New threats or new challenges

New Threats or New Challenges
Considerations on the further development
of an EU-policy to its eastern neighbours


An active policy of co-existence should be based
 neither on fear nor on blind confidence.
Willy Brandt, Nobel Lecture, 11 December 1971

  1. Europe after the cold war

With the fall of the Berlin Wall in November 1989, the countries of Central Europe (re)gained their independence from the Soviet Union. Two years later the Soviet Union first recognised the independence of the three Baltic States in September 1991 and a few months later, in December 1991, the Soviet Union itself collapsed and split up in 12 new, independent states. With these events a period of more than 40 years of Cold War and a precariously maintained balance of power between the "Free West" and the "Communist East", between the United States and its allies on the one hand and the Soviet Union and its allies on the other hand, between NATO and the Warsaw Pact came to an end.

The Cold War did not end in the way wars do traditionally end, with clear and official losers surrendering to clear and official winners after a final shoot-out. But many observers still believed that the "good", free and capitalist West had defeated the "ugly", oppressive and communist East. And although some staunch conservatives still consider the end of the Cold War as a victory for the US President Reagan and the capitalist system, it is clear for most analysts, that the complete collapse of the political, military, economic and social structures in the Soviet Union and between the Soviet Union and its allies were the main cause for the new situation on the European continent. The end of the Cold War therefore meant a complete rethinking of the political course of the countries of Central and Eastern Europe as well as a complete restructuring of their economic and social system.

As a result of the new situation, the political landscape in Central Europe changed fundamentally in the beginning of the nineties of the last century. All states had to search for a new political and economic independence and needed to reform the economic and state structures in their countries. New states were - sometimes after violent conflicts - established on the territories of the former Soviet Union and of the former Yugoslavia. These new states were desperately in search of a new identity, new state institutions and new alliances.

 With the incorporation of the German Democratic Republic (DDR) in the German Federal Republic, Germany further strengthened its position as one of the leading states in Europe; but because of this complex internal integration process it also became the country most sensitive to the urgent need for reform and restructuring in the Central and East European countries and the need for assistance in this process.

Thus - with the active support of the European Union and its member states - a great number of new countries developed in Central and Eastern Europe, some of them experiencing real independence for the first time in history, many of them establishing truly democratic institutions for the first time in history and all of them facing the need to adapt to the mechanisms of a social market economy for the first time in history.

But not only the countries in Central and Eastern Europe and their internal institutions and structures changed. Whereas all international relations of these countries (institutionally, military and economically) had been completely dominated by the leading role of the Soviet Union, they were now forced to find themselves a new and different place in the international community and had to decide on new partnerships and alliances.

With regard to the institutional development in Europe, all of the countries (including the Russian Federation) became members of the Council of Europe. All of the countries accepted and actively participated in developing a new role for the OSCE as the principal organisation in Europe for guaranteeing stability and democratic development in its member states. Ten Central European states became full members of the European Union, some others are candidates for accession and some more have proclaimed their aspirations for membership. The same countries that joined the European Union are now also members of NATO. Other countries are aspiring to become members of the alliance. Membership of the European Union and - to a lesser extent - membership of NATO thus have become the symbols of a new future for the countries of Central and Eastern Europe, far away from the dominance of the former Soviet Union. And membership of these organisations is considered to be a guarantee for the irreversibility of this new future.

Also with regard to Europe's economic organisation and development, the end of the cold war brought enormous changes. Trade between the planned economies of Central and Eastern Europe (and also their trade with the countries of Western Europe) was previously regulated within the framework of COMECON, the Council for Mutual Economic Assistance. With the collapse of the communist system also this organisation disappeared. In all countries of Central and Eastern Europe, (barter) trade between the COMECON countries was to a very large extent replaced by trade with the markets of the countries of the European Union. In 2006 more than 80% of Polish imports and exports were directed to the markets of the European Union. And also for Russia, the European Union has -with a share of about 52% of its total foreign trade - become the most important trading partner. The EU has also become by far the most important investor in Russia as it is estimated that up to 75% of FDI stocks in Russia come from the EU Member States. The European Union has, in particular in this economic context, become of far greater importance for the further development of the countries in Central and Eastern Europe than the United States.

  1. Russia after the Cold War

a. Russia in the 1990s

In the Alma Ata Protocol which regulated the break-up of the Soviet Union, the Russian Federation was granted the position as the successor state to the Soviet Union's heritage. Russia obtained the Kremlin, the Ministry of Foreign Affairs, the single command of strategic nuclear weapons, the seat as Permanent Member at the UN Security Council, the reserves of gold and diamonds and the oil and gas resources. In return, Russia recognised the inviolability of frontiers with its partner states, which was of particular importance for those states with significant Russian minorities (such as Ukraine and Kazakhstan). On the same occasion the Community of Independent States was founded; a rather lose and inefficient association of states where most members were quite happy to have broken free of the Russian dominance they had experienced in the Soviet Union.

In comparison to the Soviet Union, the superpower that had together with the United States ruled and divided the world until the eighties of the twentieth century, the newly established Russian Federation was a very weak state, which showed many of the characteristics of a defeated nation.

