Power, Energy, and the New Russian Imperialism 9780313352232, 9780313352225

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Power, Energy, and the New Russian Imperialism

Praeger Security International Advisory Board Board Cochairs Loch K. Johnson, Regents Professor of Public and International Affairs, School of Public and International Affairs, University of Georgia (U.S.A.) Paul Wilkinson, Professor of International Relations and Chairman of the Advisory Board, Centre for the Study of Terrorism and Political Violence, University of St. Andrews (U.K.) Members Anthony H. Cordesman, Arleigh A. Burke Chair in Strategy, Center for Strategic and International Studies (U.S.A.) The´re`se Delpech, Director of Strategic Affairs, Atomic Energy Commission, and Senior Research Fellow, CERI (Fondation Nationale des Sciences Politiques), Paris (France) Sir Michael Howard, former Chichele Professor of the History of War and Regis Professor of Modern History, Oxford University, and Robert A. Lovett Professor of Military and Naval History, Yale University (U.K.) Lieutenant General Claudia J. Kennedy, USA (Ret.), former Deputy Chief of Staff for Intelligence, Department of the Army (U.S.A.) Paul M. Kennedy, J. Richardson Dilworth Professor of History and Director, International Security Studies, Yale University (U.S.A.) Robert J. O’Neill, former Chichele Professor of the History of War, All Souls College, Oxford University (Australia) Shibley Telhami, Anwar Sadat Chair for Peace and Development, Department of Government and Politics, University of Maryland (U.S.A.) Fareed Zakaria, Editor, Newsweek International (U.S.A.)

Power, Energy, and the New Russian Imperialism Anita Orban

PSI Reports

PRAEGER SECURITY INTERNATIONAL

Westport, Connecticut

•

London

Library of Congress Cataloging-in-Publication Data Orba´n, Anita. Power, energy, and the new Russian imperialism / Anita Orban. — 1st ed. p. cm. Includes bibliographical references and index. ISBN: 978–0–313–35222–5 (alk. paper) 1. Energy policy—Russia (Federation) 2. Russia (Federation)—Foreign economic relations. I. Title. HD9502.R82O73 2008 333.8’230947—dc22 2008023700 British Library Cataloguing in Publication Data is available. Copyright © 2008 by Anita Orban All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2008023700 ISBN-13: 978–0–313–35222–5 First published in 2008 Praeger Security International, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America

The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48–1984). 10 9 8 7 6 5 4 3 2 1

Contents Acknowledgments

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Frequently Mentioned Companies

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Chapter 1 Introduction Chapter 2 Theoretical Background Chapter 3 Introducing the Independent Variables Chapter 4 Planting the Seeds: Russian Energy Companies’ Expansion in Central Europe in 1991–2000 Chapter 5 Consolidating State Power: Russian Energy Companies’ Expansion into Central Europe during the First Putin Presidency, 2000–2004 Chapter 6 Harvest and Obstacles: Russian Energy Companies’ Expansion into Central Europe during the Second Putin Presidency, 2004–2008 Chapter 7 Conclusion

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Chronology: Poland

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Chronology: Slovakia

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Chronology: Hungary

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Notes

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Bibliography

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Index

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Acknowledgments This book could not have been written without the generous support of professors, friends, colleagues, and family. The dissertation committee at the Fletcher School—particularly Robert Pfaltzgraff, Lisa Lynch, and Bill Martel—oversaw much of my work during my time as a PhD candidate. Constance Putnam, Susan Fink Yoshihara, Toshi Yoshihara, and Margaret Sloane have remained amazing friends through this entire experience. Aleksander Gubrynowicz, Bogdan Goralczyk, Wojtiech Roszkowski, Adrienne Ko¨rmendy, and Peter Szeratics set up invaluable interviews in Poland and provided me with research material. My former boss, Dr. Ariel Cohen, was the first person to suggest that I research Russian energy policy in Central Europe. Alexander Duleba critiqued the Slovak sections of the book. Marek Menkiszak and Agata Loskot critiqued the Polish sections. Piotr Naimski also thoroughly studied the Polish sections and put me in contact with other experts and businessmen. Hugo Bedau provided important feedback. Marcin Jastrzebski offered insights on the Odessa-Brody pipeline. Janos Martonyi provided insightful perspective on parts of the text dealing with Hungary. Andras Deak read the entire manuscript and assisted with sources and information several times. My current boss, Ambassador Istvan Gyarmati, was generous and kind enough to let me go on sabbatical to finish the book. I am particularly grateful to Paul Morton for his invaluable editorial assistance. Of course, I am most indebted to my family. I thank my children for their unbelievable patience during the long years when I wrote this book. My parents and inlaws met so many of my obligations on so many occasions throughout that time. Most importantly, my beloved husband has proven to be my most indispensable editor. Besides giving me his suggestions, whenever I felt lost, he listened to my complaints, took care of our children, and never ever stopped trusting me. Anita Orban Budapest, Hungary

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Frequently Mentioned Companies Borsodchem Europol Gas Mol Panrusgas PERN PGNiG PKN Orlen Rafineria Gdanska Slovrusgas SPP Transpetrol

Hungarian petrochemical company Polish-Russian joint venture, owner of the Polish section of the Yamal pipeline Hungarian gas and oil company Hungarian-Russian joint venture for gas import Operator of the Polish section of the Friendship pipeline Polish gas company Polish oil company Polish oil refinery Slovak-Russian joint venture for gas import Slovak gas company Owner of the Slovak section of the Friendship pipeline

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1

Introduction At the end of the 1970s, Moscow developed a plan to build six major pipelines connecting Urengoy, the world’s second-largest gas field, with Europe. The United States opposed the plan, with Antony J. Blinken writing about fears in the National Security Council about Western Europe ‘‘subjecting itself to potential energy dependence and to dangerous political leverage by relying on the USSR to supply so much of its gas.’’1 President Ronald Reagan prohibited the sale of American equipment and technology for the pipelines’ construction and asked his counterparts in Western Europe to follow his lead. They did not. Europeans called the opportunity ‘‘the deal of the century’’2 and the French foreign minister called the U.S. actions, ’’economic warfare on her allies in Western Europe.’’3 For the Western Europeans, energy supply was an economic issue. For the Reagan administration, it was a matter of security, and it did not want to assist Moscow with an economic weapon it could use against the Western alliance. The debate ended when the Soviet Union fell. After the end of the Cold War, leaders on both sides of the Atlantic sought a strategic partnership with Russia, making it seem unnecessary, as well as just improper for the moment, to raise fears of Moscow’s power over the EU’s energy supply. The result, of course, was that Russia did increase its hold over Europe’s energy supply in the 1990s and 2000s. The EU, according to its own records, ‘‘is the world’s largest importer of oil and gas. It buys 82 percent of its oil and 57 percent of its gas from third-party states. This is projected to rise to 93 percent of its oil and 84 percent of its gas over the next quarter-century.’’4 Russian crude oil accounts for 25 percent, and Russian natural gas accounts for over 25 percent of the EU’s total consumption.5 Russian natural gas accounts for 24.5 percent of the EU’s total primary energy consumption.6 Russian natural gas exports to the EU are expected to grow by more than 50 percent by 2010.7 Germany gets 40 percent of its natural gas imports from Russia. Italy gets 33 percent. The EU’s newer members are even more dependent. Poland relies on Russia for 63 percent of its natural gas imports, Hungary relies on it for 77 percent, and Slovakia for 100 percent.8 Thirty-four percent of Germany’s and 28 percent of Austria’s crude oil imports come from Russia. Poland relies on Russia for 95 percent of its crude oil imports, Hungary relies on it for 99 percent, and Slovakia for 96 percent.9 Still, it was not until 2006 when the Reagan administration’s concerns resurfaced in the halls of Washington, Brussels, and Berlin. On January 1, 2006, Russia cut off gas supplies to Ukraine, which affected all EU countries that received gas through the pipeline laid on Ukrainian territory. President

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Vladimir Putin authorized the cutoff himself and remained the key decision-maker throughout the crisis, though the Russians claimed, quite mendaciously, that it was a business move, not a political one. Gazprom remained subordinated to the Kremlin. The dispute was settled in a few days. Gazprom gained a foothold in the Ukrainian natural gas industry, and Ukraine gave up its plans to import gas from Turkmenistan, an alternative source to Russia.10 Coercion worked. Then there is Belarus. Since 1991, Russia has sold crude oil to Belarus well below world market prices as a reward for its Russian-friendly policies. But in 2006, President Alexander Lukashenko started defying Russia’s wishes. In response, Transneft, the Russia’s state-owned oil transport monopoly, introduced substantial extra charges to Belarus in January 2007, almost doubling the price of oil. Russia did not flinch, even when Minsk threatened to cut off the oil flow through the Druzhba (Friendship) pipeline,11 the major route for oil to the EU from Russia. The EU protested and pleaded for Belarus and Russia to settle their dispute. Belarus backed off from its threat and agreed to the higher prices. The crises proved that the EU was clearly at the mercy of Russia’s whims; there were few alternatives to Russian energy. The crises also disproved the assumption that supplier and transporter countries were in a state of mutual dependence, Even though Belarus could retaliate against Russian aggression by cutting off the pipeline that generates large revenues for Russia, in practice, Belarus would take short-term losses and, because it lacked any alternative source of energy, would suffer severely during the winter. In short, it had no real card it could play against Russia. The Kremlin, it was clear, directly controlled Russian energy companies and was ready to deploy them as tools of its foreign policy. Many still believe that such strong-fisted strategy does not go beyond the borders of NATO and the EU. While it is true that Moscow treats Belarus and Ukraine very differently from countries further to the west, Russian energy companies, once they enter EU territory, continue to implement Kremlin policy. If Russia is only mingling its energy and foreign policy in Belarus and Ukraine and not in the EU, Europe only has to achieve security by increasing the number of channels through which it receives hydrocarbon supplies. In that scenario, it only has to build pipelines that circumvent Belarus and Ukraine. There is no reason to worry about Russian energy companies’ acquirement of key assets in Europe. But if it is likely that someday Russia might try to influence the domestic or foreign policies of NATO members through its energy companies, than the Europeans have to develop a very different plan. Washington needs to help Europe develop a joint security strategy in regards to Moscow. Washington should also help it limit Russian energy companies’ access to key assets in the EU and back attempts to diversify energy supplies in Europe. A CONFLICT OF INTERESTS: THE RUSSIAN ANGLE In order for Russian oil or gas to reach major customers in Western Europe, particularly Germany, it needs to get through two tiers of countries. Tier 1, made up

INTRODUCTION

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of Belarus and Ukraine, former members of the Soviet Union, is called, by Russia, the Near Abroad. It represents its immediate sphere of interest. Tier 2 is sandwiched between Tier 1 and the largest Western markets and is made up of Poland, Slovakia, and Hungary, all three of them former members of the Warsaw Pact.12 All three integrated into NATO during the 1990s and the early 2000s. All three became EU members in 2004. While there are alternative routes between Russia and Germany other than through Tier 1 and Tier 2, they would either pass through the former Yugoslavia, an unstable region, or would be very expensive, such as a route through the North Sea. Tier 1 and Tier 2 are more important for transiting gas than oil. The gas market is determined by long-term supplier-customer relationships anchored by pipelines. As long as alternative technologies to distribute natural gas, such as LNG, do not become more cost efficient, pipelines will create a climate of mutual dependence between supplier and transit countries. Any transit country, even the smallest one, has the power to halt gas flow. This makes Russia or its largest customers vulnerable to countries that are in many other respects quite weak. There is still a climate of mutual dependence in regard to the transport of oil, but to a much more limited extent. It is easily possible, if not particularly cost-efficient, to transport oil through tankers and by rail. The possibility offers the supplier much greater leverage. The power of Tiers 1 and 2 as transit countries, however, is tempered by their dependence on Russia for energy. If any country in Tier 1 or 2 tried to shut off gas transit, Russia could respond by cutting off the entire energy supply to that country. That lever proved decisive in Russia’s disputes with Belarus and Ukraine. Russia cannot exercise such measures so freely, for such occasions will add to the final customer’s inclination to find alternative sources of energy even at a higher price. Moreover, it may also motivate the transit country to find alternative sources to decrease its consumption-dependence on the supplier. Therefore, it is not Russia’s interest to strong-arm the transit countries all the time. It is ideal for Russia to maintain a more cooperative relationship with Tier 1 and Tier 2. Russia regards Tier 1 as its natural sphere of influence, and so always tries to maintain strong influence in these countries. Its foreign policy goals in Tier 2 are less straightforward. With the collapse of communism, the Soviet Union withdrew its occupying forces from Central and Eastern Europe. By 1993, the last tanks had left. The occupation was followed by a cold peace. Due to deep questions of history, Central Europe wanted to escape from the Russian orbit and attempted to sever political, economic, and military ties with Moscow and integrate in the West, gaining membership in NATO and the EU. By the mid-1990s, Moscow’s opposition to Central Europe accession to NATO became central to its foreign policy. The Kremlin wanted to keep Central Europe a demilitarized buffer zone between Russia and the West. Russia saw NATO and EU enlargement as an aggressive act on the part of the West. Tier 2 countries, in turn, have been highly suspect of Russian foreign policy in the region. A major study led by the influential Russian foreign policy expert Sergei Karaganov reassessed Russia’s Central European strategy in 1997. It recommended an economic expansion in the region to counter NATO’s eastward push. The

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proposed strategy was taken seriously, as it was later referred to by no other than President Yeltsin’s advisor as the key document of the field. The recommendation was not revolutionary, but a shift in focus, a move from high politics to business. This is where Russia’s energy-driven economic interests—necessitating a way for Russia to influence transit countries without resorting to extreme measures— converges with its foreign policy interests to gain power in Central Europe. Russia has developed a strategy well in keeping with these goals. First, Russia has tried to diversify supply routes to the West by building one major new pipeline, Yamal 1, and committing itself to another two, Nord Stream and South Stream. Second, it has attempted to acquire key energy assets in Tier 2, targeting these countries’ oil and gas distribution system. Third, it has tried to circumvent Poland, a country that proved hostile to Russia’s attempts to acquire energy assets. If successful, the strategy would give Russia the upper hand. It would not be dependent on any one country. It could cut off a supply to a transit country while still keeping lines open elsewhere. It could influence a country’s policies without resorting to pipeline shutdowns. There is only one way for the strategy to work. Tier 2 countries have to allow Russian energy companies to acquire key assets, and they have to cooperate with Russia in opening up supply lines that would circumvent each other. Amazingly, some of them have proved willing to cooperate. A CONFLICT OF INTERESTS: THE CENTRAL EUROPEAN ANGLE The issue is more complicated for Poland, Slovakia, and Hungary. Russia serves as their most important energy provider. Neither Slovakia nor Hungary has any realistic chance to fully substitute Russian natural gas with any other source in the foreseeable future. It would be expensive, although theoretically possible, for all three countries to switch from heavy Russian oil to Middle Eastern light crude. In the long term, all three countries will have to remain dependent on Russian energy. For each of the three countries, it would be a good business deal to be Russia’s primary transit partner. Slovakia is an extremely important transit country. Poland is also substantially important. Each would prefer being on an irreplaceable than a secondary transit route. Only one can be the most important transit country, and in this respect their interests diverge. All three countries want to avoid becoming even more dependent on Russia. Consequently, it is not in their best interests to let Russian companies take over their key energy assets. For example, if a Russian company like Lukoil or Gazprom Neft controlled Hungary’s only oil refinery, it would be less likely to search for alternatives to Russian oil. It would be less likely to make any such substantial investments in alternative sources of energy during a pricing dispute between Hungary and Russia. None of these countries want as much Russian influence on these matters as the Kremlin hopes to gain. Warsaw, in particular, wants almost no Russian influence whatsoever. Slovakia was by far the most accommodating to Russian interests in the 1990s, to the point that NATO left it out of the first round of the alliances’

INTRODUCTION

5

enlargement. NATO’s decision forced Bratislava to reassess its alliances. And so, while it is still one of the most sympathetic EU members to Russia, Slovakia is trying to shake the taint of being Moscow’s poodle. Hungary’s stance depends on the government in power at any given time. One side of the political spectrum prefers the Polish approach. The other prefers the Slovakian attitude. There are three areas, then, in which Central and Eastern Europe’s interests conflict with Russia’s. Russia is keenly pursuing several pipeline projects to increase the number of delivery routes towards Western Europe, but the region will not benefit from this approach. The pipelines will soon reach a point of density at which each will be replaceable with one another. Each individual country is now competing for the highest capacity routes, to become the least replaceable. Moscow is also trying to acquire domestic energy assets in Poland, Slovakia, and Hungary, which could further increase their dependence on Russia by limiting their possibilities to diversify. Poland, Slovakia, and Hungary view themselves as Western countries and want to become full-fledged members of the Western alliance. The goal flies in the face of Russia’s economic expansion. THE RUSSIAN STRATEGY Russian energy companies expand in Central Europe if and when Russia is content with its relative influence in the West—giving it the will to act—and the Russian state has enough power to mobilize the necessary resources, providing it with the ability to act. Were either of these two elements lacking, the companies would not try to acquire new assets in Central Europe. When Russian energy companies do expand, as they have done in approximately 11 of the almost 17 years since the fall of the Soviet Union, they always follow the same strategy. There are two variations to the strategy, one for gas and one for oil. The primary goal of Gazprom, the only Russian gas company active in the region, has been to prevent any attempts to diversify Central Europe’s energy supply. As long as Russia is the only source of natural gas in a country, Gazprom and the Kremlin will enjoy significant leverage. Gazprom also wants to control the major transit pipelines in Central Europe, so it can benefit from transporting as well as selling gas. This protects Gazprom from having its natural gas flow shut down by a transit country. The legitimate activities associated with building and later monitoring a pipeline may also provide cover for Gazprom or Russia’s illegitimate activities, as the Polish fiber-optic cable case proved (see Chapter 5). Gazprom has also been trying to acquire control over Central Europe’s natural gas wholesale infrastructure, meaning high-capacity pipelines and storage facilities that deliver gas to distributors, who in turn deliver it to retail customers. This would allow Gazprom to inflict serious harm on a host country in case of a dispute. It could, for instance, choose to perform extraordinary maintenance work in winter, when gas is most necessary. Owning the wholesale infrastructure may also provide cover for illegitimate activity. Most importantly, Gazprom could make building pipelines

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from non-Russian sources prohibitively expensive, thanks to their control over the national artery. Monopolies in all three countries own the national wholesale infrastructure, offering an attractive target for Gazprom. Throughout the 1990s and early 2000s, Central European countries set up companies that enjoyed monopoly rights over imports. By acquiring stakes in an import monopolist, Gazprom could be both buyer and seller at the same time. As the owner of the only company permitted to purchase foreign gas, it could prevent or slow down any attempts to diversify. Upon their entry into the EU, the Central European countries were required to liberalize natural gas imports, weakening considerably all such monopoly companies. The Soviet oil industry collapsed into several small oil companies at the beginning of the 1990s. With no monopoly provider of Russian oil, Central European countries would, in theory, be free to choose which Russian oil company to buy from. To avoid a hit to its bargaining position, the Kremlin assigned an exclusive monopoly supplier for each Central European country. In effect, Moscow recreated a similar monopoly supplier position for these countries individually as Gazprom enjoyed for the entire region in natural gas. Russia has had similar goals concerning the oil industry as it has had concerning the gas industry. First, Russia has wanted to keep its companies’ dominant position over oil supply and to prevent the emergence of viable alternatives. It has also wanted to control transit pipelines and the wholesale infrastructure. It has also had a similar approach to monopoly import rights. The only important difference is that Russia has been trying to acquire refineries in Central Europe. Refineries are key links on the chain to transform crude oil into something deliverable to end consumers. Hungary and Slovakia have only one refinery each, while Poland has two major ones. If Russian companies were to control any of them, they would be able to eliminate any reasonable possibility for diversifying the crude oil supply. To achieve its goals, Russian energy companies have taken legitimate steps and outright illegal actions. On one end of the spectrum, Russian energy companies have participated in almost every privatization tender for energy assets in Central Europe. On the other end, during Gazprom’s attempt to take over Borsodchem, the former breached securities laws in order to take over the latter, while threats were delivered to a senior executive of Borsodchem aimed at forcing him to cooperate with the Russians. Most of the time, the Russian companies’ behavior can be placed somewhere between these two extremes. While Russian companies have always claimed their Central European energy deals were purely business, in all cases presented here, most of the Russian takeovers were preceded by meetings between presidents or prime ministers of Russia and their counterparts in Central Europe. Russian diplomats have always been quick to label any public criticism of these deals as irrationally anti-Russian. They made thinly veiled threats about unspecified repercussions if such ‘‘hostile’’ attitudes prevailed.

INTRODUCTION

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Russian energy companies have always sought effective control. They have been willing, for the sake of calming public outrage, to compromise by acquiring a minority stake in companies if it meant keeping effective control. They have, on occasion, taken a 49 percent stake as long as it came with management rights. One of the more interesting recurring features of their deals is the willingness to settle for only 50 percent of a company’s shares. Yet, later Russian companies demonstrated their ability to force their will in joint ventures, by relying on their other capacities in the same company as suppliers or financiers. They have frequently employed third companies as part owners in joint ventures. These companies have been indirectly and usually secretly dependent on Russian goodwill to hold the swing votes required for a Russian majority. Russian energy companies have used all sorts of tools to acquire Central European energy companies. Fair play has rarely been part of their vocabulary. Many experts and policy makers in the United States and Western Europe still believe that Russia somehow respects the borders of NATO and the EU. They assume that while Moscow is using energy as a political tool in former members of the Soviet Union, it refrains from such activity in Central Europe. That is simply not the case. The Kremlin wants to gain a foothold in the Western alliance by increasing its leverage in Poland, Hungary, and Slovakia, and Russia has used its energy companies to gain such influence. Most of this book covers recent events, the outcomes of which remain uncertain. Most official documents are unavailable, and so I have relied on newspaper articles, newswires, magazines, interviews, think tank studies, and scholarly articles. While I am convinced that it would not affect the overall conclusions, parts of this book may turn out slightly differently when official documents are made available. Such a development is unlikely, as I have approached all of my sources with the greatest caution possible.

2

Theoretical Background ‘‘Keep a weather eye on Russia. Russia has often experienced rapid shifts in relative power with dire international consequences.’’ William C. Wohlforth, ‘‘Realism and the End of Cold War,’’ International Security 19, no. 3. (Winter 1994–95): 129.

Realist theory was the prevailing theory to explain the Cold War, the balance of power between the United States and the Soviet Union. After the Cold War ended, there were several attempts to downplay the significance of realist theory. Francis Fukuyama wrote about ‘‘the end of history’’ in his influential book. He argued that ‘‘large-scale conflict must involve large states still caught in the grip of history, and they are what appear to be passing from the scene.’’1 The expectation was that security considerations (a basic tenet of the realist paradigm) will be overriden by other considerations. Consequently, military power did not seem to be the key variable explaining a state’s place in the international system. There were projections that concerns about economic security will prevail over those of military security.2 As Fukuyama phrased it, ‘‘there is no struggle or conflict over ‘large’ issues, and consequently no need for generals or statesmen; what remains is primarily economic activity.’’3 The peace dividend seemed to prevail in thinking. Belief in a new world order dominated not only scholarly thinking, but policy makers as well. In 1997, President Clinton dismissed the idea that great power territorial politics of the twentieth century will dominate the twenty-first. Instead, he talked about shared values and cooperation.4 However, ‘‘what sort of changes would alter the international political system so profoundly that old ways of thinking would no longer be relevant? Changes of the system would do it; changes in the system would not.’’5 ‘‘If the basic structure of the system has not changed since 1990, we should not expect state behavior in the new century to be much different from what it was in past centuries. In fact, there is abundant evidence that states still care deeply about power and will compete for it among themselves in the foreseeable future.’’6 Similar thinking was expressed by Joseph Nye, one of the leading scholars of institutional theory that posed, so far, one of the most credible challenges to the Realist school. Nye wrote that ‘‘it has become fashionable to say that the world after the Cold War has moved beyond the age of power politics to the age of geoeconomics. Such cliches reflect narrow

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analysis. Politics and economics are connected. International economic systems rest upon international political order.’’7 Post–Cold War changes were rather changes in the system, appearing at the unit level. The international system as such did not change. This study intends to prove that the Realist paradigm and its derivatives have a prevailing explanatory value in explaining post-Soviet Russian behavior vis-a`-vis Central Europe. The underlying question of the book is the following: why do Russian energy companies move into Central Europe in certain times, and why do they not do so in others? To answer the question, it needs to be examined whether there is any correlation between Russian state activity in Central Europe and Russian energy companies’ expansion in the region. The literature identifies the following potential answers: the primary motivation of states is to pursue power and, through that, to dominate others (the realist school); the structure of the international system compels a constant balancing from states (the neorealist school); and states are aspiring for influence that is derived from the structure of the international system and altered by the intervention of domestic incentives (the neoclassical realist school). REALIST THEORY Realist theory has a ‘‘state-centric’’ view of international relations. It means that according to realists in the international system, the key actors are nation-states.8 The central concept of realist theory is power. The realists believe that the international system is in anarchy in which the primary motivation of the different actors, i.e., nation-states, is power and security, with a bigger emphasis on the former. Hans J. Morgenthau, the father of modern realist theory, originates the competition among states from human nature. States are constantly striving to dominate others as those who make decisions on behalf of states are human beings and humans are aggressive who are aspiring to dominate each other. Morgenthau defined national interest in terms of power and said that nation-states pursue their national interest as an objective. As a result, for the realist school, pursuit of power is an end in itself.9 Pursuing national interest manifests itself in the continuous struggle for power. States’ continuous quest for power explains their behavior as well as makes predictions possible.10 In this struggle, states rely on their capabilities, which are not alike for the different nation-states. Of these capabilities, military ones have paramount importance. When realists argue that the external environment has a pivotal role on state behavior, they have the balance of military capabilities as the primary external factor in mind. In summary, the two key factors for understanding international politics according to the realist school are the interests of states (which is a continuous quest for power) and their military capabilities. States are constantly aspiring to maximize their power by actively looking for opportunities to enhance it over other nations, primarily by military means whenever they have the chance. However, all of the above fail to answer ‘‘one of the enduring questions of power and political behavior: To what extent can the intentions of states as political actors

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be inferred from the capabilities in their possession? Is there a causal relationship in which the possession of capabilities shapes the intentions of their possessors and their propensity to use power? Or, can a powerful state refrain from using its power?’’11 Morgenthau’s answer is that a powerful state cannot resist using its power over a weak state.12 Realists believe that states are inherently on the offensive. Power is a key concept in the realist school, not only for classical realists, but neorealists and neoclassical realists as well. There are several definitions in use for power. For Morgenthau, power is an end in itself, and it means domination: one’s ‘‘lust for power would be satisfied only if the last man became the object of his domination.’’13 Kenneth Waltz characterizes power as ‘‘the old and simple notion that an agent is powerful to the extent that he affects others more than they affect him.’’14 For Waltz, a causal conception is not a necessary condition of power. Waltz identifies the different capabilities of a state that together determine its power. These capabilites include economic capability, but for Waltz and the neorealists, it is military capability that is dominant.15 Robert Gilpin argues that power encompasses resources: military, economic, and technological capabilities of states.16 Moreover, he was among the first to understand power in relative terms. He used relative power as the ordering principle to understand state behavior.17 International economist Charles P. Kindleberger defines power as ‘‘strength capable of being used efficiently.’’18 In Kindleberger’s definition, power has two necessary parts: strength, and the capacity to use it effectively. It means that strength/capability does not automatically result in power. He does not separate the political and economic realms of international existence, but sees them as intertwined. The key concept in Klaus Knorr’s analysis is interdependence. He maintains that power, influence, and interdependence are interrelated. He says that conflict and cooperation can be achieved at the same time vis-a`-vis the same state: while in some issues states are in conflict with each other, in others they may cooperate. In either case, whether they cooperate or are in conflict with each other, they are interdependent. Regarding power, interdependence indicates the ability of one state to influence the other in some respect. Knorr asserts that if interdependence is mutual, both states could damage each other and themselves by ceasing the relationship between them. He uses the term ‘‘power’’ for the exercise of coercive influence only.19 In the realist school of thought, states are unitary, rational actors. As the principal actors in the international system are sovereign states, the realist paradigm assumes that nonstate actors derive their significance from states. This school of thought does not think that nonstate actors can have independent influence on the system. The significance of nonstate actors derived from the state can go in both directions: the nonstate actors can influence the policies and behavior of the state, or the state can use them as policy instruments.20 Realist Theory in Russian/Soviet Foreign Policy Studies Hans Morgenthau, in ‘‘The Real Issue Between the United States and the Soviet Union,’’ argued that the United States was most concerned about Russian

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imperialism and not about the idea of world revolution in its relations with the Soviet Union, the latter one using the idea of world revolution only for its imperialistic purposes.21 Today, realism has its renaissance, says Pursiainen. ‘‘The reason is clear. If Soviet leaders used to proclaim that Marxist-Leninist ideology . . . functions as the ‘theoretical basis for analyzing, evaluating and predicting international relations and concrete foreign policy situations as well as for the development of the strategy and tactics of foreign policy,’ then in the contemporary vocabulary of Russia’s political leadership, the concept of ideology is replaced by that of ‘national interest.’ ’’22 Even the foreign policy doctrine of the Russian Federation of 1992 stated that the foreign policy of Russia is not driven by any ideology any more but ‘‘the real distribution of power’’ in the world.23 This phrasing could not be any closer to the presumptions of the realist school of thought of international relations. Realist Explanation for Russian Energy Companies’ Presence in CEE The realist school’s explanation for Russian energy companies’ presence in Central and Eastern Europe would be that it is driven by the inherent motivation of states to pursue their national interest which manifests itself in pursuing power. Realists understand that states differ in their capabilities. For Russia today, its economic capability through its energy companies (a nonstate actor) is the primary means to achieve power. Russian behavior is driven by its quest for power on the one hand, and by the fact that it cannot resist the weakness of the Central European states on the other. Even though this explanation seems plausible, realist theory would rather expect a military buildup. It gives little explanation as to why Russia reacted with economic means and not otherwise. For their imperialistic objectives, states use their capabilities: military, economic, and cultural. Morgenthau claims that economic imperialism is not as effective as military imperialism, but if the latter cannot be used to achieve influence over a state, economic imperialism may serve the purpose.24 He pays little attention to economic imperialism or the economic base of national power, indeed. Still, Morgenthau’s answer for the initial question would be that we are experiencing a Russian economic imperialism in Central and Eastern Europe, as using its military power vis-a`-vis CEE is not a viable option for Moscow.25 In the realist explanation, the Russian state uses its economic capabilities, Russian nonstate actors, to enhance its power over Central and Eastern Europe. Samuel Huntington, although not a realist himself, points towards a possible way of interpreting economic expansion through the lens of realism. He underscores the importance that economic issues will play in the post–Cold War world. ‘‘In the coming years, the principal conflicts of interests involving the United States and the major powers are likely to be over economic issues.’’26 Huntington importantly maintains that economics is not necessarily a non-zero-sum game. Economic relations are not only about absolute gains; in many instances, relative gains matter. It

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means that a state may refrain from economic cooperation if it believes that the other may gain relatively more from the cooperation than it does. ‘‘Economic activity is a source of power as well as well-being. It is, indeed, probably the most important source of power, and in a world in which military conflict between major states is unlikely, economic power will be increasingly important in determining the primacy or subordination of states.’’27 Huntington uses the example of Japan to illustrate that Japan for decades pursued a strategy to maximize its economic power at the expense of its economic well-being, consistent with what realist theory would expect. The only exception is realist theory’s focus on military power. ‘‘Abjuring military power, it has acted precisely as realist theory would predict in the pursuit of economic power.’’28 Economic power is an essential contribution to a state’s power base. Economic power is the most fungible as it can easily be converted into military power. ‘‘Economics,’’ as Daniel Bell has said, ‘‘is the continuation of war by other means.’’ Economic primacy matters because economic power is both the most fundamental and the most fungible form of power.’’29 If realist theory substituted military for economic power, it would be well suited to explain post–Soviet Russian behavior vis-a`vis Central Europe. Accordingly, realist theory would suggest that the energy companies’ expansion should take place when Russia is not strong enough militarily to assert domination, yet it is becoming relatively stronger than the CEE region in economic terms. Only half of this prediction stands the trial of facts, however. Russia left CEE exactly because of its relative military weakness, and NATO’s expansion into the region reinforced this new military balance of power. However, the economic expansion has been taking place during a time when CEE has manifested much more robust GDP growth and lots more solid economic fundamentals than Russia. That is to say, Russia’s relative economic power vis-a`-vis CEE has been declining during the Russian companies’ expansion. This is contrary to what realist theory would suggest. In summary, it is possible to find a realist reasoning for explaining Russian energy companies’ foray into Central and Eastern Europe, but even this argument would not be sufficient to account for the timing of the expansion. NEOREALIST THEORY Neorealism, or structural realism, was phrased by Kenneth Waltz in his book, Theory of International Politics in 1979.30 Neorealist theory assumes the same anarchical structure as realist theory does. The primary actors in the international system are states that act as independent sovereign units. The theory puts structure into the forefront, meaning that structural constraints are the primary drivers of the actors and not their own priorities. Waltz ignores human nature (Morgenthau) as a motivation of states and claims that states are driven merely by survival in the anarchical system. The international structure is the primary constraint on state behavior; as a result, different states behave similarly in the structure (as opposed to Innenpolitik theories, which derive foreign policy from domestic factors). Neorealism ‘‘addresses two questions: (1) Why do balances of power recurrently form in international

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politics and (2) which of two gross distributions of power (bipolarity or multipolarity) is more prone to great power war?’’31 Neorealists do not claim that states should behave according to the worst-case scenario, i.e., war, all the time, but they claim that in case of consistent disregard for this option, the system will punish them. The most extreme punishment is the disappearance of the state. In neorealist theory, there is a basic distrust among states that are concerned of the relative gains of power vis-a`-vis each other. However, cooperation is possible as long as the relative gains deriving from the cooperation are acceptable for those involved. For Waltz, structure determines the way unit-level actors are arranged in the international system. Waltz does primarily structural-level analysis and mostly excludes the unit level. He says that at the unit level, there are two possible sources for change in the international system: ‘‘the attributes of the units and the interactions among them.’’32 Waltz does not look at how power is employed; rather, he is interested in the outcome of the interaction among the units in the international system. While Waltz explains systemic changes, he does not offer a theory on foreign policy. Neorealists only look at the outcome, and they fail to explain foreign policy decisions. ‘‘[A] theory of international politics . . . can describe the range of likely outcomes of the actions and interactions of states within a given system and show how the range of expectations varies as systems change. It can tell us what pressures are exerted and what possibilities are posed by systems of different structure, but it cannot tell us just how, and how effectively, the units of a system will respond to those pressures and possibilities.’’33 While the dependent variable of Waltz’s theory is the pattern of outcomes of state interactions, it does not aim at explaining the behavior of a specific state. Additionally, Waltz relies in his analyses primarily on the distribution of military capabilities in the international system. ‘‘Broadening the concept of security to include economic factors simply cannot be accomplished within the neorealist framework, since it would require dismantling the underlying assumptions that provide neorealism with its internal coherence . . . Waltz ultimately concludes that it is possible, indeed productive, to ignore the economic domain when theorizing about international behavior.’’34 Neorealist Theory in Russian/Soviet Foreign Policy Studies According to neorealist theory, Russia and the Soviet Union throughout its history adapted to the prevailing balance of power. The main drive behind a state’s foreign policy is national interest, defined as power. As a result, neorealists did not think that the Soviet Union had a distinct foreign policy from that of Tsarist Russia. In their interpretation, the Soviet ideology served only as a showcase; it did not have a significant influence on foreign policy. The Soviet Union’s foreign policy was a result of the balance of power in the international system. Kenneth Waltz finds that the Soviet Union’s actions were more benevolent than its internal character or ideology would have suggested. It acted like a status quo power, and this was a result of the pressure of the bipolar international system.35 For Waltz, the international system explains

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Soviet foreign policy. He underscores those views that claim that considerations of realpolitik soon superseded ideological ones during Soviet times. Regarding post-Soviet Russia, Waltz maintains that the basic structure of the post– Cold War international system remains anarchic.36 The realm of international politics will be characterized by competition. While military competition will be important, he stated in 1993 that economic competition will be as important in the international system as military capabilities.37 The rank of great powers ‘‘depends on how they score on a combination of the following items: size of population and territory, resource endowment, economic capability, military strength, political stability and competence.’’38 Even though Russia is a great power in the military sense, economically, it is insignificant. 39 ‘‘The Soviet Union, like Tsarist Russia before it, was a lopsided great power, compensating for economic weakness with political discipline, military strength, and a rich territorial endowment. Nevertheless, great power status cannot be maintained without a certain economic capability. In a conventional world, one would simply say that the years during which Russia with its many weaknesses will count as a great power are numbered, and that the numbers are pretty small ones.’’40 However, the capabilities of Russia are dramatically different in 2006 from those of 1993. Waltz maintains that the international system is shaped by the distribution of different types and levels of capabilities among states. Energy is a very important one among these capabilities. The high energy prices after 1999 changed the relative capabilities of Russia in the international system as well as its opportunities significantly. Today, Russia relies extensively on its energy capabilities to balance against the United States. Kenneth Waltz also maintains that capabilities can be used to change the system. President Putin expressed several times his desire to do so. Putin’s foreign policy markedly attempts at building up an alternative power base against that of the United States. In that endeavor, Putin is able to rely extensively on energy, which is a key capability in itself; but revenues from the sales of energy are easily convertible into other capabilities as well. Neorealist Explanation for Russian Energy Companies’ Presence in CEE Waltz would expect a rational Russia to balance constantly vis-a`-vis the United States in military capabilities, for the international structure would compel Russia to do so even in the short term. The neorealist worst-case expectation would suggest that Moscow must be prepared for the mere possibility of a coercive U.S. action against Russia. Waltz would ignore economic capabilities in balancing. However, Russian behavior today seems to contradict Waltzian expectations. Neorealists would say that in the long run, Russia will be punished by the system for its current failure to balance vis-a` -vis the United States. Even though neorealism may explain international political outcomes, it is not a foreign policy theory. As a result, explaining the particular Russian foreign policy vis-a`-vis Central Europe is beyond the realm of Waltzian neorealism.

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However, other scholars applied the neorealist model to individual state behavior as well as to international outcomes. As a result, two theories of foreign policy emerged: offensive and defensive realism. They share the assumptions of neorealist theory: the primary actors of an anarchic international system are unitary and rational states that are aspiring for security. The international system is anarchic in nature, and analysis should always start from the system level.41 OFFENSIVE REALISM As John Mearsheimer phrased it, ‘‘my theory of offensive realism is also a structural theory of international politics . . . Offensive realism parts company with defensive realism over the question of how much power states want.’’42 For Mearsheimer, security in the international system is scarce.43 As a result, states aim at achieving security by maximizing their relative power because offensive military action often contributes to security. 44 (As opposed to this, Waltz believes that states should not aspire to maximize their power, but to achieve an ‘‘appropriate’’ amount of power.45) Even though states may start with benign motives, they are often forced to act offensively because of the structure of the international system. Domestic characteristics of the different states are not important in this regard, since it is the structure that makes states, even those with different domestic characteristics, behave similarly. For understanding state behavior, offensive realists suggest to examine a state’s ‘‘relative capabilities and its external environment, because those factors will be translated relatively smoothly into foreign policy and shape how the state chooses to advance its interests.’’46 Even though survival is the number one goal of states, John Mearsheimer acknowledges that states sometimes pursue non-security goals, like economic prosperity, as long as they do not contradict the balance-of-power logic. Moreover, the non-security goals many times supplement the security-related goals. For example, economic prosperity creates wealth (productive base), which in turn can easily be transformed into military capability. However, Mearsheimer does not offer any explanation as to why states would pursue non-security goals.47 He quotes Adam Smith in suggesting that when the quest for security and wealth conflict, the former always supersedes the latter. When forced to choose between wealth and relative military power, states would choose the second.48 Stephen Brooks argues that a distinctive feature of offensive realism is that it claims that states are conditioned by the mere possibility of conflict (as opposed to its probability). ‘‘Neorealism holds that the possibility of conflict shapes the actions of states, who are seen as always adopting a worst-case perspective.’’49 Kenneth Waltz argued that in the international arena, ‘‘any state may at any time use force [and] all states must constantly be ready either to counter force with force or to pay the cost of weakness.’’50 As Mearsheimer contends, the possibility is always there that ‘‘a state’s intentions can be benign one day and malign the next.’’51 Emphasis on the possibility of conflict also means that offensive realists heavily discount the future. If a conflict is always possible, then a state needs to be militarily prepared all the time. The

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primary motivation of states is survival, states’ primary responsibility is military security. Military capability depends on a state’s productive base. However, states have different productive bases and, as a result, different military capabilities. Their military capabilities define the states’ place in the international structure. Offensive realist theory admits that there are other (than military) material capabilities, like economic (but does not consider nonmaterial factors, such as ideas and norms, at all) that determine a country’s productive base. However, if the two, military preparedness and economic capacity, come into conflict, the former always trumps the latter. In this theory, a state would never give up a degree of its short-term military preparedness for potential net increases in its economic capacity because the possibility of conflict is always there. Thus, the theory favors short-term military preparedness over a long-term one. Additionally, short-term military preparedness subsumes other long-term priorities as well. In other words, a state will always seek to maximize its short-term military security even if it has negative consequences for other state priorities in the long run. When security pressures will cease, then a rational state focuses more on other long-term priorities, among them economic capacity. The bigger the security pressures of today, the less long-term priorities matter. As Mearsheimer phrased it, ‘‘states operate in both an international political environment and an international economic environment, and the former dominates the latter in cases where the two come into conflict. The reason is straightforward: the international political system is anarchic.’’52

Offensive Realist Theory in Russian/Soviet Foreign Policy Studies John Mearsheimer argues that Russia and the Soviet Union pursued an expansionist foreign policy continuously. ‘‘Russia had a rich history of expansionist behavior before the Bolsheviks came to power in October 1917.’’53 The expansion was driven by a fear of Russian leaders from invasion. ‘‘Not surprisingly, Russian thinking about foreign policy before and after the Bolshevik Revolution was motivated largely by realist logic.’’54 The United States attempted to prevent Soviet expansion wherever it could during the Cold War. ‘‘Nevertheless, the Soviets had some chances to expand, and they almost always took advantage of them.’’55 The realist logic characterizes post-Soviet Russian foreign policy as well. ‘‘The evolution of Russian foreign policy during the 1990s provides further evidence that realism still has a lot to say about inter-state relations in Europe . . . NATO’s actions in the Balkans and its expansion eastward have angered and scared the Russians, who now view the world clearly through realist lenses and do not even pay lip service to the idea of working with the West to build what Gorbachev called ‘a common European home.’ ’’56 Moreover, Mearsheimer calls Russia and China two great powers with power-projection capabilities, which makes the current international system a non-unipolar one. Mearsheimer believes that great powers are always on the offensive, ‘‘great powers will continue looking for opportunities to increase their share of

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world power, and if a favorable situation arises, they will move to undermine that stable order.’’57 Offensive Realist Explanation for Russian Energy Companies’ Presence in CEE Offensive realists would have predicted that Russia would try to expand to CEE as soon as its means permit, independently of whether it faces tangible challenges or threats. As of the means of this expansion, offensive realism allows for the substitution of military means with economic ones as long as they are not in conflict. This is exactly what had happened. By 1992, ex-Soviet Russia left CEE militarily, creating a power vacuum that had not been filled until NATO admitted Poland, the Czech Republic, and Hungary in 1999 (the decision was made in 1997). During this hiatus, there was no credible challenge to speak of to Russian security from CEE. Still, Russian energy companies started their expansion into the region as early as 1994—exactly as offensive realism would predict. However, offensive realism suggests that economic imperialism is desirable only as long as it furthers military preparedness, even in the short term. However, by the early 2000s, when this economic expansion reached its peak, its costs have amounted to several billion dollars annually. It would be hard to argue that these funds could not have been spent on increasing the otherwise sharply declining military preparedness of Russia. For whatever reasons, the Russian leadership decided to spend this amount not on increasing military readiness, but rather on financing economic imperialism. This is in sharp contrast to what offensive realism would predict, especially in light of the fact that most of the economic expansion took place in the immediate vicinity of the region’s NATO entry (2004 in the case of Slovakia, 1999 for the other three countries), an undeniably tangible military challenge. DEFENSIVE REALISM Defensive realists assume that security in the international system is plentiful and thus argue that great powers are more secure when they aim at maintaining the status quo instead of maximizing their power.58 In the defensive realist theory, rational states can afford only to react to rare external threats. However, even in these cases, it is enough to balance against threats, with the exception being when offensive military technologies prevail and thus states fear each other. However, rogue states many times misunderstand the security-related incentives of the environment and interfere in rational states’ proper reaction to systemic incentives.59 For Brooks, while offensive realists emphasize the possibility of conflict, defensive realists focus on the probability of conflicts.60 Following from this, defensive realists do not think that the worst-case scenario determines a state’s behavior. Also, they do not think that short-term security considerations always supersede long-term considerations. According to defensive realists, states make intertemporal trade-offs based on a careful weighing of the probability of conflict. Also, military preparedness does

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not always trump economic capacity if the two conflict; for defensive realists, rational policy makers may decide to give up some military preparedness in exchange of net gains in economic capacity in case the gains are ‘‘substantial relative to the probability of security losses.’’61 Defensive realists do not subscribe to the neorealist proposition that only the balance of military capabilities affects the likelihood of conflict. They identify three more material factors that affect the probability of conflict: technology, geography, and international economic pressures.62 The probability of conflict varies over time based on the above four factors. States make their decisions based on assessing the probability of conflict. It follows that security pressures in the international system are not as imminent for defensive realists as they are for offensive realists. Actors always make choices between short-term and long-term objectives.63 It follows that for defensive realists, states pursue not only security, but power as well. Moreover, for defensive realism, the ultimate goal of states is power and not security. Defensive realists hold that a state’s productive base is composed of military preparedness as well as economic capabilities, as a result pursuit of both contributes to long-term power. Even though the pursuit of greater economic capabilities and military preparedness do not always overlap and sometimes may even be in conflict with each other, defensive realists argue that there is no hierarchy among goals (as for offensive realists, the ultimate goal is security); rather, the different objectives can be traded with each other as needed.64 Defensive realists pursue power not for its own sake, but to further other interests of the state. In this school, states do not pursue power to dominate others, but ‘‘states are seen as seeking to enhance their share of economic resources, and hence their power, because it provides the foundation for military capacity, and furthermore because economic resources can themselves be used to influence other international actors.’’65 Conquest is only one means to achieve power, and states have a wider variety of other means at their disposal to increase their power. The defensive realist ‘‘conception of international behavior asserts that in situations when the first strategy, conquest, is the most cost-effective means to increase power, states will be prone to use military force in order to enhance their power.’’66 Consequently, where the most cost-effective way to enhance power is not through military conquest but by other means, states will go into that direction. Defensive Realist Theory in Russian/Soviet Foreign Policy Studies Jack Snyder called Soviet expansionism a moderate one. He does not believe that Russia was more aggressive in its foreign policy than any other great power. ‘‘The Soviets’ moderate expansionism reflects the two-sided character of their strategic beliefs. On the one hand, the Soviet Union was born believing that security required expansion . . . On the other hand, the Soviet Union’s early leaders understood that if they exercised restraint in foreign policy, the capitalist powers would be more likely to focus their aggression on each other and leave the Soviet state alone.’’67 Snyder believes that periods of expansion were followed by periods of retrenchment by Russia. However, the explanation of what was behind expansion and retrenchment

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(external or internal factors) is still lacking. ‘‘No one . . . has tried to test systematically whether variations over time in Soviet grand strategy correlate with variations in the international circumstances the Soviet Union has faced.’’68 Snyder applied realist theory to explaining Soviet foreign policy and especially periods of retrenchment during Khrushchev, Brezhnev, and Gorbachev. He found that while moderate periods and the Soviet period after 1945 can be explained as responses to the changes in the international structure, Khrushchev’s and Brezhnev’s foreign policies cannot be so explained. But ‘‘cognitive explanations, such as the Bolshevik operational code and cognitive learning models, fare even worse, despite their current popularity.’’69 Snyder finds that the most plausible explanation can be found when applying the model of economic historian Alexander Gerschenkron of the Soviet Union; that is, its domestic political character as a late industrializer that is periodically forced to catch up in big leaps with countries that are more economically advanced. 70 Although Snyder finds that ‘‘domestic structure offers the single best explanation for variations over time in Soviet expansionism, this does not mean that the international system was irrelevant to Soviet behavior. On the contrary, the international system shaped Soviet behavior in several ways. First, the international environment helped to create the structure of the late polity by smashing the old domestic order in World War I and by providing the competitive environment that spurred Stalin’s revolution from above. Second, during periods of relatively unitary politics, Soviet policy was closely shaped by the incentives of the balance-of-power system. Finally, even during relatively cartelized periods, international conditions helped make or break strategic ideologies.’’71 Even though Snyder found that the domestic political character of the Soviet Union offers the most plausible explanation for expansion and restraint during Soviet times, the changes in the international structure have had an impact on Soviet decisions, and ‘‘their effects are filtered through the medium of Soviet coalition politics.’’72 Defensive Realist Explanation for Russian Energy Companies’ Presence in CEE With regard to the case of Russian energy companies in Central and Eastern Europe, defensive realists would have a strong argument for the possible motivations behind these actions. As neorealists, they would clearly assume that these companies are tools of the state’s designs. However, as opposed to offensive realists, they would find it easier to explain the chosen method of expansion. They could argue that independently of whether Russia faces tangible security challenges on its Western borders, weighing the probabilities of these challenges, it may decide that spending on economic expansion, and therefore enhancing its productive base, increases its overall power more than spending on its military preparedness. Acquiring assets in a strategic industry of neighboring countries would certainly advance Russia’s relative power vis-a`-vis these countries. As for the timing of the Russian corporate expansion, defensive realism fails to provide a strong enough rationale. For the first steps of this expansion started in

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1994 and 1995, when EU and NATO expansions were not foregone conclusions but mere possibilities—in case of the EU, quite distant ones. While a clear power vacuum existed in CEE, there was no significant power for Russia to balance against. Therefore defensive realism cannot account for the first years of the expansion. It also implies that Russian expansion may be more offensive than defensive in its posture. NEOCLASSICAL REALIST THEORY Neoclassical realist theory synthesizes classical realism and neorealism.73 While neorealism explains systemic outcomes, it does not explain the behavior of states. Neoclassical realist authors insert domestic variables between the systemic factors and the particular state’s foreign policy decision. Like Kenneth Waltz, neoclassical realists take the distribution of power in the international system as an independent variable. ‘‘A good theory of foreign policy should first ask what effect the international system has on national behavior, because the most powerful generalizable characteristic of a state in international relations is its relative position in the international system.’’74 Neoclassical realists distinguish between power and foreign policy interests (as opposed to classical realists, for whom power is an end in itself ). For neoclassical realists, power is ‘‘the capabilities or resources . . . with which states can influence each other.’’75 Foreign policy interests of a state are goals that drive a country’s external behavior. They add domestic perception of the system and domestic incentives as an intervening variable. Their dependent variable is the foreign policy decision, which is based on the distribution of power in the international system together with domestic perceptions and incentives. First, since individuals are making concrete foreign policy choices, so it is necessary to incorporate not only the relative power capabilities of states, but the perception of leaders about relative power capabilities. ‘‘Even if one acknowledges that structures exist and are important, there is still the question of how statesmen grasp their contours from the inside.’’76 This also means that states’ foreign policy does not necessarily follow the changes in relative power in the short and medium term, since what matters is the statesmen’s perception about their country’s relative power and then their reaction to it. This factor, however, makes analysis difficult. The link between power and policy is not at all straightforward, ‘‘rapid shifts in behavior may be related to perceived shifts in the distribution of power which are not captured by typical measures of capabilities.’’77 Fareed Zakaria and Thomas Christensen underscore the significance of perceptual ‘‘shocks,’’ which means that a single event makes decision makers conscious of the ‘‘cumulative effects of gradual long-term power trends.’’78 While neorealism may explain international political outcomes in the long term, it is not able to do so in the short or medium term. Neoclassical realism is much better suited to do so, as it incorporates decision makers’ perceptions about international events and how they translate into concrete action. Second, even though the leaders of states may have a clear understanding of the changes in relative power capabilities, they do not necessarily have freedom to direct

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their states’ resources in the direction found necessary. As a result, it is necessary to identify the strength and structure of states as a domestic intervening variable. It follows directly that states with different domestic structures but similar relative power capability perceptions act differently. ‘‘Foreign policy is made not by the nation as a whole but by its government. Consequently, what matters is state power, not national power. State power is that portion of national power the government can extract for its purposes and reflects the ease with which central decision makers can achieve their ends.’’ 79 Thomas Christensen introduces a different phase, ‘‘national political power,’’ which he defines as ‘‘the ability of state leaders to mobilize their nation’s human and material resources behind security policy initiatives.’’80 Consequently, states with similar external shifts in relative power and statesmen who have similar perceptions about the above shifts may react very differently to the changes of the international system based on how much ‘‘state power’’ they can use in their strategies to meet external challenges. Decision makers who can rely on more ‘‘state power’’ are able to react much faster to changes than those who do not possess as much ‘‘state power.’’ So for neoclassical realists to explain a state’s foreign policy, perceptions are far from enough. It is equally important to incorporate ‘‘state power,’’ which decision makers are able to use for their own purposes. Neoclassical realist theory argues ‘‘that the scope and ambition of a country’s foreign policy is driven first and foremost by its place in the international system and specifically by its relative material power capabilities. . . . They argue further, however, that the impact of such power capabilities on foreign policy is indirect and complex, because systemic pressures must be translated through intervening variables at the unit level.’’81 For neoclassical realists, the basic parameters of a state’s foreign policy are driven by the relative distribution of material power. However, they do not think that relative material power automatically translates into foreign policy (as in the case of neorealism). Neoclassical realists add two intervening domestic variables in their explanation of foreign policy outcomes. Neoclassical realists differ from classical realists and neorealists in terms of the motivation of states as well. ‘‘Instead of assuming that states seek security, neoclassical realists assume that states respond to the uncertainties of international anarchy by seeking to control and shape their external environment.’’ Moreover, ‘‘this school argues, they are likely to want more rather than less external influence, and pursue such influence to the extent that they are able to do so.’’82 Further, Gideon Rose quotes Fareed Zakaria, who writes that ‘‘states are not resource-maximizers but influence-maximizers.’’ For Zakaria, states do not expand to acquire more resources (classical realist school), but expand as a consequence of material resources. It means that increased resources—i.e., increased relative power—leads to greater ambitions to expand.83 Robert Gilpin and William Wohlforth emphasize the significance of international economic pressures that affect the economic opportunity cost of an assertive foreign policy, as well as the question of whether the most cost-effective way to influence another state is through informal economic or military means.

