Russia-EU Energy Dialogue Moving Back to Economy.
Russia-EU Energy Dialogue Moving Back to Economy.
A number of recent events related to the energy sphere of relations between Russia and the European Union have shown signs of a change in the EU’s approaches to energy security. First, Greek Prime Minister Georgios Papandreou expressed his government’s readiness to support the South Stream pipeline project (for pumping Russian natural gas to EU countries across the floor of the Black Sea) and even to lobby its incorporation in the network of Trans-European supply routes (i.e. networks that make up the backbone of the European markets of natural gas and electricity). Then followed two statements by the recently appointed European Commissioner for Energy, Gunther Oettinger. He said on a visit to Bulgaria on March 2, 2010 that the EU does not object to South Stream, since the pipeline will make gas supplies to Europe more secure. A week later, Oettinger said at a presentation of pipelines and power transmission lines to be supported as part of anti-crisis measures that the Nabucco pipeline project (which is to bypass Russia) would be supported on condition that there is enough gas for it to put through. On top of that, a day later, Paolo Scaroni, the chief executive officer of Italian energy company Eni SpA, proposed merging Nabucco and South Stream in order to optimize supplies and reduce investment in infrastructure.
Let us refrain from discussing the advantages of either pipeline or the relative benefits that Russia and the EU stand to gain from them, as this has been discussed many a time. The events in question have a more remarkable aspect – the new composition of the European Commission and the political elites of EU countries, supported by energy companies, seem to be reverting to United Europe’s more habitual economic approach to energy security. This is in sharp contrast with the policies of the second half of the 2000s when politically motivated approaches prevailed.
From Economy To Politics And Back To Economy?
It is an open secret that it is the economy rather than politics or military might that forms the basis of the EU’s influence in the world. Trade and cooperation, in the first place, and then humanitarian assistance and the impact on the global regulatory regime (in the ecology, competition, protection of intellectual property, etc.) brought the European Communities onto the world stage as a leading player. Later, they used the same instruments for achieving political objectives. As a rule, they would use the principle of political preconditioning as an efficacious instrument of influence on partners, thus pegging economic interaction to the observance of human rights and democratic procedures by counterpart governments.
The EU’s central institutions are still novices in the energy sector, as their activity there started out only in the 1990s when the European Commission led by Jacques Delors arrived at an idea of setting up a common energy market and thus eliminating the segmentation into national energy markets – twelve at the moment.
The Commission worked along two avenues. On the one hand, it stimulated development of the infrastructure of natural gas and electricity supplies, the two commodities trading in which is tightly linked to existing pipelines and transmission lines. The physical backbone of the energy market created in the 1990s consists of trans-European networks. On the other hand, regulatory mechanisms on the markets were brought closer to one another so as to set up a unified system. The effort included harmonization of ecological standards, a gradual introduction of competition among electricity and gas suppliers along with suppliers of crude oil and coal, and liberalization of access to domestic markets of the member-states, as well as gas pipelines and power transmission lines.
The principle of parallelism, which the European Court formulated back in the 1960s, made it possible for the European Community (now the EU) to cooperate with third countries and international organizations in areas where the internal regulation of the market and the appropriate competences existed de facto. That is why it was quite logical that the European Commission proposed to resolve the problem of energy security by building an infrastructure that would connect the gas and electricity markets of the EU with third countries. Along with this, they would be covered by internal market regulating mechanisms. In other words, the Commission sought to lay down a physical and legal foundation for the energy market that would extend beyond the EU’s boundaries while being subordinate to its common regulatory rules.
The European Commission always insisted that it sought to stimulate private companies towards cooperation with supplier countries and set up appropriate conditions for trade and investment. Brussels had no plans to force them into taking non-market decisions or to substitute for their activity with centralized capital investment from a single budget or to make changes in the energy balance of the member-states.
