EU needs a joint response

How should the world, and in particular the European Union, deal with an increasingly assertive Russia? The case for a joint response to Russian oil and gas imperialism is overwhelming. Yet Germany and others prefer to deal with Russia on a bilateral basis, often undermining the wider EU interest in the process. If handled badly, Russia’s energy diplomacy has the potential to divide the EU just as much the US-led war against Iraq did three years ago.

Russian oil & gas "imperialism"? Could you please make the case that there is any imperialism in Russian energy policy?

• the Ukrainian spat is either a case of bringing market prices to a relationship previously marked by political factors, or a demonstration that Russia cares more about supplying Europe than about making any political point in Ukraine, as it restored deliveries to Ukraine as soon as Ukraine diverted any European-bound gas. In the first option, describing the imposition of market prices as imperialism is possible, but probably not what you have in mind... In the second option, Russia demonstrated once more its commitment to reliable deliveries of gas to Europe.

• the current war of words between Gazprom and Blair/Barroso/Cheney (note the political affiliation of those involved, as it is pretty relevant) was launched by the West, not by Russia. Why is it that when Russia seeks other clients, it is "blackmailing" Europe, but when Europe is seeking to diversify supplies, it is somehow not theatening Russia? This is a co-dependent relationship, and both parties must be careful with their words, not just the Russians.

So, where's the imperialism?

Dick Cheney, the US vice-president, last week raised the issue in a characteristically blunt speech in Vilnius. He accused Russia of using oil and gas as “tools of intimidation and blackmail”. His speech was interpreted as a hardening of the US position ahead of the St Petersburg Group of Eight summit in July. Mr Cheney’s remarks were met with some alarm inside Russia, although they hardly made the news headlines in continental Europe.

But the continental Europeans took note of a recent statement by Alexei Miller, chief executive of Gazprom, who threatened to shift investment out of Europe unless he was allowed to invest in the downstream energy distribution business in the EU. Gazprom has recently signed a deal with BASF of Germany that would give the Germans access to a Russian gas field in exchange for an increased Gazprom stake in a German gas distribution company.

Again, please do not shift the order of things. Miller's declarations came after it had become obvious to all that even supposedly liberal Blair would not tolerate Gazprom entering the UK domestic gas market (as revealed in the columns of your own newspaper) AND after Europe started fretting noisily about growing dependence on Russia and the need to find alternatives. Russia is considering alternatives to Europe in the face of its absolute dependence on Europe as a client for gas exports, at a time when that client makes hostile noises about it. How is that unreasonable?

Germany remains Russia’s favourite partner within the EU – and a willing accomplice in a diplomatic game in which Russia plays EU member states off against each other. Angela Merkel, the German chancellor, remains committed to the special relationship with Russia, although her personal relations with President Vladimir Putin are not nearly as warm as those of Gerhard Schröder, her predecessor. At the end of the recent Russian- German summit in Tomsk, she spoke openly about differences of opinion over energy and Iran. By the standards of Russian-German summits, the meeting in Siberia did not go well on a personal level.

But one should be careful not to misinterpret Ms Merkel’s lack of personal rapport with Mr Putin as signalling a volte-face in German policy towards Russia. In particular, Ms Merkel continues to support the Baltic pipeline project, a joint venture between Gazprom and Germany’s BASF and Eon. The whole idea of this pipeline is to supply Russian gas directly to Germany and other west European countries, bypassing Poland and other east European countries.

There are very good reasons to bypass Poland - the main one is that thye do not see a pipeline as a joint endeavor, but only as a tool of blackmail and confrontation. The existing Yamal-Europe pipeline through Poland has been a headache for all parties, and it is understandable that neither the buyer not the seller of the gas are too keen to see their commercial transactions held hostage by a third party which uses the pipeline as a weapon. A pipeline is only as reliable as its weakest link, and Poland has proven not to be a reliable transit country.

The project is a relapse into the tradition of European bilateralism – although not quite on the scale of the Hitler-Stalin pact, as Radek Sikorski, the Polish defence minister, unwisely claimed. But the Poles and other east Europeans have good reason to be concerned about German-Russian deals at their expense. This pipeline allows Russia to cut off gas supplies to Poland and others while maintaining steady deliveries to Germany. There is no question that this pipeline will make Russia’s east European neighbours economically more dependent and politically more insecure.

By saying that Poland should be able to retaliate to Russia cutting it off by siphoning gas to Germany, you are making the point that gas deliveries are not commercial endeavours, and are political tools. That makes your earlier criticism of Russia supposedly using the gas weapon absolutely hypocritical. Either it is a weapon, and you cannot blame just one side for using it, or it is not, and your political arguments against the Baltic pipeline do not stand.

There is a clear need to reshape EU policy towards Russia. As Michael Emerson of the Centre for European Policy Studies in Brussels points out [link added], the EU should opt for a two-pronged policy response. It should formulate a joint position in the short run and reduce its dependence on Russian gas in the long run.

The only difference between now and a few years ago is that the UK is suddenly becoming a gas importer. France, Germany and Italy (and others) have long had to import most or all of their gas, and have managed to do this for years without it becoming an issue. They have been managing their imports from Russia (and previously, the "evil empire", Soviet Union) for close to 40 years now without a hitch. But now that the UK suddenly needs to think about importing gas, it becomes a major European concern? Give me a break. This is a UK problem first and foremost, let's not make this into a European problem.

