Russian Policies and Western Choices

Tuesday, February 13, 2007
10:00 AM – 12:00 PM

Presenter:

Vladimir Socor, Senior Fellow, The Jamestown Foundation

Discussant:

Ambassador Keith Smith, Senior Associate, Europe Program, Center for Strategic and International Studies

Report:

– A Compendium of Articles by Vladimir Socor

Overview:

On February 13, The Jamestown Foundation hosted an event featuring Vladimir Socor, a Senior Fellow at The Jamestown Foundation, and Ambassador Keith Smith, a Senior Associate in the Europe Program at the Center for Strategic and International Studies. Entitled "Russian Policies and Western Choices: Energy Dependence Versus Energy Security," the discussion focused on three main trends in Russia’s energy strategy, Europe’s response and the future of transatlantic relations in the face of adverse energy supplies:

– The rapid growth in Russia’s energy market share poses an array of challenges to the West and Central Asia since Russia has both a monopoly on energy supplies, a growing hold on energy transportation and inroads into traditionally Western oil markets.
– The West’s misconceptions about Russian energy policy and ambitions paralyze its ability to form a response, let alone a cohesive strategy.
– Alternatives to Russian energy transportation dominance exist, such as the Nabucco project and the revived effort to build a Trans-Caspian Pipeline; these alternatives, however, should not be considered "substitutes," but rather additions.

Summary:

Vladimir Socor divided his lecture into three concise parts, presenting a clear picture of Russia’s ambitions in the global energy market when considered against Moscow’s actions in the last 12 months and the West’s lack of response. During the course of 2006, there was a marked escalation in Russia’s: 1) willingness to interrupt the flow of supplies to first the transit nations (Belarus, Lithuania and Azerbaijan) and later Western nations (Poland and Germany); 2) rapid advances into downstream markets and traditional Western oil markets (Algeria); and 3) unilateral reaping of the benefits of Western funding from the IPO of state-controlled Gazprom.

Throughout 2006, Russia made numerous "bilateral" deals with Western energy majors enmeshed in opaque terms and lacking political accountability on the Russian side. In what he terms a new "Stockholm syndrome," Socor pointed out the trend of Western energy companies being pressured to turn over their Russian assets to the Kremlin when faced with trumped-up environmental violations and other charges. He cited the recent example of Gazprom’s seizure of Royal Dutch Shell’s majority stake in the Sakhalin-2 oil and gas project. Shell, hitherto the project operator, surrendered under the threat of multibillion-dollar environmental damage suits and revocation of licenses by the Russian Nature Inspectorate, in a largely farcical campaign. Socor believes Western energy companies are making a mistake in folding under pressure from the Kremlin without even making an effort to hold Russia to the terms agreed upon in their contracts.

Socor continued with a quick recap of the West’s "assumptions," or rather misperceptions, about Russian intentions. First, he debunked the widely held belief of "reciprocal access" to European markets for Russia and Russian energy projects for Europe by using the aforementioned examples of hostile Russian takeovers of Western energy companies’ stakes in Russia-based projects. Second, the assumption of "mutual dependence" — Western demand and Russian economic dependence — falters when considered against Russia’s plans to expand energy deliveries east to China, Japan and Korea. Socor described the current polarized energy market as consisting of a single seller, Russia, and a multitude of competing buyers, the unaligned European nations. The third assumption of the West holds that Moscow cannot afford to exclude or mistreat Western energy companies because Russia’s state companies do not have sufficient means to invest in energy projects on Russian territory. However, Moscow successfully challenged that proposition through the IPO’s of Gazprom, Rosneft and other state companies, which quickly raised multibillion-dollar investment funds on Western capital markets.

The final assumption that Socor highlighted was the West’s hope that Russia’s ratification of the Energy Charter Treaty and signing of the attendant protocol would help the West overcome its collective vulnerability on energy security. It is Socor’s personal opinion that Russia’s refusal is in fact a blessing in disguise for if Putin had signed the agreements, then the EU would have avoided acknowledging Russia’s unilateral, strong-arm tactics and would have failed to make the hard decisions that are needed in order to confront this growing threat. Russia is both a "strategic adversary" and an "indispensable supplier" — a "square that the West must circle," according to Socor. He suggested that the transatlantic community reduce Russia’s market share by gaining direct access to Caspian energy resources — Kazakhstan, Turkmenistan and Uzbekistan. However, Russia is already trying to control the transit of Caspian energy by routing it through southern Russia and then onto European markets.

