The Black Sea Dimensions of the Russia-EU Dialogue

Dr. Pavel K. Baev International Peace Research Institute, Oslo (PRIO) Paper for the fourth annual international conference

Energy and the Black Sea Basin

Organized by the Istanbul Bilgi University Marine Law Research Center Istanbul, 18 April 2005

This draft is not for citation, it is yet to be revised for a publication Russia-EU Dialogue 2

Oslo – March 2005 Introduction

The most surprising aspect of the topic of this paper is the near absence of the complicated and demanding issues related to the Black Sea in the well-established Russia-EU dialogue.1 There is, nevertheless, a topic for analysis here since security and development in this area would depend to a critical degree on the ability of the Union and the Federation to evaluate each other’s interests and set a template of constructive interaction. In most general terms, we can establish that Russia is certain that it has far greater interests in this area than its share of the Black Sea coast would signify. Moscow perceives the sea lines of communications starting at Novorossiisk as the Western ‘door’ of the Caucasian/Caspian region where in the near future the most crucial challenges to its security would be generated. The EU, while declaring the Black Sea are a key priority in its ‘new neighbourhood’, has not shown a real attention to, or indeed, leadership in addressing the serious and inter-penetrating problems here. It appears inevitable, nevertheless, that as the post-enlargement (2004) Common Foreign and Security Policy (CFSP) would take a more definite shape, these problems would come to the top of Brussels’ agenda.

This paper would not attempt to dramatize the current Black Sea issues in order to encourage this, perhaps necessary, shift of attention; neither would it advance any prescriptions on addressing these issues. It aims merely at identifying the already existing in a latent form or probable conflicts of interests between the EU and Russia and at warning against missing opportunities for treating those with due care. It starts with a brief examination of the trajectory of EU-Russia relations, then moves to the analysis of the impact of the changes in Ukraine’s orientation, and then touches upon the risks related to the so-called ‘frozen’ conflicts. The energy dimension of the EU- Russia dialogue is then scrutinized in order to separate the Black Sea agenda, and a

1 Indeed, in most recent expert analysis of EU-Russia relations, the Black Sea direction is not even mentioned. See, for instance, Timofei Bordachev & Arkady Moshes, ‘Is the Europeanization of Russia Over?’, Russia in Global Affairs, April 2004 (http://eng.globalaffairs.ru/numbers/7/526.html); Rolf Schuette, ‘EU-Russia Relations: Interests and Values – A European Perspective’, Carnegie Papers, no. 54, December 2004, Washington DC. For a solid analysis see Ronald D. Asmus at al. (eds), A New Euro-Atlantic Strategy for the Black Sea Region. Washington: GMF, 2004. Russia-EU Dialogue 3 particular focus is set upon the post-Yukos prospects for the oil export. The conclusion attempts to draft a political weather forecast for the post-Putin era.

Rapprochement, cooperation or coexistence?

Despite the absence of frontal collisions, the trajectory of EU-Russia relations has been quite uneven for the last decade, starting from the Partnership and Cooperation Agreement (PCA) signed in 1994 (in force since 1997). Seeking to achieve greater coherence between the CFSP and the policies of key member-states, the Union approved a Common Strategy on Russia in 1999. Moscow, to the contrary, perceived the lack of harmony among its European partners as its key advantage and aimed in its Mid-Term Strategy for Relations with the EU (approved in 1999) to develop a ‘strategic partnership’ without committing itself to any internal reforms shaped by acceptance of common values.2

Despite this discrepancy, the uncertain partnership received a powerful impulse in autumn 2001, when President Putin unequivocally joined the US-led international coalition against terrorism and expressed a firm intention to advance security cooperation with the West to a new level.3 When that impulse gradually weakened, Putin managed to produce a new one joining in early 2003 French President Jacques Chirac and German Chancellor Gerhard Schröder in their opposition to the US war in Iraq. Chirac and Schröder then advanced an initiative to establish ‘four common spaces’ (a common economic space; a common space of freedom, security and justice; a common space of external security; and a common space of research and education, including cultural aspects) that was approved as a working concept at the EU-Russia summit in St. Petersburg in May 2003.4 Developing the road maps for