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Neoclassical Theory in Russian/Soviet Foreign Policy Studies For Wohlforth, the underlying basic course of Russian/Soviet history is ‘‘a bias toward expansion. That is, both Imperial Russia and the Soviet Union were biased toward the acquisition and retention of territory, for which they were willing to pay high costs.’’84 Wohlforth uses neoclassical realist theory to explain the above phenomenon. ‘‘The standard neorealist explanatory model—the imperative of survival in anarchy given the distribution of power—is either indeterminate or predicts a defensive non-expansionary stance on the part of the state. The conclusion follows that costly expansionism can only be explained by reference to domestic politics, ideas, or some combination thereof.’’85 Wohlforth writes that Russia faced substantial security problems (outside international structural factors) throughout its history, which explain its expansionist bias. These were its flat geography in a Hobbesian environment, its relative backwardness compared to its rivals, and its size that induced a bi-level deterrence strategy inward and outward.86 Wohlforth finds that the adaptive and the expansion models explain Russian and Soviet behavior over time. The three stages of the adaptive model are: perception of a new challenge and forced adaptation; success of adaptation for a generation or more; adaptation loses its competitive edge but because of path dependency there is a substantial lag between recognizing and addressing the problem.87 Wohlforth applies the expansion model to the Russian case: 1) the state adopts an expansionist bias inspired by its leader; 2) the new territory often turns out to be too costly to conquer; 3) after the successful conquest, the territory pays off in terms of security and wealth; and 4) in the long term, changing circumstances highlight the costliness of the conquest again.88

Neoclassical Realist Explanation for Russian Energy Companies’ Presence in CEE Neoclassical realists would predict that what really matters with regard to Russia’s propensity to expand is not so much its objective status in the balance of power, but rather the Russian foreign policy leadership’s prevailing perceptions about this status and the resources available for the Russian state. More specifically, the balance of power in CEE had experienced one major shift after the Cold War: in 1999, most of the region’s countries were admitted to NATO. However, the perceptions of the Russian foreign policy elite changed at a different pace. Moreover, the resources available for the Russian state fluctuated quite widely in this period between the total collapse of 1998 and the quick recovery of the post-2001 period, with the steady decline of 1992–98 being somewhere in between. The interaction of these two intervening variables combined with the change of Russia’s objective position in the balance of power would determine the timing and the intensity of Russian corporate expansion attempts. This prediction is indeed in accordance with what had happened. Russian energy companies’ activity in the CEE grew when the Russian state became more resourceful

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and more hostile towards Western institutions, yet was marginal when the state was weaker and/or more open vis-a`-vis the West. As of the means of expansion, neoclassical realists would argue that Russia seeks to enhance its power. Based on an assessment of the probability of conflict, Russia made a trade-off between short-term military preparedness and long-term economic capabilities, preferring the latter. Instead of a short-term military buildup, it would enhance its economic power through acquisitions in Central and Eastern Europe. Another explanation could be that in the post–Cold War world, the most costeffective way of gaining influence over Central and Eastern Europe is not by formal military, but by informal economic means. For Russia, the best way to enhance its international influence is to increase its economic, rather than military, strength at the moment. Neoclassical realist paradigm is best suited to explain the object of the analysis, Russian energy companies’ expansion into Central Europe. What really matters with regard to Russian energy companies’ propensity to expand into Central Europe is the Russian foreign policy leadership’s prevailing perceptions about the country’s status in the balance of power and the resources available for the Russian state.

3

Introducing the Independent Variables A country’s actions in the international system, according to neoclassical realists, are determined by the domestic perceptions of the international system and the level of state power available for the country’s leaders. First, a brief overview of how Russian leaders perceived their relative power in the international system from 1991 to 2008 will be offered. (A more detailed discussion of the issue appears in Chapters 4, 5, and 6.) Second, the methodology for studying state power is introduced. RUSSIAN PERCEPTIONS ABOUT RELATIVE POWER DISTRIBUTION For the first two years after the collapse of the Soviet Union, Russia still saw itself as an equal of the United States, and was comfortable with its foreign influence. That confidence was short-lived. Russia tried and failed to marshal Western support to protect Russian minorities in the Baltic countries. Moscow had wrongly believed that in exchange for its support of Germany’s unification, the West would not expand NATO to include its former Central European satellites. Central Europe, for the Russians, was the playing field in a zero-sum game; it had hoped to keep the region a demilitarized, neutral zone between Russia and the West. As the West gained influence in the region, Russia lost influence. As NATO enlargement became certain in the mid-1990s, it became clear that Russia was not an equal partner. In 1996, Foreign Minister Yevgeny Primakov placed Russia on a different course. Instead of issuing empty threats against NATO enlargement, he aimed to upset the balance set by the United States. For the next two years, he looked for ways to counter the changing balance of power in Central Europe. Primakov’s strategy failed. Between 1998 and 2000, Russian leaders saw their influence in the West at its lowest point since the end of the Cold War. In 1999, NATO formally admitted three former Soviet satellites. Moscow was unable to stop the NATO bombings of Serbia, its long-time ally. Seeking the presidency, Vladimir Putin spoke to a demoralized Russia about reviving its great power status. Once Putin became president, Russian foreign policy became more assertive. In 2003, an important foreign policy document declared that NATO was one of Russia’s potential enemies. While there was a short period between 2001 and 2003 when greater cooperation between the United States and Russia became a hot topic in both Washington and Moscow, it ended up reinforcing Russian perceptions about the

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25

country’s low relative power vis-a`-vis the West, especially the United States. Ever since, Russian foreign policy has focused on restoring the country’s great power status and influence in the world. STATE POWER A powerful state is one that can marshal its resources for its own purposes. A relatively poor country—such as North Korea—can conceivably be considered of high state power if it can mobilize its resources for the state’s purposes. A relatively rich country—such as Switzerland—can be considered to have low state power if it cannot do the same. State power has much more to do with the distribution of power within a country than with its GDP. Financial ratios—i.e., ratios that measure the state’s ability to collect revenues— are more applicable as proxies of state power than non-financial ones, because money is more fungible than any other good. That is to say, money’s applicability for promoting power is better than that of other sources of state wealth. This is especially true in cases in which state power is applied to foreign affairs; because in foreign relations, the state needs to be more reliant on its material power base than in domestic affairs, where it has many other, nonmaterial sources of power, such as legitimacy. In terms of financial ratios, the most comprehensive one to measure a state’s ability to collect revenue is recurring revenues as a percentage of GDP. The numerator of this ratio shows all proceeds that a state collects regularly; that is the amount of revenue it can count on collecting next year, as well. Obviously, there are other sources of revenue—for example, privatization income or concession fees—but these are nonrecurring items, which obviously cannot be considered bases of stable power. The denominator is the total domestic value added produced. Consequently, the proposed ratio approximates how much money a state is able to capture regularly from all the money made in the country. As Russia does not use recurring revenues as a category in its national account nomenclature, I try to use an available and relatively reliable proxy instead, namely total tax revenues. Tax revenues are recurring to a large extent and cover most recurring items, such as personal income tax, corporate tax, VAT, customs, excise taxes, levies, etc. Moreover, tax revenues as a percentage of GDP have been used widely in the post-Soviet Russian studies literature to measure the state’s reach in the economy. How tax revenues as a percentage of GDP have changed in post-Soviet Russia is detailed in Table 3.1.1 As shown in both Table 3.1 and Figure 3.1, the Russian state’s material base declined sharply from 1992 to 1993, had been steady from 1993 to 1996, dropped even lower between 1997 and 1998, started to climb back in 1999 and 2000, and came back to 1992 levels only in 2004, and stayed at this very high level (or even higher) afterwards. An increasing number of scholars and analysts argue that Russia is in effect a petrostate. Fiona Hill writes,

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Table 3.1 Evolution of Russian Federal Tax Revenues

Year

Federal tax revenues as percentage of GDP, %

1992

20.3

1993

14.5

1994

14.4

1995

14.2

1996

14.6

1997

10.8*

1998

9.2*

1999

12.8*

2000

15.5*

2001

17.6

2002

17.1

2003

19.6

2004

20.4

2005

23.4**

2006

24.5**

2007

23.6**

*Ministry of Economic Development and Trade, Ministry of Finance, Economic Expert Group, Goskomstat **Vedi Russian Economic Development, http://www.vedi.ru Source: World Bank

[O]ne of the prevailing theories behind the decline of the Soviet economy that ultimately led to the collapse of the USSR is that it was precipitated by an oil production decline, combined with both a dramatic drop in world oil prices after record highs in the wake of the 1970s OPEC oil embargo, and by the mismanagement and misuse of oil resources.2

In prosperous years, according to this theory, the petroleum industry accounts for a very large portion of the country’s GDP and, more importantly, for the bulk of the state’s discretionary income. Thus, proceeds from the petroleum industry determine the Russian state’s ability to mobilize resources for its own purpose. This would suggest that the performance of the petroleum industry would serve as the best measurement for state power in Russia. There have been many studies on the extent to which the recent upswing in oil prices and Russia’s oil output drove the country’s recovery. At this point, the only real question is whether the petroleum industry was the one of the most important factors in this change, or actually the only driver.

INTRODUCING THE INDEPENDENT VARIABLES

27

Figure 3.1 Federal Tax Revenues as Percentage of GDP

Most of the petroleum-related state revenues in the Russian Federation are taxes based on revenues, not on profits, the most important being export tariffs, extraction royalties, mineral replacement taxes, and extraction taxes.3 To track the evolution, but not the actual amount, of petroleum-related taxes, the industry’s revenues have to be tracked first. Though data may be unavailable for the industry’s total revenues, one can estimate how much the industry would have collected if it sold every drop of oil and natural gas at market price. I call this ‘‘the theoretical revenue,’’ as these companies do not use market prices in all transactions, and most sales actually involve subsidies. This approach makes it possible to outline the evolution—the ups and downs—of total revenue, yet it does not give a good clue of the absolute level of the Russian state’s revenues from this industry. Figures 3.2 and 3.3 show the evolution of market prices for Brent crude oil and natural gas. (Prices are listed at EU cif parity. Most of the Russian petroleum industry’s sales take place in the EU).4 All data and later calculations are converted to 2006 USD to filter out the impact of USD inflation. As the charts show, prices varied widely during the period, with an abyss in 1998 and 1999, and a spectacular peak in 2006. For the development of total production (crude oil and natural gas) in Russia see Figures 3.4 and 3.5. As shown in these charts, the Russian oil industry experienced a major slump in output in the early to mid-1990s, from which it did not recover until after 2000. Natural gas output, however, remained very stable throughout the period. The combined effect of changes in price and production can be seen in Figure 3.6. This depicts the total development of the theoretical revenue of the Russian

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POWER, ENERGY, AND THE NEW RUSSIAN IMPERIALISM

Figure 3.2 Evolution of Crude Oil Price

Figure 3.3 Evolution of Natural Gas Price

INTRODUCING THE INDEPENDENT VARIABLES

Figure 3.4 Russian Oil Production Source: BP Statistical Review of World Energy, 2007

Figure 3.5 Russian Natural Gas Production Source: BP Statistical Review of World Energy, 2007

29

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POWER, ENERGY, AND THE NEW RUSSIAN IMPERIALISM

Figure 3.6 Total Theoretical Revenues of Russian Petroleum Industry

Figure 3.7 Comparing Federal Tax Revenues and the Petroleum Industry’s Theoretical Revenues

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31

petroleum industry, taking into account both oil and natural gas. It is not the absolute level of these proceeds, but their changes over time that are of interest here. Thus, the data is indexed according to the 1992 level (1992 = 100). As Figure 3.7 shows, from 1992, the development of the industry’s theoretical revenue has had a strikingly similar pattern to that of the ratio of the Russian state’s tax revenues and the country’s GDP. The correlation between the two data series stands at 88 percent. The similarity can be explained by the fact that most of the revenues the Russian state collects from the petroleum industry are tax revenues. Those tax revenues make up a large part of the total taxes collected. The petroleum industry accounted for a quarter of total federal revenues in 1998, and ‘‘contributed to half of total revenue gains in the post-crisis period.’’5 This finding may help support the notion that Russia has been a petrostate since 1992, but the intricacies of the relationship between these two ratios is beyond the scope of this analysis. While the two ratios depicted in Figure 3.7 follow a similar trajectory, there is some divergence between 1998 and 2000, and a significant one after 2003. In the latter case, oil and natural gas prices shot up sharply; state tax revenues did not follow so closely. Between 2003 and 2006, the petroleum industry’s theoretical revenues grew by 140 percent, while tax revenues increased by only 24 percent. This suggests that even the most spectacular price hikes are insufficient to lift up the entire Russian economy and state. While theoretical revenues in the petroleum industry provide a good proxy for state power, they seem to exaggerate its ups and downs. Thus, this analysis uses the more comprehensive variable, tax revenue as percentage of GDP, to measure state power. PREDICTIONS BASED ON THE HYPOTHESES My hypotheses of how Russian leaders’ perception of Russia’s foreign influence and Russian state power relate to the expansion of Russian energy companies in Central Europe are found in Tables 3.2 and 3.3.

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Table 3.2 Predictions for the Propensity of Russian Energy Companies to Expand in Central Europe I State power

Russian leadership’s perception about Russian influence in the world

High

Medium

Low

Low

Expand

Expand

Don’t expand

Consistent with expectations

Don’t expand

Don’t expand

Don’t expand

High

Don’t expand

Don’t expand

Don’t expand

Table 3.3 Predictions for the Propensity of Russian Energy Companies to Expand in Central Europe II Russian leadership’s perception about Russian influence in the world

State power

Predictions on the behavior of Russian energy companies in Central Europe

1991–1993

Consistent

High

Do not expand

1993–1996

Low

Medium

Do expand

1996–1998

Low

Low

Do not expand

1998–2000

Low

Low

Do not expand

2000–2004

Low

High

Do expand

2004–2008

Low

High

Do expand

4

Planting the Seeds: Russian Energy Companies’ Expansion in Central Europe in 1991–2000

PRE-PHASE: GORBACHEV ERA AND THE COLLAPSE OF THE SOVIET BLOC: 1985–1990 In November 1968, after the invasion of Czechoslovakia, Leonid Brezhnev outlined the so-called Brezhnev Doctrine, noting that the sovereignty of any of its satellites could not be ‘‘opposed to the interests of the world of socialism, of the world revolutionary movement . . . The weakening of any of the links in the world system of socialism directly affects all the socialist countries, which [we] cannot look indifferently upon.’’ According to the doctrine, the Soviet Union would suppress, by force if necessary, any attempt that would risk either the communist establishment in their satellites or those countries’ loyalty to the Soviet empire. Nearly 20 years later, in June 1988, Mikhail Gorbachev marked the end of the Brezhnev Doctrine. In a speech before the XIXth Congress of the Communist Party, he called the enforcement of a social system, lifestyle, and politics on other countries, particularly by military force, a ‘‘dangerous practice of our near past.’’ In December of that year, Gorbachev announced that Central and Eastern European countries could enjoy ‘‘freedom of choice’’ in their domestic affairs, though he insisted on maintaining a disciplined coordination on foreign policy and security issues.1 By that point, the changes in Central and Eastern European countries had taken on a nearly unstoppable momentum. The Soviet Union expected to maintain a loose military and, to a lesser extent, economic alliance. That goal became unreachable after the dissolution of the Warsaw Pact. Afterwards, Russia tried to turn Central Europe into a neutral and demilitarized buffer zone between itself and the West. In November 1989, after the fall of its communist regime, Czechoslovakia became the first satellite to demand a withdrawal of Soviet troops. Three months later, in February 1990, Gorbachev and Czech president Vaclav Havel agreed that a majority of troops would leave by the end of May. A complete withdrawal was scheduled for July 1991. Hungary signed an agreement on March 10, 1990, with the same timeline. Poland signed an agreement in October 1991. There were greater complications

34

POWER, ENERGY, AND THE NEW RUSSIAN IMPERIALISM

with troop withdrawals from East Germany. A majority of troops was to leave by November 1992. A complete withdrawal was scheduled for December 1993. At that point, the two major organizations of the Eastern Bloc—the Warsaw Pact and COMECON—still existed, and in the late summer of 1990, Poland, Hungary and Czechoslovakia agreed to coordinate their steps with respect to these organizations; in September, the three countries’ defense ministers met in a Polish town, the first time they had done so since 1945 without any Soviet representative present. Later, the foreign ministers met in Budapest, where they agreed to demand the dissolution of the Warsaw Pact. In February 1991, their prime ministers met in Visegrad, a small town outside Budapest, and adopted the name of the Visegrad Group. With newly earned confidence, they forced the Soviet Union to dissolve its military organization in April 1991. The Warsaw Pact started coming apart in July; the COMECON countries agreed to end their organization in September. EARLY ATLANTICISM: 1991–1993 Perceptions and State Power Between 1991 and 1993, Russian foreign policy was focused on building a strong relationship with the United States. According to most Russian foreign policy experts of the time, although the Soviet Union had lost the Cold War, it still enjoyed great military might, and this put it on par with the leader of the West. Foreign Minister Andrei Kozyrev, who argued for an Atlanticist foreign policy, was a key figure in giving credence to this illusion. Until this illusion of equality was possible to maintain, Russian leaders were more or less content with their country’s influence vis-a`-vis the West. Though the economy was no longer under full central control, the state still enjoyed power over most sectors. The inflow of tax revenues had held out for a short while and had accounted for more than 20 percent of the GDP in the same year, a record that Russia was unable to match again until 2004. By 1993, however, tax revenues collapsed to 14.5 percent of the GDP. Between 1991 and 1993, the degree of state power was arguably higher than at any other period in the next decade. As Table 3.3 showed, when Russia’s leaders perceive Russia’s influence vis-a`-vis the West to live up to their expectations, their energy companies will not attempt to expand into Central Europe, even if Russia possesses enough state power to mobilize the necessary resources to do so. Russian Foreign Policy toward Central Europe Between March 1988, when Gorbachev signaled that the Brezhnev Doctrine was over, and the end of 1993, Central Europe virtually disappeared from the Russian radar. Moscow had no significant message for its former satellites, and between 1991 and 1993, Russia gradually withdrew from the region. In a February 1992

PLANTING THE SEEDS

35

document entitled ‘‘The Transformed Russia in the New World,’’ Kozyrev highlighted the basic pillars of the new Russian foreign policy and listed Russian interests in various regions, but he did not mention Central Europe once.2 It was seen as a strategic no-man’s-land, under neither Western nor Russian predominance. Throughout 1992, there were several attempts to correct Kozyrev’s Atlanticist approach, as even Russian liberals had criticized the foreign minister’s ‘‘infantile pro-Americanism.’’ Arguably, the most significant one appears in a document issued by the Council on Foreign and Defense Policy in August.3 The council was evidently concerned with Russian interests in various parts of the world and mentions the possibility of Central European countries joining NATO and the European Union. The document is vague in describing exactly what consequences such developments might bring, but warns that it could result in Russia’s isolation in Europe. Still, the council seemed to see the result of Central Europe’s eventual alliance with the West as minimally destructive. ‘‘They are aiming towards the West, distancing themselves from Russia in geographic terms, and do not possess resources and technologies that could fully facilitate Russian rebirth. As a result, attempts to place these countries in the first row of the priorities of Russian politics are not realistic.’’4 The region, according to the conventional wisdom of the time, was simply not important for Russia. It was neither a source for economic opportunity nor a security threat. That said, it did single out as ‘‘the most important countries for Russia . . . Poland and maybe Bulgaria (and Slovakia may be added)’’ due to their ‘‘geopolitical situation.’’5 By December 1992, the Russian government had adopted only one goal in the region: ‘‘to prevent Eastern Europe from transforming into a buffer zone which would isolate us from the West.’’6 It was a grand statement, but there were no specific policies that supported that aim. There are several reasons, besides Russia’s concentration on its relationship with the United States, for its neglect of Central Europe. Central Europe was relatively poor compared to Western Europe. It worked outside of existing Western structures and was therefore irrelevant to any Russian plans to integrate it into the world economy and join political organizations that would have given Russia the power it sought. Moscow was also hesitant to exercise any power in the region for fear of alienating Western powers who may have viewed any such attempts as a return to the Brezhnev Doctrine.7 But criticisms of Kozyrev’s unconditional Atlanticism had an effect, and Russia gradually shifted its approach. In April 1993, President Boris Yeltsin approved the Foreign Policy Concept. It stated that Russian and Western interests could potentially differ, particularly in Central and Eastern Europe. 8 Russia must avoid international isolation, according to the doctrine, which it could do only by approaching Western security structures and Central Europe at the same time. Russia wanted a pan-European security system, to which NATO would be subordinated, and of which it would be a part. 9 The honeymoon was over. Russia started to become dissatisfied with its influence vis-a`-vis the West, the first major point of dissatisfaction was Central Europe’s fast integration into Western structures.

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Diplomatic Relations Relations between Russia and Central Europe in the first two years of the postcommunist era were restricted to technical matters. Several treaties, focusing on the withdrawal of Soviet troops and the repayment of Soviet-era debt, attempted to close a door on the communist past. The withdrawal of the troops was smooth, peaceful, and relatively quick, especially considering the many Russian troops that were still stationed in CIS countries. The countries concluded agreements on repaying Soviet-era debt relatively smoothly as well. That said, the repayment of the debt did not go that smoothly, but lasted for over a decade. Russia signed treaties with the future Visegrad Four (Poland, Hungary, Slovakia, and the Czech Republic) that intended to break with the Soviet past. In each treaty, Russia did not demand anything specific from any of the signatories; its only goal was to demonstrate toward the West that it was a mature country that hoped to build stable relations with its former satellites. Gorbachev was heavily criticized in the Soviet Union for agreeing to the dissolution of the Warsaw Pact, and Moscow found itself changing tactics in the middle of treaty negotiations. Applying the Kvitsinsky Doctrine,10 Russia tried to place so-called ‘‘security clauses,’’ which prohibited any one party from joining security organizations any other party would consider counter to its interests, in each treaty it signed with the Central European countries. The Visegrad Four maintained a well-coordinated alliance against the plan, and the initiatives failed. Russia signed basic bilateral treaties with Hungary in December 1991, Poland in May 1992 and what was by then the Czechoslovak Federation in April 1992. Hungarian prime minister Joseph Antall wanted to place a paragraph in the preamble of the Hungarian-Russian treaty denouncing the Soviet invasion of Hungary in 1956. Gorbachev disapproved; Yeltsin did not. By way of compromise, they agreed that the two countries’ foreign ministers would exchange letters on the matter and the correspondence would be attached to the treaty. More than a year later in January 1993, when the treaty was submitted to the Russian Duma for ratification, the letters were not included. 11 Laszlo Poti, a scholar of Hungarian-Russian relations, claims the real cause of the delay had less to do with that specific issue, as it did, indirectly, with frustration with Kozyrev. A strong desire that the new Russia not be held accountable for the crimes of the Soviet Union prevailed. An apology for the suppression in 1956, many feared, would serve as a precedent for many others. Russia finally ratified the treaty with Hungary in early 1995. Hungarian-Russian relations in this period were particularly notable. In the midst of a coup attempt in August 1991, Antall was the second foreign leader to call Yeltsin and offer his support. A grateful Yeltsin 12 visited Budapest in November 1992, bringing with him two Hungarian paintings that had been looted by Soviet troops in 1945. The two paintings were far from the greatest treasures Hungary lost in World War II, but the symbolism of Yeltsin’s gesture was greatly appreciated. Yeltsin and Antall signed seven agreements during the visit, the most important being the ‘‘zero solution.’’ Originally, Moscow had asked for compensation for

PLANTING THE SEEDS

37

certain buildings in Hungary it claimed were Soviet investments, though the former satellite felt the costs of the buildings were equal to ecological damages wrought by the Soviet Union. The dispute had been so intense that General Burlakov, the commander of the Soviet troop withdrawal from Hungary, threatened to decelerate and even halt the pullout.13 Yeltsin called for a ‘‘zero solution,’’ which stated that neither state would be indebted to the other. Yeltsin also agreed to establish a Committee for Restitution to restore art treasures looted from Hungary during World War II. The Russian president then gave a speech to the Hungarian parliament on the 1956 uprising. ‘‘[T]en years after the liberation of Hungary by the Soviet army from fascism one dictatorship was followed by another,’’ he said. ‘‘[W]e bow to the memory of the victims of 1956.’’14 In August 1993, seven months after Czechoslovakia split into the Czech Republic and Slovakia, Russia signed new treaties with the two successor states. By that time, Russia’s foreign policy strategies had changed significantly since it had signed a treaty with the former Czechoslovakia. The two countries signed two different treaties with Russia. The Russian-Slovak treaty called for the two parties to respect the Conference on Security and Cooperation in Europe (CSCE) and to ‘‘assist in the creation of a unified all-European space in all of its dimensions.’’15 The Czechs avoided any similar wording. The Slovak-Russian treaty was the first diplomatic success of the new Russian foreign policy in Central Europe. Slovakia was perceived as the one Central European state least resistant to Russian pressure.16 In this period, Russia had a high level of state power as measured in the percentages of tax revenues to GDP. In fact, this was the highest level the Russian state had achieved throughout the 1990s. Yet, Moscow was content with its relative influence vis-a`-vis the West. As a result, Russian energy companies did not have any meaningful moves to expand in Central Europe. FACING NATO ENLARGEMENT: 1993–1996 Perceptions and State Power In 1993, after the Atlanticist course seemed to have failed, a new approach was introduced. Moscow instituted a more assertive foreign policy that was increasingly suspicious of the West. Since the beginning of the post-Soviet period, Russia had been afraid of a new ‘‘cordon sanitaire’’ of Central and Eastern European countries allied with the West that would leave it isolated. The West’s openness to NATO accessing former Soviet satellites was particularly difficult to accept. Russia invested much diplomatic energy into trying to outmaneuver NATO by replacing it with CSCE, and later on with OSCE. Both initiatives failed. In 1994, the First Chechen War broke out. Despite Russia’s insistence that the war was an internal matter, the conflict became a major embarrassment for Russia in its relations with the West. Taken with the problems of NATO enlargement, Russia saw its place in world affairs slipping.

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As of state power, tax revenues accounted for just above 14 percent of the GDP between 1994 and 1996 (see Table 3.1. in Chapter 3), suggesting a decrease in state power from the previous period of 1991 to 1993, but still greater than the following three and a half years, from Yeltsin’s reelection in 1996 to the end of his presidency in December 1999. When the Russian leadership perceives itself enjoying little influence in the West, and the state has enough power to mobilize necessary resources, Russian energy companies will try to expand in Central Europe, as shown in Table 3.3.

Russian Foreign Policy toward Central Europe In 1993, Russia shifted from neglecting Central Europe to making it central to its foreign policy. According to Irina Kobrinskaia, an expert in Russian-Central European relations, the change was marked by a letter Yeltsin sent to Western countries in 1993 noting Russia’s opposition to NATO enlargement; Russia’s motivations in dealing with Central Europe entirely sprung from its fears of NATO and its concerns with rising Western power. 17 Between 1993 and 1997, the question of NATO enlargement hovered over every discussion about Central Europe. During his visit to Warsaw in August 1993, Yeltsin said he understood Poland’s desire to join NATO. It was not a gaffe; the statement found a place in a joint declaration between the two countries released at the end of the meeting. Three weeks later, Russia sent a letter to Washington and other Western capitals, retracting the Warsaw statement. Yeltsin expressed his disapproval of NATO enlargement, noting that it would be extremely difficult for the Kremlin to explain the move to the Russian public. NATO enlargement, Yeltsin claimed, would alienate the Russian public from maintaining its current friendly approach in foreign policy. Though Yeltsin said he would be interested in NATO and Russia enjoying closer relations, he feared that if Central European countries joined the organization, Russia would not be able to enjoy a security zone where it could enforce its special interests. While Yeltsin’s letter dealt with the future of Central European security, the Kremlin did not send it to any Central European capital. It neglected to notify its Polish counterparts about the changes in the joint Polish-Russian declaration. The contradiction between Yeltsin’s statement in Warsaw and the content of the follow-up letter illustrates the confusion Russia felt thanks to the speed of NATO enlargement. Russia still considered Central Europe as part of its sphere of influence. It is also striking that Moscow continued to view the West as its negotiating partner in deciding Central Europe’s position. During the NATO enlargement process, Russia’s primary concern was not the future position of Central Europe, but the West’s increasingly greater influence compared to that of Russia. Russia viewed NATO enlargement as the embodiment of the changing balance of power. Despite its retraction from the joint Polish-Russian communique´, Russia’s first reaction to NATO enlargement was muted, suggesting that it did not believe it would occur in the near future. It did not believe that the West would risk its

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relations with Russia by making a decision so obviously detrimental to Russia’s perceived interests.18 Throughout the first round of negotiations dealing with NATO enlargement, Moscow negotiated mostly with Western countries. Russian foreign policy analysts understood that Central Europe was not inclined to ally itself with Russia, and that Russia was not strong enough to coerce them to do so. Russia’s stated objective was only to keep these countries neutral and free of ‘‘excessive’’ Western influence. After the siege of the Moscow White House in October 1993, Russia began to reconsider its view of NATO enlargement. In 1994, Russian diplomats tried to encourage the replacement of NATO with CSCE as a pan-European security organization. Foreign Minister Kozyrev floated the concept in a February 1994 speech, suggesting that NATO would serve as a supplementary military organization to the CSCE.19 Moscow’s behavior at CSCE summits and its disregard of the organization when it appeared to contradict Russia’s interests undermined the credibility of the endeavor. The CSCE initiative went nowhere for three years. The influential Council on Foreign and Defense Policy went further than simply rejecting NATO membership for the Central European states. In its report ‘‘Strategy for Russia 2’’ issued in May 1994, the council agreed with previous assessments that NATO’s eastern expansion was not in Russia’s interests and recommended that the West should offer the Central European states the option of joining the European Union instead of NATO, arguing that EU membership would satisfy their desire to integrate into the West.20 (The report did not recommend approaching the Central European countries directly, but did recommend bargaining about their new positions with the West.) The council’s report paralleled other foreign political discussions regarding Russia’s military isolation and did not consider Central Europe’s possible importance for Russia’s economy. It categorically rejected NATO enlargement, but its alternative recommendation was unrealistic, as it was not within Russia’s power to decide the borders of the EU. At most, Moscow could only object to NATO expansion. The Kremlin started to realize that NATO enlargement was inevitable by the end of 1994, and it began a diplomatic offensive to minimize fallout from the change. It held secret negotiations with Washington in order to gain security compensation in exchange for its acquiescence to NATO enlargement. The negotiations were leaked, causing severe political turbulence in Moscow. Discussions ended, and the Kremlin later denied they ever occurred. The council issued another report on Russia’s relationship to NATO in May 1995 in which it acknowledged the inevitability of the organization’s enlargement but emphasized the difficulties the process would entail. The council recommended that Moscow highlight these problems in its discussions.21 In the spring of 1995, Moscow again began a new phase in its approach to NATO enlargement. Employing the Council on Foreign and Defense Policy’s report ‘‘Russia and NATO,’’ Moscow altered its rhetoric, emphasizing the problems of enlargement. Moscow hoped to make NATO enlargement a divisive issue, thus decelerating its completion. ‘‘The special role Russia played in the crisis in South Eastern Europe, which the Western

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POWER, ENERGY, AND THE NEW RUSSIAN IMPERIALISM

powers acknowledged as well, made Moscow try to use its regained and accepted great power status to attempt to bargain about the future of the integration of the East Central European region.’’22 By leveraging its role in the Balkans, Russia tried to influence the course of NATO enlargement. Moscow did not succeed in slowing down NATO enlargement and turned the Visegrad countries into scapegoats for its failures. Diplomatic relations between Russia and the Visegrad Four practically ceased to exist. However, before NATO enlargement became a major issue, a few scholars had pointed out the significance Central Europe might play in Russian foreign policy. Besides security issues, Andrei Zagorsky pointed to the fact that Russia’s major infrastructure and economic potential was centered in its European region; Russia could not afford to ignore this reality. 23 Russia needed Central Europe, if for nothing else, as a transit area to Western Europe. Alexander Bykov said that the existing economic structures made Central Europe’s early attempts to turn its back on Russia untenable. Besides, Western Europe was not prepared to fully open its markets to these countries.24 Both increased the chances of the potential role Russia could play in the region. Diplomatic Relations There was one noteworthy diplomatic contact between Central Europe and Russia between 1993 and 1996. In 1995, during the administration of Prime Minister Gyula Horn, a former Hungarian Politburo member and the foreign minister of the last communist government, Hungary took over the rotating presidency of OSCE, the successor organization of the CSCE. Horn’s government, the first excommunist administration since the end of the Cold War, was populated with former Communist Party officials. During Horn’s visit to Moscow in March 1995, Yeltsin said that Russia had exceptionally good relations with Hungary compared to other states in Eastern and Central Europe. The two leaders exchanged ratifications of the treaty the two countries had signed more than three years before. In the same month, on his way back from Geneva to Moscow, Kozyrev stopped to brief Hungarian leaders about his negotiations with U.S. secretary of state Warren Christopher. It was an unusual stopover and was widely attributed to Hungary’s status as chair of the OSCE. In 1995, Russia still hoped to elevate the role of the OSCE over NATO. As soon as the Hungarian presidency was over, Budapest fell out of the Russian diplomatic calendar. For the most part, Russia had very few diplomatic contacts with the rest of Central Europe during these years.

Conduct of Russian Energy Companies in Central Europe Though diplomatic relations between Russia and Central Europe were minimal, Russian energy companies enjoyed substantial activity in the region between 1993 and 1996. Armed with considerable support from the state, the Russian gas monopoly Gazprom made inroads into Poland, Hungary, and Slovakia.

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Poland Gas Contract In 1993, Poland, like several other European countries had feared that Russia would discontinue its gas shipments. Anxious to secure a long-term deal that would ensure gas supplies to the country, the government of Hanna Suchocka concluded a deal with Russia in September, during the last week of her government’s rule. The agreement entered the public discourse as the ‘‘gas contract.’’ Moscow and Warsaw agreed on the quantity of Russian gas shipments to Poland for the next 25 years, to set up a joint venture, and to build the Yamal pipelines to transfer Russian gas to Germany through Poland. Poland agreed to accept 250 billion cubic meters of gas above existing quantities from Russia. Long-term contracts for gas deliveries are common in the industry, as they minimize risks for suppliers and consumers. The 1993 agreement was first amended in September 1995, when the two countries decided to set a slightly lower amount of Russian gas that would be delivered. It had by that point become clear that the initial estimates of the growth in demand for gas in Poland had been too optimistic. The Polish economy had not developed as quickly as many had expected it would during the 1990s; gas had not replaced other energy sources. Suchocka had signed the 1993 agreement due to a fear of natural gas shortages, but her overestimation of Polish gas requirements put future governments into a disadvantageous negotiating position with Russia. The 1995 agreement stated that the 250 billion cubic meters of gas would be delivered not above the existing quantities, but altogether.25 It was assumed that the details of gas imports would be worked out by companies, not governments. In 1996, the Polish gas company PGNiG and Gazprom agreed to supply 250 billion cubic meters of Russian natural gas to Poland over the next 25 years, until 2020.26 Gazprom would deliver the first 6 billion cubic meters in 1997.27 Russian gas would be delivered via the Yamal pipeline, the first pipe providing 2.88 billion cubic meters. The second pipe would deliver the remainder, which could be as much as 11 billion cubic meters. The contract prohibited Poland from reselling the gas to a third partner and included a take-or-pay clause, requiring Poland to pay for the entirety of the gas delivered even if it was not entirely consumed.28 There was a certain flexibility in the yearly taking of Poland in the contract. This allowed it to avoid the take-or-pay paragraph. Poland would take the smallest possible amount allowed in the contract from Russia with a yearly early notice to the supplier. It would take the rest of its gas from the Ukrainian spot market. If it failed there, it still had the option to buy the rest from the flexible part of the longterm agreement.29 Neither the agreement between the Russian and Polish governments nor the contract between PGNiG and Gazprom were made public at the time. Only the negotiators knew the actual terms of the deal. The two documents served as the cornerstone of gas deals between Russia and Poland; Gazprom and the Kremlin did not hesitate to exploit the situation. In 2002, the Miller government asked for a renegotiation of the gas contract.

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Polish-Russian Joint Venture A joint venture mentioned in the 1993 agreement was established in September of that year. According to the agreement, Europol Gas, responsible for transporting gas to Poland and to Germany through Poland, would build and own the Yamal pipeline system. Yamal would be operated by the Polish gas company PGNiG. The company originally had three owners: Polish Oil and Gas Company (PGNiG, 48 percent), Gazprom (48 percent), and Gaz Trading (4 percent), a private Polish company under the indirect ownership of the Polish oligarch Alexander Gudzowaty. Gazprom utilized a strategy of establishing joint ventures primarily for importing gas in the region. The joint ventures were usually half-owned by Gazprom and halfowned by one of the local natural gas companies. Europol Gas and Panrusgas in Hungary, which had third-party owners who were involved in the gas industry, were exceptions. In the early and mid-1990s, Gazprom established 18 joint ventures in foreign countries for importing Russian gas, eight of which were in Central and Eastern Europe. In some cases, Russia planned to use the joint ventures not only for the import of gas but also constructing new pipelines on the territories of CEE countries (see Table 4.1). In the early 1990s, Central and Eastern Europe feared that Russia might stop exporting gas, and joint ventures were welcomed as a guarantee of the uninterrupted flow. But the idea backfired. Before the establishment of joint ventures, Gazprom enjoyed a monopoly only in natural gas supplies. The joint ventures gave the Russian gas company monopolies over gas imports and, in case of the Polish-Russian joint venture Europol Gas, over gas transit through the to-be-built Yamal pipeline as well. ‘‘[Gazprom] gradually exploits formal measures (certain provisions in company articles, terms of gas contracts, etc.) and non-formal means (personal connections, pro-Gazprom lobbies) to gain the deciding vote,’’30 researcher Ewa Paszyc wrote. Poland’s woes are a case in point. It appeared that Polish companies had the controlling stake in Europol Gas, as PGNiG and Gaz Trading owned a combined 52 percent of the company. But Gaz Trading had a complicated ownership structure. Gazexport, the exporting subsidiary of Gazprom, owned 35 percent of the company. The Polish state gas company PGNiG had 30 percent. Wintershall, a German company, held 5 percent. A Polish company, Bartimpex, owned 25 percent. Weglokoks, a Polish coal company, had another 5 percent. As a result, the Russian state, through Gazprom, controlled 35 percent of the shares; the Polish state, through PGNiG, held only 30 percent. The Polish company Bartimpex cast the swing vote, deciding which side held sway in the company. Bartimpex was privately owned by Alexander Gudzowaty, the Polish oligarch, who initially acquired his wealth through Russian connections and his delivery of Russian natural gas to Poland. As a result, Europol Gas, the future owner of the Yamal transit pipelines, had a nontransparent ownership structure in which the interests of Gaz Trading were murky. Europol Gas’s only source of revenue was the fee paid by Gazprom for the transit of Russian gas through Polish territory. However, the transit fee on the Polish part of

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Table 4.1 Gazprom’s Joint Ventures in Central and Eastern Europe Company

Gazprom’s Share (%) Partners/Country

Year of Establishment

Year of Project

Europol Gas

48*

PGNiG (Poland)

1993

• Construction of the Yamal pipeline through Poland

Gaz Trading

35

PGNiG (Poland)

1993

• Import of Russian natural gas to Poland

Panrusgas

50*

Mol (Hungary)

1994

• Import of Russian natural gas to Hungary • Construction of the Hungarian part of a new transit pipeline to Italy

Progresgas

50

Petrol (Serbia)

1992

• Import of Russian natural gas to Serbia

Topenergy

50

Bulgargaz (Bulgaria)

1995

• Construction of a pipeline through Bulgaria to supply Serbia

Slovrusgas

50

SPP (Slovakia)

1998

• Import of Russian natural gas to Slovakia

Wirom

25†

Romgaz (Romania)

1994

• Import of Russian natural gas to Romania

*Higher than indicated because it owns a stake in one of the other minority shareholders. †Wirom is a 50-50 joint venture between Romgaz and Gazprom’s subsidiary, WIEH, in which Wintershall is the other equal shareholder. Source: Alexander Duleba, From Domination to Partnership: The Perspectives of Russian–Central– East European Relations (Final Report to the NATO Research Fellowship Program, 1996–98), 81; supplemented and modified by the author.

the pipeline was almost 50 percent lower than the transit fee Gazprom paid for gas transit in Germany.31 According to the gas contract, Poland was to receive less than 3 billion cubic meters of gas for its own consumption through the first Yamal pipeline. The remaining 29 billion cubic meters (out of its planned capacity of 32bn) was to be delivered to Germany. Paying a transit fee to the local country or one of its companies is a widely established practice in the industry. By establishing a joint

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venture, the Russian giant managed to pay this transit fee partly to itself. Gazprom enjoyed strong leverage over Europol Gas, as both the supplier of gas and the part owner of the joint venture. It was able to sit on both sides of the negotiating table to determine transit fees, which left Poland in a particularly disadvantageous position. Revenues from the fees were not high enough for the joint venture to build the Yamal pipeline itself, and thus it had to obtain loans. These problems had been built into the 1993 agreement, which had set up a nontransparent ownership structure, established a transit fee that would not be enough to pay for the construction for the Yamal pipeline, and did not guarantee an equal say for Poland in the company. Europol Gas was vulnerable to Gazprom from the moment of its inception. Yamal The 1993 agreement gave a general outline of a pipeline that would transport gas from the Western Siberian gas field, Yamal, to Poland and Germany. In 1995, Polish industry minister Marek Pol concluded an executive protocol to the 1993 agreement with Russia, determining the schedule for the construction of the Yamal pipeline. The Yamal system was to include two pipelines. The first would begin operations in 1997 with a capacity of 32 billion cubic meters per year.32 The construction of the second line was planned to be completed in 2001, with a projected capacity of 35 billion cubic meters. With the above deal, Gazprom scored several points. The deal gave Gazprom direct access to the Western European gas market, most importantly Germany, Gazprom’s largest European customer. Gas delivered through the Yamal pipeline was priced competitively in Germany, which would strengthen the Russian giant’s position in Western Europe.33 Also, previously more than 90 percent of the Russian gas that had been delivered to Western Europe had gone through the Brotherhood pipeline, via Ukraine.34 The Yamal pipeline decreased Russia’s dependence on Ukraine. Slovakia Slovak-Russian Joint Venture Gazprom’s annual turnover hovered around $20 billion in 2002, which was larger than the GDP of Slovakia.35 Slovakia imports most of its natural gas—in 2002, it produced 0.2 bn cm of natural gas and imported 7.9 bn cm from Russia—and its total imports amount to 1.35 percent of Gazprom’s production.36 The estimated value of SPP, the Slovak gas monopoly, was between $6 billion and $7 billion, barely more than a third of the Russian giant’s annual turnover.37 Geographically, Slovakia occupies a key place in the transit of Russian gas to Western Europe. At one time, there was no alternative route to Central and Western Europe for Russian gas, and before Yamal 1 became operational, an average of 80 percent of Gazprom’s natural gas exports to Central and Western Europe traveled through the country.38 This left the two countries interdependent. It was as important for Slovakia to receive the transit fees and the gas it consumed as it was for

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Russia to be able to offer a steady supply of natural gas to its customers further away in Western Europe. The political climate in Slovakia had been very favorable to Russia during the presidency of Vladimir Meciar. Between 1993 and 1998, Bratislava’s relations with the EU and the United States substantially weakened, and the country was referred to in the press as the ‘‘Central European island of Russia.’’ When Meciar visited Moscow in September 1998, just before the Slovak election, Yeltsin told him, ‘‘we in Russia are happy that you strongly stand by your security and friendly relationship with Russia in Europe . . . We very much want you to win the next election.’’39 The prospect of a joint venture between Gazprom and SPP, the Slovak gas monopoly, was first discussed in February 1995. Gazprom offered a ‘‘gas for food’’ model, whereby the Russian giant would use part of the money received from the sale of natural gas to buy Slovak goods that it would sell on the Russian market. Slovakia had at that point lost a great deal of its hold on Eastern European markets, and it was an attractive offer. However, for reasons discussed in the next chapter, the two sides did not agree to form a joint venture until April 1997, and the venture was not established until March 1998, at the very end of the Meciar administration. Hungary Hungarian-Russian Joint Venture After the Netherlands, Hungary is the most natural gas–dependent country in Europe. In 1999, gas accounted for 39.4 percent of Hungary’s total energy consumption, compared to the European average of 22.2 percent.40 In 2004, the share of natural gas in the Hungarian primary energy supply was 44 percent compared to the EU average of 24 percent.41 But as opposed to the Netherlands, Hungary relies heavily on natural gas imports. In 2000, Hungary imported 9.2 billion cubic meters of gas while it consumed altogether 11.5 billion cubic meters. In 2004, consumption grew to 14.06 billion cubic meters and import to 10.95 billion.42 In 2006, Russian natural gas made up 80 percent of the total natural gas import of Hungary. Russian gas imports arrive in Hungary via the Brotherhood pipeline from Ukraine. There is an alternative for Hungary to receive gas, via the Baumgarten pipeline that travels from Ukraine, Slovakia, and Austria. It appears, when one looks at a map of Europe, that Hungary is connected to the Western system of gas distribution. But whether the gas comes from Austria or Ukraine, it is essentially Russian gas. Gazprom set up a joint venture in Hungary similar to the one it formed in Poland. In May 1994, parliamentary elections were held in Hungary, which resulted in victory for the Socialist Party, the Communist Party’s successor. By October, a Russian-Hungarian joint venture called Panrusgas was established. Before then, Gazexport, Gazprom’s exporter, sold gas to a Hungarian intermediary company, Mineralimpex, which then resold the gas to Mol, the Hungarian gas monopoly. A new Hungarian law required Mol to take over Mineralimpex by December 31, 1994. The law did not detail other changes to the supply chain, but presumably Gazexport would be required to sell gas directly to Mol. Beginning in October, Gazexport sold

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gas to Panrusgas, Panrusgas resold the gas to Mineralimpex, which resold it to Mol. After December, Panrusgas replaced Mineralimpex in the natural gas supply chain as an intermediary between the Russian gas producer and the Hungarian gas monopoly. There was a significant difference between Mineralimpex and Panrusgas. Mineralimpex was 100 percent owned by Mol, but Panrusgas had several owners. Fifty percent was owned by Gazexport, a daughter company of Gazprom; 30 percent by Mol; 15 percent by a Hungarian company, DKG-East (Duna´ntu´li Ko¨olajipari Ge´pgya´r, i.e. Transdanubian Crude Oil Machinery Factory); and 5 percent by Mineralimpex.43 Theoretically, Panrusgas was 50 percent owned by Gazprom and 50 percent by Hungarian companies. However, Gazprom was the majority owner of DKGEast,44 and as a result, Gazprom owned 65 percent of Panrusgas, while Mol controlled only 35 percent. Among all the gas joint ventures established in the middle of the 1990s, Hungary’s was the most disadvantageous to the host country. The company’s short-term business plan was to serve as an intermediary between Gazprom and Mol, profiting from the mediation. It was named the official Hungarian counterpart to which Gazprom was to transfer gas covered by the long-term supply treaty between Russia and Hungary. The extra company did not add any real value to the supply; it was Gazprom’s insistence that led to its establishment. Reuters reported two years after Panrusgas was established that its creation was advantageous only for Gazprom, which sold Russian gas through Panrusgas to Mol at a profit.45 Later, Gazprom was able to achieve concessions for the joint venture that it would not have been able to achieve for itself. Panrusgas did not own property, pipeline, or equipment; its core operation was based on two contracts, one with Gazexport and the other with Mol, which have been valid since 1996 and was supposed to expire in 2015. The contracts authorized the delivery of 230 billion cubic meters of natural gas.46 Neither contract was ever made public, and the price for which Gazprom supplied natural gas to Panrusgas is not public information, though a senior official of the joint venture claimed the price of natural gas corresponds with market prices—yet it is unclear what market price he had in mind. Of all countries in the region, Hungary pays neither the most nor the least for Russian gas.47 A leading Hungarian expert believes that this is not true, for ‘‘Hungary pays 15–20% more for Russian gas’’ than Germany does.48 Panrusgas could have sold gas to whomever it wished if Mol did not have its wholesale gas monopoly guaranteed by law and own all large capacity pipelines in the country. If the monopoly had been terminated, Panrusgas could sell gas to any Hungarian customer. Panrusgas’s long-term objective was to build a transit pipeline through the Hungarian region of Transdanubia as part of a larger pipeline stretching from Russia to northern Italy. At the end of 1995, the Russian and Hungarian governments agreed on building the new pipeline before the end of the decade. The pipeline would have been owned by Panrusgas, in which the Russian and Hungarian sides would have equal shares, and operated by Mol.49 The new pipeline would have broken Mol’s gas transit monopoly. (It should be noted that EU laws required Hungary to terminate any gas transit monopoly as soon as it entered the organization, which

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eventually happened in May 2004.) The new transit pipeline might have endangered Mol’s wholesale position, as well. The CEO of Panrusgas, Megdet Rahimkulov, said that his company would be able to supply Hungarian energy providers and industrial customers in a 60–70-km vicinity of the transit pipeline. He added that gas from the transit pipeline would be 15–20 percent cheaper than that delivered by Mol to this part of Hungary.50 In an interview one month later, Rahimkulov reiterated Gazprom’s plans to supply Hungarian customers directly with Russian gas by the year of 2000.51 This prospect made Reuters call Panrusgas a Trojan horse in the Hungarian gas sector.52 The original contract that established Panrusgas not only gave Gazprom control over gas intermediation, but gave it the option of potentially entering the Hungarian gas transit business from a very strong position. Panrusgas conducted negotiations to deliver gas to Italy with Edison, an Italian company, but talks broke down by the summer of 1998, and the Russian company signed a contract with another Italian company, Snam, instead. The agreement did not cover the planned pipeline, which was taken off the table. Hungarian and Russian visions for Panrusgas differed sharply. The Russians saw the joint venture as a vehicle to gain a foothold in the Hungarian gas transit business. The Hungarians wanted it to promote exports, to regain some of Hungary’s lost East European markets; Gazprom had agreed to buy Hungarian products, mostly food and medicine, in exchange for supplying natural gas in excess of the quantity set forth in the long-term intergovernmental contract. But, during its first year of operation in 1995, Panrusgas bought Hungarian products that were collectively worth only 10 percent of its total revenue. Later that year, Mol increased its share in Panrusgas to 50 percent. In 1996, Panrusgas received the right to import 2 bn cm of gas from Russia in exchange for the Hungarian state’s participation in exploring the Yamburg gas field, a right that was originally reserved for Mol. Moreover, Panrusgas had been negotiating with local gas distributors in Hungary, thus circumventing Mol. It failed to come to any deal, but its efforts illustrated that it operated well outside of Mol’s control.

