Russian Energy Monopoly a Threat to Divided EU States

This article first appeared in the 7 January 2009 edition of The Irish Times and is reproduced here with their kind permission.

Every man, woman and child in Europe is paying an ‘energy tax’ to finance Russia’s Big Power ambitions, but that isn’t the worst of what is happening, writes Richard Whelan.

The ROW between Russia and Ukraine over unpaid bills for gas supplies does not just highlight the EU’s unhealthy dependency on Russia for energy supplies, and Ukraine’s vulnerability to bullying by its neighbour. It is a warning to the West that Putin and Medvedev’s Russia harbours the same ambitions for world domination that characterised the USSR under Stalin. It is also an opportunity to rebalance the relationship between oil supplier and consumer.

The EU relies on Russia for more than 30 per cent of oil imports and half of its natural gas. With a barrel of oil around $45 (€33.60) at present, and Deutsche Bank estimating it will fall to $35 by 2010, it is time for the EU to stand up to Russian energy bullying. “Russians have learned that the vagaries of the modern global economy can cause as great a threat to a nation’s existence as do military threats. The Soviet Union survived World War II, but Russia could not survive the collapse of world oil prices,” Clifford Gaddy and Andrew C Kuchins wrote in the Washington Quarterly of spring 2008.

At current and projected oil prices Russia will face difficulties, giving the EU a chance to end Russia’s plan to control its energy supplies, despite Opec efforts to curtail supplies. While many in the West think the “problem” of Russia was solved by the collapse of the Soviet empire, prime minister Vladimir Putin and his “clone” president Dmitri Medvedev have another view.

During his presidential address to the Russian Federal Assembly in April 2005, Putin declared: “The collapse of the Soviet Union [was] the greatest geopolitical catastrophe of the 20th century.” Putin went on to clearly set out his intention of restoring Moscow’s status as a global power on the model of the Soviet empire.His subsequent actions and the fact that he has surrounded himself with Siloviki , suggests that his resentment over the collapse of the Soviet Union and his desire to reverse it is a key objective.

Putin’s rise to power has been accompanied by major growth in his wealth. In November 2007, Anders Aslund, a senior fellow at the Peterson Institute for International Economics, calculated Putin’s wealth at not less than $41 billion. Much of his wealth is said to consist of shares in state-controlled energy enterprises, including 4.5 per cent of Gazprom and 37 per cent of Surgutneftegaz.

So, what’s the way to restore great power status? Despite what many think, the Russian economy is not the answer. While Russia had reserves of $475 billion in November 2008, because of uncontrolled corporate borrowings its total external debt was $527 billion at the end of June.

Russia’s population is declining by about 800,000 people per annum. In 2006, Putin said that demography is “Russia’s most acute problem today”. The fertility rate is 1.33, and this needs to exceed two per couple to replace existing numbers. Life expectancy, already low, is declining further because of a significant health crisis, while the population is ageing at a rapid rate. The percentage of the population aged 65 or over was 12.3 per cent in 2000, and is estimated to be 23 per cent in 2050. The Russian working age population (those aged 15 to 64) will decline by 34 per cent in the period 2000-2050.

Russia achieving great power status depends on how it uses its oil and gas reserves and those it can control, and lack of unity in consumer countries. The best explanation of this is set out in “EU Energy Security: Time to End Russian Leverage” a piece by Zeyno Baran of the Centre for Eurasian Policy at the Hudson Institute, which appeared in the Washington Quarterly of autumn 2007.

Baran writes: “There is little unity among member states’ energy policies. Russia has deliberately taken advantage of this lack of cohesion to gain favourable energy deals and heighten European dependence on Russian supplies. Moscow is pursuing a divide-and-conquer strategy of striking bilateral deals with EU states. This disunity has also allowed Moscow to pre-emptively block European attempts to construct transport routes for Caspian and Central Asian oil and gas that do not involve Russia.”

Seven east European countries receive 90 per cent of their crude oil from Russia, and six take all their natural gas from it. In 2006, Russia cut off Ukraine’s gas supplies on the day it assumed leadership of the Group of Eight, disrupting supplies to EU countries and reminding the EU of its vulnerability. Today, Ukraine is again under the cosh.

There are well-founded concerns about Gazprom, Russia’s natural gas distributor and the largest energy company in the world – in which Putin, as noted above, is a shareholder. It controls the Russian gas pipeline network and consequently handles most Russian and Central Asian exports. It is majority state-owned and has deep ties to the Russian government. Many of the company’s executive management and board members also occupy or previously occupied key positions within the Kremlin. EU anti-competition rules do not seem to apply to Gazprom.

The EU needs to see beyond Russia in dealing with post-Soviet states, offering co-operation and joint energy projects as the US has done. Two pipelines, one each for oil and gas, were installed from the Azerbaijani capital of Baku across Georgia to Turkey. The Baku-Tbilisi-Ceyhan (BTC) pipeline carries oil and the South Caucasus Pipeline (SCP) gas. Gazprom can no longer bully Azerbaijan.

Belatedly, the EU and US are supporting gas pipelines directly to Europe, one from Turkey to Greece and Italy (TGI), and another, known as Nabucco, from Turkey across Bulgaria, Romania, and Hungary to Austria. Moscow, in the meantime, is making bilateral deals with France, Germany and Italy, to minimise effects of this competition, and is promoting the South Stream pipeline as an alternative to the Nabucco line.

EU energy commissioner Andris Piebalgs knows the dangers this poses. But uniting member states behind a common European energy policy is difficult, despite the commitments made in the EU Common Foreign and Security Policy (CFSP). This states that the EU should promote democracy, rule of law and respect for human rights within its borders and abroad. Dependence on Russian energy undermines Europe’s efforts to foster ideas of good governance, market transparency and democracy, both in Russia and her neighbours. And the much-trumpeted “green” measures to reduce dependence on fossil fuels – while valuable in themselves – will not deliver the energy security Europe needs in the short to medium term.

There is no alternative to wresting back from Russia the considerable stranglehold it has over EU energy supplies. We need to restore balance to the relationship and to eliminate the effective Russian monopoly.

The area around the Caspian Sea is a major source of oil and gas. Are we going to continue to look the other way while Russia builds a controlling monopoly over EU energy, levying a supplier inefficiency tax on our energy supplies, a burden on every household and business, with the aim of restoring the power that country wielded under Stalin?

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