2 Competent and insightful analysis of both documents can be found in Hiski Haukkala & Sergei Medvedev (eds), The EU Common Strategy on Russia: Learning the Grammar of the CFSP. UI/FIIA, Helsinki: 2001, Programme on the Northern Dimension of the CFSP, no. 11; Vladimir Baranovsky, Russia’s Attitudes Towards the EU: Political Aspects. UI/FIIA, Helsinki: 2002, Programme on the Northern Dimension of the CFSP, no. 15. 3 I questioned the sustainability of that momentum, which was clearly at odds with Putin’s internal policy aims, in Pavel Baev, ‘Putin’s Western Choice: Too good to be true?’, European Security, Spring 2003, pp. 1-16. See also Tuomas Forsberg, ‘The EU-Russian Security Partnership: Why the Opportunity Was Missed’, European Foreign Affairs Review, vol. 9, no. 2, June 2004, pp. 260-270. 4 See Dov Lynch, ‘Russia’s Strategic Partnership with Europe’, Washington Quarterly, Spring 2004; Katinka Barysh, The EU and Russia: Strategic Partners or Squabbling Neighbours? London: Centre for European Reform, May 2004. Russia-EU Dialogue 4 these ‘spaces’ has turned out, however, to be a quarrelsome exercise and its is mostly on the basis of the lowest common denominators that the sides are able to reach compromises towards the formal approval of the framework document at the next summit scheduled for May 2005 in Moscow.5 Against the somewhat half-hearted intentions by the EU, Moscow firmly excluded most of the issues touching upon its southwestern ‘underbelly’ from the four ‘spaces’. It was the Baltic direction that has acquired priority since the late 1990s, mostly due to the energetic advancement by Finland of the Northern Dimension initiative. The first serious stumble happened exactly in this priority area already in mid-2002 when Putin became convinced that his personal push would lead to a quick resolution of the Kaliningrad issue.6 Moscow has invested great effort in securing unrestricted transit to Kaliningrad but its policy has been ambivalent since it remains reluctant to pursue the most natural way towards fast economic development of this enclave through the Baltic networks due to the persistent fear that it would ‘drift away’ from Russia.7

It was entirely predictable that the established frameworks of EU-Russia cooperation would be modernized after the EU enlargement in 2004 and Moscow sought to minimize these changes by playing ‘hard-to-get’ with extending the PCA to ten new members. It expected to preserve the pattern of making deals with several key European states and in fact playing them against the Commission. This pattern involved cultivating personal networks, as for instance, the Chirac-Schröder- Zapatero-Putin summit in Paris in March 2005 that was supposed to prepare the ground for the EU-Russia summit in May.8 To Moscow’s surprise and irritation, the new members of the EU have managed to build their own networks and alliances and thus exert much greater influence on the EU policy-making than many in Brussels expected.9 While Russia is particularly irritated over the behaviour of the Baltic trio, it

5 See Sergei Karaganov, ‘Rossiya i EC – neobhodimost novogo formata’ (Russia and the EU – The need in a new format), Rossiiskaya gazeta, 22 November 2004. 6 Precise analysis of those miscalculations can be found in Leonid Smirnyagin, ‘The Kaliningrad problem – The avoidable sensation’, Briefing no. 5, Moscow Carnegie Center, May 2002. 7 Current thinking in Moscow is well presented in Sergei Kortunov, ‘Kaliningrad as a Gate to Larger Europe’, (in Russian), Russia in Global Affairs, November-December 2004 (http://www.globalaffairs.ru/numbers/11/3438.html). 8 Many EU member-states were less than enthusiastic about this ‘preparation’; see Pavel Baev, ‘Putin’s residual Europeanism and creeping self-isolation’, Eurasia Daily Monitor, 22 March 2005 (http://www.jamestown.org/edm/article.php?article_id=2369455). 9 Fedor Lukyanov argued that ‘great power politics’ in Europe was no longer possible whether in substance or style; see ‘Anti-Yalta or the revenge of small nations’, (in Russian) Russia in Global Affairs, February 2005 (www.globalaffairs.eu/articles/3606.html). Russia-EU Dialogue 5 is Poland that pioneers this pro-active approach, which was particularly efficient during the ‘orange revolution’ in Ukraine in November-December 2004, when France and Germany would have clearly preferred to go slow.

