Russia and Eastern Europe: energy aspect

10.03.06

MOSCOW. (Sergei Kolchin for RIA Novosti.)

The negotiations in the course of Russian President Vladimir Putin’s recent visits to Hungary and the Czech Republic almost centered on oil and gas cooperation. This is not surprising, with Russia remaining the key energy supplier to Eastern Europe and Russian companies stepping up activities on the region’s energy markets.

The current relations in the oil and gas sectors between Russia and Eastern Europe are far from simple, mostly due to overlaps of the previous period of shared history. Meanwhile, the existing economic contacts push both parties to mutually beneficial solutions to pricing, transportation routes and property relations.

Eastern Europe receives oil and gas through common pipelines, such as the Druzhba oil pipeline and the Soyuz gas pipeline dating back to the socialist era. However, Russia established market relations with its partners in Eastern Europe long ago, in particular, in trade they have switched to world prices.

Eastern Europe too has changed its attitude to its energy dependence on Russia. The country is no longer seen as a guarantee of a steady economic growth. Moreover, Eastern Europe has been seeking a way out of the dependence through contacts with the EU and alternative suppliers of oil and gas. The ambition has mostly political, not economic, roots, but it is unbiased.

Early this year, the situation with energy supplies in Eastern Europe aggravated in the wake of the Russian-Ukrainian gas conflict. In response to the newly emerged transit problems, Hungary and Croatia declared their intention to diversify gas supplies by construction of an LNG terminal in the Adriatic Sea to transport gas from North Africa.

For its part, Russia wants to consolidate its positions on the East European market. Russia’s oil and gas supplies to Eastern Europe account for 14% and 17% respectively, discounting its supplies to Baltic countries and former Yugoslav republics. On the whole, Russian oil and gas exports to Eastern Europe bring some 20% of the country’s foreign exchange revenues.

In this respect, Vladimir Putin offered Hungary and the Czech Republic alternative energy solutions that could also work for the other countries of the region. Hungary can extend the operating Blue Stream gas pipeline to southeastern Europe, and the Czech Republic is invited to use the North European gas pipeline being stretched under the Baltic Sea directly to Germany. The two promising gas pipelines bypass the post-Soviet countries of Ukraine and Belarus apt for tapping off Russian gas.

However, Russia’s oil and gas interests in Eastern Europe extend beyond stable oil and gas transportation. The country would also like to consolidate its property interests in the region, which is not a smooth process. Eastern Europe is cautious about the expansion of Russian private and state capital into its energy sector, keeping in mind its previous dependence on the U.S.S.R.

Yet, Russian energy suppliers have already made some acquisitions in Eastern Europe, and the process is likely to continue. Russia’s largest oil and gas holdings – Gazprom, LUKoil and others – have repeatedly said they would like to buy assets in Eastern Europe. In particular, LUKoil president Vagit Alekperov said: “We are close to making large acquisitions… intense work has been done to invest in Eastern Europe.” Here he means primarily oil refineries and distribution networks “to retail products, not raw materials.” Gazprom has also held negotiations with heads of Hungarian ministries to discuss its participation in energy and petrochemical projects in the country. The Russian gas monopoly still wants to buy shares of the country’s largest oil and gas company MOL from the Hungarian government.

Interestingly, Gazprom and LUKoil already own shares of Hungarian energy companies, primarily MOL, and still hope to buy more. However, the expansion of Russian oil and gas capital to Hungary is controlled by the country’s government and the policy of national privatization institutions.

In general, buying aspirations of Russian oil and gas holdings provoke an ambiguous reaction in Eastern Europe. Slovakia, Bulgaria, Romania and former Yugoslav republics are more or less benevolent, while Poland, the Czech Republic and Hungary are more cautious. There are both political and economic reasons for that: consumer competition on the market of oil and gas assets is lower in the former group.

Glories for Russian companies in Eastern Europe include LUKoil’s purchase of oil refineries in Burgas, Bulgaria, and Ploeti, Romania, and quite a large network of fuel stations in the Balkans. In its turn, Gazprom joined Gaz de France and Ruhrgas in privatization of the Slovak gas pipeline company SPP. The Russian gas giant is also considering some acquisitions in Romania, Bulgaria, Serbia, Macedonia, Bosnia and Herzegovina.

At the same time, LUKoil failed to buy oil refineries in Czech Paramo and Polish Gdansk. Both LUKoil and Gazprom were not allowed to join in privatization of the Czech holdings Transgas and Unipetrol, and Gazprom had difficulty getting access to the Hungarian MOL holding.

So, the starting positions of Russian oil and gas companies in their striving for ownership in Eastern Europe are not strong. Contacts between Russian companies and their East European partners bring more results in this region than those made at the state level, because the latter are often impeded by political considerations.

Sergei Kolchin, PhD, is the chief research associate of the Institute for International Economic and Political Studies, Russian Academy of Sciences. –0-