A European Headache?

The recent gas dispute between Russia and the Ukraine has less to do with being a European problem and more to do with being a domestic one, between the member states of the Commonwealth of Independent States (CIS). This failure in interstate relations between these independent states that make up the former Soviet Union is a result of the ruling elites of these countries failure to sufficiently develop the necessary political, legal, economic, social and business infrastructure required by a modern state today.

Last January's gas dispute was more a result of the internal infighting taking place between the often dysfunctional and corrupt elites that run these CIS countries. Once it is understood that the decisions made are often determined to meet short term vested interests, rather than long-term national interests, the behavior of the Russian Kremlin elite and the Ukrainian Kiev leadership becomes explicable. This perhaps explains why Russia and the Ukraine have failed to implement rational energy policies that would promote the economic and political interests of these states.

For instance, despite Russia having enormous gas reserves and ever-growing domestic and foreign demand for its gas, there has been a serious failure of its gas industry to invest sufficiently in modernising and expanding productive capacity and distribution networks.

Similar decision-making failures have occurred in the Ukraine, despite this country having easily accessible domestic alternative supplies of energy, the leadership in Kiev has failed to implement an energy policy that would sufficiently reduce dependency on Russian energy imports, since the first of these series of gas disputes between Moscow and Kiev took place.

As for this being a European problem, apart from a few countries in Eastern Europe having their gas supplies disrupted, most of Europe remained unaffected. For decision makers in Europe's capitals, it did not fit the popular scenario of Russia using its gas exports as a so-called energy weapon. Instead, experts are suggesting that Ukraine's leadership had deliberately provoked the dispute in order to force the Kremlin to reduce the prices it charges for its gas exports.
However, as far as it was a European problem, it was exacerbated by the failure of Europe's energy infrastructure to facilitate the delivery of energy supplies to meet the needs of eastern European countries like Rumania and Bulgaria. Such a situation demonstrates the urgency of Europe completing its energy grid as soon as possible.

For policymakers in Brussels, recent events demonstrate that the aims and ambitions of the Common Energy Policy must be implemented with some urgency. This means as part of the increased public spending commitments EU states are making to restart their economies, investment in promoting domestic energy supplies including both nuclear and coal must be given higher priority than at present. Also further improvements in energy efficiency and conservation must be achieved, even if this means putting a price premium on energy imports from outside the EU.

As for the proposed Nabucco gas pipeline, seen by its promoters as a solution to Europe's gas supply problems, it is not surprising this scheme has been subject to numerous delays. This proposed project faces several political and economic problems that make actually building a gas pipeline from Austria via the Balkans to a terminal in eastern Turkey, where it would link up with gas pipelines from countries further east look relatively simple.

Currently, only Azerbaijan has agreed in principle to supply to the EU via Nabucco, but for this project to be viable more countries from the region have to come on board. Let's take the problems one by one.

The first, is finding an additional country apart from Azerbaijan to agree to supply the EU with gas, at present the obvious answer is Iran, with its enormous gas fields, but due to the current political difficulties between the West and Iran, this option is currently unlikely, unless relations improve. An alternative option is building a pipeline that crosses the Caspian Sea to reach the gas fields to the east of this sea; unfortunately, failure to agree maritime boundaries is preventing construction of such a pipeline.

Secondly, much of the gas fields being currently developed to the East of this sea has already been allocated to either Russia or China. It is only when the next generation of fields to be developed becomes available, will Europe be able to source some of its gas needs from this region through the proposed Nabucco gas pipeline.

Thirdly, many of these states in Central Asia have inherited the same corrupt byzantine political and business culture, which currently plagues Russia and the Ukraine.

As a result such an unreformed culture makes it very difficult for foreign investors to actively participate in the development of Central Asia's massive energy reserves. It is not really surprising that due to the backward nature of this region that development has been below earlier expectations. However, it is not unexpected, given the problems faced by investors in this region that Europe has not given the Nabucco pipeline project a top priority.

Instead, it has been used as a bargaining tool in the European Union's dealings with Russia, which is dependent on Europe's goodwill that it will continue to purchase Russian gas supplies, in order to pay for the running of Russia's government and the personal enrichment of the St Petersburg elite that govern Russia and keep Prime Minister Putin in power. Nevertheless the lesson we have learned from last winter's gas dispute was how vulnerable Russia is, and how important it is that Europe continues on its path of achieving the aims and ambitions set out in the European Union's Common Energy Policy.



The recent gas dispute between Russia and the Ukraine has less to do with being a European problem and more to do with being a domestic one, between the member states of the Commonwealth of Independent States (CIS). This failure in interstate relations between these independent states that make up the former Soviet Union is a result of the ruling elites of these countries failure to sufficiently develop the necessary political, legal, economic, social and business infrastructure required by a modern state today.

by Nicholas Newman - 5 March 2009