A. Rusi. European Energy Security

Europe is not anymore divided  as during the Cold War but there  already exists an identifiable political and military dividing line between Europe and the Eurasian states controlled by the Russian federation. The economic structures of the post-Soviet economy made it difficult, even impossible to integrate Russia into the European institutions. The question was not about the lack of political will but  about history and geopolitics. Schock therapies or other quick methods failed to reform post-Soviet Russian economy. Nationalism replaced communist ideologue as a unifying force  and a vertical power system regionalization.

Furthermore, Russia has an interest to push its sphere of influence westwards.”To end up the breaking of Russia”. Contrary to other BRIC countries, Russia  displays a propensity to use force to achieve its strategic objectives. The neighboring states of Russia are targets of an advanced hybrid war including direct military threats. Instabilities have reached The Baltic Sea Region but much less in case the Nato enlargement would not have covered the Baltic states.

One of the key tactics to promote Russian  geopolitical interest is energy interdependence. Since the vertical Putin system was established during his first term as President, natural gas, even more than oil, became perhaps the most powerful tool of foreign policy. Oil trades freely, gas requires fixed pipelines. The network of pipelines, dating to the Soviet era, gave Russia clout and, with rising energy prices, Putin understood early 2000, that it constitutes the core of Russia’s power. Ukraine, through which most of gas passed, had to be firmly nestled in Russia’s geopolitical embrace.

In  the early summer 2005 Gazprom took over  with a direct involvement of Putin a major private oil company Sibneft with the cash of 13 billion dollars  from the funds of the state’s coffers. Putin controlled the company by picking loyal friends to run it at all levels. Gazprom became one of the largest corporations in the world and a powerful arm of Russian foreign policy from Asia to Europe. By strengthening Gazprom, Putin aimed at strengthening Russia’s geopolitical reach to regain after the collapse of the Soviet sphere of influence.

The construction of the longest underwater natural gas pipeline, Nord Stream 1, was launched already 1997 when Gazprom and the Finnish Neste (later on Fortum) formed a joint company North Transgas, later Nord Stream for the construction of a gas pipeline from Russia to Northern Germany across the Baltic Sea. The project was strongly facilitated by Chancellor Gerhard Schröder who had approved  one billion loan to Gazprom two weeks before the elections in September 2005, but it took until November 2009,  before the Swedish and Finnish authorities gave a permit to lay the pipeline  from Viborg to Greifsfald of 1,222 kilometers in their exclusive economic zones. A consortium made up of Russian Gazprom and energy companies E.ON, BASF/Wintershall, OMV, ENGIE and Royal Dutch Shell was created for the Nord Stream 2 project, slated to expand the existing Nord Stream pipeline with current capacity of 55 billion cubic meters.

Nord Stream 1 that was operational in the autumn 2011, and the parallel pipeline the following year had two immediate goals: (1) to bypass the old Soviet pipeline network through Ukraine, Belarus and Poland, and (2) to increase Europe’s dependency on Russia. The project was called by Polish defense minister ”the energy version of the Molotov-Ribbentrop Pact”. For many others is was only a major business deal. In Finland it was even considered that it will strengthen stability in the Baltic Sea because both Germany and Russia were committed to stability for the sake of the pipeline. In 2016  a high  share of gas supplies going from Russia to Europe has to pass through Ukraine. Nord Stream 2 is scheduled to be constructed by the end of 2019 which is the same year as the contract between Russia and Ukraine expires.

The war between Russia and Georgia in August 2008 was seen by many as an intense geopolitical contest over the flow of Caspian Sea energy to markets in Europe.  The former Prime Minister of Finland, Paavo Lipponenannounced a few days after the war in Georgia  that he had signed a contract to become a consultant for Nord Stream in order to ”build bridges between the EU and Russia” and because the issue was comic ties, not politics although the Baltic states expressed strong worries about its security policy repercussions.

First a few words   about the ongoing  energy revolution and  about the geopolitical transition in the international system. With reference to the analysis of Professor Peter Lund of Aalto University, we experience an energy revolution at the moment. Old energy sources, like gas and oil, are loosing ground to new energy sources like solar energy  and windpower. Russia’s oil and gas reserves are depleted by 2080. The driving force for this revolution is the threat of climate change, but also technology and opportunities it is offering for new  jobs.

