The European Commission’s Failure to Serve Europe’s Energy Needs

Eamon Dyas

The US marshalled and directed the events of 2014 in Ukraine in order to scotch the prospect of a Russian-friendly Ukrainian government re-emerging. The US did that as part of a strategy to prevent, or at least, impair, the evolving relationship between Europe and Russian energy. 

In many ways this could be seen as being consistent with what the EU Commission itself had been working towards for at least ten years (see article in last month’s magazine). That shared objective is something that has become concealed behind a misreading of Victoria Nuland’s infamous “Fuck the EU” statement as she discussed Washington’s preference for a new post-coup leader of Ukraine with the US ambassador to the country, Geoffrey Pyatt, on 26 January 2014. When Nuland expressed her attitude towards the EU in this way it was in response to the perceived hesitancy on the part of the European Union in getting behind the so-called “pro-democracy” Maidan demonstrators. What is sometimes forgotten is the EU response – or more accurately, lack of response – to this insult from the United States. In fact, there was no official statement of protest from the EU and even the private conversations among EU officials surrounding the incident betray a profound lack of indignation. 

Aside from the Nuland-Pyatt recording there was a second recording released on the same YouTube channel around that time. That recording reveals what Helga Schmid, the deputy to the EU foreign policy chief, says in a conversation with Jan Tombinski, the EU ambassador to Ukraine. The sum total of what was said was simply that “It’s very annoying that the Americans are going around criticising the EU and saying we are too soft.” Helga Schmid’s boss at the time was Catherine Ashton (a Labour peer who had temporarily removed herself from her position in the House of Lords for the duration of her time with the European Commission). Her official title in the European Commission was that of Representative for Foreign and Security Policy. However, she made no official statement in response to Nuland arbitrarily dismissing the prospect of the EU having any say in the outcome of the 2014 Maidan coup. In fact her office’s response when asked for one by the press was that there was going to be no official response. 

Insofar as she made any official statement during the events of this time it was on 28 March 2014 in condemnation of the violence by members of the Ukrainian ultra-nationalist party Right Sector who had surrounded the Ukrainian parliament while it was in a plenary session to discuss the shooting to death of the notorious Right Sector terrorist Oleksandr Muzychok four days earlier. What condemnation there was from the EU came from the president of the European Council, Herman Van Rompuy, who referred to the remark as “unacceptable”. This was trumped by the statement by the Chancellor of Germany, Angela Merkel who called the remark “absolutely unacceptable”. But there was pointedly no response from the European Commission.

The absence of a strong response to Nuland’s insult was understandable given the position of the EU Commission at the time. That position, unlike that of Washington, had to take account of the likely economic implications of encouraging a situation that might lead to a greater degree of social instability in Ukraine. After all, Ukraine remained the gatekeeper of Russian energy and no matter how much the EU Commission might want to see a diminution of Europe’s reliance on Russian energy, for the time being that reliance remained an important economic fact. Any prolonged disruption of the supply of Russian energy to Europe in what was still winter could have been economically and socially catastrophic should Ukraine descend below the functioning level of instability it had been operating to up to that time.

Rather than relying on a policy that involved the direct destabilisation of the existing pro-Russian government in Ukraine and all the attendant dangers that went with that, the European Commission had been operating a policy of gradually weaning Europe off Russian energy while at the same time moving Ukraine towards what it hoped would be a stable pro-EU future. This policy involved the EU in providing support by way of inducements to encourage the pro-EU political expression in the country and, as we will see, the refusal and withdrawal of such support from a Ukrainian government which it viewed as an obstacle to moving the country in that direction. Central to all of this was the need to ensure that there was at least some level of stability within Ukraine – something that at the time was seen to be threatened by Washington’s gung-ho approach to overthrowing the existing government in 2014. At the same time the EU Commission could not afford to be seen as unengaged with the political landscape that emerged in the aftermath of the events of 2014. Hence its initial hesitation to rush to the cause of the Maidan protesters and Nuland’s charge that they were not providing enough encouragement of the Maidan protesters.

The EU, NATO and Ukraine

As early as 1993 a Ukrainian government had announced that joining the EU was its main foreign policy objective and in the following year the country signed a “Partnership and Cooperation Agreement” with the EU which was scheduled to come into force in 1998. The Agreement had no economic implications but concentrated on various social, economic and administrative reforms that the EU required as part of the preparatory arrangements for closer relations in the future. The year previously, in September 1997, the first EU-Ukraine summit was held in Kiev and it was at the second summit in Vienna in October 1998 that the EU declared that relations between the EU and Ukraine constituted a strategic and unique partnership. It was at this summit also that Ukraine announced that it was making an official request to become an associate member of the EU. 

However, despite all these warm sentiments towards the country the EU continued to view Ukraine, as it had the other former Soviet countries seeking membership, as a country in the early stages of its post-communist formation and where the adoption of the capitalist economic system and a non-communist governing and administrative system had brought with it the inevitability of large scale corruption and administrative incompetence. It has to be remembered that the criteria for such countries joining the EU was very different from that which was required for joining NATO.