Although officially being the successor to the Soviet Union, the Russian Federation had lost half the population and more than a third of the territory the Soviet Union had before.

The Russian economy went through a major crisis. This period was characterized by deep contraction of output, with the GDP declining by roughly 50 percent between 1990 and the end of 1995 and industrial output declining by over 50 percent.

On the basis of the recommendations by the United States and the International Monetary Fund Russia proceeded with radical, market-oriented reforms along the lines of "shock therapy". Price controls were abolished, a process of radical privatization was started and millions lost their job and were plunged into poverty. According to the World Bank, whereas 1.5% of the population was living in poverty in the late Soviet era, by mid-1993 between 39% and 49% of the population was living in poverty. Delays in wage payment became a chronic problem with millions being paid months, even years late. The long and wrenching depression was coupled with a complete collapse of the social services and education system. Birth rates fell sharply, while the death rate skyrocketed.

Russia took up the responsibility for settling the USSR's external debts. The privatisation process largely shifted control of enterprises from state agencies to groups of individuals with inside connections in the Government and the mafia. Violent criminal groups often took over state enterprises, clearing the way through assassinations or extortion. Corruption of government officials became an everyday aspect of life. Many of the newly rich mobsters and business-people took billions in cash and assets outside of the country in an enormous capital flight.

Although the Russian Army took over the control over all nuclear weapons that had been stationed on the territory of the Soviet Union and took responsibility for large parts of the Soviet Union's Army (including most of the military bases, the air force and the naval forces), the real force of the military was reduced to almost zero. Lack of money to pay the troops and to buy ammunition, lack of spare parts to repair the weaponry and lack of fuel to keep the vehicles going, completely undermined the effectiveness and the respect for the once proud "Red Army". The 1990s were furthermore plagued by armed ethnic conflicts in the North Caucasus. Since the Chechen separatists declared independence in the early 1990s, an intermittent guerrilla war (First Chechen War, Second Chechen War) has been fought between Chechen rebel groups and the Russian military. Terrorist attacks against civilians carried out by Chechen separatists, most notably the Moscow theatre hostage crisis and Beslan school siege, caused hundreds of deaths and drew worldwide attention.

b. Russia in the 21st century

Since the turn of the century, rising oil prices, increased foreign investment, higher domestic consumption and greater political stability have bolstered economic growth in Russia. The country ended 2007 with its ninth straight year of growth, averaging 7% annually since the financial crisis of 1998. In 2007, Russia's GDP was $2.076 trillion (est. PPP), the 6th largest in the world, with GDP growing 8.1% from the previous year. The average salary in Russia was $640 per month in early 2008, up from $80 in 2000. Approximately 14% of Russians lived below the national poverty line in 2007, significantly down from 40% in 1998 at the worst of the post-Soviet collapse. Unemployment in Russia was at 6% in 2007, down from about 12.4% in 1999. The middle class has grown from just 8 million persons in 2000 to 55 million persons in 2006. Russia has a flat personal income tax rate of 13 percent. This ranks it as the country with the second most attractive personal tax system for single managers in the world after the United Arab Emirates Russia is home to the largest number of billionaires in the world after the United States, gaining 50 billionaires in 2007 for a total of 110.

Russia has the world's largest natural gas reserves, the second largest coal reserves and the eighth largest oil reserves. It is the world's leading natural gas exporter and the second leading oil exporter. Oil, natural gas, metals, and timber account for more than 80% of Russian exports abroad. Since 2003, however, exports of natural resources started decreasing in economic importance as the internal market strengthened considerably.

Despite higher energy prices, oil and gas only contribute to 5.7% of Russia's GDP and the government predicts this will drop to 3.7% by 2011The federal budget has run surpluses since 2001 and ended 2007 with a surplus of 6% of GDP. Over the past several years, Russia has used oil revenues from its Stabilization Fund of the Russian Federation to prepay all Soviet-era sovereign debt to Paris Club creditors and the IMF. Oil export earnings have allowed Russia to increase its foreign reserves from $12 billion in 1999 to $597.3 billion on 1 August 2008, the third largest reserves in the world. The country has also been able to substantially reduce its formerly massive foreign debt.

  1. The integrated Europe in the world

After the end of the Cold War it seemed that a whole new period in the political history of the European continent had started. The powerful Soviet Union was replaced by a Russian Federation that was much smaller and militarily and economically severely weakened. All of the western neighbouring countries of the Russian Federation and many of the now independent republics of the former Soviet Union had turned their eyes away from Moscow and were aiming for full integration in the European and Euro-Atlantic political, economic and military cooperation structures and institutions. Also in Russia itself the all-embracing structures of the Communist Party and the state-organised economic system had been replaced by chaotic efforts towards a western-styled system of democratic government and the wildest possible form of capitalist market economy.

On the basis of these developments, the American author/political scientist Francis Fukuyama predicted in 1992 the end of history and the establishment of a modern society, which is characterised by a full functioning market economy and a democratic political system. Whilst recognising that not everyone wants to be modern and not everybody can put in place the institutions and policies necessary to make democracy and capitalism work, there is in his view no alternative system which would yield better results.         

