Is the EU finally serious about its energy future?

On November 13, the European Commission proposed the EU Energy Security and Solidarity Action Plan as part of its Second Strategic Energy Review. Three new proposals that stand out: 1) the construction of a European supergrid, connecting power from the wind farms of the North Sea all the way to the Baltics, 2) the construction of two new gas pipelines, connecting Caspian and African gas to the bloc (Nabucco included), and 3) a "Community Gas Ring", which would essentially allow for the pooling of European gas supplies in the event of supply disruptions (here's looking at you Russia). These measures would directly address import diversification (particularly in natural gas, and specifically away from Russia), security of supply issues, and fragmented national power grids.

Despite recycling a lot of old ideas, the new proposals make this a highly ambitious plan, and in my opinion, one that has absolutely no chance of being carried out in its entirety.

The first rule of European energy is that the national always trumps the regional interest. National regulatory and interest-group challenges to EU-wide liberalization in the energy sector are formidable, and to date have blocked any substantive effort towards a single European energy market. With energy prices falling, and the commercial ties between some of the EU's most powerful members (Germany, France) and Gazprom still deep, there is little chance that this strategic plan will be successful. The European Commission has valiantly fought to create a liberal, single European energy market for 30 years, but the European Council always waters down the compromise enough to preserve the status quo in certain national markets. (Germany, France) Thus, fragmentation persists.

One also has to question the commercial viability of the alternative pipelines proposed by the plan. The Nabucco project has been hopelessly mismanaged. Its commercial viability has been suspect from day one, as the Caspian suppliers it seeks to tap are strongly oriented towards the Russian market, and only Kazakhstan has seriously entertained diversification away from Russia. It is important to note that Gazprom is highly dependent on imported Caspian gas for re-export to the EU, and therefore would not go down without a fight to keep the gas flowing through Russia's borders. I find it difficult to foresee the construction of multiple southern pipelines in the near term.

Finally, the chance of a "communal gas ring" is more reasonable, but no easier politically. Under previous EU energy liberalization directives, member states were required to compel private storage facility operators to open these facilities to universal access. In practice, this occurred less than desired because there is little commercial incentive for the private operators (who by the way, are usually state-owned monopolies like GdF). The chance of one country stretching its own supplies in a time of crisis to assist another member state's shortfall seems unlikely.

Ok, time for the rosier outlook. I was extremely pleased to find a reference to the importance of fostering interdependence between the bloc and its external suppliers (again, that means you Russia). The EU desperately needs to find solutions to its rising import dependence in natural gas. Unfortunately, its own supplies are declining at a rapid pace. This means that the diversification of import sources is the key pillar of the bloc's long term energy security. But in the short to medium term, the EU needs Russia, and Russia needs the EU. A commitment by both parties to fostering a mutually beneficial and secure energy relationship would be a truly powerful development.

Russia-EU relations: a bang or a whimper?

The Russia-Georgia war continues to have repercussions: EU leaders gathered in Brussels today for an emergency summit on the state of relations with Russia. Last month, I attempted to apply a rudimentary public choice model to the major players in the conflict. At the time, for simplicity’s sake, I treated the EU as a single entity with a unified policy position. In reality this could not be further from the truth. There are hawks, such as the previous Warsaw Pact members and the UK, and there are doves, such as Germany and Italy. In determining a member nation’s stance, it is useful to look at two metrics in particular: history and energy. Specifically, has the country been pushed around by Russia in the past (pretty much all of Eastern Europe)? And how much Russian energy does the country import? Personal relationships also play a role: Vladimir Putin and Italian Prime Minister Silvio Berlusconi are close friends, for example.

Where do the Russians stand? I’m troubled by the implications of their explicit declaration of ‘spheres of interest’. However, I still think it’s possible to at least partly understand Russia’s motives through the looking-glass of its leaders’ personal incentives. This is a view that I first heard espoused by Garry Kasparov in 2007 and again last week by Richard Baldwin. It’s certainly true that Russia’s political elites are making an enormous amount of money off of the country’s economic expansion, and they’re aware that war would disrupt this trend. As a friend of mine once put it, capitalism in Russia is like the Wild West: poorly regulated, corrupt, winner-take-all, and unprotected from government intervention. In such circumstances, powerful political actors are well-positioned to get rich. While stoking the fires of nationalism will help solidify their leadership, outright war is undesirable because Russia might lose and the economy might tank. Thus, I suspect that Russia’s leaders won’t push things too far (I’m being purposefully vague), as doing so would be against their own interests. In any case, Russian stock markets have already been majorly spooked by the war and other recent events.