The EU is an economic and political entity which has as its object the evolution of a federal or quasi-federal arrangement that requires a minimum level of synchronicity of political, economic, institutional, judicial and administrative arrangements between member states. NATO, on the other hand, was specifically a military alliance and relative to the EU operated an “open door” policy with a minimum requirement in terms of a general affinity to democratic norms and when it came to the ex-Soviet countries the requirement was that they “must be making progress towards a market economy”. Obviously, as far as new members are concerned, the prime motivation for joining NATO is that it provides a level of military protection from a perceived external threat which everyone understands could only be Russia. Membership of NATO also acts as a passport to western investment and this is an added incentive for those seeking membership.

Given the different admission requirements between NATO and the EU it is unsurprising that former Soviet-bloc countries have not joined the EU prior to joining NATO. It has always been the other way round. In fact, 12 of the 14 countries that joined the EU since the fall of the Soviet Union were either former Soviet countries or newly-formed states that had previously been part of the territories of former Soviet countries with all of them having earlier joined NATO. This meant that, in most cases, the political compass they brought with them on joining the EU was pointing in the direction of hostility to Russia – something that provided further impetus to a pre-existing suspicion about Russia that held sway within the EU Commission.

When it came to NATO the problem with Ukraine was that it was a large country on the borders of Russia but also that it suffered from a level of corruption which was exceptional among the ex-Soviet countries seeking membership. That corruption was in large part sustained as a result of its position vis-à-vis Russian energy. As the gatekeeper for the flow of Russian oil and gas to Europe there were many opportunities for individuals in positions of authority to engage in illicit and self-serving behaviour and rewards that it had the effect of not only sustaining the existing level of corruption but exacerbating it. A similar situation had existed in Russia in the early post-Soviet period but, unlike Russia, Ukraine did not produce a Putin figure capable of laying the foundations for eradicating the problem. While Putin may still not have fully eradicated corruption in Russia it is undeniable that he has gone a long way towards that end.

Yet, in 2008 this did not prevent the Bush administration at the NATO summit in Bucharest from leaving the door open for Ukrainian and Georgian membership. While Russia, from a position of economic weakness, had no choice but to tolerate the earlier expansions of NATO a further expansion which involved NATO arriving at its borders, was something that Russia could now oppose from a position of relative strength. The implications of this were apparent to Germany and France who had been the main opponents to NATO membership until the Bucharest Summit in 2008 and even then they expressed opposition to Bush’s proposal. That Bush’s proposal was only agreed in the official communiqué at the Bucharest summit was because German and France had helped formulate the Membership Action Plan (MAP) which was attached as a condition of Ukrainian and Georgian membership. The terms of this MAP which set out an unprecedented series of political, economic, defence, as well as security and legal reforms were such that it pushed the possibility of their actual membership well into an unforeseeable future.

Ukraine’s inherent instability

The reason why Ukraine would find it difficult to meet the conditions of the NATO Membership Action Plan were now the same reasons that constituted an obstacle to EU membership; namely that Ukraine had long been defined as the most corrupt country in Europe. Such was the situation that even the Guardian in 2015 (seven years after the option of joining NATO was first available) described the country as “The Most Corrupt Nation in Europe” (see: “Welcome to Ukraine, the most corrupt nation in Europe”, The Guardian, 4 February 2015, https://www.theguardian.com/news/2015/feb/04/welcome-to-the-most-corrupt-nation-in-europe-ukraine ). However, there was also a more significant and undoubtedly related issue and that was the country’s inability to construct a coherent state that could accommodate its multinational character. For an account of this see the article “Why Ukraine has failed as a multinational state” elsewhere in this magazine. Since 2022 the EU has significantly relaxed its “standards and values” when it comes to Ukraine to the extent that it fails to condemn Ukraine’s blatant official discrimination against its Russian minority through the banning of the Russian language, cultural symbols and religious expression while claiming that it is moving closer to membership.

It was because it understood what Ukraine was that Moscow in 2008 continued to believe that there was little likelihood of the country ever being in a position to meet the conditions for NATO membership. It was also the reason why it didn’t respond with any real alarm when in 2009 the pro-western government of Yushchenko issued a National Programme that included the pursuit of NATO membership as part of its objectives. In fact, such was the nature of Ukraine that the more likely outcome of the 2009 NATO membership aspiration was its reversal rather than its implementation.

And that is precisely what happened – at least until the US once more decided to intervene in Ukrainian internal affairs. Between 2010 and 2014, under the presidency of Viktor Yanukovych (the man who had been deprived of the presidency by US subterfuge in the earlier 2004 election), Ukraine decided instead to pursue a non-aligned policy. It was the abandonment of that policy and the reinstatement of the policy of seeking NATO membership in the aftermath of the 2014 Maidan coup that proved to be the touch-paper that led to Russia taking back Crimea. And then in June 2017 the Ukrainian government reinstated membership of NATO as a strategic foreign and security policy followed in 2019 by the Ukrainian parliament inserting that objective into the Ukrainian constitution without any kind of referendum. From that point onwards, with the EU and NATO cheering Ukraine on, a direct collision with Russia was only a matter of time.

