Understanding Energy Security in Central and Eastern Europe

Russia, Transition and National Interest

Wojciech Ostrowski, Eamonn Butler, Wojciech Ostrowski, Eamonn Butler

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138120341
• eBook ISBN:
  9781317311041
• Topic: Social Sciences
• Subtopic: Regional Studies
• Index: Social Sciences

The purpose of this book is to move beyond the approach which views energy as a purely geopolitical tool of the Russian state and assumes a 'one size fits all' approach to energy security in Central and Eastern Europe (CEE). It argues that in order to fully understand Russian involvement in the regional energy complex, the CEE-Russian energy relationship should be analysed in the context of the political and economic transitions that Russia and the CEE states underwent. The chapters on individual countries in the book demonstrate that, although Russia has and will continue to play a substantial role in the CEE energy sector, the scope of its possible influence has been overstated.

1 Introduction

Wojciech Ostrowski

1.1 Energy security and Central and Eastern Europe

According to the classical definition, energy security has three main components: reliability of supply, affordability of supply and environmental sustainability. Energy security is a term that was coined in the mid-1970s, thereafter its prominence steadily declined through the 1980s and the 1990s and some scholars argued that it was no longer relevant (Youngs 2009). Yet, in recent years the issue of energy security has risen again to the very top of the international agenda. Highly volatile oil prices, resource nationalism, the diminishing power of International Oil Companies (IOCs), the rise of emerging powers and their ‘Hybrid’ National Oil Companies (NOCs), corruption scandals and riots in energy-rich countries, military interventions in the oil states as well as technological breakthroughs such as the shale revolution in the USA, all played their part (Yergin 2011; Goldthau 2016). In effect, the period from 2003 until 2014 was often compared and contrasted with that of 1973–1986 the last time that the issue of energy featured highly on the international security agenda (Dannreuther 2015). European states were also affected by the developments in the international energy arena. Yet, the politics of energy security in the 2000s and 2010s played out very differently in the Western and Eastern parts of the European continent.

In the 1990s in Western Europe very few policy makers were preoccupied with the issue of energy security, primarily due to low energy prices and Russia’s ‘opening’ to Western capital. In 2001 the European Commission (EC) in its Green paper warned member states that the status quo would not endure forever and that they should look more closely at the issue of energy (Commission of the European Communities 2001). The rapid increase in energy prices in 2000s had a serious impact on industry and individual customers, and exposed Western energy companies to pressure from empowered producing countries seeking to renegotiate contracts concluded in the 1990s (Vivoda 2009; Wilson 2015). Yet, in Western Europe the shock of the 2000s was not as profound as in the 1970s. The western part of the continent no longer depended on a single region for its oil supplies (i.e. the Middle East) and had begun looking for ways to move towards renewable energy (Vogler 2013; Bradshaw 2014). In essence, the energy crises of the 2000s were limited to the problem of affordability, whereas reliability of supply – despite all the noises – played a rather marginal role (Noël 2008; Goldthau and Witte 2009; McGowan 2011).

High-energy prices affected Central and Eastern Europe (CEE) economically as much as Western Europe. However, in the case of CEE, reliability of supply also quickly emerged as another important issue. These concerns were motivated by the widespread belief that an assertive Russia, which emerged under the first presidency of Vladimir Putin, would use energy in order to either bend states in the region to its will or simply to intimidate them (Balzer 2005; Stegen 2011). The fact that Russia cut off energy supplies to some post-Soviet states in the 1990s and that Russian-owned companies took over installations, such as pipelines and refineries in some of the poorest post-Soviet republics as a way of paying energy debts, seemed to point towards an alarming pattern (Nygren 2008; Galbreath 2008). Furthermore, throughout the early 2000s the Russian state did very little to alleviate those anxieties. The pursuit of aggressive resource nationalism and the destruction of privately owned energy companies inside Russia persuaded many in the West that the Russian state was consolidating its power and that energy would become a cornerstone of a new geopolitical policy (Baev 2007; Goldman 2008; Gustafson 2012).

