Cjss second Issue: cjss second Issue qxd

In May 5, 2006 Gazpromexport signed agreement with Romanian com-
pany Transgaz ((GAZPROM in Europe: Faster Extension in 2006). Under the
agreement, the company will operate and invest in gas transmission infra-
structure in Romania together with GAZPROM which will enable GAZPROM
to use the infrastructure to increase the volume of gas supply to Turkey and
to carry out the southern gas pipeline project.   
Trans-Caspian pipeline which was designed to transport Turkmen gas
via Azerbaijan, Georgia and Turkey to Europe was influenced by Blue Stream
pipeline construction supplying Turkey with energy resources. Till today the
project is blocked.
In 2006 GAZPROM has signed a deal with Italian company ENI to build
a 900 km gas pipeline that will run from Russia to Europe via Bulgaria. The
deal is a major step towards building the South Stream pipeline, which would
take 30 billion m3/yr of Russian gas to Europe. The pipeline will be split in
Bulgaria into a northern route, going to Austria via Romania and Hungary,
and a southern route that crosses the Balkan Peninsula to Italy. GAZPROM
and ENI will each hold 50% in the venture. The pipeline will come on-stream
in 2013. The South Stream project is expected to strengthen Russia’s position
as Europe’s energy supplier and compete with NABUCCO pipeline- the way to
diversify energy sources away from reliance on Russia.
Abovementioned bilateral agreements clearly reflect multitude of often-
conflicting external energy policies of member states. Offered suggestions to
build direct access to Caspian energy sources bypassing Russia seems far
reaching for European countries. It’s obvious energy consumers perceive en-
ergy security as ,,getting reliable and adequate supply of energy at reasonable
price’’  but this perception is formulated not from diversification of energy
sources (diversification of suppliers)  but from the rules of market economy
with weak political implications- to get uninterrupted energy resources at
low price in order to operate national economy in appropriate way. Dealing
with energy security problem from this point leads to energy dependence.
Once, world sustained  devastating impact of energy dependence in 1970s,
when Middle East countries embargoed oil delivery to countries supporting
Israel during the Gulf War.
Europeans discuss ‘’energy interdependence’’ quite often, as if West has
certain tools of ‘’energy response’’ to Russia. In fact, this rhetoric bothers the
Kremlin very little. Although Russia receives big amount of its revenue from
the West, it is quite obvious that ‘’interdependence’’ may work to the point
where the resource importers know how to covert it into a real political
strength. In order to covert it in real political strength a producer should be
‘’small’’ and a bit ‘’silly’’ enough to let the consumer of XXI century (while
200
Caucasus Journal of Social Sciences

---

growing demand) use political tool over its own natural resources. Russia is
‘’big’’ and ‘’wise’’ enough not to let anybody to use any influence over her.
Russia is quite well informed that Energy producers have natural and legal
right to consider energy resources as part of their national sovereignty.
Besides, on the World energy market the EU needs to compete with
China (India too) which has loudly begun to demand Russian oil and gas sup-
plies. So, considering the evidence, talking about ‘’energy interdependence’’
is too far from reality. 
Energy Producer - Russia
The growing misunderstanding in the energy policy is based on failure
to recognize the emergence of political competitions at International level.
There are two management models:  ‘’modernization’’ and ‘’mineral-wealth’’
management models that are competing with each other. On the one hand ,
the Western model of ‘’Modernization’’ aims at removing political barriers
that limit access to raw material, to oil and gas resources where FDI is seen
as the best tool to denationalize energy resources and integrate in world mar-
ket  (less popular among energy producers). On the other hand ‘’mineral
wealth’’ management model formulates its own set of references for ‘’global-
ization’’: The model aims at the participation in the international economy,
but on the condition that the state’s long-term political, strategic and eco-
nomic national interests are served. This model is the appropriate for most of
energy producers especially for Russia. The model existence in XXI century
can be easily seen with current Russian-Georgia conflict. At first sight, the
conflict is based on territorial dispute, but if we go deep to the issue we can
easily find the seeds of regional energy strategy. As ‘’mineral-wealth’’ model
serves the state’s (producer) long-term political, strategic and economic na-
tional interests, Georgia’s incline to west, its potential NATO membership and
perhaps even the membership of EU (under doubt) puts Regional power’s –
Russia’s - political, strategic and economic national interest under  the risk.
Georgia’s and Ukraine’s membership in NATO will cause western military
presence in the region which may turn into a long-term political and strategic
threat for Russia and probably activate projected pipelines circumventing
Russian territory threatening country’s (Russia) national economic interest.
(Loosing monopoly over Central Asian countries’ energy resources). Knowing
this, Russia perceives energy security as ‘’selling energy resources to con-
sumer at high political and economic price’’. Russian formulated its energy
policy under five tactics:
Locking in demand (divide and conquer) (undercutting competitions)
201
Caucasus Journal of Social Sciences

