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A Prescription for Europe, Part 1

eu040308.jpgThe following is the first installment of a series of short policy papers we have prepared, outlining some recommendations for the European Union to reduce dependency on Russian natural gas, increase competition, and deepen energy security. You can download the full version of the paper here. Below is just the introduction. A PRESCRIPTION FOR EUROPE Part 1: Options and Opportunities for Europe to Ease Dependency on Russian Natural Gas Robert Amsterdam, Derek Brower & Tom Nichols April 4, 2008 I. Introduction There are myriad factors contributing to the European Union’s addiction to Russian natural gas, but a lack of awareness is not one of them. In recent years, there have been serious policy efforts and various business initiatives designed to reduce this dependency, yet most have largely failed. Voluminous research and analysis from well known think tanks and knowledgeable individuals have made very clear warnings, yet there is a relative paucity of viable policy proposals. What has prevented the European Union from successfully diversifying its energy suppliers (and thus deepening security), and why should consumers and citizens be concerned about Russia’s domination of the market? What options and opportunities are available for the European Union to improve energy relations with Russia?

This paper aims to identify some of the principal obstacles and challenges which have inhibited Europe’s response to the growing politicization of energy exports by from Russia, and shall set forth a series of proposals for both government and industry leaders to alleviate the problem and help avert a future supply crisis.The policy proposals outlined below are intended to contribute to the EU-Russia energy dialogue, and advance discussions of how a more competitive and more secure energy market can be established for the mutual benefit of both suppliers and consumers. The urgency of some of these new ideas has increased with the passage of time, as some of the underlying issues behind the current problems were visible years ago, when direct action could have had a greater impact. Europe can ill-afford to waste another five years passively watching (and, in some cases, actively participating) in the erosion of consumer security and possible subjugation of sovereignty to a foreign authoritarian state with monopoly control over energy exports.For some time we have argued that there is problematic methodology driving Russia’s energy relations with Europe, guided by the principles of disaggregation, asymmetry, and cooptation.Energy “disaggregation” refers to Russia’s success in preventing a common EU energy policy, and establishing a pervasive and problematic pattern of bilateral energy deals across the continent. Mark Leonard and Nicu Popescu of the European Council on Foreign Relations documented this trend in a report last year, pointing to Russia’s “picking off individual EU member states and signing long-term deals which undermine the core principles of the Union’s common strategy.” Europe’s disunity on energy is recognized as Russia greatest advantage.This contagious bilateralism has made collective bargaining, transparency, and the institution of an equitable rule-based system to de-politicize the energy trade near impossible. In 2007, we saw Russia’s disaggregation agenda aggressively advanced with major pipeline deals involving both Italy and Germany, an agreement with France’s Total on the Shtokman Field, and the ongoing quid pro quo in the form of foreign investment hostages with both BP and Royal Dutch Shell.The growing interdependence of Europe and Russia is a natural and, in theory, positive development that can strongly contribute to security of supply and security of demand for both sides. However, this interdependence has not developed within a market context of equal access, and frequent “asymmetries” have been the result, much to the detriment of Europe’s interests. Gazprom’s monopoly over the export market, ordained by law, is just one of Russia’s many anti-competitive measures in the energy sector, which have combined to significantly diminish the range of alternatives available to importing countries, creating great imbalance in the negotiating process.Further contributing to the asymmetry are aggressive restrictions on foreign participation in Russia’s strategic sectors (such as gas and oil), and a notable lack of adherence to international norms in terms of rule of law and property rights. While Gazprom went on an unprecedented spending spree in Europe over the past number of years to gain direct access to the consumer, Russia has not allowed comparable acquisitions by European companies that would give balance to the relationship and represent real interdependence.Lastly, we have seen Russia’s cooptation agenda greatly advanced in the past year, whereby alternative energy suppliers and projects outside of Moscow’s control were successfully made economically unviable and unattractive by pre-emptive deals and pacts. This was most successfully demonstrated by Russia’s memorandum of understanding with Algeria’s Sonatrach, which in theory would have put 69% of Italy’s natural gas under the control of one group – a frightening prospect which may have motivated the energy firm Eni to sign one of Gazprom’s largest supply deals in the world. Russia also made advances and suggestive comments about the formation of a gas OPEC, which although critics dismiss as an impossible project, would still be an incredibly powerful group given its ability to coordinate markets and water down competition.Across the globe, Russia has been far more proactive than Europe in locking in agreements with other energy suppliers from Venezuela and Bolivia to Iran, Kazakhstan, and Turkmenistan. Their most recent Central Asian pipeline deal, which observers say cost Moscow far more than was anticipated, is being viewed as a political masterstroke to defeat the competing Nabucco pipeline, which would have offered Europe natural gas outside of Russia’s direct control.There is no simple panacea for Europe’s current dependency, but it is hoped that if both Brussels and the market can begin to ask the right questions about Russia’s conduct in energy policy, than perhaps some fresh ideas and constructive, pragmatic proposals can be undertaken. We are quickly approaching the point at which inaction will exact a far greater cost upon the EU than proactivity, so the simple message to take away from this paper is that the time is now for Europe and the international community to demand that Russia observe international law and de-politicize the energy trade. The benefits of a new rule-based relationship between consumer and producer will contribute to long-term sustainability for all parties.