RUSSIA/US/EU: 'Security thinking' fuels energy dilemma

Analysis

Competing energy trade policies that feed off each other are in large part responsible for the energy security 'dilemma' that both Russia and the EU are facing. For example, the Kremlin's state-focused approach to the development of domestic energy resources and their delivery to international markets provokes strong Western criticism. Yet Russia's policies are, in turn, reinforced by this reaction. The parties' inability to break out of this vicious circle reflects their growing inclination to perceive energy relationships in terms of traditional security.

Russian stance.Russia bases its energy security on several strategic considerations:

• The state already holds controlling stakes in the country's largest hydrocarbons companies, and this consolidation trend is likely to continue. The pipeline networks also remain overwhelmingly in government hands (see RUSSIA: State-led oil industry becomes a reality - March 20, 2006). The ostensible rationale behind the current nationalisation drive is to ensure that the Russian people -- and not oil companies or end-consumers -- reap the benefits from the exploitation of Russia's natural wealth.
• The government's attempts to diversify supply routes for Russian hydrocarbons are designed to encourage competition among Russia's Asian and Western customers (see RUSSIA: Moscow ponders pipeline diversification - May 12, 2006). Earlier this month, President Vladimir Putin for the first time publicly put his name to Russia's ambition to export 30% of its oil and gas to Asia in less than 15 years.
• Russia demands non-discriminatory access for state gas giant Gazprom to lucrative downstream assets in Europe. Russian officials view the obstacles encountered by Gazprom and its affiliates as unfair business practices. They believe that West European governments and rival European gas companies are behind attempts to block Gazprom's expansion.
• The Kremlin does not admit to using energy supplies as a 'political weapon', although it certainly regards 'energy power' as instrumental to achieving political goals unrelated to energy (see RUSSIA: Kremlin exudes confidence and ambition in G8 - July 14, 2006).

Western position.As consumers, West European states ascribe a different meaning to energy security:

• They seek to reduce dependence on the import of hydrocarbons and expand the use of alternative fuels for greater energy self-sufficiency.
• The West is keen to reduce government intervention in international energy trade. Concern is mounting on both sides of the Atlantic over the tightening grip of 'national champions' on the supply of oil and gas. US Senator Richard Lugar said in a speech on energy security this month that 79% of world's oil is supplied by state-controlled companies (see UNITED STATES: Energy policy reform efforts strengthen - September 7, 2006). On the demand side, non-European states -- especially China and India -- are rapidly becoming the largest energy consumers, pushing up energy prices and diverting gas away from the European market. Indeed, Russia itself is a very large energy consumer.
• The West remains keen to engage with Russia in order to maintain a regular and friendly political dialogue. This is so despite the common perception in Western Europe and especially the United States that Russia remains an adversary and a security 'black box'.

Dual approach. Two distinct approaches to Western energy trade with Russia can be distinguished:

1. US approach. The United States does not receive any significant share of its oil or gas supplies from Russia. This fact influences its two-pronged policy to Russian energy. On the one hand, Washington encourages Moscow to open up its natural resources sectors and make them conducive to investment by trans-national corporations, as this would benefit US-based companies. On the other hand, it seeks to limit the influence that Russia projects -- and aspires to project -- internationally, using its energy exports:

   • Washington wishes to undermine Russia's quasi-monopoly in re-exporting Central Asian gas by supporting transportation networks that would bypass Russia on the way to Europe and the Mediterranean (see AZERBAIJAN: BTC pipeline hails political triumph - June 13, 2006).
   • It also aims to prevent Moscow from pressuring the CIS states through energy price manipulation. The economic viability of Ukraine and Georgia as democratisation showcases is one of US policy priorities in the post-Soviet space.
   • Washington would like to discourage Moscow's project to supply energy to China -- not so much out of fear of China's rise as out of concern that larger amounts of oil and gas earmarked for Asia would leave less for the competitive global and traditional European markets.

   In this context, Russia's ambitions to direct 30% of its energy exports to Asia in the next decade will raise concerns. Estimates show that Russia will find it difficult to exceed a 15% target without dramatically reducing exports to the West.

2. EU policy approach.The EU is concerned primarily with Russian gas supplies, on which many European countries are becoming increasingly dependent (see EUROPEAN UNION: EU to address security of gas supply - January 6, 2006):

   • Lack of investment in Russian gas exploration and development, especially in the Far North and East Siberia may result in Gazprom's inability to meet supply targets in the next decade.
   • Russia's use of gas exports to pressure Ukraine and Moldova on the EU's eastern periphery clashes with Brussels's preferences for their development. The EU is interested in constraining Moscow's influence over these states.
   • Russia's reliance on strong bilateral energy relationships with some of the large EU states -- notably, Germany and Italy -- is also a problem. Such relationships are dividing the EU and precluding the formulation of a common energy policy vis-a-vis Russia.

Policy limits.EU concerns have so far failed to translate into a united energy policy towards Russia, due to several factors:

• Many EU states favour national champions in the energy field, whose strong position domestically and internationally is valued more than a common EU energy policy (see EUROPEAN UNION: Nationalist response to liberalisation - March 8, 2006).
• European national champions seek to develop privileged relations with Gazprom, which has acquired monopoly on the export of Russian gas.
• Individual EU countries have different shares of Russian gas on their energy balances. For example, Germany has contracted some 60 billion dollars worth of gas to be delivered via the North European Gas Pipeline (see RUSSIA/EU: New pipeline will harm transition states - January 9, 2006), while Italy is also planning to receive Russian gas via Turkey. Clearly, these states have a stronger inclination to engage with Gazprom than other EU members.

Outlook.Chronic volatility in the Middle East, Africa and Latin America creates an opportunity for Russia and the West to build energy partnerships based on strong political engagement and mutual investment. Yet until now, such partnerships have not materialised due to the lack of consensus on the fundamentals of energy security. Frictions over conflicting policies that Russia and the West pursue in what Moscow considers to be its legitimate 'sphere of influence' will exacerbate tensions over energy policy even in the long run.

The EU will persist in its attempts to diversify sources of energy imports, placing a special emphasis on the Caspian. At the same time, Brussels will be cautious not to spoil relations with Russia over diverging approaches to the CIS. By contrast, the United States will continue with its harsh criticism of Russia's energy policies and step up efforts to enhance energy security of the friendly regimes in Eastern Europe and the Caucasus.