THE CONFLICT–COOPERATION NEXUS. POLITICISATION, SECURITY AND DOMESTIC INSTITUTIONS IN EU– RUSSIA ENERGY RELATIONS IRINA KUSTOVA A DISSERTATION SUBMITTED TO THE SCHOOL OF INTERNATIONAL STUDIES, UNIVERSITY OF TRENTO IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY TRENTO, ITALY 2014 Copyright © 2014 by Irina Kustova All rights reserved ii DISSERTATION COMMITTEE Internal Members: Prof. Paolo Rosa, University of Trento (Supervisor) Dr. Veronica Lenzi, the Association of Mediterranean Energy Regulators (MEDREG) (Adviser) External Examiners: Prof. Richard Sakwa, University of Kent, UK Prof. Luciano Bozzo, University of Florence, Italy External Reviewer: Prof. Pami Aalto, University of Tampere, Finland iii ABSTRACT Over the last decade, EU–Russia gas relations have witnessed significant deterioration—the bilateral agenda has been narrowed down to ad hoc consultations, disputes over investment and long-term contract provisions have multiplied, and disagreements between the EU and Russia have significantly hindered the multilateral process of the Energy Charter Treaty (the ECT). This deterioration seems to be rather paradoxical in light of high gas interdependence between the EU and Russia and a rich history of well-established cooperation during the Cold War under profound ideological and strategic constraints. In addition, conflictual patterns in EU–Russia gas relations occurred in the beginning of the 2000s, during the period of high oil prices and growing global natural gas demand—the period when enhancement of cooperation would be a more expected outcome. Therefore, the core research question of the thesis addresses the puzzle: why, despite decades of cooperation during the Cold War between Western European countries and the USSR, have EU–Russia gas relations become conflictual since the 2000s? By answering this research question, the study seeks to contribute to the analysis of institutionalisation of energy relations and to reveal factors that lead to cooperative or conflictual outcomes. So far, IR research inquiries in the field have prioritised resource and normative determinisms in addressing the success or failure of energy cooperation, which assume a geopolitical-realist struggle for energy resources and a priori benevolence of free markets in line with the neoliberal economic agenda respectively. The broader geopolitical approach has explained energy conflicts by structural factors of unequal resource allocation across the world and attributed a direct impact of a state resource base (an energy-rich or energy-poor state) on states’ behaviour in the international arena. Another strand of the literature, ‘the market approach’, has also viewed problematic cooperation as a result of different interests of energy producers and consumers—but from a slightly different perspective. Limited institutionalisation of interactions has been explained by different models of gas markets producers and consumers choose. Thus, consumers favour a model of the competitive liberalised gas market (a market actor model), while producers would opt for a model of vertically-integrated monopoly and resource nationalism (a geopolitical actor model) in order to preserve control over resources. Pointing to a number of opposite cases, this study disregards the straightforward assumption that there is a direct link between a resource base and states’ strategies in the international arena. Bringing domestic conditions back to these debates, the study argues that increasing differences between the EU and Russia’s domestic institutional models of the gas market have been the main factor that has triggered conflictual patterns in EU–Russia gas relations since the 2000s. These domestic institutional changes have replaced attempts to build a strategic partnership with ad hoc consultations at the level of practical implementation, and have triggered broader deinstitutionalisation of multilateral gas governance in Europe. The three case studies analyse three instances of EU–Russia gas relations, tracing the crucial differences to determine the outcome—cooperation (a creation of a new or enhancement of an existing international institution), institutionalised conflict (disagreements regarding institutional settings of interactions, which are discussed and settled within the procedures of pre-existing or negotiated international institutions), or institutional conflict (expansion of disagreements beyond iv the pre-existing or negotiated framework of international institutions, which are no more accepted by the parties for conflict resolution) between the parties. The case of the EU–Russia Gas Advisory Council shows how the parties have tried to mitigate the institutional differences, invoked by institutional changes in the EU, on a