Lund estimates that by 2050 more than 50% of the energy  sources needed are coming from solar energy  and windpower. It is needed, however, approximately 50 trillion for investments to achieve these goals. Lund is paying tribute to the US, China,Switzerland, Denmark and Germany for their ambitious strategies to replace the old energy sources with the renewable and clean energy sources. In case professor Lund has predicted the future by and far correctly, the energy revolution may take place parallel with a major geopolitical transition too.

The European security system is fragile but the international order as well The conflict between Russia and the West, but also increasingly there exists a conflict between China and the West with geopolitical dimensions. It has been emphasized that the interconnected infrastructure of the global economy provides the battleground for so called connectivity wars and economic interdependence has been ”weaponized” accordingly, the supply cuts of gas by Russia and the increase of tensions in the South China Sea as examples of ”the connectivity wars”.

Could the EU limit  the energy dependency on Russia , that is  the most important external supplier of energy to the EU (30% of gas and oil import to the EU) and to develop a united energy community  and energy foreign policy for the EU members states? For example Finland gets about 50% of its energy from Russian sources and  out of which almost 100% of gas and 85% of raw oil and  12 % of electricity. No gas will come to Lithuania from Russia anymore and Lettland and Estonia follow the suit. This is a major achievement because in 2000 Lithuania was 100% dependent on Russian oil and gas and  Lithuania had to use  more Russian energy sources again due to the closing of Ignalia nuclear reactor between 2004 to 2009. The getting of rid of the Soviet era electricity transit network BRELL, will take at least one decade to be completed, but bio mass and LNG (liquefied natural gas)-terminal in Klaipeida are examples of the transition taking place in energy sector in Lithuania but also in Lettland an Estonia.

One of the most ambitious projects of the EU Commission is the Energy Union  proposed by Donald Tusk when he was Prime Minister of Poland in 2015. The reason for this initiative was, not  necessarily climate change but Russia’s cuts of gas supplies to Europe, once in 2006 and again in 2009. The annexation of Crimea  by Russia made the establishment of the Energy Union for energy security a much more important goal.

Russia’s room for gas games is constrained by its own capacities, the gas strategies of other players, and the EU’s ability to project its regulatory power. One of the first victims of the annexation of Crimea was South Stream pipeline. Understanding the difficulties, Putin killed the project in December 2014. The sanctions hit hard the inner circle of Putin, like Gennady Timchenko, the owner of Gunvor, an oil trading company registered in Switzerland. He managed to sell all his shares just before the sanctions were introduced.

Vladimir Putin certainly believed that the price of oil would not fall so drastically as it did from the level of 147 (11.7.2008) dollars per barrel and it was believed that the days of affordable oil were over. In December 2008 the price of oil dropped to 32,40 dollars level per barrel  being somewhere between 35 to 50 dollars per barrel in 2016. No surprise that Putin accused Washington for the finance crisis of 2008, but for sure he did not predict the collapse of the price when went to war in Georgia. In the US Dept of Energy predictions the price of oil has been estimated in three scenarios: (1) 200 dollars, (2) 130 dollars and (3) 50 dollars.The last one may be closer to the truth which is a catastrophic scenario for Russia.

Since the annexation of Crimea and the sanctions set up against the Russian companies, banks and individuals by the EU and the US, Russia has both intensified its aggressive foreign policy but also improved its economic relations with China and all countries that can avoid punishments by the EU and the US. Presidents Putin and XI have criticized US unilateralism, stepped up their military cooperation and signed major energy deals, like 400 billion dollars Power of Siberia Gas pipeline project. Mongolia managed to get rid of their huge debts by signing an energy contract with Russia. Russian ”oil diplomacy” still plays a role in Asia.

A case in point is the planned gas pipeline Nord Stream 2. The question is whether the plan would contradict the plans of the European  Commission. The decision should be taken in the early autumn of 2016 and the construction completed by 2019.

• What kind of an impact will Nord Stream 2 have on the European energy security?
• What are the commercial, legal, and political-policy issues that could potentially prevent the pipeline from being built?
• Is Nord Stream 2 pipeline a geopolitical project that seeks to diminish Ukraine’s gas supply and its role as a transit country for Russia or is  Nord Stream 2 a business plan that will help Europe meet its energy demands amidst European Union’s climate change goals?