The British author (and director-general in the Secretariat of the Council of the European Union) Robert Cooper a few years later took an even clearer position. He explained the political situation in Europe, and in particular in the European Union, in terms of the development of the post-modern state. In his view "the post-modern EU offers a vision of cooperative empire, a common liberty and a common security without the ethnic domination and centralised absolutism to which past empires have been subject, but also without the ethnic exclusiveness that is the hallmark of the nation state - inappropriate in an era without borders and unworkable in regions such as the Balkans. A cooperative empire might be the domestic political framework that best matches the altered substance of the post-modern state: a framework in which each has a share in the government, in which no single country dominates and in which the governing principles are not ethnic but legal. The lightest of touches will be required from the centre; the 'imperial bureaucracy' must be under control, accountable, and the servant, not the master, of the commonwealth. Such an institution must be as dedicated to liberty and democracy as its constituent parts"

Whereas a real super power relies more easily on clearly visible power and coercion to achieve its objectives, the European Union is, on the contrary, considered to prefer negotiation, diplomacy and persuasion through dialogue and positive incentives to achieve its objectives. The European Union is therefore often described as a civilian or soft power; this in sharp contrast to the hard power of the United States (and the Soviet Union).

The American author Robert Kagan explains the European Union's strategy of multilateralism, international cooperation and respect for international law not as a characteristic of the post-modern state, but as a logical and understandable consequence of its military weakness. In this vision European soft power is an expression of weakness and American hard power an expression of strength, thus implying that if the European Union could, they would behave in the same way as the United States do.

It is not so much, that the European Union has chosen to be a civilian, a soft power, but rather that it has more or less inevitably grown into that role. There are several reasons for this. After World War II, there was a clear wish to avoid any future war on the European continent. The creation of the European Coal and Steel Community as a predecessor of the European Union was itself a clear expression of this wish to prevent a future war and to eliminate its possible causes. Especially when the attempts to create also a European Defence Community failed, the uniquely civilian character of the EU was determined for many years.

A second reason is that the whole process of European integration is based on dialogue, negotiations, diplomacy and respect for mutually agreed laws. Every step forward in the further development of the European Union is a perfect compromise, a sheer miracle of giving and taking and making sure that no country or government is losing its face. In other words the success of the European Union, its prosperity and stability, is to a very large extent based on this process of dialogue, discussions, negotiations and respect for a mutually agreed set of rules and regulations. And when it worked for the creation and development of the European Union, why would it not work for other situations?

A great problem is , however, that many of the EU's partners in the world share the vision that the soft power exercised by the European Union is just an expression of weakness, of simply not being able to use hard power like the United States. This is even more true for other structures of European integration such as the Council of Europe and the OSCE. The European Union has at least the instrument of (economic) sanctions at its disposal, both towards its member states and towards third countries, and can therefore apply the method of the carrot and the stick. The other organisations can do little more than launch strong appeals when the situation demands so and - with the possibility of excluding a member state from their organisation as their only sanction - they only have carrots and a lot of goodwill at their disposal to influence an unwanted political situation. The only remaining instrument of real hard power for European states therefore is NATO.

Yet, many European politicians are not too happy with this image of the European Union as a soft power. It is emphasised that, in particular with the further development of the ESDP and in particular with the addition of its military dimension and crisis management functions, the European Union has also been given a certain element of hard power. In a speech at the University of Colombia in September 2007, the EU Commissioner for External Relations Ferrero Waldner therefore insisted that the European Union is developing a kind of merger of soft power and hard power elements for its foreign policy. In particular the now many peace keeping missions of the European Union are given as an example of this -what she called - "smart power".

  1. Russia and the West

The careful start of greater political democracy and openness during the last years of the Soviet Union under Gorbachev (with the first pluralistic elections ever in the Russian history), were continued and intensified under the government of President Yeltsin. His hesitating attempts to introduce a kind of liberal, democratic system of government in the Russian Federation combined with his policy of radical privatization of the Russian economy contributed at the beginning of the 1990s to the growing instability in the country and an increasing lack of understanding with the people for the political developments in Russia. In particular his reliance on a small group of radical political and economic advisers and his tendency of governing by presidential decree aggravated the insecurity and confusion.

President Yeltsin and his entourage were of the opinion that they - together with the United States and its allies - had been the joint victors of the Cold War. But many other politicians and the people of the post-Soviet Russia had the feeling that they were treated by the West as a defeated enemy, The International Monetary Fund and the World Bank, the government of the United States and the governments of the countries of the European Union and thousands of consultants invaded the country in the period after 1991. Together they did not stop to advise the Russian authorities on all aspects of the transformation process that had to take place to make Russia a truly democratic country with a western style market economy. For many Russians it seemed that these Western advisers with their instructions had simply replaced the orders of the central planning agencies of the former Soviet Union.

The same also happened in these first years of transformation in the countries of Central and Eastern Europe. But there were two big differences. The newly independent countries of Central and Eastern Europe had, either since the Russian Revolution or since the end of the Second World War got used to the dominance of another power: the power from Moscow. The politicians of Russia on the other hand had never been in the situation of having to accept orders or even advice from any foreign power. They had been for the last forty years in Moscow, the centre of power for the communist world. They were the power. And the sweet memories of Moscow being the centre of power and the Russian politicians, military, secret services and economic planners being the people of power never completely disappeared.