A broad spectrum of instruments was used to ensure the EU’s energy security in this manner. It was initially believed that the Energy Charter Treaty would become a tool for implementing this policy as regards Russia. But Moscow’s flagging willingness to ratify it made the EU and Russia enter into the Energy Dialogue. It centered around ecological standards, prospects for the liberalization of Russia’s energy sector, various options for the development of energy, oil and gas supply infrastructure, ways to increase energy efficiency, and methods of energy saving.
Discussions of Russia’s accession to the World Trade Organization, too, were used for the purpose of bolstering the EU’s energy security. Although energy resource trading does not fall into the domain of the WTO regulations, European representatives tried to include the issue of terms for Russian gas exports and Central Asian gas transits into the agendas of negotiations on top of Russia’s domestic prices for natural gas. Finally, internal acts of the EU were brought into play, too. One of them was the third energy liberalization package and the so-called ‘Gazprom clause’ it contained. The clause stipulated that energy companies outside the EU could not purchase transit and distribution networks on the EU territory unless they separated production and transmission channels (in line with the EU’s principles of liberalization).
The EU central agencies’ approach towards energy security initially rested on economic logic, albeit interpreted in an imperialistic spirit. It presupposed the extension of European laws to neighboring countries and a readjustment of the entire infrastructure towards the EU’s own needs.
However, changes came through already in 2004. For a start, the Netherlands Institute of International Relations Clingendael drafted a report for the European Commission where it mapped out two approaches to energy security. One of them was based on market freedom but, as experts said, it was idealistic and could only have a narrow application. The second proceeded from geopolitical principles and had greater correspondence with today’s reality. In June 2006, the EU’s top external relations officials, Javier Solana and Benita Ferrero-Waldner, prepared a report on an “external dimension” of energy security. October of the same year saw the Commission’s report that declared movement from words to action in providing foreign-policy support for energy security.
The EU member-states and the European Commission included a provision on energy solidarity in the 2007 Treaty of Lisbon. By the end of 2008, the Commission presented the second strategic report on energy, in which it called for developing the infrastructure and diversifying the supply sources of natural gas (which literally meant a reduction of dependence on Russia). After a review of the EU’s security strategy, Solana did a considerable expansion of the provision on political bolstering of energy security. The Eastern Partnership Strategy, which was in the offing then, included articles that singled out the energy sector as a special category for cooperation and gave the EU extensive opportunities to meddle with the implementation of the strategy by Eastern partners. The conflict between Russia and Ukraine in early 2009, which led to the interruption of natural gas supplies to a number of EU countries, brought the political atmosphere around energy problems to a head.
The EU’s external activity in the energy sector evidenced politicization and securitization (or a transition to the classical strategic context). If one takes up the terms offered by securitization theoreticians Barry Buzan and Ole Waever, the EU shifted the solution of energy security issues to the category of “panic politics” as it tried to minimize dependence on Russia. Brussels practically stopped viewing tools of ensuring energy security from the angle of how much they were motivated by the market or whether they were shared by companies.
Incidentally, it would be worthwhile for the Russian side to analyze and, possibly, use some of these measures. They concern, in the first place, an increase in energy efficiency and saving which would reduce the demand for hydrocarbons and would thus cut down dependence on their imports. In Russia’s situation, this might stimulate frugal utilization of natural resources. Another noteworthy aspect is the development of alternative sources of energy in the EU and the parallel special-purpose supporting measures, which are either absent or dysfunctional in Russia.
However, a search for alternative channels of gas imports has turned into a mega-guideline. First and foremost, it presupposes the construction of terminals of liquefied natural gas (LNG) and the promotion of the Nabucco project. Formally, it does not contradict the above-said principles, which the European Commission used in the 1990s – the expansion of infrastructure and diversification of relations with foreign suppliers. But unlike the previous initiatives that had a market grounding, Nabucco is based exceptionally on the logic of geopolitics. Otherwise it would be impossible to explain the desire to invest in a pipeline whose operation at full capacity is not guaranteed – Central Asia will be short of resources for this, while the use of Iranian gas is ruled out for political reasons. On top of that, there are claims (or, rather, allegations) that Europe’s demand for gas delivered by pipelines will decrease in the future.
