President of the EU Commission Jose Manuel Barroso flies to Sochi today for an EU-Russia summit with president Putin in Sochi. Diplomats say they will discuss energy relations between the two countries, at a time when these relations could hardly be worse.

This is how bad relations are – Jonathan Stern, professor of the Oxford Institute of Energy Studies and a leading expert on Gazprom, said this at a House of Commons committee briefing this month: “the most recent set of geopolitical developments with Russia and with the Middle East may be such that in 10 to 15 to 20 years' time we could see a relationship with these regions deteriorate so badly that we will not be able to access their resources, in other words the resources exist, the economics make it profitable for them to deliver to us, but our relationship with these countries has deteriorated so badly that we no longer can develop this type of commerce and that would be a different threat to one that we had faced before”.

Just read that again – this man, a respected expert, is predicting relations between the EU and Russia could get so bad that we “no longer can develop this type of commerce”. How did it come to this?

A lot of the bad vibes between Russia and the EU are the product of media hype. As Stern says: “It is something magic about unreliable and nasty foreigners that catches [Western] journalists' imaginations and they can then see Hollywood film scripts in their mind about nasty people turning off gas and holding Europe to ransom.” Then diplomats and politicians feed off this hype, make sweeping rhetorical statements to the press, and the relationship gets worse and worse.

Hopefully the EU and Russia can see through this hype to various common points.

1)     The EU needs Russian gas and Russia needs the European market.

Russian gas is cheaper than Norwegian gas, so it’s good for the EU. And EU countries are Gazprom’s biggest customer, so it’s good for Russia.

2)     The EU should appreciate that Gazprom was always going to stop subsidizing former Soviet countries.

What has really spoilt EU-Russian relations was the stand-off with Ukraine in January. But in some ways, such a stand-off was inevitable. Why should Gazprom subsidize former Soviet countries, when the governments of those countries rarely miss an opportunity to criticize Russia?

Yes, the price hike could have been done in a more gradual and predictable way. But that doesn’t take into account the emotions of the parties involved. In effect, this is a messy Slavic divorce, with Russia feeling like Ukraine is ungrateful for all the Soviet Union did to develop it, and Ukraine feeling Russia doesn’t take it seriously and is a bully.

The emotionality of the divorce is not helped by EU figures from the Baltics or Poland, such as Andris Piebalgs, the Latvian EU energy commissioner, screaming from the sidelines.

What the EU should do in this situation is not take sides, or at least, appreciate that both sides have their legitimate gripes. The EU should try and support a rational and non-emotional working out of new terms of the relationship between Russia and Ukraine. That is in the EU’s interests, not hysterical rhetoric.

3)     The EU should note that Gazprom is going to raise the gas price for Belarus too. 

Accusations that Gazprom punished enemies and rewarded friends of the Kremlin tended to rest on the fact Belarus escaped the price hike. But it hasn’t escaped it – as of 2007, it will have to pay at least double what it pays now.

That, by the way, strikes a bigger blow at Lukashenko’s dictatorship than anything the EU has done or could do.

4)     The Energy Charter Treaty is broadly in Russia’s interests.

One of the biggest sticking points between the EU and Russia is that Russia has so far not ratified the Energy Charter Treaty, a treaty formed in 1991, signed by 52 states, which sets out rules for energy transit. If members of the treaty break those rules, they are subject to large fines. Marc Franco, head of the EU Commission’s mission in Moscow, says: “The ECT should constitute the framework in which energy relations between the EU and Russia take place”.

But Russian officials have made damning public comments on the charter. Alexander Medvedev, head of Gazexport, said in April that it was a “stillborn document”. The EU is pessimistic about getting Russia to ratify it. A diplomatic source says: “Why bring it up in Sochi when we know what Putin’s answer will be?”

But actually, ratifying the charter makes sense for Russia. As professor Stern told me: “There’s a big upside for Russia in ratifying the treaty. It means that transit countries on which it relies, such as Ukraine and Belarus, would not be able to disrupt supply to Europe without facing serious fines. It makes up for the downside of opening up Gazprom’s pipeline system to Сentral Asian countries”.