---

Russia is attempting to lock in demand by signing long-term bilateral
and multilateral contracts with European countries. Moscow prefers to deal
with the EU member states separately rather than as a group so that Russia
can compete with EU alternative ways circumventing Russian territory. 
Locking in Supply
Russia‘s second strategy is to lock in supply by consolidating its control
over strate gic energy infrastructure, most notably pipelines, throughout Eu-
rope and Central Asia. Rus sia is using outright ownership and joint ventures
to control supply, sale, and distribution of natural gas and is buying up major
energy infrastruc ture, such as pipelines, refineries, electric grids, and ports.
In 2004, GAZPROM had in vested $2.6 billion in 23 major joint ventures,
including buying a 50 per cent stake in Slovrusgaz in Slovakia, 48 percent of
Europol Gaz in Poland, and 30.6 percent of Eesti Gaas in Es tonia (Judy
Dempsey, 2004).
On May 2007, at the summit in Turkmenistan three countries Russia,
Turkmenistan and Kazakhstan agreed to build the Prekaspiiski gas pipeline
to carry gas from Turkmenistan to Russia via Kazakhstan (Ariel Cohen, 2004).
With this agreement Russia tries to lock supply opportunity to Europe, as EU
before the agreement planned Trans-Caspian pipeline intending to circum-
vent Russian-control routes from Caspian basin. 
External Consolidation 
Russia is also consolidating control of oil and gas supplies throughout
Central Asia, particularly signing long-term exploration and supply agree-
ments with Turkmenistan, Uzbekistan and Kazakhstan to preempt independ-
ent export arrangements with the West.
Internal Energy Strategy Completion- Elimination of Existing Gap Between
‘’Business’’ and ‘’Politics’’
Through the marginalization of the oligarchs Russia regained control
over the political landscape. Using a combination of tax laws, licensing and
wielding control over GAZPROM Russian internal energy strategy finalized
with success. GAZPROM turned to be successfully chosen instrument regain-
ing Russian ‘’membership of the global board of Directors.’’
Power in Action
Russian-Georgian war demonstrated that Russia is quite prepared to use
force in pursuit of its interest. By means of this action Russia once again re-
minded the world that post-Soviet political crisis is over. Russia’s relative abil-
ity to take military action in a cluster of energy-important countries around
its borders is, (without any inclination that Russia will use force abroad, the
only target can be its ‘’near abroad’’) at present, much greater than ever.
In practical term, the World is not only shaped by globalization and dem-
202
Caucasus Journal of Social Sciences

---

ocratic values but by classic power politics (Realpolitik)
Challenges for European Countries
Europe can face the following threats: 1) Increasing energy dependence
and Russian dominance on European energy market; 2) Russian application
of energy sources as ‘’political leverage’’; 3) Russian market strategy (partner-
ship with potential competitors) – Gas Exporting Countries Forum;
Russian application of energy sources as ‘’political leverage’’
Who knows how Russia will use its fundamental and newly gained com-
petitive advantage. There are risks that cannot be easily ignored. During re-
cent years, a particularly disturbing factor had been Russia’s increased use
of energy as a tool for achieving foreign policy goals. For example:
Permanent political tension with Ukraine and energy supply cutoff in
2006 motivated by Ukraine’s Western orientation
Similar tense situation with Georgia in 2006
Shutdown of oil supply to Lithuania after Lithuanian Mazeikiu Nafta re-
finery was sold to a Polish company rather than to Russian bidders;
Refusal to build the initially planned second line of Yamal-Europe gas
pipeline through Poland, substituting it with Nord Stream gas pipeline via the
Baltic Sea, which turns out to be at least five times more expensive in capital
cost and about one-and-a-half times more expensive in terms of the gas trans-
portation staff; 
Gas Exporting Countries Forum
Possible Russia-Iran cooperation in Gas OPEC threatens appearance of
new collective strength on International arena. Current Russian -Iran inten-
sive ties underline existence of strategic cooperation based on their long term
foreign policy goals. Their ‘’friendship’’ is driven by two primary motivations:
energy and security (against US). Worldwide Russia and Iran rank the first
and the second in term of gas reserves. So, in future they can not only secure
their income from gas export and raise their status on the global gas market,
but can also raise their impact on International politics. Kremlin support (be-
lieving in Iran’s good intention) of Tehran’s nuclear program once again re-
minded the World about growing importance of their cooperation. Russia and
Iran can divide energy power (gas) among each other if Gas exporting coun-
tries Forum turns into OPEC like organization, where according to length of
their reserves Russia will take first place and Iran the second one. Besides,
as Iran has less financial potential-comparing with Russia- to activate energy
production at full scale- Iran may let Russian rich investors (or company like
GAZPROM) to operate in unexplored fields, drastically increasing Russian ‘’en-
ergy management’’. This threat is now underway as on July 21, 2008 Russian
gas monopoly GAZPROM signed Memorandum on cooperation in oil and gas
203
Caucasus Journal of Social Sciences

