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RA in the FT: Rolling Over to the Kremlin’s Manipulation

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Today Robert Amsterdam has a by-lined article published in the Financial Times about energy security, as part of the Energy 2007 special supplement.

Rolling over to Kremlin’s manipulation By Robert Amsterdam Published: November 9 2007 04:36 | Last updated: November 9 2007 04:36 On September 25 the Financial Times published a letter from Alexander Medvedev, Gazprom’s deputy chairman, trumpeting his company’s dedication to deepening Europe’s “energy security”. When Russia and other petro-states are eager to market themselves on this concept, we have a serious problem of definition. Whose security, we must ask, are we talking about?

In the European Union, energy security has gradually become a misnomer: a concept that has been rhetorically hijacked to empower suppliers and constrain the options of importers. Countless bad policies have been designed in the name of this gospel imperative, resulting in a radical fall in competition, an increase in political vulnerability and a general erosion of the rule of law.A large part of the problem is Europe’s increasing dependency on imported Russian natural gas, and its inability or unwillingness to respond coherently and collectively to new patterns of resource nationalism. Europe’s narrow fixation on “security of supply” has facilitated numerous developments in Russia, including the passage of legislation to guarantee state monopoly over the export pipelines, a refusal to ratify the Energy Charter Treaty, non-transparent pricing arrangements, and rapid acquisitions of energy distribution assets in the hearts of importing countries, all of which have combined to diminish the environment for competition.Meanwhile, the Kremlin has engaged in an activist foreign energy policy to co-ordinate activities with other energy exporters, resulting in a further carve-up of markets and fewer supply options for Europe. The most tangible result of these efforts was the 2006 memorandum of understanding between Gazprom and Algeria’s Sonatrach, which theoretically puts 69 per cent of Italy’s natural gas imports under the control of one distributor, marking the beginning of the gas cartel controversy.Italian consumers were alarmed by the agreement, and even Paolo Scaroni, the chief executive of Eni, warned in Brussels that an alliance between the top three or four gas exporters would be more powerful than the Organisation of the Petroleum Exporting Countries.Then, at the end of last year, Eni signed a big deal with Gazprom, making it the company’s number one customer in the world. Subsequently, last June, Mr Scaroni and Romano Prodi, Italy’s prime minister, invited Russian officials to Rome to announce the signing of the South Stream pipeline project, dealing a deathblow to the competing Nabucco pipeline, which was designed to increase diversity of suppliers to Europe. Eni’s press release at the time stated that the project “will significantly contribute to improving the security of energy supply for the European Union”.Russia’s skilful gambit in Italy is not an isolated example of the manipulation of the energy security concept. Energy security is also regularly deployed as the rationale for the preferential relationship between Germany and Russia, and their planned undersea Nord Stream pipeline. Nord Stream is conservatively estimated to cost three times as much as an overland pipeline route.Citing the need for energy security, bilateral deals such as this are struck between individual European countries and Russia, driving a wedge between member states, diminishing their bargaining leverage as customers and leading to greater political influence for Moscow.Those left in the lurch, such as Estonia and Poland, are often accused of harbouring historical hang-ups, rather than being recognised as pursuing legitimate concerns. There is also a powerful coercive element to Russia’s ability to promote bilateral deals ahead of multilateral arrangements.To make matters worse, the pursuit of energy security has in many cases led Europe to forsake the rule of law in the name of scarcity. Although Russia is legally bound by its signature of the Energy Charter Treaty, few in Europe are willing to press Moscow on this point.Bowing to intimidation, Europe has largely ignored unlawful expropriations and bullying of foreign investors in Russia, and has generously overlooked politically motivated supply cut-offs to former Soviet states. Europe needs to realise that only through security of competition can genuine energy security be attained. Beyond signing a fast supply deal, member states should consider a more sober definition of energy security, responding to three criteria: independence from geopolitical forces; independence from market dominance; and reliability, ensuring that the system responds to emergencies, even during price disputes.Energy security may seem like a positive term, but until Europe under- stands what it means, it does more harm than good.Robert R. Amsterdam is a partner at Amsterdam and Peroff, a law firm. He is international defence counsel for Mikhail Khodorkovsky