Lecture SECURITY ANALYSIS Uppsala university Uppsala, 24 April 2006 Robert L. Larsson Energy and Security Analyst at the

1. Russian Energy and its Implications Lecture SECURITY ANALYSIS Uppsala university Uppsala, 24 April 2006 Robert L. Larsson Energy and Security Analyst at theSwedish Defence Research Agency(FOI) CONTENTS: • Point of Departure • Russia’s Perceptions • Russia’s Resources • Break • Russia’s Energy Weapon • Cases: NEGP and Ukraine • Russia’s Reliability • Conclusions Russian Foreign, Defence and Security Policy (RUFS)

2. Points of Departure • Security-political and state-centric point of view. • ‘Energy security’ encompasses more than ‘security of supply’ for the EU. • Russia’s energy policy must be understood in the light of its overall development. • A risk equation must be based on a combination of Russia’s perceptions, intentions, capabilities, track-record, trends, importer’s vulnerability, the present context and the level of uncertainties. Russian Foreign, Defence and Security Policy (RUFS)

3. Russia’s Energy Perceptions • Russia’s energy strategy shows an urge to control • Aim to be strong and independent • It will create growth and extend influence • One sided dependence is sougth after • Avert geopolitical, macroeconomic and other threats • It will use its energy policy as a security tool, but will also be a reliable trading partner – a difficult balancing act • Putin and the leadership – obsession with security • No marketization at the expense of security • Control over key firms, reserves and strategic infrastructure Russian Foreign, Defence and Security Policy (RUFS)

4. Putin’s Utopia is Emerging • Putin is creating a ‘politically correct market economy’ • Officially limited state control • Officially marketisation • Unofficial market restrictions • Solution: a New Breed of Oligarchs Russian Foreign, Defence and Security Policy (RUFS)

5. Russian Foreign, Defence and Security Policy (RUFS)

6. Categories of Russian Energy Companies • Patriots(Controlled by Russian Government - Gazprom and Rosneft ) • Conformers(Adapts to Russian Foreign Policy - Lukoil and Surgutneftegaz ) • Fugitives(Est. for money transfers, tax evasion etc. - Eural Trans Gas) • Balancers(Balances between business and government interest – BP-TNK • Outlaws(Engaged in illegal activities as money laundering etc – Yukos???) • Free Marketers(Operate in the non-strategic business sector or are small in size.) Russian Foreign, Defence and Security Policy (RUFS) Source: Vahtra, Peeter and Liuhto, Kari (2004), Russian Corporations Abroad: Seeking Profit, Leverage of Refuge?, Turku: Turku School of Economics and Business Administration/Pan-European Institute.

7. If you don’t listen to the Kremlin… Russian Foreign, Defence and Security Policy (RUFS)

8. Yukos’ main production unit (Yuganskneftegaz) was sold in a rigged auction to the shell company Trans Baikal Holding after Dresdner bank had evalutaed its assets. The deal had Putin’s blessing and the state-owned Rosneft bought TBH cheaply. De facto expropriation… And the Winner is…. Russian Foreign, Defence and Security Policy (RUFS)

9. Yukos’ main production unit (Yuganskneftegaz) was sold in a rigged auction to the shell company Trans Baikal Holding after Dresdner bank had evalutaed its assets. The deal had Putin’s blessing and the state-owned Rosneft bought TBH cheaply. De facto expropriation… And the Winner is…. Russian Foreign, Defence and Security Policy (RUFS) Rosneft will conduct greatest IPO ever. Who will benefit?

10. Russian Foreign, Defence and Security Policy (RUFS)

11. Conflicting Agendas • Within the Kremlin • Fractions (liberals vs. hardliners) • Between bureaucratic bodies • Min. of Energy v.s Transport • Between ’free’ companies • Yukos, BP-TNK • Between pro-kremlin companies • Gazprom and Rosneft Russian Foreign, Defence and Security Policy (RUFS)

12. State Control over the Energy Sector • Increased state control in Russia (esp. after 2003) • State bodies, Duma, regions etc. • Strenghened formal control of the energy sector • Regulatory framework, key companies, infrastructure • Informal control of the sector • Siloviki control – higher ratio than ever – new mindset? • Increased power to clandestine services • Putin’s personal and informal control • Conclusions – high responsivness of the sector in strategic matters Russian Foreign, Defence and Security Policy (RUFS)

13. Politics vs Realities? The Kremlin has great powers over the energy sector… …but is the sector strong in international comparisons? Russian Foreign, Defence and Security Policy (RUFS)

