Russia in the European energy sector

Russia has a significant role in the European energy sector as the largest exporter of oil and natural gas to the European Union. In 2007, the European Union imported from Russia 185 million tonnes of crude oil, which accounted for 32.6% of total oil import, and 100.7 million tonnes of oil equivalent of natural gas, which accounted 38.7% of total gas import.

The Trans-Siberian Pipeline was constructed in 1982–1984 with Western financing to provide Soviet gas to the Western European market.

The Russian state-owned company Gazprom exports natural gas to Europe. It also controls a large number of subsidiaries, including key infrastructure assets. According to the study published by the Research Centre for East European Studies, the liberalization of the EU gas market has driven Gazprom's expansion in Europe by increasing its share in the European downstream market. It has established sale subsidiaries in nearly all its export markets, and also gained direct access to industrial and power generation sectors in Western and Central Europe. In addition, Gazprom has established joint ventures to build natural gas pipelines and storage depots in a number of European countries. Transneft, a Russian state-owned company responsible for the national oil pipelines, is another important Russian company supplying energy to Europe.

History

In the early 1980s some policymakers including Ronald Reagan's administration warned that the Urengoy–Pomary–Uzhgorod pipeline (Trans-Siberian Pipeline) project could lead to increased political risks.

Russian natural gas deliveries by country

In 2007, 38.7% of the European Union's natural gas total imports and 24.3% of consumed natural gas originated from Russia. As of 2009, Russian natural gas was delivered to Europe through 12 pipelines, of which three pipelines were direct pipelines (to Finland, Estonia and Latvia), four through Belarus (to Lithuania and Poland) and five through Ukraine (to Slovakia, Romania, Hungary and Poland). In 2011, an additional pipeline, Nord Stream (directly to Germany through the Baltic Sea), opened.

The largest importers of Russian gas in the European Union are Germany and Italy, accounting together for almost half of the EU gas imports from Russia. Other larger Russian gas importers (over 5 billion cubic meter per year) in the European Union are France, Hungary, Czech Republic, Poland, Austria and Slovakia. The largest non-EU importers of Russian natural gas are Ukraine, Turkey and Belarus.

According to the European Commission, the share of Russian natural gas in the member states' domestic gas consumption in 2007 was the following:

Estonia 100% Finland 100% Latvia 100% Lithuania 100% Slovakia 98% Bulgaria 92% Czech Republic 77.6% Greece 76% Hungary 60%

Slovenia 52% Austria 49% Poland 48.15% Germany 36% Italy 27% Romania 27% France 14% Belgium 5%

The shares of Russian natural gas in the domestic gas consumption in non-EU countries in Europe were in 2006:

• Republic of Macedonia 100%
• Belarus 98%
• Serbia, Montenegro 87%
• Ukraine 66%
• Turkey 64%
• Croatia 37%
• Switzerland 12%

According to the assessment by the European Commission, Baltic countries and Western Balkans gas route are identified to be vulnerable to the Russian gas disruption.

According to Pierre Noël, Research Associate and Director of Energy Policy Forum of the University of Cambridge, the perception that Russian dominance in the European gas market is growing is not confirmed by data. At the same time, the variety of national policies and stances of larger exporters versus larger dependents of Russian gas, together with the segmentation of the European gas market, has become an extremely divisive issue in European politics toward Russia. Therefore, creation of the integrated pan-European gas market would significantly reduce the implications of the European energy security and foreign policy.

Gazprom in Europe

Main articles: Gazprom, List of Gazprom's subsidiaries, and Transneft

Gazprom has been criticized for lack of transparency in its structure. According to the risk analysis firm AZEast Group partner Roman Kupchinsky's testimony given to the United States Senate Committee on Foreign Relations, "Gazprom, with the silent support of the Kremlin has set up 50 or so middlemen companies, silently linked to Gazprom and scattered throughout Europe – such as the Centrex group of companies and the Gazprom Germania network – which do not add any value to the price of Russian gas being sold on European markets; yet they earn enormous sums of money which appears to simply vanish through shell companies in Cyprus and in Lichtenstein." According to the study published by the Research Centre for East European Studies, Gazprom uses subsidiaries such as Gazprom Germania, Gazprombank, Gazprom-Media, or shell companies to avoid resistance to its investments. However, some acquisitions like an attempt to take over British gas company Centrica in 2006 have been rejected by the hosting governments. These actions has been called by Gazprom discriminatory.