AGAINST A UNIPOLAR WORLD: 1996–1998 Perceptions and State Power The third phase of post-Soviet Russian foreign policy began with Yeltsin’s reelection in 1996 and ended with the financial crisis in the summer of 1998. Yevgeny Primakov replaced Andrei Kozyrev as foreign minister. Both men hoped to restore Russia’s global influence to the level it enjoyed during the Soviet era. But whereas Kozyrev hoped to establish a strategic partnership with the United States, Primakov, with an eye to ‘‘defend[ing] Russia’s national interests,’’ hoped to prevent the development of ‘a unipolar world under U.S. command.’ ’’53 China and India, Primakov said, could help provide a balance of power against the old Cold War rival.54

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NATO enlargement enabled the Western military alliance to deploy troops more quickly and closer to the Russian border than ever before. Primakov said that Moscow would continue to vigorously oppose NATO’s eastward expansion, unless Moscow was given a voice in the alliance’s transformation. ‘‘Only after that,’’ the foreign minister said, could anyone ‘‘tackle the question of whether or not to expand.’’55 During the period, state power declined sharply. Tax revenues made up 14.6 percent of GDP in 1996 and 10.8 percent in 1997, and fell to an abysmal 9.2 percent in 1998, meaning that within two years, tax revenues decreased by one-third. A small clique of oligarchs, who had financed Yeltsin’s reelection, gained power. The country grew desperate during the financial crisis of August 1998, when the Russian Central Bank sacrificed several billion dollars in reserves to strengthen the ruble—in vain; this marked the end of the liberal economic policies that had influenced the management of the Russian economy since 1992. As shown in Table 3.3, when Russia does not possess enough state power to mobilize the necessary resources, Russian energy companies will not try to expand into Central Europe, even when the Russian leadership perceives that Russia’s influence in the West is low.

Russian Foreign Policy toward Central Europe ‘‘We are talking about the unacceptability for us of expanding NATO’s military infrastructure up to the territory of Russia,’’ Primakov said in 1996. ‘‘If the new NATO members are fully incorporated into the alliance’s military systems—management, communications, reconnaissance, rear logistics, etc.—then NATO troops can be deployed there in a matter of hours. This possibility, though small today, will become a factor of uncertainty for us . . . A broad consensus has taken shape in Russia on the problem of NATO expansion . . . political forces of the most different orientations treat this idea equally negatively.’’56 In May 1997, Russia and NATO agreed to create the NATO-Russia Permanent Joint Council. For the Russian elite, the council allowed Moscow to accept NATO enlargement without losing face. The council would provide Moscow with regular access to NATO member countries. Not everyone welcomed the council, but though foreign policy experts continued to debate NATO enlargement, the issue ceased to shadow all foreign policy discussions, as it had done just two years before. When Poland, Hungary, and the Czech Republic were invited to start NATO accession in 1997, Russia finally decided to accept their incorporation and, further on, aimed to prevent any further enlargement of the organization eastward. New voices emerged that transformed the post-Soviet view of Central Europe. It was the first time the region found itself on the radar of the country’s leading strategists. ‘‘Russia has not yet learned to find the right tone in its relations with minor neighbors, specifically with the former Warsaw Pact allies and the former USSR republics,’’ Dimitrii Trenin said. ‘‘Geopolitics and geo-strategy still prevail in Russian foreign-policy thinking at the expense of geo-economics. In consequence of this,

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many situations are analyzed from the viewpoint of potential threats, and not from the viewpoint of possibilities being on offer.’’57 In a document released in February 1997, the Council on Foreign and Defense Policy58 acknowledged that Central Europe’s military, political, and economic integration into Western institutions was inevitable and would occur in the foreseeable future. Having been driven out from the region politically and militarily, the council said Russia had to act in order not to be cut off from the region economically as well. Russia may not serve the region as an alternative market to the European Union, but it still provided over 90 percent of Central Europe’s natural gas and provided a substantial part of the region’s demand for crude oil. Trade with the region fell sharply after the breakup of the Soviet bloc; only 14 percent of Russia’s overall trade was conducted with the region, while 40 percent was done with the European Union. The Karaganov report, as it was referred to, predicted that the Visegrad countries would be accepted into the European Union in 2005. In order to counter the region’s integration into NATO, the council said Russia should build up an economic presence in Central Europe before these countries become members of the European Union. With the exception of Slovakia, the council said that the political atmosphere in the region was unfavorably disposed toward an increased Russian presence. The report, entitled ‘‘East Central Europe and the Interests of Russia,’’ divided the countries of Eastern and Central Europe into two categories. The first category was made up of less developed countries, such as Bulgaria and Romania, that were more disposed toward Russian cooperation and that would join the European Union at a significantly later date. The second category was made up of more developed countries, like Poland and Hungary, which were less willing to work with Russia and would become members of the European Union sooner. The council called for Russia to increase its influence in the more developed countries, arguing that a strong economic presence in Poland and Hungary would be more valuable than maintaining an uncertain political influence in the Balkans. Foreign policy analysts had studied Russia’s possible economic role in the region in previous years, but the council’s document was the first major report to place greater emphasis on Russia’s economic role in Central Europe than its security concerns in the region. It stated that Russia’s economic influence in the region was as important as its military and political presence. Dmitrii Riurikov, Yeltsin’s counselor, said ‘‘the report lies on the desk of every state official in whose job description are relations with that region.’’59 Rem Vyakhirev, the head of Gazprom, held a press conference in Warsaw on January 19, 1998, echoing this approach. ‘‘[T]here is no reason to fear Russia or Gazprom. We are honest, friendly and interested in good relations with all our partners, although we can strike a blow should the need arise.’’60 Official Russian foreign policy seems to have taken the February 1997 report written by the Council on Foreign and Security Relations as a guideline for its future policies towards Central Europe. Moscow developed the concept of an asymmetric response, according to which Russia would respond to military expansion of NATO by economic expansion into Central Eastern Europe.61

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Diplomatic Relations Diplomatic relations with Central Europe were minimal. Russia raised the issue of making a transportation corridor between Kaliningrad and Belarus via Polish territory. The issue caused quite a turbulence in the Polish press. In an interview, Russian foreign minister Yevgeny Primakov said, ‘‘there has been no mention of any corridor and of an exterritorial corridor in particular. The point is to introduce, with Poland’s consent, the generally applied modes of transport from Russia through Belarus and Poland to the Kaliningrad district.’’62 The corridor issue continued causing tension throughout 1996. Russian-Polish relations were further strained by the so-called Oleksy affair. Jozef Oleksy was the prime minister of Poland between 1995 and 1996, when he resigned due to alleged connections to the Soviet intelligence service KGB. Moscow defended Oleksy and called accusations against him ‘‘dirty provocation.’’63 In the summer of 1998, President Kwasniewski was on an unofficial visit in Moscow, where he convinced Yeltsin to accept an invitation to Poland later that year. Kwasniewski expected a breakthrough in Polish-Russian relations.64 However, the financial crisis of 1998 rewrote his plans. In Slovakia, Russia perceived an opportunity to develop an alternative security alliance to NATO. Russia had actually made overtures with its security plan to the Baltic states, which refused to consider the option, but Slovakia was open to the possibility. The Slovak National Party, which was part of Meciar’s governing coalition, supported neutrality for Slovakia, as did Russian prime minister Viktor Chernomyrdin during his April 1997 visit to Bratislava. Slovakia never officially declared whether it would accept Russia’s security plan or remain neutral in East-West affairs; Russia considered either policy desirable. Meciar lost power in 1998 to Mikulas Dzurinda’s strongly pro-Western government, and Slovakia started to pursue a clear pro-NATO policy.

Russian Energy Companies in the Region From 1996 to 1998, Russian energy companies limited themselves to fulfilling contractual obligations negotiated in previous years. Gazprom employed its joint ventures to import Russian gas it essentially exported from Russia, but did not attempt to acquire new rights or assets. The construction of the Yamal pipeline continued as scheduled, according to Russia’s agreement with Poland. The Russian government and Gazprom did attempt one major development during this period: the establishment of a joint venture in Slovakia modeled after the Polish-Russian Europol Gas and the Hungarian-Russian Panrusgas. Negotiations began in 1995 but accelerated only after Chernomyrdin’s visit to Bratislava in 1997, when he signed an agreement with Meciar stating that Russia would provide Slovakia with natural gas between 1998 and 2008. The two countries also agreed to set up a gas transit route through Slovakia and to set up a joint venture between SPP and Gazprom.65 The deal was finalized in October 1997, and the new joint

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venture, Slovrusgas, was founded in March 1998, during Meciar’s final year in power. Slovrusgas had a registered capital of $1 million, with SPP and Gazprom each owning 50 percent of the company. As demand would vary based on changing weather conditions and the development of Slovakia’s gas industry, Slovrusgas received the right to import gas above the volume agreed upon in the long-term contract that lasted for 10 years. It tried to improve trade relations; Gazprom agreed to spend up to 40 percent of its revenues from gas sales on buying Slovak goods and services and selling them on the Russian market. The agreement signed between the two countries, along with the establishment of the joint venture, guaranteed that Gazprom would be the sole supplier of natural gas to Slovakia for 10 years. This made Slovakia, according to Slovak-Russian relations expert Alexander Duleba, ‘‘the only Visegrad country to be completely dependent on natural gas deliveries from Russia, at least until 2008.’’66 Soon after the joint venture contract was signed, it turned out that it gave up much more. In May 1998, Roman Vaclavik, director of the Economic, Commercial and Asset Management Division in Slovrusgas, said that if the inter-system connector pipeline (to be discussed in Chapter 5) that would have transited through Slovakia was built, the transit of gas through that pipeline would be handled by Slovrusgas.67 The Meciar government had effectively traded SPP’s biggest asset, its transit monopoly. In an interview with the Slovak weekly Trend in midsummer 1998, Jurij Komarov, a senior official of Gazprom, reiterated that the new joint venture would be involved in gas transit through Slovakia.68 It should be emphasized that Slovakia was the only country in which Gazprom attempted a major expansion between 1996 and 1998, when Russia’s state power was particularly low. It was the smallest and economically most troubled of all the Central European countries, and was more open to Russian investment and policies. It even flirted with opposing NATO accession. Still, though it achieved quite a few concessions from Slovakia in its establishment of a joint venture, Gazprom did not secure anything more than it had from Poland and Hungary years before. Even though the Russian Council on Foreign and Security Relations recommended Moscow to counter NATO’s influence in the Central European region by an increased Russian economic presence and the Russian leadership aimed at adapting the strategy, Moscow was not able to execute it because of lack of resources. While it had the will, it lacked the skill to do so. The Kremlin needed to wait a few years to have the necessary state power to counter the Western influence in the region economically.

INSTABILITY AND UNCERTAINTY: 1998–2000 Perceptions and State Power The financial crisis in 1998 dealt a major blow to Russia and to Yeltsin’s presidency. The run on the ruble and the enormous decline in real incomes

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undermined the legitimacy of the system Yeltsin and his supporters had been building through the 1990s. Anti-Western, especially anti-American, sentiment grew in Russia. According to a poll conducted by the Russian Center of Public Opinion in April 1999, only 39 percent of the Russian public maintained a positive attitude toward the United States, compared to 67 percent in December 1998. Thirty-three percent of Russians held a hostile attitude toward America.69 American consultants had helped privatize the Russian economy, and they, in turn, became one of the main scapegoats for Russia’s economic woes. Russian foreign policy reflected the anarchic mood of the period. Two major developments in Europe made Russians acutely aware of their country’s limited influence. In April 1999, Poland, Hungary, and the Czech Republic, following a decision made two years before, finally entered NATO. The arguably more painful lesson came during the Kosovo crisis. Russia demanded that NATO not intrude into Serbian affairs, but the military alliance ignored Russia’s warnings. The invasion of Kosovo was the lowest point in Russian-Western, especially Russian-American, relations in the first post-Soviet decade. It was widely resisted by the Russian public and interpreted as a betrayal of their country by America. Fears of losing further control of the members of the former Soviet bloc and its visible marginalization in world affairs led to feelings of defeat and confusion, as well as a loss of self-confidence. In 1999, reeling from the experiences of the Kosovo war, Russia revised its 1993 military doctrine (Basic Provisions of the Military Doctrine of the Russian Federation); this was the only major foreign policy document of the period. (Russian decision makers had not perceived the failures of the first Chechen war as justification for rewriting the doctrine.) The language of the document was harsh. It placed military and security concerns at the top of the Russian agenda, though it resulted in few specific reforms. It was an inarticulate expression of frustration with world affairs. Tax revenues made up only 9.2 percent of GDP in 1998. In 1999, proceeds were somewhat higher, at 12.8 percent. State power was substantially lower in 1998 and 1999 than at any time before 1997. During these two years, state power was at its lowest in the entire examined period between 1991 and 2008. When Russia does not possess enough state power to mobilize necessary resources, Russian energy companies will not try to expand into Central Europe, even when Russian leadership perceives its influence in the West to be limited (see Table 3.3).

Russian Foreign Policy toward Central Europe The last two years of the Yeltsin presidency found Russian foreign policy decision making in disarray. The collapse of the ruble and events outside of Russia, NATO enlargement, and Kosovo intervention put Russia off track. It was unable to develop a clear official foreign policy toward any country of primary importance, and it is unsurprising that it could not develop a clear strategy regarding Central Europe, either. In terms of world affairs, Moscow remained reactive, and because of the lack

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of state power, in terms of money to be able to mobilize and the prevailing chaos in the political establishment, it was unable to act according to its perceived interest. Diplomatic Relations Diplomatic relations between Russia and Central Europe reflected the uncertainties and unpredictability of Yeltsin’s final years in office. As there was no coherent policy regarding the region, Moscow became especially sensitive to steps taken by each Central European country. Relations with Poland and Hungary became tense and confrontational and shadowed by scandals. Relations with Slovakia were not as poisonous, but they were still more troubled than in any other period since the end of the Cold War. A climate of distrust and misunderstanding made this arguably the worst period in Central European relations during the post-Soviet era—‘‘the little ice age,’’ in the words of some commentators. Poland On January 20, 2000, in a major shock to Moscow, Poland expelled nine Russian diplomats for spying. The Russian Foreign Ministry called the move unfounded and accused Poland of complicating relations. The following day, Moscow expelled nine Polish diplomats in retaliation; a statement from Jacek Niedzielski, the first secretary of the Polish embassy in Moscow, claimed the act was completely unjustified and said Russian spying in Poland had increased since the country’s accession to NATO.70 Russia’s foreign minister Igor Ivanov suggested Poland was acting under foreign influence, noting that ‘‘neither can I say whether the decision had been taken in Warsaw or had been prompted by anybody else.’’71 A few days later, the Moscow press speculated that a third country’s intelligence services assisted the Poles in uncovering the Russian intelligence network.72 On January 30, Warsaw Voice reported that Russian politicians believed that the Polish move was strongly linked to NATO secretary general Lord Robertson’s recent visit to Warsaw. Robertson acknowledged that Poland notified NATO about its move in advance, but he denied any involvement in Poland’s decision. In April 2000, an allegedly secret report from Polish security services, claiming an increase in Russian espionage in Poland since its accession to NATO, was leaked to the press. Polish secret service minister Janusz Palubicki said Russia continued spying even after the expulsion of the nine diplomats.73 The situation reached a crisis level on February 23, when several demonstrations were staged in Poland against the Russian war in Chechnya. Polish protesters stormed the grounds of the Russian consulate in Poznan, painted anti-Russian graffiti on the walls, burned the Russian flag, and replaced it with the Chechen banner. The Russian Foreign Ministry called the incident ‘‘an act of vandalism during which Russian national symbols have been desecrated.’’74 Ivanov called it ‘‘an act of hooliganism’’ and said he would visit Warsaw on March 3, as planned, only if Poland provided a decent explanation of the incident. On February 26, members of the Russian Bolshevik Party pelted the Polish embassy in Moscow and the consulate in St. Petersburg with eggs and paint. According to Polish eyewitnesses, Russian security

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personnel did nothing to prevent the protesters.75 The Russian Duma passed a resolution, accusing Polish authorities of harboring pro-Chechen separatists. At the end of February, Moscow recalled its ambassador to Warsaw, Sergei Razov, while sources in the ministry indicated that his date of return was uncertain.76 Ivanov’s visit to Warsaw was cancelled. On March 4, the day after the cancelled visit was supposed to take place, the Russian Foreign Ministry issued a statement saying it was satisfied with Poland’s official reaction to the Poznan incident. In early March, more protests were held in front of the Polish embassy in Moscow. When Razov returned to Warsaw on March 17, he said, ‘‘I would like to hope that the cancelled visit of the Russian Foreign Minister to Poland and the ambassador’s recall for consultations have made them, at least, think about prospects for the relations with Russia . . . [T]he fact that the ambassador has returned by no means signifies that we are pleased with the present state of Polish-Russian relations. We expect the Polish side to investigate the matter to its end and punish the guilty parties.’’77 An article published in the Polish weekly Wprost suggested the Poznan incident might have been staged by Russians, claiming that one pro-Chechen organization was established by Russian intelligence services. The Polish counterintelligence service, it said, long suspected that Russian agents had long been involved in proChechen activities in Poland.78 The article said Russian officials instructed regional authorities to freeze contacts with their Polish counterparts. ’’[R]elations between Russia and Poland today are worse than in all previous years, much worse than at the time when there was a debate in our country on NATO’s eastward expansion,’’ Russia’s former deputy foreign minister, Andrei Fyodorov said. ‘‘Both sides are to blame for that.’’ Russia refused to treat Poland as an equal partner, he said. Unsurprisingly, Poland distrusted Russia.79 Hungary Hungarian-Russian relations became difficult in April 1999. Two weeks after the start of NATO’s bombing of Yugoslavia, Russia and Belarus sent a truck convoy allegedly carrying humanitarian aid to Serbia. Moscow had already requested and received permission to let the convoy pass through Hungary, but border guards in Zahony denied the convoy entrance for carrying several thousand liters of fuel, far beyond the amount necessary for the eight trucks and an apparent violation of the UN fuel embargo against Serbia. The convoy also included five Kamaz trucks with armored cabs, suggesting that they might be used for military purposes. The Russians considered the objections unjustified and said they would not pass through the country without the Kamaz trucks. Sergei Shoigu, Russian minister for emergency situations, said in an interview with the Russian state television channel ORT that the government had notified the Hungarians about the exact content of the convoy well in advance and had received no objections.80 The Hungarians said the original bill did not correspond with the convoy’s actual contents. Moscow accused Hungary of breaking a 1977 SovietHungarian treaty which simplified customs procedures—such as not checking the

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exact contents of a convoy—whenever humanitarian convoys needed to pass through to a third country. 81 Typical of Yeltsin’s late years, Russia remained confrontational throughout the Zahony incident. A day after the incident, the Russian Ministry of Foreign Affairs issued a press release, in which it reiterated ‘‘its lack of comprehension regarding the steps taken by the Hungarian leadership, which places obstacles in front of the passing through of the Russian-Belarusian convoy.’’82 Shoigu, in his interview with ORT, claimed the Kamaz trucks were refurbished exactly in accordance with the rules set up by the UN High Commissioner for Refugees in order to defend those in the driver’s cab.83 Russia’s Ministry of Foreign Affairs said the conduct of Hungarian authorities put the new NATO member’s interest in building a partnership with Russia into question. Vladimir Lukin, the chairman of the Foreign Affairs Committee of the Duma, said the incident ‘‘generate[d] hate.’’84 Shoigu flew to Budapest and solved the conflict in a meeting with the Hungarian Minister of Internal Affairs; after two days, the convoy was allowed to pass except for the five armored trucks, which had to remain in Ukraine. Only four of the eight trucks carrying fuel were allowed passage into Yugoslavia. The other four had to remain in the Hungarian border town of Roszke on the Hungarian-Yugoslavian border, where they would await the return of the trucks that could pass into Yugoslavia. The four trucks that could pass into Yugoslavia had to be accompanied by two Hungarian officers, as 31 of the 75 trucks in the group could be classified as ‘‘dual-use,’’ meaning they were employable for military as well as civilian purposes. Hungarian officers were to certify that all trucks were returned to Russia after they unloaded the humanitarian aid on board; the agreement proved pointless when Yugoslavian authorities denied entry to the Hungarian officers. In the end, the convoy passed safely to Yugoslavia and returned to Russia. Still, a deep rift in Hungarian-Russian relations remained. On April 20, Russia asked Janos Martonyi, Hungary’s minister of foreign affairs, to postpone his trip to Moscow, originally scheduled for the end of May. Moscow also recalled its ambassador to Budapest for consultations (he returned on May 4), which meant that the meeting between Viktor Orban and Yevgeny Primakov, the two prime ministers, originally planned for the summer, had to be cancelled as well.85 The trip’s cancellation and the recalling of the ambassador were most likely due not only to the Zahony affair. Just after the incident was resolved, the Hungarian minister for defense, Janos Szabo, announced that Hungary would discontinue negotiations with Russia on rebuilding 26 MI-24 helicopters. There were more crises during Yeltsin’s final year in office. In July, Moscow tried to send Russian KFOR troops to the Pristina airport, for which it required the permission to use Hungary’s airspace. After consulting KFOR headquarters and other countries that played a crucial role in the organization, Hungary understandably denied the planes’ passage until NATO and Russia successfully concluded negotiations. Even though Hungary’s conduct was considered justified and Moscow never officially objected to its stance, Russia again threatened grave consequences for relations between the two countries.86

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In October, Orban gave an interview to Canada’s Globe and Mail. Canadian minister for foreign affairs Lloyd Axworthy questioned whether there is still any need for nuclear weapons in NATO’s arsenal. Orban said that there should not be any doubt that the alliance still needs these weapons since Russia’s future is uncertain. Hungarians may not be happy about it, but this government would consider allowing the United States to deploy nuclear weapons in the territory of the country during a crisis situation—Orban added.87 Russia’s Ministry of Foreign Affairs called Orban’s statement a ‘‘direct violation of the basic treaty signed by Russia and NATO in 1997’’ and considered connecting the possible deployment of nuclear weapons in Central Europe with an incorrect analysis of Russia’s domestic politics dangerous.88 The Hungarian Ministry of Foreign Affairs issued a statement saying there was no talk of deploying nuclear weapons in Hungarian territory, nor was Hungary’s membership in NATO directed against Russia.89 The interview came at a sensitive time; the accession to NATO of Hungary, Poland, and the Czech Republic the previous April came about primarily out of a fear of Russia, even though all three countries claimed their membership in the alliance was not directed against the giant to the east. Orban’s statement reinforced Moscow’s worst fears of NATO enlargement. Foreign Minister Martonyi’s visit, which had been cancelled in the spring, was rescheduled for November. After four incidents in a short period of time, it was unclear if Russia would postpone the visit again. But it did not. The visit finally took place, and it served to clarify all the above issues. Slovakia In the 1998 parliamentary elections, the pro-Russian Meciar government lost, ushering in the era of Mikulas Dzurinda, who redirected Slovak foreign policy toward integration into the European Union and NATO. The new government called Russia an important partner in the energy sphere, but it called for a more balanced relationship with Moscow. ‘‘[F]oreign policy towards Russia should be entirely coordinated with the EU approach,’’ the new government program said, ‘‘while in the security sphere Slovak-Russian mutual cooperation must continue to be determined by the nature of ties between the Russian Federation and NATO.’’90 The Slovak government made three decisions between 1998 and 2000 that strained its relationship with Russia. In March 1999, the Dzurinda government withdrew from a contract signed during the Meciar regime to buy the S-300 rocket system as a means of settling Soviet-era debt; the government noted a conflict between aspiring to NATO membership and employing Russia’s S-300 system.91 The second incident occurred in the summer of 1999, when Russia approached Slovakia about opening its airspace to transfer Russian troops to Kosovo. Bratislava, as Budapest did at the same time, denied the request. But whereas Hungary was already a NATO member at the time, Slovakia was not; the decision signaled that Dzurinda’s government placed the country entirely on the side of NATO. Third, Slovakia adopted EU policy—though it was still four years away from obtaining membership

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in the organization—and introduced visa requirements for Russian citizens traveling to and through Slovakia beginning in March 2000. Slovak-Russian relations expert Alexander Duleba said, ‘‘from 1998 to 2000, the Dzurinda government managed to standardize Slovak-Russian ties and was successful in eliminating Meciar’s political heritage. Naturally, Russia responded with restraint, if not coolness, to this change in attitude.’’92 Moscow never reacted to Slovakia’s behavior with the rage it expressed to very similar moves by Poland and Hungary. Still, the happiest period of Slovak-Russian relations was over. Russian Energy Companies’ Conduct in the Region Like the previous few years, Russian energy companies restrained their development in the region between August 1998 and March 2000, focusing instead on maintaining the privileged positions of their joint ventures. The original agreement creating Slovrusgas committed Russia to buying a substantial amount of Slovakian products in exchange for gas; the deal proved to be problematic. In July 1997, Rem Vyakhirev said the goods Slovakia offered in the ‘‘gas for goods’’ model were the ones ‘‘nobody else had wanted.’’93 In March 1999, Pavol Kinces, CEO of SPP and head of the board of directors of Slovrusgas, acknowledged that ‘‘until now it has been a problem that the Russian partner was interested mainly in food’’ and not the medicine and industrial products which the Slovak side had offered from the very beginning.94 Slovakia wanted to sell goods that had a greater value in the Russian market; Gazprom wanted to receive goods it could sell more easily in the Russian market. But amendments made to the agreement proved only marginally effective. There were similar problems in Hungary. By 1998, it was obvious that Panrusgas had failed to promote Hungarian exports in the Russian market, so Mol and Gazprom signed another agreement in December, according to which Gazprom would buy Hungarian products for all gas delivered above 90 percent of the contracted volume, and not only in exchange for gas delivered above the total quantity agreed upon in the long-term contract. According to the agreement, Gazprom should have bought $65 million worth of Hungarian food and medicine by the end of 1999.95 But it did not happen. In February 1999, only products such as canned food and chicken, whose value appreciated very little in the Russian market, were exported. Hungarian pharmaceutical companies had previously done very competitive business in Russia, but were unable to make headway into the market through the gas deal.96 Another agreement was signed in March 1999, between Hungary’s economy minister Attila Chikan and Gazprom’s vice president, Vyacheslav Sheremety. Mol was to import a maximum of 1 bn cm of natural gas per year (out of a total of 8–9 bn cm of imports) in exchange for Hungarian products. Hungarian exports to Russia were expected to increase by $60 million per year as a result of the deal, making a total of $125 million. As of April 1999, a total of $10 million of Hungarian products had been delivered to Russia, $24 million less than what was supposed to have been

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delivered according to several contracts.97 The bartering of Hungarian exports for importing excess gas was so minimal that a former senior official of Panrusgas said it was not worth mentioning.98 As a much more significant move, Russia at one point during this period threatened to halt the construction of the Yamal 2 pipeline. The Yamal system was to consist of two pipes. The construction of the first was finished in 1999, when a new debate began about financing two compressor stations that would increase the pipe’s capacity from 20 to 32 bn cm. According to the 1994 contract, the construction of the second pipeline would begin in 2001, as soon as the first was fully operational.99 In February 1999, Jurij Komarov, a member of the Gazprom management board, hinted that the Russian company would back out of its agreement to construct the second pipeline. The demand for gas in Western Europe was not growing as quickly as had been expected, he said, making the construction economically unfeasible. 100 It is unlikely that Gazprom’s explanation was honest; at the time of the announcement, a plan to build a gas pipeline under the Baltic Sea to connect Russia to Germany was publicized, meaning that Gazprom was perfectly happy with Western European demand projections for natural gas.101 Additionally, it was already known that time that the costs of the Baltic pipeline would be much higher than building the second Yamal pipe.102 It is possible that Gazprom already then entertained the idea to avoid a dependent relationship on Poland. 103 ‘‘The Baltic pipeline was designed to put political pressure on Belarus and Poland,’’ a senior official of the Miller government said.104 An additional asset of the Baltic pipeline would have been to prevent building the pipeline between Poland and Norway that would have provided an alternative source of natural gas for Poland. ‘‘The President and the government of the Russian Federation support the monopoly’s [Gazprom’s] campaign to build a trans-Baltic gas pipeline to transport Russian gas directly to Germany, Great Britain, the Netherlands and Scandinavia. The construction of such a major gas pipeline would put an end to all other projects to build gas pipelines across the Baltic Sea.’’105 Demand for gas in Western Europe at the time did not support two additional pipelines, and the construction of the Baltic pipe would discourage the Yamal 2 pipeline in the foreseeable future. A series of negotiations began. Gazprom employed the Yamal 2 pipeline as a carrot and the prospect of the Baltic pipeline as a stick in its talks with Poland. In October 1999, Vyakhirev, then head of Gazprom, said his company would build Yamal 2, but he offered no specific date for the beginning of construction.106 Gazprom also said it would make its final decision about building a Baltic pipeline in a year. 107 Vyakhirev dismissed Polish anxieties somewhat crudely: ‘‘[I]f Poles don’t like Russian gas, they can always go back to burning wood in stoves.’’108 Two months later, Gazprom floated plans for yet another pipeline running from Belarus to Poland and then to Slovakia, where it would connect with the old Brotherhood pipeline.109 Gazprom called it an inter-system connector (it was also referred to as ‘‘peremychka’’) between the Brotherhood and Yamal pipes. When the inter-system pipeline was first proposed, Gazprom was unclear whether it would replace Yamal 2 altogether or only supplement the Yamal system. Gazprom

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Map 4.1 Existing and Planned Natural Gas Pipelines to, through, and around Poland as of 2000

may have been deliberately vague about the two pipes and its intentions. From the beginning, the Russian giant had considered the inter-system connector as nothing other than a threat to Ukraine. Ukraine’s gas debt was at a peak, and Gazprom had been dependent on the country, as 90 percent of Russian gas exported to Western Europe traveled through Ukrainian territory. Ukraine was also siphoning off additional gas from the pipeline. As long as the Brotherhood pipeline remained Gazprom’s main transit route to Western Europe, its ability to prevent gas theft or enforce payment was limited. The inter-system connector, which would circumvent

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Ukraine and deprive Kiev of an important source of revenue from transit fees, was part of a larger strategy to take control of the Ukrainian section of the Brotherhood pipeline. ‘‘[I]t was a kind of a virtual project to pressure Ukraine,’’ a senior official of the Miller government said.110 It should be noted that the abandonment of the Yamal 2 pipeline was the only major plan considered by Gazprom during this period, and its execution was limited to harsh, verbal threats. Regarding Slovakia and Hungary, it aimed only at maintaining the special position its joint ventures had. However, lacking the means to buy and sell enough Central European products in Russia, Gazprom was unable to carry out even this goal. Russian companies did not take part at the tender for Slovnaft, the Slovakian oil refinery in early 2000, either. According to the final terms of the agreement, the winner of the tender, the Hungarian Mol, bought an initial stake of 36.2 percent and received the right to buy the majority later on.111 Due to a very limited influence in global affairs, Russia had the will but not the skill, namely state power, to expand in Central Europe between 1998 and 2000. SUMMARY Between 1991 and 1993, no Russian energy company attempted to invest or even lay basic groundwork for any action in Central Europe, even though the Russian state’s ability to mobilize the necessary resources was arguably at its highest not to be reached again only in 2004. But as long as Moscow perceived to be treated on par by the United States regarding Central Europe, it preferred to refrain from any action that would risk the fragile equilibrium. Between the second half of 1993 and 1996, Russian foreign policy thinking and action was dominated by the specter of NATO enlargement. Moscow believed that the expansion of the Western military alliance into the former Soviet sphere of influence, i.e., the Western powers’ disregard for Russia’s concerns in the matter, reflects Russia’s low relative influence in world affairs vis-a`-vis the United States. As a result, Russian foreign policy was set to counter this trend. Russia’s open intention was to change the international structure again in favor of Russia, namely to increase Russian influence in the world. Central Europe appeared on the map of Russian decision makers as the terrain of Western expansion, i.e., an area in which the balance of power between Russia and the West would change in favor of the latter. Central Europe became the first region of the world in which Russia’s relative influence visa`-vis the West declined visibly. In the same period, state power has declined significantly compared to the first few years of the 1990s, but was markedly higher than in the years to follow. As a result, Russia still possessed enough state power to mobilize the necessary resources. Gazprom was very active in the region during this period. It had two major goals in all three examined countries. First, it aimed at getting involved in exporting and importing its own gas to Central Europe. Historically, Gazprom sold natural gas to the local gas wholesale monopoly. Between 1993 and 1996, it initiated negotiations with these monopolies and their governments about

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creating joint ventures in charge of importing Russian gas. The initiative was successful in all cases. Gazprom ended up with substantial ownership in the companies that were endowed with monopoly rights to purchase natural gas from Gazprom itself on behalf of the three Central European countries. Moreover, in case of Poland and Hungary, the Russian side tried to create a joint venture ownership structure that, on the surface, seemed to provide control for domestic companies, but in fact gave leverage to Gazprom. In Poland, where this control was more covert, the Russian side managed to keep the structure intact. In Hungary, where Gazprom’s effective control was traced through corporate registries, the issue created such a public uproar that the Russian company’s share was limited later to 50 percent. The second aspiration that Gazprom manifested in the region was to get the rights to build gas pipelines through all three countries. In the case of Poland, it managed to reach an agreement as the resulting Yamal pipeline became the major tool of Gazprom’s expansion in Poland and a serious headache for the Polish government later. Between 1996 and 1998, Russian foreign policy became increasingly concerned with the unipolar world order led by the United States as it set about to counter what it saw as excessive American influence in the world. In so doing, it aspired to restore Russia’s influence. The issue of NATO enlargement, or more precisely, Russia’s inability to halt it with diplomacy, was the most tangible manifestation of this phenomenon. At the same time, state power reached its abyss in the entire post-Soviet Russian era, with federal tax revenues accounting for less than 10 percent of the GDP in 1998, a third less than it was two years before or after. Russia’s most influential foreign policy thinkers started to discuss what Russia should do about Central Europe. A widely used report by the Council on Foreign and Defense Policy, titled ‘‘East Central Europe and the Interests of Russia,’’ proposed that Moscow counter Western political and military expansion into the region with Russian economic expansion there, specifically mentioning natural gas as an important tool in this effort. Despite this clearly articulated strategy, this thinking did not manifest itself in bilateral diplomatic relations. The only country with which Russia had strong diplomatic activity in this period was Slovakia, and the reason behind this was a good old-fashioned security initiative rather than the economic strategy suggested by the report. Russian energy companies had no meaningful new initiatives in Poland and Hungary between 1996 and 1998. The only country in which one of them, Gazprom, did expand was Slovakia, but this choice for expansion shows the weakness of Russia at the time. Slovakia was the easiest possible target for a Russian company in Central Europe during this period. It was the smallest and economically the weakest among Central European countries. It was also open toward Russia and Russian investment. The 1998 financial meltdown, the three former satellite countries’ official entry to NATO, and Russia’s inability to do anything for its long-term friend and ally, Serbia, shook the Russian foreign policy establishment. Foreign policy lost its strategic vision and became chaotic. Russian leaders have not seen since the collapse of the Soviet Union their country’s relative influence in world affairs to be so alarmingly low. Feelings of injustice and betrayal became commonplace, and hostility to the West came

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back to fashion. The ensuing reactionary visions were manifested in the Russian military doctrine of 1999, which read like the vision from a fortress under siege. Russian foreign policy decision making fell in complete disarray after 1998, resulting in a reactive but even chaotic foreign policy. This situation was exacerbated by the Central European countries’ newly found assertiveness vis-a`-vis Russia. Having joined NATO (Poland and Hungary), and having the opportunity shown to do so (Slovakia), all three countries resisted Russian pressures with vehemence and steadfastness not experienced from them before; this, combined with Russian reluctance to give in, led to serious diplomatic conflicts in case of two countries. At the same time, state power was at its second-lowest level in the entire postSoviet period, which limited the Russian government’s ability to act even if it had a clear strategy. With one exception, Russian energy companies, more precisely Gazprom, had very limited initiatives in Central Europe. Gazprom aimed merely at maintaining the special position its joint ventures had in Slovakia and Hungary. However, lacking the means to buy and sell enough Central European products in Russia, Gazprom was unable to carry out even this goal. The only major issue raised—abandoning the construction of Yamal 2—was limited to verbal threats, even if harsh ones. Russia had the will (result of the perceived very low influence in world affairs) but not the skill (state power) to expand in Central Europe in this period.

5

Consolidating State Power: Russian Energy Companies’ Expansion into Central Europe during the First Putin Presidency, 2000–2004

PERCEPTIONS AND STATE POWER President Vladimir Putin consolidated power quickly after taking office. Russia achieved a measure of political and economic stability during his presidency, thanks particularly to a dramatic increase in oil prices. In 1999, the price of crude oil hovered around $10 per barrel on the global market; that number nearly tripled by 2004.1 As oil prices directly influence the price of natural gas as well, the Russian petroleum industry became a key factor in economic recovery. According to the World Bank, about 25 percent of Russia’s GDP was attributed to the crude oil and natural gas sectors in 2003.2 Between the financial crisis of 1998 and 2004, the Russian economy enjoyed an average annual growth rate of 6.5 percent.3 The new president was profoundly dissatisfied with Russia’s role in the world. Russia’s views of the West were constantly changing, but Putin’s first term was marked by a commitment to substantially increasing Russia’s influence in the world and a willingness to make compromises as long as they served the country’s longterm interests. Russia lacked the resources to become a unilateral actor on the world stage, and therefore had to form bonds with other powers. By the end of 2001, foreign policy analysts were openly discussing Russia joining the EU as early as 2016. In order to make Russia a great power again, Putin believed it had to become a partner, particularly an economic partner, not an enemy of the West. He foresaw a world in which a country’s economic power determined its political influence, making Russia’s economic problems its greatest handicap. By September 11, 2001, Russia had been preparing for its opening to the West for over a year and a half. The terrorist attacks did not change Russian foreign policy, but they provided an opportunity for Moscow to further improve its relations with the West.4 Putin’s 2002 State of the Nation address concentrated on domestic issues, emphasizing Russia’s economic development, and focused more on the country’s relations with the West. In July 2002, the president of Russia summoned all Russian ambassadors to the capital for a briefing. ‘‘The country’s foreign policy must be subordinated to domestic economic interests,’’ he said. Economic ties, especially in the energy

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sphere, with the European Union were a ‘‘top priority.’’5 Putin demanded that Russian diplomats assist Russian businessmen in developing markets. Russian trade missions, which were supervised by the Ministry for the Economic Development and Trade, would be transferred to the Foreign Ministry, he announced. Economic departments would be established in each embassy. 6 Some analysts shared Putin’s views. ‘‘Unfortunately, until now Russian diplomacy has remained on the sidelines of pushing the real interests of Russian corporations abroad,’’ Andrei Ryabov, a political analyst at the Carnegie Moscow Center said. ‘‘Meanwhile, as some Russian companies expand to the West, they would like to get the support of the diplomatic corps.’’7 The political elite, or at least, Foreign Minister Igor Ivanov, agreed. He told MGIMO in May 2001 that ‘‘energy diplomacy’’ was becoming a promising new direction for Russia’s international relations. 8 In February 2003, at Gazprom’s 10th anniversary party, Putin called the company an essential tool for Russia’s economic and political influence in the world.9 The state also took key steps to increase its control of the energy sector. In May 2001, Putin replaced Rem Vyakhirev, the head of Gazprom, with Alexei Miller, saying the new CEO should ‘‘collect everything which by right belongs to the state and make the company’s operations, first of all its financial activity, absolutely transparent to all shareholders.’’10 Miller started to recover assets that had been stolen by Gazprom’s former managers. In January 2002, Russian authorities detained Yakov Goldovsky, ex-president of Sibur, a Russian petrochemical holding company that helped buy a Hungarian company in 2000. But the efforts did not stop there, and the Russian state has set its sight on previously privatized petroleum assets as well. The Yukos case, which began in the summer of 2003, may be the most visible example of this policy. There are several possible reasons for the Kremlin’s case against Yukos, but there are two particularly plausible ones. First, Yukos together with four other Russian oil producers announced at the end of 2002 a plan to build an oil pipeline from Western Siberia to the port of Murmansk. The project was to be privately financed and operated, but in Russia, almost all crude oil pipelines are handled by Transneft, a state-owned company. Transneft’s monopoly meant that even if oil extraction was privatized, the state maintained control over delivery and export routes, as well as the exit points from Russia. If the new pipeline of Yukos were built, it would have controlled 25–30 percent of Russian crude oil transport.11 If the head of Yukos, Mikhail Khodorkovsky, had succeeded in his plans, he would have broken the Russian state’s monopoly over crude oil transport, one of its primary sources of revenue. In November, a month after Khodorkovsky’s arrest, Simon Kukes, the new head of Yukos, said he wanted the new pipeline to be built by the Russian government, not private companies.12 Reportedly, Khodorkovsky was also conducting negotiations to sell 40 percent of the company to ExxonMobil, which would have significantly weakened the Russian state’s leverage over Yukos. ExxonMobil was not dependent on the Russian state, unlike all Russian energy companies. The deal would have made the costs of strongarming Yukos prohibitively expensive for the Kremlin, as extreme measures could

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inflict billions of dollars worth of damages on shareholders of an influential American company; this would almost certainly damage Moscow’s relationship with the United States, a pivotal country for Putin’s foreign and economic policy. Kukes, the new Yukos head, withdrew from negotiations immediately, stating that foreign companies do not offer any strategic advantage for the company.13 A few days later, Defense Minister Sergei Ivanov, one of Putin’s closest allies, said in an interview for the Russian business daily Kommersant that the Kremlin should control its oil resources more closely in the future.14 The Russian president’s plans entered the language of diplomacy as well. On October 9, 2003, Putin told German chancellor Gerhard Schroeder, We are not going to break up Gazprom. The European Commission should have no illusion: they are going to be dealing with the state in the natural gas industry . . . [T]he gas pipeline system is a child of the Soviet Union, and only we are in a position to maintain it in working condition, even if you are talking about the sections that lie outside Russia.15

Russia was growing increasingly assertive. In October 2003, Sergei Ivanov presented a paper claiming the country had a right to preventively attack neighboring countries that also implied that Russia considered NATO a potential enemy. At the end of 2003, two years after first making positive noises on the subject, Putin announced that Russia did not wish to join the EU. Yet, economic issues stayed at the forefront of Russian foreign policy. State power underwent a dramatic change. Tax revenues made up 15.5 percent of GDP in 2000, the highest level since 1993, a major recovery from the abysmal level of 9.2 percent in 1998. The number continued to increase—17.6 percent in 2001, 17.1 percent in 2002, 19.6 percent in 2003—reaching 20.4 percent in 2004, a higher level than in the first year of Russia after the collapse of the Soviet Union. The substantial growth in oil and natural gas prices was one of the most important, but not the sole factor in the recovery. As shown in Table 3.3, when influence in the world is low and state power is strong, Russian energy companies will actively expand in Central Europe. RUSSIAN FOREIGN POLICY TOWARD CENTRAL EUROPE Diplomatic Relations The Putin presidency fostered a new approach to Central European relations. A series of diplomatic crises (discussed in Chapter 4) brought Polish-Russian relations to a post-Soviet nadir in 2000. The Borsodchem scandal of August 2000 (to be discussed later) epitomized the climate of mistrust between Hungary and Russia. Slovakia, as has been noted, also felt a chilling of relations during Yeltsin’s final years. Putin’s new approach, which emphasized the energy sector in diplomatic relations, had profound effects in all three countries.

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Poland Polish-Russian relations started to warm up in 2000 after a series of phone calls between the presidents and President Kwasniewski’s unofficial visit to Moscow in July 2000. Kwasniewski considered the ice to be broken and the possibility of cooperation to be wide open in the bilateral relationship. Putin, meanwhile, accepted an invitation to visit Poland.16 In January 2002, Putin paid a two-day visit to Poland, marking the first time the new president visited a former satellite. By choosing Poland, instead of Slovakia, which had friendlier relations with Russia, Putin signaled the direction his policies would take. Putin’s diplomatic trips had been going well in Europe and the United States. He enjoyed direct access to Gerhard Schroeder, Tony Blair, and Jacques Chirac. Putin stopped in Warsaw on his way home from Paris to meet the newly elected ex-communist prime minister of Poland. Yeltsin would have flown over Poland without a second thought. Tensions between Poland and Russia had been easing since the end of 2000. Polish politicians were making several trips to Moscow, Russian politicians were coming to Warsaw, but the real breakthrough came from the Russians.17 In November 2000, Foreign Minister Ivanov visited Warsaw after canceling a trip in March 2000, due to the Poznan incident. In May 2001, Russian prime minister Mikhail Kasyanov visited Warsaw. Putin’s visit was the first by a Russian president in nine years. Putin made gestures that were unthinkable only a few years earlier, laying a wreath on the monument of the Warsaw Uprising, commemorating the victims of the 1956 uprising in Poznan. Putin told the Poles that Stalin’s crimes belonged to the past and could not interfere with the two countries’ current relationship, and that Polish victims of Stalinist terror should be compensated. According to Ekho Moskvi polls, Russians were divided over the compensation question, making Putin’s gesture particularly remarkable.18 The Russian president had ‘‘earned scores in the eyes of most of the Poles.’’19 Most negotiations between Russia and Poland concentrated on economic issues. They failed to reach agreements on most problems, including the volume of the future natural gas deliveries to Poland. But Putin and Polish prime minister Leszek Miller agreed the Polish and Russian premiers would meet at least twice a year,20 stating that they were seeking renewed cooperation.21 The two also agreed in theory in a range of measures which needed to be fulfilled to improve trade relations between the two countries. Putin said he hoped that the improved Polish-Russian relations would serve as an example for other Central European countries. (He was likely thinking of Hungary and, to a lesser extent, the Czech Republic.) Although the tone of the relationship was finally getting warmer, no tangible results came of the meeting. Putin’s visit did not, as hoped, result in the Russians easing export conditions for Polish products, as they had promised, by Miller’s visit to Moscow in June 2002. Most of Miller’s visit was dominated by the gas contract. Shortly before, President Kwasniewski stopped in Moscow on his way back from South Korea to discuss how Poland’s EU accession would affect Kaliningrad citizens’ travel. Kwasniewski

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recommended a cheap multi-entry visa for Kaliningrad residents; in an earlier EU-Russia summit, Putin had recommended a visa-free entry.22 By mid-2003, Kwasniewski changed his mind and called for a new program that would offer visa-free travel for Russian citizens to the EU within few years.23 He was evidently moving in favor of Russia. Later in the year, the Polish president came out in favor of the Baltic pipeline that would circumvent Poland: ‘‘If the Baltic route will supplement the entire infrastructure of oil and gas turnover in Europe, I see no problems in implementing the project. We should find a solution that will benefit everyone.’’24 Hungary It took longer for Russia to improve its relations with Hungary than with Poland and Slovakia. Russia may have been waiting for the outcome of Hungary’s parliamentary elections in April 2002, for which the Hungarian Socialist Party, the successor of the Hungarian Communist Party, was running on a platform to improve relations with Russia. The party’s slogan was ‘‘Gaining back the Russian markets.’’ The relationship in the last few years had been rather chilly. The Russians had cancelled Prime Minister Kasyanov’s visit to Budapest in 2001 on short notice, citing technical problems. Hungarian foreign minister Janos Martonyi of the then-ruling conservative government visited Moscow in February 2002. At around the same time, the Hungarian Socialist Party’s prime minister–designate Peter Medgyessy also went to the Russian capital. Medgyessy’s conservative predecessor Viktor Orban never came. Medgyessy met former prime minister Yevgeny Primakov and Duma president Gennadiy Seleznyov. The Russian side made it obvious that it preferred a Socialist victory in the upcoming Hungarian parliamentary elections. The Russians and Hungarians entered an intensive phase in negotiations once the Socialists won power in Hungary; the Russians saw a new opportunity to gain a foothold in Hungary. The new Hungarian foreign minister, Laszlo Kovacs, made his first trip abroad to Moscow in September 2002 to prepare Medgyessy’s visit in December, which was to be the first time a Hungarian prime minister had traveled to the Russian capital since 1995. Putin and Medgyessy had met during the NATO summit in May, which the Hungarian prime minister called a landmark meeting.25 According to a Hungarian broadsheet, to improve relations, Moscow had requested the following: a connection between the Adria and Druzhba pipelines, support for Lukoil’s plans for TVK, and the chance for Gazprom to buy Mol’s gas section. The Hungarians were apparently open to all the requests.26 Medgyessy and Putin’s meeting in December 2002 was dominated by economic issues. Medgyessy was accompanied by 200 Hungarian businessmen from diverse parts of the economy and was quite open about his support for Russian investment within Hungary’s borders: We are happy to receive Russian investors, Russian merchants, we aim at a long-term cooperation. Couldn’t we agree about the junction of the oil pipelines Adria and Druzhba?