Before assessing the impact of the post-revolution Ukraine, it appears useful to indicate that Russia is not quite prepared for the very probable increase of the EU attention to the Black Sea area necessitated by the intensifying practical work on preparing the next rounds of enlargement. Moscow has never attached any real significance to the Black Sea Economic Cooperation (and is generally disinclined towards multilateral European structures) and builds its relations with, for instance, Bulgaria or Romania, on strictly bilateral basis. Turkey, in this respect, has been perceived as a hugely important economic partner but – against many traditionalist and geopolitical prescriptions – not as a potential security challenge.10 Moscow has shown much caution in sidestepping such sensitive issues as the Kurdish separatism or the Armenian genocide and acknowledged Ankara’s balanced position regarding the war in Chechnya. Visiting Turkey in December 2004, Putin was quite upbeat about the prospects of bilateral relations – but was also puzzled by the sheer amount of political energy focussed by Turkey towards the accession to the EU.11 For most Russian politicians, the proposition of interacting with the EU in the Black Sea area when Bulgaria, Romania and, particularly, Turkey are member-states still remains incomprehensible.

The fallout from the ‘orange revolution’

Russia used to perceive with scepticism Ukraine’s European aspirations based on vague feelings on civilizational belonging but lacking any solid hydrocarbon foundation. Indeed in 2003-2004, President Kuchma’s hesitant advances towards the West were received with little enthusiasm and he had to lean increasingly towards

10 One good example of such prescriptions can be found in the White Book of Russian Special Services (Moscow: Obozrevatel, 1996), but even such respected expert as Alexei Arbatov on several claimed that in geopolitical terms Turkey would remain Russia’s ‘main regional rival’ (see, for instance, Nezavisimaya gazeta, 14 December 1995. 11 Russian experts typically emphasise the difficulties of this undertaking and the lack of enthusiasm in the EU; see Olga Vlasova, ‘Turetskii bereg stal blizhe’ (The Turkish shore has become closer), Expert, 13 December 2004; Fedor Lukyanov, ‘Krasnye linii evropeiskoi geopolitiki’ (The red lines of European geopolitics), Gazeta.ru, 16 December 2004 (http://www.gazeta.ru/comments/2004/12/16_a_212577.shtml). Russia-EU Dialogue 6

Moscow.12 The Kremlin saw in that an opportunity not only to increase its influence in Ukraine but also to present itself to the EU as a ‘natural leader’ of the borderland region that included also Belarus and Moldova. This ambitious geopolitical design required high dependency of Ukrainian leadership upon Moscow’s support so Putin invested a lot of his personal political capital in securing the desired outcome in the presidential elections in Ukraine in November 2004. The result could easily qualify as a political catastrophe.

While many Russian liberal commentators saw the Kremlin’s clumsy interference in Ukraine as a miscalculation and mistake, it was in fact a pre-determined consequence of its desire to boost Russia’s position in the relations with the EU. Moscow could present itself ‘as equal’ to the enlarged Union only if it is certain in its leadership in a loose grouping of post-Soviet states where Ukraine is a key member. Ukraine’s independent rapprochement with the EU would crucially weaken Russia’s position, so the risk assessments were structured as ‘zero sum’ security dilemma.13 The stakes were perceived as so high that Putin did not hesitate to confront all the key European organizations, singling out the OSCE as the main conduit of ‘destabilizing interference’.14 Despite accommodating attitude shown by Chirac and Schröder, the November 2004 EU-Russia summit in the Hague was bitterly poisoned by disagreements over taking sides in the ‘orange revolution’.15

The emotional stress had subsided by spring 2005 but the real scale of the problem for Russia has even increased despite Putin’s ‘peace-making’ visit to Kiev in March. Yushchenko’s firm determination to put Ukraine on the fastest possible track for joining the EU leaves Moscow with well-developed framework of ‘strategic partnership’ but without real substance to it.16 Knowing that the southern regions,