---

production and transportation with the National Iranian Company with
whom many European companies refused to work. So this official cooperation
gives chance to Russian company GAZPROM to strengthen its positions over
Iran’s energy resources. This new Russian investment was put in Iranian Pars
field one of the biggest gas fields in the world, which is expected to produce
more than 750 million cubic meters of natural gas a day by 2014 (Kostis
Geropoulos, 2008).
Finally, like OPEC, Gas OPEC can manipulate with prices and production
volume. OPEC even today manipulates with production volume - as Russian
market has lost 18 percent of its value since Russian invasion in Georgia
(RTC,2008). OPEC cuts its production (not very high) in order to increase the
price of oil. These two events can’t be regarded as coincidence- most of energy
producers still try to work together (Current Russia-Venezuela military train-
ing in Caribbean Sea)( Russian Strategic Bombers in Venezuela for Train-
ing,2008).
The means to respond to external energy challenges
Double liberalization or protectionism
Diverse European energy market - access to alternative sources of en-
ergy
( De-Russification of Central Asian energy resources; Renegotiation of
relation with Iran)
Common Energy Policy (Prevent member states from reaching individ-
ual deals undercutting the viability of EU plans to bring alternative suppliers
of energy to Europe)
Double liberalization or protectionism
Over-arching liberalized market structure needs to be built both in EU
and Russia. While Western investors’ rights to control an asset are limited by
49% shareholding rule in Russia, in Europe Russian gas company GAZPROM
creates joint ventures with 50% share (e.g. GAZPROM & OMV joint venture).
Europe should either manage to liberalize Russian energy market which is
not possible in nearest future as till now Russia consistently refuses to sign
up to any kind of binding agreements such as the Energy Charter or protect
their market from foreign dominance (strengthening anti-trust law and esp.
‘’Ownership unbundling’’) -not letting vertically integrated joint ventures (esp.
national & foreign) to have full scale capacity of production and distribution
simultaneously. The double activation by the same venture negatively effects
competition. Market fragmentation along national borders, high degree of
vertical integration and high market concentration are the roots of the lack of
a healthy market competition (Memorandum of 3
rd
energy package). It’s ob-
vious vertically integrated network operators have no incentive for develop-
204
Caucasus Journal of Social Sciences

---

ing the network in the overall interests of the market and hence for facilitating
new entry on supply levels. On the contrary, they have an inherent interest to
limit new investment and strong competition.
In addition, it is important to pay attention to the existence of long-term
energy contracts. Long-term contracts can be both good and bad. On the one
hand, they offer purchasers guaranteed supply, and better management of
the risks related to adverse price movement. But it is vitally important that
the benefits of this security are not outweighed by the negative impact on ef-
fective competition. Unhealthy competition leads to one-party dominance.
So, Insufficient unbundling of network and supply activities decrease com-
petition. Effective separation of supply and production activities from the net-
work is a key for better-functioning energy market and security of supply.
Alternative energy sources
Diversification of energy suppliers minimizes absence of market com-
petition, protects EU against potential dominance from single external sup-
plier and improves security of supply. For Alternative scenario Caspian energy
resources (not Russia, as she is already one of the biggest energy suppliers for
EU), mostly from Central Asian countries could serve as perfect example. Plus
to Central Asian countries Iran with the largest gas reserves after Russia can
be huge energy supplier for Europe. 
Common Energy Policy
EU member states have to recognize that their parallel ‘’energy protec-
tionism’’ fails to provide effective energy security for the Union. Bilateral deals
with only one energy supplier led to growing dependence on one, single
source, which will affect not only one country but the Union as a whole. For
example Germany has made step which put the country heavily dependent on
Russian gas without having the corresponding power to require its Russian
partner to take steps such as liberalizing its own markets. If Russian gas short-
ages occur it will create stress not only on Germans energy market but such
shortages could cause widespread economic disruption across the Union
(considering Germans high contribution to the EU budget). With the estab-
lishment of Common Energy policy European countries will together diversify
energy sources and spread liberalized market rules over external energy sup-
pliers in order to insure security of supply. 
205
Caucasus Journal of Social Sciences