Gazprom and privatised European energy companies

But to get back to the European Commission and Ukraine. As was explained previously, from early on the European Commission had been pursuing a policy of “soft” coercion when it came to separating European states from Russian energy. In its practical application this involved a two stage process. The first stage was to ensure that energy production and distribution utilities were privatised within the constituent states of the EU. The second stage was to manipulate the recently privatised energy companies into a re-arrangement of their activities in ways that involved the separation of the production and distribution activities of energy utility companies in order to encourage a cross-country “European” perspective which “freed” them from energy policies formulated by their respective governments – policies that were at the time tied to the use of Russian energy. In pursuit of this objective the Commission was not beyond using its anti-trust and monopoly powers to “encourage” utility companies towards doing what its policy required.

The fact that those European utility companies were selling Russian gas to their customers at up to five-times the price they were paying Gazprom led to Gazprom embarking on a policy of acquisitions, mergers and partnerships with European energy companies. (For a list of such arrangements between Gazprom and various European energy companies in the early 2000s see “The Internationalisation of Russia’s Gazprom”, by Andreas Heinrich, published in Journal of East European Management Studies, 2003, p.61).

Consequently, by 2006 the European Commission had already begun to express objections to Gazprom’s procurement of European energy companies. The Commission’s objections were based on the fact that Moscow had prohibited any reciprocal procurement of such assets located in Russia. But given that such a reciprocal arrangement would have necessitated the Russian state disposing of its stake in Gazprom through a privatisation process it is unsurprising that Moscow rejected such an arrangement. After all, Russia was not a member of the EU and therefore not subject to its privatisation agenda. It was in fact the way the European Commission had used its control and influence to pressurise the members of the European Union to privatise their respective state-owned energy utility companies that caused those assets to be vulnerable to the business practice of buy-out and mergers from the likes of Gazprom. As far as Moscow was concerned this was a normal component of the capitalism it had been led to believe was the alternative to communism.

In fact, although they put obstacles in the way of buy-outs, Russia did not prohibit investment by European energy companies in Russian energy resources. For instance in 2006 Angela Merkel travelled to the city of Tomsk in Siberia to meet President Putin for a one day summit. As a result of that summit Wintershall, the oil and gas subsidiary of BASF, negotiated a 35% stake in the development of the large Yuzhno-Russkoye gasfield.

As for involving western companies in the construction of gas delivery infrastructure, a year earlier, in 2005 Gazprom announced a joint venture with the German utility company E.ON and BASF called the North European Gas Pipeline (NEGP) which became known as Nord Stream. Under the agreement Gazprom would hold 51% and E.ON and BASF each 24.5%.  The project involved the building of a pipeline extending 1,195 kilometres along the Baltic Sea floor to connect Vyberg on Russia’s Baltic coast directly to Greifswald on the northern German coast. At the signing ceremony for the project President Putin and Chancellor Schröder emphasised the strategic importance of the project for the further development of German-Russian relations in the energy sector. As it was reported at the time in the trade press:

“Germany is Gazprom’s largest export market. The NEGP gives Gazprom as the world’s leading gas producer a further supply route to this still growing market and, in addition, improves its position as a reliable supplier in Germany and western Europe. As a result of the NEGP, Germany gains a direct link to Russia’s huge gas reserves. This helps to cover the rising demand for imports in Germany and other European countries and thus reinforces their security of supply.” (“BASF, E.ON & Gazprom Ink Deal for North European Gas Pipeline”, Rigzone, 7 September 2005).

In other words it was not designed to replace the Ukraine pipeline which was reaching its capacity and continued to be subject to the insecurity of Ukrainian oversight. The Nord Stream was meant to facilitate the anticipated growth in the demand from Europe and ensure a stability and security of supply – the opposite of how the European Commission insisted on viewing it.

Eventually, Nord Stream consisted of two pipelines and was operated by a consortium of five energy companies with Gazprom continuing to hold 51%, and two German energy companies, Wintershall and E.ON each holding 15.5%, the Dutch natural gas infrastructure company N.V. Nederlandse Gasunie, as well as the French energy company ENGIE each held 9%. The twin pipelines became operational in 2011 and 2012 respectively. As far as the funding was concerned the total cost of the project was 7.4 billion euros with 30% finance by Nord Stream’s shareholders and 70% financed externally by means of project financing from banks and export credit agencies. So in essence, although Gazprom held the majority share, the project was very much a European one. As far as European energy businesses were concerned their continuing involvement with Russian gas was a very welcome commercial opportunity.

Washington on the failure of the EU to develop a unified energy policy

The main European governments did not perceive the growing reliance on Russian energy as something which threatened their security and in fact encouraged the continued expansion of contacts with Gazprom. They did this on the basis that this relationship was in fact a symbiotic one in which it was just as much in the interests of Russia as it was in the interests of Europe to maintain a stable and reliable supply. In such circumstances it would not make sense for Russia to use the relationship as a means of imposing its political will on its customers if in so doing it damaged its extensive commercial interests that were based on that relationship. 

And it has to be said that Russia had never shown any other motivation than maintaining a stable and reliable supply of energy to its European customers. Despite this, those forces hostile to Russia, including the European Commission, continued to insist on distorting the earlier incidents in 1993, 1994, 2006, and 2009 where supply was disrupted for short periods as a result of Ukraine’s actions as incidents for which Russia was responsible (see previous article on this topic). 