A paper by Keith C. Smith noted that Russian firms have demanded foreign joint venture partners to agree to funnel profits through offshore accounts and well-known havens for "confidential funds" or to intermediary firms that bring no added value to the venture. Money laundering is used in "backdoor financing" for companies that want to conceal their Russian links and for key individuals in the West who hide the origin of their "consulting fees".

Swedish Defence Research Agency's 362-page study Russia’s Energy Policy: Security Dimensions and Russia’s Reliability as an Energy Supplier (2006) stated that from Europe’s perspective, Russia is moving in the wrong direction and is unwilling to change its behavior. The study concluded that the core problem is the combination of Russia’s perception, intentions, capabilities and track record along with lack of real stability, a high degree of unpredictability and a development away from democracy, rule of law and market norms.

Janusz Bugajski's book "Cold Peace: Russia’s New Imperialism" states that through targeted foreign investments and strategic infrastructural buyouts in Eastern Europe Russia is building monopolistic positions and substantial influence over any country's economic, financial, trade, and investment policies. Coordination is easily visible in connections between the Kremlin and the largest Russian companies - such as executive appointments, promotions of overseas operations, and financial, legal, and police instruments. Russian enterprises are used to gain political influence through involvement with officials, parties, and media outlets in targeted East European states.

According to the US-based Heritage Foundation think-tank analyst Ariel Cohen's paper "Europe's Strategic Dependence on Russian Energy" (2007) Russia is consolidating its grip on oil and gas in Europe utilizing the following strategies and tactics:

• Locking in Demand – Moscow is attempting to use long-term contracts with European countries to lock in demand. By dealing separately with countries rather than as a group, Moscow can discriminate countries on prices.
• Locking in Supply – Moscow attempts to consolidate its control of strategic energy infrastructure throughout Europe and Eurasia, including supply, sale, and distribution of natural gas as well as pipelines, refineries, electric grids, and ports.

File:Nabuccostream.png

Map of the planned Nabucco and South Stream pipelines.

• Derailing Competition – For example, Moscow has pushed South Stream which competes against the EU's Nabucco pipeline as well as the proposed extension of the EU-backed South Caucasus Pipeline.
• External Consolidation – Moscow is consolidating control of supply outside Russia, particularly by signing long-term exploration and supply agreements with Turkmenistan, Uzbekistan, and Kazakhstan.
• Internal Consolidation – Moscow is consolidating Russia's oil and gas sector in the hands of state-controlled entities. Major international entities are pushed out of Russia.
• A Gas OPEC – Russia is "stealthily and steadily" developing a "gas OPEC" cartel to control the output and price of gas. The cartel would include major producers, including Argentina, Bolivia, Venezuela, Iran, and Qatar.

Moscow signed the Energy Charter Treaty in 1997, but it has refused to implement it.

Despite calls for European energy diversity being recently amplified, doubt has been cast on whether diversification away from Russia is actually possible, as Russia's European customers have long term legal contracts for gas deliveries despite the disputes, most of which stretch beyond 2025–2030.

Keith C. Smith's Russia and European Energy Security – Divide and Dominate (2008), the Kremlin has systematically created or cultivated "friendly" interest groups in both Central and Western Europe. These groups "benefit financially from their formal and informal ties to Russian state energy companies". He suggested that if Russia succeeds to make a significant portion of Europe’s political and economic elite reliant on nontransparent financial payments, the impact on national sovereignty and decisionmaking may be greater danger than dependency on energy resources.

In Germany, members of the SPD have ties with Kremlin and Gazprom, including posts at company boards or party donations. Gerhard Schröder signed Germany into an agreement to build the Nord Stream pipeline, just before general elections. Schröder later received a post at Nord Stream AG. In addition, Germany's policies have been accused of undermining human rights in Russia. Oleg Orlov, head of the Memorial human rights group in Russia, says that Schröder's and Steinmeier's policies on Russia have been "extremely bad for civil society, democracy and the country as a whole". An article published by the Financial Times Deutschland suggested that close ties may lead the world to view Russia’s human rights violations as Germany’s human rights violations.

