Russian Energy Complex and Europe

Led by Pavel K. Baev
Dec 2005
This project constitutes a part of a larger research project THE ENERGY COMPLEX AND RUSSIA'S POLITICAL AND ECONOMIC DEVELOPMENT implemented jointly by ECON, FFI, FNI, NUPI and PRIO in 2005-2007 and supported by the Ministry of Oil and Energy (OED) as well as STATOIL and Norsk Hydro.

The aim of this broad research effort is to enhance the understanding of how political and economic developments influence on the energy complex and vice versa. In order to explore these interactions, the team of researchers will combine current analysis targeting emerging issues in the energy-politics interplay with more fundamental evaluation of the dominant trends in the transition towards a post-Putin era. The research will address:
  • the development of Russian energy policy, including the role of the state in the energy sector and the energy export policy;
  • the strategies of Russian oil companies;
  • the role and place of foreign companies in the Russian energy sector (forms of engagement, types of companies).
The sub-project 'Russia energy complex and Europe' on the first stage (July 2005 - February 2006) has produced the following results.

During the second Putin’s presidential term, Russia’s relations with Europe have been gradually but steadily deteriorating. Many different developments contributed to the accumulation of tensions, from the EU enlargement which has brought into the Union several countries with pronounced suspicions against Russia, to the ‘orange revolution’ in Ukraine where Russia and OSCE found themselves at the different sides of the ‘barricade’, to the growth of non-democratic trends in Russia’s domestic policy. In this situation of mutual estrangement, the energy dialogue serves as the crucial link connecting Russia to Europe and generating positive impact on the other areas of relations, as outlined in the four ‘roadmaps’ approved at the Russia-EU summit in May 2005.

The sub-project was aimed at examining the dynamics of the ‘energy dialogue’ driven by the constantly redefined aims and shifting perspectives of both sides and included three main research questions:
„« How has the prospect of assuming chairmanship in the G8 influenced Moscow’s foreign and energy policy towards Europe?
„« What was the impact of GAZPROM on Russia’s policy-making towards Europe and Central Asia?
„« What specific features have emerged in the political and energy dialogues in the Black Sea area?
Only provisional answers were expected to emerge from the research on the initial stage of the project; they would help in framing goals and targets for the second stage.


‘Energy security’ and the G8

The extraordinary growth of oil prices in 2004-2005 and the corresponding inflow of ‘petro-roubles’ have significantly altered the fundamental perceptions of global balance of power in the Russian leadership and provided a strong boost to self-confidence. That shift was reflected in President Putin’s declaration about turning Russia in a ‘great energy power’ – and in his decision to make the topic of ‘energy’ security the central theme for Russia’s chairmanship in the G8 in 2006. This opportunity to preside over the elite club of major industrial democracies is a matter of huge personal importance to Putin, so many sharp political issues were ‘softened’ in order not to spoil this ‘moment in history’.
Russia’s chairmanship in the club of leading industrial democracies has been a source of no small embarrassment among the Western political elites and a topic of intense though for the time being confidential debates in Washington. The emphasis on ‘energy security’ initiated by Moscow which expected to play on its strength has turned out to be ironic if not counter-productive, since Russia is increasingly seen as a source of instability on the energy market. It was certainly the ‘gas war’ with Ukraine at the start of 2006 that has accentuated these perceptions but the fundamental source of concerns is the stagnation in Russian oil and gas production that has continued since the persecution and dismemberment of the oil company Yukos in 2003-2004. Lack of investment in core assets and exploration guarantees that this stagnation will continue; Russia, therefore, would not be able to compensate for possible disbalances in supply and demand in the global oil market. While in the US there are now very little expectations about the ‘energy dialogue’ with Russia, Europe continues to focus on managing its gas import from Russia – but its prospects of forging a common position are hardly improving. Moscow has become very skilled at exploiting internal divisions in the EU leading to the de-facto abolition of its Energy Charter. Russia would not be able to increase Europe’s energy dependency in the near future but such projects as the Baltic gas pipeline could give it plenty of leverage.
These issues are examine in more detail in the report ‘Chairing the G8: Russian Energy and Great Power Aspirations’ (presented at CSIS, Washington in December 2005, available at, and articles:
‘Disentangling the Moscow-Berlin axes: Follow the Money’ (1 August 2005);
‘Putin performs a European pirouette’ (4 November 2005);
‘Russia struggles with cold and shivers from energy insecurity’ (23 January 2006); ‘Russian economic boom goes unnoticed in Davos’ (30 January 2006);
available at ( .