In the late 1990s and early 2000s, debates concerning CEE energy security overwhelmingly focused on Ukraine and Belarus. Both states occupied a strategic place in the Soviet and in the post-Soviet Russian energy complex and both states found themselves on a collision course with the Russian energy companies and the state during the 2000s (Balmaceda 2007; Chow and Elkind 2009; Högselius 2013). The two infamous Russian–Ukrainian gas wars (2006 and 2009), which became global news, were the most precarious moments in the whole saga (Stern 2006; Hafner and Bigano 2009). At the same time, the overwhelming focus on Ukraine and Belarus meant that other CEE states were sporadically a subject of equally intense academic and journalistic investigations (Balmaceda 2008; Lough 2011; Krastev 2015). This assumed that the energy relationship between Russia and post-Soviet republics mirrored those of the larger CEE region and that Moscow would be equally able and willing to use the energy weapon in order to advance its political goals (Lucas 2014). In short, the tactics used towards post-Soviet republics could be applied towards post-socialist states with a similar geopolitical objective in mind. The legacy of this thinking was clearly visible during the 2014 Ukrainian crises (Biersack and O’lear 2014; Gros 2015; Kozak 2016).

1.2 Purpose of the book and key findings

The purpose of this book is to move beyond a realist approach which views energy as purely a geopolitical tool of the Russian state and assumes a ‘one size fits all’ approach to CEE energy security. The individual contributions to this volume mainly concentrate on the post-socialist states where energy security has been understudied and is poorly understood when compared with reports available on Belarusian, Ukrainian or Central Asian energy dilemmas (Anceschi 2008; Ostrowski 2010; Luong and Weinthal 2010; Balmaceda 2013). To this end we ask the question of what role Russia plays in the CEE energy sector and how did the Russian–CEE energy relationship develop since the early 1990s? We argue that in order to fully understand Russian involvement in the regional energy complex, the Russian–CEE energy relationship should be analysed in the context of the political and economic transition that both Russia and the CEE states underwent. Thus, we assert that questions on which energy security analysis normally centre – such as a country’s energy mix, its transport system, and energy vulnerabilities – have to be considered along with questions related to the post-communist transformation, interactions between emerging post-socialist elites in Russia and the CEE region, as well as general governance structures. Furthermore, we contend that the role of energy companies is particularly important for an analysis of the energy security complex, because the involvement of Russian private, state-owned or intermediary energy companies in CEE have been often considered as a way for the Kremlin to gain a foothold in a country and prevent diversification away from Russian energy supplies. Such explanations have also constituted an important part of the geopolitical narrative. Yet, the involvement of Russian energy companies has not been investigated in any great depth in the case of post-socialist states and their impact is poorly understood.

The individual contributions to this volume demonstrate that dependency on Russian energy supplies and the involvement of Russian private, state-owned or intermediate companies in the CEE region have significantly differed from country to country and have been, if anything, decreasing in recent years with a few notable exceptions. The reason for perpetuating linkages between CEE countries and parts of the Russian energy sectors are multi-layered and are best understood when scrutinised on a case-to-case basis. Yet, there are some clear patterns. In the last twenty-five years or so, the level of involvement of Russian private and state-owned companies in the CEE region has varied from relatively low in the case of Czech Republic and Romania – two states which strongly resisted engagement with the Russian companies and treated them with deep suspicion – to relatively high in the case of the Baltic Republics and Serbia. In the cases of Poland and Bulgaria one of the most controversial elements of the Russian–CEE energy relationship has been the existence of intermediary gas and oil companies which were created throughout the 1990s. The non-transparent nature of these companies often fuelled suspicions regarding their role and the potential pressure that the Russian state might seek to exercise through them on the political and economic environment of the CEE states. However, the individual chapters demonstrate that the companies, which have caused so much anxiety, were generally bodies set up by Russian and regional elites in order to enrich themselves. In short, old fashioned rent seeking rather than political domination was the main reason behind some of Russia’s most controversial ‘energy’ ventures in the CEE region.

