Workshop Review: Tatiana Romanova—The Future of Russia-EU Energy Relations

by Joe Ralbovsky and Jon Vasdekas

In a recent interview with Dr. Romanova, we discussed the future of EU-Russian energy relations, particularly those revolving around the establishment of a single market between the two entities, and the challenges that would arise as a result of this shift.

One aspect of this development can be found in the Energy Roadmap to 2050, a document identifying both common interests and obstacles towards the creation of a more effective and sustainable energy partnership – in whatever form that might turn out to be. While the roadmap serves as a helpful tool that allows each party to identify its priorities and suggest strategies to achieve the changes needed in market structure, it begins to run into problems when administrations actually determine how to implement it.

One issue that Dr. Romanova identified was the implementation of the Third Liberalization Package, which would force Gazprom to sell some of its downstream infrastructure and ownership to comply with the anti-monopolistic aims of the policy. The Third Liberalization package also carries certain political risks, as individual member states play a large role in determining how certain aspects of the package are implemented, creating room for what could be considered as political attacks against Russia – particularly in the Baltic States. The package further complicates the viability of Russian investments in the EU, and might require fundamental changes in Gazprom’s strategy. What’s perhaps most troubling is that currently, Gazprom has almost no experience in using international bodies for dispute resolution, as no such body is currently in place for Russia – EU disputes. This is worsened by a feeling of legal nihilism, and the contrast between what courts are used for in the EU and how they’re viewed (potentially as a political tool) in Russia.

This issue is compounded by the fact that Russia has decided to so far delay or ignore implementing the Energy Charter Treaty, meaning that Russia would be lacking credibility as a player in any dispute, as they would be seen as trying to implement the rules only when it favored them. Fortunately, Russia’s recent integration into the WTO will lay some groundwork for figuring out these systems, and might lead to more frequent and effective use of supranational judicial bodies.

The European Commission has been anything but helpful in allowing Gazprom to find its own way in developing useful judicial habits, often dismissing whatever it wants to say as coming straight from the Kremlin.

One well known example of Gazprom’s inability to manage such disputes is the 2009 gas war with Ukraine. Despite Gazprom’s proactive attempts to reach out to its partners in the EU, it suffered a major blow to its public image, and is likely still losing market share as a result of that event. This event also helped to spur diversification of energy resources in both Ukraine and EU countries, particularly as the environment to do so was very favorable at the time of the dispute.

This issue of judicial approach is more than just a minor cultural difference. The European Commission has been anything but helpful in allowing Gazprom to find its own way in developing useful judicial habits, often dismissing whatever it wants to say as coming straight from the Kremlin. This has led to Gazprom dealing with dispute issues at a very high governmental level – as the Russian government, rather than establishing a meaningful lobbying operation for any major Russian companies in Brussels. There’s a large gap in understanding what can be done to lobby, which is preventing Gazprom from learning to work within the EU frameworks.

The timing of the recent investigation into Gazprom’s activities known as the Gazprom probe might have been politically motivated in relation to the final negotiations on the 2050 roadmap, but reflects the differences between how the two leaderships, in the EU and in Russia, view cooperation in moving forward into market integration. Russia sees this very much as the EU trying to impose its vision on Russia and would much prefer that this were something made in a way that was mutually acceptable. That said, this probe isn’t inherently political, and similar probes have been launched against European companies like ENI and Total in the past. In this sense, the probe was legal and logical, as Brussels is trying to legitimize itself in front of EU customers by lowering the price they pay for energy and appearing in control with Russian energy relations. Going forward, the EU’s access to affordable natural gas will be increasingly important, as it wants to increase industrial production to 20% of GDP.

In the Energy Roadmap to 2050, the EU Commission is discussing creating a single energy market for Europe and Russia. European and Russian relations oftentimes are hinged on specific wordings in legislation, and concepts many times get lost in translation or are misinterpreted when translated from one language to another. The question posed to Dr. Romanova was whether Russia and the EU interpret the meaning of “single market” differently within their camps. Her answer was clear and is paraphrased as the following:

Russia and the European Union are on the same page when it comes to infrastructural issues in the energy sector. Whether in specific sectors like oil, gas, or electricity, the EU and Russia want to become more interconnected. The Russians are especially interested in developing interconnection with Europe in the electricity sector, because electricity is a processed energy good, and would be extremely profitable for Russia to export; it could also serve as a locomotive to make the Russian economy more innovative. Regulation and legislation regarding the energy sectors and infrastructure, however, is where the two parties are at an impasse. The EU would like for Russia to adopt the legislation it has developed, whereas Russia would like to develop legislation with the EU, as it’s typically against Russia’s principle of equality to simply adopt the EU’s laws. It is also important to note that Russia simply cannot afford to implement the EU’s legislation, most notably the liberalization laws, as the Russian economy and gas sector is not as developed as it is in the European Un- ion.

…with the advent of the recent shale gas revolution in the United States, consumers are pushing for a higher percentage of natural gas prices to be linked to the spot market…

Romanova thinks Gazprom is not as rigid of a company as the media leads many to believe. It participates in spot markets in Europe, and had tried to diversify its investments by attempting to become more active in the downstream gas market. Unfortunately, this was not fruitful as a result of the introduction of the EU’s Third Energy Package in 2009. Gazprom’s major challenge today is concerned with the pricing mechanisms of gas. As mentioned earlier, Gazprom does have some experience with spot markets; however, the majority of gas sold is through long-term contracts. In these contracts, the price of natural gas is indexed to the price of petroleum products. This type of pricing can provide stability for the consumer and supplier, but with the advent of the recent shale gas revolution in the United States, consumers are pushing for a higher percentage of natural gas prices to be linked to the spot market to enjoy lower prices. It remains to be seen how Gazprom will react to the linkage of prices in the future.

Several years ago Gazprom seemed to be Russia’s untouchable energy giant with an energy hungry Europe at its mercy.

It is no surprise that the landscape of the European gas market is changing, especially since the Third Energy Package has dictated how investments in the natural gas market will be made. Several years ago Gazprom seemed to be Russia’s untouchable energy giant with an energy hungry Europe at its mercy. Now, it seems as if the tides have turned. When asked about the perception of Gazprom in Brussels, Dr. Romanova said that it is ambiguous. One day Brussels will put out legislation saying it wants to decrease its dependence on hydrocarbons from Russia, but the next will aim to increase interconnection. Ambiguity can create many challenges for European and Russian relations, and it can often lead to hard political talk, but at the end of the day Europe and Russia are both dependent on one another.

Dr. Tatiana Romanova is an associate professor at the School of International Relations of St. Petersburg State University and a leading expert of the Centre for Comprehensive European and International Studies of the High School of Economics (Moscow). She currently lectures on EU-Russian Relations; History and Theory of the European Integration, Institutions and Structures of the European Union, Current Aspects of the EU’s Energy Policy, EU’s External Activities, and Political Economy of European Integration.

Her research interests include EU-Russian relations, particularly issues of legal approximation, energy dialogue and economic relations; EU’s institutions, structures and lobbying activities; economic and legal integration and peculiarities of the EU’s relations with neighboring countries.

Jon Vasdekas is an MA candidate in the ENERPO program at the European University at St. Petersburg.

Joe Ralbovsky is an MPA/MAIR candidate at the Maxwell School of Citizenship and Public Affairs, and will be receiving his CAS from EUSP in the ENERPO program.

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