GAZPROM and Russian foreign policy-making

The Year 2005 marked a significant increase in GAZPROM’s political influence so that Russia’s policy-making towards Europe and Central Asia has become driven primarily by the company’s interests. GAZPROM has always been a strong player on Moscow’s political arena and President Putin early on in his first term made sure that the company was firmly controlled by installing Alexei Miller as the CEO and Dmitry Medvedev as the Chairman of the Board. Plans for reforming and dividing this Soviet-style monopoly were prepared in the government and discussed in the context of Russia’s entry in the WTO and its share on the liberalized European gas market. It was the Yukos affair that became the watershed on which these plans were abandoned and the de-facto merger of the GAZPROM’s and the Kremlin’s interests was advanced. While in 2004, GAZPROM was frustrated in its plans for takeover of the Rosneft controlled by a competing group of Kremlin insiders, in 2005 it truly established its dominance in determining the content of foreign policy.
In Europe, three countries were of particular interest to GAZPROM and, accordingly, to Putin: Germany, Italy and Turkey. Putin was aware that the September 2005 elections in Germany could lead to the departure from the political arena of his trusted partner Gerhard Schröder so he made every necessary effort to finalize the deal on the Baltic pipeline before the elections – and Schröder was rewarded with a place in the board of the newly-formed company that would oversee the construction. Italy, despite suffering from the cuts in delivery in January 2006, remains the key expansion area for GAZPROM and Putin seeks to secure this by cultivating ‘special relations’ with Prime Minister Silvio Berlusconi. Turkey, despite the poor operational results of the Blue Stream pipeline, is perceived as a crucially important transit country towards Southern Europe, so the political dialogue was greatly intensified in 2006. The access to natural gas resources in Central Asia is absolutely necessary for GAZPROM in order to consolidate its positions on the European markets, so Putin went to great length in 2006 in building relations with Turkmenistan and Uzbekistan.
The energy dimension of Russia’s policy towards Central Asia was examined in the article ‘Turning Counter-Terrorism into Counter-Revolution: Russia Focuses on Kazakhstan and Engages Turkmenistan’, forthcoming in European Security (March 2006). GAZPROM’s European intrigues were analysed in the articles
‘GAZPROM’s new European route: Cry Ukraine?’ (12 September 2005), ‘GAZPFOM loses Italian deal, corruption could cause more upsets’ (24 October 2005), ‘Putin, GAZPROM and “the other Norwegian company”’ (6 February 2006),
available at (


Russia and the making of the Black Sea

The expansion of the EU and NATO has greatly intensified the networking in their south-eastern periphery aimed at building a regional identity and structure in the Black Sea area. Bulgaria and Romania have traditionally pushed some limited initiatives but now Turkey, with the new prospects for joining the EU, Ukraine, with the desire to exploit the resonance of the ‘orange revolution’, and Georgia, with the desperate hope to engage closely with the two organizations, are trying to put together a meaningful regional project. Russia is generally excluded from these undertakings – but has its own quite ambitious agenda in the region.
The oil traffic from Novorossiisk constitutes by far the most important maritime activity in the Black Sea – and it is perfectly clear for Moscow that if it wants to keep control over the oil export from Kazakhstan (the second line of the Tengiz-Novorossiisk pipeline would be necessary for that), it has to find a solution for the Bosporus problem. Negotiations with Bulgaria and Greece on the Burgas-Alexandropolis by-pass pipeline remain, nevertheless, stalled and find little support in Brussels. Whatever the outcome of the parliamentary elections in Ukraine in March 2006, Russian desire to reduce as much as possible its gas transit through this country would hardly diminish, since the spectre of the ‘orange revolution’ would not disappear. The route through Turkey is no less important in this respect than the Baltic pipeline and Moscow is investing a lot of political effort in securing it. There are, however, serious complications related to the Baku-Erzerum pipeline and the plans to export gas from Azerbaijan to Europe, which are perceived quite positively by the EU. The main problem for Moscow in this area, however, is Georgia, which pursues a quite uncompromising and at times even provocative policy towards Russia, where there is no shortage of political entrepreneurs eager to exploit tensions that could escalate into a direct conflict with potentially serious repercussions. The explosions on the gas pipeline in January 2006 have made energy an element of this conflict.
The pattern of interactions between Russia and the EU in the Black Sea area was examined in the chapter ‘The Black Sea Dimension of the Russia-EU dialogue’ in the forthcoming book edited by Gareth Winrow (initially presented as a paper at the ‘Energy and the Black Sea Basin’ conference in Istanbul); presentation on Russia and conflicts in the South Caucasus was made at the conference on ‘Wider frameworks for addressing security challenges the Caucasus’ at the Royal Institute for International Affairs, London; presentation on ‘Russia’s interests and policies’ was given at the NATO/PfP seminar ‘The Wider Black Sea Area in the European Security Space’, Constanta, Romania.


