Source: Nezavisimaya Gazeta, December 16, 2005
Published by WPS – CIS Oil & Gas Report

Moscow, Russia, Monday, December 19, 2005

CEO of Gazprom, Alexei Miller, announced that Gazprom might stop gas
supplies to Ukraine from the beginning of 2006. Miller said, “If the
contract is not signed until January 1, 2006, Gazprom will not have grounds
for gas supply to the territory of Ukraine. Goods cannot be supplied outside
of the customs territory of Russia having no contract.”

Meanwhile, the energy issue grows increasingly important in the eastern
direction. Cooperation in the fuel and energy sector was the key topic of
the recent summit of ASEAN with participation of Russia. As a result of
negotiations Russian President Vladimir Putin signed a declaration on
partnership in exploration, production, transportation and consumption of
oil and gas.

Thus, strategy aspects in the foreign policy of Russia start occupying an
exclusively dominating role in the foreign policy of Russia. All this shows
that the energy factor is the most important in negotiations between Russia
and other countries.

To understand how foreign countries depend on Russia and to determine the
real motives of the intergovernmental negotiations Nezavisimaya Gazeta in
cooperation with the Institute of Problems of Natural Monopolies and
Institute of Economy and Finance drew a rating of dependence of countries

on Russian oil and gas supplies.

Three main groups were singled out in the table.

[GROUP A] The first group A includes the “oil and gas satellites of Russia.”
Countries from this category are practically fully dependent on Russian
energy resources and the share of Russia in their oil and gas consumption
varies from 50% to 100%.

To this group belong Ukraine, Moldova, Finland, all Baltic republics and
majority of East European countries. A part of them, like Finland, Bulgaria
and Czech Republic, has a very loyal or constructive attitude towards

Thus, Speaker of the Duma Boris Gryzlov previously said that, “interstate
relations of Russia and Finland are on a very high level” and assigned the
role of “builder of bridges” between Russia and European Union to Finland.
With regard to many European issues related to Russia, Finland has a neutral
position and, for instance, with regard to softening of the visa regime
Finland speaks positively.

In 2004, when Finland was considering entrance into NATO, special
presidential envoy to the European Union, Sergei Yastrzhembsky, criticized
this intention. In Finland, interference of Russia triggered a heated
discussion. This way or the other, Finland did not enter NATO in the end.

For loyalty, Russia supplies Finland with oil up to 70% and with gas 99%.
Alexei Tefdoi-Burmuli, senior researcher of the European integration
department of the Institute of Europe, remarks that to be just it is
necessary to say that, “Finland also tries to use good relations with Russia
for increase of its capitalization in the European Union.”

With regard to Finland’s neighbor Sweden where Russia’s contribution to the
energy balance amounts only to 20% of the oil situation there is radically
different. German political scientist Alexander Rahr comments, “Sweden does
not look at Russia with interest and sometimes even advocates policy of the
Baltic republic risking to soil relations with the northern neighbor.”

At any rate, not all oil and gas satellites behave friendly towards Russia.
On the contrary, Poland, Baltic countries and Ukraine raise a hysteric
anti-Russian wave. This is explainable. Vladimir Milov, President of the
Institute of Energy Policy says, “Historic factor plays the main role there.
Many East European countries believe that they have been occupied by the
Soviet regime illegally and anti-Soviet phobia keeps living there.” These
countries are also so dependent on Russia that this irritates them.

Oleg Trudov, chief specialist of the Institute of Problems of Natural
Monopolies, says, “The largest buyers of Russian gas are Hungary, Slovakia,
Czech Republic and Poland. There is practically no alternative to Russian
gas in this region now.” Alexander Tefdoi-Burmuli adds, “Relations of Russia
with Poland and Latvia are at the freezing point. Simultaneously, this shows
their extreme vulnerability.”

[GROUP B] The second group B was formed by the countries being seriously
dependent on Russian oil and gas. The share of Russian oil and gas in their
energy balance varies from 60% to 100%. This category includes the largest
countries of old Europe (Germany, France, Italy and Austria), as well as
Turkey, Greece, Kazakhstan and Belarus.

Belarus is outstanding against the common background. Being a junior brother
of Russia, it receives unprecedented preferences in gas supplies. In 2006,
Belarus will buy gas at $47 per 1,000 cubic meters whereas Ukraine is forced
to pay $160 and European countries pay $200 and more.

Large European countries Germany, France and Italy play the main role in
this group. They pursue pragmatic policy towards Russia. They are interested
in development of energy cooperation but simultaneously they are large
countries that can pursue independent policy if necessary. Rahr comments,
“These countries are peculiar because they themselves move towards this
energy dependence. Possible profit from cooperation looks very attractive.

For example, due to the German-Russian energy alliance German companies

will be the first to receive a possibility to participate in gas extraction.”
Developing cooperation with Russia Germany also pulls the rest of Europe
towards Russia, for which according to Rahr it is severely criticized by
other members of the European Union. For example, Germany advocates
softening of the visa regime and Spain and Portugal that do not depend on
supplies of Russian energy resources do not.

Tefdoi-Burmuli says, “The case of Italy is interesting. In 2004, Gazprom
permitted Italian company ENI to re-export gas although previously it tried
not to give any possibility to anyone. The reasons were good relations of
the heads of the state and large business. Thus Russia also paid for the
“good word” of Italy towards Russia said in Europe.” With France Russia is
building positive relations too but along with this Russia cannot rely on
France very much because it has traditionally positioned itself as an
independent center of force.

With regard to Turkey, Trudov comments, “It possesses alternative sources

of gas supplies from Iran and Azerbaijan. Moreover, Turkey tries to act in the
role of re-exporter of Russian gas to Europe and is actively promoting
alternative gas pipeline routes to Western Europe without participation of

[GROUP C] The third group C consists of the countries dependent on energy
from Russia. First of all, these are Norway, Holland, Denmark, Spain, UK,
Japan, India, China and US.

Recently President of LUKoil, Vagit Alekperov, announced that LUKoil was
going to stop supplies of “spare” oil to Europe. Alekperov explained,
“Russian Urals crude should be much more expensive than it is now. New
pipelines to China will divert Russian, Kazakh and Azerbaijani oil from

According to analyst Maria Belova, of the Institute of Energy and Finance,
at this point LUKoil tries to support the government in its idea to equalize
prices of Urals and Brent crude. There was also another version saying that
this statement was released to redirect a part of Russian oil to China in
the form of gratitude for assistance to Russian authorities with money in
acquisition of Yuganskneftegaz. An expert willing to remain anonymous said,
“It was obvious that money came from China. This agreement was evidently
achieved 18 months ago when Russia signed an agreement with China on
long-term cooperation in oil supplies.”

Meanwhile, LUKoil already stopped oil supplies to other countries. Thus, in
2000 the country limited oil supplies to the refinery of Mazeikiu Nafta in
Lithuania. Then this decision was made due to a wish to establish control
over the refinery and oil trade in the Baltic republics. American oil
company Williams stood in the way of LUKoil. -30-


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