The US position was clearly outlined in a paper published in 2008 by the George C. Marshall European Centre for Security Studies. This institution had been established in November 1992 by George Bush’s Secretary of Defence, Dick Cheney, under the direction and control of the United States European Command (it is currently one of six regionally-focused security studies organisations which are managed and funded by the Defence Security Corporation of the US Defence Department). The Directors of the European Centre have been US Department of Defence appointees from the outset and one of its purposes is to facilitate the publication of research papers on European security which helps inform U.S. policy in the area. Paper number 19 entitled “Europe’s Dependence on Russian Natural Gas: perspectives and recommendations for a long-term strategy” by Richard J. Anderson was published in September 2008.

Predictably, the paper sets out the “problem” as a European over-reliance on an energy source which the author frames as an unreliable and malicious actor in the form of Russia. The paper further states that because of Europe’s policies on climate change and its move away from nuclear power and coal, Europe’s reliance on Russia’s natural gas will only increase to the extent that within twenty years it will rely on Russia for 50-60% of its needs. 

The author dismisses the argument by European users of Russian gas that the relationship between Russia and Europe would be bound by the symbiotic reliance of seller and purchaser in such a way that would make any disturbance of that relationship something that was not in the interest of either party. The author provides no reason why this argument is dismissed beyond the implied “fact” that Russia was intrinsically malicious and pathologically ambitious. This contrasts with Europe’s actual experience of its energy relationship with Russia. A more honest account of that relationship was supplied by the British diplomat who had been charged with planning the sanctions on Russia in the aftermath of the Moscow’s annexation of Crimea. Ian Proud had been the economic counsellor at the British Embassy in Moscow from July 2014 to February 2019. In his memoir he paints a dire picture of the level of expertise working at the British Embassy in Moscow at this time with him being the only fluent Russian speaker for long periods before he was joined by one other. On the issue of Russia’s reliability as a supplier of energy to Europe he says:

“Cutting oil and gas exports to Europe would be like playing Russian roulette with a fully loaded gun.; there is no evidence that Russia has ever sought to cut energy supplies to Europe to serve a wider political goal.” (A Misfit in Moscow: How British Diplomacy in Russia Failed 2014-2019, by Ian Proud, 2023, p.45).

And again:

“At that time, cutting off gas supplies to Europe would have represented a nuclear option with massive economic costs to Russia itself. And there was practically no evidence that Russia wanted this.” (Ibid. p.48).

Yet, in the high command of US politics and amongst its academic battalions there was a huge effort invested in asserting that Russia was deliberately building up European dependence on its energy in order to turn Europe into a vassal region of Moscow.

On the subject of the then recently announced Nord Stream Project the US Department of Defence paper acknowledged that the existing Ukraine pipeline was inadequate to meet the growing European demand for Russian gas and that there was a need for a new pipeline. However, it claims that there was always the possibility of constructing an alternative and much cheaper overland pipeline to carry the additional volume of gas and begs the question as to why this was not done. It then goes on to provide an answer that injects a malicious element into Russia’s motivation.

As to why Europe had found itself in the position of being vulnerable to Russian machinations via its reliance on Russian energy the paper shares the perspective of the European Commission and points the finger at the capacity of EU member states to exercise sovereignty over energy policies:

“The Nord Stream is a prime example of how far the EU is from having a truly unified energy policy and indicates how one sovereign state’s energy concerns could conceivably undermine the political solidarity of the EU. From the perspective of corporate agreements, it may be too late for E.ON and BASF to back out of the deal, but in future such deal must never be brokered unilaterally by an EU member.”

But the issue of pipelines and their routes was not the thing that the United States objected to. It was the economic relationship that the pipelines represented and that both Europe and Russia were prospering through that relationship. Acknowledging the current situation the paper suggests that:

“Rather than using resources to diversify the routes of delivery of Russian gas, as Germany is doing with the Nord Stream, the overall EU objective should be to diversify away from the use of Russian gas. A prudent strategy would be to diversify in such a manner as to keep Russian gas at its current percentage of the overall energy equation, while simultaneously meeting Kyoto emission targets.”

In other words, the EU should freeze the level of Russian energy usage, while implementing climate change policies that require a growing use of renewable energy sources. That way, the use of Russian energy would be reduced and eventually make Europe less dependent.

However, while acknowledging the existing reality, the ultimate goal of the United States was not to describe but to somehow change the energy relationship between Europe and Russia or at the very least insert itself within that relationship. And that’s where the issue of energy security and NATO was seen to play a role. If NATO could somehow be made a part of Europe’s energy security policy it would provide a means by which it could be immunised from malicious Russian influence.

On NATO acting as a security guarantee for an alternative pipeline the paper says:

“If for some reason the Nord Stream project is terminated, then the EU could consider negotiating from such a position, however it would still be wisest to diversify away from Russian gas rather than simply diversifying the routes of its delivery. An additional pipeline from Russia in lieu of the Nord Stream could only be justified from a route security standpoint. The four aforementioned countries [the three Baltic countries and Poland – ED] are all NATO as well as EU and therefore such a pipeline could be secured by NATO forces in the event of terrorist activities against energy targets; such a route could provide extra security in the event of the disruption of another route. Rather than using resources to diversify the routes of delivery of Russian gas as Germany is doing with the Nord Stream, the overall EU objective should be to diversify away from the use of Russian gas.”