The book demonstrates that while a geopolitically driven analysis is not without merit – in particular in the case of Baltic Republics – the Kremlin-centred analysis overstates the strength of the leverage that Russia has had over these countries. In other words, there have been fewer pressure points in the CEE energy complex than commonly assumed. For instance, Russian gas, which has been at the centre of much of the analysis concerning the regional energy security, is much less significant in the overall regional energy mix. Indeed, in a number of the cases reviewed in this book, domestically produced coal still plays a hugely important role. Furthermore, in the majority of cases, the CEE states were also able to resist significant Russian involvement in the energy sector and managed to push for diversification away from Russian supplies. The key element in this strategy has been a new energy infrastructure which was constructed with notable financial and political involvement of the EU.

Another important part of the equation concerning the Russian involvement in the CEE countries was the state of the Russian energy sector during the transition. In the 1990s the country’s oil sector underwent a chaotic privatisation and a clique made up of ex-communist apparatchiks and directors captured the gas sector. In effect, the sector descended into a state of disarray, reducing any real threat that it could be used as an efficient ‘energy weapon’ by the state. Throughout the 2000s, Putin’s energy strategy sought to address this disarray and mainly focused on renationalising the Russian oil industry, while at the same time redefining the relationship with key post-Soviet transit states (Belarus and Ukraine). At this point in time, the CEE energy sector remained largely marginal to this project.

We acknowledge that the Russian energy sector will certainly continue to play an important part in the CEE energy complex in the years to come. However, controversies regarding Russian involvement, with the exception of Serbia and perhaps Hungary, are unlikely to dominate debates concerning regional energy security to the same extent as in the 2000s and the early 2010s. Rather, as various contributions demonstrate, the key disputes in the years to come will focus on the EU’s approach to energy markets and climate change agenda. Therefore; the centre of the debate regarding the CEE energy complex has started to shift from Moscow to Brussels. How the CEE states respond to this development will be critical to understanding future regional energy sector policy and security.

1.3 Structure of the book

1.3.1 Part I: Analytical framework

The first part of the book frames the discussion surrounding the issue of CEE energy security. The first three chapters demonstrate that in order to fully understand the dynamics shaping energy security, we will have to move beyond standard explanations and bring to the fore scholarly debates that have been hitherto marginal to energy studies, but which have the capacity to shed a new light on the key drivers shaping the CEE–Russian energy relationship. Roland Dannreuther, in the opening chapter, argues that in the scholarly literature discussions concerning the CEE–Russian energy dynamics have been contextualised within the framework of the EU–Russian energy relations, which until the mid-2000s appeared to be relatively stable. This was because Russia, after the collapse of the Soviet Union, remained a reliable supplier of energy to the European states. Yet, this sense of stability unravelled between 2004 (Yukos affair) and 2009 (second Ukrainian gas crises) and resulted in strengthening more alarmist voices regarding the reliability of Russian supplies. In his chapter, Dannreuther demonstrates that classical International Relations (IR) theories usefully captured a range of narratives that were put forward in order to describe the politics of energy in Europe. In essence, the actions of the Russian state were interpreted as being realist while the EU, with its focus on cooperation and consensus building, was largely viewed as a liberal actor. Those two narratives played an important role in shaping our understanding of the underlying forces governing the energy security relationships in Europe including the CEE region. Yet, Dannreuther suggests, the classical IR schools do not accurately depict all the drivers that have influenced CEE–Russian energy dynamics and as such other critical factors have to be taken under consideration, including (a) the need to recognise the agency and independence of the CEE state themselves and not treat the region as a strategic vacuum at the mercy of Russia and the EU; and (b) the need to incorporate the role of non-state actors, most notably the CEE and Russian energy companies. The two following contributions elaborate further on the points made by Dannreuther by focusing on the way in which the CEE region has developed politically and economically after the collapse of the Soviet Union and the strategies of the Russian energy companies in the region.