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Why couldn’t we agree in other spheres, as well? Let the Hungarian investors go to Russia and Russian investors come to Hungary.27

He added, ‘‘It is not a coincidence that the entire leadership of the Hungarian gas company, Mol, goes with me to Moscow.’’28 The two leaders settled the remaining part of Soviet-era debt and Putin agreed to return the Sarospatak books taken from Hungary in World War II. Russian prime minister Mikhail Kasyanov visited Budapest in September 2003. In an interview preceding the meeting, Medgyessy said, ‘‘When we speak about the development of our economic relations, then we, naturally, imply Russian investments into the Hungarian economy, and the use of possibilities of an increase of the Hungarian export into Russia.’’29 During a meeting with Hungarian businessmen, Kasyanov said that Russian companies could expect a chance in the upcoming privatization tenders in Hungary.30 Gazprom, Yukos, and Lukoil were all interested in the Hungarian market. Gazprom and Yukos were interested in Mol. Medgyessy and Putin met again in November 2003 in St. Petersburg to discuss trade and investment. ‘‘From the zero mark where the relations had been in the past few years, they have reached stable positive dynamics,’’ Putin said. The Russian president also expressed his concern on how Hungary’s EU accession would affect Russian-Hungarian relations.31 The two agreed to try to simplify problems with visas. They discussed the participation of Russian companies in Hungary’s privatization tenders. Russian investment in Hungary amounted to a mere $1 billion, Putin said, but Russian companies hoped to become more active in the Hungarian economy. Medgyessy said there were no prejudices against Russian investment in Hungary.32 Slovakia Mikulas Dzurinda’s Western-oriented government held power in Slovakia during the first years of Putin’s presidency, but Moscow still saw Slovakia as a friendly nation. ‘‘Slovakia always remained reliable and advantageous partner for Russia,’’ one Russian daily said. Even during Slovakia’s negotiations to join NATO and the EU, ‘‘leaders of this country from the very heart of Europe never initiated the artificial aggravation of relations with Russia, maintained interest in the development of commercial and economic cooperation [and] the maintenance of political dialogue.’’33 Foreign Minister Ivanov’s visit to Slovakia in January 2001, the first by a high-level Russian official in almost five years, was remarkable. Ivanov said that Russia respected Slovakia’s plans to enter the EU and NATO; it was the first time Russia acknowledged Slovakia’s foreign policy aspirations since the Meciar era. Slovak president Rudolf Schuster visited Moscow in November 2001, marking the first such visit by a Slovak president in history. Putin said the two countries’ relationship was not only free of any problems, but was developing in political, economic, and cultural spheres34 and the two presidents called for more economic cooperation.35 Dzurinda made an official visit in Moscow in April 2003 to discuss military and

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economic cooperation. Nezavisimaya Gazeta praised Slovak efforts to ‘‘develop valuable political and commercial-economic cooperation with Russia’’ even as it joined NATO and the EU.36 Dzurinda said the Slovak government never meant to diminish its relations with Russia. Though this was his first visit to Moscow, he noted that he had met his Russian counterpart several times already. 37 Slovak-Russian cooperation had made visible progress in the last two years, he said.38 Russian prime minister Kasyanov pointed to Gazprom’s acquisition of SPP and Yukos’s acquisition of the 49 percent stake in Transpetrol as a sign of the favorable climate in Slovakia for Russian investment.39 Other Russian companies showed their interest in privatization deals in Slovakia, he said.40 Dzurinda was open to more Russian investment. Dzurinda and Kasyanov also discussed the modernization of the Slovak army’s military equipment, particularly the Mig-29 destroyers and Mi-24 helicopters. Putin and Dzurinda talked about the inter-system connector pipeline between the Yamal system and the Brotherhood in Slovakia. Bratislava was very interested in the pipeline, Dzurinda said, and Putin said Slovakia would play a dignified role in any alternative solution for transporting Russian gas to Western Europe.41 Slovakia joined NATO in March 2004 and the EU in May 2004. RUSSIAN ENERGY COMPANIES’ CONDUCT IN THE REGION Poland Europol Gas As we discussed earlier, Poland was unable to fund the construction of the Yamal pipeline with the revenues it picked up from the transit fees on Russian gas through Polish territory. In order to complete construction, in 1999, Europol Gas borrowed $257 million from Gazprombank, a bank owned by Gazprom. A few months later, Gazprombank extended its credit to Europol Gas to $1 billion, and set a due date for the loan for June 2002.42 In March 2001, Europol Gas was left to the mercy of Gazprombank, when Rem Vyakhirev, the head of Gazprom, threatened Europol Gas with bankruptcy if it failed to repay its loan. Europol Gas’s revenues—and its ability to repay the loan—depended on transit fees paid by Gazprom, which already owned almost half the Polish company. The agreement that created Europol Gas in 1993 had determined its fate. In May 2001, it was again threatened with bankruptcy.43 Gazprom and the Polish gas company PGNiG disputed also who should cover the costs of finishing the first Yamal pipeline. According to the original agreement of the 1990s, PGNiG and Gazprom would share the cost of construction work in proportion to how much of the pipeline’s capacity each party would use. The two pipes’ joint capacity was targeted at around 67 billion m 3 , with Yamal 1 providing 32 billion m3 and Yamal 2 35 billion m3. PGNiG would buy part of the total supply through Yamal for Poland’s domestic consumption, while Gazprom transferred the rest to Germany. According to the 1996 contract, even at its peak, PGNiG would consume no more than 20 percent of the Yamal pipelines’ capacity, meaning it would

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cover no more than 20 percent of its construction. (The previous contract in 1996 stated that Poland would only import 2.88 billion m3 of gas via Yamal 1. The rest would arrive via Yamal 2, meaning that PGNiG would only utilize less than 10% of the Yamal 1 pipeline’s capacity. According to these numbers, the Poles should only then have covered 10% of Yamal 1’s construction.) Yamal 1 started operating in December 1999 at a capacity of 20 billion m3. To reach its target capacity of 32 billion m3, three compressor stations had to be built on the Polish section of the pipe. At that point, Yamal 2’s construction hadn’t even begun and Gazprom was openly considering not building it at all.44 With that threat looming, PGNiG and Gazprom debated who would finance the compressor stations until 2003, when the gas contract was renegotiated. Gazprom expected PGNiG to pay for 20 percent of Yamal’s construction, matching PGNiG’s share in the two pipes’ capacity. But PGNiG argued that it was not at all certain that Yamal 2 would be built, so it should only cover 10 percent of the costs of building Yamal 1, as it would use only 10 percent of the first pipe’s capacity. PGNiG argued that the amount it had contributed to the construction of Yamal 1 before December 1999 already equaled 10 percent of the total cost of building the first pipe, and thus the three compressor stations should be financed by Gazprom. The Buzek government said the Poles would not finance Yamal 1’s completion if Gazprom did not commit itself to building Yamal 2.45 In December 2001, the undersecretary of state at the Polish Economy Ministry, Marek Kossowski, announced that Gazprom expressed a desire to obtain 70 percent of Europol Gas. According to Kossowski, the Russian company argued that since Poland had not committed itself financially to finishing Yamal 1, it was entitled to change the ownership structure of Europol Gas in favor of Gazprom. Gazprom demanded $280 million to build the three compressor stations. Kossowski maintained that Poland had met its obligations, but in January 2002, it agreed to a $180 million investment in the first two compressor stations, which would increase the capacity of Yamal 1 to 28 billion m3.46 (The third compressor station would increase the capacity of Yamal 1 to 32 billion m3.) It’s unclear why the Poles changed their position on financing the compressor stations, but it should be noted that, at this time, Gazprombank threatened to force Europol Gas into bankruptcy. The threat may have factored in Poland’s decision. The two sides reset the transit fees and restructured Europol Gas’s debt to Gazprom to enable the joint company to finance the construction of the compressor stations. Work was to begin in April 2003, but was delayed until December. PGNiG and Gazprom decided that Europol Gas would be given until 2018 to repay its $850 million debt. The company was having other problems; if the transit fee had stayed at the level where it was, Europol Gas would not have been able to repay its loan. In the renegotiated gas contract, the transit fees were reset to enable Europol Gas to finance the construction of Yamal 1 and to repay its loan from Gazprombank. Gazprom would begin paying $2.74 for the transfer of 1,000 m3 of natural gas per 100 km, but the fee would slowly drop, reaching $1 by 2019.47

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The agreement put Poland at an even greater disadvantage. ‘‘Signing the Russian deal the government gives up potential revenues from an increased transfer of Russian gas through Poland,’’ analyst Rafal Kasprow wrote. ‘‘From 2014, Poland will be charging for the transit of Russian gas far lower fees than those currently charged in Western Europe. The fee will be roughly three times lower than today [ . . . ] [r] evenues of EuRoPol Gaz, operator of the Polish stretch of the Yamal pipeline, are going to be reduced by some $3.55bn because of the terms of the 2003 agreement.’’48 The transit fees would only allow the Poles to pay for the pipeline, but they would not be able to profit from their territory until 2018, at which point it would only receive one-third of the fees that are paid in average for gas transit in Western Europe. The Russian partner, as owner and creditor, would enjoy more power over the pipeline until 2018. Gaz Trading, the small Polish company with the confusing ownership structure, would have the chance to cast the deciding vote to determine who would have more power afterwards. The short-term dispute was resolved, but Poland lost most of its potential revenue from the pipelines. It remained an open question whether the Polish or Russian sides will end up controlling Europol Gas. Gazprombank financed the construction of the pipeline making Europol Gas vulnerable to its creditor. Under these conditions, Poland had to lose. Gas Contract As discussed earlier, the gas contract of 1993 between Poland and Russia overestimated the amount of gas the Polish economy would absorb, but the contract prohibited Poland from reselling any gas imports. There were new calculations taking into account future estimates of Poland’s demand for gas that Poland, in 2002, wanted to use to renegotiate its gas contract. The Leszek Miller government, made up of several old members of the communist regime, reopened talks on the Russian gas supply in January 2002. Poland expected to add a 10-year extension to the contract without changing the total amount of gas it would deliver. It would receive the same amount of gas over a longer period of time, thus decreasing the amount it imported annually by almost 30 percent.49 In an interview with the Polish newspaper Rzeczpospolita, Gazprom chief Alexei Miller said he did not want to renegotiate the contract, saying that Gazprom intended to resolve the gas supply issue based on the Polish-Russian agreement of 1993. He insisted on keeping the ‘‘take-or-pay’’ rule from 1996 and was unwilling, he said, to consider the pleas of Polish politicians.50 Table 5.1 Documents of the Gas Contract

1993 Intergovernmental agreement 1995 Executive protocol to the intergovernmental agreement 1996 Contract between PGNiG and Gazprom 2003 Renegotiated intergovernmental agreement annex to the contract of the companies

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In July 2002, the undersecretary of state at the Polish Economy Ministry, Marek Kossowski, suggested another proposal: Russia would release 100 billion of the 250 billion cubic meters of contracted gas, 40 percent of the total, from the ‘‘takeor-pay’’ rule. ‘‘We take the view that since 55% of [the construction of Yamal] has been realized, we should apply the ‘‘take-or-pay’’ rule to some 60% of the contracted gas.’’51 According to the agreement, Gazprom had been required to build two trenches for the Yamal pipeline; however, as of the summer of 2002, the second pipe’s construction had not even started. Negotiations stalled until October, when Poland threatened to involve international arbiters if it was unable to reach a deal by the end of the year.52 In December, Gazprom proposed a swap deal whereby the Russian company would fulfill Norway’s obligation to Poland with Russian gas and the Norwegian company Statoil would fulfill Gazprom’s contractual obligations in the UK.53 For the Poles, the suggestion was filled with problems. It ran contrary to Norwegian-Polish negotiations to build a pipeline between the two countries under the Baltic Sea. The Norway-Poland pipeline was to diversify Poland’s natural gas sources and reduce the country’s dependence on Russian gas (to be discussed below). The swap deal would have made that pipeline unnecessary, for Norway and Poland would not have an alternative gas supply route. Finally in February 2003, Warsaw and Moscow renegotiated the 1993 gas agreement. The Polish delegation was led by Deputy Prime Minister Marek Pol, who had signed the 1995 protocol that had led Poland to its precarious situation. The Poles entered the negotiations with having a signed agreement with Norway to build a gas pipeline connecting the two countries. In June 2003, PGNiG and Gazprom also signed an annex to their original contract based on the new terms of the intergovernmental agreement. According to Pol, the companies agreed to decrease the Russian gas supply to Poland by 74.6 billion cubic meters, amounting to 34.5 percent less gas between 2003 and 2020 than had been agreed upon in the original contract.54 Warsaw surrendered on the Yamal 2 pipeline.55 A senior official of the Miller government said that the reduction had been reached from three sources: 1) There was to be a decrease in the absolute quantity Russia would supply, from 250 billion to 212 billion cubic meters; 2) the contract was extended by two years until 2022, thus decreasing the amount of gas that would be imported annually; and 3) as of 2003, a significant amount of gas that was to be delivered to Poland had never arrived in the country. The new contract subtracted the undelivered gas from the total.56 Piotr Wozniak, a former board member and vice president of PGNiG, was suspicious about the reduction in gas deliveries claimed by the Polish government. He estimated that the actual reduction may only amount to 17 percent. Wozniak claimed the original agreement between PGNiG and Gazprom divided the amount of gas delivered by Gazprom into two parts, a ‘‘fixed quota’’ and a ‘‘flexible quota.’’ The ‘‘fixed quota,’’ under the ‘‘take-or-pay’’ rule, was not subject to further negotiations. The ‘‘flexible quota’’ was exempted from the ‘‘take-or-pay’’ rule and allowed PGNiG to accept the amount of gas it needed on a yearly basis. ‘‘The value of the flexible quota is similar to the reduction that PGNiG declares it has secured,’’ he

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said.57 Precisely giving up the ‘‘flexible quota’’ put Poland into a very disadvantageous position. Before 2003, it took over the gas under the ‘‘fixed quota,’’ and for the rest it conducted negotiations at the Ukrainian spot market. If it was not successful, it still was able to take gas from the ‘‘flexible quota.’’ However, the renegotiated contract gave up the latter option leaving Poland vulnerable to the Ukrainian spot market. While buying on the Ukrainian spot market was an option for PGNiG before 2003, afterwards it became a necessity.58 ‘‘The terms of Poland’s recent gas contract with Russia mean strengthening Gazprom’s monopoly for almost another two decades,’’ Rafal Kasprow, another former PGNiG board member, said. ‘‘Poland has agreed to sign an agreement that will reduce revenues from the transit of Russian gas, boost its price, hinder market liberalization, and hurt the chemicals industry.’’ He estimated that budget revenues would decrease by $1.4 billion. The domestic pipeline operator, Europol Gas, would lose $3.5 billion in revenues.59 According to the original contract, 2.88 billion cubic meters of gas was to be delivered through Yamal 1, while the remainder would be delivered via Yamal 2, which still had not been built. ‘‘An asymmetric situation has taken place: Poland is obliged to pay for gas [because of the take-or-pay rule] from a pipeline that does not exist.’’60 There was a real danger that the take-or-pay rule would be enforced. Poland asked Russia to agree to supply the additional gas for Polish demand via other points of delivery.61 The new contract said the remainder would be delivered through two old connection points, Drozdowytsche and Wysokoje, from Ukraine and Belarus.62 The Polish Supreme Board of Inspection (NIK), the state body in charge of evaluating agreements made by the Polish state, concluded that the renegotiated gas contract put Poland’s energy security at risk. Under the contract, Yamal 2 would never be built, and Poland was now committed to take in an amount of gas that would make diversifying its supply unfeasible. Apparently, Pol was not even authorized to conduct the negotiations. The report concluded that ‘‘the Act on International Agreements was breached at every level of the negotiations.’’63 Thanks to the renewed gas contract of 2003, Russia strengthened its position as supplier of natural gas to Poland until 2022. Besides securing a monopoly over the Polish gas market, Gazprom also managed to substantially weaken Europol Gas, the operator of the Polish section of the Yamal pipeline. It came closer to controlling the key transmission infrastructure on Polish territory. Rzeczpospolita wrote that Pol legitimized Russia’s violation of the original contract by agreeing to cancel Yamal 2, which made the Baltic pipeline that was to circumvent Poland only more likely.64 Poland’s commitment to Gazprom gas made the Norwegian deal irrational and, as a result, it was never ratified. Natural Gas Pipeline System to, through and around Poland As discussed previously, Gazprom in 1999 first hinted that it would withdraw from its deal to construct Yamal 2. Meanwhile, it was also floating plans of building an alternative pipeline below the Baltic Sea, which would establish a direct link with

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Germany without crossing Poland and may prevent the construction of a pipeline from Norway to Poland. Later that year, Russia raised the possibility of building an inter-system connector, which was designed to pressure Ukraine (see Map 4.1). For a summary of existing and planned pipelines discussed in this chapter, see Table 5.2. In May 2000, Gazprom officially declared that it wanted to withdraw from its deal to construct Yamal 2 and build an inter-system connector instead. The new plan Table 5.2 Major Characteristics of the Pipeline Plans to, through, and around Poland Initiator

Direction

First time idea occurred Key features

Yamal 1

Polish and East-to-West (from the Russian Western states Siberian Yamal to Germany)

1993

• Supplements the Brotherhood pipeline as a major supply route for Russian gas to Western Europe

Yamal 2

Polish and East-to-West (from the Russian Western states Siberian Yamal to Germany)

1993

• Supposed to deliver about 80 percent of the gas supply to Poland from Russia under the 1993 agreement • Its construction never started

1996

• Poland promoted it to diversify its gas import

Norwegian- Polish state Danish

North-toSouth (Norway to Poland under the Baltic Sea)

Inter-system connect

East-to-West Dec. 1999 • Would bypass Ukraine • Used as an implicit threat for (RussiaUkraine BelarusPolandSlovakia)

BernauSzczeczin

Russian Baltic

Gazprom

Bartimpex + West-to-East Ruhrgas (from Germany’s Bernau to Poland’s Szczeczin) Gazprom

July 2000 • Would deliver Russian gas

East-to-West Feb. 1999 • Presented as an alternative to Yamal 2 (from Russia • Used as a threat for Poland to Germany under the Baltic Sea)

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threatened Poland in a few ways. The section of the inter-system connector that would run through Polish territory would be shorter than the Polish section of Yamal 2; thus Poland may enjoy smaller revenues from the transit fees. The new connector would run through a less industrialized region, which would make it harder for Poland to reap any benefits from its construction. It would also interfere with a national reserve. Slovakia preferred the new plan, as it sent more gas through the country, thus giving it more revenue from transit fees. The plan would also grant the country greater cache in its relationship with Russia as a significant portion of Russian gas transported to Western Europe would have to pass through Slovakian territory. Ukraine, by contrast, would be the biggest loser if the new track were built, as it would circumvent Ukrainian territory and connect with the old Brotherhood pipeline; the section of the Brotherhood pipeline running through Ukrainian territory would most likely be operated at a lower capacity. Ukraine would be more vulnerable to Russia and lose significant revenues from transit fees. Gazprom would have the power to shut down Ukraine’s gas supply, which would be very hard to do as long as 90 percent of the gas sent to Western Europe traveled through Ukraine. The Russian company would have another instrument to force Kiev to pay its gas bills. There were still problems for Gazprom. The new track would make its trade with Western Europe more dependent on Slovakia and fail to ease its dependency on Poland. (Part of the new track would still have to be laid on Polish territory.) Russia would have to renegotiate its 1993 treaty with Poland, where Gazprom had committed itself to building Yamal 2. (Eventually, this indeed happened. There is no commitment in the renegotiated gas contract of 2003 to building Yamal 2.) On May 20, 2000, Polish economy minister Janusz Steinhoff said that Poland would consider its own foreign policy interests, as well as those of Ukraine, when deciding on plans to build the new track. The decision, he said, would concern more than the Polish economy.65 Poland was ‘‘to avoid acting counter to Ukraine’s interests,’’ President Alexander Kwasniewski said in an interview. 66 Kiev, meanwhile, started recruiting Western companies to enter a joint venture with Gazprom to operate Ukraine’s pipeline system.67 A few days later, Gazprom CEO Vyakhirev announced Gazprom would speed up the construction of the inter-system connector.68 The Russian state laid its weight behind Gazprom’s plan. During Kwasniewski’s visit to Moscow in July 2000, Putin renewed Gazprom’s proposal to build the inter-system connector.69 A few weeks later, Russia’s deputy prime minister Viktor Khristenko sent a letter to Polish prime minister Jerzy Buzek requesting Poland’s cooperation in building the connector.70 At the same time, Buzek signed a declaration to construct a natural gas pipeline with an expected 5 billion m3 capacity with his Norwegian counterpart Jens Stoltenberg.71 After consulting Ukraine, at the end of the month, Steinhoff, the economy minister, said Poland would likely not agree to the new plan for an inter-system connector.72 After Steinhoff ’s announcement, Gazprom presented a letter of intent signed by four Western gas companies—the French Gaz de France, the Italian Snam, the

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German Wintershall, and the German Ruhrgas—to construct the inter-system connector. At the same time, two companies—Alexander Gudzowaty’s Bartimpex (the indirect swing shareholder in Europol) and the German Ruhrgas—presented an alternative to the Norwegian-Polish pipe. According to their suggestion, Poland should diversify its gas supplies by connecting to the German gas system with a short pipe from Germany’s Bernau to the Polish city of Szczecin.73 Though Gazprom was not involved in this plan, all the players suspected that the Russian giant inspired the Bernau-Szczecin pipeline; there were, at the time, heated discussions about Central and Eastern Europe’s dependence on Russian gas, and the two companies at the center of the plan maintained suspicious alliances. Bartimpex focused its business on Russian gas deals. Ruhrgas had acquired a 2.5 percent share in Gazprom in December 1998; Gazprom had agreed to supply one-third of Ruhrgas’ total needs until 2030. In May 1999, Ruhrgas acquired a further 1.5 percent of Gazprom, thus owning a total of 4 percent of the Russian company.74 In early 2003, Bruckhard Bergmann, chairman of the executive board of Ruhrgas, became a member of the board of directors of Gazprom.75 Though advertised as a means of diversifying Poland’s gas supply, the Bernau-Szczecin pipeline would only aid Gazprom’s position. Gas market analysts pointed out that the German pipeline would deliver Russian gas. Gas passing through the pipeline would cost more than Russian gas arriving through the Yamal pipeline, since it had a longer and more indirect route to Poland, going through the whole Polish territory to Germany and then turning around back to Poland. In October 2000, Gazprom announced a deal with Gaz de France, Snam, Wintershall, and Ruhrgas to construct the inter-system connector, bypassing Ukraine.76 Only a few days after the deal was concluded, Putin asked Warsaw to agree to the construction of the inter-system connector, for which he promised a revenue of $1 billion in transit fees.77 In November 2000, a representative of Poland’s foreign ministry and Steinhoff softened their criticism of the project and said that Poland, in theory, could agree to it as long as Ukraine’s interests were not hurt.78 On November 22, Russian foreign minister Igor Ivanov visited Poland, where he said he was dissatisfied with the ‘‘political noise’’ around the issue, complaining that Warsaw was making its decision based on more than economic considerations. He told the Poles that the whole issue ‘‘should not arouse such a great deal of emotion, should not be dramatized.’’79 If politics did interfere, he said, ‘‘Russian gas will bypass Poland.’’80 Russia’s foreign minister had delivered a threat from Gazprom, which later proved to have some teeth. In January 2001, the Russian giant announced that it was soon to sign a letter of intent with the Finnish Fortum Oy and two German companies to construct a gas pipeline under the Baltic Sea, as an alternative to the Yamal 2 pipeline.81 For a summary of the rather complex chain of events related to the existing and planned natural gas pipelines in and around Poland, see Table 5.3. Gazprom was able to play not only with planned pipelines but exploit already existing ones. The most famous case became known as the fiber-optic cable scandal. According to the original contract, Gazprom was allowed to lay a fiber-optic cable

Table 5.3 Natural Gas Pipeline Ideas and Plans to, through and around Poland Pipelines

1993

Yamal 1

Polish-Russian intergovernmental agreement on gas supply and the construction of the Yamal pipelines (Yamal 1 and 2)

1998

Jan. 1999

Dec. 1999

May 2000

Yamal 1 begins operating with 20 billion c3 capacity; the issue of who will finance the two compressor stations arises

Yamal 2

NorwegianDanish

Feb. 1999

Gazprom first hints that it would withdraw from constructing Yamal 2

PGNiG and Norwegian Statoil begin talks about delivering 3– 4bcm of gas to Poland

Statoil freezes negotiations to construct a pipe between Norway and Poland

Gazprom announces intent to withdraw from the construction of Yamal 2 and to build the inter-system connector pipe instead

July 2000

Oct. 2000

Inter-system connector

Idea of a pipeline from Germany’s Bernau to the Polish Szczecin first occurs

Bernau-Szczeczin

Russian Baltic (predecessor of Nord Stream)

Gazprom signs a deal with Gaz de France, Snam, Wintershall, and Ruhrgas about the construction of the inter-system connector pipeline

The idea of the inter-system connector pipeline is first entertained

Gazprom hints that it is considering a pipeline under the Baltic Sea connecting Russia with Germany

Pipelines

Nov. 2000

Yamal 1

Fiber-optic cable scandal breaks out

Yamal 2 NorwegianDanish

Jan. 2001

Mar. 2001

June 2001

Aug. 2001

Feb. 2002

Feb. 2003

The renegotiated 1993 gas contract resolves the issue of the financing of the compressor stations at Yamal 1 PGNiG, the Danish DONG, and Statoil enter a consortium to build a natural gas pipeline from Denmark and Norway to Poland

PGNiG signs an agreement with DONG to supply 2 billion c3 gas per year

Poland signs an agreement with Norway to construct a pipeline that would supply 5 billion c3 gas per year

Inter-system connector

Bernau-Szczeczin Russian Baltic (predecessor of Nord Stream)

Idea of the inter-system connector is dropped Gazprom, the Finnish Fortum Oy, and two German companies announce signing of a letter of intent to construct the Baltic pipeline

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along the Yamal 1 pipeline, part of an established practice in the gas industry for monitoring gas flow and any other problems. But in November 2000, Warsaw recognized that the cable, laid by Gazprom along the Yamal pipeline, had far too much bandwidth for it to be used solely for monitoring pipeline activity. The highcapacity data transfer cable, according to communications minister Tomasz Szyszko, could pose a threat to Poland’s national security.82 Some claimed the cable’s bandwidth was technically feasible to use it for eavesdropping. It may transfer the amount of data equivalent to eavesdropping on all phone conversations conducted within Poland. It may have had enough capacity to transfer data from all phone conversations in Europe.83 ‘‘The lack of a decisive reaction from state authorities in the face of Gazprom’s activities in question may in consequence lead to the loss by Poland of a part of its sovereignty over its territory in the high-tech sector,’’ Szyszko said.84 Others were calmer, claiming that the cable simply did not have the capacity to transfer that much data. According to this opinion, the national security scare was unjustified.85 It’s unclear whether the cable threatened Poland, but the scandal illustrated a few essential points. Gazprom never apologized or explained its conduct, and never attempted to correct its actions. The incident also proved that Europol Gas had lost effective control over the fiber-optic cable and the Yamal pipeline. The language of the 1996 contract between PGNiG and Gazprom had been vague, but it did state that the fiber-optic cable was only to be used for monitoring the pipeline and not for any commercial purposes. In that sense, Gazprom had violated its spirit, if not its basic rule. The cable issue made headlines in the Polish press, but actually proved to be less problematic for Polish-Russian relations than the gas contract or the construction of Yamal 2. The scandal was solved in August 2001 when the Sejm passed an amendment to the Telecoms Law restoring the Polish government’s control over the fiber-optic cable. From then on, foreign operators of networks on Polish territory had to be approved by the state to make sure their activities did not harm Polish national interests.86 The cable scandal inspired Polish justice minister Lech Kaczynski to launch an investigation into Poland’s dependence on Russian gas, which ‘‘concluded that Poland’s dependence on one single supplier grows deeper, since the Polish side did not seek other sources of acquiring natural gas, and did not construct an underground gas storage base, so no reserves can be saved in case of emergency.’’87 The Buzek government took its cue and accelerated negotiations with Norway and Denmark. In March 2001, Norway proposed building a pipeline to Poland that would supply 5 billion m3 of Norwegian gas per year, starting in 2007. At the same time, the Danish state gas company DONG proposed a shorter pipeline capable of delivering 2 billion m3 of gas annually starting in October 2003, and which would eventually link to the Norwegian pipeline.88 By the end of the month, PGNiG entered a consortium with DONG and the Norwegian Statoil.89 Poland would still receive the vast majority of its gas imports from Russia, but the small alternative offered by the North-South pipeline gave it a better negotiating position. Poland and Gazprom were still in the middle of negotiations over the routing of Yamal 2. Since Poland kept objecting to the inter-system connector version, on

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March 20, 2001, Vyakhirev ‘‘threatened the Polish side that if it did not consent to the construction of a new part of the Yamal pipeline [the inter-system connector pipeline], the visit to Warsaw by the Russian Prime Minister would be deferred.’’90 When the secretary of the Russian Security Council, Sergei Ivanov, arrived in Poland for a two-day visit the following day, he called Vyakhirev’s statement ‘‘a completely curious example of the influence of economic circles on the world of politics.’’ He went on: I am not prepared to treat this seriously, and all the more since, according to my knowledge, contacts concerning the course of the pipeline are very effective and a lot has already been said, and certain deadlines have even been written down. So, if Vyakhirev said something like this, this only witnesses to the fact that he is quite simply breaking away from a particular language, from a particular philosophy of talks.91

Still, Vyakhirev may not have been exaggerating. The Kremlin would later prove happy to make political visits contingent on a country’s attitude toward Russian energy companies. The Buzek government hoped Norwegian and Danish gas contracts would improve Poland’s energy security. In June 2001, Poland signed an agreement with Danish DONG, whereby Poland would buy 16 billion m3 of gas between 2003 and 2011. A pipe would be built from the Danish town of Rodvig to Poland’s Niechorzi with a capacity of 8 billion m3 of gas per year. Eventually, it could be used for transporting natural gas from Norway.92 The deal was immediately attacked by the ex-communist Polish Socialist Party (SLD), whose chief Leszek Miller said the deal would be reconsidered if it won the parliamentary elections in the fall. The SLD claimed the Bernau-Szczecin pipeline, which connected to Germany, but actually delivered Russian gas, was a cheaper solution for gas diversification. Economy Minister Steinhoff answered that the price of Danish gas was lower than that coming through Bernau. By that time Hungary and Slovakia had also expressed interest in building the North-South pipeline to diversify their own gas imports, which would have helped ease the construction costs on Poland.93 In August 2001, Poland concluded a similar deal with Norway, marking the Buzek government’s last major energy deal before it lost power. The Norway-Poland natural gas pipeline would supply Poland with 74 billion m 3 of Norwegian gas between 2008 and 2024. The first 2.5 billion would be delivered in 2008. The pipeline would have a total annual capacity of 8 billion m3. By 2011, 5 billion m3 would be delivered to Poland annually.94 Norway would find a buyer for the remaining 3 billion m3. The SLD government, as promised, started reconsidering the Danish and Norwegian deals immediately after taking office. In December 2001, the new economy minister, Jacek Piechota, hinted that Poland could not afford Norwegian gas95 and one month later, the decision to construct the pipeline from Denmark was put on hold for a year.96 The agreement with Norway had to be ratified by December 1, 2002. That did not happen, and the ratification deadline was postponed one more

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time to December 31, 2003, which also came and passed. Eventually, PGNiG and Statoil officially withdrew from their contract.97 The withdrawal came after Poland and Russia renegotiated the gas contract and thus secured a supply monopoly for Gazprom in the Polish market for the next 20 years. In February 2002, Gazprom dropped the idea of building an inter-system connector through Slovakia. Boris Fyodorov, a member of Gazprom’s board of directors, said the company would concentrate on the pipeline under the Baltic Sea and the Yamal pipeline instead. ’’My impression is that the [inter-system connector] is basically cancelled. It was not discussed [at the previous board meeting] . . . This project from an economic point of view in any case was not the best solution.’’98 The idea, as his candor suggests, was always part of a political, not a business, strategy. It served to blackmail Ukraine and to break the Polish-Ukrainian alliance. Rafineria Gdanska The workings of the oil industry are markedly different from those of the natural gas industry. In the oil industry, the only way a supplier can become a true monopoly is for it to gain control of all major oil pipelines, port terminals or refineries—to gain control, in other words, over the distribution channels of alternative sources of supply. The Central Europeans have several opportunities for alternative sources of oil outside of Russia, which in terms of its proven reserves is not as significant a player in the world oil market as it is in the world gas market. It is much easier to transport oil than gas. The cost of natural gas is a function of the distance between the consumer and the extraction site: the longer the distance, the higher the costs of natural gas. In the European market, Russian natural gas loses its competitiveness (compared to Norwegian, Algerian, and British gas) somewhere in the middle of Germany and Italy. Distance is much less of a determining factor in the cost of oil, making it much easier to substitute one seller for another. If Russia ceased selling crude oil, within limits, there would always be alternatives to buy oil. Gas is mainly transported through a pipeline.99 Crude oil is easily transportable by pipeline as well as by sea. A country with a seaport equipped with an oil refinery can enjoy a continuous supply of refined oil. If the pipeline route leading to a refinery is cut, in theory it can always buy crude from tankers. Of course, the case is much more complicated when refineries are located farther away from access to seaports. Countries commit to a gas provider for decades to secure a stable supply of natural gas, but they do not have to tie themselves to one crude oil supplier for long. Gas contracts tend to be long-term. Oil contracts tend to be short-term. The consumer in the oil market enjoys far more advantages than the consumer in the gas market. If a supplier wants to strengthen its position, it has to limit a consumer’s alternatives, and the only realistic means one has to do that is to limit the means of entry into the market. In the case of crude oil this amounts to pipelines, ports, and refineries. Pipelines serve as the primary vehicles for transporting crude oil in Central Europe. If a Russian company owns a pipeline in a Central European country, it

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would be able to deny access to its transit capacity to any third party without providing an explanation.100 Let us assume that Lukoil owns the only oil pipeline crossing Hungary. If Mol, the Hungarian oil monopoly, buys crude from Azerbaijan to be transported via Ukraine, Lukoil in theory would be able to deny the Hungarian part of the pipeline for the transport of the Azeri oil. Coastal countries usually have at least one port capable of receiving large tankers. These countries may receive most or all of their crude imports through pipelines, but the possibility of receiving crude from other sources prevents them from falling into the power of their pipeline supplier. If an oil company supplies a certain country with crude oil through a pipeline and wants to gain leverage over its oil industry, it can try to gain control over the country’s oil terminal as well. If this oil company also controls the part of the pipeline going through the country’s territory, it would have full control over the country’s oil market. Once it is imported, crude oil has to be refined, hence the presence of oil refineries at the end of each pipeline and oil terminal. If Lukoil owned Hungary’s only refinery, it could pressure Hungary to buy only Russian oil through the pipeline leading to the refinery. Otherwise, it could decide not to process oil from other sources. Despite the difficulty of obtaining a monopoly in the industry, Poland, Slovakia, and Hungary imported more than 90 percent of its crude oil from Russia 13 years after the end of the Cold War. Up until mid-2003, only few Russian oil companies had carved out a significant presence in Central and Eastern Europe. The Kremlin aspired in the mid-1990s to create an artificial monopoly situation for its oil companies in their export-import relationship with countries of Central Eastern Europe. Even though the oil sector was split into several companies in Russia, CEE countries were not able to choose from the best offer they could receive from these individual companies. Instead, the Kremlin created a system of coordinators that is it appointed one oil company as the coordinator for Russian crude oil supply to a given country. Import of Russian crude oil to that particular country could go only through the coordinator. This way, Moscow artificially created a monopoly supply position for its oil companies in Central and Eastern Europe. Slovakia’s coordinator was Slavneft, Hungary’s and Poland’s Yukos.101 The Russian Ministry of Energy’s control over Transneft, which owned almost all crude oil pipelines in the Russian Federation, proved its most important asset in controlling the flow of Russian oil abroad. (Transneft had been kept in state hands as the rest of the oil industry was privatizing in the early 1990s.) As an industry analyst noted, ‘‘Transneft is only one of a few companies the government owns in the industry and represents the ultimate tool to control the major oil companies.’’102 This system of coordinators seems to have broken down towards the end of the 1990s. There was one feature of Central Europe’s oil industries that made them vulnerable to Russian power. Central European countries usually have only one major pipeline in their territory, which is owned by a sole operator. They also usually have only one or two refineries and one big supply company. The setup is part of the legacy of communism, in which strategic industries were centralized and owned by the state. Small countries also tend to have no more than one oil company, as the oil industry

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tends towards consolidation, making it very difficult for multiple players to coexist in small markets. If a country wanted to privatize its oil industry, a Russian company would only have to buy a pipeline operator or one refinery to gain leverage over the entire nation’s operation. Between Hungary, Slovakia, and Poland, only Poland has direct access to the sea, with one major sea terminal. It also has several oil refineries, but only two enjoy substantial capacity. Slovakia and Hungary are both landlocked. For Slovakia to access a seaport to the south, it would need to go through two countries. To access a seaport in the north, it would need to go through Poland, a route that would require it to drive a pipeline through the Carpathian Mountains, a formidable natural barrier. Transpetrol, a pipeline company, does enjoy a domestic transport monopoly in the country. There’s also one major oil refinery controlled by Slovnaft. Until 2007, Hungary received almost all of its crude oil from Russia in the east and had the option to buy through the Adriatic port of Omisalj via a pipeline laid through Croatia. While the Russian company Yukos aimed at reversing the flow of the Adria pipeline in 2002, it did not manage to do so due to the objection of Croatia. Mol, the domestic oil and gas company, enjoys a supply monopoly over oil and owns the country’s only significant refinery in Sza´zhalombatta. When Poland began privatizing its oil industry, there were two major oil refineries. The bigger one, PKN Orlen, located in Plock, controlled 60 percent of the market.103 The other, Rafineria Gdanska (RG) in Gdansk, controlled 20 percent.104 Gdansk is supplied by the Friendship (Druzhba) pipeline with Russian crude. Friendship also delivers to Germany. The Polish section of the pipe is owned and operated by a Polish company, PERN, which is fully owned by the state. The country’s only sea terminal, Naftoport, is located in Gdansk. The Polish government was undecided for years whether to consolidate the oil industry by fostering a merger between PKN Orlen and Rafineria Gdanska, and if so, what kind of privatization to allow. Supporters of the merger argued it would strengthen PKN Orlen’s position in Central Europe, compared to Austria’s OMV and Hungary’s Mol, and provide it protection from a hostile takeover.105 Opponents claimed a single Polish oil company would prove an easy target for any Russian oil company. If Lukoil or Yukos were to take over the merged company, the whole oil industry would immediately fall into Russian hands; the new company would actually be a very tempting target for Russian companies. Some called for completely avoiding consolidation of the Polish oil sector. It was inevitable, supporters said, that Russian oil companies would take over Poland’s industry, but Poland could try to force them to compete in the market. Proponents of the measure suggested that the Polish government should support the creation of two big Polish oil companies, PKN Orlen and RG, and then privatize them. As RG’s market share was one-third that of PKN Orlen’s, the strategy would require strengthening RG’s position. When privatizing the industry, the government had to decide what percentage of the refineries’ shares would go on sale, whether to sell the refineries to a strategic or financial investor, whether to favor domestic over foreign buyers, and how to attract Western companies.

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The Polish government initially decided to privatize Rafineria Gdanska before PKN Orlen, a strategy that precluded a merger between the two companies. In 1996, the government created Nafta Polska (NP), a state agency charged with executing the oil industry’s privatization, and gave it the government’s share in the two companies. NP was authorized to prepare the tender for RG’s privatization, evaluate the bids and pick a winner. A first attempt to sell RG in 1998 failed, allegedly because it did not receive good offers. The second tender was launched in early 2001, in which 75 percent of RG’s shares were put on sale. By May, the tender was whittled down to two finalists: the Hungarian oil company Mol and Rotch Energy, a mysterious UK-based company allegedly owned by two Arab sheiks. Rotch Energy, which was undercapitalized, did not have a single investment in the oil industry or Central Europe and it was unclear why it was interested in buying RG. A rumor grew that it was partly or entirely owned by a Russian company, either Lukoil or Yukos. If true, selling RG to Rotch would have meant selling to a Russian oil giant. The allegation was never proven, but it was not far-fetched. Russians have often entered privatization tenders in the region under the guise of a Western company. This happened, as will be discussed later, in the case of the Hungarian petrochemical company, Borsodchem. Rotch was chosen over Mol to start due diligence, but it soon became clear it lacked the financial means to back its offer for the refinery. Yukos, whose offer had been rejected for procedural reasons, announced it would still be interested in buying RG if Rotch failed. Yukos’s interest in RG could not go unnoticed in Poland. Polish treasury minister Wieslaw Kaczmarek said that selling the stake in RG to a Russian investor would ‘‘create a huge political storm . . . Yukos is not being taken into account at this stage of RG privatization, but one has to realize that after 10 years of absence, Russian investors will someday return to Poland.’’106 A few days after Yukos’s announcement, Rotch announced that because of the financial block to buying RG, it had teamed up with Lukoil to carry out the deal.107 According to Rotch’s agreement with the Russian company, Lukoil would get 49 percent of the public shares of RG, while the remaining 51 percent would go to Rotch. According to a preliminary agreement between the potential buyers and the Polish state, Rotch would be prohibited from selling its share in RG to Lukoil for 10 years.108 There was a general consensus opposed to Russian companies’ takeover of strategic industries; a poll conducted in the fall of 2002 found that over 51 percent of Poles believed that Russian investment was not favorable for Poland.109 So Russian companies started partnering with Western companies in privatization deals to earn themselves some much-needed legitimacy.110 Western-Russian consortiums were indeed more welcome, but there were several examples of Western partners selling their shares to Russians after deals had been completed in the region. This is the source for the clause in the Rafineria Gdanska deal prohibiting Rotch from selling its shares to Lukoil for the next 10 years. In July 2002, Treasury Minister Kaczmarek said of the Rotch-Lukoil deal, ‘‘I would evaluate it very high. However, this project involves political risk.’’111 The fact that the deal gave Russian control to the second largest refinery in Poland, with a

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market share of 20 percent, did not in itself present a political issue. The bigger cause for concern was that the refinery owned 26.54 percent of Naftoport, Poland’s only oil terminal, which provides the country with access to alternative sources for crude oil. ‘‘[T]he Russians will make use of any business weakness on the part of their negotiating partners,’’ a former Polish gas industry executive said.112 ‘‘The Russians are tough and uncompromising partners. We are too weak for them. If we sign the sale agreement for RG we will be making a mistake that they will exploit to the full.’’113 Others agreed. The managing director of Fitch Ratings, Richard Hunter, said that a takeover of RG by Lukoil would make Poland permanently dependent on Russia and a less attractive target for Western investment.114 ‘‘Our offer gives what’s most important—stability and security,’’ Lukoil CEO, Vagit Alekperov, said. ‘‘The refinery is given a chance to purchase oil straight from the producer, with no third parties involved. All buyers will benefit from it.’’115 In late 2002, Lukoil threatened discontinuing crude oil sales to PKN Orlen, the stateowned company that provided more than 75 percent of Poland’s demand for refined oil, unless the Russian company received its demands with RG.116 Coming at the beginning of the heating season, the threat amounted to blackmail. In a visit in February 2003, Russian prime minister Mikhail Kasyanov openly supported Lukoil’s bid for the Gdansk refinery, saying that ‘‘Russia’s government supports endeavors of Russian companies to invest in Poland. Proposals, such as Lukoil’s and Siewierstal’s [Severstal], are still valid.’’117 In April 2003, Nafta Polska proposed that the Polish government call off the tender for RG. Poland revised its oil industry strategy. It did not explicitly prohibit a future merger between PKN Orlen and RG, but the two companies’ privatization was postponed until each was strong enough to maintain its power in case of a foreign company’s takeover. That summer, RG merged with three southern refineries, creating a new group, Lotos. PKN Orlen–Mol Merger The idea of fostering closer cooperation or even a merger between the Polish and the Hungarian oil monopolies first arose in the fall of 2000, when conservative governments were still in power in both countries, Buzek in Poland and Orban in Hungary. The thinking went that merging the two companies would defend them against a hostile takeover. By 2000, it was well understood that Russian companies involved in exploration tended to a vertical buildup, whereby they would move to the sectors of the industry involved in transit, refining, wholesale, and retail. PKN Orlen and Mol were wholesalers and retailers, but their exploration activities were small compared to those of the industry majors, and market analysts predicted they would soon be taken over by a third company, the common fate for oil companies uninvolved in exploration. As Western companies proved to be uninterested in Central and Eastern Europe’s oil industry and as Russian companies proved eager to expand, the partly stateowned companies and their governments began to pursue negotiations to strengthen

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their position. In August 2001, Mol proposed a $1.5 billion merger of equals with PKN Orlen.118 These negotiations were held parallel with the tender for RG, of which Mol was one of the contenders. Rumors flew that Yukos would use Mol to gain access to RG, and Mol failed to persuade the Poles that these fears were unfounded. The Mol–PKN Orlen negotiations broke down in January 2002, at which point the Polish government invited OMV to present an offer for a 17.6 percent stake in the Polish oil company; a short three months later, in April 2002, the Miller government decided against selling the stake. There were two major considerations behind the discussions, whether a Russian company would use Mol to gain control over PKN Orlen, and whether the new entity would be an easy target for takeover by a Russian company. It was widely believed in Poland that Yukos had a substantial share in Mol, and the merger would grant it a good part of PKN Orlen. At that time, 30 percent of Mol’s shares were traded on the Hungarian stock exchange by small shareholders whose identity was unknown. Market analysts speculated that Gazprom owned a part of Mol during the Borsodchem takeover (to be discussed later) in September 2000, after which Mol transformed its structure to prevent such an incident from occurring again. The Hungarians were never able to prove that Mol was strong enough to defend itself against a Russian takeover, a senior executive of Mol said. The so-called ‘‘dual-headed’’ model Mol recommended for the merged entity would have made it difficult for a third party to acquire a substantial share in the new company. ‘‘We could say anything. The fear from the Russians was deeply set in the heads of the Poles,’’ he said.119 The Poles’ rejection became definitive in April 2002. In November 2003, Mol again received exclusive rights to negotiate a merger with PKN Orlen and again fears the new entity would become an easy prey for the Russians dominated discussions. ‘‘[I]t is a misunderstanding to believe that the merged entity will be able to buy oil more cheaply,’’ Rafal Jankowski of Pekao Bank said. ‘‘Mol’s negotiating capabilities are very limited, especially as far as the Russians are concerned. Mol has an exploration joint venture with Yukos. This is not usual that the Russians allow someone to explore their oil deposits. And if they did, they are going to be dictating the terms.’’ The Polish government ordered a study on the possible impact of the merger from the Polish Foreign Ministry’s European department, the Ministry for Economics, and the Centre for Eastern Studies (CES), a Warsawbased think tank.120 ‘‘Merging Orlen with the Hungarian company could result not only in the state losing control over Orlen, but also in the merged entity being taken over by Yukos,’’ it said. The report noted Russia’s growing expansion in Central Europe’s energy sectors and said the regional interests of the Russian state and the major Russian energy companies—Gazprom, Yukos and Lukoil—were concurrent. These were the same reasons the Polish government had opposed the merger two years before.121 Fearing a Russian takeover, the Poles did not comply. ‘‘Postmerger, both companies will be too small to defend themselves effectively,’’ Sebastian Slomka, analyst at PKO BP brokerage told Gazeta Wyborcza. ‘‘Moreover, taking over a single company is easier than taking over two. Both companies’ relatively dispersed ownership makes them easy takeover targets.’’

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As of April 30, 2004, the deadline for negotiations, the deal was left unconcluded. In an interview for the Polish dailyParkiet, Maciej Gierej, the former president of Nafta Polska, said that a game was and was still then being played aimed at taking over the merged company. Russian fuel giants, he guessed, were behind these plans.122 It is unclear whether he was right and whether Polish fears were justified, but they were the main factor behind the Polish state’s final decision.

Slovakia The Privatization of SPP The Slovak gas company Slovensky Plynarensky Priemysel (SPP) enjoyed a monopoly on Slovakia’s gas industry, with exclusive rights to import gas and distribute it wholesale. It owned the pipeline system that transported natural gas through Slovakian territory from the east to the west; in the 1990s, SPP made about $600 million a year transporting gas through these five lines,123 amounting to about half of SPP’s revenues.124 The pipeline system’s capacity stood at 90 billion cubic meter per year, nearly three times that of Yamal 1 (32 billion m3) and 30 percent more than that of the two Yamal lines combined (67 billion m3), and during the ’90s, the system’s transport capacity was almost fully utilized. In 1998, SPP transported 84 billion m3. In 1999, it transported 88 billion m3.125 Before it was privatized, SPP was entirely owned by the state. To control Slovakia’s gas industry, as the Slovakians themselves were very aware, one only had to take over SPP. In May 1999, Economy Minister Ludovit Cernak said that even though Slovakia was eager to attract foreign investors, it was crucial to maintain state control over strategic companies like SPP.126 The Slovak government first floated the idea of privatizing SPP at the beginning of 2000, only a few months after Gazprom threatened in October 1999 that it would consider building a pipeline under the Baltic Sea. In March 2000, Gazprom issued an ultimatum to Slovakia and Poland: either consent to building the inter-system connector, or Gazprom would construct the northern underwater pipe.127 SPP was poised to turn a good profit. If the inter-system connector was built, the volume of gas transported through Slovakia would have increased significantly (requiring significant investment in Slovakia’s pipeline), thus making Slovakia the major point of transit for Russian natural gas. If, however, the Baltic line was built instead, SPP would be threatened with a possible drop in its transit value. The Slovakian pipelines had been used almost exclusively for delivering Gazprom gas, and Gazprom’s threats and offers influenced SPP accordingly. On March 14, 2000, Slovakia gave its consent to the inter-system connector pipeline and agreed officially to build a gas pipeline through Belarus and Poland to Slovakia.128 Economy Minister Lubomir Harach claimed the new pipeline would diversify Slovakia’s resources as it delivered gas from Yamal, and it would also increase the value of SPP before its privatization.129 In May 2000, the Slovak government decided to sell 49 percent of SPP, and a few days later, Harach said Gazprom expressed its interest in participating in the

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privatization to the Russian ambassador in Bratislava. 130 The Slovakians, unlike the Poles, were unconcerned by the interests of a Russian investor and likely actively supported Gazprom’s participation. According to an article in the Russian business paper Kommersant, published a few days after Harach’s comments, Slovakia did not object to the construction of the inter-system pipeline through its territory as long as the Russian giant participated in SPP’s privatization.131 Gazprom did not comment on the article, and the Slovak Economy Ministry denied any link between the pipeline and SPP’s privatization. But Harach said Slovakia would not necessarily find itself dependent on Russian energy if Gazprom bought part of SPP. It all depended, he said, on the size of the Russians’ stake.132 Slovakia started on a new direction in May 2000, when it expressed interest in the alternative pipeline the Poles were planning on building with Norway. It also openly considered an alternative pipeline through the Czech Republic. ‘‘We are interested in good cooperation not only with Gazprom and Russia, but also with other countries of the former Soviet Union because a certain diversification in eastern natural sources for the supplies of Slovakia is needed,’’ Harach said.133 In March 2000, Gazprom’s senior official responsible for export policy, Jurij Komarov, threatened Bratislava ‘‘uncertainty of position of Poland and Slovak Republic about this issue [intersystem connector pipeline] may force Gazprom to make a decision about priority construction of the Northern pipeline [ . . . and] construction of the second line of the Yamal-Europe pipeline [he means the inter-system connector pipeline] will be postponed for a long time, which will inevitably lower the status of Poland, Slovak and Czech Republics as transit countries.’’134 As plans for the Norway-Poland pipeline waned, Slovakia returned to supporting the inter-system connector. During his visit to Bratislava in January 2001, Russian foreign minister Igor Ivanov said he welcomed Slovakia’s interest in participating in the construction of the pipeline. The tender for SPP was finally announced in August. Gazprom officially confirmed its interest in participating in SPP’s privatization on June 18, 2001, two months before the tender was released. In November, Gazprom’s chief executive, Alexei Miller, said, ‘‘Gazprom’s participation in SPP’s privatization is strategically important for both countries and will guarantee stable gas supplies to Slovakia as well as to other European countries in the future.’’135 Miller made his announcement as the Slovak president was visiting Moscow and it is hard not to see the thinly veiled threat in Miller’s words, which link a stable gas supply to privatization. Gazprom frequently used this implicit threat and made good on it not once, during discussions with Belarus and Ukraine. Discussions between Gazprom and Slovakia started in November 2001 after Slovak president Rudolf Schuster met with Putin in Moscow, where, a company press release said, Gazprom’s participation in SPP’s privatization received special attention. 136 Miller, Gazprom’s CEO, suggested at the time that the Slovak government had changed its position regarding the possibility of the Russians taking over the full 49 percent of SPP.

