Medvedev Proposes a New “Energy Balance” in Europe

During his visit to Helsinki, Finland on April 20, 2009, Russian President Dmitry Medvedev outlined a plan which would transform the Energy Charter, a document which has never been ratified by Russia, "in order to meet the interests of energy producers and consumers" (Kommersant, April 21, 2009). The plan envisions that gas producers and consumers share a role in energy transit routes in third countries and ensure that these routes are maintained and renovated to keep them in working order.

The proposal also calls for the creation of an "energy balance" report to outline the long-term needs of consumer states in order for Russia to determine the level of investments needed into its energy sector and ensure that long-term contracts are met.

The Russian proposal seemed to be aimed above all at stopping the Ukrainian-EU agreement reached in Brussels on March 23 which calls for the EU to renovate and expand the capacity of the Ukrainian gas trunk pipeline from the present through-put capacity of 145 billion cubic meters of gas annually by 58.6 billion -without Russian participation. The Kremlin’s reaction to the agreement was virulent.

Prime Minister Vladimir Putin lashed out by asking the far from rhetorical question: "Nobody asked us if we are ready to transport such quantities [of gas]" and threatened to raise the price of gas to EU customers if the agreement is carried out (UNIAN, March 24, 2009).

But the proposal also appears to be aimed at Poland through which the Yamal pipeline sends 20 percent of Russian gas to Germany. The Polish section of the Yamal pipeline is operated by EuRoPolGaz which is 48 percent owned by the Polish company PGNiG, 48 percent by Gazprom and 4 percent by Gas Trading SA, controlled by the Polish oligarch Aleksander Gudzowaty who has often been suspected of harboring strong pro-Gazprom views. In June 2006, Krysztof Glogowsky, the president of the monitoring group of EuRoPolGaz S.A., accused Gazprom of attempting to implement a policy of financially weakening EuRoPolGaz in order to bankrupt the company. According to PGNiG, Gazprom was doing this in order to gain control over the Polish section of the Yamal pipeline (www.intellibriefs.blogspot, July 12, 2007).

Other transit countries which could be affected by the Russian plan are Bulgaria, Belarus, Romania, Slovakia and the Czech Republic, as well as Hungary and Austria which have already signed on to the Russian South Stream gas pipeline project as transit countries (EDM, June 10, 2008).

Equally, the Russian proposal might only be a test of unity within the EU. If the EU agrees to the new transit country proposals it would hand over to Gazprom an inordinate influence over pipeline decisions within EU member countries.

The answer to the Russian proposal came on April 22 when the European Parliament approved by a vote of 596 for and 45 against the "Third Energy Packet" of the EU gas liberalization legislation, which, according to many commentators, will block Russia from achieving its long-standing plan of gaining control over EU domestic gas distribution pipelines. This would allow Gazprom to dictate transit tariff fees as well as collect huge rents from domestic EU gas sales, not to mention the immense political advantages Russia stood to gain from such a coup.

The "Third Energy Packet" legislation demands the de-coupling of energy producers from pipelines they own -and can possibly manipulate in order to inflate prices through by-passing the terms of existing long-term gas sales contracts.

One commentary in the Russian press stated that "while the North Stream project is not threatened by this ["Third Energy Packet" legislation] because it is protected by a special agreement which forbids the assignment of management of the project to third parties, Russia will not gain the political influence in Europe which it expected and which has prolonged the project’s implementation (Kommersant, April 23, 2009).

What apparently upsets Moscow’s energy interests is that the legislation will pave the way for EU gas companies to buy Russian gas at the Ukrainian-Russian border and thereby integrate the Ukrainian gas transit pipeline into the EU gas pipeline network. Such a move will further undermine Vladimir Putin’s goal of subjugating Ukraine.

The way to combat this strategically important geopolitical challenge in the eyes of the Kremlin lies in the upcoming Ukrainian presidential elections. If the Kremlin decides to once again support the pro-Russian Ukrainian Party of the Regions -as it did in 2004- it might demand that their favored candidate Viktor Yanukovych, rejects the March 2009 Brussels agreement. Instead, by allowing Russia to participate in the reconstruction of the Ukrainian pipeline, it will obtain a powerful say in controlling the Ukrainian gas transit system.

The outcome of this gamble is far from clear. Yanukovych has remained non-committal on this issue while Yushchenko has insisted on the revision of the January 2009 gas import contract with Gazprom (Ukrayinska Pravda, 23 April 2009). This does not appear feasible. Yushchenko’s somewhat confused statement at his press conference on April 22 was vague and appeared to be yet another attack on Prime Minister Yulia Tymoshenko as part of his effort to discredit her. However, Gazprom is now set on controlling all its gas transit routes in Europe.