Being able to ensure reliable supply to the EU has been a key concern for Gazprom. In fact, one of the drivers of the Ukraine stand-off in January was that Gazprom wanted control of Ukraine’s pipeline system, so it wouldn’t have to be at the mercy of the capricious kulaks for its EU exports. It’s likewise pressuring Belarus to give it joint control over its gas pipelines.

But that’s certainly not going to happen in Ukraine, and it might not happen in Belarus. So what’s the next best way of ensuring reliable transit? Signing up to international laws whereby transit countries which disrupt supply face large fines. That has to mean ratifying the ECT. “It’s the only game in town for regulating international energy transit”, as Stern puts it.

The problem is that Russia thinks the ECT secretariat will be biased against Russia and in favour of Ukraine in any disputes. Denis Ignatiev, spokesperson for Gazprom, says: “What did we see in January? Ukraine, which has ratified the charter, disrupted the transit of Russian gas to the EU, and no one from the ECT said anything against them, despite the fact that its actions were illegal according to the charter”.

But sources at the ECT secretariat say it is not for the secretariat to assign blame for what happened in January. If Russia was a member, it could bring a case against Ukraine under the terms of the treaty. The problem is, so far Russia has not provided any transparent information about how much gas it put into Ukraine’s pipeline, and what went missing. “The worrying thing is, we still don’t know what happened in January”, says Stern.

The point for EU officials to remember is, members of the Russian government and of Gazprom are more positive about the charter than they sometimes appear. Stern says they are “intensively negotiating” on the subject. Sergei Yastrzhembsky, Putin’s special representative to the EU, told me “There are certainly positives in the Charter for Russia. It just needs to be more equal to both sides”.

The fact that representatives of Gazprom met with representatives of Naftogaz Ukraine at a special ECT meeting in Brussels last week shows that the ECT could still work as a mediating forum for gas relations in the region.

But what needs to happen is:

5)     The EU needs to convince Russia that the ECT can be an even-handed and depoliticized treaty

The EU, and other signatories of the treaty, needs to re-assure Russia that the ECT is a non-politicized treaty and will be fairly implemented. They need to acknowledge that Ukraine may have been at fault under the terms of the treaty, and stress that if Russia brought forward information that showed Ukraine took gas from the pipelines, then Ukraine could actually be liable for at least a rebuke, and at most a serious fine.

That maybe the last thing Ukraine needs now, when it is facing mounting gas debts. But it signed the treaty, and the ECT secretariat has to implement it. But that depends on Russia actually providing information on what happened in January.

The ECT should be a technocratic, depoliticized treaty, where basic terms of contracts can be defined and disputed, beyond media hype, beyond political rhetoric. But for that to happen, all sides need to trust it. With some convincing, Russia can be made to trust it. Having a trusted, depoliticized forum for CIS energy disputes could help improve relations between Russia and other former Soviet countries. It would be like a third party arbitrating the divorce.

6)     The EU needs to accept Gazprom will retain its monopoly position for the foreseeable future.

Speaking to EU diplomats, one of their key gripes is that Gazprom has a monopoly position on exports to the EU, blocking the ability of independent gas companies and foreign companies to develop projects and export to the EU.

It just has to accept this. It’s not unusual – Norway has Statoil, Algeria has its state gas company, Saudi Arabia has Aramco. In fact, it’s unusual for countries with large natural resources to have diversified private ownership of natural resources.

The EU says it’s worried that Gazprom hasn’t made the investment to meet the EU’s needs. Experts like Stern says it doesn’t need to worry on this score. Gazprom will be able to meet the EU’s needs. It will do so in joint ventures with foreign oil firms – the participants of the Shtokman field project will hopefully be announced in the next two months.

Those are the main points to keep in mind, it seems to me. The point is, we need each other. Hopefully, the diplomats meeting in Sochi will keep their heads and work out a more sensible relationship to the benefit of both sides. That’s what we pay them for, after all.

Julian Evans, a British freelance journalist based in Moscow.

May 24, 2006

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