There were a few other reasons for the EU’s pivot from an economic approach to energy security to a political one. The main of them was that Russia had not liberalized its gas market on the basis of rules designed in Brussels and had not opened up its territory for free transit of Asian gas to United Europe by third parties. In addition, high energy prices and the redemption of foreign debts by the mid-2000s boosted the Russian government’s self-confidence many times over. A growing skepticism as regards the Energy Charter Treaty forced Moscow to seek other – and far from always economic – means of ensuring its energy interests in relations with transit neighbor states (Ukraine and Belarus), complications in which arose rapidly enough. The Five-Day War in the Caucasus in August 2008 strengthened the Europeans’ suspicions (which were especially fanned by anti-Russian countries in Eastern and Northern Europe) that Russia wants to control pipelines outside its own territory so as to deny the EU an opportunity to diversify hydrocarbon supply routes.
Internal EU factors played a role, too. They were the reforming of the legislative base that dragged on for years and the desire on the part of some countries (especially Poland) to append the constituent documents with provisions for energy security and solidarity of the member-states. Last but not least, the situation was aggravated by the record high prices for hydrocarbons that grew unabated through to 2008.
This means that the EU’s reversion to the politicizing of energy security, however ungrounded from the angle of the interests of all the participants in energy relations, is quite explicable if one takes account of the existing combination of factors. However, passions around the ‘Russian threat’ began to cool off as of the end of last year. The talk of the dangers of dependence on Moscow as a supplier has subsided. Leading officials of the European Commission and national leaders have stopped mentioning it almost completely. Statements mentioned at the beginning of this article make it possible to believe that measures to shore up energy security are gradually returning to the economic track.
The South Stream project’s entering the list of trans-European networks, should it become a reality, will not help its implementation much from the financial point of view. Contrary to the widespread conviction, the EU allocates but tiny sums for infrastructure and, as a rule, they are used to organize seminars for potential participants in projects or for conducting preliminary research. However, a step like this would be symbolic as it would signal the EU’s renunciation of politicized or economically unfounded projects in favor of more logical and properly guaranteed patterns of energy security. (Whatever the doubts surrounding South Stream, scarcely anyone will argue about the availability of enough gas for it.) From the practical perspective, this would facilitate the resolution of administrative and bureaucratic problems emerging during the construction of trunk pipelines on the EU territory or the expansion of Russian companies’ business activity there.
The Anatomy Of Reversion To Economic Logic
A transition to the upholding of energy security by economic means will require tedious work on the part of the European Commission’s leadership (President Joso Manuel Barroso and Gunther Oettinger who is new to EU politics), who will face resistance from some member-states. Nonetheless, there are several factors conducive to the present reversal, which will stay in place over the medium term.
First, the fall of hydrocarbon prices in 2008 calmed down the agitation among European consumers. The prices of gas (pegged to crude oil prices with a lag of six to nine months) reached their peak in January 2009 when the conflict between Moscow and Kyiv broke out. (Incidentally, the interruption of supplies was even profitable for EU companies at the moment – it allowed them to use the gas accumulated in storage facilities instead of purchasing it at maximum prices.)
The decrease of prices caused both suppliers and consumers to take a calmer look at their own interests. Suppliers (and Russia among them) are interested in retaining the markets, while consumers are interested in acceptable prices. Cheap hydrocarbons reduced the attractiveness of many mega-projects for the construction of gas pipelines and large-scale use of renewable energy sources, which simply lost competitiveness compared with oil and gas. In addition, the financial crisis resulted in a sizable decline in lending and government subsidies, and in tougher terms for these.