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Throughout the privatization process, the Slovak state continually emphasized that it intended to sell the 49 percent share to one strategic investor or a consortium of investors. Gazprom wanted to win the 49 percent stake alone, but the chances of that, whatever their likelihood, soon evaporated in December when the Slovak Privatization Agency sold 49 percent of shares and management rights for Transpetrol, the owner and operator of the Slovak oil pipeline to Yukos.137 The Slovak press and industry analysts denounced the move, creating a controversy that would make it unlikely for a similar sale, involving SPP, to be publicly accepted in this former bastion of pro-Russian sentiment. Gazprom’s offer in October in the second round of SPP privatization no longer presented a viable option. When the final deadline for submitting bids for the 49 percent stake in SPP arrived in February 2002, the government received only one offer, from a consortium made up of Ruhrgas, Gaz de France, and Gazprom. The Slovak government accepted the offer. Ruhrgas and Gaz de France were to pay for the acquisition, while leaving the option open for Gazprom to join in by buying one-third of the 49 percent stake. Although the Slovak state would maintain a 51 percent stake in SPP, the transaction agreement prescribed a 52 percent shareholder approval for any decision and two-thirds approval for major decisions.138 The Slovak state, for all practical purposes, lost control of the gas company, as all major decisions would require the consent of minority shareholders. If the Slovak government wanted to sell more shares, the minority shareholders would enjoy an option for a further 3 percent, meaning that the consortium would eventually have the opportunity of obtaining 52 percent of SPP. SPP’s sale presented another problem for Slovakia, besides the fact that the state had ceded veto rights to the minority shareholders as the consortium paid Sk130 billion ($2.7 billion) for the 49 percent stake, significantly less than the government’s target of Sk150–200 billion. Gazprom did not succeed in buying the 49 percent stake of SPP alone, as would have been its desired goal. It received the option to have a say in all decisions related to SPP and to become a partial owner of the gas monopoly. However, it never took advantage of this opportunity and at the end did not buy the one-third of the 49 percent stake it was entitled to do. This will be discussed more fully in Chapter 6. The Privatization of Transpetrol Transpetrol—which was established in 1991 with only one shareholder, the Slovak Economy Ministry—owned and operated the Slovak part of the Druzhba crude oil pipeline, a 515-km track with an annual transport capacity of 21 million tons. The pipeline delivered Russian oil to Slovnaft, which owned the only Slovak refinery located in Bratislava, and also to Mol in Hungary. It was heavily underutilized, transporting in 2000 only 9.279 million tons of crude oil, about 44 percent of its total capacity. That year, the Economy Ministry decided to sell its 49 percent stake of Transpetrol to one or a consortium of strategic investors. By the final phase of the tender in September 2001, there were six possible investors: Slovnaft, Ceska Rafinerska

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(the single Czech refinery), Rosneft, Texaco, Surgutneftegaz, and Yukos.139 The privatization process met an unexpected obstacle a month later; Humenne District Court halted the sale of Transpetrol shares when a private company sought to acquire 34 percent of the pipeline operator’s shares as compensation for losses apparently caused by faulty tax declarations in 1995.140 But the Privatization Ministry continued with the process anyway, despite the preliminary injunction issued by the court. Ceska Rafinerska dropped its bid in November and Rosneft also backed out, voicing concerns about the pending 34 percent share.141 In the end, Slovakia received only two final offers for Transpetrol, one from Yukos and the other from Slovnaft. In the end, the 49 percent share, as well as effective control over the company’s operations, were sold to Yukos for $74 million. Privatization Minister Maria Machova said the price offered for Transpetrol weighed 60 percent in the selection criteria. The ministry also considered the bidders’ capital, the ability to develop the transit pipeline, and the possibility of increasing the value of the state’s stake in the company.142 Slovnaft heavily criticized the decision, as it had bid $65.4 million along with the free transfer of its storage tanks, worth $20 million. It claimed it had not been notified the storage tanks would not be considered as part of the bid. The sale met with controversy, with the Slovak daily Novy Cas writing that it ‘‘will only deepen the inadmissible dependence of Slovakia on one course.’’143 Narodna Obroda, another daily, wrote, ‘‘If bidders and the seller start to argue about the clarity of conditions after a tender worth billions of crowns was completed, there must be something wrong with it.’’144 While Transpetrol owns and operates the only crude oil pipeline crossing Slovakia, it makes up a tiny part of Yukos’s investments. In 2000, Yukos had a turnover of $9.8 billion, equivalent to almost half of Slovakia’s GDP, spent $1 billion a year to increase production and intended on spending $4 billion to expand in Europe.145 For Yukos, Transpetrol’s $74 million price tag was negligible. Even though, during the privatization process, Yukos said it was willing to diversify Slovakia’s sources for oil,146 it reversed its stand once the tender was completed. In December 2001, Prime Minister Mikulas Dzurinda said Slovakia was interested in a crude oil pipeline between Brody and Odessa that would transport oil from the Caspian Sea through Slovakia to Western Europe. Yukos vice president Jurij Beilin said his company saw the project as unwelcome competition.147

Hungary Borsodchem Takeover At the beginning of the 1990s, Hungary’s oil industry was typical of Central Europe. The one state-owned company, Mol, enjoyed a monopoly, owning the Hungarian part of the Friendship crude oil pipeline along with wholesale rights for oil. Mol also owned the country’s only oil refinery, whose by-product, naphta, was a key raw material for the country’s petrochemical giant, TVK, which was located in Tiszaujvaros. TVK sold its by-product, ethylene, a sensitive, explosion-prone

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material, to the region’s second-largest petrochemical company, Borsodchem (BC). According to European standards, ethylene can only be delivered through pipelines, which is how all three companies are connected. In 2000, TVK and BC were among the best performers on the Hungarian stock exchange, and BC was among the most successful petrochemical producers in the world; under professional management, it was the only company in the industry that had not suffered any losses since 1990. BC’s customers were entirely Western and had only managed to grow, buying a Czech company.148 TVK, which is the biggest petrochemical raw material supplier in Central Europe, enjoyed a symbiotic relationship with BC. If TVK did not supply BC with ethylene, the operations of BC, which has no pipeline connection with any other ethylene supplier, would be endangered. Any other partner that did supply BC with ethylene would be forced to send the by-product through the one pipeline system passing through TVK, thus requiring TVK’s goodwill. On the other hand, if BC refused to take TVK’s ethylene, TVK would be forced to find a safer way to store its by-product. That would only be a temporary measure. Eventually, it would have to find another partner that would accept the surplus. There is another symbiotic relationship between oil and petrochemical companies. Oil companies produce many by-products during the refining process that are essential for petrochemical companies. It is extremely hard to store these materials, and as refining involves low profit margins, refineries require revenues from the sales of such residuals to survive. (Although oil companies are generating enormous profits today, this had not been that easy in the 1990s and early 2000s before oil prices started to skyrocket.) By-products from Mol’s Szazhalombatta refinery go to TVK. Mol’s ability to turn a profit is dependent on TVK’s purchases and TVK’s operations are dependent on BC’s purchases. If BC stopped buying from TVK, TVK would halt its operation. If TVK halted operations, Mol would have problems selling its residues. In short, TVK can directly and BC can indirectly inflict substantial harm on Mol (see Map 5.1 below). In the spring of 1998, Croesus, a Hungarian investment fund, bought 15– 25 percent of TVK. Templeton, a fund based in Singapore, bought 10 percent.149 The two funds kept acquiring shares through 1999, which forced Mol to acquire more TVK shares for fear the company would fall into the hands of a nonstrategic investor. Mol also asked BC to acquire some shares in TVK from Croesus and Templeton. In the summer of 2000, BC’s management decided to buy 30 percent of TVK, with the hope of ensuring a stable supply of ethylene. BC set up a so-called ‘‘handcuffs’’ deal. It offered TVK cash for shares and ensured that Templeton and Croesus could not sell their TVK shares without the approval of the BC board. However, having failed to achieve their purpose of taking control of TVK, the two funds sought to sell their shares. They finally escaped from the ‘‘handcuffs’’ by selling their shares in the forms of GDRs (certificates of share ownership) to an Ireland-based offshore company, Milford Holdings, of which very little was known, though Irish authorities claimed it was owned by a group of Cypriots. Milford’s name had first appeared in Hungary a few years earlier in connection with Gazprom.

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Map 5.1 Symbiosis among Mol, TVK, and Borsodchem

In 1999, Gazprom bought a 51 percent share in Sibur, a Russian petrochemical complex, marking the first time Gazprom diversified into the petrochemical sector. On September 5, 2000, Milford bought 24.58 percent of BC. Though market analysts immediately claimed that Milford represented Gazprom, the Russian giant denied any association. On September 19, Milford admitted in a statement that it was owned by Gazprom.150 Several other companies purchased BC shares on Gazprom’s request. The Russian MDM Bank bought 8.15 percent of BC; the Viennabased Central European Oil and Gas bought 17 percent.151 This was, as Gazprom was not seeking the consent of BC’s management, a hostile takeover. Hungarian laws required the owner of 33 percent of the company’s shares to issue a public offer for the remainder of the company,152 an amount that Gazprom had effectively acquired at the beginning of September 2000. But the companies Gazprom had entrusted with the buy-ups did not admit they had acted on behalf of Gazprom until November.153 Gazprom had concealed its ownership of the 33 percent of BC, thus avoiding the mandatory public offer of the rest of BC’s shares. As BC had acquired 30 percent of TVK the summer before, BC’s owner would essentially control TVK. Gazprom would control two of the three companies that made up the delicate symbiotic relationship in Hungary’s oil industry. In an attempt to calm TVK’s shareholders, Milford issued a statement, signed by its representative in Hungary, Megdet Rahimkulov, who was also the presidentCEO of Gazprom’s bank in Hungary, as well as president-CEO of the RussianHungarian joint venture of Panrusgas. The statement said the companies in the Gazprom group and the cooperating company Oriana in Ukraine would be able to provide a steady supply of benzol, vynilchlorid, and propylene to TVK and BC. After Oriana’s planned extension, it would be able to cover all of the Hungarian

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companies’ needs for the three products as well as ethylene.154 Eventually, Rahimkulov said, Gazprom would replace Mol as the major supplier of TVK, thus reinforcing the notion that Gazprom’s intensions were not necessarily benign. In a September interview, Rahimkulov denied that Gazprom was in the process of buying up Mol shares, but he did not exclude the company from doing so in the future.155 As Gazprom had denied any connection to Milford for two weeks, the Russian company’s trustworthiness regarding the statement of Rahimkulov is rather questionable. Mol feared severe losses in the new order. Industry analysts speculated Gazprom might want to force Mol to sell its natural gas wholesale business.156 On the day when Milford admitted its connection to Gazprom, September 19, trading of BC, TVK, and Mol stock was suspended at the companies’ request. In a meeting between BC and Mol, BC sold a 7 percent share in TVK to Mol, meaning the oil company now owned a total of 29.8 percent of TVK, and then received the right to buy an additional 25 percent of TVK through option deals with BC and Hungarian financial institutions. In a few days, Mol had acquired the option of becoming TVK’s majority owner, thus preventing Gazprom from taking it over. When trading of the three companies’ stocks had been suspended, market analysts had assumed Mol would buy BC’s TVK shares. On September 21, Rahimkulov, Gazprom’s Hungarian representative, warned in a television interview that if Gazprom’s interests were not taken into account during these transactions, the Russian company would reconsider purchasing Hungarian meat, vegetables, fruit, and medicine in exchange for natural gas, though he did say the company would continue to supply natural gas regularly and reliably. Milford, with its 24.7 percent share in BC, would not be able to prevent Mol from buying TVK, he said, but if Mol did succeed, Milford would go to court in Hungary and other parts of Europe to reverse the deal.157 Milford sued BC’s management, dropping the case only after Gazprom acquired a controlling majority of the company in November 2000. BC and TVK signed an agreement, extending their ethylene contract from 2003 to 2013. Although the Hungarians could prevent Gazprom from controlling TVK, they could not prevent Gazprom’s penetration into BC. In October, Gazprom said that, through Milford, it planned to replace BC’s management at the company’s November 24 meeting and revoke the petrochemical company’s agreement to sell a 15 percent share in TVK to Mol within two years.158 The sale of BC’s TVK shares depreciated the value of Gazprom’s investment in BC, as the Russian company had expected to gain leverage over TVK when it bought BC. Gazprom was left only with BC. Some investors speculated Gazprom might consider sharing ownership of Borsodchem. It should be noted that the BC takeover was Gazprom’s first venture in the petrochemical industry outside the former Soviet Union; it has since entered several privatization tenders in petrochemical companies in the region. There are four possible reasons why Gazprom wanted to buy BC. Most likely the real reason was a combination of them. First, Gazprom simply wanted to control Hungary’s petrochemical industry, a major strategic industry in any country. BC and TVK were the best stocks on the Hungarian Stock Exchange, and a boom was expected in the petrochemical industry

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of what was a transitional economy. Many expected a continuous increase in demand for PVC and other plastics. Second, Gazprom wanted to control TVK and BC’s ethylene pipelines. The 50-km pipeline connecting TVK and BC is owned by BC. The Hungarian part of the 120-km pipeline connecting Oriana, Ukraine, and Tiszaujvaros, Hungary, is owned by TVK. TVK, back in the summer of 1997, had considered connecting the former COMECON countries’ petrochemical factories, thus enabling raw materials to be delivered safely and cheaply under EU rules. The 910-km system would have connected Tiszaujvaros and Szazhalombatta in Hungary, Bratislava in Slovakia, Schwechat in Austria, and Litvinov in the Czech Republic. One end would have connected to the German system, the other to Kalus, Ukraine, the headquarters of Oriana.159 Sibur, Gazprom’s petrochemical company, wanted to build an ethylene pipeline snake from Russia to Western Europe. 160 Gazprom’s Hungarian representative told the Hungarian daily Nepszabadsag in September 2000 that his company was considering building an ethylene pipeline to several European countries.161 Third, the deal might have been an attempt for establishing a money-laundering operation, for which the pipeline system connecting Ukraine with Hungary would have been ideal. In fact, Sibur head Yakov Goldovskiy was among those who were imprisoned for similar charges during Putin’s moves to consolidate Gazprom two years later in 2002. Fourth, Gazprom’s BC takeover may have also been part of a gambit to control Mol. If the deal had been executed the way Gazprom had originally planned, the Russian company would have controlled BC and gained veto power in TVK, thus giving it strong leverage over Mol. Mol fearing a Gazprom takeover, not only bought BC’s shares in TVK, but also rewrote the company’s statute to protect itself against hostile takeovers. The Russians never denied their interest in Mol. In a press conference after meeting Hungarian prime minister Ferenc Gyurcsany in April 2005, Alexei Miller said Gazprom was interested in buying the 12 percent of Mol that was then up for sale.162 Rumors of Gazprom’s interests proliferated.163 Mol is a listed company with a very diverse ownership structure. At that time, 30 percent of its shares was owned by small shareholders, and it is unclear if Gazprom or its proxies were among them. Market analysts continually estimated that Gazprom had a substantial share in Mol. A former board member of BC estimated Gazprom’s share in Mol at 17–20 percent.164 Former management of Mol estimated Russian investment in the company in either the single or low double digits, though admitting that it was nearly impossible to tell the exact size but believed that the Russians might own a significant share of Mol.165 At the time of the BC takeover, Gazprom also entered a tender for Oriana. Oriana sold raw materials to TVK, though it had enough ethylene to supply BC if TVK was to be circumvented as BC’s key supplier. TVK and Oriana were connected with an ethylene pipeline, but none existed between Oriana and BC. Oriana was unreliable. It would operate for two or three months and then interrupt its operations.

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The Ukrainian government announced the privatization tender for Oriana in 2000. Sibur and Lukoil participated, and it was assumed, especially at a BC board meeting in September 2000, that Gazprom would soon control Oriana. 166 At the height of the BC takeover, in the second half of September, Gazprom went so far as to offer Oriana’s raw materials to supply the Hungarian companies. After it took over Oriana, it claimed it could supply BC with ethylene.167 The arrangement would have dramatically weakened TVK, which, in turn, would have hurt Mol. Gazprom also required Oriana for its planned snake pipeline. When in October 2000, the Ukrainian government named Lukoil the winner of the tender, Gazprom’s threat to replace TVK as the key supplier of BC became less feasible. The Hungarians feared that Gazprom was not a strategic investor with the necessary technology to run its new companies. Gazprom indeed had a reputation for asset stripping and impoverishing acquired companies. Such fears led to EBRD’s announcement in mid-November 2000 that the European Bank would not take more shares of BC, because of its nontransparent ownership.168 At the time, the family of BC’s CEO was receiving threats accompanied by demands that he cooperate with Gazprom.169 This was, according to many, the Russian way of doing business at the time. The Hungarian government, along with the country’s business community, was involved in Mol and BC’s negotiations. Western intelligence agencies, as well as a security firm, were involved as well. A hotline between an embassy of a Western country in Budapest and the Hungarian prime minister’s office was set up during the final negotiations.170 The Westerners were worried mostly about money laundering, as Gazprom had used cover companies to disguise its identity. Milford, as has been mentioned before, had connections with Cyprus. Irish authorities identified two Cypriots as its directors, but the identity of the real owners could not be found out from the company documents.171 Investigators traced 30 money transfers to buy BC shares.172 Gazprom also employed two Austrian companies, Vienna Capital Partners and CE Oil and Gas, as cover, both of which denied, with very little credibility, any connection to Gazprom until the end of November 2000, as they voted together with Milford and Sibur at general assembly meetings. Georg Stahl, a CE Oil and Gas representative, became a Sibur board member in July 2001.173 Hungarian laws required a company that acquired more than 33 percent of its shares to make an offer for the whole. Even if a takeover was unpreventable, it would at least be more expensive. The move would protect the price of small shareholders’ holdings. But the evidence that Gazprom had acquired more than 33 percent of BC was, according to the Hungarian government, circumstantial, there was no specific evidence suggesting Gazprom’s cronies were connected, and the Hungarian government forewent any action against Gazprom. In the summer of 2001, the Hungarian government passed a new law making circumstantial evidence sufficient to force a tender, in order to prevent such future deals. The Hungarian government could also have intervened in the takeover by inquiring about the source of the money as well, but to do so would have required specific, not circumstantial, evidence of money laundering. The law was changed accordingly afterwards as well. A

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former board member of Borsodchem said about the Russians that ‘‘they gambled that the Hungarian government would not step in, and they won. The Hungarian government refused to do a forced tender for the company, but allowed it to be taken over in the capital market . . . The takeover was a very sophisticated, well-organized, shrewd, smart move by the Russians.’’174 Later on, both Sibur and Capital Vienna Partners sold its stake in Borsodchem. Sibur’s withdrawal occurred after Gazprom had initiated a bankruptcy against Sibur. The company became one of the symbols of asset stripping going on in Russia during the 1990s. However, the move might have also indicated that since the ultimate target—i.e., Mol—was not acquired, other considerations behind the Russian investment in BC did not prove strong enough to keep the shares. Connecting the Druzhba and Adria Pipelines In 2000, Russian company Yukos started lobbying to connect the Druzhba and Adria pipelines. The Druzhba pipeline runs from Russia through Belarus, Ukraine, Slovakia, and Hungary to the Hungarian refinery of Szazhalombatta. The Adria pipeline connected the Croatian port of Omisalj with the Szazhalombatta refinery. Yukos envisoned connecting the two pipelines and reversing the flow of the Adria pipeline to gain more access for Russian oil to the Adriatic Sea. The idea was not new. When the Adria was built in 1979, the Soviet Union wanted to connect it to the Druzhba pipeline, but Yugoslavia rejected the plan, fearing it would result in its energy dependence on Moscow. 175 The plan became more feasible after September 11, 2001, when the United States stepped up attempts to diversify oil imports from Venezuela and the Middle East with crude oil imported from Russia.176 Omisalj is able to handle 500,000-ton tankers, a transportation tool that makes Russian oil economically viable in the United States.177 Tankers from Omisalj would also avoid the overcrowded Bosporus Sea. The integrated pipeline would initially transfer 5 million tons of crude oil per year for an estimated cost of $20 million. Later, the capacity of the pipeline would increase to 15 million tons for $100– 150 million.178 Hungary did not use the Adria pipeline until 2007. Its crude oil demand was covered by import from the East. Still, its very existence and its ability to supply oil from global markets for the entire year was its greatest advantage. Adria gave Hungary a sense of security, making it less dependent on Russian oil. When the Russian request came to connect the Friendship and Adria pipelines, Mol was concerned that the connection would compromise Adria as a backup security measure for the country’s oil supply. Before agreeing to the connection, Mol requested that the Hungarian government ask its Russian partner to guarantee a stable crude supply.179 Mol’s Croatian partner had guaranteed that, if necessary, the original direction could and would be reinstated.180 The Russian state-owned company Transneft, the owner of crude oil pipelines in Russia, was the project’s coordinator. By November 2001, Transneft managed to reach an agreement with Slovakia, Hungary, and Croatia on a single tariff system,

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Map 5.2 Druzhba and Adria Pipelines

however, it was still waiting for Ukraine’s approval.181 Ukraine objected to the transit tariff of $0.64 per ton agreed upon by other countries, as it was $.09 lower than the amount the Ukrainians charged for Russian oil transport on the Druzhba.182 The Croatian government approved the sale of 25 percent plus one share of the state-owned oil company INA. INA had two oil refineries and also owned 38 percent of Janaf, the operator of the Croatian section of the Adria pipeline. In early April, Transneft persuaded Ukrtransnafta, the operator of the Ukrainian section of the Druzhba pipeline, to approve the lower transit tariff.183 Then Croatia set an obstacle to the project when it asked for additional time to study its impact. Zagreb’s reaction

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might be related to a scandal considering INA’s subsidiary in western Siberia, White Nights. White Nights was denied access to the trunk pipeline system by Transneft, the Russian operator, for technical reasons. Many suspected that Transneft was acting on behalf of Slavneft, another Russian company that wanted to buy White Nights from INA. Apparently Slavneft offered $4–5 million for the company, while Andersen valued it at $35 million.184 Finally, at the end of April 2002, the Croatian company Janaf signed the framework agreement to connect Adria and Druzhba. Transneft guaranteed an annual delivery of 5 million tons supplied by TNK and Yukos.185 On the very same day, Yukos acquired the 49 percent stake and management rights in the Slovakian section of the Druzhba pipeline. Controlling Transpetrol and connecting the Druzhba and Adria pipelines was all part of Yukos’s larger strategy. From Slovakia, the Druzhba pipeline goes to Hungary. Through the Hungarian and Adria connections, Yukos planned to start oil deliveries to the United States. Yukos envisoned buying refineries in southeastern Europe and supplying the whole region with crude and refined oil.186 Yukos’s plans enjoyed the support of the Kremlin. ‘‘Earlier this year [2002] Putin had a meeting with the president of Yukos Khodorkovsky and advised him to pay steadfast attention to the assets in Eastern Europe. Putin had a similar meeting with the president of Lukoil Alekperov, too.’’187 Russia, Belarus, Ukraine, Slovakia, Hungary, and Croatia signed an agreement to connect the Druzhba and Adria pipelines in December 2002. Meanwhile, Rosneft made an offer for the Croatian INA. According to an analysis, this was the first time that Rosneft entered a privatization tender, ‘‘and its objective is, probably, to represent the Russian state’s strategic interests in creating a new oil export route via Omisalj, rather than its own economic interests.’’188 But Rosneft withdrew its offer at the last moment. The Croatian minister for economy said, ‘‘Rosneft revoked its bid because the Croatian government rejected its demand to sell the controlling stake in INA.’’189 The Croatian government named Mol the winner. By controlling the Hungarian part of the Druzhba and acquiring power in Janaf, Mol increased its control over the Druzhba-Adria project. The project experienced unexpected problems again when the Croatian pipeline operator Janaf asked for $4 instead of $2.5 per ton for the transfer of oil in Omisalj. It referred to an increase in investment costs from $20 million to $60 million.190 Later, it appeared that Yukos decided to offer financial assistance to Janaf to facilitate the project. The terms of the deal were kept secret. The Transneft president said, ‘‘If Yukos invests its own money in the Croatian pipeline extension, it is possible to presume that the company of Khodorkovsky has either bought Janaf or has established a joint venture with it.’’191 The Ukrainian parliament twice refused to ratify the agreement on oil transit via the Adria-Druzhba pipeline192 before approving it in the summer of 2004.193 At the same time, Russia approved a strategy for developing four export routes for Russian crude oil, one being the Druzhba-Adria pipeline.194 Further issues mounted in Croatia, mostly environmental concerns that might result in lowering revenues in the tourism industry. The Croatian minister of transport and sea communications said in January 2005 that the Croatian government

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was close to rejecting the project in its current form.195 Zagreb did indeed withdraw at the end of 2005. SUMMARY During the first Putin presidency, Central Europe came into the forefront of Russian thinking and strategy. Bilateral diplomatic and economic contacts became far the most intensive than ever before since the collapse of the Soviet Union. Russian energy companies made several attempts (some successful ones among them) to increase their presence in Central Europe. They not only applied for the privatization tenders of companies in the strategic industries in these countries, but pushed for the sale of others and recommended new pipeline roads. Russian companies were assisted by Russian official diplomacy (ambassadors, prime minister, president) and sometimes implied to act on behalf of the state. They used the most overt means in their expansion in Slovakia where they were the most welcome, but they came mostly covertly in Poland, where public opinion has been clearly against Russian presence in strategic industries. Their tactics changed vis-a` -vis Hungary with the new government of Peter Medgyessy. Before 2002, Russian companies used covert means in their actions. With the election of the ex-communist politician, they became very open about their intentions. During the first Putin presidency, Russian companies gained a significant foothold in all the three countries: Yamal 1 ($1 billion investment) became operational in Poland, Yukos won the privatization tender for the operator of the Slovak part of the oil pipeline (Transpetrol), and Gazprom acquired the majority ownership of one of the largest petrochemical companies in Hungary (Borsodchem). Moscow not only attempted to do so, but indeed managed a successful economic expansion into Central Europe between 2000 and 2004. During the first Putin presidency, Russian energy companies’ activity in the Polish petroleum sector reached a level not seen any time since the collapse of the Soviet Union. Russian energy companies tried to exploit every opportunity to strengthen their position in Poland. In the gas sector, Gazprom managed not only to keep its advantageous position in Europol Gas, but also to lower the fee it needed to pay for the transit of gas. Moreover, it managed to neutralize the biggest challenge to its monopoly supplier position, the planned Norwegian gas pipeline. It secured Gazprom’s monopoly position in the Polish gas import for the next 20 years. Between 2000 and 2004, Russian oil companies made systematic attempts to enter the Polish oil industry. They entered both privatization tenders for the second largest Polish refinery, Rafineria Gdanska. Several times they expressed interest in buying into PKN Orlen, the biggest refinery of Poland. However, Russian companies were well aware that they have little or no chance of winning at any of the Polish privatization tenders on their own. It would have gone against the very intent of the Polish governments to sell one of the two biggest refineries to a Russian company. To circumvent this problem, they used covert means to achieve their aspirations, but to no avail.

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It is clear that Russian oil companies’ room for maneuver has been much smaller than Gazprom’s. Although Russian oil accounted for 80 percent of Polish crude import, Poland had every means with which to switch suppliers—an oil terminal with a refinery, pipelines it controls—and Russian oil companies have had no way to strong-arm the Polish government into any deals the latter would not have wanted to enter otherwise. They also tried to achieve their aspirations through covert tools. However, these had very little chance for success. As the history of the PKN-Mol merger attempt shows, the Polish government, as well as the Polish media and public, has been suspicious of any likely Russian ownership in the strategic industries. Ever since Mol was made public, rumors of Russian companies acquiring significant shares in the Hungarian company have surfaced. A significant portion of the shares are held by banks and institutions that handle them for the benefit of clients. Only these custodians know the actual owners. Warsaw’s suspicion that these shares were in Russian hands led it to withdraw from the planned PKN-Mol merger. Though the Hungarian government and Mol’s management board never agreed with the Polish assumption—they argued that no Russian companies tried to appoint directors to Mol’s board, which was controlled by investors—they were never able to disprove it. It was possible, the Poles argued, that a Russian company held shares it would employ after a merger. The Russian state seems to have concentrated most of its efforts in Poland to help the more promising gas industry, and wasted much less energy supporting the very challenging task of helping Russian companies acquire any major Polish oil assets. During the first Putin presidency, Russian energy companies were more active than ever in Slovakia. As in the case of Poland, Russian companies could count on the support of Russian diplomacy, as well as the prime minister and even the president. With such background, they took part in both of the major privatizations in the energy sector and won one of the two tenders. In contrast with their forays into Poland and Hungary before 2002, the winner for the Transpetrol stake, the Russian Yukos was able to do so overtly, without any disguise or cover. Gazprom had three major objectives with regard to Slovakia in this period. First, it wanted to use the country as a supporter in its dispute with Poland over the intersystem connector pipeline. This aspiration was fulfilled relatively easily. Second, it wanted to prevent Slovakia from becoming a major supporter of the Polishinitiated North-South pipeline. While Bratislava voiced its desire to decrease its dependency on Russia, in effect it did not provide any meaningful support for the Polish side. Third, it wanted to get at least blocking control of SPP, the Slovakian pipeline monopoly. Gazprom had to seriously compromise in this field and achieving its blocking position in consortium with two other Western gas companies. Similarly, Russian companies were more than welcome to bid in the privatization of Transpetrol, the most important oil company of Slovakia, the owner of the Slovak part of the Druzhba oil pipeline. In a sharp contrast to Poland, the Russian companies entered the privatization tender on their own, as they did not need a consortium with a Western partner. It applies not only to Yukos, but also to Rosneft, a stateowned Russian oil company, and Surgutneftegas, which was also known for its close

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ties to the Kremlin. By choosing the Russian company and supporting the strategy it promoted, Bratislava had foregone the opportunity to diversify its crude oil supplies. All in all, Slovakia proved to be friendly turf for the Russian giant, which managed to further strengthen its position in Slovakia during the first Putin presidency. Gazprom tried to acquire the two largest petrochemical companies in Hungary, probably as a part of a larger strategy targeting Mol, the Hungarian oil and gas monopoly, in 2000. Because the Hungarian business community and public opinion did not welcome Russian investments in strategic sectors of Hungary, Gazprom used primarily ‘‘covert’’ means to reach its goal. Gazprom went very far down this road and acquired the majority shares of Borsodchem through illegal means not free from mafia methods. It was due only to Mol’s determined action that Gazprom did not manage to acquire the majority shares in the other major Hungarian petrochemical company, TVK, and a substantial stake in MOL. Attitude of the Hungarian government towards Russian investments changed substantially after the elections in 2002. Russian diplomacy and energy companies were not short of ambitions. Russian oil companies intended to gain leverage over the Hungarian oil industry. One of their goals was to secure the approval of Hungary to reversing the flow of the Adria pipeline. Another interest concerned Mol, the pivotal oil and gas company in the Central European region. These efforts bore fruit only somewhat later, in the next period that also brought a new government in Hungary.

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Harvest and Obstacles: Russian Energy Companies’ Expansion into Central Europe during the Second Putin Presidency, 2004–2008

PERCEPTIONS AND STATE POWER Putin’s Unity party could have easily won the 2003 parliamentary elections freely and fairly. But the atmosphere during the election made life for the Russian president’s political opponents more difficult than ever before.1 It was only one way in which Russia was becoming more authoritarian. After the Beslan hostage crisis, Putin introduced authoritarian security measures. Previously, oblasts (regions) directly elected their governors; now Putin nominated governors and left it to local legislative bodies to approve his choices. Putin also changed election rules for the Duma and strengthened its hold on the media. The revolutions in Russia’s neighbors—Georgia (2003), Ukraine (2004), and Kyrgyzstan (2005)—shocked the Kremlin. Ukraine’s size and location, large population of ethnic Russians, and transit pipelines made it an important focus of Russian foreign policy. Despite Moscow’s interference in the Ukrainian elections, its favorite, Viktor Yanukovich, lost. The Russian media blamed the revolutions on foreign NGOs, and Moscow consequently banned them from operating in the Russian Federation. The Russians became obsessed with stopping any more revolutions before they began and reversing the ones that had taken place. Russia was concerned about its security beyond the borders of the CIS, as Foreign Minister Sergei Lavrov made clear in a speech: [I]t should also be understandable that for all the nonconfrontational nature of Russian foreign policy some ‘‘red lines’’ do exist for us: this is when a real threat emerges to our national security or to the existing international legal order. In this case we surely cannot but respond and uphold our positions fully. Among such questions are the plans to deploy bases of a US global missile-defense system in Europe and settlement in Kosovo.2

NATO’s enlargement began in the late 1990s, and in 2004 it took on three former Soviet states: Estonia, Latvia, and Lithuania. Ever since the first round of NATO

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enlargement, Moscow’s influence seemed to erode even further in Central and Eastern Europe. The most obvious sign of their declining influence came when the United States discussed locating antimissile bases on Polish and Czech territory, which infuriated the Russians. The Americans’ rationale for the bases ‘‘do not convince us that it is an adequate response to real threats, which exist today in the sphere of nuclear and missiles proliferation,’’ Lavrov said.3 He went on, ‘‘we see no objective reasons for placing elements of it in Europe, and do not consider threats from North Korea and Iran sufficient for such radical shifts in strategic stability.’’ 4 Russian defense minister Sergei Ivanov said, ‘‘The positive background of Russia-NATO cooperation should not serve as a cover for the formulation of anti-Russian plans’’ and called the antimissile defense system ‘‘a new virtual Berlin wall.’’5 The chief of the Russian General Staff of Armed Forces, General Jurij Baluyevsky said, ‘‘the U.S. missile shield plans in Central Europe are aimed to change the current security system in Europe and not’’—as the U.S. argument stated—‘‘against possible strikes from ‘rogue states.’ ’’6 At a joint press conference with Russian deputy foreign minister Sergei Kislak, military leaders suggested the antimissile bases in Central Europe could precipitate a global conflict.7 For his part, Putin made a vague threat. ‘‘Our response will be asymmetrical but highly effective.’’8 Russia was also disturbed that it had little say over the future of Kosovo. It was the only member of the Contact Group that did not support the Athisaari plan for Kosovo; it made its support conditional on being recognized as an active partner in defining new international standards.9 Foreign Minister Lavrov said, ‘‘We see a feverish search for pseudo-legal arguments as a smokescreen for unilateral actions in Kosovo affairs.’’ He went on to say, ‘‘There goes behind-the-scenes maneuvering around the United Nations leadership, whom [the United States and some EU nations] want, in breach of their prerogatives, to induce towards legitimizing future illegal moves.’’10 The issue of the CFE Treaty also added to the fuel during the second Putin presidency. The CFE Treaty was negotiated during the last years of the Cold War and placed caps on the number of troops NATO and the Warsaw Pact could station in Europe. The treaty was amended in 1999, but NATO members refused to ratify the amendment unless Russia withdrew its troops from Georgia and Moldova. Moscow refused to do so and threatened to suspend the treaty if NATO members did not ratify the amendment as it stood. In 2007, it made good on its threat. Moscow has been deeply unhappy with the existing balance of power and was determined to change it. As Putin said in a speech in Munich, ‘‘There is no reason to doubt that the economic potential of the new centers of global economic growth will inevitably be converted into political influence and will strengthen multipolarity.’’11 State power continued to grow during the second Putin presidency. Tax revenues made up 24 percent of GDP in 2005 and 2006, the highest level ever in the history of the post-Soviet Russia. As shown in Table 3.3, when Russia sees its influence in the world to be low and state power is strong, Russian energy companies will actively expand in Central Europe.

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RUSSIAN FOREIGN POLICY TOWARD CENTRAL EUROPE Poland Vladimir Putin’s visit to Poland in January 2002 was greeted with a fresh sense of optimism. The ruling social democrats in Poland, at the time, were historically less suspicious of their Russian neighbors than their center-right opponents. But a short three years later, relations between Russia and Poland reached their lowest point since the end of the Cold War. Some theorists claim that the two countries have been destined to exist in conflict with each other as a simple matter of geography. After 1989, the two countries found themselves divided by two interpretations of history, two approaches to human rights, and two perceptions of energy security. Moscow had never considered Warsaw an equal partner. Poland, in the meantime, was creating a bit of trouble for Russia on its eastern border in Ukraine and Belarus. Rather than treat Poland as an equal competitor in these countries, Moscow, somewhat recklessly, pursued another policy, one of positioning Poland as a proxy of the United States and thus discrediting it in the EU community as a pathologically anti-Russian entity whose opinions could not be seriously considered. To prove its point, Moscow found itself manufacturing disputes and creating trumped-up allegations. Any single incident in Poland that had even the slightest tinge of anti-Russian sentiment was immediately confronted. Poland: An Unequal Partner At the end of January 2005, a day before a ceremony honoring the 60th anniversary of the liberation of Auschwitz, the presidents of Russia and Poland were scheduled to mark the occasion by meeting in Krakow. Tensions were high, and the two leaders were to resolve their differences over the Beslan crisis and Poland’s involvement in Ukraine’s Orange Revolution the previous fall. But citing a snowstorm in Poland, Putin postponed his arrival in Poland to the actual commemoration ceremony, thus avoiding a one-on-one meeting with Polish president Alexander Kwasniewski. The snowstorm, it can be assumed, was an excuse. The early part of this decade saw the diamond anniversary of a few particularly sensitive historical events in Eastern Europe. And around this time, Moscow invited Kwasniewski, along with many world leaders, to participate in one honoring the Yalta conference. Kwasniewski agreed to come to the event, though many Poles, including Bronislaw Komorowski, representative of Civic Platform, objected, calling for further discussion of the trip in the Foreign Affairs Committee [of the Parliament].12 The leaders in Putin’s Russia had started their careers in Soviet security services, and as a result, according to Adam Eberhardt, ‘‘treat the references to the Soviet period (including the Stalin era) as a vital element of the superpower propaganda.’’13 Many Eastern Europeans remember Yalta as the loss of sovereignty, freedom, and independence. Russians of the Putin era were starting to remember their history differently. The Russian Ministry of Foreign Affairs issued a statement in the middle of February, calling it a sin for Poland to complain about Yalta since

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‘‘it was there where the allies confirmed their willingness to make Poland a strong, free, independent and democratic country.’’14 At this time, a side controversy erupted when a monument was unveiled at a World War II museum in Moscow portraying Soviet, American, British, and French soldiers. Poland actually had a larger army than France during the war, and Warsaw considered the omission of Polish soldiers an intentional insult. A telephone call between the two countries’ foreign ministers tried to resolve the issue.15 Meanwhile, the controversy over Kwasniewski’s participation continued until the celebrations in May. Those most furious about the possibility were incredulous when Moscow also invited General Wojciech Jaruzelski, the last leader of Communist Poland, who introduced martial law in 1981 and crushed the Solidarity movement. In the end, Kwasniewski did attend the conference, where he was seated in the back row. Putin failed to mention Poland’s contribution to the war effort. And the Russian president awarded the Medal of Victory to Jaruzelski. Another dispute arose concerning the Katyn massacre in 1940, when 5,500 Polish officers were slaughtered by Soviet forces. Russian authorities had been investigating Katyn for 14 years since 1990, when during Kwasniewski’s visit to Moscow in 2004, the Russians agreed to hand over all their Katyn files for the benefit of the Poles’ own investigation. But the Russian chief military prosecution later reneged on the promise and claimed that the Politburo held total responsibility. The Poles, on the other hand, claimed that all 2,000 soldiers involved in the killings should be held responsible.16 The Polish Institute of National Remembrance was never able to conduct an independent investigation,17 and thus close one of the worst chapters in the country’s history. During celebrations marking the 750th anniversary of Kaliningrad in July 2005, Putin invited German chancellor Gerhard Schroeder and French president Jacques Chirac but failed to invite the leaders of the exclave’s two neighbors, Poland and Lithuania. Without notifying Poland or the three Baltic states, a German company had previously signed a memorandum of understanding with Gazprom to lay a direct gas pipeline between Russia and Germany under the Baltic Sea. Perhaps the nastiest expression of Russia’s view of Poland came from the editor-inchief of Russia in Global Policy, who wrote that ‘‘recognizing Poland as an important enemy would be humiliating for the Russian elite.’’18 The head of the All-Russian Public Opinion Research Centre went a little deeper. ‘‘[W]e are not going to reconcile ourselves anytime soon with the thought that a country so small as yours [Poland] could become a serious enemy for us. We have become accustomed to the fact that our state has powerful enemies: the United States, China, the entire West, and the entire World.’’19 At the end of 2005, the Russian Ministry of Agriculture introduced a ban on Polish meat and vegetable products, leading international relations expert Bartlomiej Sienkiewicz to note, ‘‘the Russians are also trying to treat the new member states [of the EU] differently than the old ones. They’re controlling the Polish dairy plants, and I haven’t hear about them controlling the German ones.’’20 There was no major health or veterinary scandal to cause the ban. There had been, according to Russian officials, some forged documents from the Poles 21 and the Polish Ministry of

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Agriculture did not dispute the problem.22 But Warsaw did dispute what it considered to be Russia’s disproportionate response. Gazeta Wyborcza, a leading Polish daily, quoted an anonymous source from the Russian Ministry of Foreign Affairs saying that ‘‘instances did occur of Polish companies falsifying veterinary certificates, but Russia used them to push a political agenda.’’23 Several Poles believed the ban was a means of punishing Poland either for its involvement in political movements in Ukraine and Belarus or for not immediately bowing to Gazprom’s demands to take over the Yamal pipeline. The ban was introduced on the day the Marcinkiewicz government asked for a vote of confidence in the parliament. There were bilateral talks between the two countries’ foreign ministers to lift the embargo. Polish prime minister Kazimierz Marcinkiewicz pleaded with his Russian counterpart, Mikhail Fradkov, in a letter he sent in March 2006. After such diplomacy proved vain, Warsaw looked to the EU for support, marking the first time it had brought a Polish-Russian issue to the organization. By the end of the year, the European Commission was holding meetings with Polish and Russian representatives.24 In November 2006, a year after the embargo was introduced, Warsaw vetoed the beginning of negotiations for a new agreement between the EU and Russia, which was to replace the Partnership and Cooperation Agreement. The move was meant to force Brussels to convince Moscow to lift the ban on Polish meat and vegetables, as well as ratify the European Energy Charter and transit protocol. EU inspectors confirmed that Polish meat products met proper standards and said that ‘‘our Russian partners should lift the ban on Polish food imports.’’25 The deal was simple: Warsaw would withdraw the veto, Moscow would lift the ban. But Moscow, which was negotiating with individual capitals seeking to break the unity of the EU, refused. To accept Poland’s offer would have encouraged other countries to employ Brussels during disputes with Moscow. After Bulgaria and Romania entered the EU, Russia started threatening a ban on all EU meat imports.26 Moscow finally lifted the ban in December 2007, more than two years after it introduced the embargo. The new Polish government of the Civic Platform was being received much more warmly in Brussels than that of the previous Law and Justice party. Even though the new government made some concessions to Russian demands in this regard, as Poland’s meat sanitation had not changed significantly in two years, it is hard not to conclude that the decisions to introduce and lift the embargo were purely political. Moscow implied that the previous Polish government had served as an impediment to itself in the manner of the embargo. Moscow was saying, in effect, that it could work with a Polish government that the EU also accepted. Warsaw agreed to lift its veto on EU-Russia talks. ‘‘In this situation, our veto will materially cease to exist—it will be a great pleasure for me to announce this,’’ the new Polish prime minister Donald Tusk said.27 Poland as American Proxy? Kwasniewski’s visit to Moscow in September 2004 occurred right after the notorious hostage crisis in Beslan. The Polish media criticized Putin’s handling of the crisis,

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several Polish intellectuals signed a letter defending democracy in Russia. In turn, the Russian Ministry of Foreign Affairs issued a statement, accusing Polish authorities of orchestrating an anti-Russian campaign.28 Under this climate—Putin claimed that nowhere in the world had the press written so many anti-Russian screeds about Beslan than in Poland29—not much was accomplished during Kwasniewski and Putin’s meeting. Some commentators considered the meeting as an achievement in itself, but Polish-Russian relations soon began to deteriorate. That November, Moscow was furious with Poland’s involvement in Ukraine’s Orange Revolution. It became the most important factor in determining Moscow’s policy toward Poland in the years to come. Kwasniewski’s mediation between Yushchenko and Yanukovich in the Ukrainian elections, Moscow claimed, was an attack on its sphere of influence. ‘‘I understand the president of the United States,’’ Kwasniewski said. ‘‘Every major international power would rather see Russia without Ukraine.’’30 Putin answered, ‘‘I have the impression this remark was not made by an incumbent president but by somebody who is looking for a job because his term is about to expire.’’31 Kwasniewski, Putin claimed, was trying to isolate the Russian Federation.32 Several Russians called him a proxy for the United States.33 Russia and Poland had strikingly different interests in their neighboring countries. But those differences, festering since the end of the Cold War, did not surface until 2004. Things hit a nadir a year later in November 2005 when the Polish minister of defense, Radek Sikorski, announced Poland would declassify a significant part of its Warsaw Pact archives, including a stunning Cold War scenario that would have sacrificed two million Polish lives. When the Warsaw Pact had been dissolved, the member states had agreed to never publish the documents. As Poland had never ratified the agreement, according to Polish Defense Ministry lawyers, national law overruled the agreement. Sikorski’s announcement came right after Kwasniewski and Prime Minister Kazimierz Marcinkiewicz announced that it had agreed to housing one interceptor missile base for an American antimissile shield on Polish territory. Moscow was predictably outraged. Konstantin Kosachov, chairman of the Russian Duma’s Foreign Affairs Committee, called Sikorski’s announcement an antiRussian provocation.34 Moscow was more horrified by the missile defense, which it considered a security threat. ‘‘If Poland and the Czech Republic make the decision [to accept a U.S. proposal to base 10 interceptor missiles and a radar in their countries], Russia’s Strategic Missile Forces will aim its missiles at them,’’ Colonel General Nikolay Solovtsov, commander of the Strategic Missile Forces, said.35 ‘‘The Czech Republic and Poland probably want to protect their distant ally so much that they are prepared to tolerate a shower of dangerous debris,’’ General Jurij Baluyevskiy of the Russian army said. ‘‘However, Russians have the right to ask why they should be made a hostage to that situation.’’36 Russians remained steadfast in their opposition for years. In spring 2007, the minister of defense, Anatoly Serdyukov, said, with a little more tempered words, that ‘‘the strategic missile defense system is a serious destabilizing factor that could have a significant impact on regional and global security.’’37 The missile shield triggered Russia’s decision to suspend the Treaty on Conventional Armed Forces in

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Europe in December 2007. ‘‘Russia’s decision is, on one hand, a political demonstration of Moscow’s refusal to accept the existing order of European security, and on the other, a way to pressure the NATO states in order to obtain concessions in the security sphere, or to undermine the Allies’ solidarity.’’38 Poland and the Czech Republic’s decisions were a painful reminder of Russia’s declining influence in the region. Poland was simply a proxy again. Russia saw the United States as its real opponent, and it reinforced Russia’s need to expand its energy companies in Central Europe. The Russian Federation Council charged a group of experts in July 2005 with strategizing ways to improve Russia’s image abroad. The experts claimed that Poland and the three Baltic states were most responsible for Russia’s poor image.39 Thus, Russia became more determined to discredit Polish anti-Russianism. There did appear to be a warming at the beginning of 2006 when President Kaczynski said Poland wanted the best possible relations with Russia.40 In his annual press conference, Putin said, ‘‘we relate to Poland with high esteem for its contribution to world culture, for its contribution to world economy and for its contribution to today’s European and world affairs.’’41 In February, Russian presidential advisor Sergei Yastrzhembsky visited Warsaw, hoping to prepare an important meeting between the two presidents. In the spring, Putin sent a letter to Kaczynski proposing the two meet in Belarus, which Poland was boycotting due to the Lukashenko regime. The recommendation was a clear provocation. Neither the two presidents nor the two prime ministers met that year or the next. Finally, in February 2008, the new Polish prime minister Donald Tusk went for a working visit to Moscow in the first top-level meeting in years between the two countries.

Tit for Tat The Chechen question fueled a lot of tensions. After the assassination of the Chechen leader Aslan Maskhadov, the Polish minister of foreign affairs, Adam Rotfeld said that killing the Chechen leader was ‘‘worse than crime—it is a political error.’’42 The Russian minister of foreign affairs called his Polish colleague to tell him his position was ‘‘not acceptable and not compatible with basic norms of intergovernmental relations.’’43 Pro-Chechen circles held anti-Russian demonstrations in Poland. Lech Kaczynski, then the mayor or Warsaw, approved a decision of the city council to name a traffic roundabout for the Chechen general Dzhokar Dudayev. In response, Moscow officials threatened to rename the street in Moscow where the Polish embassy stands after the general who suppressed the Polish uprising in 1863.44 In July 2005, three teenage children of Russian diplomats in Poland were mugged. The Poles pointed out that the act was essentially apolitical. Police caught the perpetrators and returned the stolen items, but Moscow used the occasion to highlight anti-Russian sentiment in Poland. (Putin called it an ‘‘unfriendly act.’’45) Within a week, there was an evidently organized beating of three Polish diplomats and a journalist in Moscow. When a Russian diplomat was stopped by Polish police in October 2005 for drunk-driving, he refused to show his ID and would not take a Breathalyzer

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test. He threatened the Polish policemen with retaliation on Polish diplomats in Moscow.46

Slovakia Russia considered Slovakia and Hungary, if not Poland, ‘‘good neighbors.’’ A ‘‘good neighbor,’’ according to Russia, made no serious attempts to decrease its dependence on Russian energy, was open to Russian investment, did not raise historical complaints, did not criticize either Russia’s foreign or domestic policy, did not hinder Russia’s cooperation with NATO and EU, and did not interfere in Ukraine and Belarus.47 Putin paid an official state visit to Bratislava in February 2005, the first by a Russian president since Boris Yeltsin’s in August 1993. The primary purpose of Putin’s trip was to meet with his American counterpart, George W. Bush, at a summit meeting in the Slovak capital. At the time of Putin’s visit, it was still unclear who would take control of Yukos’s 49 percent stake in Transpetrol, the operator of the Slovak section of the Druzhba pipeline, which was up for sale again after bankruptcy procedures were initiated against Yukos. The issue dominated the Slovak-Russian talks.48 Putin said that the Russian company Tatneft was interested in purchasing Yukos’s stake. The Russian president was essentially elevating a business matter to matter of bilateral relations between Slovakia and Russia. Robert Fico, who became prime minister after Slovakia’s elections in June 2006, was more open to Russia than his predecessor Mikulas Dzurinda. ‘‘We have seen various statements by [Fico and his foreign minister] to the effect that we should be more active in our relationship towards Russia,’’ the Dzurinda government’s Foreign Minister Eduard Kukan said. ‘‘They should probably explain what they mean by better relations.’’49 Fico’s Foreign Ministry, however, denied any changes in Slovakia’s foreign policy, though he did say he would make it more economically centered.50 The Russian press noticed the change. One paper reported on the ‘‘warm atmosphere’’ during Fico’s official state visit to Moscow ‘‘where Putin described the Slovaks as friends.’’ The statement was ‘‘unusual in Russia’s current relations with Eastern Europe.’’51 The Slovak weekly The Slovak Spectator went as far as saying that ‘‘in 2007, the policy of the Slovak government towards Russia is the same as it was in 1997,’’ when the Meciar government’s unusually warm relations with Russia contributed to the country’s failure to be admitted to NATO in the first round of enlargement. Fico adapted the views of Moscow in regards to placing anti-missile bases in Poland and the Czech Republic. ‘‘Ten years ago, Prime Minister Mecˇ iar was a ‘spokesman’ for Russian President Yeltsin,’’ the paper said. ‘‘Today, Prime Minister Fico is presenting to the world ‘the standpoint of Mr. Putin.’ ’’ 52 Slovak president Ivan Gasparovic returned Putin’s visit in November 2006, during which he said that Slovakia would like Russia to one day join the EU.53 Putin called Slovakia a reliable and important partner of Russia, particularly in the energy industry.54

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In May 2007, Fico paid a one-day official visit to Moscow, during which the two sides considered two central questions regarding Russia’s declining power in Central Europe: the status of Kosovo and the placing of missile bases in the Czech Republic and Poland. Fico officially adopted Putin’s policy on the missile bases. And he also agreed that the Kosovo solution should be more favorable to Serbia.55 Putin said if the United States built missile bases in the Czech Republic and Poland, Russia would point its nuclear weapons at both countries. Fico said he understood ‘‘Russia’s concerns’’ and assured the Russian president he would not agree to allowing the United States to build either a missile or rocket base in Slovakia.56 On this issue, Fico differed from his own Foreign Ministry under Jan Kubis, which had stated that the antimissile shield would improve Europe’s security.57 A prime minister’s opinion has greater weight, according to foreign policy expert Alexander Duleba. Fico’s statements had damaged Slovakia’s relations with Poland and the Czech Republic, with which it had closer political and economic ties than with Russia.58 Slovakia had become the only country in the region to denounce the U.S. missile plans in Central Europe.59 There was considerable controversy over Fico’s remarks within Slovakia itself. An opposition member of the Slovak parliament, said, ‘‘The premier wanted to negotiate a lower gas price, but that wasn’t accomplished, and I see this within the context of us making a political gesture [speaking against the antimissile bases] and wanting economic benefits in return.’’60 An analyst of the Slovak Foreign Policy Association, Ivo Samson, said that ‘‘Slovakia has really begun to concentrate on Russia . . . It has turned against its allies in NATO and other transatlantic structures. It has done so repeatedly in word, and now also in deed.’’61 Former Slovak ambassador to the United States Martin Bu´tora said, ‘‘We will wait and see about the economic effects, but from the security, political, or foreign policy point of view, I would say the visit will have problematic results for Slovakia.’’62 There was also the matter of the Conventional Forces Treaty (CFE), which hoped to decrease the number of armed forces in Europe. NATO had said that it would not ratify the treaty unless Russia had met all of NATO’s conditions, including the withdrawal of Russian troops from Georgia and Moldova. Slovakia had adopted NATO’s conditions as its official position. But when Putin threatened that Russia would withdraw from the CFE if NATO did not fulfill its obligations as perceived by Russia, Fico merely said that the Russians, ‘‘only want the treaty to be fulfilled.’’ The Slovak daily Sme saw Fico’s reply as an indirect support for Russia.63 There were other issues on the table during Fico’s visit. As part of its EU accession agreement, Bratislava agreed to decommission by 2008 two old nuclear reactors that were part of the Jaslovske Bohunice nuclear power plant.64 The action would cost Slovakia 10 percent of its electricity production. 65 The previous Slovakian government had been in discussions on modernizing nuclear power plants in Jaslovske Bohunice and Mochovce since 2003.66 The Slovak prime minister mentioned he was interested in employing the Russian company Atomstrojexport to modernize its reactors in Mochovce and build new ones in Jaslovske Bohunice.67

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Putin recommended that the two countries enter into a joint venture for their defense industries.68 Fico seemed open to the idea. Bu´tora, the former Slovak ambassador to the United States, was not: ‘‘Is arms production the future for us? It broke down at the beginning of 1990’s under Vladimı´r Mecˇiar’s rule . . . A few companies can earn money from it but it is not promising for Slovakia as a whole.’’69 The Slovak daily Sme was even more critical, ‘‘Slovakia under Fico is being lured into greater energy dependence for the sake of a few arms contracts.’’70 Discussions were held also on extending the broad-gauge railroad into Slovakia. The broad-gauge railroad uses a wider gauge than the standard used throughout Europe. Russia has used the broad-gauge since the Tsarist era, and trains had to be emptied and reloaded at the Ukrainian-Slovak border as each country used different gauges. Slovakia and Russia signed a memorandum during Fico’s visit, looking into the opportunity of extending the broad-gauge railroad to Bratislava. The railroad extension, many opponents in Slovakia pointed out, would cost Cierna nad Tisou, which sits on the border with the Ukraine, its status as a hub in Eastern Slovakia, costing hundreds of jobs.71 Trains would still need to be reloaded in Bratislava, where all other tracks were standard. The idea was not welcomed in Slovakia at all. Fico had damaged Slovakia’s relations with two strategic partners, the Czech Republic and Poland, put it in an uncomfortable setting within the NATO alliance, and failed to make a single economic gain for all his troubles. Fico did not secure any promises for cheaper gas or oil. Fico had even decided to sell a minority stake in Transpetrol to a Russian company. And despite the controversy, Fico held to his policy.72 Slovakia’s relations with Russia were polar opposites to Poland’s.

