POLITICAL PIPELINE PRESSURE
Robert Hodgson
Budapest Times
Monday, 22 September 2008
Hungary
Energy security and geopolitics
Keith C. Smith of Center for Strategic & International Studies believes
corruption, and not dependence, is the threat to Western Europe from
Russian energy trade. He criticised the EU for what he sees as its
pusillanimous reluctance to stand up to Russia.
Although there has been much talk of global warming and greenhouse
gases, the strongest message that came out of a conference on energy
security, held in Budapest last week, was this: For now, and for years
to come, it remains the question of oil and gas supply will continue
to set the international agenda.
The second of three round table discussions on energy organised by
the independent, Washington-based pro-democracy think tank Freedom
House took place last Thursday at the British Embassy in Budapest. The
broad topic was Energy Security and Geopolitics, and talk focussed
mainly on the EU and Russia and the complex symbiosis that is their
natural gas trade.
Keith C. Smith
Nouveau Riche
Christopher Walker, director of studies at Freedom House observed
an apparent correlation between energy price and the corrosion of
democracy in developing oil producing states. This not only applies
to Russia, but has implications for several other countries, such
as Venezuela and Iran, he observed. Freedom House has identified a
number of the presumed effects of rising international demand for oil
and gas on these and other "energy-rich, democracy-poor petro-states".
As oil and gas become more valuable, runs the theory, state bureaucracy
increases, and policy development becomes more opaque and often fails.
The abundance of hard cash means it can be thrown around in the right
quarters to consolidate the power of the ruling elite; in other words,
"fiscal pacification" is used by government and oligarchs to suppress
dissent. Lastly, there is a crackdown on the media to limit access
to independent sources of information.
In energy-hungry Western countries that no longer produce enough oil
and gas of their own, or never did, a commonly voiced concern is that
energy-rich authoritarian states are now using energy supply as a means
of applying political pressure. In addition, western multinationals
are piqued that they are being refused the opportunity to profit by
exploiting huge oil and gas reserves abroad.
The real Russian threat
Keith C. Smith of the Center for Strategic and International Studies
(CSIS) clearly believes that Russia, in particular, needs to be brought
into line. The CSIS is a corporate- and industry-backed US think tank
set up at the height of the Cold War to "to find ways for America
to sustain its prominence and prosperity as a force for good in the
world". Smith cited several instances where Russia used the threat of
cutting off its gas supply to influence the Baltic states and Ukraine,
which, like Hungary, are overwhelmingly reliant on Russia for their
natural gas.
Smith – who believes corruption, and not dependence, is the threat
to Western Europe from Russian energy trade – criticised the EU
for what he sees as its pusillanimous reluctance to stand up to
Russia. President Dmitry Medvedev pointed out recently – as some
voices in Brussels muttered of punishing Russia for its military
intervention and recognition of the independence of Georgia – that
sanctions would hurt the EU more than they would Russia.
The CSIS associate responsible for its energy and national security
programme sharply criticised the business environment in Russia,
Ukraine and other regional petro-states. Referring to "recent media
reports" on the presumed wealth of certain prominent Russians, he
called for the EU to employ "forensic accountants" to track down
the proceeds of oil and gas sales to whatever offshore haven they
are lurking in, and find out who is ultimately in control of energy
supplies.
Uneasy partnership
In fact, neither Russia nor the EU can afford to snub the
other. Andreas Goldthau, assistant professor at the Central European
University in Budapest and head of its Energy Security Programme,
said that Europe as a whole receives about 50% of its natural gas
from Russia. For the EU the figure is about a fifth, with the Baltic
states, Finland, and Slovakia all either entirely or heavily dependent
on Russian supplies. Hungary, for example, gets over 80% of its natural
gas from Russia, with the rest from fairly limited domestic production.
Gas, not oil
And it is largely gas that we are talking about: "There is a global oil
market, so that cannot be used as a political weapon," said Goldthau,
who believes the question of gas supply is also one of business,
not politics. At present, the EU imports 57% of its gas, but this
is set to rise to 84% by 2030, much of which will come from Russia,
unless the status quo is changed.
For its part, Russia gets 30% of its state budget from the state-owned
Gazprom. Within its own borders, the Russian gas market is highly
regulated, and 100% of Gazprom’s profit comes from the 25% of its
output that it sells to higher payers abroad. Goldthau even suggested
that one way to tame Gazprom would be to give it access to the European
market, thereby exposing it to regulations and accountability that
it is not subject to behind the Russian border.
Diversify
The idea of letting Gazprom into the EU would horrify many in Brussels,
however. A protectionist instinct was evident when Hungary last
year introduced the controversial legislation to prevent a hostile
takeover of its largest company MOL, by Austria’s regional energy
giant OMV. The legality of the "Lex Mol" law is being reviewed by the
European Commission, which feels it contravenes the EU principal of
free movement of capital within member states.
Although not explicitly aimed at Russia, Lex MOL also prevents a
takeover by Gazprom or any other state-owned companies or sovereign
wealth funds. Also indicative of a reluctance on the part of states
within the community to surrender national industries to the global
market is a regulation approved by the German government last month
to prevent non-EU owned investment funds from acquiring more than 25%
of key domestic energy, telecommunications and banking firms.
So, if the Russian beast cannot be tamed, it must be escaped from –
at least that seems to be the general feeling in Brussels. Hence the
proposed Nabucco pipeline, which aims to bring natural gas from the
Caspian Sea region – notably Azerbaijan and Kazakhstan, possibly the
secretive Turkmenistan, and even Iran – into the EU via Turkey.
