How Much Russian Energy is Good for Europe?

On November 10, 2005, the Carnegie Endowment for International Peace hosted a meeting entitled “How Much Russian Energy is Good for Europe?” with Pekka Sutela, Head of the Bank of Finland Institute for Economies in Transition. Anders Aslund, Director of the Carnegie Russian and Eurasian Program, chaired the session. Sutela’s remarks are summarized below.

The Finnish perspective on Russia is unique among EU countries. Russia is Finland’s number one export market. Finland imports seventy percent of its energy, and seventy percent of its imports come from Russia.

The situation between Europe and Russia is different. Sixty percent of Russian export revenue comes from energy. About half of that is exports to the EU. So Russia may be more dependent on the EU than the EU is on Russia. European energy dependence will increase over the foreseeable future as North Sea production declines. According to official forecasts the EU will import seventy percent of its energy by 2030. For the EU the problem isn’t too much Russian energy. Rather it’s that the EU won’t be able to import as much Russian energy as it would like. Competition among buyers, not overwhelming market share, will give Russia leverage.

For Russia the problem is production stagnation in oil and gas, not the prospect of becoming a petrostate. One must take seriously the official Russian forecasts, which envision only modest production growth. Russia supplied half of new production over the past ten years, so this will have a large impact on the margins.

Global warming may have some effect on Russian energy supply. Warmer temperatures might make it easier to tap reserves in the northern oceans and open waterways for tankers carrying LNG. The retreat of the permafrost could make pipeline construction more difficult, however. The Shtokman field could be affected by these trends. Gas from this field, by the way, may go to the EU as well as the US.

Much has been made of the North-European Gas Pipeline, but this idea has been around for a long time. The Balts and Finns raised the alarm ten years too late.

Global energy companies still want to go into Russia, even if the conditions are not what they had once hoped. Most countries don’t sell majority shares in big fields. So Russia is becoming a more normal energy-producing country.

Q&A

Q:  The EU’s dependence makes it a passive taker of policy. The EU Energy Charter is dead because Russia and Norway will never accept it. The EU has no energy policy. Wouldn’t it be rational to demand more, to express concern over production stagnation, to argue its case over China?
Sutela: The EU doesn’t really have leadership. Its credibility as a unified decision maker has suffered from French and German violation of the stability pact and the constitutional referendums. Some EU nations, like Finland, are very dependent, while for Spain Russia is economically irrelevant (though it may be important politically). In principle the EU takes the Energy Charter, common markets, and competition seriously. But France is less interested in competition in any field. They want to protect their own energy companies. Countries’ actual behavior isn’t consistent with the goal of competition. Moreover competitive markets and long-term supply agreements are hard to reconcile.

Q: The most competitive EU countries are also the most anti-Russian. What about ownership of facilities? In small countries Russia owns 50-70 percent of them. Most of the talk is about competition between Gazprom and Rosneft. But Transneft is the main actor, and they have no interest in increasing pipelines.
Sutela: For Gazprom it makes sense to own shares in pipelines and downstream facilities. They can do this and put a guy on the board. They have 30 percent of pipelines and distribution in Finland, for example. But majority stakes raise eyebrows. These countries should push for a unified EU policy, despite the obstacles. Transneft isn’t much of a political tool—it’s too blunt an instrument. Notice Latvia hasn’t suffered, in macroeconomic terms, from the boycott of Ventspils. In some cases Russia accepts increased dependence on the Baltics as transit countries. We shouldn’t assume unified Russian policymaking on this issue.

Q: What does Putin mean by “energy security?”
Sutela: This is just a way to sugar-coat things. He wants buyers to compete while he claims to be selling “security.”

Q: There are different views in Western and Central Europe. Schroeder et al cut deals with Putin over the heads of the EU community. The Energy Charter was a missed opportunity. The EU should insist on pipeline competition. But the main problem is transparency, and the EU should demand more. Cynics in Russia say Moscow signed on to the Kyoto Protocol in exchange for a promise from Chirac and Schroeder not to call for more transparency and competition. With Ruhrgas, Russia is putting money into the Baltic political systems to buy up Baltic gas companies. As part of the North-European Pipeline deal Gazprom gets to buy part of Ruhrgas. It will then be in the position to veto pipelines through Poland.
Sutela: Gazprom’s share in Ruhrgas would be small, not a legal way to block decisions. It’s more so Gazprom can get information. The dominance of big countries within the EU won’t end anytime soon. Anyway Kyoto was never that important to Germany and France. It’s hard to see Chirac and Schroeder as crusaders for the planet. This theory reflects the Soviet penchant to see conspiracy everywhere. It’s true the EU doesn’t push transparency. For example, they don’t even know where the money from trans-Siberian overflight fees goes. The EU accepts opacity as a fact of life in Russia.

Q: Transparency is supposed to be part of the acquis communautaire. It’s easy to enforce in countries like Finland, but hard in countries like Lithuania. In these places daughter companies funnel Gazprom or Lukoil money into politics. The EU isn’t helping these countries with transparency—in fact the US is doing more. The big EU countries are afraid to offend Moscow. Gazprom is putting a German banker, an ex-Stasi friend of Putin, on its board.
Sutela: The Baltic countries are not on the radar for most of the EU, except the Nordic countries. But we don’t have much clout.

Q: The Nordic countries have been the most transparent in the world for 200 years. Why can’t others follow? It’s obvious transparency cleans out corruption.
Sutela: If Brussels is falling apart, there should be national projects. Estonia has basically done this. But we can’t convince France.