The Nord Stream 2 has become a very divisive issue inside the EU and the transatlantic community. Within the EU solutions are being sought to prevent Nord Stream 2 from dividing the union into losers and winners. In the Baltic states it is considered as a geopolitical tool and as a bad business deal. In April the Swedish-Estonian community published a resolution in protest of Nord Stream 2 for security reasons. At least the EU has been able to say to Russia that ”comply with our laws and sell as much as you can in our market”. However, this has not solved the political problems. The US administration is skeptical of the argument that the pipeline is a commercial project, pointing out that the existing Nord Stream is not running at full capacity and it could kill LNG-strategy of the Energy Union based mainly on the US reserves.

The timing of Nord Stream 2 is certainly not good. However, energy policies  are not based on short term interests.  In the early 1980s  chancellor Helmut Schmidt pushed a  pipeline project forward with the Soviet Union against the objection of Ronald Reagan. Schmidt did not want  the Soviet Union to increase its geopolitical influence in Western Europe, but both for the long term consolidation with Moscow as well as for energy security for Western Europe. Today the EU is dealing with the similar kind of problem although the diversification of energy sources are not pushing Europe to the brink of scarcity as it was the case in the 1980s. Prices of electricity may rise, but this does not lead to shortage  shocks of energy as it was the case during the oil crises in the 1970s.

In Europe the business community is not unified on Nord Stream 2. One can agree that the commercial and political issues cannot be separated regarding Nord Stream 2. In German business as well as political community in particular they emphasize the need to let the markets fix and support Nord Stream 2. Especially the Social Democrats are advocating the project also for political reasons.

One of the most critical arguments has been expressed by a Swedish scholar Anders Åslund. In his view  the EU Commission is too weak to check the big European energy giants and they are now colluding with Gazprom to build a completely unnecessary pipeline to beat Ukraine and get oligopoly with higher prices for European consumers. The EU is not sharing this criticism but insists to keep Ukraine as one of the key transit routes for gas in the future too.

Although oil and gas may loose their attraction in the longer term, Russia is an energy power in the field of nuclear energy and in the search of new territories  for energy, like in the Arctic, as part of its geopolitical  enlargement strategy.  Rosatom has invested to Fennovoima, a Finnish company, to build a new nuclear reactor to Pyhäjoki. The chairman of the Green party Ville Niinistö has criticized the project as a new sign of finlandisation.

Finland will chair the Arctic Council next year and Finland would like to chair the summit for the Council members. Let us hope that this afford would stop militarization of the Arctic.

Conlusions:

1. The short-term question for Europe should not be how to break energy bonds with Russia, but how to limit the damage caused by the  Russian aggressive strategy to weaponize energy interdependence. Nord Stream 2 should not be implemented in case no real political unity achieved inside the EU on the project. In particular Finland and Germany should reconsider their business first approach in supporting of Nord Stream 2 in case the Baltic states and Sweden are against.

2. Taking into consideration the ongoing energy revolution and Russia’s problems in the longer term, the EU, for the sake of its energy security, should invest still more effort in finding alternative sources of energy to make itself less dependent on Russian gas. Here again a Baltic-Nordic co-operation is needed for the control of electricity prices as for example Sweden is closing its nuclear reactors and the dependence on Russian gas diminished.

3. The Arctic should be safeguarded from geopolitical competition and for environmental reasons.

4. Energy security needs to be better integrated to an overall security strategy of the EU taking into consideration hard security (geopolitics), energy revolution as well as soft security (i.e. environmental factors). Consequently, I would like to raise the question whether there exists a conflict of interest after the annexation of Crimea by Russia that two former heads of the governments of the EU are involved as well paid experts in Nord Stream 2 project. President Vladimir Putin can be identified as the real initiator of Nord Stream pipelines also for geopolitical interests of Russia.

EUROPEAN AND INTERNATIONAL COOPERATION | POLITICAL DIALOGUE & ANALYSIS

Conference of the Working Group of Young Foreign Policy Experts in Stockholm

May 26, 2016, 17:30-19:00
Stockholm, Sweden
First Hotel Norrtull
Sankt Eriksgatan 119