Initial net assessments and issues for further analysis

Energy has been the main dimension of international relations limiting Russia’s estrangement from the West and compensating for the decline of other elements of its power. Putin’s claim for the status of ‘great energy power’ corresponds to this reality even if the material foundation for it – in terms of infrastructure rather than resources – has been eroding rather then strengthening. The pronounced emphasis on increasing the state control over the oil-&-gas sector has brought diminishing efficiency of management and sustained decline in the industry that could hardly be reversed in the near future. At the same time, the experiments with using energy as an instrument of policy (which, in principle should complement the focussing of foreign policy on advancing energy interests) have turned out to be awkward and counter-productive. As a result of the ‘gas war’ with Ukraine, Russia has suffered not only reputation damage but also a serious setback in its plans for consolidating its market positions in Europe. The EU now appears set to re-evaluate the prospects of its energy dependency upon Russia, and the second round of the Moscow-Kiev conflict (all but pre-determined to escalate in mid-2006) could convince Brussels to move to some practical planning aimed at reducing it.
These preliminary assessments as well as initial investigations in a range of related issues (for instance, Russia’s internal energy demand or its ability to manage the financial surplus) lead to outlining key questions for further research:
„« How the ideology of ‘great energy power’ would translate into foreign policy guidelines and energy policy directives?
„« How the ‘energy security’ theme would be developed during Russia’s chairmanship in the G8?
„« How the ‘energy dialogue’ with the US could be substantiated?
„« How the EU would approach the problem of Russia’s outsized role in its energy strategy?
„« How Moscow would seek to connect the expansion of its control over the gas industry in Central Asia with the aims of its gas policy in Europe?
These questions would constitute the set of goals and targets for the second stage of the research project where the theme of energy geopolitics would be closer linked to Russia’s domestic political and economic transformations.



Popular Article

Baev, Pavel K. (2007) Economic Thinking in the Kremlin Shifts in the 'Munich' Direction, Eurasia Daily Monitor, 24 April.
Baev, Pavel K. (2006) Could Corruption be Good for Russia?, Eurasia Daily Monitor, 13 November.
Baev, Pavel K. (2006) Russian Politics and Economics Face an Energy Crisis, Eurasia Daily Monitor, 23 October.
Baev, Pavel K. (2006) Is Putin Becoming Desperate about Being "Best Friends" with Germany?, Eurasia Daily Monitor, 19 October.
Baev, Pavel K. (2006) Moscow Quietly Raises its Game in the Middle East, Eurasia Daily Monitor, 31 July.
Baev, Pavel K. (2006) Russian Economic Paradoxes and the Power of 'Stupid Money', Eurasia Daily Monitor, 21 June.
Baev, Pavel K. (2006) Ustinov's Firing Reveals Clan Maneuvring Inside Kremlin, Eurasia Daily Monitor, 5 June.
Baev, Pavel K. (2006) Europe Calls Gazproms Bluff and Ponders its Threat, Eurasia Daily Monitor, 24 April.
Baev, Pavel K. (2006) Putin's Fear of Elections and Fear of Investment, Eurasia Daily Monitor, 13 April.
Baev, Pavel K. (2006) Quarrels in the Government Fuelled by Inflation and Intrigue, Eurasia Daily Monitor, 20 March.
Baev, Pavel K. (2006) Moscow Counts the Pros and Cons of 'Selective Cooperation', Eurasia Daily Monitor, 13 March.
Baev, Pavel K. (2006) Selling 'Energy Security' in Budapest and Prague, Eurasia Daily Monitor, 6 March.
Baev, Pavel K. (2006) Putin, Gazprom and 'The Other Norwegian Company', Eurasia Daily Monitor, 6 February.
Baev, Pavel K. (2006) Russian Economic Boom Goes Unnoticed in Davos, Eurasia Daily Monitor, 30 January.