14. Russia’s Resources • GAS • Largest proven reserves (~26%) (Iran 15%) • Largest production (~21%) (US 21%) • Russia’s proven reserves of natural gas underscores that Russia will remain the world’s supreme supplier. • OIL • 2nd largest proved reserves (~6%) (Saudi Arabia 23%) • Largest or 2nd largest production (~12%) (Saudi Arabia 12~%) • Russia will scarcely keep pace with Saudi Arabia in either oil production or exports. Russia =>unsustainable policy of maximizing output Russian Foreign, Defence and Security Policy (RUFS)

15. Russia’s Resources: Bottomline • Russia’s role as an energy supplier will be strengthened as demand elsewhere increases. • At the same time - Russia’s export levels will likely decrease strongly even in the short-term perspective. • Russia will not save the world from depletion… Russian Foreign, Defence and Security Policy (RUFS)

16. PEAK OIL Russian Foreign, Defence and Security Policy (RUFS)

17. The Geopolitical Picture • Security problems emerge in the wake of competition • The consumers • USA • Europe • Asia - China, Japan, India • The producers • OPEC • Russia • Central Asia Russian Foreign, Defence and Security Policy (RUFS) Asia is taking new ground…Europe is falling behind

18. Coffee Break… Russian Foreign, Defence and Security Policy (RUFS)

19. Energy as Foreign Policy Levers Several possible levers: • Control of infrastructure • Control of companies • Usage/creation of debts • Coercive price policy • Suitable marketisation • Overt/covert threats • Supply interruptions • Strategic vs. tactical means • Russia and the CIS • Russia and China Russian Foreign, Defence and Security Policy (RUFS) A tool becomes a weapon when it is used as such – all issues beyond normal market actions can be levers

20. Frequency of Incidents • ~ 55 incidents since 91 (20 under Putin) • ~ 40 interruptions (15 under Putin) • ~ 10 cases of: threats, blackmail, punishment • ~ A few unconfirmed Russian Foreign, Defence and Security Policy (RUFS)

21. Direct – the FSU: • Estonia • Latvia • Lithuania • Belarus • Moldova • Ukraine • Georgia • Azerbaijan • Czech Republic • Indirect: • Most parts of Europe Targets of Russia’s Energy Weapon Russian Foreign, Defence and Security Policy (RUFS)

22. Usage of the Energy Weapon • GAINS: The case for further usage of the energy weapon • Increased actual capability to affect in the long run • Increased credibility for its energy deterrents • Believed possibility to affect outcome in the short run • Arguments against usage of the energy weapon are weak • Revenue losses small in comparison, Russia unsensitive • The West does not care as long as it is held within CIS/Baltic • No real factors of inertia of short duration cut-offs • Conclusions: Russia belives that it is not a bad idea unless it is done against the West or for a sustained period Russian Foreign, Defence and Security Policy (RUFS)

23. Example: Russia and Ukraine 2006 • Russia has legitimate rights to increase prices - but the way it is done is strategically motivated. • The gas row of 2005/2006 was an example of ”marketisation”, which was: • Selective – not affecting allies • Selective in time – when politically suitable • Retroactive – exising contracts were not considered • Artificial – Gazprom is a monopoly company • Conducted from the Kremlin • Taken care of by dubious companies. • It was also a result of Russia’s incompetent management. Russian Foreign, Defence and Security Policy (RUFS)

24. Energy = Russia’s New Arsenal? Russian Foreign, Defence and Security Policy (RUFS) Replacement or complement? Non-military pressure = good pressure?

25. Example: A Geostategic Agenda – the NEGP Russian Foreign, Defence and Security Policy (RUFS)

26. By who? • Gazprom • E.ON/Ruhrgas • BASF/Wintershall • For who? • Germany • Denmark? • Sweden? • The UK? • The Netherlands? • Belgium? The North European Gas Pipeline Stretch: Vyborg to Greifswald Length: 1,200 km long Size: 1,219 mm Pressure: 210 atm working pressure Estimated total investment: More than EUR 4 bln. Operational: Estimated 2010 Total Energy capacity: 275TWh Capacity Swedish spur: estimated 10TWh Volume capacity: 55 bcm/year (27.5 for the first stage, two pipelines required to reach 55bcm/year). Russian Foreign, Defence and Security Policy (RUFS) A new Russian-German strategic axis based on murky personal connections?

27. NEGP - The Personal Dimension Gerhard Schröder Vladimir Putin Mattias Warnig Russian Foreign, Defence and Security Policy (RUFS)

28. Issues of Political Concern • Increased Russian leverage on NEGP-states • Increased Russian leverage on the Baltic states, Poland, Ukraine, Belarus • Appeasement risks • International competition and frictions Russian Foreign, Defence and Security Policy (RUFS)

29. Issues of Physical Concern • Dependence on gas – and on Russian gas? • Depleting geological resources? Costs? • Alternatives? Amber? Yamal 2? • Environmental issues? • Manipulation of European power industry? Russian Foreign, Defence and Security Policy (RUFS)

30. Russia Aims to be a Reliable Supplier Russian Foreign, Defence and Security Policy (RUFS) Can We Trust It? Can We Trust Him?

