EU-Russia energy dynamics

Energy represents-who control and capable to access and sell it

Energy security-security for both suppliers and buyers

Energy-as a foreign policy tool, it has capability to maintain stability and generate interdependence between exporting and importing states

In developing countries; Sierra Leone and Nigeria: access to natural resources (oil/diamond) produced scarcity and bloodshed.

In developed countries; Canada and US energy resources increased level of political and economic progress but also cause vulnerability and dependence to natural gas and oil

Energy dependence: political and economic vulnerabilities of resource dependent

Energy a strategic resource- vulnerability and sensibility political access

Energy as foreign policy actor: inherently sovereign attributes of energy/energy’s ability to transform the future of states.

• Energy resources: strategic national asses (territorialized); ownership, access, transport and sale.

• Natural energy resources provides internal order and external influence, it is used in pursuit of national interests.

• National revenue ; if energy resources are well managed (exporter states such as Qatar, Norway, Canada) significant revenue raised from their sale can be reinvested for the benefit of the state.

However poor management of energy resources can produce damaging trends (radical privatization or nationalization part of energy industry) such as in Russia and Venezuela

Or corruption of government or extortion by local militia can provoke violence such as in Nigeria, Sudan and Colombia.

Responsibility for energy; public (includes government/energy enterprises owned or controlled by company) and private sector (companies)

Foreign energy policies of states; mix of national interest of public sector and business interest within the national goals of states.

Authority over energy issues divided between the European Commission and EU member states

Union; Lack of cohesion and competence (authority) in energy matters , 2006 gas stoppage compelled European states reconsider this situation and in 2011 Commission declare new “EU energy policy”

• January 2006 “gas spat” between Russia and Ukraine and role of energy to generate insecurities between sovereign and commercial actors (Russia stop to flow of natural gas to the Ukraine and its impacts on Europe)

• Energy security- new in foreign policy agenda but natural resources always play important role in Europe

• ‘resources war’, geopolitical structure of power and trade.

Energy indicates national prosperity (domestic policy) and national security (foreign policy)

Energy security: “assurance of the ability to access the energy resources required for the continued development of national power…and adequate infrastructure to deliver these supplies to market” (Kalicki and Goldwyn, 2009: 9)

• Energy security: for importer state (European) it means security to supply (delivery of affordable energy)

• for exporter states (Russia) it means security of demand (access to developed and reliable market for the long term sale of energy products)

• Energy assurance can be undermined by unexpected stoppage of supplies or price shocks

• Transit states: countries across whose territory energy is transported.

• Political and economic concerns about supply and demand of energy resources strongly connected. States use economic instruments (energy) to pursue political objectives/energy resources as political leverage

• Energy as foreign policy tool/power (coercion or diplomacy/state can use these tools to achieve its desired ends)

• As foreign policy tool for exporter it takes the shape of diplomacy or embargos (OPEC, Organization for Arab Petroleum Exporting countries in 1973), in some cases coercion (Russia)

• For importers: lack of leverage but they posses large markets, energy is used to achieve soft power objectives (EU) but also impose embargo (Iraq) and sanction (Iran)

• Role of military: when market incentives are threatened energy can be caused military presence (US historic and recent activism in Middle East and Persian Gulf)

• Russia stop to flow of natural gas to the Ukraine and its impacts on Europe

• Stoppage of gas is example for hard power (coercion) or soft power (diplomatic compellence)

Break-up of Soviet Union and reconstruction of European energy policy

Deep engagement with Russia Political reforms, aid packages and

multilateral projects during 1990s (by EU) PHARE in 1989(Pologne, Hongrie Assistance

a la Reconstruction Economique) TACIS in 1991 (Technical Assistance to the

CIS-Commonwealth of Independent states-former Soviet countries)

• INOGATE energy initiatives (Interstate Oil and Gas Transport to Europe)

• European Energy Charter (EEC) signed in 1991 to help set the political context of tackling East-West energy issues, establish closer relation with Russia and former Soviet energy suppliers /creating reliable hydrocarbon trade transit across Europe

• Energy Charter Treaty (ECT, 1994), multilateral treaty established binding obligations on the trade, transit, resting on liberal markets. It underlines free-market principles and guarantee security of supply), aim to establish stability and clarity to all aspects of European energy industry

• Political significance of Energy Charter Treaty (ECT); recognizing energy as a key feature of national infrastructure of every European country.

• Bolster the economic efficiency and competitiveness of post-Soviet economies, making Russia and Eastern European states spread of political reforms and integrating with Europe

• Russia and Ukraine key strategic actors in the impetus of East-West reforms, establishment of common strategy in 1999.

• EU-Russia Energy Dialogue was launched in 2000, aim to increase long-term reform and promote reliability in Russia’s public and private sector but has not solved energy security issues still plaguing the EU-Russia relationship

• Differing views of Gazprom (the largest gas extractor company in Russia) of the liberalization process of European and Russian energy markets

• Gazprom believed that ECT would diminish its monopolistic position in Russian energy markets and oblige Russia to open its pipeline network to transport cheaper gas and oil from Central Asia.

