ISSN 0024-5089
Copyright © 2007 LITUANUS Foundation, Inc.

Volume 53, No 2 - Summer 2007
Editor of this issue: Violeta Kelertas

Book Review

Smith, Keith C. Russian Energy Politics in the Baltics, Poland, and Ukraine: A New Stealth Imperialism? Washington, D.C., Center for Strategic and International Studies, 2004, ISBN 0-89206-456-0, 77 pages.

Keith Smith was a member of the U.S. Foreign Service for many years, with postings in Hungary, Estonia and Norway culminating in his appointment as U.S. Ambassador to Lithuania from 1997 to 2000. He served as director of policy for Europe in the State Department and as senior adviser for the support of East European democracy. Recently he served as a consultant for an international energy company and, at the time of writing, was a senior associate in the CSIS Russia and Eurasia Program. He is, therefore, extremely well-qualified to write this exposé of Russian energy politics, particularly since he was in post at Vilnius during the negotiations for the purchase of the Mažeikiai oil refinery, the oil terminal at Būtingė and the associated pipeline. His short book, not much longer than an extended pamphlet, provides us with a worrisome overview of Russian policy in what Moscow used to call the ‘Near Abroad.’ By the end of the book, Smith has concluded that the question mark in his title should be removed since Russian policy, in his view, is designed to create dependence and political subordination among the five states under discussion. His well-documented argument, supported by interviews with some one hundred experts in the field, demonstrates that there is a real risk that energy dependence on Russia could have far-reaching and dangerous political consequences for her neighbors.

Smith’s careful indictment of Russia and his warnings to the East to take heed of the risks rests on several foundations. Since the end of the cold War, Russian policy under Yeltsin and particularly under Putin has focused on regaining some of the power lost during the dissolution of the Soviet Union, which Putin has referred to as a tragedy, a sentiment apparently widely supported among the Russian population. The Kremlin has sought to project its power and control in the region by playing the energy card. Russia enjoys a near monopoly of oil and gas supplies to East Central Europe – geography, price and existing pipelines have ensured that alternative energy supplies are not available. As a result, approximately 90 percent of Poland’s and Lithuania’s crude oil consumption and about 60 percent of Ukraine’s comes from Russia. In addition 58 percent of Poland’s natural gas supplies come from Russia (2001), 100 percent of Estonia’s and Lithuania’s (2002) and 88 percent of Latvia’s (2002). In itself this would provide the Kremlin with powerful leverage. But Smith goes on to argue that, under Putin, the Russian government has established control over the major energy companies, either by state ownership or by ensuring that the companies, though in theory privately owned, conform to Kremlin policies. In this way, companies such as Gazprom, Transneft, Lukoil and Rosneft are primarily instruments of state policy, rather than entities maximizing shareholder value. To ensure compliance, these companies’ policies have to be approved by the Presidential Administration, and ex-KGB officers (siloviki) are members of their boards. In this context, the independence and relative transparency of Yukos made it an awkward partner for the Kremlin and led to its brutal demise. 

Smith argues that the risks to the security and indeed the sovereignty of Russia’s neighbors are higher than are generally recognized in the West. Russia has been prepared to use blatant energy pressure to compel governments in the Baltic States and Ukraine to conform to her will. Smith points to the Kremlin cutting off energy to the Baltic States in 1992–93 and, during the dispute over ownership of Mažeikiai, Russia interfered with oil shipments to Lithuania on nine separate occasions between 1998 and 2000 to try to force the Lithuanian government to cede control to Lukoil. At the end of 2005, Gazprom raised the price of gas to the Ukraine fourfold in an attempt to help the Kremlin influence Ukrainian politics in the aftermath of the Orange Revolution. In 2002, Transneft cut off supplies of crude oil to the Latvian port of Ventspils after the port owners had rejected its attempt to buy them out. 