31. Reliability and Risks Russian Foreign, Defence and Security Policy (RUFS) Robert L. Larsson, FOI 2006

32. Short-term vs. Long-term risks? Russian Foreign, Defence and Security Policy (RUFS) Robert L. Larsson, FOI 2006

33. Risks for Supply Interruptions • Risks for short duration supply interruptions • Small risk for Western Europe, (may experience annoying behaviour) • Some risks for Eastern Europe (high concerning ”collateral damage”) • Continued high risk for the Baltic countries, Ukraine, Belarus, Moldova and Georgia (depending on bilateral relations) • Risks for permanent or long-duration supply interruptions • No risk in the near future. • Risks in the long-run depends on: • 1) Russia’s general development and foreign relations in combination with • 2) infrastructure for alternative export routes. Currently not an issue. Russian Foreign, Defence and Security Policy (RUFS)

34. What is Putin and Russia Afraid of ? Russian Foreign, Defence and Security Policy (RUFS) What could trigger further pressure?

35. A Contagious Disease? + Russian Foreign, Defence and Security Policy (RUFS)

36. A Contagious Disease? + Russian Foreign, Defence and Security Policy (RUFS) Spread of militant islamism and terrorism?

37. Russia and Denmark Russian Foreign, Defence and Security Policy (RUFS) Denmark refused to extradite the Chechnyan Envoy Zakayev- Russia threathened Denmark with a boycott ….but Russia would not do anything against the West?

38. Russia is dependent on access to markets • Russia is dependent on Western Money • Russia would never do anything against NATO or the EU • Russia needs to be reliable – otherwise it gets badwill Counter Arguments Russian Foreign, Defence and Security Policy (RUFS) Are These Barriers High Enough?

39. Are the Barriers High Enough? Russian Foreign, Defence and Security Policy (RUFS) Robert L. Larsson, FOI 2006

40. Further Potential problems • Problems of supplies • ”Technical problems” • Contracts are cancelled or not renewed • Bureaucratic harassments • Price changes and ”marketisation” • Unnecessary diversification Russian Foreign, Defence and Security Policy (RUFS)

41. From Europe’s Point of View • Frame: Europe’s growing dependence on imported energy in the light of international competition for Russian (CIS) resources • Cure: Russia is seen as a solution – not as a problem (more reliable and stable than to Africa or the Middle East). • View: Clashes in view on Russia and energy exist between EU states. No common energy strategy. No coherent policy to be seen. • Result: EU and most of its members turn a blind eye to Russia’s negative development, the war in Chechnya and the coercive actions towards CIS countries. Russian Foreign, Defence and Security Policy (RUFS)

42. Issues to Tackle • Russia acting on other values that its customers. • Risks to security of supply – especially for new Europe • Russia may take political consideration when choosing targets of exports • When Russia’s resources are being depleted or increasingly used domestically, the competition for Russian resources will increase and frictions will materialise. Russian Foreign, Defence and Security Policy (RUFS)

43. Conclusions: Russia’s Policy • Russia’s perceptions of energy as a security mechanism legitimises its management by extraordinary means. • The result covers democratic deficits and a lack of real market mechanisms. • An obsession with security and vertical control in combination with skew economy creates structural instability and conflicting trends. • Russia is not a mature international actor on a democratic and market foundation. Russian Foreign, Defence and Security Policy (RUFS)

44. Selected Conclusions • By and large, Russia is a reliable energy supplier… • ..but frictions and problems are numerous: • Russia is moving in the wrong direction • Kremlin is prepared to economic sacrifices for political and security reasons • Kremlin is in full control over security and strategic issues • Exisiting stability is a mirage • Unpredictability and lack of rule of law the norm • Way out – getting Russia on the right track? Russian Foreign, Defence and Security Policy (RUFS)

45. Contact information: Robert Larsson FOI 194 90 Stockholm E-mail:robert.larsson@foi.se Phone: +46 (0)8-55 50 37 60 FOI-Reports on Energy • Russia’s Energy Policy: Security Dimensions of Russia’s Reliability as an Energy Supplier (Larsson) • Russia’s Strategic Commodities: Energy and Metals as Security Levers (Leijonhielm & Larsson) • China’s Quest for Energy: Impact upon Foreign and Security Policy (Kiesow) • Energy in China: Coping with Increasing Demand (Sandklef) • Energy in Asia: An Outline of Some Strategic Energy Issues in Asia (Kiesow) • Order/download reports: www.foi.se,+46 (0)8-55 50 39 04, chrber@foi.se Thank you for your attention! Russian Foreign, Defence and Security Policy (RUFS)