In other words, any overland alternative to Nord Stream would only be acceptable if it was under the security of NATO. This idea of a NATO involvement in EU energy security was something that had been proposed by Poland two years earlier in 2006. Later, in November of the same year, in his address to the NATO Summit in Latvia, the Chairman of the US Senate Committee on Foreign Relations, Senator Richard Lugar, endorsed the idea. Nonetheless, it remained a non-starter primarily because of scepticism on the part of Germany and France.

Basically, what was being suggested was that the EU develop a unified energy security policy which consisted of the following: taking away the sovereign rights of its constituent governments over their national energy sectors; the discouragement of pipeline projects like Nord Stream; the development of alternative land-based pipeline projects to carry Russian gas to Europe under NATO oversight; seek alternative sources of hydrocarbon energy for Europe; and in the meantime to freeze the level of Russian gas being used in Europe and over time use climate change policies to diminish its reliance on Russian gas.

As we have already seen in the previous article, by this time, with the exception of the NATO involvement in the operation of a land-based alternative to Nord Stream, the other elements were already being implemented or being instigated under the auspices of the European Commission. 

None of this, however, provided a practical alternative to the ongoing reliance of Europe on Russian natural gas. From the perspective of the European Commission what the development of Nord Stream represented was something that potentially diminished not only Ukraine from the energy equation but also diminished the influence that the European Commission had over the way in which Russian gas was currently transshipped to Europe via Ukraine. In the context of North Stream it therefore became more important that the European Commission increased its leverage over Ukraine through a system of inducements and promises designed to keep the country within its sphere of influence and away from Russia.

The Joint EU-Ukrainian International Investment Conference of 2009

So it was that the Joint EU-Ukraine International Investment Conference on the Modernisation of Ukraine’s Gas Transit System was held in Brussels on 23 March 2009. The ostensible object of this conference was to procure international funding for the modernisation of the Ukrainian gas pipeline and storage facilities. Such an outcome was intended to serve the twin purpose of weakening the Russian case for Nord Stream by providing for a far greater volume of Russian gas through the Ukraine route. It was also intended to ensure that Ukraine shared the management of the new upgraded facilities with the EU through its relationship with external financial interests and thereby remove it from the potential volatility of Ukrainian politics.

The President of the European Commission, José Manuel Barroso, in his opening address at the conference acknowledged the reliance of Europe on the Ukrainian pipeline and emphasised that “We cannot afford for it to become – very frankly – an unreliable conduit, as it was for a few dark weeks in January.” He further stated that Ukraine was:

“a key strategic partner playing a crucial regional role: we look to Ukraine as a flagship in driving forward our Eastern Partnership initiative, which is so important to us, and more generally in upholding and promoting the European values which we share.” (Speech by José Manuel Barroso, President of the European Commission at the Joint EU-Ukraine International Investment Conference on the Modernisation of Ukraine’s Gas Transit System, Brussels, 23 March 2009).

In other words, the Commission had an interest in Ukraine not only because it held an important position geographically when it came to the transit of Russian gas but because it was viewed as an upholder and promoter of shared European values.

Barroso went on to welcome the fact that Russia was represented at the Conference and acknowledged that “Russia is a key energy supplier and of course partner of the European Union and Ukraine in the supply of gas and will remain so for many years to come.” However, despite Barroso’s warm words it transpired that Russia was not permitted to take part in the three-way negotiations involving the EU, Ukraine and the western financial institutions. Moscow was also not pleased with some of the provisions of the joint declaration that was issued at the end of the Conference. It viewed these provisions as disruptive of the agreement it had previously come to with Ukraine in the aftermath of the supply crisis the previous January. The Russian Ministry of Foreign Affairs issued a statement in response to the EU-Ukraine conference declaration which included the following:

“The Russian side had actively prepared for participation in the conference, the invitation to which the CED President, José Manuel Durao Barroso, conveyed to us during the Russian Government-CEC February meeting. In particular, he pointed out that ‘it is very important that Russia be represented there so we can create cooperation and strengthen trust.’ We had presumed that its outcomes could reinforce the positive forms of collaboration on the settlement of the problem of gas transit via Ukraine and lead in the Russian-EU-Ukraine format to new accords in the interests of maintaining the energy security of Europe.

         “Regrettably, the organisers of the event chose a different course by actually excluding us from the three-way format of the conference.

“In particular, the Russian-Ukrainian bilateral accords were reached in January 2009 that clearly fixed the price for natural gas and tariffs for its transit through the territory of Ukraine. These documents are meant to ensure the uninterrupted supply of natural gas to Ukraine and through the territory of Ukraine to European consumers. But a number of provisions of the joint declaration, which, specifically, allows for growth of tariffs for transshipping gas, run counter to the said long-term accords and may lead to a rise in the price of gas for its Ukrainian and European consumers. Russia stands for strict observance of the long-term contracts on a transparent and economically justified basis.” (Russian MFA Spokesman Commentary on Joint EU-Ukraine International Investment Conference on the Modernisation of Ukraine’s Gas Transit System, 23 March 2009).