The second difference was that the West came to the countries of Central and Eastern Europe not only with lots of good advice but also with lots of money. During the first six years of its independence, i.e. the period from 1991 till 1997, about 900 million Euros in aid from the EU's TACIS programme had been allocated to the Russian Federation of which about 600 million Euros had also been paid during these six years. During that same period about 6 600 million Euros from the EU's PHARE programme had been allocated to the 10 countries of Central Europe which were aiming for accession to the European Union of which at that moment about 3 700 million Euros had been effectively paid. During that same period the small Baltic States with a population of about 6 million people received per year about the same amount of support as the Russian Federation with its 148 million people. Russia got more advice on how to carry out the transformation process in their country than it got financial support to implement the good advice.

Mistakes have been made in the way the West has been treating the Russian Federation, but perception is everything.

Most Russians feel humiliated by the West, by the United States and - to a lesser extent - by the European Union. In the eyes of the Russian politicians, but also of the average Russian citizen, the politics of the West towards the Russian Federation have been since the early 1990s a policy of containing Russia; of keeping Russia small and less powerful than the military superpower United States or the civil power European Union; of offering partnerships to Russia on condition that Russia would play by the rules as they were laid down by the western democracies.

This image still stands today. Many Russians still see themselves a surrounded by enemies. When asked in one poll in 2004 if Russia has enemies, two-thirds of those questioned responded affirmatively. Asked who these enemies were they cited (in decreasing order of perceived magnitude of the threat): "industrial-financial circles of the west", "the United States", "NATO", "Russian oligarchs and bankers", "democrats", and "Islamic extremists".

A particular cause of Russian irritation has been the loss and (partly) the subsequent re-alliance of the newly independent states, which had already been - with different degrees of autonomy and with the exception of some short periods of independence during a few years immediately after the Russian Revolution - part of the Russian empire since the middle of the 18th century (Ukraine and the Baltic states) and the beginning (Caucasus) or the middle (Central Asia) of the 19th century.  This was even more painful with respect to the countries with a relatively high degree of ethnic Russian citizens, such as Kazakhstan, Ukraine, Latvia and Estonia.

 In the Russian view the Baltic countries' accession to the European Union and even more their accession to NATO left little possibility for maintaining a special relationship with these new states or with part of the (Russian) population of these states.  The possibility of Ukraine and Georgia joining NATO is absolutely unbearable. Russia's resentment over the loss of influence in these states which were once part of the Russian Empire and of the Soviet Union should therefore not be underestimated. Not without reason, Putin called the fall of the Soviet Union the greatest disaster of the 20th century. And it is now in particular that impression that Russia can not - unlike the US or the European Union - do in its backyard as it wishes without any "international interference", which causes a feeling of indignation and continued humiliation.

  1. Power of the new Russia

The situation, however, has changed drastically since Vladimir Putin became the President of the Russian Federation. Under the government of President Putin and his successor Medvedev, Russia has not only been able to regain some of its lost strength but it has also lost much of its shyness and modesty in the international field. In his book 'Inside Putin's Russia', the Financial Times' Moscow Bureau Chief Andrew Jack describes Putin's three major achievements. The first achievement being that he has been able to overcome the still deep ideological split that existed in Russia at the end of the Yeltsin period. In doing so, he has finalised the transition from communism to capitalism in a way that neither of his predecessors was able to achieve. His second achievement has been that he has been able to use the country's economic growth - largely based on the export of the country's large energy and other natural resources and the rapidly increased prices for oil and gas - as a way to restore and strengthen Russia's competitiveness, well-being and status as a "great power". His third achievement has been the reestablishment of order in the country and the recreation of a kind of functioning administration from the chaotic situation he inherited.

And although Europeans can have little sympathy and understanding for the sometimes brutal way in which this order ha been restored and for the autocratic way in which the Russian state now functions, there is still a potential for a further development towards democracy in Russia which is far more developed than during the years of the Soviet Union. Elections are taking place - although it is difficult to call them free and certainly not fair - and there is a functioning Parliament although the pro-Kremlin party has an absolute majority. Pluralistic printed media exist - although the electronic media (in particular the nation-wide television channels) are largely controlled by the Kremlin - and journalists have a relatively large freedom to write what they want as long as it is not too critical of those who are in power. Different political parties do exist and civil society can organise itself as long as they behave within the rules given by the political authorities and are not considered as a threat to the organisation of the state and are no real threat to those in power.

The communist ideology has been replaced by a vision of autocratic capitalism. The repression of the Soviet state has been replaced by a system of rather wild capitalism and sovereign democracy. The vision of a communist superpower that can rule the world on the basis of a superior ideology has been replaced by the wish of simply regaining part of its power on the basis of economic and improved military strength.

In some ways the Russian Federation has on a number of points come to be a little bit like the United States, with the same capitalist economic system, with oligarchs (and not millionaires) and people with a background in the military (and not democratically appointed generals) or the FSB (and not the CIA) having an important influence on the government in the Kremlin (and not in Washington). The fundamental difference, however, remains the basic liberal democratic organisation of the United States. One may therefore sometimes wonder why many left-wing people in Europe still can develop such a high degree of understanding and sympathy for the present radically capitalist Russia and why the right wing is not capable of having some warmer feelings for that same country instead of still considering it the country where the (communist?) devil is still in power.