Hungary By calling Hungary a ‘‘good neighbor’’—namely for helping Russia gain influence in Central and Eastern Europe—Putin confirmed the perception that Hungary had played its hand very poorly vis-a`-vis Russia. Hungary never criticized Russian foreign or domestic policy. It held no public position on Ukraine or Belarus. The Medgyessy (2002–4) and Gyurcsany (2004–) governments never developed a serious strategy for Hungary to diversify its energy supplies, and they were open towards Russian investments in the energy sector and elsewhere. Bulgaria was the only other absolute ‘‘good neighbor’’ in the wider region; it had sold some of its strategic assets in the energy industry to Russia and signed onto the Russian pipeline of South Stream, endangering the EU’s project of Nabucco. After 2004, as other countries were opposing Putin’s increasing autocracy, Budapest was building a so-called ‘‘pragmatic’’ relationship with Moscow. Russia grew to consider Hungary its ‘‘best neighbor’’ in the Central European region. It was the only new EU member, Moscow said, to not terminate its bilateral agreements with Russia, but to merely modify them.73 The new Hungarian government’s attitude was demonstrated well in December 2004 when the entire Western world backed Viktor Yushchenko in the presidential race in Ukraine, an internal memorandum from the Hungarian Ministry of Foreign

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Affairs was leaked, indicating Hungary’s support for Russia’s preferred candidate, Viktor Yanukovich.74 During the Medgyessy government’s reign from May 2002 to August 2004, five presidential or prime ministerial meetings took place between the two countries. During the 20 months of the first Gyurcsany government, from August 2004 until April 2006, three more such meetings took place. It is a striking contrast to the previous era; between 1991 and May 2002, a period that was more than twice as long, the two countries only held four such meetings.75 The meetings after 2002 were overwhelmingly dominated by economic issues, namely considerations over Russian pipeline plans and Russia’s interest in Hungary’s energy sector. The renewed Russian activity was not restricted to diplomacy. It coincided with an increased presence of Russian organized crime in Hungary. Hungarian secret service noted in its yearly report an increased presence of Russian intelligence services in Hungary, ‘‘There is significant effort on their part to exploit business opportunities in the strategic industries, for this purpose they mobilize their wide-range of network, and try to build political and governmental contacts.’’76 During the first meeting between Putin and Gyurcsany in February 2005, the two sides finally came to an agreement for Moscow to return books taken from the Sarospatak library during World War II.77 Every previous Hungarian government had attempted to get those books back, and all had failed. But the administrations of Peter Medgyessy and Gyurcsany, unlike their counterparts in Poland, had no interest in discussing some of the more problematic chapters in Hungary’s dealings with Russia. At the same time of the agreement, Moscow had also denied to send Poland its files on the Katyn massacre and decided to invite former communist dictator Jaruzelski to the 60th anniversary celebrations in Moscow. The Kremlin was punishing one government and rewarding another. The Sarospatak books arrived in Budapest in February 2006, two months before the parliamentary elections in April. It marked, according to the Hungarian prime minister, an end of an era of the Soviet occupation in Hungary and ‘‘the longer than necessary, unjustified untrustworthiness which caused damage not once’’ in bilateral relations.78 In December 2005, for the first time since 1991 the chief of staff of the Russian army received a Hungarian politician, Imre Ivancsik, state secretary in the Hungarian Ministry for Defense.79 Putin’s official visit to Hungary after the return of the Sarospatak books at the end of February marked the first by a Russian president after more than 10 years. He praised the Medgyessy and Gyurcsany governments and commented on the positive and stable atmosphere in Hungary. A change, Putin said, would hinder Russia’s plans and affect the European economy.80 They agreed to turn Hungary into a center for the trans-Siberian railway.81 Russia would later promise other Central and Eastern European countries the same opportunity concerning the railroad hub. Later, it appeared that Putin had lobbied for the Siberian KrasAir, which was owned by Russian oligarch Boris Abramovich. Abramovich was interested in buying the Hungarian airline company Malev and had already established a company to participate in a privatization tender. The Hungarians gave Abramovich positive signals.82

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The timing of Putin’s visit was rather interesting. Parliamentary elections in Hungary were to be held in April 2006. In February, polls favored the opposition parties and many pro-opposition papers saw Putin’s visit as part of Gyurcsany’s campaign. But there may be another reason for the timing of Putin’s trip. There had been several plans for Putin to visit Hungary going back to the fall of 2005. As parliamentary elections approached, Russian diplomats privately conveyed their concern that Putin did not want to appear to be interfering in another country’s domestic politics. It is possible that the Russian president went to Budapest to secure the incumbent government’s approval for energy deals of primary importance for Russia. The April 2006 elections resulted in the victory of the governmental parties. The next bilateral meeting between Putin and Gyurcsany took place at the Russian President’s dacha on the Black Sea coast in Sochi in September 2006. It was an unofficial visit, but the two leaders covered the same ground they had at the previous meeting. Even after its accession to the EU and NATO, Putin said that Hungary was able to pursue its national interest and build a constructive relationship with Russia at the same time. Brussels felt differently, and pressured Hungary to drop its backing of a Russia’s favored pipeline and instead support the EU’s project. Putin and Gyurcsany met again in March 2007 in Novo-Ogaryovo at the Russian president’s residence, a venue reserved for only the most important guests. (The meeting had been scheduled for the Kremlin, but changed at the last minute.) The Russian president started the meeting with pointing out ‘‘that all of our previous agreements are being executed.’’83 Surprisingly, little was released about the meeting other than some cliche´s, like placing pragmatism in front of idealism and emphasizing economic over political issues. Such banal talk seemed unsuited to the circumstances. In fact, this was the first time that, due to the enormous pressure from its Western allies, the Gyurcsany government started to backtrack from some of its earlier declarations, openly preferring the Blue Stream pipeline over the EU-sponsored Nabucco. Soon after the meeting, during his visit to London, the Hungarian prime minister said that Hungary shares the EU’s aspiration for diversification of energy sources. It is important to note, however, that the issue was in no way settled, and Hungary has not shut the door on Moscow. Hungarian defense minister Imre Szekeres had scheduled a trip for June to meet his counterpart Anatoliy Serdyukov in Moscow. Serdyukov canceled the trip on just a few days’ notice, claiming that he had a tight schedule. Citing sources in Russia’s Ministry for Defense, the Russian press claimed that Serdyukov had canceled the meeting because of Hungary’s support for NATO’s position on the CFE treaty during a meeting in Vienna that month.84 There is an alternative explanation for the cancellation. It was Defense Minister Szekeres who, during his visit in Washington, DC, openly supported the EU-backed pipeline project Nabucco at the expense of the Russian alternative. ‘‘If a choice can, and must, be made, Hungary will opt for Nabucco,’’ the minister said.85 In this interpretation, the slap on the wrist was a symbolic gesture to indicate the unhappiness of Moscow with the Gyurcsany government’s newfound hesitance about the Russian pipeline project.

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Putin and Gyurcsany met again that summer in the Russian town of Saransk, officially so that the Hungarian prime minister could participate in the Finno-Ugric festival. The Finno-Ugric linguistic group includes Hungarian, Finnish, and Estonian. But though Moscow had invited the Finnish president, it had failed to invite any high-ranking Estonian official. Moscow and Tallinn were in the middle of a nasty string of crises, involving a World War II memorial and a cyber war. The Russians claimed the festival was a chance to put culture ahead of politics. Yet it was still punishing its small neighbor. Putin and Gyurcsany spoke at the airport before the Hungarian leader’s departure. Gyurcsany claimed they drew a quick inventory of their bilateral relationship, which was unlikely. It turned out they discussed issues related to the Hungarian company Mol.86 In December 2007, Russia and Hungary conducted an intergovernmental consultation. Russia had participated in similar forums with Germany, Italy, France, and Finland, but this was the very first time it had done so with a former satellite. The Hungarians had requested the discussion.87 Prime Minister Viktor Zubkov and several Russian ministers visited Budapest, just a few days after the heavily criticized Russian parliamentary elections in which Moscow prohibited the OSCE. The elections were not mentioned between Hungary and Russia. Most of the meeting was spent on Russia’s planned South Stream pipeline. RUSSIAN ENERGY COMPANIES’ CONDUCT IN THE REGION Russia’s major project in the energy sector during the second Putin presidency was building new outlets for Russian hydrocarbons going to Europe. The routing of the new pipelines became the major question in its relation with countries of Central Europe. Russia’s primary aspiration was to decrease its dependence on the Central European countries as transit countries. Besides, Russian energy companies attempted to gain control over assets along the existing pipeline routes in all the three countries. Poland Pipeline System After 2004, Russia considered Poland and the Baltic states ‘‘bad neighbors.’’ ‘‘Good neighbors,’’ as a matter of contrast, were those who pursued a policy Moscow considered pragmatic. They made no serious attempts to decrease their energy dependence on Russia. They remained open to Russian business and infrastructure projects. They did not discuss historical disputes. They avoided criticizing Russia’s domestic and foreign policy. They were open to Russian views of the EU and NATO and were not active in the so-called ‘‘common neighborhood’’ of Russia and the EU.88 From its demand for an apology for the Katyn massacre, to its criticism of Beslan, Poland was clearly a bad neighbor. It was also the most active EU member in the common neighborhood of Belarus and Ukraine. It also pursued policies to

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decrease its gas and oil dependency on Russia, and tried to disallow further Russian investment in the energy sector. By 2004, after the success of Yamal 1 for Russia—a mixed blessing for the Poles— Moscow realized that it would be unlikely to gain significant access to the rest of the Polish energy sector. Therefore, it focused on areas of the energy sector in which it already had strong positions, namely gas supply and transit. Russia’s strategy was threefold. First, Russia’s goal was to circumvent Poland. After Yamal 1 had opened, Poland became a transit hub for 17 percent of the EU’s gas imports from Russia. Gazprom decided that it would not export through Poland any more than that amount in the foreseeable future and dropped plans to build a second branch of the Yamal pipeline entirely. Although the additional costs of building Yamal 2 would be from three to four times less than those of building the Nord Stream pipeline under the sea, by building the latter, Russia is able to circumvent Poland—and Belarus—entirely. As soon as the Nord Stream is built, Gazprom would be able to reach Germany, its primary customer, directly. The Nord Stream pipeline would have eventually achieve a capacity of 55 billion cubic meters of natural gas per year, compared to Yamal 1’s 32 billion cubic meters and may enable Gazprom to decrease substantially the proportion of gas that travels through Poland in the future. Russia’s second goal was for Gazprom to take control of the existing Yamal 1 line in Poland by acquiring Europol Gas, the Polish-Russian joint venture in charge of operating the pipeline. The plan was very similar to Gazprom’s attempts to acquire Beltransgas, owner of the Belarusian section of the Yamal pipeline. Russia’s third goal was to prevent Poland from diversifying its supplies, and to maintain its high level of energy dependence on Russia. Poland had tried several times to build a pipeline between Norway and Poland. Moscow was continuously looking for Polish supporters to join the Nord Stream project. If so, it would make the Norway-Poland pipeline pointless.89 Russia also successfully reversed the flow of the Odessa-Brody pipeline in 2004, which would have been the first nonRussian route for Caspian oil to Central Europe, thus postponing its extension to the Polish refinery Plock for years. By the early 2000s, Moscow was trying to make Russian gas deliveries to Europe independent of any one transit country. In the 1990s, it had accused Ukraine of stealing gas from the Brotherhood transit pipeline, and in 2000, Rem Vyakhirev, Chairman of the Gazprom board, said his company would build pipelines that would circumvent Ukraine entirely.90 One of Russia’s greatest motives in building the Yamal pipeline, which travels through Belarus and Poland, was, in fact, to decrease Russia’s dependence on Ukraine. The construction of the inter-system connector (discussed in the previous chapter) was, admittedly, an attempt to teach the Ukrainians and others a harsh lesson about trying to circumvent Russia. The intersystem connector would go through Belarus and Poland and connect the Yamal system with the Brotherhood pipeline in Slovakia. But Belarus and Poland soon fell out of favor in Moscow. By 2003, Alexander Lukashenko had proved to be an albatross for Russia after the Belarusian president had rejected Putin’s offer for the state union that would have meant Russia absorbing Belarus. At that point, Russia decided to

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stop subsidizing Belarus’s economy and, in 2004, Gazprom temporarily cut off supplies to the country. Poland’s opposition to the inter-system connector in 2001 and its progressed talks on the Norway-Poland pipeline made it, for Russia, a less reliable partner. So Gazprom’s owners began considering a way to reach their major customers—particularly Germany—by cutting out the middlemen, the transit countries, entirely. The company started hypothesizing a gas pipeline under the Baltic Sea. Even though it seemed unfeasible due to its high costs and other problematic circumstances, by 2002, the Baltic pipeline had become Gazprom’s priority project. By 2004, it had earned the full backing of the Russian government. Project costs did not decrease, but the mounting tensions with Ukraine, Belarus, and Poland made these countries problematic transit routes. Moscow did not just wish to diversify its export routes, but to gain the ability to drop any transit routes through these countries if such moves proved necessary. Gazprom conducted its first offshore feasibility studies in the Baltic region between 1997 and 1999. In December 2000, the European Commission offered the planned pipeline, which was to be called the North European Gas Pipeline, Trans-European Network status, which opened the door for EU funding.91 In early 2001, Poland’s objections had largely killed negotiations over the inter-system connector. Meanwhile, Poland’s negotiations for the Polish-Norwegian pipeline were intensifying. For the Russians, a North European pipeline that would circumvent the ‘‘bad neighbors’’ was beginning to seem not only more possible, but more necessary. In April 2001, Gazprom started collaborating with three companies, two German and one Finnish, on a feasibility study for a pipeline that would connect Russia and Germany under the Baltic Sea.92 The pipeline’s construction was to start in 2005– 6.93 In January 2002, Gazprom decided the North European Gas Pipeline (NEGP) would be its most important export route.94 By October 2002, the director of Gazprom’s foreign relations department suggested that if Poland was not sufficiently cooperative, all decisions for exporting Russian gas would be made solely by the Russian government.95 In November 2002, Gazprom’s board green-lighted the NEGP, and the Russian news service SKRIN reported, ‘‘the project has long been considered Gazprom’s trump card in its talks with Ukraine, Belarus and Poland, allowing the world’s largest gas firm to agree on better transit terms via existing routes.’’96 Analysts still viewed the NEGP with skepticism. The new pipeline was more expensive than other transport routes, and its construction was predicted to last six years. Russia’s actions to cut out the countries on its Western border from its transit were more political than economic. Vedomosti noted, ‘‘it seems that Poland as a gas transportation corridor is losing its former attractiveness.’’97 Despite Gazprom’s deputy CEO Jurij Komarov’s denials, the company confirmed that it favored building the NEGP over the Yamal 2, which would diminish Poland’s importance as a transit country.98 Though estimates varied through the years, Gazprom consistently admitted that the NEGP’s construction would be more expensive than any of its other land routes

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for the same markets. In 2002, Gazprom estimated the costs of the NEGP at $8– 10 billion, and several reports estimated it on the higher end. 99 ‘‘However, the project is more preferable because others are subject to transportation risk via Ukraine and Belarus.’’100 At the end of 2003, Gazprom lowered its estimate to $5.7 billion.101 A European Commission document from the end of 2003 accepted the estimate for the cost of a single line with a projected annual capacity of 20 to 30 billion cubic meters of gas at 5.43 billion euros ($6.68 billion). 102 The International Energy Agency was much more pessimistic, estimating that building the pipeline under the Baltic Sea under the simplest conditions—one line with a capacity of 30 billion cubic meters—would cost at $8–10 billion.103 On the other end, the cost of building Yamal 2, which was to have a capacity of 35 billion cubic meters, was estimated at $2–2.5 billion. 104 Some estimates went as low as $1 billion.105 The difference was enormous, but the Russians never seriously reconsidered their decision. There were some setbacks in 2003. In March, Gazprom postponed the NEGP’s construction, as it awaited approval from the Baltic states.106 A couple of days later, the media announced that several Western companies rejected Gazprom’s offer to take part in the Baltic pipeline’s construction.107 But by the summer, Russia and the UK signed a cooperation agreement for the NEGP.108 The European Commission also offered its crucial support. The EC supported both the Yamal 2 and the NEGP, but it offered the NEGP its preference with a decision on December 10, 2003.109 According to Boguslaw Sonik, Polish member of the European Parliament, Putin had convinced London and Berlin to support the NEGP.110 At the same time that month, the Polish gas monopoly PGNiG and the Norwegian company Statoil officially cancelled their agreement to build a gas pipeline from Norway to Poland. Every obstacle to the NEGP’s construction seemed to have been cleared, and in January 2004, Russian prime minister Mikhail Kasyanov signed a resolution authorizing the start of the project. It may not be a coincidence that in February 2004 Gazprom turned off Belarus’s gas tap for the first time, which meant that Poland started receiving much less gas than had been agreed upon. Gazprom said Belarus failed to pay for previous gas shipments, and Beltransgas, the operator of the Belarus section of the gas pipeline, started to siphon off gas from the pipeline.111 Gazprom had been trying to take over Beltransgas since July 2003, when it offered $500 million for the company, when the market priced its worth at several billion dollars. When Gazprom stopped supplying Belarus in February, it did so with the open blessing of Moscow. It continued to do so until mid-May, during which time, other Russian companies provided the gas that had been agreed upon in the Russia-Belarus treaty, using quotas received from Gazprom for deliveries to Belarus. Gazprom played with gas prices. Though it wanted to raise prices substantially to stop subsidizing the Belarus economy through low gas prices, it would have willingly agreed to continue offering low prices on the condition that Minsk agreed to its terms to take over Beltransgas.112 It took less than 24 hours for other companies to fill the void left to Belarus when Gazprom had turned off the tap. But during that short period, Poland suffered a 30–

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50 percent decrease in gas supplies.113 Thirty percent of Poland’s gas demands are met by the Belarusian system, which is also responsible for 70 percent of Poland’s gas imports.114 The Social Democratic prime minister of Poland, Leszek Miller, publicly criticized Russia’s actions in Belarus. ‘‘This situation will have consequences because it undermines confidence in Russian suppliers, not only in Poland but also across Western Europe.’’115 Even though Polish households were not affected, PGNiG had to cut gas supplies to several major Polish petrochemical plants.116 After the crisis, the Polish deputy economy minister assessed the losses to Poland at $1.5 million.117 Gazprom hinted it would be ready to discuss compensation for Polish companies.118 But any such possibility was soon retracted by the general director of Gazexport.119 The Russian ambassador to Poland claimed the one-day disruption of the gas supply did not violate the original agreement between Russia and Poland.120 Gazprom and its Belarusian counterpart signed a temporary agreement, lasting for 10 days, that provided for Polish relief. In the end, though, there were no further cuts in the gas supply, but the incident raised serious debates about the country’s energy security. The Polish oligarch Alexander Gudzowaty again raised the possibility of building the Bernau-Szczecin pipeline (discussed in the previous chapter). The pipeline, which would have a capacity of 2.5 billion cubic meters, he said, could be operational in 2005.121 PGNiG was interested in the pipeline, but started looking at other ways to diversity its supply, including reversing the flow of the Yamal pipeline; if gas was to be cut off from the East, the Yamal pipeline could theoretically get gas from the West. Under this plan, PGNiG would build special hubs on Yamal’s western exit point from Poland and find a German company ready to make a deal for what would be a volatile natural gas supply. According to the deputy head of PGNiG, a German company called VNG committed itself to a daily quota of 3 million cubic meters of gas if the flow from the East stopped.122 The Polish company started trying to take greater advantage of its existing alternative pipeline connections, and tried to increase its capacity to store gas in neighboring countries. It planned to increase its supply from Ukraine via the Torzhok-Dolina and Ivatsevich-Dolina pipelines, which had been unutilized since the Yamal pipeline had been completed; Ukraine was willing to supply Poland with an additional 2–3 billion cubic meters of natural gas annually.123 Gazprom deputy CEO Alexander Medvedev did not think it was feasible to increase the supply of Russian gas to Poland via Ukraine. Ukraine already suffered a gas deficit, he said, and was soon to receive gas from Gazprom at European prices.124 Gazprom supplied Ukraine with natural gas and controlled a substantial part of Ukraine’s energy industry and infrastructure. The country, in short, was not a good source for Poland to attempt to diversify its gas supply. Poland sought other ways to diversify. Statoil agreed to supply PGNiG 2–2.5 billion cubic meters of North Sea gas annually.125 At the time, there was no discussion of building a new pipeline for the gas. It would travel from Germany, via the existing German-Polish connection. The plan was not a great one and it is worth noting that the shutdown of the gas flow to Belarus came two months after Warsaw withdrew from plans for a Polish-Norwegian pipeline.

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In February 2005, Gazprom CEO Alexei Miller pushed the deadline for NEGP to go into operations from 2008 to 2010.126 The 3,000-km pipeline would stretch from Vologda and St. Petersburg under the Baltic Sea to Germany. A second phase would take it under the North Sea to the United Kingdom. In April 2005, under the presence of Putin and German chancellor Gerhard Schroeder, Gazprom signed a memorandum of understanding with the German company BASF. Gazprom would increase its 35 percent share of Wingas—a joint venture between the Russian gas giant and Wintershall (a 100 percent owned subsidiary of BASF)—to 50 percent minus one share. Wingas would then connect the NEGP to the German land gas pipeline system.127 ‘‘It is known that both countries are very close when it comes to energy,’’ Schroeder said. ‘‘But we are developing a strategic partnership, and the European Union and Russia will have one too.’’128 Alexei Miller, head of Gazprom, said the new pipeline would ‘‘reduce the risk of transporting gas through other countries.’’129 Poland and the three Baltic states had entered the EU a year before in May 2004, and they made clear that the deal with Germany would affect their energy security. They also began to discuss the environmental risks associated with building a pipeline on the seabed.130 At the same time, Gazprom started reviving discussions on building Yamal 2. Gazprom and PGNiG agreed to set up a team for a feasibility study of Yamal 2, but the Russian giant’s Deputy CEO Alexander Medvedev set one condition for building Yamal 2, namely that Gazprom would be able to increase its ownership of Europol Gas, the Polish-Russian joint venture that operates the Polish section of Yamal, to 50 percent.131 At the time, Gazprom owned 48 percent of Europol Gas. PGNiG owned 48 percent. The Polish company Gaz Trading owned 4 percent. Gaz Trading was still controlled by Alexander Gudzowaty, who became unreliable in Gazprom’s eyes after 2001 when the Russian company tried to remove Gaz Trading from among the owners of Europol Gas.132 Russia’s actions in Poland were very similar to its actions in Belarus. Gazprom had the same goal of controlling the transit of its gas with Poland as it had with Belarus since 2004. Gazprom went so far as to cut off Belarus’s gas supplies to take control of Beltransgas, but in Poland, they merely promised to reconsider building another pipeline, Yamal 2—the construction of which may actually increase Poland’s energy security—in order to gain more leverage over Europol Gas, the Polish equivalent of Beltransgas. Gazprom’s offer to build Yamal 2 was unserious from the start; the existence of NEGP, according to previous statements from Gazprom and the general estimate of Europe’s demand for gas, made such a pipeline superfluous. The GermanRussian deal had put Warsaw in a precarious position, and Gazprom was simply trying to exploit Poland’s fears to give it more power. Of course, even the existence of Yamal 2 at that point would not have ensured Poland’s position as a transit country. For Nord Stream and Yamal ‘‘should not be considered alternatives,’’ Gazprom deputy chief executive Andrei Kruglov said. ‘‘It will depend on the situation which route we will choose. An essential thing is to have free capacities.’’133

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NEGP became an almost definite reality when, in September 2005, Gazprom entered into an agreement with BASF and another German company, EON, to establish the North European Gas Pipeline Company to build the pipeline. The single line, with a projected capacity of 27.5 billion cubic meters, was to be operational by 2010. A second pipeline, to be completed later, would double the overall capacity to 55 billion cubic meters. Gazprom owned 51 percent of the North European Gas Pipeline Company. EON and BASF owned 24.5 percent each.134 Other owners were permitted, but could only purchase shares from the two Germany companies. The pipeline would deliver gas to Wingas and Ruhrgas, the subsidiaries of BASF and EON. The agreement confirmed that Gazprom would raise its existing 35 percent stake in Wingas.135 The Yuzhno-Russkoye gas field in Russia would provide the source for the pipeline. Gazprom and Wintershall, the BASF subsidiary, would jointly develop the field. EON could join later. Putin and Schroeder attended this signing ceremony as well, granting the deal the highest-level blessing possible. Russia again failed to consult Belarus and Poland or the Council of the Baltic Sea countries, a 12-member intergovernmental body of countries bordering the Baltic Sea, including Sweden, Finland, and Denmark, that is authorized to deal with environmental, health, and navigational safety on the water body.136 The deal came a month before German parliamentary elections in hopes of boosting Schroeder’s Social Democratic Party by demonstrating his achievements in ensuring the country’s energy security. It is unclear just how much the NEGP would aid Germany’s energy security, but it dealt a catastrophic blow to countries between Russia and Germany. ‘‘The seabed pipeline . . . de-couples these countries from the EU gas market, leaving the Baltic states in particular to deal with Gazprom on their own,’’ wrote one commentator.137 The German-Russian agreement was a huge victory for Putin. Germany had granted Russia’s project legitimacy. Schroeder had stepped away from Germany’s traditionally Atlanticist foreign policy and established strong personal ties with Russia. In order to be reelected (his later steps led some to point to other motives as well), he had violated the principle of solidarity on which the EU had been founded. The 27.5-billion-cubic-meter capacity of the seabed pipeline is slightly smaller than that of Yamal 1, whose 32 billion cubic meters is split to send 2.88 billion to Poland and the rest to Germany. Upon the completion of NEGP, if it wanted to— perhaps simply to gain power of Europol Gas, the Russian-Polish joint venture— Gazprom would have the opportunity to completely shut off Poland’s gas supply without harming its consumers in Western Europe. Poland and the Baltic states started pushing the Amber pipeline—a less costly, more environmentally friendly project that had been first discussed in 2004—as an alternative to the NEGP. This land pipeline would travel through Latvia, Lithuania, and Poland to connect Russia and Germany. It avoided Belarus entirely, thus exploiting Russia’s claim that the NEGP was meant to avoid dependence on Lukashenko’s unreliable whims. The European Commission provided $1 million for a feasibility study, to be completed by 2008, of the pipeline.138 But Russia remained resolutely

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Map 6.1 Nord Stream and Amber Pipelines

uninterested in Amber, which meant that even if it was built, the pipeline would always run empty. As it had done before to Poland, Moscow started discrediting the Baltic states as anti-Russian and the Amber pipeline as an essentially unrealistic plan.139 The Amber plan had come too late, anyway. For the EU, Germany, and Russia, the NEGP was an established reality. In October 2006, the North European Gas Pipeline Company renamed itself Nord Stream AG. The NEGP was renamed the Nord Stream. According to Gazprom, the change reflected the company’s new goal to provide Northern Europe with gas.140

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The European Commission again expressed its support for the pipeline in February 2007. The consortium building the project sought the help of the European Investment Bank to finance two-thirds of the project, which amounted to $5 billion.141 EIB’s mission is to support infrastructure projects within the EU, and every EU member is represented on its board. The bank’s president, Philippe Maystadt, said the Nord Stream would mostly be laid in a region beyond EU territory. Financing the project would require the unanimous consent of the EU states. Opposition to the plan remained in some quarters, and the consortium failed to secure funding from the EIB. The blueprint of the Nord Stream pipeline showed a transverse route through waters that Denmark and Poland were fighting to claim as their exclusive economic zone.142 The dispute proved impossible to settle, meaning the pipeline would have to comply with both Danish and Polish laws. Poland had found a way to have some power over the pipeline’s construction and the consortium agreed to discuss Warsaw’s request.143 In mid-February, the Swedish Environmental Protection Agency called the consortium to conduct research into alternative routes for the pipeline and to determine the impact Nord Stream, if it was constructed according to the proposal, would have on marine life.144 One month before, in January, Alexander Medvedev, Gazprom’s deputy CEO and export general director, made an offer for Poland to build Yamal 2. He said its construction would only be considered if Poland’s demand for gas reached 11 billion cubic meters annually.145 (At the time, Poland imported only 7 billion cubic meters of gas from Russia every year. It consumed 14 billion in total.) If Poland accepted Medvedev’s offer, it would drop all of its diversification plans, thus making itself entirely dependent on Russia, in order to strengthen its status as a transit country. Two months later, in March, after the actions of the Swedish Environmental Protection Agency, Gazprom again played the old chip and claimed that the construction of Yamal 2 was almost a done deal. ‘‘The enlargement of the Yamal-Europe gas pipeline remains on the agenda,’’ Gazprom deputy chief executive Andrei Kruglov said. ‘‘The project will be economically expedient, and we have made the decision. The question is when it may be added to the investment program.’’146 By the time Kruglov made his announcement, which marked an about-face for the Russian company, Poland had adopted a new strategy for its natural gas that had completely discounted Yamal 2. Warsaw had, at that point, effectively given up on the possibility.147 But PGNiG later confirmed its interest in Yamal 2 on the condition that the pipeline would either be used for transit or that Poland maintained the right to reexport the natural gas delivered by the pipeline. Gazprom failed to contact PGNiG for three months, until the end of June, to discuss further details for the pipeline. 148 The two lines of the Yamal system would have had a capacity of 67 billion cubic meters. If Yamal 2 was to be built according to Poland’s conditions, the Yamal system would have transited almost 60 billion cubic meters of gas. The Nord Stream would have transited only 55 billion. After Gazprom’s many zigzags and about-faces on Yamal 2, it had, as of 2007, decided to now call Yamal 2 an economically viable option. Its decision may have

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been due to the unexpected hindrances the Nord Stream project was facing. The section of the pipeline on Russia’s land territory was delayed. Though Nord Stream AG obviously favored Russian suppliers, those suppliers did not have the advanced technology best suited to underwater construction, and so it wrote a tender for the supply of underwater pipelines. Even the deadline for the tender had to be postponed. Russia decided to use the offshore Shtokman fields, as opposed to Yuzhno-Russkoye, as it had originally planned, as the source for the pipeline. The Kremlin had decided the year before, in October 2006, to prohibit foreign companies from buying part of the field, and this caused a delay in gas exploration. The Nord Stream was starting to look even more expensive than it had originally.149 In April 2007, the Nord Stream consortium submitted information on the impact the pipeline would have on countries whose territorial and economic waters may be affected, such as Finland, Denmark, and Sweden.150 Citing environmental concerns, Finland claimed the section of the pipeline that was to be laid in its rocky and shallow waters could have been more easily placed in Estonian underwater territory. Gazprom’s plans had avoided Estonia, one of the three Baltic countries the pipeline was meant to circumvent, at all costs, but by that point, it seemed the company would be forced to concede to Finland’s request. Gazprom requested permission from Estonia to conduct seabed research in the country’s economic zone. The Estonian minister for economics was worried about the plans151 and Estonia formally denied the consortium’s request. Tallinn argued it had not received sufficient information about the research, its purpose, timetable, or methods. The country officially asked the Russian-German consortium to resubmit a proper request.152 The very steep financial and diplomatic problems that were confronting Nord Stream’s construction were, if nothing else, a sign of just how badly it had been planned. Countries, such as Finland, Poland, Lithuania, and Sweden, that most opposed the Nord Stream shifted their strategy to emphasizing its ecological threat over its economic costs. In the middle of the summer, news broke that the consortium was considering redirecting the pipeline’s route away from Polish into Danish waters, by laying the pipeline to the north rather than the south of Denmark’s Bornholm Island, as it had originally planned.153 As Russia hoped to ultimately avoid Poland, the change in the plan was likely long premeditated. The additional costs seemed miniscule in comparison. Meanwhile, Gazprom was seeking to develop the Shtokman fields, the new source for the pipeline. It entered into a consortium with the French company Total, giving it 25 percent ownership, while retaining the remaining 75 percent. Gazprom maintained 100 percent ownership in the company licensed to the field as well as 100 percent ownership of all hydrocarbons produced in the area.154 Gazprom left options open for other companies to help develop the gas field in the Russian sector of the Barents Sea. At the end of October 2007, Norway’s StatoilHydro acquired 24 percent of those shares. Gazprom now owned only 51 percent of the project.155 The Amber pipeline, at least for the Europeans, was starting to look more viable and rather lucrative. At the end of July 2007, economy ministers from Poland and the Baltic states wrote a joint letter to the European Commission asking for the Nord

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Stream pipeline to be replaced by the Amber pipeline.156 (The letter could not be sent without the signature of the Latvian economic minister; due to a governmental crisis in the country, the post was vacant for a few months.) The participants hoped for the EU to finance a feasibility study that would prove that the Amber pipeline is more cost-effective and environmentally friendly than its alternative under the Baltic Sea.157 Lithuania’s economic minister pointed out that Gazprom planned to eventually build separate pipelines to Latvia and Kaliningrad, which would make a land route even more reasonable.158 In early August 2007, due to a dispute on debts Belarus had accumulated for past shipments of Russian gas, Gazprom threatened to cut gas supplies to the country by 45 percent. Belarus was a transit country for about 20 percent of the EU’s gas imports from Russia, and the move would have directly affected Poland and Lithuania.159 To avoid cutting gas supplies, Belarusian president Lukashenko agreed to pay $460 million it had owed for gas transported by Gazprom in 2007.160 But Beltransgas had managed to pay only $190 million before the deadline set by Gazprom expired. Gazprom lowered its threat to cutting off 30 percent of the gas supply until the debt was paid.161 Though Beltransgas eventually settled its debt, the incident proved useful for Gazprom to show Belarus’s unreliability and thus the need for the Nord Stream. At the end of August, Nord Stream AG made the final decision to redirect the route of the Nord Stream pipeline to circumvent Bornholm Island to the north, through undisputed Danish waters, so as not to transverse the Polish economic zone. The rerouting increased the pipeline’s length by eight kilometers and led to further environmental and legal issues. The company’s official explanation was that ‘‘studies indicate that a more northerly route, which will stay even further away from known munitions dump sites south of Bornholm, will minimize any environmental impact and avoid the possibility of delay due to legal uncertainties with regard to the unsettled sea border line south of Bornholm.’’162 (The area south of the island had been disputed between Poland and Denmark for 30 years.) Even if this were the actual reason for Nord Stream AG’s actions, it only highlights the hastiness of their plans. Besides the long-standing Polish-Danish disagreement, the area was littered with World War II–era weapons that increased environmental risks. The most likely real reason was implicitly stated by the Russian paper Vremya Novostey: ‘‘Poland should abandon any hopes of blocking the construction of the Northern Pipeline from Russia to Germany through the Baltic Sea.’’163 The biggest blow to the Nord Stream pipeline came from Estonia in September 2007 when Tallinn again denied the request from the Russian-German consortium to conduct surveys in Estonian waters. The Russians had announced that its navy would protect as well as perform maintenance at construction sites, which meant, according to Endel Lippmaa, the head of the energy council at the Estonian Academy of Sciences, that ‘‘it is clearly a military project for Russia—it will give Russia in the future a legal right to bring as many military vessels as it wants into the Baltic Sea, just by claiming it has ‘pipeline problems’ somewhere under the sea.’’164 Mart Laar, former prime minister of Estonia, laid out three reasons for Estonia’s rejection.

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First, though the Nord Stream AG claimed that it would only conduct research in Estonia’s economic waters, attached maps showed it was also interested in its territorial waters, which are closer to the country’s shoreline. Second, the surveys would enable the company to collect information on Estonian natural resources. Third, the request included other ‘‘incorrect technical information.’’165 Estonia hoped its decision would push the EU to support a land route instead of the Nord Stream. Estonian prime minister Andrus Ansip said, ‘‘Estonia understands Europe needs Russian gas, but a land route is much more environmentally friendly.’’166 Estonia’s decision came amid a particularly turbulent period in its relations with Russia. Tallinn had announced it would relocate a Soviet-era World War II monument, to which Moscow objected. Russia retaliated by launching a bizarre cyber war in April, in an attempt to harm the Baltic country’s all-important information economy, and reducing the number of goods it transported via Estonian rail. Nord Stream AG responded to Estonia’s decision by opting for the more difficult Finnish route; Helsinki had granted permission for surveys in Finnish waters to the consortium in June 2007. The consortium downplayed the problems caused by Estonia’s decision, but political leaders and businessmen alike were frustrated. Russian energy minister Viktor Khristenko called Estonia’s move ‘‘pure politicization of the issue that is being done in a very crude way.’’167 Schroeder’s successor, Angela Merkel, in a meeting with Putin, had called the Nord Stream ‘‘politically desirable.’’168 The Belarusian government reacted by making a bid for Russia to reconsider building Yamal 2. Belarusian prime minister Sergei Sidorsky said all the facilities necessary for the land pipeline had been built and planned. He estimated the cost of actually following through and building the pipeline at $2.5–3.5 billion.169 Lukashenko offered Russia free transit for five years if it built the pipeline. In May 2007, Gazprom bought 50 percent of Beltransgas, Belarus’s gas transport company, the owner of the Belarusian section of the Yamal pipeline, for $2.5 billion to be paid in four installments until 2010. 170 Thus, Russia had a much bigger leverage over the Yamal gas pipeline in Belarus. On October 19, Russian prime minister Viktor Zubkov announced that Russia might reconsider building Yamal 2.171 Europol Gas had scheduled a board meeting for November 7, 2007, at which it expected Gazprom to arrive with just such a proposal.172 But the news came that Russia had just as quickly dropped the idea.173 Khristenko, Russia’s energy minister, said that there were no reasons to resume negotiations for Yamal 2.174 The Nord Stream pipeline, he said, allowed Russia to satisfy European demand. 175 Gazprom concurred. Gazprom deputy CEO Medvedev reiterated his demand that Poland import 12 billion cubic meters of gas annually if it wished to have Yamal 2.176 The PGNiG CEO implied that Gazprom’s hints on Yamal 2 were part of a game of deception. ‘‘Russia has not confirmed so far its interest in this investment,’’ he said. ‘‘I’m afraid that the information published in press on the subject are propaganda,’’ meant to draw attention away from the Nord Stream pipeline.177 In November, the Swedish environment minister asked Nord Stream AG to examine rerouting the pipeline farther away from the Swedish economic zone and closer

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to other Baltic states.178 Swedish military experts were particularly concerned about an increased Russian naval presence in the Swedish economic zone.179 At about this time, the Dutch company Gasunie joined the consortium by acquiring a total of 9 percent of Nord Stream from the two Germany companies, whose shares fell to 20 percent each. Gazprom retained 51 percent ownership. As part of the deal, Gazprom obtained the option of buying 9 percent of the BBL pipeline connecting the United Kingdom and the Netherlands. The agreement between the companies was signed in the presence of Putin and Dutch prime minister Jan Peter Balkenende, with the Russian president declaring, ‘‘the participation of a Dutch company in the North European Gas Pipeline project makes this a truly multilateral project, and of course creates better conditions for its realization.’’180 Poland and Baltic states often referred to the pipeline as a bilateral project between Russia and Germany, but as Russian presidential aide Sergei Yastrzhembskiy pointed out, ‘‘the project, which started as a bilateral venture between Russia and Germany, has incorporated the Netherlands. It is also open to other partners.’’181 There was one final push for the Amber pipeline in November, when Swedish, Finnish, and Estonian environmentalists protested the Nord Stream.182 The protest failed. Gazprom CEO Alexei Miller announced late in the month that the construction of the Nord Stream pipeline was on schedule and would start operating in the second half of 2010.183 A couple of days later, the Finnish prime minister announced that Finland would not join the project.184 The Nord Stream pipeline is still a work in progress. It is clear that both Russia and Germany wants to build it very much, yet there are formidable political and technological obstacles to be overcome. Europol Gas Gazprom’s tactics toward Europol Gas, which operated the Polish section of the Yamal pipeline, were part of its general strategy to place Poland in the same position as Belarus, discrediting it before the world as an unreliable transit country. Gazprom, as we have noted, already owned 48 percent of the company. PGNiG owned another 48 percent. Gaz Trading owned 4 percent.185 Gazprom employed legal and financial gambits, exploiting trumped-up ownership disputes. It dangled the possibility of building Yamal 2 before Poland as a carrot to encourage it to cede control of Europol Gas. Gazprom tried to gain control over Europol Gas through a dispute on the size of transit fee. The agreement that led to the creation of the company stated that the transit fee needs to be set at a level to ensure the operation of the company, but not to create profits for its owners. Gazprom and PGNiG were not able to agree on the size of the transit fee that would serve the above purpose. Gazprom insisted on paying lower transit fees, while PGNiG wanted it to be higher. The disagreement between the owners of Europol Gas led to court. Gazprom started pressuring Poland in 2005 by decreasing the transit fees the country would receive. That year, two requests for setting up a new tariff rate for

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2006 were submitted to the Polish Energy Regulatory Office (URE). One came from the Polish president of Europol Gas and his deputy, both delegates of PGNiG. The other was signed by two members of Europol Gas’s managing board, delegated by Gazprom. URE accepted the PGNiG delegates’ proposal, which Gazprom claimed violated the 2003 Polish-Russian intergovernmental agreement. The agreement stated that the transit fee was meant only to ensure the company’s operation, not to increase profit for its owners. The transit fee accepted by URE, Gazprom claimed, generated a profit beyond maintaining a loss-free operation for the pipeline. The Polish Anti-Monopoly court held that URE’s decision was invalid due to the disagreement between Europol Gas’s owners. By default, the court maintained the old 2005 rates, $2.7 per 1,000 cubic meters of gas traveling at 100 km, which were actually higher than the proposals of either PGNiG ($2) or Gazprom ($1.94) for 2006.186 The dispute was repeated again a year later over the 2007 transit fee. URE again accepted the Polish rate, and again a court found against URE. Defying the court order, Gazprom has continued to pay the fee that it deemed to be justified. According to estimates, it would have cost Gazprom an extra $65 million to pay the rate proposed by PGNiG, and even more to obey the court’s decision.187 The lower transit fee, besides eating into Europol Gas’ profits, made it much more difficult for it to pay back the loan it took from Gazprombank in 1999 to finance the construction of Yamal 1. Gazprom was determined that Europol Gas would remain in its debt. Several times before the new fees were set, PGNiG offered to repay Europol Gas’s debt ahead of schedule, but Gazprom refused.188 According to an analyst at Di Bre Bank, [S]o far, the issue of huge debts owed to Gazprom [ . . . ] was used by Russians to try to expand its influence on the Polish gas pipeline operator EuRoPol Gas . . . it seems unlikely that they would now be ready to give up this tool and agree to the early payback, even though the chances for takeover of control over Polish gas pipeline are very small because of the defiance of the Polish government.189

Gazprom reiterated its opposition to increasing the transit fee and permitting early debt repayments in the fall of 2007, with the deputy director of the company’s export division saying that creditors would not be interested in either move.190 Gazprom had other methods of dominating Europol Gas. The agreement that established the joint venture set up a system whereby a PGNiG appointee would directly run it, while a Gazprom appointee would head its supervisory body. Gazprom also attempted to decrease the PGNiG-appointed president’s power over the company. At a January 2007 supervisory board meeting, it tried to abolish the rule authorizing the head of the company—by definition, a PGNiG appointee—to break ties at meetings of Europol Gas’s managing board.191 Gazprom wanted tie-breaking decisions to be delegated to the supervisory board, which was headed by Gazprom, or to the shareholders. The move would destabilize the Polish control of the company. ‘‘Gazprom has broken off cooperation,’’ PGNiG spokesperson Tomasz Fill said. ‘‘While waiting for it to start back up, we are exchanging all the documents

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necessary for technical operations by mail.’’192 Gazprom found other ways of disrupting Europol Gas. For a short period, its supervisory board could not meet, as Gazprom failed to name a chairman, who could call a meeting.193 Without those meetings, it was much harder to solve the price dispute. The CEO of PGNiG was quite open about what he thought of Gazprom’s plans in the summer of 2007. Gazprom, he said, ‘‘has for a year or longer been conducting its plans towards [Europol Gas] and is pursuing dominating it or taking it over.’’194 The story of Europol Gas is clearly not over yet. Odessa-Brody Pipeline An oil pipeline connecting Odessa, Ukraine’s port on the Black Sea, to the Ukrainian town of Brody, which the Friendship crude oil pipeline also crosses, was built in 2002 with financing from the Ukrainian government. An extension was planned to the Polish refinery in Plock, and from there to Gdansk, which would supply them with oil from the Caspian Sea. The Odessa-Brody section would deliver up to 14.5 million tons of oil per year with a potential increase to 45 million tons.195 But the pipeline ran dry until the fall of 2004. Declaring the planned pipeline a pan-European interest, the European Commission joined with Poland and Ukraine in May 2003 to express their intention to extend it to Plock. The pipeline, according to the EC would increase the supply of oil in the European market. It would introduce competition for oil deliveries in the EU. It would mark an independent route for Caspian oil from Russia, leave the overcrowded Bosporus Straight less burdened, and perhaps ease the Black Sea’s ecological problems. In November 2003, Poland and Ukraine signed an agreement to connect the Odessa-Brody pipeline with the Polish pipeline system. In February 2004, after months of hesitation—Russian companies, most actively the British-Russian joint venture TNK-BP, had been trying to persuade Kiev to use the pipeline to transport Russian oil to Odessa—Ukraine finally decided to use the pipeline to transport Caspian oil.196 ‘‘Ukraine made the decision because it is interested in oil supplies not only from Russia but also from the Caspian Sea,’’ Ukrainian president Leonid Kuchma said.197 The governments began talks on setting up an international consortium that would build the extension to Plock. ‘‘We decided, having full declaration from the Ukrainian side, that it will be Caspian oil [being transferred], that in the nearest time, there will be a meeting of interested countries and European Union as well,’’ Polish president Kwasniewski said. ‘‘If there is an agreement, it will be possible to set up an international consortium to complete construction.’’198 The first transport of Caspian oil was planned for May. Kuchma began to discuss supplying the pipeline with Kazakh oil. 199 The European Bank for Reconstruction and Development developed a deal with the Ukrainian government to finance the extension,200 which was to be completed in 2005 and have a capacity of delivering 10 million tons of oil in the first phase, with a potential to increase its capacity to 25 million. The American company Chevron Texaco discussed transit fees with the Ukrainian government to decide whether it wanted to eventually become

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Map 6.2 The Originally Planned Route of the Odessa-Brody-Plock Pipeline

involved in the project.201 Other companies with operations in Kazakhstan—the French Total Fina Elf, the British Shell, the Russian Lukoil, and the Kazakh KazmunaiGas—said they were interested in joining the consortium.202 The adviser to the chairman of the board of Ukrtransnafta, Alekxander Shevchenko, said, ‘‘practically all major shareholders in Western European refineries and those who produce oil in the Caspian Sea are interested in using this route because they confirm that it is competitive, it is cheaper, it is more appropriate in the mid- and long-term prospective.’’ 203 At the same time, a Russian diplomat noted that ‘‘the extension of the pipeline to Plock does not reflect the interests of Russia,’’ by which he meant gaining

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political and economic control of Ukraine.204 But in a stunning speech, Ukrainian president Kuchma announced that employing the pipeline for northward transports was not economically reasonable. He said it made better sense to use it to transport Russian oil southward to Odessa, which would generate profit for the Ukraine.205 Ukrtransnafta and PERN continued negotiations to set up a consortium, and failed to meet the first deadline to start delivering oil in May. The Ukrainian government was sending contradictory signals. The Ukrainian minister for fuel and energy mentioned the lack of tangible commitments from companies, while Prime Minister Viktor Yanukovich said the Ukrainian government ‘‘decided at its meeting on February 4 to use the Odessa-Brody pipeline for transporting Caspian oil to Europe remembering about the significance of the project to the security of supply of the EU. This decision is final and invariable.’’206 Yanukovich’s commitment to deliver Caspian oil did not last long. In July, the Ukrainian government passed a resolution stating the pipeline would not be exclusively employed for northward directions toward Brody. A southward direction would also be possible. Yanukovich had discussed the issue with Russian Prime Minister Fradkov in Moscow a couple of weeks before. 207 Now Yanukovich expressed the belief that the pipeline could be employed in a two-way direction. Specialists, he said, should set the amount of the two types of oil that would flow in each direction.208 Ukrtransnafta and PERN finally established a joint venture, Sarmatia, in July. Sarmatia was to conduct a feasibility study to extend the Odessa-Brody pipeline to Plock.209 But with its other hand, Uktransnafta kept taking steps to reverse the pipeline’s direction, when the company’s supervisory board authorized its management to sign a deal with TNK-BP permitting the delivery of Russian oil from Brody to Odessa. Alexander Todiychuk, former president of Ukrtransnafta, protested, warning that if Odessa-Brody’s direction was reversed, ‘‘Ukraine could lose its chance to really integrate with Europe and Russia will again control all corridors after these steps.’’210 Uktransnafta and TNK-BP made their agreement to reverse the flow final that very month, with TNK-BP intending to use the pipeline to transfer 9 million tons of Russian oil to the Black Sea and from there to Europe. The agreement, signed three months before the Orange Revolution of Ukraine, was to last three years. Ukraine had offered TNK-BP the use of its Pridniprovsky pipeline instead of the Brody-Odessa. The Pridniprovsky runs from Samara through Kremenchuk to Pivdenny, a port city next to Odessa. The transit of oil would have cost TNK-BP $3 less per ton, and the route would have been 600 kilometers shorter. Todiychuk, the former Uktransnafta president, said the deal would have saved TNK-BP $27 million.211 Oleksiy Ivchenko, the newly appointed chairman of NaftoGaz Ukrainy, a stateowned oil and gas monopoly that owns Ukrtransnafta, agreed, saying, in 2005, ’’the only reason for reversing the direction was to thwart the originally intended use.’’212 The Pridniprovsky pipeline, he said, was running at less than 50 percent of its capacity.213 In March 2005, less than half a year after the Orange Revolution, Poland, Ukraine, and the EC reexamined the possibility of extending the pipeline to Plock,

