Clarity is needed from Ukraine. Ukraine is part of the EU's energy problem: not only thanks to the Druzhba pipeline but because, with a GDP one-quarter that of Belgium, Ukraine is the sixth largest consumer of gas in the world.

James SHERR, Fellow, Conflict Studies Research Centre
Defence Academy of the United Kingdom [1]
Mirror-Weekly on the web, No 9 (638)

Will energy security be the death knell of Euro-scepticism? Or will it be the death knell of the EU? There might not be a third option.

In the days when security was mainly guaranteed by armed forces, those who championed the supremacy of the nation state could be confident that when collective security was threatened, Europe could rely upon NATO.

But today, when in the words of Russia's official energy strategy, it is energy which 'to a large extent determines [a] country's place in geopolitics', then NATO, in the words of its Riga Summit Declaration, can at most 'add value' to what only the EU can do.

But will the EU do it? Will it persuade Gazprom, Transneft and the Kremlin that they are dealing not with 27 'little platoons', but an integrated and toughly regulated internal market?

Will it enforce its longstanding principles of market liberalisation, transparency and competitiveness not only in defiance of Russia's energy giants, but the 'national energy champions' of some of its own member states?

Will it apply its oldest principle, solidarity, in support of members facing asset grabs, ultimata and supply cut-offs-and governments exposed to bribery and blackmail? Or will it fail to display the quality that Ernest Renan defined as essential to a nation: 'the sentiment of shared sacrifice'?

Without this sentiment, how can the EU 'move beyond' the nation state or even remain a repository of trust for new members and a pole of attraction?

Therefore, today's Euro-sceptic does not fear the power of the EU, but its fragmentation and impotence. Yet he can finally draw some comfort.

On 11 January of this year, the European Commission published a 22-pg document entitled 'An Energy Policy for Europe'. Its language is unusually forthright and its recommendations unusually bold.

Mindful not only of rising EU energy demand, but of 'external vulnerability'-'the progressive concentration of hydrocarbon reserves in a few hands', the 'discrimination and abuse' of monopoly and the overwhelming dependence of several member states on 'a single supplier'-its unmistakeable conclusion is that 'this situation cannot continue'.

'A common voice' in energy policy (which already exists in trade) has become 'crucial to geopolitical security', and energy must now 'become a central part of all external EU relations'.

This week, the European Council (heads of government) will meet to consider the Commission's 'communication'. Needless to say, it is most unlikely that they will endorse its most radical recommendation: the 'unbundling' of large, vertically-integrated national energy companies which, like mini-Gazproms, control energy networks, production and sales in their own countries.

Eleven EU members have already made the transition from 'managed markets' to competitive markets, with significant energy efficiencies and price savings for consumers. Yet for the time being, several others will refuse to follow suit. That is unremarkable.

What is remarkable is that the European Council seems set to adopt most of the Commission's remaining recommendations, including:

[1] supporting projects that promote 'diversity with regard to source, supplier, transport route and transport method';

[2] expanding nuclear power (which already satisfies one-third of EU aggregate electricity demand) as well as new sources of energy and new energy saving measures;

[3] strengthening the regulatory framework 'based on the highest common denominator' of best practice;

[4] adopting a Priority Interconnection Plan, including construction of a Power-Link between Germany, Poland and Lithuania and the Nabucco pipeline, bringing gas from the Caspian to Central Europe.

If implemented, these measures will have far-reaching consequences in themselves. They will bring the EU into partnership with the United States, Azerbaijan, Georgia and other countries seeking to develop transport routes independent of Russia.

They will address the most acute energy security problem faced by Lithuania and several other new member states: energy isolation, brought about by the eastward orientation of pipeline infrastructure and the absence of electricity connections to the rest of the EU. And whilst the Commission's call to break up national energy giants will not be accepted, the trend is against them.

They already are on the defensive politically and are coming under increasing legal pressure, because EU Directorate for Competition is enforcing Community legislation, and even the strongest are being reminded that the rules are the rules.