12 Sharp analysis of this manoeuvring is in Arkady Moshes, Ukraine in Tomorrow’s Europe. FIIA Report no. 4, Helsinki, 2003. 13 Such pro-Kremlin commentators as Mikhail Leontiev argued that Yushchenko’s victory would bring ‘NATO tanks to Kharkov’, see interview with Moscow Echo, 26 November 2004 (http://www.echo.msk.ru/programs/personalno/33176/). 14 I examined this conflict in Pavel Baev, ‘Needing a scapegoat for fiasco in Ukraine, Moscow slams OSCE’, Eurasia Daily Monitor, 1 December 2004 (http://www.jamestown.org/edm/article.php? article_id=2368932). 15 The official propaganda at that time treated the EU in much the same way as it had treated NATO during the quarrels on enlargement, see Sergei Strokan, ‘V okno Evropu’ (Europe through the window), Kommersant-Vlast, 20 December 2004. 16 Russian media plays up the hurdles on the way to Europe but admits that Yushchenko’s goal of membership by 2014 is feasible; see Vladimir Frolov, ‘Rossiya-Ukraina: Bez paniki’ (Russia-Ukraine: Russia-EU Dialogue 7 including Odessa, are not particularly supportive to his presidency and that the Crimea is all but hostile, Yushchenko is particularly interested in activating the Black Sea cooperative avenue towards the EU. For what can be determined from his first steps in the European arena, Yushchenko would try to avoid competing with Turkey for ‘who-would-get-there-first’ but seeks to mobilize every bit of support he can find among the ‘new Europeans’.

One specific problem where Ukraine can prove its value to the EU is the deadlocked Moldova/Transdniestria negotiations where a breakthrough – 15 years after the violent escalation – appears by no means impossible. Yushchenko’s very helpful support to the newly-Europeanized Moldovan communists in the parliamentary elections in February 2005 quite possibly has given him a useful entry point into this asymmetrical but delicately balanced political system.17 Russia, to the contrary, has been nurturing its grudge against Moldova, which dared to turn down its plan for settling the conflict back in December 2003, and fails to show any constructive attitude in the new situation. Transdniestria appears to be ripe for solution but Moscow would probably prefer not to encourage any changes in the fixed balances of power in the conflict situations in the Black Sea area.

New risks in the old conflicts

Russia did play a crucial role in breaking the trend towards violent destabilization of the Caucasus in the first half of the 1990s, applying its military force carefully and supporting it with political pressure. It was not, however, particularly keen in resolving the terminated conflicts assuming that its interests would be better served by the preservation of fragile ceasefires. The victorious separatists in Abkhazia, Nagorno Karabakh, South Ossetia and Transdniestria saw few incentives in settling their disputes with abandoned states, which entered a protracted period of political and economic stagnation.18 Russia’s position as a status quo power was problematic

No panik), Vedomosti, 18 March 2005; Maxim Sokolv, ‘Evropeiskii vybor Ukrainy’ (Ukraine’s European choice), Expert, 22 November 2004. 17 As one Moscow commentator asserted, the ‘defreezing’ of the Transdniestrian conflict could become the first serious step for Ukraine on the road to Europe; see Shamsutdin Mamaev, ‘Novyi GUUAM’ (The new GUUAM), Expert, 15 March 2005. 18 This proven survivability of secessionist quasi-states is thoroughly analysed in Charles King, ‘The Benefits of Ethnic War: Understanding Eurasia’s Unrecognized States’, World Politics, no 53, July 2001, pp. 524-552. See also Vladimir Socor, ‘Frozen Conflicts: A Challenge to Euro-Atlantic Russia-EU Dialogue 8 already in the late 1990s, since for many actors the ‘no peace – no war’ situations were unacceptable, and it has become counter-productive since the start of the new decade, as the artificial stability in the region erodes to the level of unsustainability.

The EU did play a modest but helpful role in post-conflict rehabilitation of the three South Caucasian states and has expressed intention to increase this role after accepting ten new member-states in 2004.19 The enlargement, however, has brought much greater complications than Brussels had budgeted for, so the intention to give more attention to the Black Sea are and the Caucasus in particular has not materialized so far. Russia, on its side, has shown no interest whatsoever for including joint conflict management here in the agenda of its dialogue with the EU and its main concern has been for a long time the ‘interference’ of its ‘strategic partners’ into the Chechen war. Moscow has never expected to sell this protracted bloodshed to the EU as a ‘counter-terrorist’ operation so cutting short any discussions of Chechnya has been its best option. The murder of Chechen president Aslan Maskhadov in early March 2005 serves this purpose perfectly as now there is indeed nobody in the resistance who can be a partner in a ‘political solution’ advocated by the West.20