In 2009, the almost eight-years-long saga over the reform of the EU’s statutory documents was eventually over and the Treaty of Lisbon took effect. Although the treaty contains a provision on the member-states’ solidarity in the field of energy security, this provision is very general and leaves it for national governments to choose specific forms of this solidarity. This means the EU has returned to its pre-reform positions suggesting that Brussels can influence energy security issues only with the aid of economic levers.
Besides, elections to all of the EU’s institutions and structural departments took place in 2009 and 2010. The formation of the European Commission was over in early February. Barroso and ex-Commissioner for Energy Andris Piebalgs made tough statements towards Russia until they secured seats on the Commission for themselves (Barroso has preserved his post, while Piebalgs has taken the position of European Commissioner for Development). After that, the attacks on Moscow’s “energy imperialism” gradually subsided to zero. Other EU leaders are demonstrating the same tendency, although in a less explicit form. In other words, the politicization of relations with Russia was an element of internal political struggle – or even career struggle – among bureaucrats. The end of the electoral period enables the EU to get down to scheduled activities and break the vicious circle of populist statements.
The third cause for the reverting of energy security to the realm of economy lies in the tiredness from innovations in how powers are transmitted from the national level to the pan-European one. This tendency manifested itself in the provision on competences, which was included in the Treaty of Lisbon. The provision says that the EU can act only in areas defined by member-nations on the basis of decisions worked out at the national level. Political aspects of energy security do not belong to this list and practice shows that most European governments prefer to make arrangements with suppliers at the bilateral level, as they cannot entrust a problem so important in the electoral sense as energy supplies to supra-national organizations.
The current situation within the EU displays the member-states’ reluctance to proceed with the deepening of integration. National governments keep calling for a reduction of the European Commission’s legislative activity; they limit and change its bills and even send some of these back without having a vote on them. As a result, the Commission concentrates on the kernel of its competences, in the first place, on monitoring how member-states comply with obligations pertaining to their domestic markets, on eliminating market barriers and on using competition laws for micro-corrections.
Complicated talks with Turkey on EU accession also exert an impact on the principles of the EU energy policies. The energy aspect of the negotiating process, in the course of which harmonization of laws is expected to take place, has been blocked by Cyprus. In response, Ankara refuses to continue market liberalization and to join the Energy Community, which includes the EU and Balkan states. The result is that Turkey remains far from becoming a territory under Brussels control from the angle of view of regulations.
> Turkey Map
In addition, from time to time Turkey sends reminders of its key role in ensuring the so-called fourth energy corridor for hydrocarbon supplies from abroad. It thus hopes to use its position as a political resource at any talks with the EU. So Brussels only fortifies Turkey’s stance by politicizing the energy dialogue with Russia.
Given the context of what we have said, a return to the economic approach to energy security (on the basis of economically reasonable infrastructure and the harmonization of regulations) appears to be a well-grounded idea. All the more so that the member-states have stopped challenging the EU’s competences and the Commission’s right to make the necessary decisions, unlike it happens in questions concerning energy security and relations with third countries.
The Problems Of Re-Economization
Re-economization does not mean that Russia-EU relations in the energy sphere will begin to improve rapidly. The behavior of Russian market players in the energy sector is far from free of political logic (especially when it comes to export supplies). Nonetheless, a strong economic component is present in it and most steps are dictated by the objective of drawing maximum profits from hydrocarbon sales. The problem is that an abyss lies between Russia’s understanding of market relations as something aimed at getting maximum profits and what Brussels believes is an economic way to ensure energy security.
In the first place, the EU’s reverting to the economic vision of energy security will imply a resumption of attempts to embrace Russia by legislation effective on the domestic European market. This will likely have a beneficial effect in the field of energy efficiency, resource saving and the development of renewable sources of energy. The Russian and European norms are identical there but Russia still feels a shortage of institutional opportunities to translate legislation into life, or by-laws, or enterprises specializing in the relevant segments of business (like the issuance of passports for the energy efficiency of buildings).
