24.06.2012
Gas Security in the Transitional European Market
№2 2012 April/June
Tedo Dzhaparidze

Tedo Dzhaparidze — Chairman, Foreign Relations Committee of Georgian Parliament, former Minister of Foreign Affairs of Georgia, a former Secretary of the National Security Council of Georgia.

Ilia Roubanis

Ilia Roubanis is advisor at the European Parliament; previously worked for analytical centers in Greece and other EU countries.

Tendencies, Events and Alternatives for Russia in Europe

Natural gas is viewed as the most preferred kind of fossil fuel in European power engineering of the future. This product is relatively common in nature, inexpensive and environmentally friendly, and there are advanced technologies for its processing. However, the reliability of its source and its supply to Europe largely depends on relations between Moscow and Brussels, especially as there will be no alternatives to Russian resources in the foreseeable future. Europe has plunged into an unprecedented recession, which has called into question the attractiveness of the European energy market and its ability to draw up long-term plans (reach agreements and build an effective supply infrastructure). However, Europe’s weakness does not equal Russia’s strength, because Moscow and Brussels are bound together by geography and the entire complex serving the energy sector.

There is no universally accepted definition of energy security. Judging by discussions in the Euro-Atlantic community, there are at least two notions which are not necessarily mutually exclusive; these are consumption safety and supply security.

If we analyze energy relations between the European Union and Russia, then we may speak of a choice between oligopsony and oligopoly, or even speak of a “balance of fear” in the fossil fuels market, especially the natural gas market. The EU meets 40 percent of its gas needs (as of 2008) and 32 percent of its demand for oil (as of September 7, 2011) with imports from Russia. In general, as noted by Amy Myers Jaffe, “Russia’s status as a current and future energy producer is close to unrivaled. It holds the eighth-largest proven oil reserves in the world, but ranks a close second in oil production to Saudi Arabia.” Also, Russia holds a quarter of the world’s natural gas reserves. However, unlike other resource-rich countries, for example Saudi Arabia, Russia – due to its geographical position and the existing infrastructure – is “wedded to European markets.”

Europe believes the danger of its energy dependence on Moscow is obvious. The second Russian-Ukrainian crisis in January 2009 showed the danger of being wedded to only one source of supply and to one supply network controlled by one company. (The failure of the Early Warning Mechanism, established by Moscow and Brussels after a 2006 crisis, came as an even more alarming signal.) The reason for the nervousness is understandable: although the European Union has alternative energy sources, such as Norway and North Africa, some regions are more dependent on supplies from Russia. These are, above all, land-locked Balkan countries, the Baltic States, part of Northern Europe, Central Eastern Europe, and – to an increasing extent – Germany. However, after the opening of the Nord Stream gas pipeline (bypassing Ukraine) in November 2011, the problems of Western Europe related to the security of Russian gas supplies can be considered solved.

The period of steep economic growth in Russia, witnessed from 2000 to 2007, is over. Compared with the other BRIC countries or even Turkey, the Russian economy has stalled. In other words, Russia’s development largely depends on the state of European markets. The state trade deficit in Russia in 2011 (with the exception of the energy sector) stood at 13.5 percent, according to the Ministry of Finance. This challenge must be met before consequences of the European economic crisis hit Moscow. The reason for the deficit of non-energy transactions is clear: back two years ago, Russia’s finance minister warned that the share of energy in GDP would likely decline from 25 percent in 2010 to 14 percent in 2014. It is safe to say that Moscow’s structural dependence on European consumers is extremely high.

These trends have prompted Georgian economists Vladimir Papava and Mikheil Tokmazishvili to suggest two different scenarios, or “paradigms,” for possible structural evolution of relations between Russia and the EU.

Confrontational scenario. This is an agent-oriented approach, in which oligopsony-oligopoly relations structurally are a zero-sum game or a confrontational game. From the perspective of the EU, the energy security dilemma can be solved by diversifying supply sources and types of energy. From Moscow’s position, energy security is ensured by maintaining a monopoly on supply, switching to non-European markets and creating a cartel of natural gas suppliers. Papava and Tokmazishvili have described this bipolar approach to the analysis of EU-Russia relations as a “pipeline Cold War.”