For Ukrainians to focus on the exceptions to these rules is to miss the point of the story. The European Union has begun to establish an integrated energy market and a liberalised one. But can it succeed in the face of determined opposition from Russia?
                               THE RUSSIA COMPLEX
The Russia complex is, as ever, a combination of overweening confidence and congenital insecurity. From the vantage point of Kyiv, Vilnius and Warsaw, Russia under Putin has acquired money, power and the determination to use both.

But from the vantage point of Beijing, Tokyo, Seoul and even Almaty, Russia is a country characterised by stark demographic imbalances, decaying infrastructure, dysfunctional governance and chronic underinvestment. It is this combination of ambition and vulnerability which makes partnership with Russia so difficult.

Where energy is concerned, this difficulty is felt in four respects:

(1) DIVERGENT ECONOMIC CULTURES. As Ukrainians well know, Russia under Putin has experienced a considerable re-nationalisation of economic power with a strong security service component. Like the defence sector in Soviet times, the energy sector is now seen by many as the engine of growth and modernisation.

Although leading Russian experts have exposed the deficiencies of this model, it has brought short-term prosperity and the appearance of international success.

This appearance of success makes it exceedingly difficult for the EU to speak to Russia with authority, let alone persuade it that its approach needs adjustment.

To Russia's energy mastodons, 'markets' exist wherever money-commodity relations exist, however unbalanced, inequitable or monopolistic they are.

But to the European Commission, monopoly is the antithesis of markets, which, in principle, mean choice for buyer and seller.

To Alexei Miller, CEO [predsedatel' pravleniya] of Gazprom, energy security is guaranteed by a strong vertical of integration and control: 'the regulation from a single centre of regimes of extraction, transport, underground storage and sales'.

From the Commission's perspective, it is guaranteed by an impartial and effective regulatory framework and by 'diversity with regard to source, supplier, transport route and transport method'.

(2) THE EMERGING GAS DEFICIT. The Russian fuel and energy complex has become an increasingly important prop for the authority of a state congenitally distrustful of decentralisation, alarmed by demographic trends and conscious not only of China's power, but the emerging aspirations of resource rich Central Asian states.

It is this which largely explains the Kremlin's arduous efforts to limit the presence, bargaining power and 'centrifugal influences' of independent energy actors, whether foreign or domestic (e.g. the former YUKOS).

Yet without major restructuring and market liberalisation, Russia will not meet projected energy demand at home or abroad.

Production at three of Gazprom's four major fields is already declining. Even to maintain current levels of production, the International Energy Agency calculates that 200 bcm [bn cubic metres] per annum will need to be produced in new fields by 2015: a project which qualified experts believe demands $11 bn p.a. in investment. But such investment is not taking place. In the oil sector, the picture is no more encouraging.

(3) AN AGGRESSIVE RATHER THAN PRODUCTIVE PATTERN OF INVESTMENT. Gazprom's current investment strategy appears to be focused on compensating for Russia's emerging gas deficit rather than remedying it.

Whilst under-investing in new fields and refurbishment of internal infrastructure, it has displayed a marked appetite for export infrastructure, downstream (i.e. foreign) acquisitions and non-gas projects, whilst conducting what Mikhail Gonchar calls an 'active hunt' for energy resources in other parts of the world.

In alliance with the Kremlin, it also seems determined to use every means at its disposal to derail new energy projects that exclude Russia, such as Nabucco and the South Caspian Gas Pipeline. Yet when pressed to say where the gas from Russia's own pet projects will come from, there are no reassuring answers.

Whatever the motive behind this behaviour, it would be perilous for the EU to reward it. By doing so, it will surrender its primary means of escape from Russia's already palpable energy crunch.

It will make itself increasingly hostage to Russia's energy deficit and whatever steps the Kremlin takes, or fails to take, to address it.

(4) GEO-ECONOMICS IN THE 'NEAR ABROAD'. The 'legacy' issues of inter-elite ties, similar bureaucratic and business cultures, as well as the multiplicity of economic linkages and dependencies means that energy will continue to provide Russia with opportunities for geopolitical tradeoffs and inducements to limit the sovereignty and samostoyatel'nost' [capacity to exercise independence] of neighbours.

Why should such opportunities not be utilised in future as they have been used in the past? Yet today there is a more worrying question.