• So Russia terminated its provisional application of the ECT in 2009, Russia stand oppose to what it perceives as an imposition of EU-style model of liberalization.

• Russian foreign energy policy has developed mix of political revanchism (policies directed at the recovery of territory and power) and quasi-liberal adjustments.

• So the recent gas war between Ukraine and Russia does not reflect a policy change in Moscow because this was not something new.

• Russia had used its energy power in an attempt to influence foreign and security policies of its neighbors since 1990s.

There was lack of progress in energy security dialogue between EU and Russia and during this period EU’s dependence on imported Russian gas has increased.

EU-Russian division on energy issues in 2005 Russia sees ECT as counter to its

interests Russian energy power are threefold;

First; ownership and access to its vast energy resources by state owned company Gazprom (world largest gas producer and exporter) Second; pipeline ownership, pipelines owned by another state-owned company, Transneft.

• Third; long term contracts with Russian exports to guaranteed set of European importers

• gas spat was outcome of differing perceptions on the long-term Ukraine-Russia gas contract

• Russian energy monopolistic challenge to European perspective, Gazprom and Transneft influential agents of government oil and gas policy

• Russian energy dominance, external political goals

• Russian energy; as foreign policy component

• Russia’s coercive use of energy dominance to force political compliance in its immediate neighborhood

• Lack of energy reserve of most of European states, Europe pipeline project “Nabucco” designed to reach from Black Sea to Austria

Europe-reliable buyers of Russian exports and even 2004 enlargement included states heavily dependent on Russian gas.

Non-EU countries between Moscow and Brussels; Ukraine, Georgia, Belarus-pipeline transits –in the middle of external dimensions of EU integration and Russian revanchism.

• Majority of EU countries dependent upon energy import specifically Russian gas, EU also depends on key transit countries

• Ukraine as transit state connect Russia to markets in Germany, Austria, Italy, Slovenia, and Croatia.

• Ukraine dependent on Russia for the revenues

• Ukraine also dependent on European market to keep its transit relationship with Russia healthy and dependent on Russia for its domestic gas import

Ukraine is the most important transit country in the energy trade relationship between Russia and Europe.

Europe as a whole receives roughly 30 percent of its natural gas supplies from Russia.

The dependency is mutual; more than 90 percent of Russian gas exports

go to Europe

40 percent of Ukrainian energy consumption is natural gas, and 60 percent of domestically consumed natural gas is supplied by Russia.

• 2004 tension between Russia and Ukraine because Ukraine’s inability to pay for Russian gas, Ukraine’s rising debt to Russia

• Energy relations between Ukraine and Russia worsened in 2005

• Russia acknowledged the risk that a shortfall would cause to European costumers

• Ukraine was aware of its strategic location between Russian suppliers and European buyers

Ukraine cut itself deal by charging Russia European level transit tariff level for gas bound to Europe (to increase its national revenue) Russia accepted the agreement if only Ukraine agreed to pay these same higher prices for its own domestic imports!!!! Which could have negative impact on Ukraine national revanue

• Russia announced that it was prepared to shut down gas to Ukraine provoked alarm in Western Europe and anger in Kiev.

• Who would blink first?/tit-for-tat retaliations• Three option of Ukraine; 1-Ukraine would have

to weigh up the value of retaining pipeline ownership versus the revenue gained by keeping prices low, 2-it could continue to demand increase transit tariffs but faced increased cost of its own import, 3-Ukraine could consider illegally tapping into Russian exports to feeds its own market.

Russia’s options; 1-Russia negotiate with Ukraine in an exchange for lower subsidizer. 2- it could insists that Ukraine operate at the higher European market prices, 3- Gazprom could shut off the gas supply to Ukraine with consequence of dramatic reduction of Russian gas to key European markets and also damaged reputation as a reliable supplier.

• Two events caused security of supply crisis;

• 1-Remote cause: political cause, extension of East-West tension of ideas-Orange Revolution (2004-2005)

• EU’s increased bilateral relations with Ukraine and its inclusion to ENP in 2004-EU membership as the ultimate goal/EU led transformation and rejection of Russian leadership

Orange revolution outcome of Kremlin backed President Victor Yanukovich as the chosen heir of outgoing president Leonid Kuchma and the pro-western incumbent, Victor Yushchenko

Victor Yushchenko leader of Our Ukraine Block (color orange) campaign for independence from Russia but Yanukovich won the election in 21 November 2004.

Allegation's of corruptions during elections

Popular reaction to Kremlin’s interference turned to the street protests and recount (of votes) ordered by Supreme Court on 26 December 2004 and Victor Yushchenko won the voting.

Kiev now leaned close to Brussels and further from Moscow

• 2-Proximate cause: commercial• Gazprom in a televised broadcast

showed Gazprom technicians shutting down key pipelines/stop gas supply to Ukraine on January 1, 2006.

