Why Russia refuses to ratify Energy Charter

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MOSCOW, (Dr. Sergei Kolchin for RIA Novosti)

The energy ministers of the European Union (EU) have called on Russia to speed up the ratification of the Energy Charter, but Russia is not in a hurry to comply.

The reasons for procrastination have returned to the top of the Russia-EU agenda.

The Energy Charter stipulates free market relations in energy between the countries that ratify it. It was drafted in Europe in the early 1990s within the framework of the nascent East-West energy cooperation. Since then, all the EU member states and more than 50 other countries have signed or joined the treaty.

Russia signed the charter in the early 1990s, but has not ratified it. The EU, which is the main consumer of Russian energy resources, was seriously alarmed by the Russian-Ukrainian gas conflict in January 2006 and, in attempts to protect its interests, has insisted that Russia ratify the treaty. However, Moscow considers its individual clauses too harsh and has called for amending it.

Presidential Aide Igor Shuvalov said Russia would refrain from ratifying the Energy Charter Treaty and would demand its amendment.

One of the main Russia-EU contradictions concerns the transit protocol to the charter, which stipulates the non-discriminating access of companies and other countries to Russian pipelines, primarily the gas transportation network controlled by state-owned gas holding Gazprom. In fact, Russia is being called upon to give access to its pipelines to independent producers and other countries, such as Kazakhstan and Turkmenistan. This is an issue of serious contention for Russia, which does not want to become a gas transit country or liberalize Gazprom's export gas pipelines.

Industry and Energy Minister Viktor Khristenko has said Russia would ratify the treaty upon reaching a mutually acceptable agreement on transit with the EU. "Russia is conducting intensive, but difficult negotiations on the transit protocol," the minister said.

Another point of contention is the responsibility for under-deliveries of gas to Europe because of Russia's conflicts with post-Soviet transit countries, notably Ukraine. According to the EU, its member states, which buy Russian gas on the western border of the former Soviet Union, should not be affected by post-Soviet contradictions. The treaty stipulates the arbitration of price disputes and would prohibit Russia from stopping gas deliveries to any country.

Gas prices on the Russian domestic market are another problem. So far, Moscow and Brussels have not found common ground concerning Russia's domestic gas prices. EU officials say they are unjustifiably low, which gives Russian exporters advantages over European producers. But Russian government experts say that low domestic prices are a natural advantage of the country, just as a milder climate is an advantage of Europe.

Russia cannot agree to adjust domestic gas prices to global ones and the EU does not demand this categorically either because a rapid growth of gas prices in Russia would change all price proportions in the national economy. And given the low volume of the export of finished goods, the thesis about unjustified privileges granted to Russian producers sounds strange too.

Another issue on the agenda is the leveling off of prices of Russian and Central Asian gas, which would not benefit Russia. According to Gazprom's data, accession to the charter would cost the gas holding $4.5-$5 billion in annual losses owing to price adjustment.

Russia is still coordinating the gas provision business in the former Soviet territory. Central Asian states sell their gas not to consumers directly but to Gazprom, at prices that are lower than the market value. Theoretically, Russia could become an ordinary transit power, but this would disrupt the whole system of economic and political relations in the former Soviet territory where many former Soviet republics receive Russian gas at half the market prices.

At the same time, accession to the charter may also benefit Russia. Some experts say that it would help Russia attract $480-$600 billion for its fuel and energy sector and increase energy exports to 600 million metric tons of conventional fuel by 2010.

Leonid Grigoryev, President of Russia's Institute of Energy and Finance, said Russia would ratify the charter in time for the July 2006 G8 summit in St. Petersburg. He said oil consumption could dwindle, increasing political risks related to hydrocarbons production and distribution, in 20-30 years because of the transition to hydrogen technologies and renewal energy sources. Therefore, Russia should ratify the charter, he said.

So far, Russia's stand is very harsh: the state (Gazprom) will retain control of the gas transportation network and domestic gas prices will not be adjusted to global ones. According to a Gazprom spokesman, the Energy Charter provides for unilateral advantages for the EU over producers concerning access to mineral resources and their delivery to the international market. The gas holding's management contends that the treaty in its present form would considerably lower the competitiveness of Russian gas on the world market.

However, this position of principle is unlikely to prevent the ratification by Russia of the Energy Charter, but rather will be used as a bargaining chip in relations with the EU. The problem will likely be solved eventually on the basis of mutual consensus.

Dr. Sergei Kolchin is a chief researcher of the Institute for International Economic and Political Studies (IIEPS) at the Russian Academy of Sciences.

The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.

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