The current situation between Russia and the West is "without parallel" — Russia is the world’s number one supplier of gas and number two supplier of oil, and has geopolitical ambitions to control supplies out of Central Asia, giving the Kremlin even more leverage over the EU and to some extent over the United States. Socor believes that current EU and U.S. policies are insufficient and unsubstantial, citing the U.S.-Russia Energy Partnership and EU-Russia Energy Dialogue as both late and lackluster endeavors. Socor ended with several suggestions to ameliorate the current conditions of tight energy supplies and Russian bullying: reactivate U.S. leadership in the Trans-Caspian project and create an effective and coherent joint EU-U.S. policy toward Russia through the vehicle of NATO. He cited U.S. Senator Richard Lugar’s speech at the NATO summit in 2006 as being full of creative and feasible ideas for how NATO, in particular, can successfully confront Russia’s growing monopoly of energy supplies.

Ambassador Keith Smith echoed many of Socor’s points and added depth to his arguments by offering a comprehensive description of the European political environment and in turn its implications for the situation with Russia and the transatlantic alliance. Having extensive personal experience in Russo-European energy affairs (Smith is the former U.S. ambassador to Lithuania), Ambassador Smith gave several personal anecdotes of first hand experience with an "unreliable Russia" — in 1992, while staying in Estonia, the ambassador was forced to sleep with all his clothes on at his hotel because Russia had turned off energy supplies to Estonia. Between 1997 and 2000, Russia cut off energy to Lithuania nine times and each time with only little warning. Even when faced with the cut offs to many Eastern European countries, Smith pointed out that Paris, Rome, Berlin and Madrid blindly continue to maintain their mantra of Russia being a "reliable" energy supplier. Energy cut offs only appear to matter to Brussels if they affect Western Europe as they did most recently when Russia halted oil exports to Germany via Belarus from January 7-8 without any warning.

Smith remarked at length upon Socor’s point that Western oil companies and European national "champions" continue to hand over ownership stakes to Russia when threatened with bullying from Moscow. He observed that the EU’s reaction to Russia’s growing monopoly in the downstream European energy markets significantly contrasts with the EU’s reaction to Honeywell’s and Microsoft’s entries into the European consumer market. Although Brussels used the 1957 Treaty of Rome, the founding document of the European Community, to block Microsoft’s and Honeywell’s access to Europe, it will not do the same with Russia. He explained Europe’s reluctance as resulting from a combination of complex European politics and rivalries and Russian energy pressure.

His final observation highlighted the complexities of the Eurasian energy market that spans from the sources in Central Asia all the way downstream to the consumers in Europe and across the Atlantic in the United States. While Russia claims it is subsidizing the transit countries, such as Belarus and Azerbaijan, with low cost energy, the transit countries are in fact subsidizing Russia by allowing the cheap transportation of supplies through their countries. Smith concluded with a final example to underline the need for "reciprocal access." He noted that just down the street from the White House there is a Lukoil gas station, yet there is no U.S. equivalent of this in Russia. A Chevron or Texaco would never even be allowed to rent office space in Moscow.

During the Q&A period, Socor and Smith addressed a variety of queries from the audience ranging from an "oil OPEC" to Russo-Iranian relations. When asked specifically about his suggestion of creating a common European energy policy, Socor explained that there is urgent need for cooperation among supplier countries, transit countries and consumer countries and a forum for ideas to be proposed in order to confront Russia’s monopoly on energy. Responding to the question of whether Russia is seeking to create a "gas OPEC," Socor pointed out that the use of the term "OPEC" in the question is misleading because in the case of the gas trade there is only one export channel which Russia controls, however in the case of the oil trade there are a multitude of export channels and each exporting country controls its own.

When asked to elaborate on a possible Russo-Iranian partnership, Socor remarked that Iran is interested in a strategic economic partnership with Russia as it faces a continued U.S. blockade of investment. Socor believes current U.S. policy toward Iran should be reconsidered in light of Russia’s growing energy monopoly in Central Asia. Locking up Iranian energy supplies only plays into Moscow’s hands as it consolidates Russia’s control of the European market. Socor proposed two scenarios for the future of Russo-Iranian relations: 1) Moscow and Tehran come to the understanding that Tehran will only export east, while Russia maintains its monopoly of the European market; and 2) Moscow and Tehran agree to share the European market. Socor ended by emphasizing that the response of the West to any Russo-Iranian understanding should be a recommitment to the Nabucco project, which will ensure the transport of supplies from fields in the Caspian Sea to Central and Western Europe, bypassing Russia.

Directions:

The Jamestown Foundation

1111 16th St. NW

7th Floor Conference Room

Washington, DC 20036