Harmonious relations scenario. There is also a different agent-oriented approach based on a functional paradigm. Referring to the notion of competitive advantages, the authors of this approach argue that, despite different models of capitalist development and institutional traditions, the energy market from Moscow to Brussels can act as a self-regulating mechanism. The EU believes that pipelines supplying energy resources to Europe should be not alternative but complementary. However, while promoting the development of a system of such complementary routes, Brussels should take into account that Russia will inevitably remain a strategic supplier of the European Union. Russia’s investment in the monopolization of gas supplies will distract capital from other infrastructure projects vital to Russia and will create tensions in regions of critical geopolitical importance. Papava and Tokmazishvili have tagged this scenario “pipeline harmonization.”

THESIS: ARGUMENTS IN FAVOR OF CONFRONTATION

Academic circles and journalists naturally focus extensively on the exciting scenario of a “pipeline Cold War.” Moscow has made it clear that it will use the energy sector as a lever for solving larger-scale strategic tasks. According to the Energy Strategy of Russia Until 2020, adopted in August 2003, the country’s role in world energy markets will be largely determined by its geopolitical influence. To this end, President Vladimir Putin actually nationalized the oil and gas sector, starting with ruining Yukos and imprisoning Mikhail Khodorkovsky, which sparked heated debates. As a result of these efforts, there has emerged a giant public sector, organically linked with the Kremlin, as follows from the policy of appointing state officials to the boards of directors of oil and gas companies and from the direct relationship of their CEOs with the state.

The rivalry between Moscow and Brussels is more and more reduced to the question of whether Russia will be able to consolidate its strategic status of the main extracting power with an oligopoly in the area of ??supply networks. Russia has been advancing fast and more or less successfully in this field. At least, such infrastructure projects as Nord and South Streams are far ahead of initiatives promoted by Brussels.

As regards the Western European market, the Nord Stream project, already completed, is expected to start operating at full capacity in 2012. South Stream at first met with serious problems in Southeast Europe. Until recently, the position of Bulgaria on its participation in the project was a major sticking point for it, as the Boyko Borisov Cabinet promised “equal support” for South Stream and the rival Nabucco project sponsored by Brussels. Actually, it meant benevolent neutrality, as the Bulgarian government sought to limit the country’s dependence on Russian energy. But now Bulgaria’s position has changed, although the Bulgarian parliament is planning to ratify the agreement on Nabucco, as well.

In 2008, Moscow enlisted cooperation from Belgrade, when Serbia agreed to sell a controlling stake in its energy monopoly NIS to Gazprom Neft without an international tender and for less than half of its estimated market value. After the project was supported by Greece, Austria and Slovenia, South Stream seems to have secured a northern corridor from the Black Sea to northern Italy and Central Europe.

In response to Russia’s offensive strategy, the European Commission in 2007 published a document entitled An Energy Policy for Europe, and in 2008, Strategic Energy Review. The European Commission proposed an action plan aimed to weaken the positions of Gazprom. The Third Energy Package, adopted by the EU in 2009, requires that gas companies abide by certain rules to ensure that the production/supply and transmission network operations are conducted independently and that transportation infrastructure are opened up for competitors. Violations of the package provisions incur huge fines of up to 10 billion euros; so South Stream will have to overcome tremendous obstacles to retain its monopoly position.

At the Budapest summit in January 2009, it became clear that the European Commission prefers Nabucco to South Stream. Nabucco is an international consortium set up in 2004 to construct and operate a pipeline network that will serve as a link between the Caspian Basin, with its Central Asian gas reserves, and the European market. Financially and technically, the project is very ambitious: the total length of the pipeline is about 3,900 kilometers, and its maximum discharge is 31 billion cubic meters of gas. Europe hoped that Nabucco would help it solve the strategic task of diversifying its gas supplies. But politically and logistically, it has met with even more serious obstacles than South Stream.

Gazprom’s deals with Turkmenistan and Kazakhstan in 2008 meant that Nabucco would face new difficulties with supply sources, as it would have to compete for Central Asian resources not only with Russia but also with China. In 2009, a pipeline system was put into operation to export energy resources of Turkmenistan, Kazakhstan and Uzbekistan to the Chinese market, whose demand had been growing exponentially. Nevertheless, Nabucco expected to receive large amounts of Turkmen gas for more attractive prices. The project was trapped in a vicious circle: the infrastructure could not be built without guaranteed supply, but while the pipeline construction was delayed, more and more energy resources were supplied via rival supply networks.