The demanding engagement in Chechnya, useful as it has been for consolidating Putin’s regime, has made Moscow increasingly worried about the decline of its influence in the Caucasus where its power projecting capabilities have become clearly insufficient and unimpressive. It was the swift collapse of the Shevardnadze regime in Georgia in November 2003 that has intensified these worries and the forceful but bloodless resolution of the latent secessionist conflict in Adjaria by the new Georgian leadership has forced Moscow to acknowledge that the habitual status quo is in flux. The Russian leadership does not have many instruments for controlling the gradual shifts and preventing sharp changes but it is certain that the EU encourages exactly those trends that it seeks to check. Geopolitical defence is clearly a losing proposition so Moscow tries to move pro-actively exploiting its main asset – dependency of the

Interests’, pp. 127-137 in Asmus (ed.), A New Euro-Atlantic Strategy, 2004. 19 Many aspects of possible pro-active EU policies are examined in Dov Lynch (ed.), The South Caucasus: A Challenge for the EU. Chaillot Paper no. 65, Paris: ISS EU, December 2003. See also Heather Crabbe, ‘A More Ambitious EU Policy for the Black Sea Region’, pp. 106-115 in in Asmus (ed.), A New Euro-Atlantic Strategy, 2004. 20 The counter-productiveness of that ‘success’ was emphasised in many Russian media comments; see, for instance, Boris Dolgin, ‘Maskhadovs’s elimination: To frighten your own’ (in Russian), Polit.ru, 10 March 2005 (http://www.polit.ru/author/2005/03/09/elimi.html). Russia-EU Dialogue 9 leaders of the secessionist quasi-states.21 As the October 2004 elections in Abkhazia has demonstrated, this dependency does not necessarily translate into readiness to follow the orders, so Moscow at least tries to reduce the opportunities for these ‘tails’ to wag the ‘dog’.

It is Georgia that is identified as the weak link in the emerging structure of Western influence so the efforts to turn the tide of negative (from the Russian perspective) developments are now focussed on the country that has set it in motion. Such clumsy moves from Moscow as the harsh pressure on Abkhazia when its interference in the elections failed were perhaps counter-productive while others, like the escalation of hostilities around Tskhinval, South Ossetia in summer 2004, are quite risky. Nevertheless, the Russian authorities assume that a Westernisation project driven by a tiny elite group in a country where the culture of corruption has such deep roots is inevitably vulnerable and can be undermined.22 This potentially sets Moscow on a collision course with the EU, which is committed to supporting Georgia’s state- and democracy-building.

Competing energy corridors

Intense discussions on Russia’s energy exports to Europe constitute not only the central part of the first ‘common space’ but also the main theme of the whole EU- Russia dialogue. It is natural gas that has been the main topic in this theme since the Soviet times but during the last couple of years the style as well as the substance of the ‘gas dialogue’ has changed quite significantly. Moscow has taken full advantage of the sharp growth of the oil prices and seeks to assert that the far more regulated gas market is also becoming a ‘supplier market’, without any ‘unhelpful’ deregulation. Such issues as the reform of GAZPROM and the competition of smaller companies according to the rules of the new Energy Charter on the liberalized EU market have all but disappeared and now the Russian authorities lobby GAZPROM’s interests with Putin taking the lead with no reservations.23 Interestingly, this shift in Russia’s

21 A meeting of these leaders was held in Moscow in mid-March, see Aleksandr Reutov, ‘Nezavisimye tsepliayutsia za nepriznannyh’ (Independent cling to unrecognised), Kommersant, 18 March. 22 See Aleksandr Pikaev, ‘Georgian ultimatum is a desperate act’, interview with Polit.ru (in Russian), 15 March 2005 (http://www.polit.ru/analytics/2005/03/14/base.html). 23 In 2002, Moscow was still contemplating proposals for dividing GAZPROM and privatising its parts (see Jan S. Adams, ‘Russia’s gas diplomacy’, Problems of Post-Communism, May /June 2002, pp. 14- Russia-EU Dialogue 10 position has been embraced by Germany so wholeheartedly that a peculiar quality of this interplay between business and high-level politics attracts increasing and not always positive attention.24

