by Tomas Valasek

The Czech government floated proposals in May that would see the EU take a more active role in solving frozen conflicts in eastern Europe. The Czechs hold the EU’s rotating presidency next year, so their wish may become reality. But just what exactly can the EU offer? The four conflicts in Europe’s east, South Ossetia and Abkhazia, Nagorno-Karabakh, and Transdniestria, have been ‘frozen’ for so long that even hardened optimists have lost hope.

To investigate, I recently joined a German Marshall Fund-organised trip to one such ‘frozen’ place, Transdniestria. It’s a small, poor region, populated by ethnic Russians, Moldovans and Ukrainians. In 1992, it broke away from Moldova, which is only somewhat larger, equally poor, and populated by the same mix of Russians, Moldovans and Ukrainians (albeit in somewhat different proportions). The conflict over Transdniestria is a strange one indeed. There are no obvious ethnic cleavages. Its citizens mingle freely. Some 7,000 Transdniestrians study in Moldova, and 30,000 of them hold Moldovan transports. All major Transdniestrian businesses are registered in Moldova, which allows them to use Moldova’s privileged access to Russian and EU markets. The only person to die on the Moldova-Transdniestrian administrative border in recent years, the OSCE says, was a ‘visiting’ prostitute. She died when a patrolman accidentally discharged his rifle during the amorous act.

But there is no such thing as an ‘easy’ frozen conflict, and even Transdniestria, with its lack of obvious differences from Moldova, stubbornly resists re-integration. So what can the EU do to help? It turns out the EU has done much already: it helped bring about the relatively close business relationship that the two constituent parts of Moldova enjoy. But it could do more.

In November 2005 the EU launched a Border Assistance Mission to Moldova and Ukraine (EUBAM). The Moldovans deem it a massive success. The mission’s 120 customs and border experts trained officials working along the Ukrainian-Moldovan border. The EU-trained force has succeeded in seriously cutting smuggling from Transdniestria to Ukraine, effectively removing the breakaway republic’s major source of income. So Transdniestrian businesses have registered with Moldova in order to gain rights to export to Russia and the EU. This represents the most visible step towards re-integration of Moldova and Transdniestria to date.

More needs to be done to help nudge Transdniestria and Moldova together. In the long run, Moldova’s best hope for re-unification lies in making itself attractive to the Transdniestrians. It needs to become a much freer, more prosperous place. This would erode the authority of Transdniestria’s rulers, and entice the region’s population to support re-unification.

To this end, the Moldovans have launched drastic economic reforms. For example, they have cut corporate taxes to zero to entice foreign investors. But the economy is not picking up nearly as fast as it could. Moldova remains deeply corrupt, which discourages entrepreneurs and investors.

The country is not doing well on the political front either. It is a much freer society than Transdniestria (which is essentially a one-person fiefdom). But Moldova’s president, Vladimir Voronin, also has a serious authoritarian streak. He treats the opposition with disdain and arrogance. Worse, he rigs the system in his favour. His Communist party uses its control of public TV (the only source of news for about 80 per cent of Moldovans) to keep out ‘undesirable’ politicians and analysts. Voronin changed the election law in a way that will make it difficult for the (badly divided) opposition to form effective coalitions against him.

As a result, ordinary Transdniestrians do not see enough difference between Moldova and their own, even more corrupt and authoritarian leadership. Moldova is a freer and happier place than Transdniestria, but not dramatically so. It is not losing the battle for the hearts of the Transdniestrians, but it is not winning it either.

So the EU’s best contribution to solving Moldova’s frozen conflict lies in pressuring Chisinau to clean up corruption and keep society free. The EU has serious influence in Moldova. The country wants to join the European Union, and it has modelled its economic and political reforms after the new EU member-states. When the EU speaks, Moldova has a compelling reason to listen. What Brussels says, and what the Moldovans need to hear more often, is that the faster you grow and the freer you become the greater the chances of accession. Better yet: the freer and richer you become, the more attractive Moldova looks in the eyes of ordinary Transdniestrians. So Moldova would stand a better chance not only of joining the EU, but of joining it as a newly re-united state with Transdniestria.

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

by Katinka Barysch

Last week, Russia belatedly signed up to a timetable for pulling back its troops from the ‘buffer’ zone in Georgia. The EU, and its current president, Nicolas Sarkozy, deserve credit for having brokered the initial ceasefire and then pushing hard for Russia to follow the terms. The important question now is how the EU will respond in case tensions do not ease, or even grow further.