In what concerns energy saving, ecological aspects of energy consumption or the development of green energy, Russia and the EU have major mutual interests since the objectives of this country’s energy strategy do not contradict the measures being taken by the EU. More than that, the main discussions on toughening the regulations are held at both bilateral and multilateral levels, with Moscow and Brussels being equitable participants in them – namely, at the International Maritime Organization, within the frameworks of the Kyoto process, etc. This cushions off the EU attempts to encompass Russia into its regime. Also, this is a sphere that requires reciprocal steps on both sides and not only unilateral concessions from Russia.
The situation with the organization of markets is totally different. Moscow has implemented the same principles of market liberalization in electric power engineering and the oil sector that are propagated by Brussels. However, it has refused to apply the same approach to the natural gas sector. Russia’s Energy Strategy envisions the creation of fair conditions for the stability of all institutions and structures of the energy market, as well as the modernization of the sector, instead of the fundamental logic of liberalization (accepted in the EU). The Russian stipulations are not equivalent of liberalization, which appears to be only one instrument for attaining the objectives.
The EU’s return to the economic approach to energy security will inevitably imply that the EU will again demand the freedom of the market in Russia as a basis for leveling out conditions for its participants. In response, Moscow may propose establishing a regime that would be acceptable for producers and consumers alike, on the one hand, and would not be dictated by Brussels, on the other. And if the debates become heated, the risk of politicization of Moscow’s position will grow correspondingly. Moscow will demand equality as a partner in determining a new legal regime, as it happened with the Energy Charter Treaty.
The situation requires cautious negotiations within the framework of efforts to elaborate a new flexible mode of resource trading or a reform of the Energy Charter Treaty, as well as discussions on relevant articles of a new basic agreement between Russia and the European Union. The negotiations should fix both partners’ objectives – the optimal functioning of markets, defense of consumer rights, steady performance of the sector, and its modernization. Along with this, liberalization may be considered an option, along with today’s organization of the Russian market based on the key supplier’s monopoly on infrastructure.
This will help bring Moscow’s and Brussels’s strategic energy thinking to a common denominator at the current stage and leave both sides with a freedom of action and an opportunity for further evolution if (and when) Russia gets prerequisites for liberalization in the gas industry. Such measures will stand in line with the principle of subsidiarity, which enjoys so much respect in the EU and which stipulates that common goals may be reached by means that the contracting parties find acceptable at the lowest level accessible for them – in this case, at the national level for Russia and the Union level for the EU.
The solution will help eliminate the traditional Russia-EU standoff in a rather narrow sphere. Moscow speaks in a political language and quite often resorts to abstract notions (for instance, “equality”) without bothering to explain what this might actually mean when applied in a given area. In turn, the EU, represented by European Commission officials, makes accent on technocratic issues and practical solutions but does not rise to the conceptual level. Brussels refuses to admit, for instance, that a simple extrapolation of its laws to third countries means inequality and encroachment on democracy, and far from always offers adequate methods for resolving problems existing there or for achieving objectives similar to the ones the EU sets for itself.
The second problem that will inevitably spring up is the difference in understanding the notion of mutuality, the major one for both sides. For Brussels, mutuality means a leveling-out of market conditions and the maximum possible bridging of discrepancies between them. Ideally, this should be done on the basis of rules the EU has established for itself or, in the worst case, through negotiations within the framework of an international organization, with a further adoption (or change) of norms inside the EU (such as the ongoing discussions on financial regulation, bank reservations, etc.). I have many a time defined this approach to mutuality as reciprocity at a macro-level, or the creation of a basic level of some kind for all the enterprises in one or another sector and harmonization of conditions determining the activity of all players on the market.