And where does this leave us? For the time being, I suspect that ‘pragmatism’ on all sides wins the day. The EU stopped short of applying sanctions: the last thing that leaders in flagging economies want is to be on the wrong side of high-stakes energy diplomacy. Still, the rarity of such emergency EU summits signals that they’re taking this seriously. Russia, in turn, is quite reliant on the EU for its export market (which feeds into the reasons mentioned above). Is this the right policy for the EU to be pursuing? It’s doubtful: I think the EU ought to be taking a tougher line, and it still might if it can get its own ducks in a row on the appropriate policy response. This is something to keep watching.

(photo by dbarronoss)

On Georgia and Russia

Reports are coming in that a peace plan has been agreed by Georgia and Russia. The details remain largely unclear, but French (and current EU) president Sarkozy, who helped broker the deal, assures that Georgia's territorial sovereignty will be guaranteed by the "spirit of the text." Whatever that means, an end to hostilities is welcome news in and of itself: this has truly been a nasty little war, and our deepest sympathy goes out to everyone who has been affected.

There has been an enormous amount of quality analysis of this mini-war from every conceivable angle. I imagine the military types in particular are falling over themselves for a chance to analyze how Russia's army has performed in a large-scale conventional military operation. We here at Zeitgeist have had several conversations about how we could add to the debate. Rather than trying to analyze the outcomes or their implications, we want to try to provide a framework for understanding why the major players behaved as they did (or in some cases, didn't.)

In situations like these, international politics looks a bit like a high-stakes card game. Each player makes a bet and wins or loses depending on how the other players react. In this particular hand, we had:

President Mikhail Saakashivili; President Saakashivili knows that tensions with Russia over South Ossetia and Abkhazia have been brewing for a very long time. Also, he perceives his own personal credibility to rest in large part on whether he can keep his election promises to bring the breakaway regions under control. He understands the power disparity between Russia and Georgia, but calculates that any response would have to be limited, because the terrority nominally belongs to Georgia, and also because Georgia has been seriously courting Western allies for the past few years. They have a disproportionate number of troops in Iraq and have upgraded their military with American weapons technology. Mr. Saakashivili doesn't think that the West will stand idly by if Russia does overreact.

President Medvedev/Prime Minister Putin; Leaving aside any discussion of who's actually in charge, Russia is keen to maintain hegemony in its 'near abroad', the area which comprises the former Soviet Union. The color revolutions and reorientation of Ukraine and Georgia toward the West have infuriated Russia, and Russia perceives Georgia's desire to join NATO as a direct threat. Combine all of this with the fact that Russia believes that NATO helped facilitate Kosovo's secession from Serbia. Russia is therefore looking for any plausible reason to further destabilize Georgia by encouraging the breakaway regions, both to punish Georgia and send a message to the West.

EU President Sarkozy; The European Union is keen to not antagonize Russia, a key energy supplier for much of Western Europe. Most of Europe is also much less enthusiastic about Georgia joining NATO than the United States. There is almost no chance that any European country would forcefully intervene in the conflict. Any actions would likely be primarily face-saving (carefully condemn the use of violence and work for any sort of deal that stops hostilities as soon as possible.)

President Bush; Georgia was a key pillar of Mr. Bush's freedom agenda, and relations between the two countries have been especially strong during his tenure. Mr. Bush is clearly unhappy with Russia's actions, but his hands are tied. He is personally extremely unpopular, American troops are busy fighting two other wars, and the injection of American forces into the conflict would be tantamount to a serious escalation. The US pushes a tougher rhetorical line than the EU and agrees to help transport Georgian troops back from Iraq to take part in fighting, but is highly unlikely to intervene otherwise.

Given the motivations and limitations of the main players, it is perhaps a bit easier to understand why things happened the way they did. Unfortunately, this was not a card game. This was real life, and there were real consequences.