CER/ECFR conference on 'Achieving energy security in Europe'

17 November 2009

Speakers included: Carl Bildt, Andris Piebalgs, Maciej Wozniak, Pierre Noel, Richard Morningstar, Hryhoriy Nemyria. With the support of the Swedish Presidency of the EU.

Location info

Brussels

Belarus: An artful balancing act

Written by Charles Grant, 23 February 2009
From International Herald Tribune

Read more

Why Ukraine matters to Europe

External Author(s)

Tomas Valasek

Written by Tomas Valasek, 05 December 2008

Download PDF

Purchase this publication in hard copy

Who is winning Eastern Europe's great game?

Written by Katinka Barysch, 19 July 2010

By Katinka Barysch

The US is withdrawing from the former Soviet space; the European Union struggles to be taken seriously there. Does that leave Russia free to strengthen its influence in the countries around its borders? Not necessarily, for the situation in the region is complex.

Hillary Clinton toured the Caucasus recently to reassure Georgia, Armenia and Azerbaijan that Washington had not abandoned them in its quest to ‘reset’ relations with Russia. Nevertheless, the predominant feeling in those countries is that the US is a lot less interested and engaged than it had been during the presidencies of George W Bush and Bill Clinton. Similarly, many Central Asians feel that the Obama administration pays little attention to them, unless they can serve as launch pads for planes destined for Afghanistan. NATO membership for Ukraine and Georgia is no longer on the cards.

While much of America’s attention has moved elsewhere, the European Union hardly has a foothold in the region. The EU’s neighbourhood policy has proved rather ineffective, and the 2009 ‘Eastern partnership’ has not yet had time to make much of a difference. Ukraine, still smarting that the EU has never offered the prospect of membership, appears to be turning towards Russia. Moldova looks keener than ever to get closer to the EU – with few people in Brussels and other capitals taking notice. The EU’s Central Asia strategy has lacked political backing and consistency. In the Caucasus and Central Asia, the EU is a rather new player and its traditional approach of exporting norms and values as the basis for bilateral relations has not been received well. The fact that the EU’s foreign policy machinery is currently in bureaucratic paralysis does not help.

In theory, US neglect and European weakness could leave Russia free to consolidate what President Medvedev likes to refer to as a ‘sphere of privileged interests’. Russia is certainly trying. But success has been patchy at best.

Although by far the most populous and prosperous country in the region, Russia does not necessarily have the means to project power into the neighbourhood. Its tools looked more formidable before they were actually used. Now some of them have turned out to be blunt.

Russia’s use of military force in Georgia last year backfired when even Moscow’s staunchest allies scrambled to become less reliant on their dangerous-looking big neighbour: Belarus turned to the EU, Armenia started talking to Turkey and not a single one of the former Soviet countries has followed Moscow in recognising the independence of Abkhazia and South Ossetia.

Russia has repeatedly used trade embargoes and other economic means to put pressure on its neighbours, in particular smaller ones where Russia’s own business interests are limited, such as Georgia or Latvia. But there is arguably not a single instance where the use of economic sanctions has got Russia what it wanted. Businesses in the countries affected have reinforced their efforts to find alternative markets and sources of investments, making them less dependent on Russia in the long term. Russia’s strategy of gaining influence through directly controlling local businesses has proven more successful: in Armenia for example, various sectors from banking to transport are dominated by Russian-owned companies. How this will translate into political leverage remains to be seen.

This leaves energy as the most promising tool of Russia’s neighbourhood policy. Russia has used pipeline plans, nuclear projects, gas prices and oil deliveries to get what it wants from its neighbours. But even here, Russia’s success rate is mixed. In Belarus and Ukraine, Russia is making headway towards its aim of gaining control over transit pipelines. The recent standoff between Belarus and Russia over gas prices and transit fees only highlighted Minsk’s lack of options: Lukashenko’s announcement that he would buy gas from Venezuela was little more than symbolic. In Ukraine, Russia managed to use the offer of cheaper gas to get the lease for its Black Sea fleet in Sevastopol extended. It has also successfully pressured Kyiv into at least considering merging parts of the two countries’ gas monopolies, Gazprom and Naftogaz, which would give Moscow effective control over Ukraine’s transit pipelines.

The situation is very different in the Caucasus and Central Asia, where energy producing countries are gaining room for manoeuvre through building stronger links with China, Iran and Turkey. Turkmenistan opened a large gas pipeline to China at the beginning of the year and signed another gas delivery contract with Iran in June. It has invited international oil majors to help build an internal pipeline that could one day deliver Turkmen gas from the massive Yolotan field to the Caspian shores and from there to Europe. It had previously promised to let Russia build the pipeline and buy much of the gas. Azerbaijan has spurned a Russian offer to buy up all the gas from its new Shah Deniz 2 field, instead committing it to Turkey and to European buyers. Russia’s attempts to lock up Caspian gas supplies by foiling pipeline projects such as Nabucco are looking increasingly desperate.

The perceived withdrawal of the US and the ineffectiveness of EU policy in the region has not so far played into Russia’s hands. Russia (like the EU and other players in the region) has had to learn that the former Soviet Union does not constitute a homogenous neighbourhood. There are cocky and cash-rich energy suppliers such as Azerbaijan and Kazakhstan, and there are poor and divided countries such as Moldova and Armenia. Russia can cajole and coerce in one place but it has to plead and please in another. All countries in the region will benefit from being less dependent on Russia, in trade and energy terms as well as in politics. While the US might pay less attention to the region, the EU should redouble its efforts, while also taking more account of the the specific situations of individual countries.