In order to regain its power, Russia remains anti-American just as the United States show little confidence in the Russian leadership. Therefore Russia has a continued tendency of getting satisfaction from raking some mud in the American backyard by selling weapons to the Venezuela of Chavez and the Sandinista Nicaragua. Just like the United States do somewhat over-zealously support the Georgia of the not so democratic President Saakashvilli.

  1. Russia a danger for Europe?

Directly after the start of the conflict in Georgia in August 2008 speculation started about the possible start of a new Cold War. This is not new. Since 1989 almost every difficulty the Russian Federation had with one of its neighbouring countries (the diplomatic fight with Estonia about the monument for the Red Army soldiers, the stopping of gas deliveries to Ukraine, etc.) is - because of the increased European and Euro-Atlantic integration of these countries - followed by a discussion about a possible restart of the Cold War. This time the discussion about a possible new Cold War was further encouraged by some remarks made by the Russian President Medvedev in an interview with the Russian international television channel Russia Today only hours after the Russian recognition of the independence of Abkhazia and South Ossetia.

Being asked if 'Russia was prepared for a long and tough confrontation with leading world powers , Medvedev replied: "We are not afraid of anything, the prospect of another Cold War included. Of course, we don't want that. In this situation, everything depends on the stand of our partners in the world community, our partners in the West. If they want to preserve good relations with Russia, they will understand the reason for making such a decision, and the situation will be calm. But if they choose a confrontational scenario, well, we've been through all kinds of situations, and we'll survive."

Still, the European security architecture is not the same as during the years of the cold war. And also not the same as during the immediate post-Cold War years. The European Union has not only enlarged till now 27 member states, but it has also - partly by incorporating the main element of the Western European Union - considerably extended its competences with a security and defence component as well as with still increasing competences in the field of home security.

On the other hand, the Organisation for Security and Cooperation in Europe, having come into existence during difficult and long negotiations in the final years of the Cold War, has not been able to fulfil the high expectations of the immediate post-Cold War period, that the organisation could become the main body for guaranteeing Europe's security. The organisation is already for a number of years in a serious crisis of identity and effectiveness. Its political/military dimension aiming to create mutual democratic control over the military is at risk with the Russia withdrawal from the Treaty of Conventional Forces in Europe. Its economic dimension has never been properly developed. And Russia and a number of other member states have never taken full ownership of its human dimension, which has sincerely weakened both its conflicts resolution ability as many of its human rights and democracy development activities, such as its activities with respect to the defence of minority rights and to the election monitoring in some of its member states.

Where many had hoped that NATO could have disappeared after the end of the Cold War - just in the same way as the Warsaw Pact had disappeared - or could have been transformed in a body for transatlantic security dialogue, the organisation has on the one hand extended its field of operation (both in the field of tasks as of territory) but has on the other hand seen a considerable weakening of its European military capacity in comparison with the continuing strong military capacity of the United States.

Although the European Union still has difficulties to determine its own role in the current post post-Cold War Era, due to the problems to get the Lisbon Treaty finally adopted by all member states, it has not only emerged as the dominant organisation for European integration, but also as the leading organisation for bringing about stability and security on the European continent. It is in this context very indicative that the "peace agreement" in Georgia was negotiated and concluded by the French EU Presidency and not by the OSCE. This situation does on the other hand mean that there exists a lot of overlapping in responsibilities of the different organisations. There is therefore so an increasing lack of clarity and sometimes outright confusion about the role each organisation has to play in the build-up of a new European security architecture. Is it the soft power of the EU, the hard power of NATO or the lack of power of the OSCE?

The major question is in this framework, if the regained power of Russia also constitutes a threat for Europe and the countries of the European Union and what such a threat would consist of. At this moment in the development of Russia, the threats can be either a threat to the economic security of the countries of the European Union or a more traditional military threat to European security.

  1. Stopping Russia's gas supplies - a threat to the economies of the European Union?

a. Europe's dependency on Russian gas

Russia holds the world's largest reserves of oil and gas and it has emerged as the most important supplier country to Western and Central Europe It provided 38% of gas imports and 33% of oil imports last year. Some European countries - especially former Soviet republics and satellites - rely on Russia for virtually all their energy. But some other European countries like the United Kingdom, Sweden, Spain, Portugal, Denmark and Ireland are importing less than 1% of their natural gas consumption from Russia.

By 2030 (predicts the International Energy Agency) Europe's gas imports will have doubled, with much of the extra supply coming from Russia.where it covers up to 100 percent of imports for some countries. Despite this apparent dependence of European gas customers, however, there is no objective case for an "energy weapon". The reason lies in the specific nature of the gas market

Since the exploration of gas fields and the construction of pipelines are extremely expensive and time-consuming, producers and consumers engage in long-term contracts that usually cover 20 years or more and entail destination clauses prohibiting secondary trading. Based on these take-or-pay contracts, the producer is able to invest in a multibillion-dollar project, as there is a constant and reliable return on investment. Furthermore gas is a product which is almost exclusively transported via pipelines. Hence, if either the producer or the consumer wants to opt for dealing with an alternative contractual partner, he has to make a high additional investment, i.e., build a new pipeline.