The terms of the practical arrangements arising from the conference were negotiated over the next few months and announced in the summer of 2009. The BBC reported on those arrangement in the following terms:

“The EU and international lending institutions have agreed a deal with Ukraine to help it provide stable supplies of Russian gas to Europe. Loans worth $1.7bn (£1bn) were agreed in return for reforms to Ukraine’s gas sector, the European Commission said. The deal is meant to include money to help Ukrainian national gas company Naftogaz to pay off large debts to Russia.

“In January many countries were left without gas because of payment disputes between Moscow and Kiev. The new deal will allow Ukraine to replenish its reserves of Russian gas before the winter.

“Commission President José Manuel Barroso said Ukraine had made commitments which would ensure increased transparency and the long-term viability of the industry, though he did not give details.

“The agreement should provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia and therefore provide the security of supply that member states and our consumers expect,” he said. (EU reaches gas deal with Ukraine, BBC, 1 August 2009).

It was the part of the arrangement that was “to include money to help the Ukrainian national gas company Naftogaz to pay off large debts to Russia” that Russia felt was undermining its ongoing negotiations with Ukraine. As far as Russia was concerned, those debts had been built up as a result of Ukraine’s deliberate policy of withholding payment as a means of obtaining free Russian gas and if the EU was to provide Ukraine with the means of continuing that policy, it would only serve to encourage such behaviour in the future.

The Energy Charter Treaty

Russia’s growing disillusionment with the EU was reflected at this time by its announcement that it was not going to ratify the Energy Charter Treaty.

The collapse of the Soviet Union not only entailed a major reshuffling of the energy relationship between Russia and its former satellite states, it also opened a window of opportunity for Western Europe to project its own interests and norms eastward. When it came to energy the primary vehicle for accomplishing this was the Energy Charter Treaty (ECT). Emerging from the European Energy Charter declaration of 1991 which aimed at jumpstarting the economic recovery of the region through the encouragement of energy cooperation between Europe and the former states of the Soviet Union, the ECT was a multilateral treaty relating to investment and trade in energy and was signed in Lisbon in 1994 by forty-one signatories, including Russia. It entered into force in 1998 and had a number of broad objectives that included: protecting foreign investors from host government discrimination or expropriation; liberalising the trade in energy products and equipment based on General Agreement on Tariffs and Trade (GATT) and World Trade Organisation (WTO) rules; guaranteeing the freedom of transit through pipelines and energy grids; safeguarding the environment by promoting efficient energy use; and establishing dispute resolution mechanisms for states as well as private companies.

The ECT not only elaborated new rules for East-West energy flows, it also attempted to create new institutions to oversee the process. Western European countries drove this process, imprinting it with their desire to safeguard investments in Russia’s upstream gas and oil production and their own energy security. At the same time, Russia initially cooperated because it wanted to be protected from politically motivated embargoes on pipeline machinery and financing as had occurred during the Cold War but also because the treaty was supposed to guarantee “the freedom of transit through pipelines and energy grids” – something, as we have seen, that was a central concern for Russia in its relationship with Ukraine.

However, it has to be said that Russia’s relationship with the ECT had always been problematic. Many in Russia believed that as it was signed when Russia was weak politically and economically, this ensured that its terms would never favour the country. Also, the country most capable of imposing embargoes on the export of western pipeline machinery, computerised control systems and finance, that is, the US, was not a party to it and this meant that an important aspect of the treaty from Russia’s perspective was of limited value. In addition, the EU had failed consistently to defend the treaty’s claim to guarantee the free transit of Russian gas and oil through the transit pipelines and energy grids located in Ukraine. This meant that Russia felt compelled to find alternative ways of ensuring that it had a greater level of control over the distribution of its gas beyond its borders.

In fact, the European Commission had been increasingly using the Treaty as if it were an internal EU arrangement to further its own market liberalising agenda rather than something which was meant to maintain a stable market in energy in collaboration with an economy that remained, in the case of Russia, outside the EU. In those circumstances, it was only a matter of time before Moscow began to walk back from the market liberalising policies of the EU and saw no real purpose in ratifying the Treaty.

The Commission and two Ukrainian governments

The year after the EU’s generous treatment of the pro-European Ukrainian government under Viktor Yushchenko a different government emerged with the election of Viktor Yanukovych in 2010. While attempting to maintain close relations with the EU the new government also set about the task of restoring relations with Russia. 

As a result the two countries signed an agreement on 21 April 2010 involving a 30% reduction in the price Russia was charging Ukraine for its gas and a new more generous agreement on the transit charges which Russia paid for moving its gas through Ukrainian territory. Associated with this agreement was a continuation of the Rent Agreement for Russia’s right to use the Sevastopol Naval Base for a further 25 years beyond its current term. The agreement was subject to the ratification of both the Russian and Ukrainian parliaments. However, when it came to ratification by the Ukrainian parliament on 27 April, a crowd of what was claimed to have been 10,000 demonstrators led by ultranationalists who viewed the agreement as a sell-out, attempted to storm the parliamentary building while inside eggs were thrown by extreme opposition politicians at the Speaker as he attempted to announce the ratification (see: “Police clash with protesters in front of Ukrainian parliament”, Kyiv Post, 27 April 2010). 

