Energy dialogue needs more pragmatism 0

Europe decided that there will be huge energy imports from Russia and that it will be dangerous, but never asked Russia what it thought on the subject.

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An interview with Vladimir Feigin, Director, Institute for Energy and Finance (Russia), and Pami Aalto, research fellow, Aleksanteri Institute, University of Helsinki (Finland), by Rita Rudusa

Mr.Feigin, you have been quoted as saying that if energy is an element of politics it is not necessarily a bad thing. This idea is at odds with the view commonly held in Europe, namely, using energy as a political tool is a dangerous practice. What are your arguments in support of your take on the issue?

Feigin: We must put things in context. To say that, in today's world, energy issues could be detached from politics is an attempt to play some card or other. Energy issues are being dealt with at a very high political level, G8 countries do it, the European Union, you name it. All big players understand that energy is a crucial part of their security policy, international relations. Energy has already entered politics whether we like it or not. If you look back, in the times of the Iron Curtain, it was the same; energy played a major role in political relations. For example, in the early eighties the question was whether to permit huge supplies of Soviet gas to Western countries. For purely political reasons, [US President Ronald] Reagan banned delivery of equipment for our gas pipes. Europe, on the other hand, made a political decision not to follow the American lead. Reagan did not want to have that dependence; he did not want to develop closer relationship with USSR. So, energy is an important element in international relations, in security policy etc. And, as such, it becomes political.

However, in the case of Ukraine and Belarus energy issues seem to go beyond a ‘regular political agenda’, do they not?

Feigin: We only have problems with CIS countries. With established partners, the Baltic states, for example, or Finland, we have no problems whatsoever. And Finland has 90 % dependency on Russian energy supplies! We have stable commercial relationships based in international practice; we follow certain procedures in signing contracts and prolonging them.

But, with CIS countries, for various reasons, energy has recently become a burning issue.

What are those reasons?

Feigin: Firstly, our relationships were based on transitory principles; they were by no means true business relationships. Prices were agreed at the governmental level and producers had no say in it. World prices had risen sharply, but these countries considered any price hike dangerous and disadvantageous. So, an attempt to put these relationships on a commercial footing is a painful thing to do. Also, these countries are still in transition and use their own tools of pressure. For example, they would sharply increase tariffs, etc. And, yes, for some time, there was a kind of tug of war going on between Ukraine and Russia, and Belarus and Russia. Russia said, I want to switch to business relationship and do it quickly, because I want more money, I do not want to subsidize Belarussian economy anymore. But Belarussian consumers are used to paying very low price for gas. This is a painful issue, I admit. And, because energy has become a major focus in international relations, every such incident, every sign of tension attracts a lot of attention from politicians and the media. My feeling is that it is going to calm down in one way or another, as relationships will become more business-like. The importance of energy will remain, though.

Aalto: I agree — if energy were still a low-key issue, it would not make such big headlines. But, speaking of Russia, there is one more thing that needs to be mentioned. My understanding is that, in the nineties, there was no expectation of Gazprom to make large profits and to have market-based relations with former Soviet countries. But the perception on the part of the new regime was that it needs means for increasing capital in Russia; there was a need to pile up some funds in order to develop the country both economically and socially. Profits needed to be extracted from somewhere and Gazprom was an obvious company that could do it. The transition was quite quick and sudden and might have been a bit of a rush, but it was something that was bound to happen sooner or later. So, the two reasons why we had such a crisis in relations between Russia and transit countries were — first, these countries were losing an important asset, namely, transit fees, and, second, there was a big pressure from Russia to switch to market-based relations.

Would you say that current pains are partly caused by the fact that the transition is happening so late, fifteen years after the collapse of the Soviet Union?