For the last year, the key project in this reformatted dialogue has been the giant gas pipeline connecting Russia and Germany across the Baltic Sea with the extension to the UK, advocated by GAZPROM and supported by Germany against the objections of many Baltic states.25 The Black Sea has been mentioned only in passim in these discussions but that does not mean at all that it is in the periphery of GAZPROM’s interests. To the contrary, the Russian gas giant has demonstrated high activity in this area – but it has seen no point in moving its plans and projects under the ‘umbrella’ of EU-Russia dialogue. Advancing several projects in the Balkans (on the unhelpful background of Russia’s political retreat from this post-war sub-region), GAZPROM focused on ‘conquering’ the Turkish market – and this focus had been set well before the EU set the date for opening the accession negotiations.26 Despite the remarkable success with constructing the ‘Blue Stream’ pipeline, GAZPROM has encountered more setbacks than it expected with implementing its plans – but it is firm set at resolving those on the bilateral basis.27

A major challenge for the scheme of building significant reserve capacities for delivering Russian gas in anticipation of a steady growth of Turkish demand comes from the Baku-Erserum pipeline, and here GAZPROM’s concerns overlap with the widely spread animosity towards the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. In this

22), but in October 2003, Putin stated at a meeting with Schröder that the European Commission ‘should have no illusions: in the gas sphere it will be dealing with the Russian state’ (see Evgeny Verlin, ‘The Germans Arrived to the Urals’, Nezavisimaya gazeta, 10 October 2003). 24 Both Russian and German media looks into the roots of the exceptional warm personal relations between Putin and Schröder in the dense business contacts between GAZPROM, E.ON and the Deutsche Bank; see, for instance, Dmitry Butrin, ‘Protivoestestvennoe rodstvo’ (Unnatural family ties), Gazeta.ru, 20 December 2004 (http://www.gazeta.ru/column/butrin/214314.shtml); Katya Tikhomirova, ‘Nichego ne vizhu, nichego ne slyshu, nichego nikomu ne skazhu’ (I see nothing, hear nothing, will tell nothing), Inopressa.ru, 20 December 2004. 25 See Judy Dempsey, ‘Russian push for pipeline to Europe raises doubt’, International Herald Tribune, 15 March 2005. 26 See Mikhail Tsyganov, ‘”Golubaya mechta” vo ploti’ (The “blue dream” in flesh), Mirovaya energericheskaya politika, no. 5, May 2002. 27 See Anna Skornyakova & Petr Orekhin, ‘GAZPROM pytaetsya spasti “goluboi potok”’ (GAZPROM tries to save the “Blue Stream”), Nezavisimaya gazeta, 28 August 2003. The prospects for Russia’s gas export to Turkey were thoroughly discussed during the visit of Turkish Prime Minister Erdogan to Moscow in January 2005; see Galina Bazina, ‘GAZPROM hochet v Ankaru’ (GAZPROM aims at Ankara), Gazeta.ru, 12 January 2005 (). Russia-EU Dialogue 11 attitude, disappointment about lost profits from oil transit are mixed with geopolitical worries about declining influence.28 There is hardly any need in re-examining here the rationale for this huge projects but as its completion comes closer, Moscow would probably see more clear that it deals not with an ‘evil intrigue’ orchestrated in Washington but with a functional channel of oil supply to Europe. This might eliminate unnecessary anxiety but would certainly not reduce competition between the two energy ‘corridors’.29

Russia understands perfectly that the vulnerable point in its ‘corridor’ is the Bosphorus with its tightening restrictions on tanker traffic, and so has invested serious political efforts in organizing a way around this ‘bottleneck’.30 These efforts have failed to bring a breakthrough and now Moscow has to re-orient its bargaining from Bulgaria and Greece towards Brussels, since the project is inevitably considered in the context of the next phase of the EU enlargement. Russia will hardly be able to play competing state interests against one another since for the EU the security of oil supply becomes the key concern, so the Commission is not going to choose Novorossiisk over the Ceyhan but would seek to keep both ‘corridors’ open and functional. Ukraine might make a limited but important contribution to this channelling of Caspian oil flows and for what can be seen in the most recent signals, Kiev seeks to do everything possible to increase its usefulness to the EU.31