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redirecting its flow northwards. The Brody-Plock extension would be 490 kilometers. The construction costs were estimated at 300 million euros for the first stage and 150 million euros for the second. The capacity of the pipeline would be increased from 10 million to 25 million tones of oil between the two stages. The EC assigned 2 million euros in credit for a feasibility study.214 The fate of the Odessa-Brody pipeline experienced one more twist when its possible extension through Slovakia came into play. In October 2006, Ukrainian president Viktor Yushchenko proposed extending the Odessa-Brody pipeline through the Druzhba system in Slovakia to the Kralupy refinery in the Czech Republic. Prime Minister Yanukovich, who had led his government to reverse the flow of the pipeline in 2004, backed the president. But the pipeline took another hit at the end of the year. ‘‘Information released following the December 10–11 session of the UkraineKazakhstan Intergovernmental Commission on Economic Cooperation suggests that Russia has successfully forced an indefinite postponement of the Odessa-Brody-Plock oil transport project.’’215 Kazakhstan announced that all of its oil was committed in other directions, away from Odessa or Brody, which was a problem. The OdessaBrody pipeline was viable only as long as a supplier existed at its end. In December 2006, TNK-BP and Ukrtransnafta signed another deal that extended their original three-year agreement to transfer Russian oil from Brody to Odessa for another three years until 2010.216 The life of the pipeline continued its bizarre path. At the beginning of 2007, Yanukovich reinforced his support for the pipeline at the World Economic Forum in Davos by claiming that Ukraine was ‘‘working to complete a pipeline to carry an additional 12 million metric tons of oil per year to the EU from Azerbaijan, Kazakhstan and Russia.’’217 As many observers considered Yanukovich to be closely allied to Russia, his announcement came as a surprise. If Russian crude oil was imported in the pipeline, Poland said, it would defeat its very purpose to diversify oil supplies.218 In February, the plenipotentiary of the Polish Government for Diversification, Piotr Naimski, said his country would not make a single investment in the project unless Kazakhstan and Azerbaijan participated as supplier countries, and Georgia and Ukraine took part as transit countries. The fear was that Odessa-Brody would become one more route for Russian oil to Europe. The European commissioner for energy, Andris Piebalgs, supported Poland by saying his organization saw the extension to Plock as a way to diversify oil supplies to the EU.219 The extension of the Odessa-Brody pipeline through Slovakia to the Kralupy refinery in the Czech Republic gained a new momentum when Slovak minister of economy Lubomir Jahnatek talked about connecting the Odessa-Brody pipeline with the Druzhba pipeline during his visit to Kiev in December 2006. Slovakia promised Ukraine that it would begin, on an experimental basis, pumping both Russian and Caspian oil through the Druzhba pipeline, even though Caspian oil is lighter than Russian oil. It is possible to pump the two types of oil through one pipeline, but it would require minimal investment in the Druzhba. The Kralupy refinery in the Czech Republic was the only one on the southern branch of the Druzhba that was open to taking Caspian oil. Slovnaft in Slovakia

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and Mol in Hungary used heavier Russian crude oil and had no intention of changing their operations. ‘‘Since the company operating the Slovak sector of the Druzhba has been privatized, the government has no effective control over this company,’’ Slovak prime minister Robert Fico said. ’’However, we believe that the issue will be settled soon with the involvement of the Russian investor.’’220 At this time, talks about reselling the embattled Yukos’s 49 percent stake in Transpetrol were going on. It seemed that a Russian company would emerge as the winner of the shares. An article published in a leading Slovak daily even made the claim that Transpetrol was so interesting for Russia in order to control or block a possible route for the Caspian oil to Europe. ‘‘It is not that Russia does not want to treat Europeans to Caspian oil, but if the Kremlin could influence what kind of oil will flow through

Map 6.3 The New Route for the Polish Extension of the Odessa-Brody Pipeline and the Druzhba Pipeline

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the Ukrainian Odessa-Brody oil pipeline, which is connected to Druzhba, it would have a lever for negotiation against the Ukrainian Government and similarly against Azerbaijan.’’221 In February 2007, Transneft, the Russian oil transport company, said it would be able to build the Baltic Pipeline System (BPS-2) to Primorsk within 18 months, and if that happened, Russia announced, it would shut the Druzhba down. Deputy CEO for Strategy of the Polish pipeline operator PERN, Marcin Jastrzebski, said the move did not make economic sense. Russia’s threat, he said, had to be political.222 Druzhba’s shutdown would hit PERN severely, as most of its profits came from transporting oil through the Polish section of the Druzhba pipeline system to refineries in Poland and Germany. The BPS-2 did for Russian oil what the Nord Stream did for Russian gas, by circumventing Belarus and Poland and redirecting at least part of, if not all, Russian oil exports to Primorsk, a Baltic Sea port. Russia argued that the cost of repairing the Druzhba in case of an accident would be prohibitively expensive.223 It must be noted that staging an accident has not been unheard of from Russian companies— something of the sort occurred at the Lithuanian refinery Mazeiki. At the same time, a representative of Ukrtransnafta, Oleksandr Dikusarov, said that PERN intended to take over the Ukrainian oil pipeline system in exchange for building an extension of the Odessa-Brody pipeline.224 ‘‘The geopolitical competition of Poland and Russia for the most lucrative economic assets of Ukraine entered a new phase,’’ the Russian daily Nezavisimaya Gazeta said. The paper also said Warsaw and Moscow had begun talks with Kiev to acquire key gas and oil pipeline systems that deliver most of the energy from Russia and Central Asia to Europe.225 The Ukrainian minister for fuel and energy Jurij Boyko immediately denied that PERN made any such move.226 The claim that PERN had any such intention was bogus. The Slovak extension seemed to gain priority over the Polish extension. Ukrainian prime minister Yanukovich held a joint press conference with the chairman of the European Commission, Jose Manuel Barroso, announcing that Ukraine was in negotiations about extending the pipeline through Slovakia. He called the extension to Plock and Gdansk a second stage for the project.227 The goal became to extend the Odessa-Brody pipeline through Slovakia to the Czech Republic first, as the pipeline system already existed in that direction. Kazakhstan said it was interested in supplying the Odessa-Brody pipeline, and from there the world market. But Kazakh president Nursultan Nazarbayev made Kazakh participation conditional on Russian involvement. 228 During Polish president Lech Kaczynski’s visit to Kazakhstan in early April, Polish oil company PKN Orlen and the Kazakh gas and oil company KazMunaiGaz were expected to sign a deal that would have provided the basis for the Odessa-Brody’s extension. KazMunaiGaz backed out at the last minute, and asked that Russia be invited to join the project.229 Kazakhstan dealt another blow to the project when the Polish president invited the heads of states of potential supplier, transit, and consumer countries along the

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pipeline—Kazakhstan, Azerbaijan, Georgia, Ukraine, and Lithuania—to a summit in Krakow in May 2007. The Kazakh president was the only one of the five to snub Kaczynski, by meeting with his Russian and Turkmen counterparts in Moscow and sending his deputy energy minister instead. The Russians had called the Moscow meeting only after learning of the Krakow summit, thus forcing Nazarbayev to choose his loyalties, and to prevent Kazakhstan, a potential major supplier, from supporting the Odessa-Brody. The participants of the Krakow summit agreed to set up a working group to study the feasibility of extending the Odessa-Brody pipeline to Poland. The Kazakh representative claimed it was too early for his country to commit oil supplies to the project, at least not until the pipeline was operational. Azeri president Ilham Aliyev did not commit oil supplies, either, for the same reason.230 But he gave out some hopeful signals, saying, ‘‘We plan to increase production of oil in the coming years so we will have extra amounts of oil which will be exported in various directions.’’231 The summit did manage to confirm and strengthen its participants’ political commitment to the project, though it was still unclear who would supply oil for the pipeline and how it would be profitable. As Kazakhstan insisted on Russia’s involvement, the other participants decided it would be best if only Azerbaijan served as the pipeline’s oil supplier. The Polish president set a target date for 2011 for Caspian oil to begin flowing north.232 In August 2007, in an interview, PERN deputy CEO for strategy said his company had rerouted the potential extension for the Odessa-Brody pipeline. Originally, it planned to link Brody directly with Plock. The new route would extend the Odessa-Brody line to Adamowo on Poland’s border with Belarus, and from there the pipeline would link to the existing Polish section of the Druzhba pipeline. As the Druzhba would experience a decline in oil flow, by rerouting the extension, he said, PERN could make use of part of the Druzhba’s free capacity.233 The BrodyAdamowo extension was 300 kilometers long. A direct pipeline from Brody to Plock would be 490 km. In the summer of 2007, the Polish-Ukrainian joint venture Sarmatia, which had been set up in July 2004 to construct the Polish extension of the Odessa-Brody pipeline, invited energy companies from Georgia, Azerbaijan, and Lithuania to join the consortium. In mid-October, the five countries signed an agreement in Vilnius to employ Sarmatia in building an extension, this time from Brody to Gdansk, the Polish refinery on the Baltic Sea. Konstantin Zatulin, a member of the Russian Duma and director of the CIS Studies Institute, called the project anti-Russian. The project, he said, had no commercial value. Its participants were acting from political motives.234 In December, the Polish and Ukrainian presidents said they planned to start deliveries of Caspian oil northwards on the Odessa-Brody pipeline starting in May 2008; it was the only way, Yushchenko said, the pipeline would be beneficial for Ukraine.235 The extension to Plock was expected to be built by 2011. Currently, there are two possible routes for the extension of the Odessa-Brody pipeline. One, which is already existing, is through Slovakia to the Kralupy refinery in the Czech Republic. The other would go through Poland to Plock. As the

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infrastructure is already in place in Slovakia and the Czech Republic, that extension seems to be the priority. However, a lot depends on the future fate of Transpetrol, the operator of the Slovak section of the Friendship pipeline. A Russian owner of the Slovak company may prevent the extension of Odessa-Brody through Slovakia. However, if Slovakia manages to buy back the shares, or if a strategic investor from the region emerges as a winner, Odessa-Brody’s Slovak extension may become operational in the foreseeable future. In this case, the flow of Odessa-Brody would be reinstated in its original direction and would deliver Caspian oil from the Black Sea port of Odessa to Central Europe. This pipeline would be the first-ever direct access of Caspian oil to Central Europe. As Moscow expressed several times that it considered the extension of Odessa-Brody a hostile move, moreover, it successfully prevented and postponed this development by reversing the flow of the pipeline earlier, it certainly will not sit still while the Sarmatia consortium works on the two different extensions.

Slovakia Transpetrol The Slovak government sold a 49 percent stake in and management rights for Transpetrol to Yukos for $74 million in December 2001. Yukos also received the right to buy an extra 3 percent of the shares, which would have given it a majority ownership, if the Slovak government decided to sell them.236 Besides operating the Slovak section of Druzhba—between Ukraine and the Czech Republic—Transpetrol also stored crude oil for commercial and state needs. Transpetrol’s section of the Druzhba could transport 20 million metric tons per year, but it only ran at half its capacity. About half the crude oil in the pipeline supplied Slovakia’s only refinery, which was owned by Slovnaft, a subsidiary of Hungary’s Mol. The other half supplied refineries in the Czech Republic, most importantly Ceska Rafinerska.237 Transpetrol was a strategic company not for these deliveries, but for its location as a potential hub of crude oil pipelines in the region. As the Brussels-based Energy Security Institute noted, ‘‘Transpetrol has an important role to play in the construction of the Odessa-Brody Euro-Asian pipeline corridor.’’238 As covered extensively in the Polish section of this chapter, Transpetrol was in a strategic location to offer an extension to the Odessa-Brody pipeline, which was built in 2001, with the original purpose of transporting Caspian oil northwards to Western Europe. In an article subtitled ‘‘Slovakia is Russia’s last remaining window to Europe,’’ the Russian commentator Viktor Yadukha wrote, ‘‘tiny Slovakia is the last remaining route through which Russia can export oil and gas to the West without hearing ultimatums about political and economic surrender.’’239 But Fico-era Slovakia’s friendliness, while helpful, was not what made the control of its section of the Druzhba so important for Putin-era Russia. Slovakia’s Druzhba section provided the easiest access to Western Europe for Caspian oil. As Russia wanted at some point to control

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Map 6.4 Extension of Odessa-Brody through Slovakia

all Caspian oil deliveries to Western Europe, it would not, at whatever cost, lose control of Transpetrol. In July 2003, the Russian Prosecutor’s Office asked the Russian Federal Tax Service to audit Yukos. In October of that year, 44.1 percent of Yukos shares were frozen. In December 2003, the Russian Federal Tax Service claimed Yukos had failed to pay $5 billion in taxes in 2000, a year before it acquired 49 percent of Transpetrol. There were more charges of tax evasion. A 76.8 percent share of Yuganskneftegas, Yukos’ main asset, was auctioned off for $9.35 billion in December 2004. The buyer, Baikalfinansgroup, was bought by Rosneft within a few days.240 More assets were put on sale in the next few years. There was every reason to believe that sooner or later, Yukos’s shares in Transpetrol will be among them. According to the original contract

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between Slovakia and Yukos, Slovakia could veto any of Transpetrol’s new owners if Yukos decided to resell part of its stake. That right expired on March 31, 2007. Throughout its march to bankruptcy, Yukos tried to protect its two most valuable non-Russian assets, namely the Mazeiki Nafta oil refinery in Lithuania and Transpetrol, both of which were owned by a Netherlands-registered Yukos subsidiary called Yukos Finance B.V. In order so that Transpetrol would not be taken over by the Russian state or Western creditors, the Slovak minister for economy, Pavol Rusko, declared in November 2004 that Slovakia intended to buy back the 49 percent stake in Transpetrol.241 ‘‘Slovakia wants to be the first potential bidder to be considered as a buyer for the stake as soon as the Russian side decides to take this step,’’ Rusko said. The Slovak government sought the support of the Kremlin in its move with an official letter.242 But in an interview with Slovak radio on February 22, 2005, Putin insisted that Transpetrol’s fate should be decided by Yukos and not by state governments.243 The Slovak government seemed to follow his lead by opting not to discuss the issue during Putin’s official visit to Bratislava on February 24–25. A spokesman for the Economy Ministry, Maros Havran, said courtesy dictated Slovakia’s deferment, adding that Bratislava would wait to see how Russia would conduct the Yukos affair.244 But, oddly, Putin proved less shy, raising the issue himself during talks with Dzurinda, who was still in office at the time, and saying that two companies had expressed an interest in buying Transpetrol.245 The identities of those two companies were hidden for a day, with Dzurinda merely noting that Putin, ‘‘informed me about two specific firms whose names I will not disclose that are seeking to buy the ‘nationalized’ stake in Transpetrol.’’246 One of those companies, it was later revealed, was the partially state-owned, Tatarstan-based, Russian company Tatneft.247 The name of the other company was not disclosed until December 2005. But a couple of days after Putin’s inquiry on behalf of Tatneft, Yukos officials declared unequivocally their intention not to sell the 49 percent stake in Transpetrol.248 In early March, Tatneft officials showed up in Bratislava to apparently hold discussions on the Transpetrol stake with Slovak officials. According to the Slovak Ministry for Economy, this was its first clear sign that Tatneft was actually interested in buying the Transpetrol shares.249 The Slovak government threatened in October 2005 that it would confiscate Transpetrol property if Yukos failed to sell it before the end of the year. As Yukos would not have the resources to meet Transpetrol’s social and investment obligations, lawyers predicted the government would end up following through on its threat.250 The Russian state, meanwhile, had already insisted that Transpetrol remain in Russian hands.251 In October 2005, the state-owned Russian company Rosneft also tried to gain Yukos’s foreign assets. As one of Yukos’s creditors, it secured a temporary verdict from a Dutch court that prohibited Yukos from managing its foreign assets, among them Transpetrol.252 The court reversed its decision on November 24, but Rosneft would continue to leverage its position.253 The new Slovak economy minister, Jirko Malcharek, placed the buyback of Transpetrol on the top of his agenda when he took office in October. The Slovak daily Sme named three options for Bratislava. The government could either buy back the stake,

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agree to the sale to a third company, or unilaterally cancel the privatization deal.254 After his trip to Moscow in December, Malcharek decided the stake should be sold to a Russian company, saying ‘‘the original effort to regain the shares was not in favor of Slovak strategic interests.’’255 Maros Havran, now a former spokesperson for the Economy Ministry, criticized the decision. He said the ministry, when under the administration of Pavol Rusko, had planned to buy back the 49 percent stake in Transpetrol and resell it to a strategic investor. Slovakia was surrendering its opportunity to determine the new buyer, he said.256 Malcharek said Transpetrol’s new owner had ‘‘to be a legitimate company that will be able to define its intentions for Transpetrol, and assure that the relationship with Russia wouldn’t be harmed.’’257 Indeed, after Malcharek agreed to sell Transpetrol to a Russian company, a ministry spokesperson said relations between the two countries had improved.258 It is, of course, rather odd that the Economic Ministry would prioritize foreign relations when considering the fate of one of the country’s great economic assets, as the ministry repeated several times. One can only wonder what Russian officials told Malcharek during his visit to Moscow, though they may not have had to tell him much. Reports that Russia was considering substantially lower its oil supply in October 2005 alarmed Slovak and Hungarian refineries. Malcharek may have been trying to ensure Russia’s commitment.259 A few days after Malcharek’s visit to Moscow, the spokesperson of the Slovak Economy Ministry mentioned that it was also important, ‘‘that the company interested in Transpetrol is not burdened by any obligations and that the flow of oil to Slovakia is not interrupted by any other entity that will be out of the reach of the Slovak or the Russian government.’’260 Proponents of selling the Transpetrol stake to a Russian entity continued to cite the need to secure a stable oil supply in the region. In December, the Russian deputy energy minister named the two Russian companies that were interested in the Transpetrol stake: Rosneft and Tatneft, marking the first time Rosneft was officially mentioned in regards to the sale.261 The Slovaks reportedly accepted the two candidates. Yukos would have preferred other buyers, but the Russian government set the choice.262 A third Russian company, Russneft, was named a couple of weeks later. ‘‘If such a tender takes place the Russian government would like to support Russneft as its candidate,’’ Russian deputy economy minister Andrei Sharonov said. Russian economy minister German Gref had confirmed Russia’s intention to consider Russneft as a preferred bidder in a letter sent to the Slovak government a few days before.263 By the end of the month, Russneft officially confirmed its interest to the Slovak economy minister.264 In the end, Russneft did indeed buy the 49 percent stake in Transpetrol for $103 million in February 2006.265 Russneft, a privately owned, vertically integrated Russian oil company, came into existence in late 2002 through a series of acquisitions. Its output grew by over 200 percent in 2004 and 2005, making it the ninthlargest oil producer in Russia by early 2006. It was owned by Mikhail Gutseriyev who had previously presided over the Russian-Belarusian oil firm Slavneft. During Yukos’s other sell-offs in 2005, Russneft had acquired a 50 percent stake in Zapadno-Malobalyskoye (a 53,000-b/d joint venture with Hungary’s Mol).266 At

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the time of the deal, Russneft produced 15.5 million tons of crude oil per year, of which it supplied 3 million tons to Slovakia, more than half of the country’s crude oil import from Russia.267 It is rather surprising that the Russian state granted Russneft its approval for the sale of the Transpetrol stake, over Rosneft and Tatneft, which seemed to have closer ties to the Kremlin. As mentioned before, Slovakia, according to its original agreement with Yukos, still had a right to veto the sale to Russneft. The Slovak Anti-Trust Bureau granted the first necessary approval.268 But the Ministry of the Economy was more tentative. The deal seemed to be going smoothly at first. ‘‘Our discussions with the Slovak government were very constructive over the past few months, and we agreed that the offer submitted by Russneft was in line with the interests of all parties involved,’’ Yukos President Steven Theede said.269 Economy Minister Malcharek, after calling a group of experts to hear their opinion, declared in February 2006, that they had a positive assessment of the deal.270 By March, though, the minister said ‘‘[I] redefined my priorities.’’ 271 The Dzurinda government may have been afraid of a noconfidence vote. The ministry postponed its decision four months until after the elections scheduled for June 2006. At the end of the month, Dzurinda himself said he was not in favor of the planned sale to Russneft.272 Some noise was made about Slovakia buying back the 49 percent stake in Transpetrol. Dzurinda claimed the move was unfeasible, as Yukos and Russneft had already signed a contract.273 But Malcharek said, ‘‘I will meet Yukos President Stephen Theede to discuss the rebuying of the Transpetrol shares.’’274 A Slovak weekly claimed that during his visit to the United States, American officials had advised Dzurinda against selling Transpetrol, and the Slovak government afterwards decided to veto the sale to Russneft.275 In July 2006, Gazprom entered the scene, with a $105 million offer for the Transpetrol stake.276 In September 2006, Russneft announced its withdrawal from the deal, saying it was not economically viable. Rosneft and Gazprom were quick to restate their offers.277 For several months, the Russian press consistently blamed Russneft’s decision on the Slovak government’s veto.278 Russneft did not acknowledge the real reason for its decision for almost a year until July 2007—that the head of Gazprom Neft, Alexander Ryazanov, had approached Russneft and asked the company to defer the opportunity of buying the stake to the state-owned gas giant.279 Though Russneft had written permission from the Russian Ministry of Economy and Trade to buy the Transpetrol stake, a request from a state company took precedence. Russian authorities found Russneft’s mere withdrawal from the deal inadequate. According to media reports, Mikhail Gutseriyev, the founder, president and controlling shareholder of Russneft, was presented with a $1 billion offer to sell his company to a state-owned Russian oil company in 2006.280 (In early August 2007, analysts valued Russneft at $10 billion.281) After he refused, Gutseriyev was charged with fraud in May 2007,282 right when Putin was discussing Gazprom’s options in Transpetrol with Fico at a summit.283 Then, in June 2007, the Russian Federal Tax Service initiated eight lawsuits against former and current Russneft shareholders, for selling and purchasing shares in their company against ‘‘foundations of the rule of law and morals.’’284 The charges could

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precipitate a state takeover of Russneft. At the end of July, Gutseriyev left the company, after which the Russian paper Vedomosti reported that the Kremlin-friendly oligarch Oleg Deripaska would buy Russneft for $6.5 billion. Deripaska’s buyout would not result in a consolidation of Russia’s oil industry, according to analysts. ‘‘We don’t see much of a fit between Russneft and the portfolio of any other major Russian oil company,’’ said Alexander Burgansky of Renaissance Capital. ‘‘But if that’s what the government wants to happen, it will happen.’’285 According to Vedomosti, Kremlin officials acknowledged that authorities ‘‘became dissatisfied with’’ Gutseriyev after he attempted to buy Transpetrol.286 Gutseriyev left Russia that summer and filed for asylum in the United Kingdom in October. The punishment suffered by Russneft follows a pattern of all Russian energy companies, like Yukos, that attempt to compete with Kremlin-friendly entities in acquiring part of the industry the Russian state considers particularly important. The procedure against Yukos continued. On March 29, 2006, the Moscow Arbitration Court placed the company under the supervision of an outside manager appointed by the court, who turned out to be Eduard Rebgun, a favorite of Rosneft. Rebgun took charge of selling Yukos’s assets, which would result in its bankruptcy and, potentially, its nationalization. On March 31, a Russian court placed a ban, prohibiting Yukos from selling assets valued more than $1.1 million as part of bankruptcy proceedings initiated against the company by Western banks. Yukos had to secure Rebgun’s permission to sell its property.287 The Russians headed off another Transpetrol buyout. When Fico became prime minister of Slovakia in June 2006, he broke with his predecessor’s policy and contemplated letting a Russian company buy into Transpetrol in lieu of a buyback from the Slovak state. After a visit by Steve Hellman, a U.S. State Department advisor, Fico’s cabinet is reported to have decided to switch course and, like the Dzurinda government before, to find a way for the Slovak government to buy the Transpetrol stake back.288 On August 1, 2006, a Moscow arbitration court declared Yukos bankrupt, placed it in receivership, and named Rebgun as receiver. Eight days later, the Slovak government met with the management of Yukos Finance B.V., of which Transpetrol was a subsidiary, and agreed about buying back the shares. On August 13, Rebgun fired Yukos Finance’s two managers, Bruce Misamore and David Godfrey, ‘‘for acting against shareholders’ interests in talks on the sale of Yukos’ foreign assets.’’ 289 The agreement between Slovakia and Yukos Finance came to nothing. A Dutch court ruled on August 17 that Rebgun could practice his rights on part of Yukos’s foreign assets but denied him full control. The ruling was murky and left the Slovak government in limbo, since it was unclear with whom it could negotiate: Rebgun, or Misamore and Godfrey. Slovak economy minister Jahnatek said his country aimed to buy the Transpetrol stake back by the end of the year. Fico also set the buyback as a priority.290 Slovak president Gasparovic traveled with Jahnatek to Moscow on November 5, 2006, where Jahnatek discussed the issue with the head of the Russian Cabinet Office, Sergei Naryshkin. And there, despite all previous statements and Slovakia’s Shermanesque insistence, the two sides agreed that either Slovakia or a Russian company

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would buy the stake. They also agreed that if a Russian company bought into Transpetrol, it had to fulfill the following conditions: 1) It had to hand over managerial control to Slovakia; 2) it would increase the amount of oil transported through the Druzhba pipeline; 3) it would also transfer Caspian crude oil through the pipeline; and 4) it would extend the pipeline to the refinery in Schwechat, Austria.291 After meeting with Putin, Gasparovic told journalists that whether Slovakia or a Russian company bought the stake, ‘‘I can say that both are advantageous for Slovakia, although each of them is advantageous from a different point of view, of course.’’292 Bratislava had, in just a few months, given up its insistence on buying back the stake, and now considered the purchase by a Russian company as an equally good possibility. The Russian-Slovak agreement had also excluded Poland’s PERN and Hungary’s Mol from buying the stake. The agreement came after a Slovakian poll on energy security in which 75 percent of respondents supported the Slovak government’s attempts to regain full control of Transpetrol.293 Gasparovic’s declaration had creepily prepared the ground for a Russian company to announce it was interested in buying the stake, while still floating the possibility for several months that the Slovak government would buy it back. Still, Slovakia had the right to veto any new minority owners until March 31, 2007. If, however, Bratislava failed to buy back the Transpetrol stake by the March deadline, the chances that a Russian company would acquire it, grew. Even afterwards, the consent of the Slovak Economy Ministry was needed for significant changes in Transpetrol management.294 Two weeks after the Slovak president’s visit to Moscow, the Slovak Economy Ministry, the majority owner in Transpetrol, called together an extraordinary meeting to replace members of the board of directors and the supervisory board.295 Two sets of representatives showed up on behalf of Yukos Finance, one from the old management, headed by Misamore and Godfrey, and the other from Yukos receiver Rebgun. The Slovaks acknowledged only Rebgun’s representatives. 296 The two boards were reshuffled, leaving the political opposition to call it a chilling return to the Meciar era of 1993–98. A week after the board meeting came the first serious signs that a Russian company would take over the Transpetrol stake, when a Slovak Web site claimed Putin had told Gasparovic during their meeting that he did not like the idea of Slovakia conducting negotiations with officials of the bankrupt Yukos on buying back Transpetrol shares.297 In a radio interview, Jahnatek said he preferred that a Russian company take the minority stake in Transpetrol as long as the Slovaks could regain their control of the pipeline’s management and the move resulted in the increased flow of Russian oil.298 In February 2007, Jahnatek discussed the 49 percent stake with the deputy director general of Gazprom, Valery Golubyev, and the president of Gazprom Neft, Alexander Dyukov. The discussions, according to the minister, were not particularly fruitful.299 These discussions, however, did mark the first time a possible Transpetrol stake sale to a Russian company was linked directly to how it would benefit Slovakia. Jahnatek, Golubyev, and Dyukov all discussed the supply and price of natural gas in Slovakia. At the time, Slovakia’s long-term gas contract was due to expire in 2008. According to Kommersant, Slovakia may receive cheaper natural gas

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in the new contract as part of the exchange for Slovakia’s concession for a Russian company to buy Transpetrol.300 Not everyone was convinced. The Slovak daily Sme wrote that ‘‘it is equally mistaken to think that if we sacrifice Transpetrol, we will receive cheaper natural gas from Russia as a bonus.’’301 And Golubyev was noncommittal, saying that he was ready to listen to all of Slovakia’s demands, but ultimately the final price of gas would be decided during discussions between Gazprom and SPP, the dominant Slovakian gas wholesale company.302 Russia tied and untied its interests with Gazprom and other Russian companies as it saw fit, and here the issue was delegated to the company level. Slovakia may or may not be rewarded with lower gas prices, but the Slovak public will not know either way. Gas prices in long-term contracts are usually secret. It was in Russia’s interests to postpone its decision on the sale until after Slovakia’s veto right expired on March 31, 2007, when Slovakia would no longer have any say in naming the new owner of the minority stake in Transpetrol. Jahnatek announced that he was preparing a measure to extend the veto right of Slovakia303 until the minority stake in Transpetrol was lawfully transferred to a commercial entity. At the end of March, the Russian daily Vedomosti reported that the Kremlincontrolled Moscow bankruptcy court in charge of the Yukos bankruptcy allegedly intended to present the Transpetrol stake to a Russian company.304 A Slovak daily responded by writing, ‘‘if the whole problem were only commercial and if Russia’s interests were not involved, it might have been settled long ago.’’305 There was no extension. The deadline came and passed. With the passing of the deadline, Slovakia accepted that it would not be able to buy back Transpetrol. And Fico found himself making one more argument in favor of selling the pipeline to a Russian company after visiting Moscow in May. Russia had several opportunities to transport oil to Western Europe. ‘‘It must not necessarily be via Slovakia. So it is necessary to consider whether we want to liquidate Transpetrol and make an unimportant pipe of it, or if we want it to be a strategic company.’’306 Transneft had made its priority to build the BPS-2, the Baltic Pipeline System from Unecha on the Belarusian border to the port of Primorsk. When Transneft head Semen Vaynshtok was asked whether the amount of crude oil going through the Druzhba via Belarus and Poland—the stated goal of the BPS-2 was to circumvent Belarus—would decrease as a result, he answered, ‘‘the aim of building BPS-2 is not to reduce oil transport via Druzhba, but rather, to diversify the flow.’’307 BPS-2 had a projected annual capacity of 50 million tons. The Slovak section of the Druzhba had a capacity of 20 million tons. While, the BPS-2 would eat into Slovakia’s customers in the north, the Slovak Web site, Aktua´lne.sk, noted that a planned pan-European pipeline, which would transport oil from Constanta on the Black Sea to Trieste in Italy, would eat into its customers in the south. The latter pipeline, with a projected annual capacity of 40 million tons, was set to begin operations in 2012 and had the backing of Italy, Croatia, Slovenia, Serbia, Albania, and Romania. According to Aktua´lne.sk, ‘‘Within five years, [BPS-2 and pan-European pipeline] will reduce the need for the southern [i.e., Slovakian] branch of the Druzhba oil

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pipeline, and Slovakia’s position as a transit and customer country for Russian oil will be threatened.’’308 Putin may have threatened making Transpetrol completely insignificant. Fico may have found the argument good by itself. Either way, it was the argument that he kept employing. The Russian news service SKRIN even reported that Slovakia agreed that a Russian oil company could take complete control of Transpetrol in exchange for guaranteed energy supplies to Slovakia at least until 2014, when the long-term contract for crude oil supply was to expire.309 The former deputy chairman of Yukos’ board Alexander Temerko, according to Vedomosti, said that Yukos Finance managers had originally asked Bratislava to sell the 49 percent stake at a tender, but the Slovak government decided to sell the shares directly to Gazprom allegedly in exchange for ‘‘guaranteed hydrocarbon supplies.’’310 The situation surrounding the Transpetrol stake, according to the Slovak prime minister, was not transparent. Slovakia would have no say in who the new owners of the remaining parts of Yukos would be because this is a legal issue of international significance, the prime minister implied.311 The Russian daily Kommersant reported that one Russian negotiator had said that, ‘‘the Russian side has managed to obtain a confirmation that Yukos’s assets in the Slovak Transpetrol company will go to the Russian state concern Gazprom.’’ The Slovaks denied the development, but admitted that Fico had asked Putin to remove all obstacles to transferring the Transpetrol stake.312 His request marked the very end of Slovak resistance to a Russian company acquiring a stake. Now it was only a question of whether Gazprom or Rosneft would win the stake. Temerko, the vice president of Yukos’s board of directors, was quoted in Vedomosti as saying the shares could first be sold to the Slovak government, which would then resell them to Gazprom.313 At the same time, a spokesperson of Yukos Finance, the actual owner of the Transpetrol stake, denied that Gazprom would buy the 49 percent share. ‘‘An evaluation of the 49% stake of Transpetrol is currently being finalized. Yukos Finance B.V.’s intention is to sell these shares through an auction to the highest bidder who will respect the resulting market value of the stake.’’314 Yukos Finance, of course, did not have the final decision, but Rebgun, the receiver, did. Referring to unofficial information, one source claimed that Gazprom originally valued the stake at $120 million and was ready to pay as much for it. But after the January 2007 crisis with Belarus, it saw the pipeline as a riskier investment, as all crude oil going through the Slovak section of Druzhba had first to go through Belarus. After January 2007, a possible oil pipeline, BPS-2, from Unecha to Primorsk, which would circumvent Belarus, became more likely. Gazprom was concerned what the new pipeline would mean for Druzhba’s circulation.315 Experts predicted Rosneft, which had bought up all of Yukos’s other assets, would buy the stake. It was also possible Rosneft would buy the stake and then exchange it with Gazprom for other assets.316 From the point of view of the Russian state, as Valerie Nesterov, a Troika Dialogue analyst, said, it did not really matter which company bought Transpetrol. It would retain its power and influence over the pipeline either way.317

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Finally in July 2007, Regbun, Yukos’s receiver, announced an auction for the sale of Yukos Finance, B.V. for mid-August. The Transpetrol stake was estimated at $100–200 million. The Slovak news agency reported that ‘‘Russian officials are on record as saying that they prefer the stake to be sold to a Russian firm in order to strengthen the country’s position as an energy superpower.’’318 However, right after the announcement, the Dutch Court of Appeal in Amsterdam ruled that the Yukos receiver was not allowed to take over the Yukos shares in Transpetrol, as the amount realized from the sale of Yukos assets within Russia exceeded what Yukos owed its creditors. There was no need to sell foreign assets to satisfy creditors in Russia.319 Additionally, the ownership of the shares up for auction was disputed by the original buyer Yukos and its Dutch subsidiary, Yukos Finance, before a Dutch court, which would not render a verdict until October.320 It was not certain who was in charge of Yukos Finance: the old management of Misamore and Godfrey; former close colleagues of Mikhail Khodorkovsky; or Sergei Smelkov, who was appointed by the receiver Rebgun to manage Yukos Finance after he had fired Misamore and Godfrey. If the court decided that Rebgun did not have right to fire Misamore and Godfrey and to replace them as managers of Yukos Finance, then the receiver would not have the right to sell Yukos Finance assets.321 The decision left non-Russian companies, particularly Poland’s PERN, wary of taking part in the tender.322 Amid this legal limbo, the tender for Yukos Finance took place in Moscow on August 15, 2007. FIS News reported that Rosneft would take part.323 Gazprom, surprisingly, did not.324 But a Russian oil company Promneftstroy, a former subsidiary of Rosneft, was announced as winner of the Yukos Finance B.V. for $305 million.325 The Slovak government did not bid at the tender, allegedly because it would have been interested solely in the Transpetrol stake and not the whole of Yukos Finance. It was suspected that Promneftstroy was acting on behalf of Rosneft, to whom it would soon transfer its shares. According to the Slovak Spectator, ‘‘analysts have expressed concerns that the Transpetrol shares might end up in hands that would use them as a tool for economic extortion, because the Slovak pipeline network enjoys an advantageous position in the European crude petroleum market.’’326 At the same time, a Rosneft spokesman denied any link between Rosneft and Promneftstroy.327 ‘‘Rosneft did not participate in this auction,’’ he said. 328 Rosneft had sold Promenftstroy to a company called Monte Valle not long before the auction, apparently to allow the Moscow-registered company to bid at the tender.329 The new owners of Transpetrol could not feel secure with their new investment until the Dutch court released its verdict on October 31. The Amsterdam court decided that ‘‘the sale of foreign assets held by Yukos Finance, the Dutch subsidiary of Russian oil giant Yukos, was illegal on grounds that a Russian bankruptcy move against Yukos was invalid under Dutch law.’’330 According to the decision, Misamore and Godfrey were still Yukos’s legitimate managers, and Promenftstroy’s purchase was void. Slovak economy minister Jahnatek immediately declared its interest in buying back the 49 percent stake. He said the Slovak government would either simply buy it back, or a strategic investor would buy the stake back while returning management

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rights to Slovakia and conceding to Slovak requests to increase the flow of oil through the pipeline, make it capable of transporting Caspian oil, and connect the Slovak refinery of Slovnaft with the Austrian refinery of Schwechat.331 During his trip to Moscow in December, Jahnatek discussed the stake’s status with Sergei Naryshkin, the Russian deputy prime minister and the head of the Slovak-Russian Intergovernmental Commission, as well as with representatives from Gazprom.332 It is unclear why he discussed the issue with Gazprom, as the company officially had no interests in Transpetrol, but the matter went unnoticed in the Slovak press. The 49 percent stake will likely be sold a third time. It is unclear who will control it then. SPP As discussed in the previous chapter, a consortium of the German Ruhrgas, the French Gas de France, and Gazprom bought a 49 percent stake in SPP, the Slovak gas monopoly transporter and distributor, in July 2002. Gazprom did not have the means to pay for its share, so the two Western companies covered the stake and agreed to allow Gazprom to buy one-third of the 49 percent stake within two years. Alexei Miller, then Gazprom’s head, said that ‘‘our investment in SPP is part of Gazprom’s overall strategy to diversify its export routes.’’333 Gazprom failed to pay in time, and in February 2004, the three parties agreed to postpone Gazprom’s deadline to December 31, 2005.334 In March 2005, Gazprom announced it had given up on buying the 16.33 percent stake of SPP for the time being. It may decide to buy the stake in the future, but it would not specify when that would be.335 Gazprom deputy CEO Alexander Medvedev said that ‘‘it would make no sense for us to enter a consortium.’’ 336 In early 2006, Gazprom gave another explanation: ‘‘Having considered the reserves in Europe, and plans to develop the North European Gas Pipeline, we concluded that participation in SPP would be an inefficient option.’’337 (In September 2005, two German companies, EON and BASF, and Gazprom signed a basic agreement on the construction of the NEGP, later renamed Nord Stream.) It was hard to explain Gazprom’s decision to give up its attempt to gain a foothold in SPP, as two-thirds of all Russian gas exports to Western Europe go through Slovakia and, according to a 2005 agreement between Gazprom and Austria’s OMV, an additional 4.4 billion cubic meters would be shipped from 2007 until 2020.338 There were three possible, but by no means absolute, explanations. The first, held by many experts in the region, stated that Gazprom, hoping to dominate SPP, lost interest in such a small minority stake; its behavioral pattern suggests that it is always seeking to gain only majority stakes or substantial minority stakes with management rights. A second theory, held by some experts and businesspeople, suggests that Gazprom was looking for another way of dominating SPP than by acquiring a controlling share. The many ways that Gazprom employed to gain a 50 percent share in Poland’s Europol Gas shows it has several strategies to achieve its goals. A third theory, even though unlikely, suggested that Russia planned on closing the Brotherhood pipeline as soon as the Nord Stream was operational. Polish economy minister

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Piotr Wozniak said that ‘‘there is danger that [Nord Stream] will become a substitute for two currently existing land pipelines Yamal and Brotherhood.’’339 It is a plausible scenario only in the long term, for the Slovak section of the Brotherhood pipeline had the capacity to transfer 94–96 billion cubic meters of gas a year and, at the time, transported about 80 billion cubic meters. The Nord Stream’s maximum capacity was 55 billion cubic meters per year, after both spurs were put in operation. Christophe Poillon, a member of the SPP board of directors, estimated a decrease in the transfer via the Slovak section of the Brotherhood pipeline of 10 billion cubic meters per year after the Nord Stream pipeline was built.340 It is hard to estimate the effect on other pipelines when the Nord Stream will have been built, but it was unlikely that the Brotherhood will be closed anytime soon. It still remains the gas pipeline with the greatest capacity to deliver gas to Europe. Hungary Nabucco vs. Blue Stream and South Stream The Nabucco pipeline, an initiative of the Austrian gas company OMV, would deliver Azeri and Iranian natural gas through Turkey, Bulgaria, Romania, Hungary, and Austria; it would provide the first direct access for Central Asian gas to Europe. After several years of talks, the Nabucco Gas Pipeline International Ltd. was established with the participation of the Austrian OMV, Hungarian Mol, Romanian Transgaz, Bulgarian Bulgargaz, and the Turkish Botas in 2004. Its construction was supposed to start in 2009, and operations were to begin in 2012. For its first few years, the pipeline would have a capacity of from 4.5 to 13 billion cubic meters a year. It would increase to from 25.5 to 31 billion cubic meters. The EU had funded the pipeline’s feasibility study and included it in the Trans-European Energy Network, which is given to projects of European interest. The EU commissioner called the project strategic for Europe’s gas prices.341 In September 2007, the commission appointed former Dutch foreign minister Jozias van Aartsen to oversee the project, giving the pipeline a particularly favored status. The Nabucco pipeline was also a project supported by the United States. The Blue Stream pipeline, according to Gazprom, was designed to avoid transit countries. Its first section connected Russia to Ankara, Turkey, via the Black Sea. Built by Blue Stream Pipeline B.V., a joint venture between Gazprom and the Italian gas company Eni, it was inaugurated in November 2005. Its Russian-Turkish section was expected to operate at full capacity by 2010 and deliver 16 billion cubic meters of gas annually. As soon as the Nabucco pipeline appeared more likely, Moscow started contemplating an extension of the Blue Stream pipeline from Turkey through Bulgaria and Romania to Hungary. Moscow and Gazprom always considered the Nabucco pipeline a competitor and essentially anti-Russian. The extension of the Blue Stream pipeline was Russia’s alternative. But the Blue Stream, which ran partly on Russian territory (the section under the Black Sea was even partly owned by Gazprom), failed to meet one of the EU’s goals to diversify gas supplies for Europe. The Blue Stream became the southern

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Map 6.5 Nabucco and Blue Stream Pipelines

equivalent of the Nord Stream, which was also meant to give Russia leverage against diversification attempts. During Putin’s visit to Hungary in February 2006, Putin and Gyurcsany agreed to extend the Blue Stream pipeline to Hungary and to build gas storage facilities in Hungary, thus making the country a gas distribution hub. During this visit, the Russian president met privately with Peter Medgyessy, the former Hungarian prime minister. The German paper Frankfuter Allgemeine Zeitung speculated that Putin wanted to offer Medgyessy the same business favors in regards to the Blue Stream he had offered Gerhard Schroeder in regards to the Nord Stream. 342 Acquiring the

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Hungarian government’s support for the Blue Stream pipeline is one of the two plausible explanations for the timing of Putin’s visit to Budapest right before the parliamentary elections. As soon as the political approval was secured, the matter could be delegated to the level of companies. The Russian and Hungarian leaders’ agreement fell to Mol and Gazprom. In June, Gazprom’s German subsidiary ZMB GmbH signed an agreement with the Hungarian company to establish a joint venture, a ‘‘study company’’ to assess the feasibility of extending the Blue Stream pipeline through Hungary to Italy, as well as building a gas storage facility with a 10-billion-cubic-meter capacity. (By way of comparison, Hungary’s annual gas consumption is 12–14 billion cubic meters, depending on conditions in wintertime.) It was to be one of the greatest investment projects in Hungary’s history. The cost of the gas storage was estimated at $4 billion. Gazprom head Alexei Miller and deputy CEO Alexander Medvedev conducted negotiations with Gyurcsany, the Hungarian economic minister, and the CEO of Mol. The Mol-Gazprom agreement was hailed as a great success in Moscow, mostly because it occurred a few days before an agreement of intent for the Nabucco project was to be signed in Vienna.343 In September, before the Russian president received Gyurcsany, Gazprom CEO Miller apparently told Putin that the joint Hungarian-Russian study company would prepare the feasibility study on extending the Blue Stream pipeline by the end of 2006. ‘‘We have big plans with Hungary in building gas pipeline-systems,’’ Putin said.344 The meeting of the two leaders took place right after Putin returned from Greece, where he talked about the extension of the Burgas-Alexandropolis pipeline, the first Russian-controlled oil pipeline on EU territory. The extension from Hungary required Hungary’s commitment. Little was revealed about Putin and Gyurcsany’s meeting. Putin only said there was no reason to assume the major investments planned for Hungary’s energy sector would not occur.345 In December that year, Gazprom signed a memorandum of understanding with the Serbian Srbijagas to build part of the Blue Stream extension in Serbia. Gazprom wrote that with this agreement, Serbia would acquire the status of ‘‘transit country’’346 and with Srbijagas established a working group to examine the feasibility of the project until the summer of 2007. The Serbian extension would be the last step before the pipeline enters Hungary. In a March 2007 interview, Gyurcsany said ‘‘the Nabucco has been a long dream and an old plan. But we don’t need dreams. We need projects.’’ Unlike Nabucco, he said, ‘‘Blue Stream is backed by a very strong will and a very strong organizational power.’’347 Mol CEO Zsolt Hernadi reiterated his commitment to the Blue Stream, but suggested that Mol would participate in the Nabucco project if the EU guaranteed its support.348 ‘‘Nabucco has only one serious problem,’’ he said. ‘‘It has not started. So who can provide us with a source for gas? Russia came up with the idea of extending the Blue Stream pipeline.’’349 Hungary’s commitment to Blue Stream caused serious concerns in Europe and the United States. As Hungary was an essential part of the Nabucco consortium, Budapest found itself under enormous pressure from its allies not to jeopardize an

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essential European diversification project. Finally, the Hungarians requested a meeting from the Russian president. Just two days before it took place, the European commissioner for energy, Andris Piebalgs, spent a day in Budapest among others to get acquainted with the Hungarian position. Despite Putin and Gyurcsany’s positive reports about their meeting in NovoOgaryovo, Russia, in March 2007 the Russian paper Vremya Novostey said the situation was much more tense. Gyurcsany said his government had not yet decided between the Nabucco and Blue Stream projects, but the two sides agreed that Hungary must make a decision. Noting the strong opposition to the Blue Stream project in Hungary, Gyurcsany assured Putin that he was weighing the pros and cons of both possibilities.350 The lunch between the two leaders was to last one hour, but turned into two and a half hours. Putin wanted to keep Hungary on board the Blue Stream. Within weeks, Hungary shifted its rhetoric on Nabucco. In mid-April 2007, during his visit to London, Gyurcsany discussed Hungary’s desire to decrease its dependence on Russian energy and expressed his support for the EU’s unified energy policy. The Russian paper Gazeta wrote that experts saw Gyurcsany’s comments as a clear sign he had moved in favor of Nabucco. Some Hungarian officials, the paper added, differed, reminding that statements of Hungarian officials gave voice to their belief that Blue Stream was a more realistic project than Nabucco. ‘‘This [Hungarian] goodwill to the project of Gazprom can be explained by the sufficiently warm relation of Russia to the Hungarian Mol.’’351 Mol may have gained access to exploration sites in Russia in 2006 thanks to its good relations to Gazprom, and the paper suggested that Gyurcsany’s move would endanger the company’s ambitions in the Siberian oil fields. Hungarian foreign minister Kinga Go¨ncz joined Gyurcsany, saying Nabucco would help the country diversify its gas supplies.352 On a visit to Washington, Hungarian defense minister Imre Szekeres said, ‘‘if . . . a decision has to be made, Hungary would choose Nabucco.’’353 Mol’s CEO Zsolt Hernadi took a more moderate line, saying, ‘‘both proposed pipelines would be beneficial for Mol, and it is necessary that one of them is implemented, so we’re working hard on both.’’354 Mol and Gazprom started drifting apart. In May, Gazprom signed an agreement with the Austrian OMV, expressing its interest to extend the Blue Stream pipeline to Austria and there build a gas storage facility and a hub. Meanwhile, the deadline for the feasibility study to extend the Blue Stream pipeline to Hungary was postponed first six months until July 1, 2007, and then again to the end of the year. After a meeting in St. Petersburg between Hernadi and Gazprom deputy CEO Alexander Medvedev, Gazprom claimed the two companies were still working on the study.355 Meanwhile, a new pipeline came into the picture. Gazprom and the Italian ENI signed a memorandum of understanding on the construction of the South Stream pipeline in June 2007. The pipeline, a potential alternative for Russia to the Blue Stream extension, would connect Russia directly with Bulgaria through an undersea pipeline. Its southern branch would go through Greece to southern Italy. Its northern route had two potential routes. The first sent it through Romania, Hungary, and Slovenia to northern Italy, with a branch to Austria. The second sent it from Bulgaria

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through Serbia and Croatia, and from there to Italy and Austria. For the Russians, the South Stream offered the advantage of circumventing Turkey in favor of its preferred partner Bulgaria. With a planned annual capacity of 30 billion cubic meters, it would cost $14.6 billion, about as much as the Nord Stream.356 The memorandum of understanding was elevated to an agreement in November 2007 when it was signed by Putin and Italian prime minister Romano Prodi in Moscow. Mol would have been the strategic partner with Gazprom in building the Blue Stream extension. It could not hope for a similar status in the South Stream project. That honor fell to Eni. The Russian daily Kommersant said, ‘‘Hungary appeared to be outside of the Russian gas transport policy.’’357 Russia invited Austria to participate in the South Stream project in August 2007, which Austria’s economy minister saw as a sign that Russia was trying to kill the Nabucco project. Neither the Russian government nor Gazprom commented.358

Map 6.6 Planned Route of the South Stream Pipeline

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A conference on Nabucco was held in Budapest in September 2007. Hungary lent its full political weight to the project, with Gyurcsany saying that ‘‘one of the most important tasks of this conference is . . . to give an impetus and dynamism to finding a solution for funding issues.’’359 It opened the possibility to recruit a sixth partner in the Nabucco consortium. But Hungarian officials also made clear that they were still considering the Blue Stream and South Stream options. In his speech, Gyurcsany said the ‘‘South Stream, as opposed to Blue Stream, enjoys the formal or quasiformal support of the European Union. This issue is raised as an alternative to a much lesser extent than previously.’’ There was actually no real difference between the EU support for the South Stream and Blue Stream. Both would rely on sources in Russia. Both are the children of Gazprom. Both would serve as an alternative for Nabucco. Mol emphasized that Nabucco and either the Blue Stream or South Stream were not mutually exclusive projects. Both could conceivably be built. Even if the Blue Stream or South Stream did not pass through Hungary, Mol still believed it was possible to build a gas storage facility in the country.360 At the end of 2007, Gazprom’s interest in the Serbian oil refinery NIS was becoming more apparent. In October, Gazprom CEO Miller visited Serbia and said Gazprom’s participation in the privatization of NIS was directly related to his company’s plans for the South Stream in Serbia. In the summer, the Russian press reported that Lukoil had purchased 51 percent of NIS, which the company denied.361 The Russian-Serbian joint venture Yugorosgaz, which was set up in Serbia in 1996, was already working on connecting the Bulgarian and Serbian gas systems.362 If Gazprom won the privatization for NIS, it would increase the likelihood for a Bulgaria-Serbia-Croatia routing of the northern branch of the South Stream pipeline, thus circumventing Hungary. In an interview before the Russian-Hungarian intergovernmental meeting in December 2007, the Russian ambassador to Hungary said that while the routing for the South Stream pipeline from Russia to Bulgaria had been set, its further route from Bulgaria to Italy had not yet been determined. Hungary was still considered a potential transit country and gas storage hub.363 Just two days before the meeting, Mol announced a plan to create an alternative transport network of Central and South European companies, called the New Europe Transmission System (NETS). The project would provide a more stable gas supply and would create an entity better suited to obtaining credit for financing large-scale European projects, like the construction of Nabucco. Mol invited companies from Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Romania, Bulgaria, and Austria to participate. The network would amount to 27,000 square kilometers, making it the third-largest unified European system after systems in France and Italy. If Mol’s plan was successful, the Russian daily Kommersant noted that Gazprom would be forced to negotiate with a consortium, and not individual countries, on routing the South Stream. Another Russian paper speculated that the unified front would force Gazprom to drop the South Stream pipeline and force it to supply gas to Nabucco instead.364 The head of Gazprom’s foreign relations department, Stanislav Tsygankov, traveled to Budapest within days to get a handle on the situation.365