consultative ad hoc basis. The case of adaptation of long-term contract provisions between the EU and Russia demonstrates the differences have been attempted to be alleviated within the pre-existing institutionalised context of the EU–Russia framework and international arbitration. The case of failed negotiations on the Transit Protocol to the ECT shows how differences in EU and Russia’s institutional models have expanded the conflict over transit provisions beyond the existing institutionalised framework and have consequently led to further deinstitutionalisation of the ECT process. The thesis contributes to ongoing debates about the impact of domestic institutions on actors’ policy strategies in the international arena, bringing insights from energy economics, energy law, and regulatory studies to IR. It argues that differences in domestic models under conditions of high interdependence might lead to politicisation of gas market issues and broader aspects of energy governance. The study also enriches debates about energy security, arguing that energy security depends also on a stable and predictable institutional framework for interactions, which inter alia requires compatibility of actors’ domestic models. v ACKNOWLEDGEMENTS Writing a PhD is not only a long and demanding exercise but also a fascinating journey into the world of academic research. When I joined the Programme in late 2010, I had little idea of what exactly my dissertation would look like. However, I always knew that my academic and professional passion—energy—would guide my research path. These four years have allowed me learning. I had a great opportunity to attend conferences and participate in summer schools. Visiting research periods abroad offered me indispensable experience in enriching my understanding of the topic. During these four years, I made my first steps in writing and publishing. Not always easy, not always bright and shiny, but always motivating and inspiring, these years have taught me a lot, and I am glad that once I have chosen this way. This dissertation would be not completed without help of many people. I would like to express my gratitude to my supervisor, Prof. Paolo Rosa, for his support and his belief in me, for his patience and understanding. He encouraged me to move forward and let me take some time to think about my dissertation. I am extremely indebted for his comments and suggestions, thorough revisions, and fast replies to my numerous mails and questions. I also owe a lot to my adviser, Dr. Veronica Lenzi, at the Association of Mediterranean Energy Regulators (MEDREG), who gave me a lot of useful suggestions in the intricate field of gas markets. I am grateful to the King’s College London and the Energy Research Institute of the Russian Academy of Sciences (ERIRAS) for hosting me during my research periods abroad. Special thanks go to Dr. Frank Umbach and Dr. Maximilian Kuhn at the King’s College London; and Prof. Tatiana Mitrova and Mr. Vyatcheslav Kulagin at the ERIRAS, and to Ms. Anastasia Goryacheva, with whom we shared the office at the ERIRAS and nice days of chats during late autumn in Moscow. I am thankful to the team of the Agency for the Cooperation of Energy Regulators (ACER) for helping me understand the intricacies of the EU gas market design. My warmest thanks go to my mentor, Mr. Joaquin Garcia Gimenez, and to the Market Monitoring Team—Mr. Lewis Hodgart, Mr. Martin Godfried, Mr. Rafael Muruais Garcia, Mr. Ljuban Milićević, and Ms. Lea Slokar—the member of which I was proud to be during five months. If I know something about the gas network industry and gas markets, this is also their merit. I am extremely indebted to the team of the ACER Gas Department and its head, Mr. Dennis Hesseling. Mr. Juan de Miguel Salanova, Mr. Boyko Nitzov, Mr. Peter Pozsgai, and Mr. Marco Senčar were very patient in answering my endless questions about gas markets and regional cooperation. I would like to thank the team of the Energy Charter Secretariat for giving me an opportunity to get first-hand information about negotiations on the Draft to the Transit Protocol to the Energy Charter Treaty and participate in the ongoing modernisation process of the Energy Charter. My work with Mr. Kanat Botbaev, Mr. Matteo Barra, Mr. Ernesto Bonafe, and Mr. Steivan Defilla was extremely fruitful. I am grateful to all those who offered me fruitful academic discussions during this long and demanding road—for Prof. Andrei Belyi at the University of Tartu; Dr. Tom Casier at the Brussels School of International Studies; Prof. Andreas Goldthau at Harvard University; Prof. Nikolay vi Kaveshnikov at the Moscow State Institute of International Affairs (MGIMO); Prof. Andrey Konoplyanik at Russian State Gubkin Oil and Gas University;