Russian Perspective on the ECT

1. Russian Perspective on the ECT Andrei V. Belyi Dept on international energy politics Higher School of Economics, Moscow

2. Energy Charter processin light of the EU-Russia relations interest in the ECT lies in the Protection of Russianinvestments in the EU Russian view Transit Protocol ispendingbecauseRussiaisconcerned about securing long termgassupplyagreementswith the EU Fossilenergies are rare subjects to trade restrictions, whereasRussiainsists on nuclearmaterials to beincluded to the ECT, whichisstill not the case Non-participation of the majority of producing states makes the ECT the EU-power tool for Russia

3. What are the investorsinterests? Interest for EU Investors Russian Upstream (production and new resource development) Russia represents the largest short and mid term resource potential in hydrocarbons located next to the EU About 40% of Russian budget revenues are provided by the oil and gas exports to the EU Access to Pipelines and export About 35% of EU oil imports and 40% of EU gas imports are from Russia Financial flows Downstream European markets Interest for RussianInvestors EU’s downstream represents the short and mid term possibility for export diversification and higher capitalization for Russian energy companies

4. EnergyInvestmentRegimeisneeded? Since the G-8 Summit in 2006 weperceive an explicit conflict of values: EU’s concern: security of supply and of investments into upstream of producing states Russia’s concern: security of demand and of investments into downstream of importing states Whyregime? To facilitateupstreamresources of energy-producers and to keep control of downstream via supply diversification to enhancecompetition Whyregime? To facilitatedownstreammarketsaccess of energy-importers and to keep control over resources and over access to pipelines to have pay-backstability

5. Forms of « EnergyGovernance » Before 1991 Political accord between ideologically different blocks Monopoly on exports and monopoly on imports « Seminar diplomacy » and the Energy Charter Process Trend towards liberalization of cross-border investment flows 1990s Security-driven energy relations Extreme politization or securitization of energy trade Since 2000s Since the politization of EU-Russiaenergytrade, a reciprocityprinciplebecomes a factor of the governance

6. Case of Russia-Ukraine gas transit dispute politization in the EU January 2006: Russia diminished gas supplies to Ukraine due to the tariff related conflict, some supplies were disrupted to the EU The event received a wide mass-media coverage in Europe, which lead to an over-exaggeration of a threat (and hence extreme politization) Though according to Russia, Ukraine violated transit provisions, Russia did not use the ECT framework for the transit dispute settlement mechanism Reason: too much power allocated to the conciliator (decides on volumes and supplies, read on political issues), whereas Gazprom has been able to resolve disputes bilaterally

7. Consequences of securitization: restriction of investments Europeanreciprocity Russianreciprocity • Reciprocityis an instrument to export the EU liberalization model to the third countries • ThirdEnergy Package and « Gazprom clause » aim to establish the EC-levelinvestment restriction on transmission • Politicalleverage on the access to downstream • Reciprocity is a political accord to access investments from third countries • Subsoil Law and Strategic Sectors Law establish new rules on governmental control over energy resources • Political leverage on the access to upstream “Reciprocity” is a negative-sum game that is talked about as a positive-sum game

8. EU-Russiaframeworkdoes not provideenergyregime Lisbon Treaty rejection means there is still no energy nor investment competences at the supranational level the two subjects, in which Russia is particularly interested to co-operate with the EU Russian non-ratification of the ECT and rejection of the EU « energy market » acquis the framework within which the EU conceives relations with Russia In turn, Russia conceives the competition in gas sector as a dangerous move for the security of demand

9. Russianview: Is the ECT frameworkis relevant? Investment protection: Pro: Russian companies can protect their investments in the EU Contra: pre-investment phase is not stipulated in the article 10 Investment arbitration mechanisms: Pro: Russian companies can rise investment and contract claims against the European Community or its Member States Contra: Fear of a boomerang effect (i.e. Yukos case)

10. What prospects? • Without a clear compromise on the pre-investment phase non-discrimination in Europeandownstream, Russiamightkeepdelaying Transit Protocol deal and hencedelay the ratification • The ECT allows to bypass EU-Russiaframework and to move towards a multilateralapproach, where the EU does not need to have a supranational competence in energy and investments and whereotherenergyproducing states are included • The « Energygovernance » isclearlyhindered by the extremepolitization of the EU-Russiaenergy relations A secret of politics? Make good treaty with Russia (Otto vonBismark, 1863)

11. Thankyou for your attention To contact the author: abelyi@hse.ru