Another serious problem was finance. Nabucco, initially estimated at about ?8 billion, is now estimated to cost ?10-26 billion. Meanwhile, the main sponsor of the project, Germany’s RWE, seems to have become the main victim of Germany’s decision to abandon nuclear energy and impose a tax on nuclear fuel. Considering that RWE had to cut its investment costs, the probability of it withdrawing from the Nabucco project increased. Yet the company has declared its strong commitment to the project: the abandonment of nuclear energy by the largest market in Europe makes natural gas more attractive. So, RWE has assured the shareholders that the project still stands. Actually, the potential suppliers for Nabucco are only Azerbaijani, Iranian and Iraqi gas fields.

Iran cannot be considered a realistic option for the foreseeable future. Along with Russia, Iran is opposing Nabucco with all means, putting up legal obstacles in the Caspian Basin and expressing doubts about the possibility of laying a pipeline across the Caspian Sea. In addition, there are concerns over the state of the environment. Considering the above, plus the political tensions over Tehran’s nuclear program, the Iranian gas resources will likely remain out of reach for Nabucco – especially as the EU and the U.S. are planning to tighten sanctions against Iran. The managing director of the National Iranian Gas Exporting Company has termed Nabucco a “dead project.”

The Nabucco consortium reasonably pinned more hope on Iraq, but there emerged problems there, as well. Iraq has a high extraction potential, but investors are not enthusiastic about the conflict between the Kurdistan Regional Government and the central administration in Baghdad over revenue sharing. And although RWE is already present in the Kurdistan autonomous region, where it is building a local supply network, statements to the effect that the region should first meet domestic demand for gas and only then think of exporting it hardly inspire investors. In addition, the extraction industry in Iraq has not been fully privatized yet, so there is no clear understanding of the rules of the game. This problem is not insoluble, but its solution will take time. And in any case, Iraqi gas alone is not enough for Nabucco.

The viability of Nabucco largely depended on Azerbaijan, potentially both a supply source and a transit country for Turkmen gas. Two years ago, Baku’s participation in the project was called into question after the State Oil Company of Azerbaijan Republic (SOCAR) signed an agreement with Gazprom to give it access to the second stage of the Shah Deniz gas field in Azerbaijan. To win the deal, which could be a fatal blow to Nabucco, Gazprom offered to buy “as much gas as SOCAR can supply” during the long-term period at European prices (U.S. $350 per 1,000 cubic meters). This financial sacrifice could be justified. If Nabucco had secured cooperation from Azerbaijan and Turkmenistan, Ukraine could have gradually reduced its energy dependence on Russia and thus seriously undermined the latter’s geopolitical positions. However, two years later, after a major gas discovery by the French group Total at Azerbaijan’s offshore Absheron block, it turned out that Gazprom’s deal with Azerbaijan was a Pyrrhic victory. The new gas field may become a major supply source for Nabucco. These developments may cause Gazprom to buy more gas at very high prices in order to preserve its oligopoly. On top of that, there is a risk of Russia losing its influence in Turkmenistan.

Meanwhile, SOCAR and Turkey’s BOTAS Petroleum Pipeline Corporation signed a major agreement on October 25, 2011 in Izmir to build a pipeline to transport Shah Deniz II gas to Turkish and European markets. The construction is planned to be completed by 2017. The European Commissioner for Energy, Guenther Oettinger, hailed the agreement at a conference in Brussels as “good for Europe.” But he added that “is not sufficient, and it does not change our focus. We want to see sufficient dedicated pipeline capacity that links Azerbaijan to Europe. And this pipeline capacity needs to be operated within a strong legal framework compatible with international law” (that is, Nabucco – T.D., I.R.). Its advantages were: a) the ambitious idea of building a pipeline from Baku to Baumgarten in Austria with a single tariff structure; and b) a single pipeline going through Turkey. But for all the attractiveness of these plans, a virtual infrastructure cannot replace a real one. The main task of Azerbaijan was to get access to European markets, and since Nabucco had not proven feasible, the Shah Deniz field emerged as an alternative.

When it became clear that the Trans-Caspian project would not be implemented in the near future and that Turkmen gas could be considered as lost for Nabucco (although Iraqi gas fields could still be used), Baku began to look for ways to withdraw from the project so as not to offend any of the partners, ranging from Brussels and Washington to Moscow. Azerbaijan wanted at least 10 billion cubic meters of its natural gas to make its way to Europe annually, without waiting for the realization of the ambitious Nabucco plans which provided for the transit of 31 billion cubic meters of gas a year. In November, SOCAR and BOTAS agreed on the construction of a reliable and compatible pipeline across Anatolia, which would go parallel to the planned Nabucco pipeline. The South-East Europe Pipeline (SEEP), sponsored by BP, has so far been viewed as the main option among several pipeline routes. The Interconnector Turkey-Greece-Italy pipeline (ITGI) has already been rejected as targeted solely at the Italian market. Another option is the Trans-Adriatic Pipeline (TAP) sponsored by the Norwegian energy company Statoil and, possibly, DEPA of Greece, which would transport natural gas to Italy and the Balkans.