Despite the agreement being ratified its opponents continued to plot for its eventual overturning. One of the main opponents of the agreement at the time was Arseniy Yatseniuk who pledged his intention to break the agreement at the first opportunity and in the meantime his Ukrainian party, Front for Change, would continue to work for its annulment (see: “Agreement on Black Sea Fleet may be denounced”, Kyiv Post, 27 April 2010). It should be noted that Yatseniuk was later to became Prime Minister of Ukraine on 27 February 2014 in the aftermath of the Maidan coup – the event that informed Moscow’s decision to initiate the process leading to the annexation of Crimea.

In the aftermath of that ratification, on 31 May 2010, Gazprom presented a proposal to the Ukrainian government to establish a 50-50 joint venture with Naftogaz Ukraine to oversee the management of the transit of Russian gas through Ukraine. In July 2010, Mykola Azarov, the new Prime Minister of Ukraine in Yanukovych’s government, in an effort to maintain relations with the EU, sought to take this proposal further and announced that his government was hoping to negotiate the establishment of a gas transportation consortium involving Ukraine, the EU and Russia. It was hoped that such a consortium would ensure joint overseeing of the arrangements by which Russian gas could securely and reliably use the Ukrainian transit pipeline in future.

This announcement coincided with the Ukrainian government passing a law meeting the conditions that were part of the Brussels Declaration of March 2009 which the previous government had been party to. Those conditions were part of the financing arrangements agreed at the Joint EU-Ukraine International Investment Conference on the Modernisation of Ukraine’s Gas Transit System described earlier. The cost of the modernisation had been estimated to be $2.5 billion. This was to be part an IMF $15.3 billion stand-by provision for various improvements and reforms applicable to government processes and institutions including the energy sector.

By December 2010 the IMF had disbursed $3.4 billion of the agreed sum most of which had been invested in other areas of the economy or lost through the corruption that continued to plague the country. An IMF review was scheduled for August 2011. This was meant to determine future disbursements of the agreed fund. However, that review was postponed until November 2011 at which time the IMF failed to reach an understanding with the Ukrainian authorities about the nature and timing of the next swathe of reforms (see: “The Underachiever: Ukraine’s Economy Since 1991”, by Pekka Sutler, Research Report published by the Carnegie Foundation for International Peace, March 2012). It appears that the contending issues between the Ukrainian government and the IMF related to the government’s pension commitments and subsidised gas prices being charged to households and utilities which the IMF had demanded be cut. 

These were issues that had been agreed with the previous government and had they been dealt with as the IMF demanded would have resulted in the sitting government being overthrown by popular reaction particularly at time when the country was tentatively emerging from an economic crisis. Naturally, in view of that, the Ukrainian government was loath to deal with these issues in the manner and timescale that the IMF required. Even so, in such circumstances it was unusual for the IMF to suspend the funding after allowing the new government a mere 18 months to undertake structural reforms that would require a much longer period to implement without causing social unrest. The suspicion was that the IMF had made a conscious decision that it was no longer interested in assisting the Yanukovych government after discovering that it was not sufficiently pro-western. An explanation of the context for this is provided by the EU think tank, the Warsaw-based Centre for Eastern Studies:

“In March 2009, Ukraine and the EU signed a declaration in Brussels according to which the Union and International financial institutions agreed to finance the modernisation of the Ukrainian gas pipeline network, and in return, Ukraine undertook to reform its gas sector in accordance with EU standards (including the separation of the functions of sales, delivery and transport of gas, the formation of tariffs, and free access to gas networks and underground gas tanks). The cost of modernisation was estimated at about $2.5 billion. In July 2010, Ukraine adopted a law on the gas market which formally meets the conditions of the Brussels declaration. Since that time, Ukraine has tried unsuccessfully to establish a tripartite consortium (with the participation of Russia and the EU) to manage the Ukrainian gas pipelines.” (Centre for Eastern Studies, 2 February 2011. https://www.osw.waw.pl/en/publikacje/ analyses/2011-02-02/controversial-statement-eu-commissioner-ukrainian-gas-pipelines). https://www.osw.waw.pl/en/publikacje/analyses/2011-02-02/controversial-statement-eu-commissioner-ukrainian-gas-pipelines

The consortium proposal was made by the Ukrainian government in July 2010 – that is before the IMF pulled the plug on its funding – and was made in the context of the evolving plans by Russia that were designed to ensure a more stable and secure gas supply to Europe. Those plans had begun with the Nord Stream Project and by 2010 the plan for the South Stream gas pipeline through the Black Sea had also been mooted. In the case of the former, the project was well advanced with the first gas being piped in September 2011. On the other hand, in 2010 the South Stream Project was still in the agreement-signing stage. Both these pipelines were the outcomes of two concerns on the part of Russia. The first was the manner in which Ukrainian behaviour over the years had caused disruption of Gazprom’s supply to its European customers. The second was the anticipated significant growth in demand from Europe which the current Ukraine pipeline network was not capable of servicing.