For the time being, the EU should put maximum pressure on Russia to ratify the energy charter, which sets the ground rules for the trade and transport of energy in Europe. It was agreed by 49 European states in 1994 but Russia continues to refuse to ratify the treaty because it objects to the charter’s draft transit protocol. This would oblige Russia to open up spare pipeline capacity to foreign suppliers. José Manuel Barroso, president of the European Commission, and Mr Putin met in March to discuss this issue but without success.

Imposing third party access to Russia's pipelines is an apparently innocuous way to call for the break-up of Gazprom and for giving access to Russia's hydrocarbon reserves to Western investors. Implicitly, it asks for Russia's population to start paying full market prices for gas - when cheap gas is, very literally, whas has saved the country in the 90s, by providing at least the vital heat and power needed to survive. While there are arguments that the domestic energy sector in Russia could be made more efficient, including via price increases, this is really a domestic Russian issue, and preempting that debate for the profit of a few Western oil&gas companies is pretty selfish or short-sighted, not to mention intrusive and rude. We want Russian gas - well, we'd better deal with the fact that the Russians have the absolute right to set the terms under which that gas is produced and transported within their country.

The EU should also agree on a mutual support mechanism. This would be similar to Nato’s mutual defence clause. If Russia ever cut off gas supplies to any single EU member, other EU countries would be obliged to make up the shortfall. Such a mechanism could also go some way to neutralise the political fears caused by the Baltic Sea pipeline project.

Again, this shows a terrible combination of hypocrisy and inconsistency.

• On the one hand, why would market mechanisms fail in such a situation? If one country were to be cut off, price signals would make it profitable for other players in the European gas market to divert gas to that country to take advantage of thre arbitrage opportunities created by the artifical shortage. Or are you admitting that market solutions do not work? If you were calling for further liberalization of the markets, it would at least be consistent. But this call for "solidarity" shows that you do not even believe in your own grand liberal theories;

• Again, the only new issue today is the UK's sudden dependency on imports. What you are calling for is effectively for countries that have worried about security of supply and have built the infrastructure to deal with that preoccupation to subsidize the one country that has made no effort in that respect and now hopes to intimidate others, on spurious ideological arguments, into sharing their more reliable imported gas (which came at a cost) with it. Profits are privatised, and costs are socialised... The markets in action, again?

• Finally, I'd be curious to know what market mechanisms are going to build the pipelines and other infrastructure needed to provide alternative gas sources to the countries that would be cut off from Russian gas. Or who should pay for this? Taxpayers or consumers? From the targetted countries or from all of Europe? Pro rata consumed volumes, imported volumes, Russian volumes? It's very easy to talk about "solidarity" without describing what you have in mind, and who will pay for it - or who decides on these questions. Politicians? Which ones?

The most intelligent long-run response consists of further energy liberalisation, securing alternative supply routes such as the planned pipeline project from the Caspian basin, and investing in liquefied natural gas, which is easier to transport.

After writing for two paragraphs how non-market solutions are needed, you now come back with the incantation for "markets, markets, markets". Excuse me if I don't take this seriously.

Neither big pipelines not big LNG projects are built on the basis of market mechanisms. They require long term "take-or-pay" contracts (i.e. the buyer has to pay whether it needs the gas or not) that cannot be cancelled; price formulas set for the whole duration, and strict contractual terms on all parties in the chain: the gas provider, the transporter and the buyer. This is the only way to finance these investments, as they need a minimum of visibility for anyone to pitch in the multi-billion dollar amounts needed before a single molecule can flow. All oil&gas companies know this, and use the same kind of contracts, becuase it's the only way this business works. Not acknowledging this and then pontificating about the reforms needed in the sector is tiresome, frankly.

Perhaps the single most important long-term measure – currently resisted by many EU states including Germany – would be to rethink their policy to phase out nuclear energy. Nuclear energy would not eliminate the need for gas imports but could play an important part in a strategy to reduce dependency on an increasingly aggressive monopoly supplier in the long run.

We've been discussing this in the Chernobyl thread, but the dichotomy between gas and nuclear is a false one. First of all, we should be worrying about energy conservation, and then we should focus on renwable sources (wind, solar, biomass). The debate about nuclear vs hydrocarbons should come a long way after.

This is not just a problem of one-sided dependency. Russia is just as dependent on the EU as the EU is on Russian gas. Russia’s reliance on oil and gas revenues has also distracted from economic reforms and contributed the country’s more authoritarian posture.

And the loud and repeated noises from Blair and Barroso (and now Cheney) about the need for Europe to diversify supplies, and for Russia to be forced to open its reserves and pipelines can only be seen by them as acts of aggression, intimidation and, yes, blackmail.

This is why Russia has become increasingly dangerous to the rest of Europe. There is a clear case for an effective EU policy towards Russia. Unfortunately, the EU is currently in the middle of a relapse into economic patriotism. Russia tests the EU’s ability to protect its interests – with the outcome uncertain.

Frankly, the only "economic patriotism" I have seen increase in recent months is that of the UK, which suddenly sees that "markets" don't solve all problems in the energy sector and tries to blame the more prudent Europeans on the continent for its self-inflicted woes - or the Russians, which have done nothing to deserve this.

So let's stop blaming the Russians, thinking that "markets" can solve what they very obviously will not (from your own writings), and let's start focusing on the very real issue of own wasteful and unsustainable use of energy.