By putting the Trans-Anatolia pipeline into operation earlier this year, Turkey and Azerbaijan have deprived Nabucco of its Turkish leg, thus downsizing it into an abridged version (the so-called Nabucco-West) without its eastern (Turkmen) part. Somewhat later, ITGI was denied access to the Shah Deniz field, and now there is talk of its merging with Nabucco-West. That would be a strong move. But the original Nabucco project is now actually dead.

ANTITHESIS: NEW DYNAMICS OF RUSSIAN-EUROPEAN RELATIONS

The zero-sum game, in which the European Commission and the Russian Federation were involved, could be politically motivated but it was devoid of economic sense. The Commission’s political goals often do not coincide with corporate objectives, while Russia, as a rule, achieves its strategic aspirations only by reducing state revenues from energy sales. As the economic crisis in Europe deepened, threatening to cut down Russia’s budget revenues as well, a pipeline war became disadvantageous to both parties.

Russia’s energy sector, as anywhere in the former Soviet Union, is largely government-controlled. The state owns 50 percent of companies, whose stocks are traded on the Moscow Commodity Exchange, and energy companies make the main contribution to the high share of state-owned property. The prevalence of government-controlled assets enables the state to strategically plan the sector’s development. At the same time, short- and medium-term yields can easily fall victim to political ambitions and motives.

Paradoxically, the aforementioned SOCAR-BOTAS deal on gas supplies from Shah Deniz II was a good sign for Gazprom shareholders. The reason was revealed in a report by Azerbaijan’s Center for Economic and Social Development (CESD), which said that the company’s export portfolio, estimated at 158 billion cubic meters, was largely dominated by foreign gas, including gas from Azerbaijan and Turkmenistan, purchased at European prices and sold to European consumers actually without profit. Cheap Russian gas is replaced in Gazprom’s portfolio with expensive foreign gas. According to a CESD report of November 4, 2011, lost profits or alternative costs exceeded U.S. $3 billion. This price may be worth paying if it lets one maintain one’s oligopolistic positions in Europe and monopoly in Ukraine and Turkmenistan in the long term. But if the goal is not achieved, such losses would be harmful, because this money could have been invested in extraction and supply infrastructure. The deal between SOCAR and BOTAS can exempt Gazprom from its contractual obligations to buy expensive Azerbaijani gas.

But even if Nabucco is ever completed, it will not be a serious geopolitical challenge to Russia, as it was originally viewed. For the foreseeable future, Moscow will remain the only western partner of Turkmenistan, so natural gas prices may be revised in negotiations. Ukraine is also fully dependent on Russian gas supplies, especially as the Shah Deniz II consortium is expected to focus on the South-East European market. Finally, it is less and less likely that the European Commission will be able to block the development of Russia’s South Stream project.

It might seem that the European Commission actually secured a victory over South Stream, when the so-called “Gazprom clause” was included in the Third Energy Package on March 13, 2008. The clause stipulates that the Russian company shall give a third party access to its supply infrastructure, whereas the Nabucco project is exempt from such requirements. This is a very sensitive point in relations between the European Union and Russia.

At the same time, the Commission may find that it is not the Russian government or Gazprom that offer the fiercest resistance to its policy. Since South Stream was announced in 2008, 50 percent of this Swiss-based consortium has belonged to the Italian company ENI. In June 2010, it was joined by the French group GDF. Later, Putin invited major German energy companies (Wintershall, BASF and E.ON.) to participate in the project, as former Chancellor of Germany Gerhard Schroeder is the main lobbyist for Russian gas interests in Germany. So, the main opponents of the “Gazprom clause” are in EU member-countries.

Problems and contradictions that await the European Commission in the EU will become more vivid if we analyze the web of alliances formed around Nord Stream. Initially, not everyone liked the project’s idea. In 2005, the then Polish defense minister, Radoslaw Sikorski, likened it to the Molotov-Ribbentrop Pact; Swedes expressed their concern over Russian military presence in the zone of their exclusive economic interests; and several organizations raised environmental objections. Nevertheless, the initiative was finally realized. The Nord Stream opening ceremony in November 2011 was attended by Russian President Dmitry Medvedev, German Chancellor Angela Merkel, French Prime Minister Francois Fillon, Dutch Prime Minister Mark Rutte, the CEOs of the leading European energy companies, and European Commissioner for Energy Guenther Oettinger.