Post-Yukos energy horizons

28 In the vast literature on the BTC political profile, Russian experts persistently play up the proposition that this geopolitical project has no sound economic foundation; see, for instance, ‘Proekt Baku-Tbilisi- Dzheikhan: ekonomicheskie somneniya i finansovye problemy’ (The BTC project: Economic doubts and financial problems), Regnum, 28 December 2004 (www.regnum.ru/news/384129.html). 29 My recent analysis of this competition is in Pavel Baev, ‘Russia’s Happiness in Multiple Pipelines’, CACI Analyst, 16 June 2004 (http://www.cacianalyst.org/view_article.php?articleid=2452). 30 The fire on a Russian tanker in the Bosphorus in November 2004 was ignored by the Russian news media but the plans for the Burgas-Alexandropulis bi-pass pipeline are widely commented; see, Ilya Zaslavsky, ‘Neft potechet po ukazke Kremlya’ (Oil will flow by the Kremlin’s orders), Gazeta.ru, 4 Novemver 2004. 31 One specific issue where Ukraine could make an important choice is the direction of oil flow in the Odessa-Brody pipeline, which is currently used, according to the Russian plans, for transporting its oil towards the Black Sea; see ‘Ukrainskii povorot’ (The Ukrainian turnaround), Polit.ru, 31 January 2005 (http://www.polit.ru/event/2005/01/31/ecomdev.html). Russia-EU Dialogue 12

Most current assessments of Russia’s future role on the energy markets are based on the scenarios developed in the Energy Strategy approved in Autumn 2003.32 The key guidelines in the oil-and gas sector have, however, changed quite dramatically since then, and not at all in the directions outlined in this Strategy. A steep watershed was erected with the attack of the presidential administration on the oil giant Yukos, starting with the arrest of its owner Mikhail Khodorkovsky in October 2003 and continuing through the confiscation of its major asset, Yuganskneftegaz, in December 2004. This on-going saga has received a lot of media coverage and analytic attention;33 several large-scale direct consequences – such as the end of the pipeline projects towards Murmansk and towards China – are already clear, some other are still uncertain but could have more relevance for the Black Sea area.

The shock effect from this attack was so strong that all other Russian oil companies have lost interest in long-term investment in any fixed assets, from exploration to refinery. While the state has increased its share in and control over the oil sector, it does not provide any leadership in modernizing the industry. This decline in investment activity, quite unnatural on the background of extraordinary high oil prices, undermines the trend towards steady growth of oil production and increases the possibility of reaching a peak before the end of this decade (as indicated in a ‘worst-case scenario’ in the Energy Strategy).34 Even if Russia would prioritise, for political reasons, oil exports to Europe, constructing new pipelines and terminals could then become unnecessary, since the ‘big oil’ from Kazakhstan could be transported through the existing infrastructure (plus the BTC).

Putin tried to reassure the big business that their ‘empires’ would be safe providing they show some ‘social responsibility’, but the relentless pressure on Yukos and the increase of taxes on extra profits from oil exports were more convincing than any words.35 The change in the behaviour of LUKOil, Russia’s largest oil company, is quite striking: in the second half of the 1990s, this giant was aggressively expanding

32 This highly informative document can be found on the website of the Ministry of Industry and Energy (http://www.mte.gov.ru/docs/32/189.html). 33 Vladimir Milov, Director of the Institute of Energy Studies, has been one of the most insightful analysts, see, for instance, ‘Nationalization or Privatization?’, Gazeta.ru, 14 March 2005. 34 Assessments of mid-term prospects for oil production in Russia vary in a wide corridor, primarily due to the fact that the size and quality of reserves officially continues to be a state secret. 35 Putin’s meeting with the business leaders on March had a very different tone from their collective visit to Kiev on Yushchenko’s invitation on March ; see Russia-EU Dialogue 13 its presence in the Caspian area and exploring several possible export routes, but in the last couple of years, it has been quite passive and apparently lost its appetite for opportunistic acquisitions.36 Other companies also prefer to accumulate funds rather than invest in fixed assets and that reduces the key content of Russian political manoeuvring in the Black Sea area.