At its emergency summit on September 1st, the Europeans managed to stick together in an unprecedented condemnation of Russian aggression. To signal their willingness to act, they froze negotiations on their new Partnership Agreement with Russia. This decision did not sway Russia’s plans. But, being used to a squabbling and uncritical EU, Moscow will have taken note of the Europeans’ relatively strong reaction – relative because compared with the tough rhetoric of some US politicians the EU’s reaction looked measured. Those who criticise the EU for this miss the point. The EU cannot be a mediator in the conflict and take sides at the same time. The EU’s mediating role was all the more effective because it was backed by an angrily growling America that openly backed Saakashvili. The Americans found it easier to be firm because they could rely on the EU to do the negotiations.

The latest ceasefire agreement, of course, will not end the tensions. Already, there are new disagreements about how many Russian soldiers should remain in Abkhazia and South Ossetia, and where EU monitors will be allowed to go. Moreover, many people, and not only in Ukraine, Poland or Estonia, predict that Russian efforts to control its neighbourhood will not stop at the border of South Ossetia.

So the EU needs to continue its debate about what kind of tools it has available to ratchet up the pressure if necessary.

Most of the measures that politicians and commentators have discussed since August 8th are more likely to harm European interests without making Russia change its ways. Moreover, any panicky over-reaction would make Russia look scarier than it is, which Russian leaders may secretly enjoy.

Economic sanctions are almost a non-starter. Almost 30 per cent of the gas consumed in the EU comes from Russia, and the EU is in no position to replace these supplies in the foreseeable future. Acutely aware that this dependence is mutual, Russian leaders have been notably careful not to mention energy in their angry exchanges with the West. The EU could try to limit Russian sales of non-energy goods or Russian investments in EU countries. But in the absence of a UN mandate, such steps would violate the EU’s own rules for openness and non-discrimination. Economic sanctions risk undermining the principles on which the EU is based. And they could stunt Russia's diversification away from oil and gas, which is good for its long-term stability.

As for Russia’s WTO application, the EU is keen on getting Russia to respect international trade rules and submit to the WTO dispute settlement procedures while Moscow seems in no rush to finish the accession negotiations. Russia’s membership is in any case a long way off, because of Moscow’s erratic trade policy, the US’ refusal to repeal the Jackson-Vanik amendment and vetoes from Georgia and, possibly, Ukraine (both WTO members). The EU should not use the WTO to make a political point at a time when the organisation is already weakened by the break-down of the Doha trade talks.

Nor would it be a good idea to ban Russians from visiting or working in EU countries. If Russians cannot travel, they may be more prone to believing their government’s propaganda about a West that is hostile and hypocritical. And the EU needs to think very carefully about targeted visa sanctions. A ban on Russian leaders and top officials would signal a new world in which the Europeans no longer believe that engagement can achieve anything. We are a long way from there. The EU could make it harder for Russia’s big businessmen to holiday at the Cote d’Azur or do business in London, hoping that they would put pressure on their leaders to change their ways. But many rich Russians have acquired foreign passports and few will risk falling out with a regime that seems to enjoy a bit of oligarch bashing from time to time.

The EU’s decision to continue doing business with Russia does not mean that it will be business as usual. The EU could stop preparations for a trade agreement for nuclear fuels, something that Russia wants badly to grab a bigger share of the European market. The same applies for Russia’s participation in EU research projects.

More fundamentally, the EU’s response should not start by asking how to punish Russia or change its course. It should start within the EU, with a set of well-defined objectives. The tricky part is to figure out how to achieve these objectives in the face of Russian opposition or obstruction. After Georgia, the EU can no longer pretend that its goals do not clash with Russia’s. That is good because it forces the Europeans to have a more open and realistic debate about its ties with Russia and to set clearer priorities (a slimming down the bloated EU-Russia agenda in reaction to Georgia would help with this). The EU’s priorities should be: stability beyond the EU’s eastern borders, energy security, and international tasks that require some sort of Russian involvement, such a preventing Iran from building a nuclear bomb. Russia would have to take the Union a lot more seriously if it beefed up its neighbourhood policy, made some tangible progress towards a common energy policy and streamlined its foreign policy-making.

Katinka Barysch is deputy director at the Centre for European Reform.

by Katinka Barysch

Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.

First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.

Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.

Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.

Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.

Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.

The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.

Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf

Katinka Barysch is deputy director of the Centre for European Reform.

by Charles Grant

After several years of chilly relations between Moscow and western capitals, a little warmth is detectable. At both the Davos Word Economic Forum in January, and the Munich Security Conference in February, the Russians’ exchanges with Americans and Europeans were fairly polite. Of course, this change in the political weather may prove to be short-lived. Indeed, some commentators argue that even if the style is softer, the substance of Russian foreign policy is as hard as ever (see Quentin Peel in the Financial Times, and a forthcoming CER policy brief by my colleague Bobo Lo). Thus in recent weeks Russia has announced plans for a new naval base in Abkhazia (which is legally part of Georgia) and encouraged Kyrgyzstan to close the American airbase at Manas.

But in international politics, style matters. Russia’s leaders know that their economy is being harder hit by the economic crisis than most others in Europe. One adviser to the Russian government recently said that a GDP shrinkage of 10 per cent could not be ruled out this year. Russia’s leaders know that the modernisation of their country will require western capital and technology. So perhaps it is not surprising that they have become less inclined to display the swaggering arrogance that was so visible at certain moments last year, and again during the gas crisis in January.

Even on substance, the Russians appear to be making an effort to be nice on a few issues. Russia’s threat to put short-range missiles in Kaliningrad – in response to American plans to install missile defence systems in the Czech Republic and Poland – has been withdrawn. And Russia is offering to help the US to get civilian supplies to its forces in Afghanistan. As Sergei Ivanov, Russia’s deputy prime minister, said in Munich: “Russia is ready to improve relations on a range of issues, including talks on reductions of nuclear arms.”

Ivanov was responding to the olive branch that Vice President Joe Biden brought to Munich. “On NATO-Russia relations, it is time to press the reset button,” said Biden. “Let’s co-operate on fighting the Taliban, securing nuclear facilities, and cutting numbers of nuclear weapons…of course we’ll disagree on some issues but we should work together where our interests coincide.”

Some of this new US approach to Russia merely reflects the realism that now dominates some – though not all – policy-making circles in Washington. Russia can help on several important issues, so it should be engaged, flattered and treated like the super-power that it wishes to be seen as. Iran is particularly important in shaping US policy on Russia. President Obama sees the challenge of Iran’s nuclear programme as one of his very top priorities. His administration thinks that Russia may be able to lean on Iran. Therefore it is willing to ‘give’ Russia some of the things it wants, like a review or postponement of plans for missile defence and NATO enlargement.

The Europeans are now willing to help the US on Iran. They share the American view that the best way of preventing Iran from pursuing its nuclear programme is to offer a combination of bigger incentives and stronger penalties. The bigger incentive is American engagement: Obama has indicated that he is ready to talk. The stronger penalties are more stringent economic sanctions against Iran. Germany was reluctant to consider these but Chancellor Angela Merkel indicated in Munich that she was ready for new sanctions.

Tougher sanctions are unlikely to achieve much unless Russia and China support them. Currently they do not, but American and European diplomats believe that if Russia moved, China could well follow. “We need Russia’s help on Iran, so that sanctions are effective,” said President Nicolas Sarkozy in Munich. “We don’t have much time, the recent Iranian satellite launch [which showed Iran’s mastery of some ballistic missile technologies] is very bad news. Russia must show whether it really wants peace [in the world], and whether it is prepared to behave like a great power.”

There are two big unknowns about Russia’s relationship with Iran. First, could Russia really influence the country, if it wanted to? Would the Iranians listen to Russia’s advice, or respond to pressure from its leaders? Second, if the answer to the first question is yes, does Russia really want Iran to abandon its nuclear programme? In public, of course, Russia’s leaders say they do not want Iran to develop nuclear weapons. And that may well be the case. But one may suppose that some Russians think that the Iranian nuclear programme suits them very well. It creates huge problems for the US, Russia’s principal strategic competitor, by amplifying tensions between America’s allies and radical regimes across the broader Middle East. The activities of pro-Iranian groups in Iraq, Lebanon and Palestine help to weaken American (and European) soft power in the region. And so long as senior western policy-makers regard Iran’s nuclear programme as a major geopolitical headache, they will see Russia as a potential source of assistance, and thus treat it with respect. And that suits Russia very nicely.

Russia will probably tell the US that it will try to help with Iran. But if the answer to either of those two questions turns out to be no, President Obama will be disappointed. Of course, there are many important strands to the US-Russia relationship other than Iran. But a falling out over the Iranian nuclear programme would put a chill back into the entire relationship.

Charles Grant is director of the Centre for European Reform.