Katinka Barysch is deputy director of the CER

Comments

Has Ukraine lost appetite for reforms?

Written by Tomas Valasek, 17 December 2010

In a study on Ukraine published in October, the CER gave President Viktor Yanukovich credit for passing difficult economic reforms but criticised his efforts to suppress political opposition. Since then, reforms have stalled while the concentration of power in the president's hands has continued unabated.

A recent visit to Kyiv has left me deeply worried. The government continues to amass power. This is in part due to the weakness of the opposition – former leaders of the Orange revolution such as former president Viktor Yushchenko and former prime minister Yulia Tymoshenko are genuinely unpopular with voters, who blame them for disappointing economic performance and failure to move Ukraine closer to the EU. Even so, President Yanukovich seems intent on preventing free and fair elections. The October 31st regional poll was marred by widespread use of government powers to help the ruling Party of Regions. The European Parliament notes in its November 25th resolution that "some parties, such as [Yulia Tymoshenko's] Batkivshchyna, were unable to register their candidates". Phil Gordon, the US assistant secretary of state, said that the United States: "does not believe that those elections met the standards of openness and fairness that applied to the presidential election earlier in the year."

The story is not much better on the economic front. Even in those areas, where progress had been made, the government has started to backpedal. For example, the new public procurement law, which the EU helped to draft earlier this year, is being riddled by exceptions: the country's parliament has exempted work on sites for the 2012 European football championship. The EU has viewed the law as key to countering corruption, and its partial reversal dismayed EU ambassadors in Kyiv. Economists also say that the government cheated to comply with a key requirement from the International Monetary Fund (IMF): in order to cut tax refund arrears it simply stopped accepting claims. The IMF is due to decide this month on whether to disburse further aid to Ukraine.

There has been little progress on reforming the country's all-important gas sector. The government has increased domestic gas prices, which has helped to improve the finances of Naftogaz, the country's monopoly – and perennially insolvent – importer and distributor of gas. But there has been no progress on making the company more efficient and transparent. In September 2010 Ukraine acceded to the EU's 'energy community', which groups countries that pledge to uphold each other's security of supply, on the condition that the government separates Naftogaz's gas transit pipelines from other businesses. The Ukrainian parliament passed legislation in July that had ordered Naftogaz to do just that. But nothing has changed: Naftogaz remains untouched and important secondary legislation – to create an independent regulator, for example – is not even under consideration. Meanwhile, Naftogaz is descending into deeper financial trouble. A court in Ukraine has ordered the company to repay nearly $4 billion to one of Ukraine's most powerful businessmen, Dmytro Firtash, who had sued for damages incurred when the previous government cancelled the services of his company in brokering gas purchases from Russia. It is not obvious that Naftogaz has enough money or gas to reimburse Firtash.

The government recently passed a law that would make it easier to explore oil reserves in the Black Sea. These could in the long run lessen Ukraine's dependence on energy imports from Russia. But to extract the reserves, Ukraine needs foreign expertise. So it is baffling that the government has recently imposed a new 40 per cent duty on imports of refined oil (punishing Shell, a key importer) and increased royalties on gas and oil extracted in Ukraine. Foreign energy majors will have little reason to invest in the country. One representative of a Western energy major says that "there is plenty of gas here, in shale and under sea, but no one will tap it because there is zero confidence among investors that they would ever see their money back." Non-energy companies are treated similarly. Deutsche Telekom and Norway's Telenor wanted to buy Ukraine's national telecommunications operator, Ukrtelecom, but the Kyiv government excluded them from the privatisation on a technicality.

Curiously, while the economic reforms have stuttered, relations with the EU have improved, though from a low point. At an EU-Ukraine summit in November, the parties agreed a 'road map' which may eventually allow the Ukrainians to travel to the EU without visas. Talks on a new 'deep and comprehensive free trade agreement' (DCFTA) have also been resumed, after months of paralysis. When the European Commission had threatened in October to cut off talks altogether, President Yanukovich ordered Prime Minister Mykola Azarov "to make all necessary concessions" to restart negotiations. But the order itself is symptomatic of what is wrong with the relationship: Kyiv only pays attention when talks are about to collapse; even then it takes short-term measures: nothing is being done to assess the economic impact of DCFTA on Ukrainian industries or to encourage the losers to move into new lines of business. This guarantees that some of the country's politically powerful oligarchs will eventually revolt against DCFTA.

The EU has limited tools to press for greater political freedoms and proper economic reforms but it is not powerless. The Ukrainians do care what the EU states and institutions think. They have cheered the European Parliament’s November resolution, in which, for the first time, an EU institution (albeit one without decision-making powers in the matter) says that "Ukraine has the right to apply for membership" (something that the Council of Ministers has been reluctant to say). EU High Representative for Foreign Policy Catherine Ashton and senior national diplomats should speak out more forcefully about the state of democracy in Ukraine. EU governments should also use their influence in the IMF to demand real economic reforms. The IMF loans represent the most important leverage that the European governments and the US have in Ukraine today. The current government in Kyiv is capable of tough choices, but only when it feels real pressure.

Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.