The new chess board
So the Caucasus and the central Asian countries are now the centre
of the energy power game. Russia has been very actively courting
the governments of the region in a transparent attempt to maintain
its powerful grip on gas supply to Europe. Trade in natural gas does
not follow the usual rules of supply and demand. Its price is pegged
to that of oil, and to whom it can be sold is dependent on having
extremely expensive infrastructure in place. If you are the only
one with a pipeline and the sources, you have a automatic monopoly
on supply.
South Ossetia in Georgia was only one of several "frozen" conflicts
left behind after the collapse of the USSR. It is significant
because Georgia was a proposed transit country for Nabucco, and any
destabilisation of the region could seriously impede a project which is
already proving very slow to get off the ground. Russia’s unilateral
recognition of the statehood of the breakaway Georgian regions of
South Ossetia and Abkhazia increases concerns about re-igniting other
frozen territorial disputes.
"The summer conflict in the Caucasus will have severe ramifications
for the energy market in the years to come," said Adam Hug, policy
director at the UK’s Foreign Policy Centre. The de facto state of
Nagorno-Karabakh in Azerbaijan is a similar potential flash point,
he added. Military spending by the Azeri government surpassed USD 1
billion in 2006, and an attempt to invade – like Georgian President
Sakashvili’s ill-judged attempt to recapture South Ossetia in August –
would seriously jeopardise gas infrastructure. This will undoubtedly
make investors think twice.
Turkmenistan, on the eastern side of the Caspian sea, was isolated
under the bizarre and autocratic rule of Saparmurat Niyazov from
1991 until his death in December 2006. Although underdeveloped, the
country is sitting on perhaps the fifth largest gas reserve in the
world – at least 2.3 trillion cubic metres, but possibly as much as
6 trillion. There are clearly ample sources in the Caspian region,
but Hug shares the feelings of many western EU states in saying that
attempting to access them directly would be a "big gamble".
When Nabucco was announced in 2006, Russia quickly countered with a
rival plan dubbed "South Stream", to carry Russian gas – or gas sourced
by Russia from central Asia – to the EU. With its backers unhindered
by EU foot dragging and not having to set up a consortium of national
energy companies, often with competing interests, Gazprom’s South
Stream has left Nabucco standing. Hungary’s prime minister Ferenc
Gyurcsány upset Brussels last year by backing South Stream and
calling Nabucco "a dream". With Hungary already behind South Stream,
Bulgaria signed up and Serbia agreed to the construction of a section
on its territory, in January this year. Greece followed in April,
clearing the whole route from Russia, under the Black Sea, to Italy.
Also speaking at last Thursday’s conference was Milan Simirdic,
who represents the European Movement for Serbia and is an advisor to
the board of Serbian energy company NIS, of which Gazprom acquired
51% at what many saw as a knock down price in January. Like several
countries in the region that are dependent on Russian gas, he feels
there is room for both Nabucco and South Stream. He said, however,
that Serbian foreign policy is now a "triangle between Brussels, Moscow
and Washington". He closed by saying: "I hope that no one will start to
describe the Balkans as the natural gas keg of Europe", a reference to
the historical description of the Balkans as a political "powder keg".
Not only about the region
For Richard Youngs, research director at the Madrid-based think
tank FRIDE, the principle weakness of EU energy policy is its
"lack of recognition of the effect of internal politics in supplier
countries". He questioned the EU’s ostensible insistence on trading
partners demonstrating good governance and respect for such things as
human rights. In fact, he said, in energy negotiations with Azerbaijan
and Algeria such strictures were not imposed.
The former Fidesz foreign minister János Martonyi was even more
expansive on the theme of national differences, de-constructing
several tenets which were once received wisdom. Firstly, he dismissed
the notion that everything is dependent on the economy. "We learned
this in school by reading a famous philosopher. His name was Karl
Marx. Now culture matters," he said.
Martonyi also used the current power struggle over energy supplies
as proof that globalisation has done nothing to reduce the tendency
of large states to vie for control of more and more territory –
even if they no longer go so far as to claim other nations as their
own. Also turned on its head by the rise of China and Russia is the
idea that increasing wealth automatically leads to democratisation,
said Martonyi.
For all this, however, the centre-right politician believes Russia
is a reliable supplier, and will remain so – something of a contrast
to party leader Viktor Orbán’s occasional bouts of anti-Russian tub
thumping. The idea that Martonyi shared with most speakers is that
it is a bad idea to rely too heavily on one supplier regardless of
how comfortable the relationship may be.
"If Russia controls oil supply in the Caucasus and central Asia, we
will have access to non-Russian gas and oil, but only via Russia," he
said. "That is the name of the game," he asserted. Martonyi believes
Europe can only be an active player in the energy game if it acts as
one. "The reason I and my party support a much stronger EU is because
we need each other," he said.
Overall, there was a consensus on one thing: however the great energy
game plays out, Europe is going to be reliant on Russian gas to some
extent for at least another two decades. Very little was said about
renewable energy sources, perhaps because it is not a geopolitical
issue, but rather a question of political and civic will in individual
states.
Some countries are making strides to reach the EU’s 2020 target of
boosting the use of renewables by 20%. Spain is now dotted with more
windmills than Don Quijote could ever have imagined, and Germans with
solar panels are selling surplus electricity to distributors who are
legally required by law to pay above the market price for it. Others
countries have shown less eagerness. There is no doubt that Europe
is going to need gas and oil, and a lot of it, for many years to
come. And a good deal of it is going to come from Russia.
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