Russia espouses a different approach. Russian companies see to it – with support from the state – that they get benefits on a par with their partners in each specific transaction. This criterion is applied with more vigor in the electrical energy industry and especially in the gas industry than in other sectors. The case in hand is a comparison of absolute benefits rather than an analysis of what both sides might obtain specifically, even though in a different degree. In a concentrated form, this thesis was voiced by Putin at the Russia-EU summit in Mafra, Portugal in 2007. He said then that investors were discriminated by the EU, not Russia. (Later, other Russian officials made similar statements.) Moscow’s approach can be described as reciprocity at the micro-level, which means the equality of specific parties to specific deals in terms of benefits, rather than the equitability of opportunities as a fundamental principle.
Notwithstanding the obvious difference, the macro-level and micro-level understandings of equality do not contradict each other. Rather, they are located at two opposite extremes of the same continuum. Every deal occupies a place somewhere between the two suggested poles and combines macro- and micro-reciprocity. Since Russia finds the macro-level unacceptable so far, why should it not build up the quantity of specific deals backed up by appropriate guarantees of legal stability for investors in each concrete case? And if the amount of transactions reaches a critical value, the pressure towards a rapprochement will emerge at the macro-level, too. The type of this rapprochement will be decided by companies which know their field of operations through and through, rather than by orders from above.
This approach is already being practiced in a number of narrow segments, for instance, in the sectoral dialogues Russia is conducting with the European Union as part of efforts to build a common economic space. The parties are actively discussing the harmonization of practices in the fields of ground transportation, construction and energy efficiency.
Finally, problem number three is the difference in relations between the government-controlled and private sectors in the EU and Russia. The Europeans imagine business in Russia as something shepherded by the authorities, deprived of independence, interests or initiative. The extreme form of such visioning portrays Russian businesses exclusively as a lever for the solution of foreign-policy tasks set forth by the government. In contrast, the EU-based business is conceptualized as an independent player steering its actions in conformity with the general European and member-states’ legislations and tethered only for the sake of benefits of the internal market. Businessmen also take on the role of equitable partners in a drive towards achieving market unity and developing foreign economic relations. Sometimes, they are featured as the European Commission’s allies in opposing national governments.
Quite obviously, both descriptions are overly simplified. However big an influence the Russian government might have, for example, on Gazprom, the corporation has its own commercial interests all the same. On the other hand, EU manufacturers do not enjoy absolute freedom from political impacts and especially from the pressure or support from their countries of domicile. And yet, it would be totally unreasonable to deny the differences. Once again, it makes sense here to speak about continuum. At one of its extremes there stands total influence by the state and at the other, full freedom of commercial players. Companies are not found at the extremes – they are positioned everywhere in between and are dynamically moving along this improvised scale.
It makes sense to develop dialogue between businesses – an independent dialogue rather than one mediated by state organizations – to achieve a better understanding of each other. In the energy sector, for example, this dialogue might unfold within the frameworks of associations – the EU-Russia Industrialists’ Round Table, the European Union of the Natural Gas Industry (Eurogas) and the Russian Gas Community, Eurelectric and associations of Russia’s power-generating companies. Also, it would be useful to include as many business executives as possible in sectoral dialogues, to listen to their opinions and to stimulate the convergence of viewpoints in order to lay down a foundation for further legal solutions.
Re-economization of the EU’s energy security benefits both Russia and the EU, as politicization of the sphere leads but to an impasse. Still, we must be prepared for an activation of somewhat forgotten or yet incompletely shaped contradictions – the problems of legal rapprochement and liberalization, the differing perception of mutuality, and the dissimilarities in building dialogue between the private and government-controlled sectors.
The situation looks serious but far from hopeless. The depoliticizing of interaction and the transition to a more down-to-earth cooperation should facilitate efforts to overcome problems and will exert an encouraging effect on relations between Moscow and Brussels in the energy sector. The main thing is to avert a situation where the difference of viewpoints regarding the quality of economic partnership might ignite mutual irritation and a yet another revival of attempts to resolve economic problems by political means.
Tatyana Romanova is an Assistant Professor at the International Relations Department of St. Petersburg State University. She holds a Doctorate in Political Science.
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