Publication: Eurasia Daily Monitor Volume: 3 Issue: 123

Putin faces threats from energy consumers -- and suppliers

In mid-June, the heads of one North American, some Eurasian, and most European states travel non-stop, seeking to patch holes in the laboriously spun networks of cooperation. Russian President Vladimir Putin last week shook hands in the Kremlin with Italian Prime Minister Romano Prodi and then made a short trip to Minsk to the joint summit of the Collective Security Treaty Organization (CSTO) and the Eurasian Economic Community (EEC). One week earlier he had traveled to China for the fifth summit of the Shanghai Cooperation Organization (SCO). President George W. Bush attended the U.S.-EU summit in Vienna and then visited Hungary to commemorate the 50th anniversary of the October 1956 uprising against Communist rule. Before touching base with Bush the European leaders had held an EU summit in Brussels, while an EU-Russia summit had happened some three weeks earlier. This kaleidoscope of photo-ops has produced few surprises and hardly a single breakthrough (Uzbekistan’s re-entry into the CSTO was long expected), but the one topic that came up at every gathering is energy security.

It might appear that the theme is quite tired and hollow, since everybody is in favor and nobody is actually against enhancing collective security. It might also appear odd that politicians devote so much of their limited ability to an issue of overvalued significance; the astonishing rise of oil prices has so far produced surprisingly little impact on global economic trends. It is worth noting, nevertheless, that they are giving only passing attention to oil, where markets are mostly beyond their control, and focus more on natural gas, which has always been a commodity with value beyond just money. Nowadays, gas has become a problem that incorporates the worst features from the oil market, with its unpredictable price hikes, and from the political arena, with its unreliable friendships and protracted quarrels.

News on the gas front keeps coming thick and fast. Turkmenistan has announced its non-negotiable decision to raise prices on the gas it exports to and through Russia to $100 per 1,000 cubic meters, following the example of Kazakhstan (Vedomosti, June 22; EDM, June 23). The newly formed government coalition in Ukraine has boldly declared its intention to revise “in a friendly manner” all agreements reached with Gazprom earlier this year (RosBusinessConsulting, June 22;, June 23). Belarus has flatly rejected Russia’s demands for a triple price increase and transfer of ownership over pipeline infrastructure (Kommersant, June 24). In the absence of market mechanisms, prices are decided through a political tug-of-war and Moscow appears increasingly irritated that its raw power does not secure clear victories since it keeps slipping on issues of transit and trust.

These setbacks keep disturbing Moscow’s grand gas game with Europe. Putin has developed considerable skill at playing a weak hand, but he now wants to develop a position of strength. Herein lays the irreducible dilemma of “energy security”: The EU has concluded that it could only find it by diversifying away from Russia, while Russia seeks to achieve “security of demand” that would reduce all plans for alternative sources of energy and suppliers to irrelevance. This dilemma cannot be resolved by tailor-made agreements on granting select Western companies stakes in developing gas fields in Russia in exchange for cutting Gazprom in on the ownership of distribution networks, like the deal struck with German BASF in April or the one currently under discussion with Italian ENI (Vremya novostei, June 21). Such agreements contain significant asymmetry: Gazprom, generously awarding its partners up to 49% of the shares, excludes them completely from the management of the joint companies, while it expects to have a big say in the decisions about the choice of suppliers for the distribution companies (, June 7).

What is more, the Europeans have become aware that they would be selling their assets not to an energy “champion” driven by financial calculations and market incentives, but to the Kremlin, which is driven by entirely different considerations. In this perspective, the anxiety around the transfer of power in 2008 has direct implications for Russia’s position as a provider of “energy security”; it makes political sense for Putin to keep everybody guessing about his choice of successor, himself being at the top of the list, but Gazprom’s business reputation inevitably suffers. This behemoth of a company can swiftly execute any political order, from seizing control over media outlets to building a presidential resort in Krasnaya Polyana beyond Stalin’s fantasies, but it cannot adopt an economically rational strategic investment plan.

While Europe still agonizes over this dilemma, the United States has connected the dots and argued that Russia’s retreat from democracy undermines its role as a reliable supplier of energy. This point was clearly made by Vice-President Dick Cheney in his Vilnius speech last month, but the strong reaction from Moscow convinced the Europeans to soften the approach and offer some new cooperative incentives (Washington Post, June 19). At the U.S.-EU summit, the joint concern about Russia’s trajectory was reiterated, which in fact was one of the few points in the agenda where common ground was firmly established (Kommersant, June 22). President Bush sent a clear warning to Moscow in his Budapest speech and then held a meeting with key experts on Russia at the White House in order to finalize the U.S. position before the July G-8 summit in St. Petersburg (, June 23).

This gathering stands apart in the seasonal high-level socializing and Moscow, while initially blowing its significance out of all proportions, is now trying to downplay it (Moskovskie novosti, June 23). It would hardly be a moment of truth — but nevertheless a good opportunity — to cross each “t” and dot every “i” in the term “security” as applied to energy matters. It was Putin’s idea to “securitize” the balance of demand and supply and he should not be allowed to play his favorite game of pitting the partners one against another.