Andrei V. BelyiDept on international energy politics

Higher School of Economics, Moscow

interest in the ECT lies in the Protection of Russian investments in

the EU

Fossil energies are rare subjects to trade restrictions, whereas Russia insists on nuclear materials to be included to the ECT, which is still not the case

Transit Protocol is pending because Russia is concerned about securing long term gas supply agreements with the EU

Russian view

Non-participation of the majority of producing statesmakes the ECT the EU-power tool for Russia

Russian Upstream(production and

new resource development)

Access to Pipelines and export

Downstream Europeanmarkets

Financial flows

About 35% of EU oil imports and 40% of EU gas imports are from Russia

Russia represents the largest short and mid term resource potential in hydrocarbons located next to the EU About 40% of Russian budget

revenues are provided by the oil and gas exports to the EU

EU’s downstream represents the short and mid term possibility for export diversification and higher capitalization for Russian energy companies

Interest for EU Investors

Interest for Russian

Investors

What are the investors interests?What are the investors interests?

Russia’s concern:

security of demand and of investments into downstream of importing states

EU’s concern:

security of supply and of investments into upstream of producing states

Why regime?To facilitate upstream resources of energy-producers and to keep control of downstream via supply diversification to enhance competition

Why regime?To facilitate downstream markets access of energy-importers and to keep control over resources and over access to pipelines to have pay-back stability

Since the G-8 Summit in 2006 we perceive an explicit conflict of values:

Political accord between ideologically different blocks

Monopoly on exports and monopoly on imports

« Seminar diplomacy » and the Energy Charter Process

Trend towards liberalization of cross-border investment flowsSecurity-driven energy relations

Extreme politization or securitization of energy trade

Before 1991

1990s

Since 2000s

Since the politization of EU-Russia energy trade, a reciprocity principle becomes a factor of the governance

The event received a wide mass-media coverage in Europe, which lead to an over-exaggeration of a threat (and hence extreme politization)

January 2006: Russia diminished gas supplies to Ukraine due to the tariff related conflict, some supplies were disrupted to the EU

Though according to Russia, Ukraine violated transit provisions, Russia did not use the ECT framework for the transit dispute settlement mechanism

Reason: too much power allocated to the conciliator (decides on volumes and supplies, read on political issues), whereas Gazprom has been able to resolve disputes bilaterally

Consequences of securitization: Consequences of securitization: restriction of investmentsrestriction of investments

European reciprocityEuropean reciprocity Russian reciprocityRussian reciprocityReciprocity is an

instrument to export the EU liberalization model to the third countries

Third Energy Package and « Gazprom clause » aim to establish the EC-level investment restriction on transmission

Political leverage on the access to downstream

Reciprocity is a political accord to access investments from third countries

Subsoil Law and Strategic Sectors Law establish new rules on governmental control over energy resources

Political leverage on the access to upstream

“Reciprocity” is a negative-sum game that is talked about as a positive-sum game

Lisbon Treaty rejection means there is still no energy nor investment competences at the supranational levelthe two subjects, in which Russia is particularly interested to co-operate with the EU

Russian non-ratification of the ECT and rejection of the EU « energy market » acquisthe framework within which the EU conceives relations with RussiaIn turn, Russia conceives the competition in gas sector as a dangerous move for the security of demand

Investment arbitration mechanisms:

Pro: Russian companies can rise investment and contract claims against the European Community or its Member States

Contra: Fear of a boomerang effect (i.e. Yukos case)

Investment protection:

Pro: Russian companies can protect their investments in the EU

Contra: pre-investment phase is not stipulated in the article 10

Without a clear compromise on the pre-investment phase non-discrimination in European downstream, Russia might keep delaying Transit Protocol deal and hence delay the ratification

The ECT allows to bypass EU-Russia framework and to move towards a multilateral approach, where the EU does not need to have a supranational competence in energy and investments and where other energy producing states are included

The « Energy governance » is clearly hindered by the extreme politization of the EU-Russia energy relations

A secret of politics? Make good treaty with Russia

(Otto von Bismark, 1863)

To contact the author: abelyi@hse.ru