If we project arguments in favor of the completion of Nord Stream to other projects, the logic of Vladimir Papava’s and Mikheil Tokmazishvili’s “harmonization scenario” will become clear, as will the assumption of Norwegian analyst Bendik Solum Whist, who described it as “harmony through interdependence.” Formally, the more Russia is tied to the European market, the more balanced the structure of these “monopsony-oligopoly” relations will be. As the opposition to South Stream in the European Union subsides, Russia will focus on building customer confidence, rather than rely on coercive monopoly. Ultimately, such an incentive will inevitably become the only viable strategy, because pipelines, unlike gas liquefaction plants, cannot be moved anywhere. The more Russia invests in this infrastructure, the less the probability that its strategy of building up exports will be reoriented towards Asia.

Moscow’s concern will grow as it has doomed itself to a race for monopoly supply at the cost of short and medium-term revenues. Gazprom’s desire for foreign acquisitions has resulted in reduced investment in exploration and development. The International Energy Agency has even suggested that Russia may soon be unable to meet the external and domestic demand for energy. Similar criticism has come from Brussels, as well.

Analyzing the issue of diversification of supplies in the Balkans, Greek analysts Ares Yamouridis and Spiros Paleoyannis came to the following conclusion. The European crisis, which has reduced demand for energy, has introduced uncertainty into the issue of meeting the demand of some Balkan countries for energy and their ability to make large investments in infrastructure. At the same time, the reduced demand makes it possible to think of a small-scale diversification of supplies and more flexible solutions. Instead of multi-billion dollar investments in pan-European pipeline projects to transport billions of cubic meters of Caspian gas across the Balkans, there are much less expensive options: for example, pipeline interconnectors (with reverse flows), LNG re-gasification facilities, and additional gas storage facilities that several countries could use at once.

One needs to think more locally not only in the Balkans. For example, almost all of Italy’s demand for gas can be met by building LNG sea terminals during the next 15 years. In short, if Brussels or Moscow are not convinced by arguments concerning their functional interdependence, then arguments in favor of easing the pipeline war will make sense anyway. The parties simply cannot afford this race today.

 

SYNTHESIS: DEPARTURE FROM THE AGENT-ORIENTED PATTERN

The positions described in the “thesis” and “antithesis” sections above gravitate towards the traditional agent-oriented approach adopted in diplomacy. But this case requires a constructivist approach, which is rarely used in the analysis of security issues. In European studies, it has become widespread thanks to Alexander Wendt. The main premise is that social phenomena such as norms, threats, power and identities emerge as a result of interaction processes which produce a collective meaning. With this approach, international actors define their “interests” through interaction with others. For example, defense and foreign ministries rely on their experience of confrontation with major enemies. They write scenarios for specific actors (a company or a state) in the context of established traditions.

In this pattern, a foreign-policy “identity” or self-determination emerges in interaction rather than as a result of cold calculations of armchair opinion shapers. If viewed through this prism, the nature of foreign-policy relations between the European Union and Russia was formed in the Cold War conditions following the fall of the Berlin Wall and the breakup of the Soviet Union. Identities, like traditional notions of “national interests,” are relatively stable. But unlike interests, identities depend on the role assumed by international actors. The pressing question is whether the Moscow bureaucracy or technocrats in Brussels rethink their role in the context of the unfolding economic crisis. As the general situation changes, Russia’s view of itself and Europe’s view of Russia will change, too. The recession experienced by Europe and Russia may transform the views of both parties. The crisis prompts one to increase short-term or, at most, medium-term incomes, thus possibly sacrificing long-term geopolitical objectives.

However, Russia’s relations with other former Soviet republics have always been marked by the spirit of confrontation. From 1999 to 2003, Russia suspended oil supplies to Latvia a dozen times. It is not surprising therefore that in 2003 Riga decided to sell its oil transshipment base in Ventspils to U.S. Williams International, and Lithuania sold its largest oil refinery Mazeikiu Nafta to a Polish company in 2006. Estonia faced a sharp reduction in gas supplies from Russia in 1993, after the adoption and ratification of a new law on citizenship. Gas crises have repeatedly arisen in Russian-Ukrainian relations, and in August 2008 a war broke out between Russia and Georgia. Obviously, Russia is determined to use energy as leverage to achieve its political goals. But as more and more energy resources are found in the Caspian and Aegean Seas and as more and more natural gas liquefaction facilities are built, Russia will inevitably have to focus on customer care and abandon its struggle for influence in the European markets.