Feigin: Let us look back at the nineties. There was chaos and maintaining the transit of energy was of critical importance. Transitory relationships were built just to maintain the supplies. There were very rapid changes happening in Europe and the EU was concerned about the gas supplies –- how were they going to work in these new circumstances, with all these new countries emerging. But it was done and, I think, it was a joint success for all countries concerned. Then, in the late nineties, energy prices dropped dramatically. For example, the price for a thousand cubic meter of gas in Europe at that time was 70 US dollars, now it is 257. At that time some people in Russia said, it is not profitable for us to deliver gas at all. But Russia managed to keep the balance because investments in the infrastructure were done during the previous regime and Gazprom did not have to pay any debts, it only had to cover operational costs. At that time it was important to agree on transit fees that would make exports commercially viable. Ukraine was paying 50 dollars per thousand cubic meters and it was a more or less reasonable price, because the rest of Europe was paying 70.

Then, in the beginning of this century gas prices started going up rather dramatically. It had nothing to do with Russia’s relationship with the EU or anyone else; it was the reality of the market. Changes happened very rapidly and it became obvious that intergovernmental relationships with the CIS countries were out of date. There was an incentive to do something about it. Maybe Russia could have changed the rules of the game in, say, 2004, but not earlier. Earlier it would not have made sense, for economic reasons. With countries, which you have treated as family members, it is very hard to agree on price increase. But Russia itself is going through the same thing; the prices for domestic consumers go up, too. Gazprom can no longer live off the Soviet legacy, the costs have gone up and it has to develop new fields, new regions. In other words, what is happening now is that prices will go up to match the real costs of production and world gas prices. In a couple of years or the process will be finished.

Energy dependence is a popular buzzword, loved by media and politicians. But what does this dependence mean in practice and what are possible dangers behind it? For example, Finland is basically dependant on one supplier and has been for a long time.

Aalto: High energy prices have highlighted the major differences in countries’ approach to energy security. The EU wants security of supplies, transit countries want transit security, Russia wants security of demand. There is a mix of interests, which makes them interdependent, because of the common infrastructure linking them. That is why I would like to talk about interdependence, not dependence.

As for Finland, yes, there is 40 % dependence on Russian energy supplies. Electricity imports are lower, but gas dependence is 100 %. Nevertheless gas has never been considered in the context of security, unlike electricity. Rosenergo wanted to invest into a cable link to Finland and Sweden, but Finnish energy companies were trying to prevent Russia from developing an extra energy capacity, because they have their own investments in Russia and they wanted to import electricity themselves from the companies owned or partly owned by them. When we are talking about energy security, these matters are always very complex. There is always some economic motive involved. Politics and economics are often mixed in these cases.

Is Russia’s image a factor in discussions on energy security?

Aalto: I think Russia has acquired a rather unfair negative image in relation to Ukrainian and Belarussian cases, even though the real problems lay with Ukraine and Belarus, not Russia. Ukraine owed Russia a huge amount of money, around 700 million euros. And there was a lot of technical evidence that Ukraine in fact was taking gas in an unauthorized manner during the crisis and that is why European consumers were suffering. I think Russia has been very unfairly portrayed in recent years. Media discussion often misses lot of the points that were on the ground.

But, whatever the reasons behind this image, it has become a prominent feature in discussions on energy security. Does Russia think it has to respond in any way to the image problem if it is, as you say, unfair?

Feigin: Energy has rather quickly and unexpectedly become a political issue and attracted a lot of attention. People are interested in this topic and media provide the coverage. My feeling is that Russia has to do more to create a correct image; it has already been recognized. It does not happen automatically. There is a long history of antagonism between the two blocks and to create an image of Russia as something completely different from the Soviet Union is not an easy task. It cannot be done in a few weeks. We need a good story, for example, our relationship with Finland, and this story has to be presented to people. Relationship with the Baltic countries is becoming a positive example also. Some people believe that tsarist Russia, USSR and today’s Russia is the same thing, nothing has changed. We, Russia, have to break it up and to present Russia as it really is. It will take time.

What are the issues that the sides involved in interdependent relationship should focus on to make it work, to turn it into opportunity rather than a sensitive issue, which creates so much commotion?

Aalto: In the Baltic states, and partly in Finland and Sweden environmental concerns are emerging over the transit via the Baltic Sea. There are also political and security-motivated concerns over the high dependency on Russian supplies. My point is, the narrow agenda of energy dialogue is already becoming multi-sided, there are new actors entering the dialogue.

Who are these new actors?