Documented examples of financial ties

• Gerhard Schröder's deal with Gazprom and subsequent chairman position with Nord Stream.
• In Poland, Russian agent Vladimir Alganov was recorded discussing bribery of Polish officials, in Vienna. Marek Dochnal was caught bribing officials on behalf of a Russian client.
• In Finland, Paavo Lipponen first backed Gazprom's pipeline plans as Prime Minister and was then was hired by the consortium.
• In Italy, parliamentary investigations alleged that Prime Minister Silvio Berlusconi's friend was a major beneficiary in a Eni-Gazprom deal which involved Central Energy Italian Gas Holding.
• In Serbia in October 2008, signing of the an annual protocol to the Russia-Serbian gas agreement was criticized as non-transparent. The critics alleged that YugoRosGaz, a joint subsidiary of Gazprom and Yugoslav government is redundant and introduced in the supply scheme under pressure from Gazprom.
• Gazprom's subsidiary Nord Stream AG has hired at least one former Swedish official.
• GPlus Europe is one of the PR agencies used by Gazprom. GPlus specializes in recruiting former EU officials and eminent journalists.
• Hill and Knowlton, another PR company used by Moscow, has given Members of European Parliament private jets flights to Siberia.
• CEZ Group's influence on the Czech politics and connections to Russia has come under scrutiny.
• Czech President Václav Klaus and his staff has been associated with Russian energy interests.
• Czech political party Party of Civic Rights – Zemanovci has ties to Russian energy interests.

This list is incomplete; you can help by expanding it.

Documented examples of energy sector incidents

• Russia cut gas supply to Ukraine in 1991 and 1992
• Energy to Estonia, Latvia and Lithuania was cut off in winter 1992-1993 order to affect a policy change.
• Russia–Ukraine gas disputes in 1994
• Oil deliveries to Lithuania were cut off 9 times in 1998-1999 alone.
• Gas supply to Moldova was cut off in the winter of 1999.
• Georgia in January 2001
• In 2001, Lithuania sold Mazeikiu refinery to an American company instead of Russian company. Russian Lukoil started to harass the company.
• In 2002, Russia cut oil deliveries to Ventspils Nafta in Latvia. A Russian company had earlier attempted to acquire it, but had failed.
• Georgia in 2003
• Russia cut gas supply to Ukraine in 2005-2006 and in 2007-2008
• Russia–Belarus energy dispute in 2007.
• In 2007, Swedish Defence Research Agency's 110-page study Nord Stream, Sweden and Baltic Sea Security (2007) counted over 55 incidents (cut-offs, explicit threats, coercive price policy and certain take-overs) since 1991, most with "both political and economic underpinnings".
• Russia cut gas supply to Ukraine in 2008-2009

This list is incomplete; you can help by expanding it.

Iran as alternative supplier

Iran has proposed a pipeline from Iran to Europe (Persian Pipeline) which would reduce dependence on Gazprom. Russia is concerned that Iran's potential entry would undermine Russia's dominance. The Chinese People's Daily also noted that: "Observers speculate that Russia's fresh attempts to reach Iran's energy resources and its tempting proposals to Iran suggest that Moscow is willing to see Tehran's energy flow to Europe via Russia in order to maintain the monopoly of transport routes."

Proposed measures to reduce dependence and risks

Several authors have recommended legal action. Antitrust and anticompetitive behavior by European and foreign companies doing business inside the European Union is prohibited by Article 82 of the Treaty Establishing the European Community. Neither Transneft or Gazprom has yet faced anti-trust charges.

Keith C. Smith recommends that both Article 82 and the Energy Charter Treaty are used to prosecute Gazprom. In addition, "Western firms should petition the European Union, DG COMP, and national governments to enforce vigorously existing antitrust and competition policies". The European Union has previously prosecuted Microsoft. Keith C. Smith states that the price tag of Microsoft's behavior is a just small fraction of "the cost paid by Germans, Czechs, Hungarians, Italians, Greeks, and Austrians for Russian oil and gas as a direct result of the state-dictated export monopolies of Transneft and Gazprom".

Marvin Baker Schaffer suggested that the European Union could prosecute Gazprom and Eni under Article 82.

