Publication: Eurasia Daily Monitor Volume: 3 Issue: 195

Russian President Vladimir Putin endured a most unpleasant dinner with the EU heads of state and top officials last Friday (see EDM, October 20). The day before he departed for Lahti, Finland, he held one of the least successful meetings with the ministers and heads of key agencies in the economic “bloc” of his government (Vremya novostei, October 20). The central theme for discussions at both meeting was energy, and, despite the protracted expert consultations and top-level exchanges, the disagreements now run deeper than at the start of 2006. The problem was not that the EU member states had put extraordinary efforts into forging a common position while the Russian quarrelsome bureaucrats and energy “tsars” kept pulling in different directions. The real problem is that the accumulated and unaddressed imbalances in Russia’s energy complex have undermined Europe’s confidence in the reliability of this supplier and forces it to re-evaluate the risks for its energy security.

Energy has been traditionally one of the most disagreeable topics on the EU agenda, with very different levels of dependency and complicated ties between political elites and companies that aspire to be “national champions.” It has always been clear that the EU Commission could hammer out a common platform only with Germany’s consent, so Putin focused his energy offensive on Germany, while also advancing secondary positions in France, Italy, Hungary, and Turkey. The offer to channel all gas from the giant Shtokman field in the Barents Sea towards Germany was perceived by the Kremlin as irrefutable, but instead it confirmed Berlin’s worst suspicions (see EDM, October 19). As Fedor Lukyanov, one of the sharpest analysts of Russian-European relations, argued, Putin was carried away by the “light-headedness of success” and acted like a “nouveau riche, confident that he can buy everything for his resources,” while in Europe such manners were not acceptable (, October 19). German Chancellor Angela Merkel insisted both on the eve of the Lahti summit and at the final press conference that the Energy Charter provided the most reliable guidelines for partnership and that Russia had to open its internal market for European investors and provide guarantees for their holdings (, October 20).

Putin tried shrugging off his disappointment and suggested signing a new treaty on strategic partnership to replace the Partnership and Cooperation Agreement that expires next year (RIA-Novosti, October 21). EU Commission President José Manuel Barroso pointed out, however, that trust was a serious issue in relations with Russia, in essence conveying the message that Putin’s personal reassurances were not good enough for Europeans. Finland, which currently holds the EU rotating presidency, confirmed that opinion, despite being almost entirely dependent upon Russian energy imports (BBC News, October 21). In fact, opinion polls show that two-thirds of Finns do not trust Putin (Kommersant, October 21).

There are many reasons behind Putin’s declining European ratings, but as far as energy is concerned, experts are most worried about Russia’s ability to deliver on its commitments, since internal demand increases at a far greater rate than production. That was the main problem discussed at the meeting in the Novo Ogarevo presidential dacha last Thursday, where Prime Minister Mikhail Fradkov delegated to Viktor Khristenko, minister for industry and energy, the honor of presenting the government’s plan to overcome the electricity deficit by increasing deliveries of natural gas and sharply raising the benchmark prices on both gas and electricity (Kommersant, October 20). Putin rejected the plan out of hand, insisting that the high tariffs were already causing “depopulation in some regions” and that “strategically important export deliveries” could not be re-oriented toward domestic gas consumers (Vedomosti, October 20). The president expressed great dissatisfaction that his instructions to put together a “clear and comprehensible” program for developing the electricity sector had not worked and ordered them to present him a comprehensive assessment of the energy balance in two weeks.

It is certainly true that electricity production has lagged behind Russia’s remarkable economic growth and has become a serious handicap to further expansion. It is also clear that the most natural candidate for allocating the blame is Anatoly Chubais, despite the evidence on record that his plans for reforming the electricity monopoly Unified Energy Systems were blocked by the government and torpedoed by the Kremlin. The only problem with this scape-goating game is that Putin knows for sure that only Chubais and his first-class team of managers could prevent shortages and overloads from escalating into a full-blown crisis. The politically astute Chubais is not shy about pointing out that the most shocking distortion in current energy prices is not of his making. Indeed, Russia now purchases gas in Central Asia at $110-120 per 1,000 cubic meters and sells it on the European market at $200-240, but the domestic consumers who take up more than two-thirds of internal production pay only $40-45. Khristenko tried to present in Novo Ogarevo the common-sense conclusion that the first step in constructing a meaningful energy balance had to be the doubling of internal prices, but Putin would have none of that.

He insists on increasing the role of coal in a new energy strategy, but such a shift can be accomplished neither in two weeks nor in two months, since the coal industry needs massive investment to achieve the required growth. Quite possibly, the perspective Putin is really interested in is closer to 20 months, when a carefully chosen successor would have to launch the unpopular reforms that are now deliberately postponed by the Kremlin. That “kamikaze” cabinet would invite a tsunami of public wrath — and then Putin could make a “surprise” comeback and harmonize the flows of energy and money. He might even offer a new “real deal” on Shtokman to the Europeans — but that would hardly eliminate the danger to their energy security.