Until recently, it seemed that Washington took seriously Russia’s desire to restore its former living space. In June 2003, the Pentagon announced plans to deploy 15,000 troops in the Caucasus – in Azerbaijan and, possibly, Georgia – to guarantee long-term viability of projects to export Caspian energy resources. So far, the only project of an alternative supply network to transport Caspian energy resources to Europe was implemented on Washington’s diplomatic initiative. It is not accidental, as Mamuka Tsereteli says, that the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which has linked Azerbaijani oil fields and the Turkish Mediterranean port of Ceyhan across Georgia was not the fruit of Brussels’ efforts. The same applies to the South Caucasus Pipeline, 692 kilometers long, which runs parallel to the BTC pipeline and across Georgia. It links the giant Shah Deniz field in the Azerbaijani sector of the Caspian Sea and the city of Erzurum in Turkey.

However, a confrontational approach will not be Washington’s choice in the future. Neither the U.S., nor NATO showed enough determination to enter into an open confrontation with Moscow over Georgia in the summer of 2008. Staunch allies of the West in Georgia and Azerbaijan (Ukraine is no longer considered as such) now know very well that neither Europe nor America will apply coercive measures against Russia when it defends what it views as its living space – especially now that the United States plans to cut its defense budget by $450 billion over the next decade. This figure is five times more than the defense budgets of France and the UK combined. Moreover, Hillary Clinton has made it clear that U.S. strategic priorities are moving from Eurasia to the Pacific. Baku did not miss the message and refrained from joining in the Trans-Caspian pipeline project, which could undermine its relations with Moscow and Tehran and leave it with no guarantees of security.

It is too early to say how the geopolitical transformation of relations between Brussels, Washington and Moscow will affect energy security. But alliances may change when they are put to test, especially if they face a shock like the one experienced by Georgia in August 2008. The continuing economic rapprochement between Berlin and Moscow may ease the confrontation between Moscow and Washington and change the views of major players in and beyond the energy sector of themselves and of their roles. If, as outside observers believe, we are gradually moving from a multilateral security architecture to a multipolar paradigm in the Eurasian balance of power, we can no longer hope that the behavior of individual states or corporations will be as predictable as it used to be in the Cold War years. A power vacuum is developing as a result of Washington’s military retreat and the economic decline in the EU. The West is increasingly inclined to recognize Russia’s right to set “red lines,” and to work along this avenue.

At the same time, “harmonious cooperation” does not inspire hope, either, considering the divisions and divergence of interests among corporations and states and between EU members and the European Commission, the contradictions within the Kremlin elite, and the strengthening of new regional players, such as Turkey. Currently, roles are performed according to an outdated scenario. The energy game taking place on a vast territory from the Atlantic to the Urals and from the Caspian Basin to the Baltic Sea is becoming unpredictable.

Russia has a choice. It is free to view itself as a European power and to strengthen its strategic ties that facilitate its independence in a new multilateral architecture of international relations, to which Moscow can also contribute. This inevitably implies pacifying some countries in the region, including those whose behavior it may consider defiant, because a multilateral approach obliges one to abide by the rules. Or Russia may regard itself as a European nation situated outside Europe. As a result, Russia runs the risk of being involved in a costly military confrontation and a continued pipeline war with the main market for its energy, that is, with Europe.

Europe may continue building its relations with Moscow, viewing it as the main historical “outsider.” However, such an approach has already been rejected by the Franco-German axis and some other countries in the EU. In any case, a continued confrontation in the energy policy is a costly and unrealistic scenario, considering the dismal situation in the economy.

If Moscow, Brussels and Washington find a happy medium in their diplomacies, their mutual relations in the energy field will change dramatically. The “happy medium” option is becoming increasingly likely. The looming crisis makes “small-scale approaches” more attractive. Large-scale and expensive strategic projects are now viewed as risky ventures. So, after the curtailment of the Nabucco project, we may expect similar flexibility from South Stream.

Greater attention will have to be paid to economic notions: market pooling, efficient investment and quick returns. Energy dОtente will not mean the advent of a competition-free era; nor will the era of geopolitical projects continue. Growth and profits will become the main concern.