GAZPROM could have acted like a locomotive (or a battle-ram) for the oil sector but its activities are also seriously affected by the Yukos ‘affair’. Against its stated aims and priorities, it had to take part in the dismemberment of this company and securing state control over Yuganskneftegaz through a series of highly questionable deals. The embarrassing quarrels in the presidential administration around this badly mismanaged ‘special operation’ not only stained GAZPROM’s business reputation but also undermined its ability to follow a coherent plan. Instead of thinking strategically about mid-term, this company cannot approve the investment plan for 2005 (as of late March) and has only vague picture of the consequence of the ‘friendly takeover’ of the state-owned Rosneft oil company with its huge debts.37 While the coming months could be crucial for determining the energy prospects in the Black Sea area, GAZPROM is lagging behind and is too often paralyzed into inaction by political infighting.

The dawn of the post-Putin era

In present-day Russia, political decision-making is hyper-centralized to such a degree that it appears meaningless to discuss any issue without focussing on attitudes, opinions and personal interests of the very narrow circle of trusted aids and advisors around Putin, often referred to as ‘the Kremlin’. At the same time, since the start of Putin’s second presidency, the integrity of the system of highly centralized power has been rapidly deteriorating, despite the lack of any organized opposition. Without doubt, the brutally enforced control without accountability over the rich financial flows generated by the energy export has been a key corrupting influence for the narrow-based regime. Analysts now eagerly engage in speculations about the

36 For an informed opinion, see Douglas Blum, ‘Why Did Lukoil Really Pull Out of the Azeri-Chirag- Guneshli Oilfiled?’, PONARS Memo 286, Washington: CSIS, January 2003. 37 See Alena Kornysheva, ‘GAZPROM nadkolol pravitelstvo’ (GAZPROM has split the government), Kommersant, 4 March 2005. Russia-EU Dialogue 14 possibility of a ‘colourful’ revolution in Russia.38 Revolutions, however, remain highly unpredictable events, and spelling disasters is hardly a useful exercise. What is clear, nevertheless, is that Putin’s demoralized team has abandoned all attempts to develop a modernization strategy for Russia and cannot even focus on the tactical aims of securing a smooth transition of power in 2008, since its attention is entirely consumed by the burning issues of immediate survival.

Quickly accumulating sum of miscalculations and failures creates a situation where the sooner this ‘team’ is removed from power the better is the chance to avoid violent or even catastrophic scenarios.39 It is impossible to predict how this process could be managed but what is significant for this analysis is that the dismantling of Putin’s regime will inevitably involve dismissal of several key concepts compromised by poor implementation. One of such instrumental ideas is the direct state control over key energy assets, so that the prediction of Andrei Illarionov, outspoken but not very popular presidential adviser, that Yukos will be returned to its legitimate owner, might indeed come true.40 That would significantly reshape the energy interactions in the Black Sea area, where instead of one slow moving GAZPROM we could see several dynamic and aggressive oil-and-gas companies, smartly lobbying their interests. Russian policy, accordingly, could become much more pro-active and competitive, and that would seriously redefine the dialogue with the EU.41 New dynamism as well as new risks in the Black Sea area would then make it a key part of the ‘newest Europe’.

38 See, for instance, Petr Ilinsky, ‘Recipe against revolutions’ (in Russian), Globalrus.ru, 23 December 2004 (http://globalrus.ru/opinions/139476/); Yuri Shevtsov, ‘Oil instead of revolution’ (in Russian), Russkii zhurnal, 4 March 2005 (http://www.russ.ru/culture/20050304_yushev.html). 39 See Yulia Latynina, ’This is the collapse’ (in Russian), Novaya gazeta, 14 February 2005 (http://2005.novayagazeta.ru/nomer/2005/11n/n11n-s00.shtml). 40 See interview with Izvestia, 8 February 2005 (http://main.izvestia.ru/economic/08-02- 05/article1168050). 41 Current picture is clearly analyzed in F. Stephen Larrabee, ‘The Russian factor in Western Strategy Toward the Black Sea Region’, pp. 147-158 in Asmus (ed.), A New Euro-Atlantic Strategy, 2004.