A panel in a seminar organized by Chatham House and Transparency International said that "These anti-trust and anti-competition practices are a clear violation of Article 82 of the EC Treaty and of Article 45 of the Energy Charter Treaty" and asked "How many Western leaders can really negotiate well with the seasoned KGB-ers who make energy policy?"

Claude Mandil, the former head of the International Energy Agency, has said that "We need more energy efficiency, more liquefied natural gas, more renewable energy, more nuclear energy".

Keith C. Smith proposed that the Union demands the right to immediately investigate the causes of disruptions of Russian or non-Russian oil or gas to any EU member state. When disruptions appear designed to pressure a member state, the European Union should apply economic sanctions on the assets in Europe of Transneft and/or Gazprom. Both companies should be forbidden to buy assets in EU member states until the companies become more transparent in their accounting and operating practices.

Keith C. Smith recommends that if EU investors in Russia can not own more than 25 percent of Russian enterprises, then Russian enterprises should not be able to own more than 25% of European energy facilities and energy marketing companies.

Many authors have called for common European foreign policy on energy.

The European Union has made proposals to diversify energy supply. One of them is the Nabucco pipeline.

See also

• Energy policy of Russia
• Energy policy of the European Union
• Foreign relations of Russia
• Russian influence operations

References

Further reading

• Cold Peace: Russia's New Imperialism. Janusz Bugajski (November 2004). ISBN 0-275-98362-5
• Petrostate: Putin, power, and the new Russia. Marshall Goldman. Oxford University Press US, 2008 ISBN 0-19-534073-6
• The New Cold War: Putin's Russia and the Threat to the West. Edward Lucas. Palgrave Macmillan; Second Edition, Revised and Updated edition (17 March 2009) ISBN 0-230-61434-5
• The New Cold War: Revolutions, Rigged Elections, and Pipeline Politics in the Former Soviet Union, a 2007 book by Mark MacKinnon ISBN 0-7867-2083-2
• Russian energy politics in the Baltics, Poland, and Ukraine: a new stealth imperialism? Keith C. Smith (2004) ISBN 0-89206-456-0
• The New Cold War: How the Kremlin Menaces Both Russia and the West. Edward Lucas. 2008
• Russian Energy Power and Foreign Relations: Implications for Conflict and Cooperation. Taylor & Francis, 2009. ISBN 0-415-48438-3

External links

• Robert L. Larsson (March 2006). "Russia’s Energy Policy: Security Dimensions and Russia’s Reliability as an Energy Supplier". Swedish Defence Research Agency. http://www2.foi.se/rapp/foir1934.pdf.
• Christophe-Alexandre Paillard (March 2007). "Gazprom, the Fastest Way to Energy Suicide". Russia/NIS Center. http://www.ifri.org/files/Russie/ifri_Gazprom_paillard_anglais_mars2007.pdf.
• Nord Stream, Sweden and Baltic Sea Security Robert L. Larsson March 2007
• Celeste A. Wallander (Spring 2007). "Russian Transimperialism and Its Implications". The Washington Quarterly. http://www.twq.com/07spring/docs/07spring_wallander.pdf.
• Russian Leverage on the CIS and the Baltic States. Jakob Hedenskog, Robert L. Larsson. June 2007
• Zeyno Baran (Autumn 2007). "EU Energy Security: Time to End Russian Leverage". The Washington Quarterly. http://www.twq.com/07autumn/docs/07autumn_baran.pdf.
• Ariel Cohen (5 November 2007). "Europe’s Strategic Dependence on Russian Energy". http://s3.amazonaws.com/thf_media/2007/pdf/bg2083.pdf.
• "Central Europe’s Energy Security Schism". The Center for European Policy Analysis (CEPA). July 2008. http://www2.atlantic-community.org/app/webroot/files/articlepdf/Central_Europe_Energy_Security_Schism20080724.pdf.
• Russia, Georgia and the European Union – The Creeping Finlandization of Europe Marcel H. Van Herpen September 2008
• Bendik Solum Whist (November 2008). "Nord Stream: Not Just a Pipeline". http://www.fni.no/doc&pdf/FNI-R1508.pdf.
• Mariusz Nogaj, Russia – A New Empire under construction: the Russian policy towards former communist satellites – mechanisms of exertion of influence, Naval Postgraduate School, 2008sr:Русија у европском енергетском сектору