Energy, Russian Influence, and Democratic Backsliding in Central and Eastern Europe A comparative assessment and case studies from Belarus, Ukraine, Moldova, Hungary, Romania May 2017 Project financed through a grant by the National Endowment for Democracy CONTENTS Energy and Politics: How the Kremlin is Using the Energy Policy to Regain Influence in Eastern Europe. And What Should Be Done to Fight Back ..................................................................................................... 4 BELARUS. Anesthesia a la Russe. ..... How Belarus Became a Rentier-State and What Are the Paths ....................................................................... 14 Introduction................................................................................................................................................................................... 14 Rentier-state theory ................................................................................................................................................................... 15 Soviet legacies in Belarus ......................................................................................................................................................... 16 Rents as anesthesia for the insolvent economic sectors. Lukashenka’s survival strategy ........................... 18 Oil-based rents ............................................................................................................................................................................. 20 Gas rents ......................................................................................................................................................................................... 21 What’s next? Rentier state losing rents .............................................................................................................................. 24 Recommendations for Brussels and Washington .......................................................................................................... 26 UKRAINE. The Price of Independence: From Bribery to War ......................................................................... 27 The Winner Takes It All. How Russia silently took over Ukrainian energy assets .......................................... 27 Chasing the Grail. Russia’s restless attempts to control international gas transit through Ukraine ........ 29 Together in the Wobbling Boat. Russia’s pipeline politics threatening Ukraine and the EU alike ............ 33 Last Resort. Russia’s exploiting vulnerable groups of coal miners to disguise igniting the conflict. Burden of hybrid warfare ........................................................................................................................................................ 42 Recommendations for the EU: ............................................................................................................................................... 46 Recommendations for the US government, Congress and Senate: ......................................................................... 46 Recommendations for both Brussels and Washington: .............................................................................................. 47 MOLDOVA. Pulling the Strings: Russia’s Control over Moldova’s Energy Sector ...............................48 General overview ........................................................................................................................................................................ 48 Russia’s monopoly in the gas sector .................................................................................................................................... 48 Dependence on Russian gas .................................................................................................................................................... 49 Debts in energy sector ............................................................................................................................................................... 50 Russian monopoly on gas sector ........................................................................................................................................... 53 Indirect electricity dependence on Russia ........................................................................................................................ 54 Russia’s indirect influence on electricity production and supply ........................................................................... 55 Poor governance of the electricity market ....................................................................................................................... 57 Third Energy Package in Moldova........................................................................................................................................ 60 Scenarios of Russia’s future actions .................................................................................................................................... 60 Conclusions .................................................................................................................................................................................... 61 2 Recommendations to the EU: ................................................................................................................................................. 62 Recommendations to the US: ................................................................................................................................................. 63 HUNGARY: Exploring new frontiers for Russian energy policy capture – the Hungarian case .........................................................................................................................................................................................64 “We have large-scale plans with Hungary” ....................................................................................................................... 64 The shaky fundaments of dependence: energy trade and Russian inward sectoral FDI .............................. 65 Energy policy capture – the Hungarian case .................................................................................................................... 70 The issue of South Stream pipeline – the first contact… ............................................................................................. 75 MET-trader – leaving the public sphere behind… ......................................................................................................... 76 Shooting the silver bullet – the utility rate cut ................................................................................................................ 79 The Paks nuclear extension – the crown jewel of Russian influence ..................................................................... 80 Domestic perspectives on Russian energy dependence ............................................................................................. 84 The unwilling ally – Hungarian foreign policy towards Russia in the time of sanctions............................... 86 Conclusions .................................................................................................................................................................................... 87 Recommendations for Brussels: ........................................................................................................................................... 88 Recommendations for Washington: .................................................................................................................................... 89 Notes for Brussels and Washington .................................................................................................................................... 89 ROMANIA: No need for Russian pressures, Romanians misgovern themselves ................................91 Russia’s investment policy in Romania .............................................................................................................................. 92 The natural gas factor ................................................................................................................................................................ 95 Interconnections and geopolitics ......................................................................................................................................... 97 Making a mess out of it – still a possibility for the future ........................................................................................ 100 No guarantee that EU policy has the upper hand ....................................................................................................... 100 Turkish Stream .......................................................................................................................................................................... 102 Conclusions and recommendations .................................................................................................................................. 102 Recommendations for EU: .................................................................................................................................................... 103 Recommendations for the US government, Congress and Senate: ...................................................................... 103