Given the profitability of the EU market, the needs of the Russian economy and the Kremlin's fear of popular discontent, then upon whom will the scissors first close as Russia's resource constraints mount?

The answer is inescapable: energy dependent neighbours. Ukrainians have no reason to doubt this answer. Yet it appears that many once again deny it, preferring to believe that 'fraternal relations' will protect the country from the consequences of Russia's mistakes and Ukraine's own weakness.
Ukraine matters, and the EU knows it. It was, after all, the January 2006 gas cut-off that prompted the EU to reconsider the mantra that 'Russia is a stable and reliable supplier of energy'. But the EU does not know what to do about Ukraine except wait.

This is because it equates dvoevlastie [divided power] with paralysis, rather than ferment. In this it is mistaken. But apart from Yulia Tymoshenko, many of those best placed to point out this mistake are unconvincing communicators.

Clarity is needed from Ukraine. This is because Ukraine is part of the EU's energy problem: not only thanks to the Druzhba pipeline but because, with a GDP one-quarter that of Belgium, Ukraine is the sixth largest consumer of gas in the world.

New efficiencies and new investment demand an energy economy constructed on the basis of rules rather than deals. If Ukrainians who share this vision do not make themselves known in Brussels, then Ukraine's 'European course' will bear no resemblance to the EU's European course.

Clarity is also needed, indeed candour, to counter the danger that the EU, armed with more scepticism than knowledge, will make decisions that impact unfavourably on Ukraine. In other words, Ukraine needs to demonstrate that it can be part of the solution.

The first step in this direction has already been taken: the law on gas pipelines passed by the Rada and signed into law by the President on 6 February. But the 6 February model needs to be more broadly applied:

[1] against the proposed Bohorodchany-Uzhhorod gas pipeline, which would make the EU and Ukraine even more dependent on Russian gas and undercut part of the market rational for Nabucco;

[2] against the moves afoot to transfer stakes in obloenergos [oblast' level distribution companies] to Gazprom: yet a further step to circumvent the 6 February law;

[3] against plans (some well advanced) to grant access to Black Sea gas deposits on the basis of inter-governmental understandings with Russia rather than open market tender;

[4] against the final assault on Naftohaz Ukrainiy and the transfer of vital revenue from an entity which can be audited and monitored to another entity, UkrGazEnergo, which cannot.

Outside parliament, the other founders of the 6 February model need to become more cohesive and visible. Since absorbing the implications of the RusUkrEnergo saga and his own responsibility for it, President Yushchenko's instincts about energy security have been unerring.

His group of officials in the Secretariat and the National Security and Defence Council includes individuals of outstanding calibre.

But has the group become a team? Are European capitals aware of its existence? Are they generating a body of ideas and alternative policies that can be put to use once it becomes clear, even to the government itself, that the present course leads to surrender and penury?

Moreover, it is presidential institutions, not parliament, who must take the lead in responding to the three seismic shifts that have taken place in the geopolitics of energy since the end of last year.

[1] The first of these is the decision by Azerbaijan to defy Russia, assist Georgia and proceed with projects (including the Kars-Tbilisi-Baku railway) that promise to provide effective energy connections between the Caspian, the South Caucasus, the Black Sea region and Europe. This change of course has brought GUAM back from the dead.

[2] The second shift is the quiet but unmistakable realisation in Kazakhstan that the EU formula of 'diversity with regard to source, supplier, transport route and transport method' now serves its own interests and is coming within its means.

[3] The third is President Lukashenka's brutal realisation that his policies have left Belarus with no energy security at all. For the first time since 1994 the possibility of direct energy connections between the Baltic and Black seas is now open.

The questions before Ukraine is so inescapable that even the government understands it: is Ukraine to be a cavity in this matrix or part of the glue that holds it together?

Is the EU prepared to be part of the glue that holds it together? Despite the Commission's report, that is still in doubt, because too many dogmas, habits of mind and narrowly construed national interests stand in the way.

Clarity is therefore needed from the EU as well. It must ask itself what it wants in Ukraine, the South Caucasus and the Caspian, and it must ask itself what it will contribute in order to get it.

Only then will it be able to reformulate the old question with new authority: where is Ukraine going and with whom?

Material provided by Action Ukraine Report


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