POISONED BY GAS: INSTITUTIONAL FAILURE, ENERGY DEPENDENCY, AND SECURITY EMILY J. HOLLAND SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE GRADUATE SCHOOL OF ARTS AND SCIENCES COLUMBIA UNIVERSITY 2017 © 2017 EMILY J. HOLLAND ALL RIGHTS RESERVED ABSTRACT POISONED BY GAS: INSTITUTIONAL FAILURE, ENERGY DEPENDENCY, AND SECURITY EMILY J. HOLLAND Many states lack domestic access to crucial energy supplies and must deal with the challenge of formulating an energy security policy that informs their relations with energy producing states. While secure and uninterrupted access to energy is crucial to state security and welfare, some states fail to implement energy security policies and remain dangerously dependent on a foreign supplier. In the post-Soviet region many states even actively resist attempts by the European Union and others to diversify their supplies. Why and under what conditions do states pursue energy security? Conversely, why do some highly dependent states fail to maximize their security vis-à-vis a dominant supplier? I argue that that to understand the complex nature of energy dependence and security it is necessary to look beyond energy markets to domestic political capture and institutional design. More specifically, I argue that initial reform choices guiding transition had long-lasting affects on the ability to make coherent policy choices. States that did not move away from Soviet era property rights empowered actors with an interest in maintaining the status quo of dependence. Others that instituted de facto democratic property rights to guide their energy transitions were able to block energy veto players and move towards a security maximizing diversification policy. I term this the Strong Players, Weak Rules Theory. Although the institutional legacies of the Soviet Union had long-lasting effects on all states in the region, I argued that all states were not doomed to path dependency. Change is possible in both directions: towards and away from the institutional reform that facilitates energy security. To illustrate this logic I first present an original dataset, which facilitates an innovative method of accurately measuring the complex nature of energy dependence in the region. To examine the conditions under which states choose various energy security policies, it is first necessary to understand the extent to which they are dependent on their primary supplier. I argue that current measures of energy dependence are inadequate, and miss out key political and country level variables including provisions in bi-lateral contracts overseeing the provision of natural gas supplies across borders and ownership structures of key downstream infrastructure. I first review the components of an original index of energy dependency and then present my findings both within case over time and comparatively across countries. In Chapter Four I present initial quantitative evidence of a correlation between weak property rights, corruption and energy dependence. Due the magnitude of data collection and methodological issues regarding measurement of institutional development, this chapter is just the first step towards showing a relationship between institutional development and energy outcomes. I first review measures of the dependent and independent variable and then present findings as well as areas for future research. In Chapters Five through Seven I evaluate three cases of energy dependence post- 1991: Ukraine, Lithuania and Hungary. Ukraine illustrates a classic case of Strong Players, Weak Rules. Lithuania shows how a state can break from path dependency to pursue energy security, and Hungary demonstrates how a state can regress from a policy of energy diversification to one of dependency. I find that institutional legacies of the Soviet period have long-lasting effects energy security even decades after independence. I further find that globalization has provided new avenues for corruption and reinforced Soviet patterns of elite resource distribution that can hamper a state’s ability to maximize its security. I conclude this study with broader applications and directions for future research and policy implications. TABLE OF CONTENTS TABLES AND FIGURES ..................................................................................................................... iii Figures ........................................................................................................................................... iii Tables ............................................................................................................................................ iii ACKNOWLEDGEMENTS ................................................................................................................... iv CHAPTER 1 - INTRODUCTION .............................................................................................................. 1 Energy Security and National Security ..................................................................................... 5 Diversification .............................................................................................................................. 8 Policy Implications .................................................................................................................... 10 The Argument ........................................................................................................................... 11 Scope ........................................................................................................................................... 13 Roadmap .................................................................................................................................... 17 The Legacy of the Soviet Energy Trade ................................................................................ 20 CHAPTER 2 - STRONG PLAYERS, WEAK RULES: A THEORY OF ENERGY DEPENDENCY ....... 26 Introduction ............................................................................................................................... 26 Strong Players, Weak Rules ..................................................................................................... 35 The Making of Energy Veto-Players ...................................................................................... 39 The Uniqueness of the Energy Sector ................................................................................... 44 Research Design ........................................................................................................................ 48 Conclusion ................................................................................................................................. 52 CHAPTER 3 - WHAT IS ENERGY DEPENDENCE? A NEW INDEX ................................................ 53 Introduction ............................................................................................................................... 53 Why Natural Gas Contracts? ................................................................................................... 55 Gazprom’s Contracts in Eurasia ............................................................................................. 61 Nuances of Energy Security .................................................................................................... 80 Understanding Energy Security: A New Index of Energy Dependence .......................... 96 CHAPTER 4 – INITIAL QUANTITATIVE ANALYSIS ........................................................................ 107 Introduction ............................................................................................................................. 107 Research Design ...................................................................................................................... 107 Results ....................................................................................................................................... 111 Discussion and Conclusion ................................................................................................... 113 CHAPTER 5 - WE’VE GOT WHAT WE’VE GOT: THE CASE OF UKRAINE ................................. 116 Introduction ............................................................................................................................. 116 Soviet Ukraine: “We’ve Got What We’ve Got” ................................................................. 120 The Kravchuk Era (December 1, 1991-July 19, 1994) ...................................................... 127 The Kuchma Era (July 19, 1994 to January 23, 2005) ....................................................... 143 The Orange Revolution and the Yushchenko Era (November 2004- February 25, 2010) .................................................................................................................................................... 167 The Yanukovych Era (February 2010-February 2014) ..................................................... 176 The Ukraine Crisis and Energy Security .............................................................................. 183 Conclusion ............................................................................................................................... 188 CHAPTER 6 - FROM ENERGY POVERTY TO INDEPENDENCE: THE CASE OF LITHUANIA ..... 191 Introduction ............................................................................................................................