Given extremely high upfront costs, it becomes very costly for either involved party to leave an established bilateral contractual gas relation. A quick look at the dense pipeline grid connecting Europe and Russia reveals that neither side can be interested in dumping all the money each have invested; nor do they have a real choice. Russia does not have the option to sell its gas to, say, China, since the existing infrastructure is insufficient, at least in the short run. Nor can the Europeans simply turn away from their Russian provider. In other words, both sides are mutually dependent, from the very moment they have committed to a contract. What follows from the structural logic of the gas market is that there is only a limited possibility for Russia to use natural gas as a foreign policy instrument and to unilaterally cut gas supplies to a consuming country without significantly and immediately affecting its own budget revenues. This does not look like an attractive move for a country whose largest share of federal budget income stems from hydrocarbon sales.

The conflict about the supply of Russian natural gas to Ukraine at the beginning of 2006 and even more so the conflict at the beginning of 2009 and their impact on the transit of Russian gas to the countries of Central Europe, have clearly demonstrated this mutual dependence between Russia as the gas supplying country and the gas consuming countries of Central Europe. Both the Russian government and the management of Gazprom have - immediately after the outbreak of the conflict between Russia and Ukraine in the beginning of this year - made great efforts to limit the potential damage to the Russian image as a reliable gas supplier by making direct contacts with all institutions of the European Union and even accepting the European Union as a mediator to solve the conflict. The Russian authorities made it very clear at that instance that they could not afford the risk of losing the main customer of its major export product.

Major Recipients
of Russian Natural Gas Exports, 2006-2007



Exports (bcf/y)

2007 Exports (bcf/y)

2006 % of Domestic
NG Consumption






















Czech Republic













































Serbia & Montenegro




























Sales to Baltic & CIS States













































Sources: "Domestic Consumption" EIA International Energy Annual, 2007; "Exports 2006 and 2007" Gazexport as cited by Energy Intelligence, March 2008, and 2008 Gazprom 1Q Quarterly Report; "Sales to Baltic and CIS States 2007", CIS and E. European Databook. 2006 from Gazprom Annual Report.


b. Pipelines for the future

The main gas pipelines crossing Ukraine constitute the most important route for Russian gas ex­ports, transmitting over 80% of all Russian gas sent beyond the CIS. The export route splits in Ukrainian territory to form the western branch transmitting Russian gas via Slovakia to Germany and the Central European countries of the European Union, and the southern branch supplying Romania, Bulgaria, the countries of the Western Balkans, Greece and Turkey.

There are also two other gas export routes of lesser importance: Russia sends approx. 15% of its gas exports to Europe via the Yamal Europe pipeline via Belarus, while the Blue Stream pipeline connecting Russia directly with Turkey accounts for just 3.2% of Russian gas exports. At this moment a number of new projects for Natural Gas Pipelines to export gas from Russia have been started. The main purpose of these new pipelines is to reduce the Russian and European dependence of the current transit countries and to diversify the transport routes for Russian gas supply to the major gas consuming countries in Europe. The most important of them are:

Yamal-Europe II

The Yamal-Europe I pipeline, which carries natural gas from Russia to Poland and Germany via Belarus, would be expanded. Gazprom and Poland currently disagree on the exact route of the second branch as it travels through Poland. Gazprom is seeking a route via southeastern Poland to Slovakia and on to Central Europe, while Poland wants the branch to travel through its own country and then on to Germany. Expansion is expected to be completed by 2010 at a cost of around $10 billion.

South Stream

In June of 2007 Italy's Eni and Gazprom signed a memorandum of understanding on a feasibility study for the underground and first component of the South Stream project. The first component of the South Stream project plans to send natural gas from the same starting point as the Blue Stream pipeline at Beregovaya for 560 miles under the Black Sea, achieving a maximum water depth of over 2000 metres. The second, onshore component will cross Bulgaria with two alternatives: one directed towards the northwest, crossing Serbia and Hungary and linking with existing gas pipelines from Russia; and the other directed to the southwest through Greece and Albania, linking directly to the Italian network. Russia and Bulgaria signed an intergovernmental agreement on the pipeline in January 2008. Gazprom expects the project to be completed in 2013.

Blue Stream Expansion and Interconnection

The Blue Stream natural gas pipeline connects the Russian system to Turkey through a 750-mile pipeline, 246 miles of which extends underneath the Black Sea. Natural gas began flowing through the pipeline in December 2002.

Nord Stream Pipeline (or North European Gas Pipeline)

A northern pipeline extending over 2,000 miles from Russia to Finland and the United Kingdom via the Baltic Sea, was proposed in June 2003 by Russia and the UK, and was renamed Nord Stream by the stakeholders in 2006. About 700 miles of the pipeline will pass under the Baltic Sea. In November 2006, Gazprom (51% shareholder), and Germany's BASF and E.ON (24.5% each) submitted project information to Baltic Sea countries for the start of an environmental impact assessment. Offshore pipe laying is expected to begin between 2008 and 2010. The project is expected to cost more than $11 billion (or 7.4 billion euros, two times as much as originally planned). Project sponsors currently expect test deliveries by spring of 2011. The main advantage of this pipeline is that Russia will no longer have to negotiate transit fees with nearly half a dozen countries or pay them in natural gas. A possible spur connection to Sweden is also under consideration.

