Russia’s power of persuasion

As summer gives way to autumn, the subject of Europe’s growing dependence on Russian energy supplies is again a key focus of political attention. At a meeting in Paris with French and German leaders Jacques Chirac and Angela Merkel on Saturday (23 September), Russian Prime Minister Vladimir Putin stressed that energy co-operation was a major priority for his government. But, uneasy EU leaders are unlikely to have been reassured by his promises of secure energy supplies for this year’s winter.

Putin’s talk of co-operation rings hollow given last week’s apparently arbitrary suspension of the €15 billion Sakhalin 2 liquefied gas project, which was being led by Western multinational Shell, with the participation of two Japanese companies. The project ground to a halt after the Kremlin withheld an environmental permit (the plant is near feeding grounds for endangered grey whales). But green concerns, never a priority in Russia, would appear to have been nothing more than a convenient excuse for renegotiation of the deal. The terms of the production-sharing agreement signed with Shell meant that Moscow would have borne the brunt of escalating project costs, effectively losing out on profits. Annoyed at the exclusion of Russian companies from the consortium, the Kremlin has frozen the deal and launched a full-scale investigation, allegedly to allow national energy giant Gazprom to barge its way in.

The EU and Gazprom have never really got along. Last winter, EU governments were indignant when the company took the decision to interrupt gas supplies to Ukraine, a move widely seen as a direct order from the Kremlin to chief executive Alexei Miller. The Sakhalin saga, which again involved Gazprom, is the latest example of the worrying leverage possessed by the Russian government in energy matters. The signs are that the Kremlin’s bully-boy tactics may be working, with Shell now negotiating with Gazprom over interests. Russia’s ambassador to Tokyo said last week that the project would go forward quickly if Gazprom was allowed to participate.

The Kremlin’s plans to turn Gazprom into an international energy giant straddling the gas, electricity and oil sectors seem to be working well. Despite the outcry earlier this year over the Ukraine episode and all the subsequent rhetoric emanating from EU politicians about cutting dependence on Russian energy supplies, Gazprom has been making substantial inroads into the European market. Since April’s asset swap with BASF, which included a stake in the German chemical giant’s gas distribution network, Gazprom has been active on all fronts, wheeling and dealing its way closer to EU consumers. "Gazprom wants to be involved in the end-user market where the profits are extremely high," says Peter Lavelle, a Moscow-based analyst. "They want to be involved at the very start of upstream all the way down to downstream."

In addition to supplying its German customers through the BASF network, Gazprom looks set to increase its gas supply to France and the UK via the planned Baltic pipeline which is being built with German group E.ON. Through the pipeline, due on-stream early next decade, Gazprom could increase its total EU supply by a fifth. Speculation over whether Gazprom will launch a bid for UK company Centrica is dying down, but plans for joint projects with Spanish utility Endesa are now underway following talks this month. The latter could still merge with E.ON, a key Gazprom partner in Europe.

Italy, unnerved by a memorandum of understanding signed in August by Gazprom and Algerian state-run company Sonatrach, quickly moved to form an energy partnership with Russia this month. Sonatrach supplies 10-12% of Europe’s gas needs. With the 30% market share currently held by Gazprom, the pair could quite feasibly hold EU consumers hostage to a co-ordinated pricing policy. Italian Prime Minister Romano Prodi announced plans for Italian company, Enel, to buy €2-4 billion worth of Gazprom gas and electricity assets by the end of next year. Italian group ENI, which has already worked with Gazprom on the Blue Stream pipeline running across the Black Sea to Turkey (now to be extended to Hungary and then to south-east Europe), is to sign a major partnership agreement with Gazprom next month.

Gazprom has also been busy in the oil sector. Following talks between Putin, Greek Prime Minister Costas Karamanlis and Bulgarian President Georgy Parvanov earlier this month, it seems certain that it will be awarded controlling stakes in a planned 280 kilometre oil pipeline linking the Bulgarian port of Burgas to the Greek port of Alexandroupolis. At the same time, it is reportedly in talks to buy a stake in British-Russian group TNK-BP, one of the largest oil companies operating in Russia.

Many of these deals have yet to produce real results, but Gazprom has cast its net wide, creating a number of opportunities that could pay off handsomely. But it still has issues to face closer to home. Gazprom is said to be determined to raise ridiculously low domestic gas prices. "Gas supply is literally going out windows. You can’t keep giving away natural gas in the [country with the] highest land mass in the world," says Lavelle.

Agreeing that Gazprom faces a difficult winter, Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies in the UK warns that Gazprom should be adopting a more focused approach. "I think what Gazprom is doing is testing the water all over the place, which is a sensible thing to do. But, if I were Gazprom, I’d just relax about buying equity in the EU market. It’s terribly overpriced. You’ll never get a proper return on your money. In general, politicians want to block you. I’d just focus on maximising the value of the gas. What I think is important is that they want to get closer to the market. But, understanding the market better doesn’t mean throwing money away."

Whether the Kremlin could go on to exploit Gazprom’s potentially powerful position in Europe remains to be seen. Lavelle is adamant that the Kremlin’s desire to manipulate the soon-to-be listed company (half of which is still state-owned) for political ends will wane. "I think this whole thing is upside down," he says. "The more Gazprom integrates into Europe, the less incentive there will be to blackmail countries. European politicians and pundits have to understand, the Russian government cares more about the bottom line than anything else."

As summer gives way to autumn, the subject of Europe’s growing dependence on Russian energy supplies is again a key focus of political attention. At a meeting in Paris with French and German leaders Jacques Chirac and Angela Merkel on Saturday (23 September), Russian Prime Minister Vladimir Putin stressed that energy co-operation was a major priority for his government. But, uneasy EU leaders are unlikely to have been reassured by his promises of secure energy supplies for this year’s winter.