do not expect that the G8 will be able to produce any concrete and practical document regarding energy security at its coming summit. Most probably, it will be a statement describing how important it is to assure energy security without specifiying what exactly energy security means.

Sergei Shishkarev, Deputy Chairman, Committee on Energy, Transportation and Communications (United Russia):

I would not over dramatize disagreements between Russia and the rest of the G8 members on energy security. The statement that the G8 leaders will issue at the end of the day will reflect their shared vision on how energy security should be achieved and on what rules and principles it should be based, including Russia’s call for security of supply to be matched by security of demand.

Indeed, both the United States and the European Union have come close to embracing at least some of the ideas advanced by Russia on energy security. For instance, U.S. Ambassador to Russia William Burns said in a recent media interview that Washington looks favorably on Russia’s interest in acquisition of downstream assets in the West, including in the United States.

And the EU has come a long way towards acquiescing to the inevitability of Russia’s dominance in energy exports to Europe and is no longer insisting on the preposterous proposal that long-term contracts with Gazprom should be banned. In fact, the EU is now floating the idea of a free trade zone with Russia in exchange for guarantees of reliable gas deliveries backed by limited European acquisitions (but no controlling stakes) in Russian upstream assets.

What is really surprising, and welcome, is the news that Washington and Moscow are now on the same page with regard to nuclear power. The insistence by Moscow and Washington that the G8 energy security statement contain strong references to civilian nuclear power as the most viable alternative source of energy, with proposals to increase international cooperation in safe and secure nuclear power technologies, is extremely encouraging. The market for nuclear power is rapidly growing again, and Russia is one of the world’s most technologically advanced states in this field. After the G8 summit, Russia and the United States will launch negotiations to conclude a civil nuclear cooperation agreement that would allow Moscow to profit handsomely from nuclear fuel and reprocessing services.

Russia was right to put this issue forward for the G8 summit agenda.