Terry Cox’s wide-ranging contribution, which draws on a succinct analysis of transition studies literature, demonstrates that any serious discussion concerning energy security and policy in the CEE region and the relationship with Russia should start with the recognition of the fact that while all the states in the region underwent a form of transition, the outcomes vary significantly from country to country. To allow us to unpack the reasons for those different outcomes, we need to consider various issues, such as economic liberalisation, privatisation and the character of ownership, in addition to issues of state capture and corruption. Cox, through his exploration of a variety of policy sectors, notes that questions concerning the formation and development of new elites and the renewal and circulation of old elites are closely connected to questions of economic viability, state effectiveness and most importantly privatisation. Cox also argues that the political and economic transformation that the states in the CEE region underwent cannot be divorced from the international environment and neo-liberal economic orthodoxy which dominated economic thinking in the region until the 2000s and which, as we show elsewhere in the book, still plays an important role in the energy sector. Furthermore, it is important to keep in mind that the transition did not occur in an institutional vacuum and that the paths followed by countries before the transition started matter a great deal for the final outcome. This point is particularly significant in the case of energy systems and their operations which are based on long-term projects, arrangements and links that cannot be easily broken. Cox, in his contribution, further demonstrates that the study of the politics of transition also allows us to understand why, in several cases, the state retained a greater ownership share of the energy sector and why even the most liberal CEE countries proved to be reluctant to either completely privatise or open their energy sectors to foreign investments. Finally, the discussions that have taken place in the last twenty-five years or so, within the realm of transition, shed light on the issue of corruption and state capture which, as the individual chapters in the volume demonstrate, are an important element for understanding the CEE–Russian energy dynamic.

The discussions concerning the Russian energy sector often focus on the Kremlin, petrodollars and the way in which they are spent by the regime in order to maintain the status quo. Yet, the existing studies devote relatively little time to the industries that generate the actual rent. This is an important omission since the study of the industry brings to the open dynamics which may otherwise get lost. The contribution by Sylvan Rossiaud and Catherine Locatelli underscores this point. They demonstrate that the Russian oil and gas sector is far from static and that it underwent fundamental changes during the last two decades. The authors also note that it is important to take into account the very significant difference between the oil and gas industries. In their chapter, Rossiaud and Locatelli argue that instead of concentrating solely on the Kremlin and the politics of post-Soviet Russia, we should pay much more attention to the economic drivers. Furthermore, we should recognise that Russian companies – in particular, Lukoil – to a large degree failed to penetrate the CEE energy sector. At the same time, Rosneft, the number one Russian oil company, remained absent from the CEE downstream market. The authors also demonstrate that Russia is a very attractive supplier of gas to the CEE region due to the proximity of these markets and the relatively low production and transport costs. In short, despite everything that has been said regarding diversification in the CEE region, the simple reality is that Russian gas is extremely competitive for a number of countries. As a result, Rossiaud and Locatelli note, commercial considerations should be given greater weight in an analysis of the choices made by CEE actors regarding their energy security. At the same time, we should also more closely scrutinise the actions of Gazprom, its strategy aimed at maximising gas rent and its responses to the liberalisation of the EU gas market.

1.3.2 Part II: Case studies

The case studies discussed in the second part of the book demonstrate that, although, Russia has and will continue to play a substantial role in the CEE energy sector, the scope of its possible influence has been overstated. Most importantly, Russian gas plays a much smaller role in the CEE energy mix than has often been assumed. The CEE countries began devising different projects aimed at diversification away from Russian energy supplies, in some cases as early as the 1990s. The Czech Republic was most successful at adopting this strategy while others followed its footsteps in the 2000s with the help of the EU. The Romanian political elites, supported by the local population, firmly rejected any involvement of Russian companies in the country’s energy sector. In the case of Bulgaria, Poland, and more recently in the case of Hungary, the corrupted nature of the transition led to the creation of a conducive environment for the involvement of Russian energy actors who in tandem with local political elites established rent-seeking, intermediary companies. The presence of those companies was viewed as part of the Kremlin’s strategy aimed at dominating the CEE energy complex, but there is a lack of evidence to show that this was generally the case. At the same time, the legacy of the scandals and struggle that those companies generated had an important impact on various strategies being pursued by the individual states vis-à-vis Russian actors. In the case of the Baltic Republics and Serbia, the Russian energy companies managed to penetrate the energy system to a much greater extent than in other states in the CEE regions, albeit, for very different reasons. The Baltic Republics due to their historic Soviet ties and relative isolation from the European energy system did not have much ch...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of tables
• List of contributors
• Acknowledgements
• List of Abbreviations
• 1. Introduction
• PART I: Analytical framework
• PART II: Case studies
• Index