Russia-EU: will oil become a political tool?

By David Cronin

Date: 14/10/04

IF OIL is the lifeblood of the world economy, then Russia is the heart that pumps it.

Delivering an average of &036;8.5 billion dollars (€6.8bn) per day, it shot ahead of Saudi Arabia, the world's number one oil producer, last year.

While the latest Russia Review from the Bank of Finland states that "Russia's oil boom of recent years appears to have peaked", the country will remain a huge player in the world energy scene for decades. Outside of oil, its gas deliveries to other European countries came to 133 billion cubic metres in 2003, giving it a 25% market share. It also appears determined to become a major supplier of nuclear technology; Russia is forging ahead with plans to build Iran's first light-water reactor, despite America's fears that the Iranians could use its spent fuel to build nuclear weapons.

Officially, the EU and Russia have been eager to promote cooperation in energy. To illustrate that, the two launched an 'energy dialogue' in 2000.

The discussions have been fraught on occasions. In late 2003, Russia refused to ratify the transit protocol of the European energy charter, which is designed to deal with legal cases where oil or gas pipelines cross several borders. Gas giant Gazprom has opposed the protocol, lest it challenge the firm's near-monopoly position.

Another big problem has been the EU's complaints that the price of domestic gas in Russia is less than one-quarter of the price at which Russia exports gas to the rest of Europe. This had become one of the main obstacles to Russia joining the World Trade Organization but in May a deal towards clearing the obstacle was reached. Russia committed itself to almost double its gas prices for industrial users between now and 2010.

And despite last year's suggestions by Silvio Berlusconi, then the president-in-office of the European Council, that the EU was not worried by the affair, there has been much friction between the EU and Russia over the treatment of Mikhail Khodorkovsky.

The Commission, in particular, has protested at how the October 2003 arrest of Khodorkovsky, head of the Yukos oil giant, appears to have politicized the marketplace in Russia. Although he was arrested on fraud charges, it is widely suspected that his apprehension was more linked to his financial support for President Vladimir Putin's political opponents. There have also been suggestions that Putin wants to destroy Yukos so that he can create a state oil company. Although Russia has a state gas company (Gazprom), it does not have an oil equivalent. According to journal Inside Russia and the FSU, this makes it "almost unique among countries for whom oil is a prime political tool and an economic mainstay".

A lawyer for Khodorkovsky contends that the most powerful EU states should be more vocal about the assault on Yukos. "Russia is increasingly being made hostile for foreign investment," says Robert Amsterdam.

"Yet leading members of the EU - France and Germany, at the highest levels - have decided to dispense with even the pretext of the rule of law when it comes to foreign relations. The long-range implications of those double standards are incalculable."

But Arkady Moshes from the Finnish Institute of International Affairs believes the Khodorkovsky case is not turning major energy firms away from Russia. "The short-term implications are not strong," he says.

"Western buyers are as likely to buy assets in Russia in the field of energy. We don't see BP pulling out of its deals and the Germans are still interested in buying shares in Gazprom. Small and medium businesses are not likely to invest, though, because the climate is not investment friendly, with problems such as corruption remaining serious."

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