---

206
Caucasus Journal of Social Sciences
Conclusion
Natural resources became either geopolitical challenges or opportunities
for countries in XXI century. Energy security became self-serving depending
on energy producers’ and consumers’ different interests. For producers gas
and oil became not the source of ‘’short energy war’’ as it once happened in
1970s, but the tool for well-coordinated, long-term political goals. That’s why
for producers’ energy security became source of gaining high, expensive eco-
nomic and political value on International level. As energy producers per-
ceived their legal and natural right to consider energy resources part of their
sovereignty consumers were left only with getting supply at ‘’reasonable price
‘’ - uninterrupted energy resources at less fluctuated price. Despite differences
consumers and producers turned to share one common character - energy
security became part of their natural security. But still there is difference as
producers more politicized the subject than consumers. Producers recog-
nized existence of both internal and external threats, but consumers could
not follow the same path. It could be explained by consumers’ different na-
tionality. Talking with ‘’one voice’’ still remains a problem for European coun-
tries which can be regarded as the weak link in their energy strategy, while for
producers like Russia mixture of inner and outer threats became less difficult
(considering current political turmoil in Middle East and increase on de-
mand). 
European failure to establish common energy policy and effective
competitive Single Market for energy in Europe may lead to energy depend-
ence on single supplier with ‘’political leverage’’ and creation of Gas OPEC
with strong market division and intention to monopolize. The abovemen-
tioned threats can be responded with strong anti-trust law (a bit protection-
ism is needed) and diversification of suppliers. As double liberalization is far
from reality (Russia will never agree with Transit protocol and never liberal-
ize market, at least in nearest future) anti-trust law (competition law) should
become strict enough to disband production and distribution by the same
company which will lead to healthy competition, Second way to somehow de-
crease dependence on Russia should be Caspian hydrocarbons and elimina-
tion of Iran Isolation. Otherwise Russia influence over Central Asian resources
may repeat over Iran by means of Gas OPEC. Moscow makes plenty of noise
about selling its gas to China and Japan instead of Europe. But it will be some
time before Russia can build planned infrastructure to do that. In addition,
Europe can also find third way - renewable energies especially nuclear energy
which so perfectly works in France. So energy insecurity can be dealt only
with mixture of energy tools (diversification of suppliers, unbundling and re-
newable energies). 

---

207
Caucasus Journal of Social Sciences
References:
Blagov, S. (2007). Russian Celebrates Its Central Asian Energy Coup from
http://www.eurasianet.org/departments/insight/articles/eav051607.shtml
Cohen, A. (2007). Europe’s Strategic Dependence on Russian Energy, Her-
itage Foundation, from www.heritage.org/Research/Europe/bg2083.cfm
Dempsey, J. (2004).  Russia casts Energy Web over East Europe’’, Inter-
national Herald Tribunal, from www.iht.com/articles/2004/10/01/energy
ed3.php
Dempsey, J.  (2007). Hungary Choose GAZPROM over EU, International
Herald Tribunal, March 12, 2007, from www.intcom/articles/2007/03/12/
news/hungary
The Energy Charter Treaty 2000.
European Council Action Plan. (2007-2009).
‘’Energy Package’.’ June 9, 2008.
Green Paper, Brussels, 8.3.2006, from www.wave-energy.net/index_
files/documents/EU green paper.pdf
GAZPROM in Europe: Faster Extension in 2006, Center of Eastern Stud-
ies, Warsaw February 2007, from http://www.euractiv.com/en/energy/
expansion-gazprom-headaches-commission/article-162504
Geropoulos, K. (2008). Gazprom to fill Iran’s Investment Vacuum, July 21,
2008 from http://www.neurope.eu/articles/88908.php
Helm, D. (2007). Europe’s External Energy Policy: Russian Dimension,
from www.EurActive.com
Lobkakas, A. (2006). Russia: EU maintains Codependence Energy Rela-
tionship, Free Europe/Radio Liberty Memorandum of 3
rd
energy package’’ 
RTC , Stock Exchange, September 9, 2008 from  www.rts.ru/ru/index
Russian Strategic Bombers in Venezuela for Training, September 10,
2008 from rustavi2 news
Shell Global Scenario to 2025’’ from  http://www.shell.com/#about
Socor, V.  (2008) OMV Joins GAZPROM to undercut NABUCCO from
http://www.jamestown.org/edm/article.php?article_id=2372756

---