• Gazprom strategy of using energy leverage as a form of foreign policy to bring about change in behavior of another actor (Ukraine)

• Use of energy for political dominance!!• Coercive diplomacy!!!

However Russia claimed that European gas was still running through Ukrainian pipeline and shortfall was due illegal taking by Ukrainian gas company Naftogaz (so Gazprom shut down Ukraine’s domestic import?)

On January 2, Russia pumped additional gas to avoid any damage as reliable gas supplier

• Three major outcome of gas spat:• 1- increased concern about Gazprom’s

reliability and Russia’s use of energy leverage over European markets couples with pro-Western changes in Ukraine (shift away pro Kremlin) gas stoppage as retaliatory tactics!!

• 2-European states realize that they have lack of external energy policy to deal both economically and politically/interdependence /energy policies of Kremlin danger to Europe

3-need for more collective and cohesive policy on security of energy supply

Developed common foreign and trade policy approach in support of energy policy objectives: relations with Russia-pursue it to ratify ECT

Newest form of EU foreign policy-external energy relations

New foreign policy objectives in the wake of gas crisis

focus on security of supply issues sustainability and competitiveness

(new pillars of EU energy policy) Increased awareness of energy

security and its importance

Mix and complex outcomes; cheaper Turkmenistan gas as new source in domestic market but with higher rates.

Yuliya Timoshenko (leader of Ukraine’s parliamentary opposition) believes that Ukraine’s future lies with the EU and EU needs common policy to handle foreign policy challenges posed by Russia

Russia’s perspective; gas stoppage as result of politically motivated punishment of Ukraine by Gazprom (surrogate of Russia)

Gas spat incident was result of Ukrainian illegal taking of transit gas bound for Europe and damage Russia’s reputation as reliable supplier.

After the new deal/new price with Ukraine Gazprom used set prices and guaranteed agreement with all other CIS countries (Commonwealth of Independent states-former Soviet countries)

Concern of security of demand by Gazprom and concern of security of supply European countries

European Perspective: lost political battle in Ukraine. Russia/Gazprom used energy to coerce/force Ukraine back into the fold of Russian influence

Russia used its energy as “weapon” in relations with other countries

Russia’s use of energy as coercive element to increase prices in countries that were perceived to move in pro-European direction (Armenia, Azerbaijan, Georgia, Moldova in 2007)

Forceful statement by Gazprom in 2006 that “it could easily afford to switch its supplies to Asian markets further EU member states”

Russia’s use of energy dominance to pursue both economic and political objectives

Lack of agreement with former soviet state on gas price-accusation “Russia is using energy exports as political weapon” to immediate neighbor and dependent EU countries

Ukraine: Ukrainians believe that agreement on January 10, 2006 was not result of leverage of Russia but result of poor negotiation skills of President Yushchenko

need for more comprehensive agreement on energy issues between Russia and EU as policy issue not foreign policy tool!!!

Otherwise both side will look for alternatives to replace each others “energy security dilemma”

Neither side can afford to lose the other as a key element of its overall security

Energy is symptomatic of the broader geopolitical issues at the heart of this current

crisis. Russia uses gas debt and pricing to gain

leverage over Ukraine

This debt is a significant point of leverage for Russia.

In December 2013, the deal reached between Vladimir Putin and Viktor Yanukovych partly around gas debts touched off broader protests.

Gazprom has been seeking payment since January, but Naftogaz is broke

There have been no threats by the Russian authorities or by the Russian gas giant Gazprom that they are planning to cut off the gas because of geopolitical tensions.

That does not mean that the situation is static. A significant escalation of the military dimension of the crisis could incite the Russians or the Ukrainians to change their calculus.

But it is impossible to divorce the geopolitical tensions from the issue of debt payments. European and Ukrainian gas may be threatened if the Ukrainian government fails to pay Russia for its imports in a timely manner (non-payment of debts was the immediate trigger for the 2006 and 2009 cut-offs).

Europe and Ukraine have limited tools at their disposal to reduce their energy vulnerability.

The most obvious and immediate solution would be to provide the Ukrainian government with cash to pay down its debts

In the medium to long term, however, there are a variety of options for Europe and Ukraine to

increase their energy security. Seeking alternative supply options: using U.S.

liquefied natural gas (LNG) exports to aid the Europeans and Ukrainians

U.S. does not have any LNG export facilities at present

Ukraine does not have an LNG import facility as well

in the short term the United States has no ability to supply gas to Europe since it does not have any export facilities and in the long term

The only way to extract Ukraine from the immediate payments crisis is to provide money for Ukraine to pay down its debts.

However, that does not address the fundamental problems that resulted in Naftogaz indebtedness in the first place: massive corruption, opaque markets, and poor pricing.

The best way to put pressure on Russia in the long term and reduce European vulnerability is by encouraging significant structural reforms

in Ukraine transparent, and market-oriented energy

sector. Pricing reform is a key element of these structural reforms