Publication: Eurasia Daily Monitor Volume: 3 Issue: 176

Russian President Vladimir Putin

Russian President Vladimir Putin resumed his European engagements last week, traveling to Budapest and Paris; he also plans a sentimental trip to Dresden in mid-October. The atmosphere at the meetings, however, was not exactly cordial, with French President Jacques Chirac assuming a rather reserved tone and German Chancellor Angela Merkel, who joined them for a traditional “troika” summit, not even pretending to be a personal friend like her predecessor, Gerhard Schroeder (Gazeta.ru, Nezavisimaya gazeta, September 22). The riots in Budapest did nothing to improve the mood of the tour, perhaps reminding Putin that political lies are a universal pattern, but truth is a really dangerous substance (Gazeta.ru, September 21).

On the rich diplomatic menu, one theme received far less attention than usual: energy security. It had dominated the Russia-EU dialogue in the first half of this year and was Moscow advanced it as the top issue for the July G-8 summit in St. Petersburg despite the simultaneous crisis in Lebanon. It was by no means exhausted at that carefully staged event; significant disagreements over the meaning of “energy security” and the means of achieving it persisted and required further compromises (Kommersant, July 18; Polit.ru, August 4; EDM, September 6). Putin certainly did not grow tired of maneuvering across markets and pipelines or pitting opponents against one another. There is, nevertheless, a distinct impression that he now seeks to shift gears in these debates and to re-evaluate the basic premises of energy relations.

His strategy, presented with drive and passion on many occasions, boiled down to a simple scheme: European investors were invited to take minority stakes in projects to develop huge oil and gas fields in Russia, and Gazprom went on a shopping spree across Europe purchasing gas distribution networks. There was certainly some smart thinking behind these “asset swaps,” since Moscow planned to keep its monopoly on decision-making in domestic projects, even if foreigners would accumulate 49% of shares, but it expected to have a major say as a minority shareholder in European downstream companies. This mutual ownership was expected to balance the interests of Russian and Western companies more harmoniously than the Energy Charter, against which Moscow continues to raise objections.

It was the April deal between Gazprom and the German giant BASF, which acquired a large stake in the Yuzhno-Russkoye gas field in exchange for a stake in its distribution company Wingaz and subsidiary Wintershall, that was hailed as a model for cooperative projects (International Herald Tribune, April 28). Another German “major,” E.ON was expected to follow suit, but so far the deal has not materialized — and the problems appear to be political rather than technical. For many European companies it has become clear that selling their assets to Gazprom is the same as granting a voice in the decision-making to the Kremlin, and since the start of the year this customer has proved rather difficult.

The bitter quarrel around the Sakhalin-2 project has been making international headlines lately, and many commentators are shocked that Gazprom is using ecological expertise and the Ministry of Natural Resources in order to wrestle at least a 25% share for itself out of the hands of an international consortium that includes Shell, Mitsui and Mitsubishi (Vedomosti, September 20, 22). In fact, there is nothing unusual about this behavior, as the BP can attest from the experience of its blocked project on developing the Kovykta gas field, and Total has experienced considerable harassment with its Kharyaginskoe oilfield project (Vremya novostei, September 22). The latter issue was raised during Putin’s visit to Paris but to little avail, while the decision on the huge Shtokman gas field in the Barents Sea, which was expected to be announced at the G-8 summit, has been postponed indefinitely. There is more to this massive pressure on Western companies than just the desire to re-negotiate the production-sharing agreements from the 1990s; the Kremlin now appears to believe that the energy sector should be under its exclusive control and that the international investors are not welcome anymore.

In parallel with this offensive, the rationale for acquiring assets in Europe has been re-evaluated. Indeed, the profitability of the distribution networks is quite low and the profits are taxable by European laws (Gazeta.ru, June 7). It makes sense for Gazprom to buy into the networks that would distribute the gas to be pumped through the planned North-European pipeline in order to secure the advance of this problematic project (Kommersant, August 30). It makes even more sense to acquire assets that would support the export of gas by the Southern route through Turkey and the planned Blue Stream-2 pipeline; hence the importance of Putin’s visit to Hungary (Polit.ru, August 30; see EDM, September 21). In a broader perspective, however, the only benefit of investing in European companies is the guarantee that they will continue to buy Russian gas — and Moscow is now far from sure that it wants to sell that much of its gas to Europe.

One part of the problem is the obvious discrepancy in the energy balance for 2010 and longer-term, where the flat production, rising internal demand, and recently expanded export commitments — particularly to China — leave a yawning gap. The government has launched a revision of its Energy Strategy in order to restore this balance, primarily by reducing the internal consumption, but this exercise most probably would remain theoretical (Kommersant, September 19). The main part of the problem, however, is the underlying political assumption that the inter-penetration of the Russian and European energy complexes would make Russia more than just a reliable trading partner — actually a truly European state. Despite all the smiles and backslapping at the summit meetings, Putin understands perfectly well that by tightening control over domestic politics approaching the political watershed of 2008, he is taking Russia away from Europe. Deepening the energy cooperation thus becomes politically inane and the order of Légion d’honneur that he received from Chirac is perhaps a symbolic mark of fin de siècle of gas interdependence.