Moreover, Russia’s energy policies pose a threat to the development of transparent democratic governments and free market policies in her neighbors. In each of the countries in question there are members of the former nomenklatura and leaders of Communist-era industries who have retained links with Moscow and have materially benefited from those connections, not least in acquiring ownership of privatized companies. In addition, Russian energy giants, such as Gazprom, have established alliances with Baltic companies run by wealthy individuals with Russian links, or have created allegedly independent companies, through which financial support has been channeled to local political interests. Smith alleges that some top political figures in Lithuania had “extremely close ties” with Lukoil CEO Vagit Alekperov and other executives. He also asserts that there is widespread oral evidence of politicians taking bribes or illegal campaign financing from Russian companies or companies linked to Russian interests, giving the Paksas-Borisov connection as just one example. What this means, he believes, is that Russia uses its energy sector to corrupt and weaken relatively poor neighbors that have not had time to build strong transparent governmental and judicial institutions. There is, therefore, a risk that Russian policies will undermine the development of democratic government and market-oriented societies. 

Smith admits that the use of companies to further a state’s foreign policy objectives has not been unknown in the West, but argues that Western leaders “no longer systematically use companies to influence or undermine democratically elected governments.” Western firms are also required to open their books to international scrutiny. Of course, energy dependence does not necessarily pose a threat to national security. What matters is the country’s ability to diversify the sources of its energy imports; this depends on the ability to pay higher prices in emergencies, the capacity to store reserves, and a relatively favorable geographical position open to international trade  routes. The five states discussed here do not currently enjoy these advantages. Indeed, Russian energy companies currently own or control pipelines, refineries, oil ports, distribution companies and retail petrol stations in most of these countries.

What can be done to limit the power of Russian companies acting as surrogates for the Kremlin to force dependence on the neighboring states? Smith suggests a number of possibilities. The Baltic States, for example, in 2002 established a coordinating unit to devise regional solutions to energy shortages, which will include greater energy efficiency and conservation, the creation of new links to Nordic and Polish suppliers of electricity, increased storage capacity for oil and gas, and a replacement nuclear power station for the soon to be decommissioned Ignalina plant. However, there is a limit to what the five countries, and particularly the Baltic States, can accomplish on their own. For Smith, the role of the European Union is of crucial importance here. Hitherto, the focus of EU countries has been on increasing energy supplies from Russia. Germany, France and Italy, for example, regard Russia as an indispensable energy partner, and the recent decision to build a North European pipeline from Russia to Germany under the Baltic Sea, bypassing Poland and the Baltic States in the process, exemplifies this. Individual European states give priority to negotiating bilateral deals with Russia rather than using EU institutions to negotiate an EU-Russia agreement. But, Smith argues, the EU commission has betrayed a lack of understanding of, and a corresponding indifference to, the problems outlined in his indictment, leaving it up to these states (which, apart from Ukraine, are members of the EU) to “look after themselves when negotiating with Russia.” Smith cannot conceal his astonishment when one EU official told him that the EU was reluctant to help Latvia over Ventspils because of Latvian treatment of Russian minorities. Or when another said that he understood Russia’s fears that the Baltic States might attempt to cut off Russian supply routes. It was obvious that Russian disinformation was having great success in Brussels.  

It will be difficult for the EU to assert itself given the priorities and self-interest of its member states, but assert itself it must. Smith suggests the following program of action: the EU must provide sufficient funding to replace Ignalina and/or to build a power bridge north/south from Finland to Poland; it must be prepared to help Poland and the Baltic States to receive Norwegian oil and gas, particularly in view of its own requirement that 30 percent of member countries’ energy comes from second sources; it must continue to press Russia to sign the EU’s Energy charter, which requires Russian companies to be more transparent and competitive in their business dealings with member state companies; Transneft should be required to allow other gas companies than Gazprom to use its pipeline system; and the Baltic States and Poland should be given a greater role in the EU-Russia energy dialogue to push the Commission to take a tougher stand on the Energy Charter. He concludes by demanding that Russian energy firms should be forced by the EU to pledge some assets in the West as collateral in case of the arbitrary cut-offs of supplies. If Russia is serious in its claims to be a reliable energy partner of the EU, it should agree to this requirement. 

Since the publication of this book, two events above all have sensitized the EU member states to some of the concerns expressed by Smith and have strengthened their willingness to look again at energy policy. The first was the decision of Gazprom to raise gas prices to Ukraine by 400 percent on 1 January 2006. The second was the election of Angela Merkel as German Chancellor in 2005. The latter has shown that the Russian-German relationship will no longer be as cozy as it was under Chancellor Schröder. Both will ensure that Smith’s coherent and persuasive case will receive a more responsive hearing in the corridors of power in Brussels. 

Thomas Lane