Eastern Siberia and Natural Gas for China

The Kovykta natural gas field could provide China with natural gas in the next decade via a proposed pipeline). The field is believed to have big reserves of gas. The project is producing at this moment small volumes of gas for local markets after the completion of an 80-mile pipeline to Irkutsk.

China has stated it is ready to import gas from this project; but since the natural gas would not arrive until 2012 at the earliest and since China is pursuing other natural gas import plans in the meantime, it is possible that Kovykta natural gas will not have a buyer.

It can therefore be concluded that also for the future the export of Russian gas is almost fully directed to the countries of the European Union. And why would Russia consider risking this most important source of income for its economy and its state budget?

But the European Union does not only receive gas from Russia. It also imports natural gas from an array of countries, including Norway, Algeria, Libya, Egypt, Trinidad, Nigeria and others. And the sources of supply become more diverse with every year that passes. That diversification is necessary because in the near future Russian supplies to Europe will remain at constant levels at best. Over 70 percent of Gazprom's gas comes from four fields, three of which are in decline. The company's new reserves are in the Yamal Peninsula and the Barents Sea, both of which will be difficult and expensive to develop. Even if Gazprom raises supplies to Europe significantly-which is unlikely given the expense involved and rising gas demand within Russia-it will at best top a 30 percent market share, which is not much above current levels.

Meanwhile, Europe's quest for diversification of its gas supply proceeds. An important project for alternative supply may be the Nabucco pipeline, which will link the countries of the Caspian Sea, and possibly the Middle East, to Central Europe. The 2009 conflict between Russia and Ukraine has considerably reinforced the European Union's endeavours to the construction of the Nabucco pipeline and has also reinforced the position of Turkey as a strategic partner in the realisation of these diversification efforts. Meanwhile also new pipelines from Algeria are being built, exploration activities are being intensified in Libya, and new liquefied natural gas supplies are coming online in Asia and in the Middle East, adding significant volumes to a tight market. While they haven't drilled a gusher, Europe's diversification program is yielding results.

  1. Military threats to the security of the European Union

With the increased wealth and the increased budget resulting from its energy exports, the Russian leadership has also become more and more assertive with regard to its possibilities to regain the military power the Soviet Union once had. The Russian military regularly announces the development of new "super-arms" just as the government announces regular increases in the budget for the development of these new weapon systems. But despite this new funding and against confident self-assessments, Russia's strategic arsenal continues to shrink, and many key modernisation projects, such as the Bulava missile for strategic submarines, have encountered serious setbacks. Reforms aimed at bringing the armed forces on par with post-Cold War challenges are muddling along.

Among them is the transition to fully professional combat units. Teenage conscripts - who lack skills and only have to serve one year instead of two under a Putin-directed reform - continue to account for the bulk of the 1.13 million-member armed forces. As of last year, only about 140,000 people had voluntarily signed up to serve as privates and sergeants, far from enough to fill the ranks of the vital combat units on submarines and in hot spots. In addition to a lack of professional skills, the conscripts pose a major headache to commanders due to their involvement in the hazing of younger or weaker soldiers. Still, the military says things are getting better.

Russia's desire to secure higher international status does not seem to amount to malicious revisionism; so over-reaction to its experiments with muscle-flexing could constitute a greater risk to the Western strategy of engagement than underestimating its ambitions.

Expanding demonstrations of the dilapidated strategic arsenal increase the risks of technical failures but fall far short of initiating a new confrontation of the Cold War type.

a. Conflicts in the Caucasus - real threat to European security

Still, the events in South Ossetia and Georgia have substantially increased the fear for further intervention of the same type in other regions close of the Russian neighbourhood. Indeed the Caucasus is one of the greatest worries for the Russian leadership. The active and aggressive Islamic-based separatist movement in Chechnya has already engaged the Russian army since the 1990s and, in spite of the enormous display of power in the area, the army has not been able to completely destroy the insurgency. The separatist movement has even spread to other regions such as Dagestan, Ingushetia and North Ossetia.

But not only the continuing unrest and conflicts in the Caucasus and their possible spread to other Russian regions sincerely worry the Russian leadership. The Caucasus is also becoming an increasingly important route for the transport of oil and gas from the Caspian Sea region to Turkey and beyond to southern Europe. And following the discovery of greater new reserves in the Russian part of the Caspian Sea and the conclusion of agreements for the transport of Central Asian oil and gas via the system of Russian pipelines, the unpredictability of the political developments, the not so frozen conflicts and the rapid militarisation of the region are a continuing headache for the Russian leadership.