Aalto: Environmentalists in Finland and Sweden, the governments of these countries. Norway, too, over the Barents Sea and environmental concerns there. In Estonia and Lithuania there is the issue of electricity sufficiency after the closure of Ignalina [nuclear power plant]. This discussion is already spilling over to the sectors other that just economic and political. One thing to do would be to nag the European Commission to cover more sectors in its negotiations with Russia, because they are infiltrating the agenda from the outside anyway. You cannot do much about the issues that are not officially included in the agenda. This approach would make things far more complex, but it also opens up an opportunity to make package deals.

Feigin: I have a couple of things to add. What is Russia currently focused on? It is focused on its economic development. It wants to use energy exports for solving long-term tasks, to become a more developed, prosperous country. It is not easy and must entail much wider cooperation with Europe. Europe could help Russia with skills, investment. It is a tradition of the nineties to look at Russia simply as an energy supplier, but it better for both sides to have a broader perspective and develop a large-scale cooperation. Europe needs energy, no doubt, but it also needs markets for its knowledge. Russia also needs more diversified cooperation with Europe.

The threat of energy dependence media and exerts love talking about has some peculiar aspects to it. Europe makes these calculations –- we will need this much energy in the future; we do not know where it will come from; let us say it will come from Russia; therefore we will depend on Russia. The figures cited are 70 or even 80 % dependency on Russia. But has it ever been discussed with Russia? No! If you look at Russian energy strategy and forecasts there is no intention to export 400 billion cubic meters of gas to Europe!

Aalto: Besides, it cannot be done. They can export 250 billion, at most.

Feigin: Yes, that is true. So, there is this bogus threat. They decided that there will be imports of that scale and that it will be dangerous, but never asked Russia what it thought. It was not part of the energy dialogue, it was never agreed. These issues have to be discussed in a more pragmatic manner. If Europe wants more Russian gas it has to come to Russia and talk about it. But is has to be discussed not portrayed as a threat!

Are your saying that all this stress is over some hypothetical figures that are not even realistic?

Aalto: To a certain extent, the problem lies with Europe. The EU does not have a unified energy policy. The EU has it own energy dialogue with Russia, the UK has it own dialogue and so on. There are too many actors on the scene. The European Commission is trying to play a more coordinating role focusing on security of supplies, sustainability and market competitiveness. But not all members agree on that and therefore there has been a lack of strategic thinking and agreement on whom should be dependent on, do we need alternative suppliers, must we develop our own alternative sources. Even in 2000 they were still saying “we will just get this stuff from Russia” and that is it. That is a little shortsighted. Only in the last couple of years the EU has started seriously thinking of alternative solutions.

Is coming to a common understanding on energy issues crucial for the EU?

Aalto: It is absolutely crucial. And I would be in favor assigning more competence to the EU on these matters. In the areas where the EU is given more power to negotiate it has shown itself as a powerful negotiator, which can defend the interests of the member states more effectively than the governments could do individually. So I would transfer more power to the EU in this matter.

Feigin: If more negotiating power is to be transferred to the EU then the people involved in negotiations would have to be much more capable. My experience shows that, presently, there are very few people on the EU side who know the ins and outs of the business. Sorry, that is the reality. I think there should be more professionals.

How important is it for Russia and the EU to come to an agreement over the EU Energy Charter Treaty?

Aalto: I have strong doubts that they can come to an agreement over the Charter in its existing form. The Charter reflects the realities of the nineteen nineties and is therefore outdated. We have to look at what is happening in Russia today and have those elements reflected in the document. It has to be seriously renegotiated; only then can it be made to work.

Can the parties involved do without it?

Aalto: Yes, they can. Energy supplies are flowing as we speak without any charter. It is easy to agree on the basic thing, the price, amount, and who is the supplier and consumer. We were able to agree on these things even in the times of the Cold War. We can agree on energy trade, but energy policy is another matter. It would be useful to have it, but not absolutely necessary.

Feigin: It is inevitable that there will be a detailed document dealing with energy matters. It could be a new agreement or a modernized Energy Charter Treaty. My understanding is the sooner the practical negotiations will start, the better. A pause in practical talks gives more space for speculations.

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