It is no coincidence that Russia’s new president is Gazprom’s former chairman. Whereas Russia once saw its power and influence in stockpiles of nuclear missiles, today it strives to reclaim its place on the world stage as an ‘energy superpower’. Like it or not, Europe is at the centre of this strategy – and it’s high time we woke up to the implications.
At the moment the EU relies on Gazprom for around a third of its gas supplies. That is worrying enough. But with our dependence on imports set to increase dramatically over the next 20 years, we could soon find ourselves in a situation where the murky state-owned monopoly supplies the vast majority of our gas. Gazprom already has investments in most EU countries, and six rely on it entirely for their supplies.
Russia and its puppet company have systematically undermined all our attempts to build pipelines outside of their control from the Caspian and Central Asia to Europe. They are determined to maintain their stranglehold over the European market, and are prepared to be ruthless. While the EU struggles to coordinate its policies, Vladimir Putin has engaged in vigorous ‘pipeline diplomacy’, sealing deals to divert the region’s gas to Russia and provide potential customers of new pipelines with alternative Russian sources.
Faced with this apparently overwhelming combination of economic and political muscle, many European governments appear to have decided ‘if you can’t beat them, join them’. In true ‘beggar thy neighbour’ style, they are scrambling to curry favour with Russia and sign long-term contracts with Gazprom which they hope can give them the reliable supplies they need.
This security is an illusion. For a start, as western energy companies know from bitter experience, Russia will not hesitate to tear up contracts if it decides they are not to its liking. It does not see the law as a binding obligation, but as an expression of the balance of power in a given moment.
At the huge Kovytka gas field, the Russian government threatened to cancel TNK-BP’s license for failing to meet production quotas, even though the only legal means to evacuate the gas – via Gazprom’s network – was denied by Gazprom itself. In the end the companies were forced to sell their stake in the project to Gazprom at a greatly knocked down price. Shell suffered a similar fate at the massive Sakhalin-2 gas project, when the Russian government revoked its operating license citing environmental violations. These objections were soon dropped after Shell agreed to sell a controlling share of the project to Gazprom.
Then there is the chance that Russia may choose to use its gas reserves as a political weapon. The timing of Gazprom’s recent price increases in Georgia and the Ukraine looked highly suspicious following the ‘Rose’ and ‘Orange’ revolutions that had brought pro-western leaders to power. Gazprom protests that it has made a business decision to end subsidies to former Soviet states. But even if we accept this argument, the risk remains that Europe could be caught in the crossfire if the taps are turned off in an ugly price dispute with a transit country.
What should scare European governments most, however, is growing evidence that Gazprom cannot fulfil its contracts even if it wants to. As a consequence of its monopoly position, the company has preferred to expand its power rather than engage in expensive development of new fields. While production in the privately owned oil sector has more than doubled in the last 10 years, Gazprom’s production has barely increased at all. In recent years it has actually spent more money outside the sector buying football clubs and building skyscrapers than it has in getting gas out of the ground.
So far, so scary. But it’s not all doom and gloom. If Europe can stand together, we are actually in a much stronger position than most people realise. Russia needs us at least as much as we need Russia. It is worth pointing out that two-thirds of Gazprom’s revenue comes from European customers. Most of Russia’s gas is sold at a loss on the home market, helping to stave off social unrest. If export revenues were threatened, the effects could be cataclysmic. Not only that, but Gazprom’s taxes provide a quarter of the Russian government’s budget. It is Kremlin coffers stuffed with energy riches which have given Russian leaders the confidence to stand tall after the perceived humiliation of the 1990s.
Nor is Russia exactly big on alternatives to European customers. For the time being all the large Russian pipelines go west. Despite Putin’s veiled threats to turn to China if Europe won’t sing to his tune, Moscow has long prevaricated when it comes to building anything. Even if the will was there, the infrastructure would not be in place for decades. Besides, China is not willing to pay anywhere near the high prices paid by Europeans.
For too long, Russia has been allowed to exploit a Europe weakened by its divisions. It dreads the day that Europe begins to speak with one voice, and with good reason. A united EU would be able to bring considerable pressure to bear. We need a principled bilateralism where all member states use their contacts with Russia to support common EU goals.
A more coherent approach is beginning to take shape. Energy policy proposals currently being examined by the European parliament contain a ‘reciprocity clause’ meaning that Gazprom could not buy distribution companies in Europe unless it allows western companies to take part in production.
But we must go further. This is about the kind of Russia we need as a partner, and not only in energy. The shady Gazprom, with its intimate ties to the Kremlin, is a direct product of Russia’s undemocratic system of rule. Under Putin the state has become more like a super-company, dominated by a small cabal of bureaucratic capitalists. They chase profits on the boards of state-owned corporations with no public accountability. Europe should stand up for democracy not just on principle – only a democratic Russia can give Europe the transparency it needs in an energy supplier.
The EU should also demand that Russia respect the rule of law. The rule of law is the best approach to our relations, as it eliminates the need for abstract lecturing. President Medvedev has said encouraging things on the subject, and we should hold him to them. This means upholding both the letter and the spirit of the law. The dubious legal pretexts used to kick out our companies or close down British Council offices are simply unacceptable. It should be pointed out that through its membership of the Council of Europe and the OSCE Russia has obligations to protect democracy and civil liberties. When it flouts the principles of contracts it has signed, we must speak out loud and clear.
Europe should not be intimidated by the bullying tactics of Gazprom and the Kremlin. Time to use our combined strength to demand a partner we can rely on.