Georgia has always been regarded by the Russians as a failed state and the verbal aggression of its President Saakasvilli and his constant seeking of support with the United States have extremely irritated the Russian leadership. The harsh reaction to Saakashvilli's attempt to recapture the lost territory of South Ossetia can therefore not have come as big surprise. What came more as a surprise were the apparent initial preparedness of the Russian forces to do away with the "Georgian problem" once and for all by occupying its main transport routes and the determinedness with which President Medvedev has at least solved the problem of the two conflict zones by recognising the independence of Abkhazia and South Ossetia.

But another less and less frozen conflict continues to exist: Nagorno Karabakh. On the basis of its rich reserves and increasing production and export of oil and gas, Azerbaijan is gradually becoming a regional power in the Caucasus. As well as being blessed with significant offshore hydrocarbon deposits, Azerbaijan is also ideally placed to act as an energy pipeline hub not only for the transfer of its own oil and gas to western markets but also to Kazakhstan and Turkmenistan. It offers a route for the transport of energy which bypasses Russia through the transit states of Georgia and Turkey via the Baku-Tbilisi-Ceyhan oil pipeline and the more recent South Caucasus gas pipeline Baku-Tbilisi-Erzerum. If the Trans-Caspian Gas Pipeline comes to fruition it will also further enhance Azerbaijan's status as both a producer and transit hub.

Politically, Azerbaijan has chosen to keep a relative distance to both Russia and the USA and has chosen to invest in the improvement of relations with Turkey and Iran and to playing an active role in regional organisations such as GUAM, BSEC and the Black Sea Trade and Development Bank.

In view of its difficult relationships with Turkey and Azerbaijan, small landlocked Armenia still needs reassurance and security through a "Treaty of Friendship, Cooperation and Mutual Assistance" with Russia This and cooperation with Iran in the energy sphere has made Armenia  to be regarded as part of a Russo-Iranian-Armenian triangle wanting to prevent Azerbaijan's revitalisation, limiting the presence of the West in the Caspian and reducing the involvement and authority of Turkey in the Caucasus.

A disturbing factor has been the growth of military budgets of both Azerbaijan and Armenia, and in particular the fact that Azerbaijan's military expenditure exceeds the whole of the Armenian budget".

Armenians believe that, although fewer in number than their Azeri counterparts, Armenian and NK armed forces combined are superior in combat capability, especially in mobility, efficiency and the quality of officers with combat experience. The weakness of Nagorno Karabakh's armed forces is the lack of army aviation - a restraining factor in the conduct of combat operations. There can be no doubt that Armenia would support the Nagorno Karabakh militarily if serious fighting broke out once more. Whilst in the past Armenians defeated the Azerbaijani army, their assessment about their own military abilities and capabilities could be over-optimistic. The acquisition of the 300mm multiple launch rocket system 9K58 "Smerch" (Whirlwind) by Azerbaijan from Ukraine could be a battle winner. However, the danger is that if salvos fell on Armenian territory proper that could widen the scope of the conflict. It should in this context be remembered that there are a number of mutual arrangements which form a network surrounding the possible war zone. Armenia has a Treaty of "Friendship, Cooperation and Mutual Assistance" with Russia dated 29 August 1997; moreover Armenia also has a number of arrangements and projects with Iran. Azerbaijan, whilst it would almost certainly have the backing of Turkey, also has a web of agreements with Iran, which also assists in giving Azerbaijan access to its Nakhichevan exclave. There is also an agreement between Azerbaijan and Iran that their territory cannot be used for an attack on the other party. There is therefore a serious risk, that if an armed conflict breaks out between Azerbaijan and Armenia, other powers in the region may take sides. And an armed conflict involving Russia and NATO member Turkey has really all ingredients of a serious disruption of European stability coming from the Caucasus.

b. Other possible conflict zones

A similar scenario as for Abkhazia and South Ossetia is feared for Transnistria, with Russia recognising the independence of Moldova's separatist territory. Transnistria is home to a large part of Moldova's heavy industry; it fought a war for independence between March and July 1992. The territory's population is in virtually equal measure (one-third) Moldovan, Ukrainian and Russian. The Russians are now the fastest growing section of the population. As in Georgia, there is a large contingent of Russian "peacekeepers"; they have been in place since the 1992 ceasefire agreement. In October 1994, Russia and Moldova signed an agreement on the withdrawal of the peacekeepers within three years; the agreement was never implemented because the State Duma (Russia's parliament) refused to ratify it. Later, Moldova attempted to force a Russian withdrawal by having a clause inserted into a 1999 revision of the Conventional Forces in Europe Treaty. It took nearly five years before Russia ratified the amendments. Since then, Moscow has withdrawn the very minimum amount of weaponry required under the terms of the amendments. The Moldovan government continues to describe the presence of the Russian peacekeepers as "a foreign military occupation".

A recent referendum held in Transnistria asked the population whether they wanted to remain "independent and in free association" with Russia - or become part of Moldova. More than 97% voted for the former. The territory is ruled by a strong-man leader (and ethnic Russian) Igor Smirnov, much criticised by human rights groups for his treatment of political opponents and the media.

Directly after its recognition of the independence of Abkhazia and South Ossetia Russia started a dialogue with the government of Moldova, in a renewed effort to find a political solution for the frozen conflict in the country.

In some ways it seemed as if the Russian government wanted to demonstrate that it is capable of doing things also in a different way than just solving problems by military force. O


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