Both of those issues could have been solved if Russia could trust Ukraine to break with its past practices as a volatile and unreliable manager of the gas pipeline and also if the aging pipeline network – which dated from the Soviet era – could be modernised to take the anticipated higher volumes of Russian gas to Europe. But all of this needed to happen within an environment in which Russia, Ukraine and the EU could work in harmony towards that objective. The first, and only time this was possible was in 2010 with the consortium proposal. Had it come to pass it would have benefited all involved and future history of the area might have been very different.

Russian thinking around the alternative pipeline was based on the economic benefits from an anticipated significant increase in demand for Russian gas from Europe. Under normal circumstances, a decision on whether the transit of that gas through underwater pipelines with the associated high construction costs, or through a far cheaper modernised overland pipeline would have favoured the latter option. But up to this point Russia’s experience with Ukraine had compelled it to seek out the far more expensive underwater alternative. In the circumstances of the more accommodating Ukrainian government being elected in the form of the Yanukovych government of 2010 it is unsurprising that Russia should keep the door open to the consortium idea. After all the consortium proposal provided an administrative guarantee of Russia’s and the EU’s future direct involvement in the policing of a far cheaper modernised land-based Ukrainian pipeline. From the Yanukovych government’s perspective, the prospect of increased transit revenue from the additional gas flows through an upgraded modern pipeline was also a commercially attractive proposition.

But none of this came to pass due to the attitude of the EU. As to the attitude of the EU we can refer to the then EU Energy Commissioner, Gunther Oetinger, who in early 2011 made a statement to the effect that:

“‘There is no point in modernising the Ukrainian gas system if there is no gas in it, and gas comes from Russia.’ Later, the Commissioner’s representative stated that the statement had been misunderstood, although it may demonstrate that continuing Ukraine’s status as a transit country for Russian fuels is not a priority for the EU. If Ukraine loses this status (for example, if Russia completes the South Stream pipeline) Brussels will have no intention of giving aid to the Ukrainian gas sector.” (Ibid.)

It would appear that the Energy Commissioner’s attitude was formulated on the basis of Russia’s decision to construct the South Stream pipeline which he misleadingly stated would result in there no longer being any need for the Ukrainian pipeline. But as was explained earlier that was never the case. And in any case both the Nord Stream and the South Stream were already in the offing in 2009 when the EU’s attitude was more accommodating to the earlier western-leaning Yushchenko government. 

On the question of the South Stream project. This had been announced by Russia in June 2007 and in September 2007 with a timely efficacy that leads to the suspicion that it was composed in response to that announcement, the European Commission formulated its Third Energy Package. The Package was adopted by the European Parliament and the Council of the European Union in July 2009 to come into force in September 2009. Although the South Stream Project continued for some years afterwards it was abandoned by Russia in December 2014 in the face of ongoing obstructions and objections placed on it by the EU Commission citing non-compliance with the Third Energy Package. 

Getting back to consortium proposal. The EU’s antipathy to the proposal also made no sense as it had been generally acknowledged that an upgraded pipeline endorsed by both Ukraine and Russia offered the best prospect for a future use of the Ukrainian pipeline in ways that would make the idea of a South Stream pipeline redundant.

In the year following its initial rebuttal by the EU Commission the Ukrainian Prime Minister Azarov once more attempted to present the idea of a Russia, Ukraine and EU consortium proposal before the Commission. But rather than engage realistically with such a proposal, the EU Energy Commissioner’s office continued to be dismissive:

“Asked to comment on the proposed consortium, Marlene Holzner, spokesperson to Energy Commissioner Gunther Oettinger, said that the idea ‘has been around for some years’, but no specific proposals had been presented.

‘The EU has consistently emphasised that it is up to Ukraine to decide how to manage its gas transmission system and should Ukraine and other parties be willing to move in the direction of a consortium, including the EU gas industry, the European Commission is ready to play a facilitating role, provided that the application of EU and international law, including as enshrined in the Energy Community Treaty, is guaranteed’, she said.” (Euroactive, 11 September 2012). 

By this stage there was no longer any reliance on the disingenuous argument that South Stream would make the Ukrainian pipeline redundant. Instead there was a switch of emphasis to a willingness to look seriously at any proposal which was consistent with “the EU and international law, including as enshrined in the Energy Community Treaty”. In demanding that the proposed consortium comply with the “Energy Community Treaty” the Commission was insisting on compliance with the new regulatory framework that came into effect with the EU’s Third Energy Package. As this required the separation of companies’ generation and sale operations from their transmission networks it was obviously directed at Gazprom and its partners. The European Commission was therefore demanding that the main European supplier of natural gas, a company in a sovereign state outside the EU, comply with EU regulations. In doing so it must have known that such an unreasonable demand, in effect, amounted to a final rebuttal and the means by which the idea of a Russian, Ukrainian and EU consortium managing the Ukrainian gas pipeline network became a non-starter.

So it was that the EU effectively sabotaged the only prospect for the establishment of a consortium that would provide Russia – as well as the EU – with the potential for overcoming its long-standing instability issue over the transit of Russian gas to Europe via the Ukrainian connection. This shows that, from the outset, the European Commission’s idea of energy security had nothing to do with stability and reliability of supply but rather the removal, or reduction, of Russia’s role in that supply.