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At the December 2007 intergovernmental meeting, Russian prime minister Zubkov promised his Hungarian counterpart that the South Stream pipeline would reach Hungary.366 Russian deputy energy minister Ivan Materov said the Nabucco should not be considered either as an additional or as an alternative project for South Stream. He said gas deliveries via Nabucco would be much more expensive. The South Stream, if it was built, would make Nabucco’s fate more troubled.367 Mol CEO Hernadi and Gazprom head Miller met in Moscow a few days later, where, Kommersant reported, the Hungarian company invited Gazprom to participate in NETS. A Mol spokesperson immediately denied the claim.368 Finally in January, on his last official trip abroad, Putin signed a deal with Bulgaria, taking one more step to ensure its commitment to the South Stream project. The agreement stipulated that Russia and Bulgaria would take a 50–50 ownership over the Bulgarian section of the pipeline.369 An agreement with Serbia soon followed. Gazprom gained a majority stake in the Serbian section of the South Stream pipeline and a majority stake in the Serbian oil and gas company NIS. Hungary remained the only missing link. A new energy political concept was presented by the Hungarian Ministry of Economy in the summer of 2007 with the goal to replace the existing one of 1993. The Hungarian government endorsed the document in December 2007. The concept said ‘‘among the alternatives for diversification (Nabucco, Blue Stream, LNG at the Adriatic Sea) it is not desirable to give priority to any of the projects.’’370 In order to make Hungary a potential regional hub for gas distribution, the ministry said that a new pipeline should cross Hungarian territory and that natural gas storage facilities should be built along it. It recommended that the Hungarian government not favor any one project over another and to maintain a balanced foreign policy between Russia and Western Europe. It called for a strategic partnership with Russia. The revised energy political concept was submitted to parliament in 2008. The chairman of the Foreign Affairs Committee, Zsolt Nemeth, said the concept should openly endorse Nabucco. His move was rejected. For months, Hungary and Russia had been negotiating the South Stream’s extension to Hungary. In February 2008, Janos Veres, Hungary’s finance minister and the Hungarian chairman of the Russian-Hungarian Intergovernmental Economic Committee, was in Moscow. According to the Hungarian ambassador to Russia, Veres discussed possibilities to cooperate with Leonyid Reiman, Russia’s minister for information technology and communications.371 The Hungarian News Agency (MTI) reported that Veres, after he had learned about the gas dispute between Russia and Ukraine in Moscow, had requested a meeting with Gazprom CEO Alexei Miller. He wanted to ensure a stable supply to Hungary.372 Normally, the economic minister handles transit issues. The finance minister supervises state property, including state-owned pipelines. A few weeks later, it appeared that Veres had served as an envoy of the Hungarian government to discuss Hungary’s involvement with South Stream. By the end of the month, it became clear that Russia was holding negotiations with Croatia at the same time as it held them with Hungary. A reliable business daily

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depicted two scenarios in an article published on February 14. In one, a new pipeline would extend South Stream to Hungary via Romania. It would be owned 50–50 by Gazprom and Mol. In the other scenario, the two pipelines in the Hungarian gas system would reverse their flow. Gas would stop flowing on the Brotherhood pipeline south to Serbia, but would come north to Hungary. Gas would now travel from Gyor, Hungary, to Baumgarten, Austria.373 Hungary would, in effect, become a transit country for Russian gas traveling north to Austria. The second option would keep the existing infrastructure. The first would require a new pipeline. Under the second option, Hungary would lose Baumgarten as the only alternative route for other than Brotherhood. Hungary would receive gas from Brotherhood and South Stream, both of which are supplied by Russian gas. Veres returned to Moscow on February 22 to discuss further details with Gazprom and the Russian government. Official statements from Russia indicated that Veres was discussing bilateral relations. Veres himself was equally secretive about his trip’s purpose.374 On the very same day, a Russian paper hinted that Dimitry Medvedev, the deputy prime minister, presidential nominee, and Gazprom chairman, might go to Belgrade and Budapest in a few days to see through the intergovernmental agreement on South Stream.375 There had been no public intergovernmental agreement on the issue between Hungary and Russia at that point. Medvedev negotiated the final agreement in Budapest on February 25. The pipeline would have a volume of at least 10 billion cubic meters. A storage facility with a capacity for 1 billion cubic meters would be added. Hungary and Russia would each have a 50 percent stake in the company that would build and operate the pipeline. Gazprom would represent Russia in this joint venture. The Hungarian Development Bank would represent Hungary. Mol, the Hungarian oil company and the owner of the gas transmission network in Hungary, was left out of the deal. The announcement of the agreement set off a political firestorm in Hungary. The major opposition party Fidesz protested the deal, calling it nontransparent and secretive. The Financial Times said Hungary’s decision ‘‘could threaten the prospects of Nabucco.’’376 Matthew Bryza, U.S. deputy assistant secretary of state for European and Eurasian affairs, told a Hungarian daily that Russia hoped the South Stream’s construction would stop Nabucco.377 The European commissioner for energy, Andris Piebalgs, however, said the EU did not object to Hungary signing onto South Stream.378 The Russian press was triumphant, turning Medvedev into a national hero a mere five days before the presidential election. Nezavisimaya Gazeta announced that Nabucco would no longer threaten Gazprom, quoting experts who said the EU-backed pipeline was dead. Dan Fried, the assistant secretary in the Bureau of European and Eurasian Affairs in the U.S. State Department wrote a piece in the Hungarian daily Nepszabadsag, called ‘‘America does not want ‘gas pipeline war.’ ’’ Fried said Nabucco was the most cost-effective way to deliver natural gas to Hungary and Central Europe. Fried quoted Gazprom CEO Alexei Miller, who said that, ‘‘we estimate that South Stream will meet the total gas demand of Southern and Eastern Europe.’’ Fried wrote, ‘‘This does not sound like Gazprom’s CEO envisions a Europe where Nabucco and South

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Stream co-exist.’’ (Medvedev had claimed that Nabucco and South Stream could coexist.) ‘‘This is not a moment to allow our attention to be diverted by a pipeline which will cost at least three times as much as Nabucco and is pushed by a monopolist to kill competition,’’ he wrote.379 The opposition party Fidesz called for a parliamentary resolution stating that Nabucco should be built before South Stream. Romanian president Traian Basescu and Fidesz chairman Viktor Orban agreed there was an urgent need to accelerate the Nabucco project. The intergovernmental agreement was officially signed in Moscow by Gyurcsany and Putin on February 28, the second-to-last working day of his term as Russian president. Gyurcsany told him, ‘‘you were faster than Nabucco.’’380 Putin was particularly brutal in regards to Nabucco. There’s always an alternative [Nabucco] but it’s worse than cooperation with Russia. You can build two pipelines, you can build three. The question is what you pump through them [ . . . ] It’s very clear that the project we are proposing can be realized and has supplies guaranteed. If someone wants to dig up the ground and build a pipeline—go ahead, we don’t mind.381

The Hungarian government published the Hungarian version of the intergovernmental agreement on the Web site of the Hungarian Ministry of Foreign Affairs on February 29. The route of the pipeline was still undetermined, and the agreement had left blanks concerning the entry and exit points of the South Stream. It was unclear how much gas would actually flow through the pipeline. The two sides agreed they would examine the possibility of using the pipeline for additional Russian natural gas supplies in the Hungarian market. They aimed for Trans-European Energy Network status, which is awarded to priority EU projects such as Nabucco. The Russian-Hungarian joint venture would set the transit fee. The Russians had the right to employ the full capacity of the pipeline. The Hungarians guaranteed that natural gas would be transited on Hungarian territory without any obstacles. Hungary would provide custom and tax incentives to encourage investment. The agreement would be valid for 30 years and would be automatically extended for another five years unless the parties notified each other about other wishes nine months in advance.382 The intergovernmental agreement raised other questions, as well. Gazprom’s negotiations to enter the Hungarian gas industry through acquisitions in Eon Natural Gas Supply and Eon Natural Gas Storage broke down in mid-2007. The Hungarian long-term natural gas supply agreement signed between Eon and Gazprom expires in 2015, and the Hungarian-Russian agreement on South Stream weakened Eon’s negotiating position. Gazprom may very well end up acquiring 50 percent or more of the Hungarian gas storage and wholesale business within a few years. What Gazprom failed to achieve through its hostile acquisition attempt of Borsodchem, the privatization of the gas industry, negotiations with Eon, it may very well achieve through an intergovernmental agreement with the Gyurcsany administration. The deal was a major victory for Moscow in its psychological warfare against Nabucco. Hungary’s commitment weakened the coalition behind the U.S.- and

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EU-supported pipeline. The agreements on the South Stream pipeline were made as hastily as the agreement on the Nord Stream pipeline had been made with Germany. Gazprom signed agreements with Bulgaria, Serbia, and Hungary without getting permission for the necessary undersea section of the pipeline that would cross the economic waters of Ukraine and Romania in the Black Sea. This raised questions on the project’s feasibility. Mol Privatization and Exchange of Shares between Eon and Gazprom On January 1, 2004, Mol split its gas operations into three companies—Mol Natural Gas Supply, Mol Natural Gas Storage, and Mol Natural Gas Transmission —each of them organized around a different activity in the natural gas industry. Mol retained 100 percent ownership of all three daughter companies. Mol Natural Gas Supply had exclusive wholesale rights for natural gas in Hungary. Besides, it sold 2.75 billion cubic meters of gas directly to industrial customers and an additional 740 million cubic meters on the market every year. Mol Natural Gas Storage operated gas storage in Hungary. It had an annual accumulated mobile capacity of 3.4 billion cubic meters of gas and the capacity to extract 44 million cubic meters of gas per day. This amounted to 45–50 percent of demand on an average winter’s day.383 Mol Natural Gas Transmission operated the 5,000-km-long, high-pressure gas transmission system in Hungary, which supplied the regional gas distribution companies.384 When the Medgyessy government took office in 2002, Moscow asked Budapest to give Gazprom the opportunity to buy the gas division of Mol. According to media reports, the Hungarians did not immediately turn the Russians down.385 The procedure to sell Mol’s gas operations began at the end of 2003. In March 2004, Gazprom announced it would participate in the tender.386 In July, Janos Szito, the Hungarian representative of the Viennese subsidiary of Gazprom, said that the Russian company would be interested in all three parts of gas operations if Mol were to put them on sale.387 There were also reports that summer that Mol was considering selling its 50 percent share in Panrusgas, the Russian-Hungarian joint venture. (Gazprom had 40 percent and Interprocom, a company controlled by Megdet Rahimkulov, another 10 percent.) Gazprom started looking at options of obtaining that 50 percent. Kommersant reported that Gazprom contemplated a swap, by which Gazprom would gain Panrusgas in exchange for Gazprom assets in Russia and Hungary. The deal would not have involved any money.388 By the end of August, three other companies besides Gazprom had expressed interest in the Mol share: the Ukrainian NaftoGaz, the German Eon Ruhrgas, and the French Gaz de France.389 In September, Gazprom confirmed it had submitted an offer in a consortium with a secret partner.390 (According to Kommersant, the Ukrainian NaftoGaz was Gazprom’s secret partner. 391) A day later, a Gazprom spokesperson said the company was only interested in Mol’s gas transmission

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company,392 which was odd as Mol had only put 25 percent and one vote of Mol Natural Gas Transmission on sale, and Gazprom always sought a minimum 50 percent control of every company that it tried to acquire. In November, Mol decided to sell 75 percent minus one share of Mol Natural Gas Supply and Mol Natural Gas Storage companies and 50 percent of Panrusgas to Eon Ruhrgas. Mol and Eon signed an optional agreement by which Mol could sell 75 percent minus one share of Mol Transmission to Eon within two years.393 That decision meant that Mol Transmission remained in Mol’s hands, outside the reach of Gazprom and Naftogaz’s consortium. But to finalize the deal, Gazprom, as part owner, would have to approve the sale of Panrusgas’s shares. Gazprom would have to give up its preemptive right to buy the 50 percent of shares in Panrusgas owned by Mol in order for Mol and Eon to complete their transaction. Gazprom entered into talks a few days later with Eon about the shares the German company had acquired in Mol’s gas division.394 Kommersant projected that Gazprom may be able to return to Hungary. Gazprom’s pending approval in the Panrusgas deal and the fate of Mol Transmission, it hinted, could be part of a bigger bargain with Eon.395 The Eon-Gazprom negotiations did not come as a surprise for the Hungarian decision makers. Janos Szito, the CEO of Centrex, the representative of Gazprom in Hungary, commented that when Eon made its offer to buy Mol’s gas operations in September 2004, it notified the Hungarian partner that Eon would involve Gazprom as a strategic partner to guarantee the stable supply of natural gas.396 A press release after a meeting at Gazprom headquarters between Gazprom’s Miller and Mol’s Hernadi in November 2004 indicated that Mol was comfortable with Gazprom’s attempts to gain control in the Hungarian gas storage and wholesale business. But the approval of the Hungarian government—not just Mol—was required to execute Eon and Gazprom’s deal. Moreover, not only the Hungarian authorities, but also the European Commission had to approve the deal. However, the EC did not give its permission and stated that the supply and storage companies had to be sold in their entirety, not partially. So, on January 12, 2006, Mol agreed to sell 100 percent of Mol Natural Gas Storage and Mol Natural Gas Supply and 50 percent of Panrusgas to the German company. Mol still held onto Mol Transmission. The transaction was to be finalized on March 31, 2006. A few days later, Gazprom accelerated discussions with Eon to buy part of Mol Natural Gas Storage and Mol Natural Gas Supply. In exchange for shares in its Hungarian gas business, Eon would receive a stake in a company with rights to explore the Yuzhno-Russkoye gas field. Eon hoped to gain 24.5 percent of shares in that company. On his visit to Budapest in February 2006, Putin may have wanted to secure the approval of the Hungarian government for a swap deal between Gazprom and Eon. This would be the other plausible explanation for the timing of Putin’s trip to Budapest. In March 2006, the Russian press believed Mol’s gas division would end up in Gazprom’s portfolio.397 The two sides were to conclude their deal by the end of April 2006. Gazprom did not give up its preemptive right to buy 50 percent of

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Panrusgas throughout its negotiations with Eon. Gazprom originally had asked for 50 percent shares in the Mol Storage, Mol Supply, and Eon Hungary (Eon Hungary had one of the 10 highest annual revenues of any company in Hungary. It provided electricity and gas in the Transdanubian region and electricity in eastern Hungary). But Eon was not ready to give more than 40 percent in each of the former Mol companies and 25 percent and one vote in Eon Hungary.398 There was no agreement. There followed a series of phone calls and meetings, the exact details of which are unclear. In early June, Putin and Gyurcsany spoke by phone on a weekend and the Hungarian prime minister reiterated his government’s approval of the EonGazprom deal.399 At the end of June, Gyurcsany met privately with Gazprom head Miller, who was in Budapest to sign a deal with Mol related to the Blue Stream pipeline. According to information from the Hungarian opposition party Fidesz and one of the dailies close to the government, Eon president Wulf Bernotat was in Hungary in July to discuss the planned Eon-Gazprom agreement with Gyurcsany and the economy minister. Gyurcsany called Putin again, to, as was vaguely reported, talk about the same things they discussed in the previous phone call. Eon and Gazprom announced their agreement to exchange shares two days later. In July, Eon and Gazprom announced they had reached a framework agreement to exchange their shares. Eon would receive 25 percent less one vote in the YuzhnoRusskoye gas field in Siberia. In exchange, it would give 50 percent minus one vote in Mol Natural Gas Storage, 50 percent minus one vote in Mol Natural Gas Supply, and 25 percent plus one vote in Eon Hungary.400 Putin and German chancellor Angela Merkel lent their support. There were no details. The two sides were to do due diligence about the value of the different assets offered for exchange. Both sides reserved the right to receive extra cash if there appeared to be inequities between the worth of all the assets exchanged. Eon even agreed to pay an additional 1.2 billion euros within a three-year period.401 Kommersant, referring to sources close to negotiations, said Gazprom originally wanted to have controlling shares in Mol Supply and Mol Storage. The final negotiations were about a difference of a few percentage points, from 48–51 percent.402 Gazprom finished the due diligence in the spring 2007, and in June 2007, Gazprom deputy CEO Medvedev announced that Gazprom intended to review its deal with Eon. Medvedev questioned how well the shares Eon had offered met Gazprom’s strategic needs and to what extent their value matched the stake in Yuzhno-Russkoye Gazprom had offered. Experts cited by Kommersant said the value of the stake Eon had offered was lower than the ownership stake in the Yuzhno-Russkoye gas field. Gazprom said that if Eon did not increase the number of shares it offered, it would withdraw from the agreement and offer its stake in the gas field to a fourth member of the Nord Stream consortium, the Dutch Gasunie.403 In October 2007, an Eon representative in Russia said that he expected that a final deal would be concluded between the companies within weeks.404 No final agreement was reached at the time of this book’s writing. Gazprom obviously wanted a controlling or at least a 50 percent share in Mol’s gas division. It failed at first and attempted a renegotiation. It did not hide its intention throughout the renegotiation process, even threatening

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Eon with denying it access to one of the gas fields which would be so vital for the German company. OMV-Mol In 2007, the Austrian OMV oil and gas company made two attempts to take over Mol. A total of 31.5 percent of OMV was owned by the Austrian state, and another 17.6 percent was owned by the International Petroleum Investment Company of Abu Dhabi, a so-called sovereign wealth fund, with a long track record of being friendly—i.e., vote together—with the management. Of its shares, 50.9 percent were owned by small shareholders, all of whom individually owned less than 5 percent. The structure enabled OMV to be state controlled in fact, but to be a majority private company nominally. In 1968, the company became the first Western company to conclude a gas supply agreement with the Soviet Union. It renewed its longterm gas supply contract with Gazprom in September 2006, making it valid until 2027.405 Russia provides 80 percent of Austria’s gas imports. It is unclear how much Russian backing OMV enjoys, which was a significant issue considering its attempt to acquire Mol. Russian companies had been trying to acquire Mol for years; such was the goal of the Borsodchem takeover in 2000. An analysis published by the investment bank Merrill Lynch in May 2007 stated that Hungary’s location made Mol—particularly its possible use for gas storage and its interest in the Blue Stream project—indispensable for gas deliveries to Western Europe.406 The first step of OMV’s attempt came in May 2007, when Megdet Rahimkulov, a Russian businessman, bought more than 5 percent of Mol through A´E´ B Bank. Rahimkulov, a Hungarian resident, was a former Gazprom manager. A´E´B Bank used to be owned by Gazprom, but was sold to the Rahimkulov family. Rahimkulov allegedly had plans to increase his share in Mol to 10 percent.407 Some speculated that Gazprom was actually using Rahimkulov to acquire shares in Mol. Merril Lynch repeated that hypothesis in its analysis.408 Yet, Rahimkulov’s shares did not land in Gazprom’s lap, but in OMV’s. On June 25, OMV announced that its share in Mol had increased from 10 percent to 18.6 percent, thanks in part to a purchase of a 6.2 percent package from Rahimkulov.409 Bank Austria then announced it had acquired a 5.6 percent stake in Mol but did not disclose whether it had acted alone or on behalf of a third party.410 OMV wanted to enter discussion with Mol for a possible merger. Mol declared the attempt a hostile takeover. The hostile bid came one month after Putin visited Austria. During this visit, Putin and the Gazprom CEO named Austria an important transit country for Russian and Central Asian gas. Gazprom and OMV signed a memorandum of understanding for Gazprom to obtain a stake in the Central European Gas Hub (CEGH), a 100 percent owned subsidiary of OMV that ‘‘provides an international gas trading platform at Baumgarten and other bordering points of the Austrian

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network.’’411 Already one of the three most important gas hubs in Europe, OMV and Gazprom hoped to make it the single most important in the continent. The two companies also agreed to extend the storage capacity in Austria and in neighboring countries.412 Putin called Austria ‘‘the biggest, and I stress this, the most reliable transit agent for Russian gas.’’413 There were several reasons observers believed Gazprom was behind OMV’s move. As a 31.5 percent state-owned company, OMV would almost certainly require the consent of the Austrian state if it were to make a move against Mol. The May Austrian-Russian agreement had been viewed as a victory for the Russians. The director of the Center for Eurasian Policy at the Hudson Institute, Zeyno Baran, testified before the U.S. House of Representatives Committee on Foreign Affairs that ‘‘in any case, 31% of OMV is owned by the Austrian state, which is susceptible to more ‘traditional’ Russian pressure tactics.’’414 She said, ‘‘the Kremlin may now be pursuing another approach: using Austria as a Trojan horse to gain control of the Hungarian company.’’415 Jamestown Foundation senior fellow Vladimir Socor referred to the ‘‘Austrian backdoor for Russian takeover,’’ and wrote: [T]he Kremlin must assume that direct Russian takeovers of Hungary’s strategic energy assets would be politically unfeasible . . . A two-stage process might seem more feasible, however. Moscow may calculate that it can accomplish such takeovers through the back door, by entering Hungary from the EU member country Austria, two or three years hence.416

Moreover, OMV’s takeover attempt had a very low likelihood for success. For OMV would have needed to acquire 75 percent of Mol’s shares to have meaningful influence over the Hungarian company, because MOL’s corporate bylaws limited any single shareholder’s voting rights at 10 percent, unless it acquired the 75 percent required to change this bylaw.417 OMV was unlikely to gain that 75 percent, as Mol’s management was estimated to own more than 25 percent of the company. The seemingly futile attempt led many to see some designs in the background. Sme, the leading Slovak daily, noted that The potential hiking up of the stocks price to irrational levels [through the highly priced takeover proposal] supports the speculation that there is not just the invisible hand of the market behind OMV, but also the somewhat more visible hand of Gazprom, which plays in a different league and can afford to pay whatever price for taking control over the region.418

Whether or not OMV succeeded in its takeover, its attempt brought Russia closer to obtaining Mol. If OMV had succeeded in its attempted takeover, it would have owned three refineries—the Austrian Schwechat, the Slovak Slovnaft, and the Hungarian Szazhalombatta—a scenario that would have been deemed unacceptable to competition authorities. OMV would likely have been forced to sell one of them.

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OMV would almost certainly have ended up dropping either Slovnaft or Szazhalombatta. Both are supplied with Russian oil by the Druzhba pipeline, and Russian companies had expressed their interest in the refineries several times. Russian papers speculated that Gazprom Neft, Lukoil, and Rosneft could emerge as potential buyers.419 Thus an OMV-Mol merger would have resulted in Russia acquiring a strategic refinery either in Hungary or Slovakia. As Russia had already obtained leverage over Slovnaft through Transpetrol, a Russian company would more likely have sought the Hungarian refinery.

Map 6.7 Refineries in Austria, Hungary, and Slovakia

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An Austrian weekly speculated that a joint company between OMV and Mol would be an ideal target for Gazprom. The weekly claimed Gazprom was negotiating to buy the 17.6 percent stake held by International Petroleum Investment Company from Abu Dhabi and had further plans to buy OMV shares.420 Alexander Medvedev said during his trip to Austria in May 2007 that Gazprom sooner or later would look into buying OMV shares, but that time had not yet come.421 Some speculated that Gazprom already owned significant shares of OMV through related enterprises.422 Stratfor claimed that, ‘‘although Gazprom does not openly own portions of OMV as a major stakeholder, Gazprom-related interests are thought to control significant portions of the floating stocks in OMV.’’423 Even if the OMV takeover attempt was unsuccessful, it had seriously weakened Mol. The company immediately started buying back its own shares with savings it could have used for acquisitions. OMV’s attempt clearly weakened Mol’s growth prospects, thus making a more likely target for a Russian takeover. Moreover, the hostile bid made any other friendly looking suitor appear more attractive than before. Mol CEO Hernadi said in an interview a few weeks after OMV’s takeover attempt that he believed it was more rational for Mol to partner with several other companies besides OMV, including Lukoil and Rosneft.424 Kommersant wrote that Rosneft would not consider a partnership with Mol, but Lukoil would. The deputy chairman of Lukoil, Leonyid Fedun, said that his company would be interested in buying Mol, the Polish PKN Orlen, or OMV, but that a climate of nationalism and protectionism in Central and Eastern Europe had made them refrain from making any such attempts. Lukoil had earlier expressed interest in buying the Mol refinery at Szazhalombatta.425 Hungarian prime minister Gyurcsany ended up asking Putin bluntly in a mid-July meeting between the two leaders in Saransk if Gazprom was behind OMV’s actions. Afterwards, Gyurcsany announced that the relationship between Mol and its Russian partners was quite the opposite of that between OMV and Mol. The Hungarian company, he said, had realistic chances for further concessions in exploration in Russia.426 Putin, the prime minister said, denied Gazprom’s involvement in OMV’s attempted takeover.427 At the end of September, OMV made another attempt to acquire Mol. It announced it held 20.2 percent of Mol’s shares. It offered to buy further shares at HUF32,000 per share, an 18.7 percent premium over the closing price the day before. OMV made its offer conditional on acquiring a majority stake in Mol.428 OMV’s second attempt, too failed. SUMMARY Between 2004 and 2008, Moscow continued to saw its influence declining in Central Europe. NATO enlarged further in March 2004, admitting Slovakia and the three Baltic states of Latvia, Lithuania, and Estonia among others. Talks continued about further enlargement of the military alliance. Washington reached a theoretical agreement with the Czech Republic and Poland about placing antimissile

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bases on their territory. Moscow failed to defend its long-term friend and ally Serbia, and Kosovo practically became independent. The dispute about the CFE Treaty also illustrated Russian weakness. After consolidating power within Russia by the end of his first term, Putin was even more determined to direct substantial state power into achieving his foreign policy objectives. Poland, Slovakia, and Hungary continued to be targets of Russian energy companies’ expansion. With regard to Poland, Russian attempts concentrated on entrenching the monopoly position of Russian supply and preventing a diversification of natural gas and crude oil import. The Kremlin delivered the ultimate score when Gazprom agreed with two German companies about building the North European Gas Pipeline (previously called Baltic pipeline, later renamed Nord Stream) in September 2005. The primary motivation behind the pipeline was to lessen Russian dependence on transit through Belarus and Poland. The new pipeline decreased the chances of the Norway-Poland route. It might also enable Russia to cut natural gas supplies to Poland without endangering supply to Germany. The Kremlin also managed to torpedo the Odessa-Brody-Plock project. In 2004, the flow of the Odessa-Brody pipeline was reversed for an initial three-year period. It started to deliver Russian crude oil to the Black Sea instead of supplying Caspian oil to Central Europe, as its original purpose would have been. Gazprom’s only foot in the Polish economy was Europol Gas, the Polish-Russian joint venture. Europol Gas was important because it owned and operated the Polish section of the Yamal pipeline. Control of the transmission network was always a primary target of Russian energy companies. Gazprom used all possible means from financial to legal to get control over Europol Gas and through that over the Polish section of the Yamal pipeline. The mid-2006 elections in Slovakia resulted in the victory of the populist Fico government. Robert Fico displayed a friendly attitude towards Russia, as much so to criticize Polish and Czech decisions about placing antimissile bases on their territories. In Slovakia, Russia’s primary investment target was to keep Transpetrol, the owner and operator of the Druzhba crude oil pipeline, in Russian hands. It was owned by Yukos, but with that going bankrupt, it again was for sale. With an illegal move, Moscow successfully prevented an attempt of the Slovak government from buying back the 49 percent stake and management rights in Transpetrol. Afterwards it did not need to be covert in its actions against the Slovak company. The Kremlin successfully convinced the Slovak government to concede to sell the shares to a Russian company again. At the same time, Gazprom resigned from its opportunity to buy 16.33 percent in SPP, the owner and operator of the Slovak section of the Brotherhood pipeline, 49 percent and management rights of which it won in 2002 in a consortium with Ruhrgas and Gaz de France. The Russian gas giant most likely gave up its shares in SPP to find another way to gain controlling rights or a minimum of 50 percent in the Slovak section of the largest pipeline delivering Russian natural gas to Europe.

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Friendly winds blew in Hungary from Moscow’s point of view during the second Putin presidency. The new Hungarian government of Ferenc Gyurcsany was open towards Russian investment. Even though it did not sell Mol’s gas division directly to Gazprom, it did so to its German partner Eon. Before the winner of the tender was announced, Gazprom had said it would immediately start negotiations with Eon about entering the Hungarian gas industry in case the German company emerges as the winner. So it was. The two, however, failed to agree; and most likely, Gazprom is raising the stakes and will not be satisfied with less than a 50 percent share in the Hungarian gas storage and wholesale business. The Kremlin scored a huge victory when it made the Hungarian government commit to the Blue Stream pipeline instead of the EU- and U.S.-backed project of Nabucco. Even though later on, Budapest backtracked and seemed to support Nabucco, the Hungarian government continued to flip-flop between the two projects in 2007 and early 2008, as well. Finally as the last major foreign political act of his presidency, Putin managed to sign an agreement with Hungary on extending the South Stream pipeline through the latter’s territory, thus seriously harming the chances of the Nabucco pipeline. Mol remained a continuous target of Russian interest. Even though it is unlikely that Gazprom was behind OMV’s two takeover attempts, if successful, it might have resulted in Russian control of either of the two refineries Mol had: Szazhalombatta or Slovnaft. The Hungarian government’s receptiveness towards Russia earned it the label of ‘‘good neighbor.’’ The end of the Putin presidency does not mean an end to Russian aspirations in Central Europe. Russia will continue to try to gain further strongholds in the region, cut its diversification attempts, and entrench Russian monopoly supply position.

7

Conclusion To deliver hydrocarbons to Western Europe, Russia would have to lay its pipeline first through Belarus, Ukraine, and the Baltic states (Tier 1 countries) and then through a second group of countries in Central Europe, Poland, Slovakia, and Hungary (Tier 2 countries). Circumventing these countries would prove costly, as Russia would have to either lay its pipeline to the north via the Baltic Sea or the south via the risky ex-Yugoslav region. If it wanted to maintain its position as Western Europe’s primary supplier of hydrocarbons, Moscow would need to increase the amount of oil and gas flowing through Central Europe. It wanted more, however, namely to regain some of its old power in the region. In order to reach both its economic and foreign policy goals, Russia pursued a strategy of getting control of key energy assets in these countries. APPLYING NEOCLASSICAL REALIST THEORY The expansion of Russian energy companies in Central Europe has as much to do with the ups and downs of Russian foreign policy as it does with business. Neoclassical realists probably best explain why Russian companies are sometimes quite active in the region and then quite inactive. Neoclassical realist theory argues that the relative distribution of power in the international system (independent variable) through the perception of state leaders (intervening variable) together with state power, to be defined as power to mobilize the necessary resources (intervening variable), explain foreign political outcomes (dependent variable). Russian energy companies tried to expand in Central Europe precisely when the Russian leadership saw that Russia’s relative influence vis-a`-vis the West is low and the Russian state had enough power to mobilize the necessary resources. When Russia was satisfied with its international position, or when its state power was limited, the companies made no attempts to expand in the region. Russian leaders were comfortable with their country’s international influence during the first two years after the fall of the Soviet Union, the so-called Kozyrev era (1991–93). That perception soon changed, as Moscow faced NATO enlargement from 1993 to 1996, and it increasingly realized that Russia’s influence in the world was low, especially compared to that of the United States (1996–1998). Russia’s international influence was at its lowest between the 1998 economic crisis and Putin’s assumption of the presidency. The Kremlin continued to be dissatisfied with its

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influence throughout the Putin era, as witnessed by the countless references the Kremlin has made about the long-term goal of restoring Russia’s influence in the world. Central Europe had been the one region where Moscow’s declining influence had been most apparent, thanks mostly to NATO enlargement, and later the quasiindependence of Kosovo, the planned antimissile bases in the region, and the failed agreement on the CFE Treaty. As a result, after 1993, Russian foreign policy sought to tip the balance of power in the region towards Russia. Moscow has not always had enough state power to mobilize necessary resources to further its aspirations. Federal tax revenues as a percentage of GDP were high between 1991 and 1993, when they started a gradual decline until 1998, when federal tax revenues were only 9.2 percent of the Russian GDP compared to 20.3 percent in 1992. Tax revenues began to climb in 1999, sometimes accelerating exponentially. In 2004, federal tax revenues made up 20.4 percent of the Russian GDP and state power underwent a substantial transformation. State power reached its peak in 2006, when federal tax revenues were 24.5 percent of the Russian GDP. To regain its lost influence, Russia, when there was enough state power, relied on its energy companies which could serve as tools of foreign policy. There were three periods in which Russian energy companies expanded in Central Europe. When they expanded in the region, Russian energy companies tried to gain footholds in Poland, Slovakia, and Hungary. They participated in the privatization tenders for these countries’ companies and strategic energy assets, and were proactive in finding opportunities to acquire control of key pieces of energy infrastructure.

RUSSIAN VIEWS ON CENTRAL EUROPEAN COUNTRIES Moscow considered Poland a ‘‘bad neighbor.’’ Poland interfered in Ukraine and Belarus, criticized Russian domestic and foreign policy, sheltered Chechen refugees, and tried to diversify its energy sources to lessen its dependence on Russia. Polish public opinion generally held against Russian investment. The Kremlin did differentiate between governments formed by Polish conservatives and the governments of Table 7.1 Predictions for the Propensity of Russian Energy Companies to Expand in Central Europe II Russian leadership’s perception about Russian influence in the world

State power

Predictions for the behavior of Russian energy companies towards Central Europe

1991–1993

Consistent

High

Do not expand

1993–1996

Low

Medium

Do expand

1996–1998

Low

High

Do not expand

1998–2000

Low

High

Do not expand

2000–2004

Low

High

Do expand

2004–2008

Low

High

Do expand

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the Polish Social Democrats, a successor of the Polish Communist Party. The Social Democrats had the same policy as the conservatives on Ukraine and Belarus, and were publicly opposed to Russian investment in the energy sector. But they were also less skeptical of the Russians and less focused on energy diversification. Moscow, then, happily waited for Poland’s government to change. Slovakia was considered a ‘‘good neighbor.’’ Moscow hoped to turn it into a proRussian island during Meciar’s reign in the 1990s. It held onto its favored status, even when the Western-oriented government of Mikulas Dzurinda took power, and Slovakia made a bid for NATO and EU accession. Bratislava did not criticize Russian domestic or foreign policy, did not interfere in Russia’s perceived sphere of interest on its eastern border, did not make any serious attempt to diversify its energy resources, and was open to Russian investment. Hungary’s status somehow fell in between Slovakia’s and Poland’s. The Kremlin’s view of Hungary changed with each of its new governments. During the Orban government, Hungary was a ‘‘bad neighbor.’’ It became a ‘‘good neighbor’’ when the ex-communist Socialist Party took power. Orban openly supported Viktor Yushchenko’s candidacy in Ukraine and halted a Russian convoy to aid Serbia during the bombing of Kosovo. It did not view Russian investment in Hungary favorably, and used all means to defend TVK and Mol against attempted Russian takeovers in 2000. The ex-communist Medgyessy and Gyurcsany governments behaved very differently. They did not interfere in Ukraine. Hungary was the only EU country to support Viktor Yanukovich in 2004. They tried to promote Russian investment in Hungary. Gyurcsany was ready to support a Russia-backed project to transport Russian gas to Western Europe over an alternative plan from the EU. RUSSIAN ENERGY STRATEGY TOWARD CENTRAL EUROPE The Russian energy companies’ strategy first and foremost is securing their monopoly supplier position and acquiring key assets, the bottlenecks of the energy industry, in Central Europe. Securing the monopoly position required a twofold strategy: entrenching the monopoly supplier position of Russian energy companies and preventing diversification attempts. Poland, Slovakia, and Hungary are overwhelmingly dependent on Russian natural gas and crude oil supplies. Slovakia and Hungary in particular are among the most gas-dependent countries in Europe. Through a series of deals in the 1990s, Gazprom became the primary supplier of natural gas to Poland, Slovakia, and Hungary. Moscow appointed a coordinator for each country in the early 1990s, through which all Russian crude oil deliveries had to travel, thus preventing competition among Russian suppliers for the Central European markets. Moscow stopped the Norway-Poland pipeline, the most significant attempt to diversify the region’s natural gas supply. Once the Social Democrats took power in Poland, Moscow renegotiated the gas contract, securing Gazprom’s monopoly supplier position for 20 years and making the Norway-Poland pipeline unfeasible. Moscow also tried to stop the construction of the EU-backed Nabucco pipeline, which

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would transfer natural gas from outside Russia to the EU. It promoted its own alternatives, first the Blue Stream and then the South Stream, which would deliver Russian gas through Russian territory. It is harder for Russia to make its customers as dependent on its oil as they are on its gas. Moscow still tried. For several years, Russia postponed plans to transport Caspian oil to Central Europe via the Odessa-Brody pipeline, which ran outside Russian territory. Russia tried to acquire Rafineria Gdanska, the owner of a sea terminal that gave Poland access to an alternative crude oil supply. It tried to reverse the flow of the Adria pipeline a route for alternative crude oil to Hungary. Russian oil companies also successfully gained control over oil transport in Slovakia. The key acquisition targets were companies with import rights, the transmission system, and wholesale companies in the gas industry. In the case of oil, Russian investments target companies with import rights, the transmission system, wholesale companies, and refineries. At a determined hand, control of any of these assets can yield leverage over the whole value chain. During its first wave of expansion, Gazprom set up joint ventures with monopolistic power to import natural gas. Those joint ventures imported from Gazprom. Russian companies tried to control key gas transmission systems of the Brotherhood and Yamal pipelines. The Brotherhood goes through Slovakia, which Russia considers a reliable partner. In 2007, it delivered 73.8 billion cubic meters of natural gas, 20 percent of the EU’s annual consumption.1 Gazprom wanted to win the tender for the minority shares of its operating company, SPP, in 2002 but was able to do so only as member of a three-party consortium. As it was far from an ideal solution, in the end Gazprom did not live with its option to buy one-third of the 49 percent stake won by the consortium. To build Yamal, Poland and Russia in the mid-1990s set up the Europol Gas joint venture. Through that joint venture, Russia would try to gain full control over the gas pipeline. When the Hungarian gas and oil monopoly Mol put its gas division on sale, Gazprom tried to acquire the gas transmission network. It entered discussions with Eon when Eon won the privatization tender for Mol’s gas wholesale company. Gazprom has been interested in PGNiG, the Polish gas monopoly. Perhaps surprisingly, Gazprom passed on the opportunity to buy a small minority stake in SPP, the Slovakian gas wholesale monopoly. The stake, however, was so small that it would not have yielded any meaningful control for Gazprom, and as we saw, the Russian company does not like to be a financial investor. Russian oil companies also eyed Central European oil import and wholesale companies, particularly the Polish PKN Orlen and the Hungarian Mol. They did not participate in the privatization of Slovnaft, a Slovak wholesale company, which was put on sale during a period when Russian companies were not expanding in the region. Russian energy companies also wanted to gain control over the oil transmission network of the region. They did buy Transpetrol, the operator of the Slovak section of the Druzhba pipeline. And they contemplated to circumvent PERN, the owner of the Polish section of the Druzhba, in hopes of eventually taking it over. Mol, which was already a declared target for Russian oil companies, owned the Hungarian section of the Druzhba pipeline.

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Russian oil companies were also interested in refineries. They bid for the Rafineria Gdanska in Poland. In case of an OMV-Mol merger, Russian oil companies said they were interested in buying the Hungarian refinery of Szazhalombatta. They emphasized their interest in PKN Orlen, the owner of Poland’s largest refinery, several times. Russian energy companies aimed for at least a 50 percent stake, but preferably a controlling share in each of these assets, and settled for a minority stake only if it came with management rights. The seemingly awkward 50 percent share had almost always turned into an effective controlling stake in the hand of Russian companies, thanks to their status as monopoly energy supplier. Yet, they have never been content with a true minority stake, which is likely to be the reason why Gazprom gave up its right to buy 16.33 percent of SPP, the Slovak gas company, and withdrew from its agreement with Eon Ruhrgas to acquire 50 percent minus one vote of the Hungarian Mol Natural Gas Supply and Mol Natural Gas Storage. MEASURING SUCCESS Russia’s attempts to prevent diversification and acquire assets in Central Europe were not always successful. Russia’s success depended on the willingness of host countries to comply with its whims. Russia was most successful in Slovakia and in Hungary. It was more successful with socialist than conservative governments in Hungary and Poland. While there has been a difference between the attitudes of liberal and populist governments in Slovakia, with the latter being more proRussian, the overall sentiment of the Slovakian governments was a lot friendlier visa`-vis Moscow than elsewhere in the region. This has not been the case in Poland and Hungary. Russia tended to wait for socialist or social democratic parties—successors of communist parties—in Poland and Hungary before it made deals. Polish socialists were generally less receptive to Russian whims than Hungarian socialists. But while the ex-communist Miller government of Poland did not sell any Polish energy assets to Russian investors, it still signed a long-term contract that further entrenched Gazprom’s monopoly in Poland and set back any serious diversification attempts for years. Hungary’s socialists proved as receptive as Slovakia’s populist governments in the 1990s. Table 7.2 presents the major cases in which Russian companies attempted to prevent diversification or acquire assets in Poland, Slovakia, and Hungary, comparing the Russian companies’ success to the receptiveness of the host governments. The Nord Stream pipeline, which sought to circumvent Belarus and Poland, is not included, as Warsaw had no real say in its fate. The first column of the table indicates when the final decision that eventually decided the fate of the particular project was made. The next column shows the attitude of the Central European government in power that time towards Russia. Socialist governments of Poland and Hungary are labeled friendly, conservative ones as skeptical vis-a`-vis Russia. Populist Slovakian governments of Vladimir Meciar and Robert Fico are labeled friendly, while the government of Dzurinda skeptical. The

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third column assesses the outcome of the decision from the Russian point of view. When the decision served Russian aspirations, then it is called advantageous. When the decision went against the interests of Russia, it is called disadvantageous. The cases presented here represent the major moments of Russian expansion in the last 16 years, but they tell a limited story. There is no real data to determine the attitude of Hungary’s conservative governments, as there is an overlap of a few months between the first wave of Russian expansion and the Antall government. The first half of the second wave of Russian expansion coincided with two years of the conservative Fidesz government in power. The periods of Polish and Slovakian government changes make it possible to study more cases. Eleven out of the 15 cases presented were Russian initiatives. Russian energy companies not only reacted to privatizations of Central European energy assets, but also developed their own plans to create joint ventures, build pipelines, and buy companies that were not necessarily for sale. Table 7.2 Major Russian Attempts in Central Europe

Decision

Host government

Outcome from Russian perspective

Host country

Gas Contract 1/Yamal 1/ Europol Gas

1993

Skeptical

Adv*

PL

Gas Contract 2/Yamal 2

2003

Friendly

Adv

PL

Norway-Poland pipeline

2003

Friendly

Adv

PL

Rafineria Gdanska

2003

Friendly

Dis**

PL

Europol Gas pricing

2006

Skeptical

Dis

PL

Odessa-Brody (from Polish perspective)

2007

Skeptical

Dis

PL

Slovrusgas

1998

Friendly

Adv

SK

Transpetrol (Yukos acquisition)

2002

Skeptical

Adv

SK

SPP

2002

Skeptical

Dis

SK

Transpetrol (Promneftstroy acquisition)

2007

Friendly

Adv

SK

Panrusgas

1994

Friendly

Adv

HU

Borsodchem

2000

Skeptical

Dis

HU

Adria-Druzhba

2002

Friendly

Adv

HU

Mol gas division

2004

Friendly

Pending

HU

2006–2008

Friendly

Adv

HU

Blue Stream/South Stream *Adv = advantageous **Dis = disadvantageous

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Table 7.3 Success Rate of Russian Attempts Attempt

Success

Poland

6

3

Hungary

5

3

Slovakia

4

3

Pending

Success rate

50% 1

75% 75%

Russian energy companies were overwhelmingly successful in Slovakia and Hungary. In both countries, their success rate is 75 percent. In the case of Hungary, the outcome of one deal is still pending that of negotiations between Eon and Gazprom about the Hungarian gas storage and wholesale business. Poland, which is four times as large as either Hungary or Slovakia and was thus the greatest target of Russian interest, presented the greatest resistance. Russia succeeded only three times out of the six times it targeted Poland (see Table 7.4. Russian energy companies’ attempts to build strongholds in Central Europe were very successful during Russian-friendly governments. They had initiatives and agenda to push during both friendly and skeptical governments; however, their success rate showed a wide variation. They were overwhelmingly successful when there was a friendly government on the other side. Besides the one pending case, out of the eight attempts, seven were concluded with advantageous results for Russian energy companies. The difference is striking when the recipient was skeptical of the purity of Russian intentions. During these times, Russian energy companies were successful only in every third case. Russia had varying successes with friendly and suspicious governments between each country. Except for one instance in the early 1990s, skeptical Polish governments resisted Russian moves. In 1993, the Suchocka government, afraid that Russian gas supplies would be discontinued, signed the disadvantageous gas contract. It’s difficult to compare the success rates of Russian expansion during suspicious Polish and Hungarian governments, as Russia made only one attempt to gain a foothold in Hungary when it was ruled by a conservative government, namely the ill-fated Borsodchem affair, which the Hungarian government resisted fiercely. Russia always considered Slovakia a reliable partner. It entered privatization deals in the country even when it was ruled by the pro-Western Dzurinda government. Under the Dzurinda government, a Russian company won the tender to operate the Slovakian section of the Druzhba pipeline. Russia has been open about its intentions with Slovakia. It attempted no hostile takeovers like the Borodschem scandal in Hungary.

Table 7.4 Success Rate of Russian Attempts Compared to the Friendliness of the Recipient Government Try

Success

Pending

Success rate

Friendly host government

9

7

1

88%

Skeptical host government

6

2

33%

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Table 7.5 Success Rate of Russian Attempts in Each Country Poland

Slovakia

Hungary

Friendly host government

67%

100%

100%

Skeptical host government

33%

50%

0%

One can see the stark difference between Poland and Slovakia’s attitude regarding Russian investment in each country’s approach to Hungary’s Mol. Warsaw withdrew from a planned merger between PKN Orlen and Mol because it feared that Russian companies owned a substantial part of Mol. Bratislava, however, let Mol buy its only refinery, Slovnaft. The difference between the success of Russian energy companies during friendly and skeptical Hungarian governments could not be more noticeable either. Besides a pending case, they reached everything they wanted in Hungary under favorable times. Out of 15 cases, Russia usually succeeded in expanding with friendly governments and failed to succeed with skeptical governments. Moscow did score victories with skeptical governments in Poland and Slovakia, signing the gas contract in 1993 and emerging as the winner of the privatization for Transpetrol. It suffered an unexpected loss during the Miller government in Poland, failing to win the privatization tender for Rafineria Gdanska. Russia was least successful in Poland, where it gained a monopoly supplier position but did not control any key assets of the energy industry. Moscow tried to gain at least a 50 percent, but preferably a decisive, say in Europol Gas, the only company in which Gazprom had a foot in Poland. Otherwise, it focused on entrenching the monopoly position of hydrocarbon suppliers (Gazprom’s through the renegotiated gas contract and by preventing for a while the alternative Norway-Poland pipeline, and Russian oil’s by preventing the building of the Odessa-Brody pipeline). In Hungary, Russia successfully became a monopoly supplier and made the Hungarian government join the South Stream pipeline as opposed to the U.S.- and EUbacked Nabucco. While the outcome of the discussions between Gazprom and Eon is still pending, it is likely that the former will receive at least a 50 percent say in the Hungarian gas storage and wholesale business. In Slovakia, Russian companies continue to be monopoly oil and gas suppliers and one of them acquired a 49 percent Table 7.6 Summary of the Successes of Russian Attempts in Central Europe (1991– March 2008) Outcome from Russian perspective

Advantageous

Advantageous

Disadvantageous

Disadvantageous

Host government

Friendly

Skeptical

Friendly

Skeptical

Poland

2

1

1

2

Hungary

3

Slovakia

2

1 1

1

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share and management rights in Transpetrol, the owner and operator of the Druzhba pipeline’s Slovakian leg. RUSSIAN ENERGY COMPANIES’ TOOLBAR Overt vs. Covert When Moscow perceived friendly terrain, it made its intentions open. When it saw unfriendly terrain, it hid its goals. The difference between Russian attitudes to friendly and skeptical governments could not be more illustrative than its behavior in Hungary during Putin’s first term. Gazprom initiated a hostile takeover against the petrochemical company Borsodchem in Hungary, hoping to eventually take over Mol. The Kremlin called the Orban government, which opposed the plan, unfriendly. As soon as the Socialist Party came to power, Russian attitudes changed. Hungary became a ‘‘good neighbor.’’ The Kremlin would never have considered presenting Orban a list of desired energy assets, but it presented just such a list to Orban’s successor, Peter Medgyessy. Mol became again a target, but this time Moscow spoke openly about its intention to get a foothold in the Hungarian company. When Russian energy companies eyed an investment opportunity and Moscow judged the host government as being receptive, an amazing series of bilateral meetings ensued. When Moscow believed the other side would not welcome Russian investment in the country, bilateral meetings were dropped and visits were cancelled. And so Hungary and Russia openly met to discuss Mol, Blue Stream, and South Stream during the Medgyessy and Gyurcsany governments. Years before, Russia cancelled one important meeting between Orban and Prime Minister Kasyanov referring to technical reasons. Overt-covert tactics changed with governments in Poland, as well. Gazprom secretly laid a fiber-optic cable along the Yamal pipeline during the skeptical Buzek government. Its capacity well exceeded its original purpose to monitor the flow of gas in the pipeline. During the privatization tender for Rafineria Gdanska under the social democratic Miller government, neither Lukoil nor Yukos hid its intention to buy the refinery. Moscow quite openly discussed the sale of Transpetrol in 2006 with the friendly Fico government in Slovakia. It did not have to rely on covert means to reach its goal but was able to discuss its intentions openly with officials of the Slovak government. Creating Nontransparent Circumstances Russian business operated secretively. Nontransparent circumstances proved to be handy during unfriendly governments to reach its goal. The gas contract of 1993 created nontransparent circumstances when it came to Europol Gas, the Russian-Polish joint venture, which later proved a Trojan horse for Moscow to gain a foothold in Poland. Moscow tried to gain control of the Polish section of Yamal through the joint venture, relying on the original contract and financial and legal measures. It pushed

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Europol Gas to take a loan from Gazprombank to construct compressor stations and set a transit fee that would ensure the company’s failure to pay back its loan. It exploited every opportunity to hinder the company’s daily operation by postponing the appointment of a chairman to its supervisory body. Russia relied on dubious legal means to maintain control over Transpetrol, the operator of the Slovak section of the Druzhba pipeline. An appointee of the Moscow Arbitration Court sold the Yukos stake in Transpetrol at an auction in Moscow as a Dutch court was still in the process of deciding the company’s ownership. Involving Local Partners Moscow sought partnerships with local parties with questionable allegiances. In Poland, Gaz Trading, which is partly owned by the Polish oligarch Alexander Gudzowaty, became the third owner and the swing voter of Europol Gas after Gazprom and PGNiG. Gudzowaty had made his fortune by trading with Russia. In case of Panrusgas, Gazprom pushed a Russian-owned Hungarian company to become the Hungarian minority owner of the gas import monopoly. Playing Countries Off Each Other Since Tier 2 countries were competing for better gas prices and for statuses as transit countries, the Kremlin was easily able to set them against each other. It pitted Poland and Slovakia against each other in case of the inter-system connector pipeline. Moscow signed similar agreements with Vienna, Budapest, and Belgrade to create gas distribution hubs for Russian gas in each of their respective territories. Promises to Host Governments Russian energy companies have always promised the same benefits for friendly governments if they opened up their countries to Russian energy expansion. Such friendly governments were usually eager to use these promises for communication purposes. They often mentioned the opportunity to benefit from lower gas prices. Gas prices were subject to negotiations between Russia and the host country. Gas prices were a sensitive issue for transition economies, particularly in Slovakia and Hungary, among the most gas-dependent ones in Europe. Gas prices directly affected the host governments’ approval ratings. However, contracts were secret and included terms and conditions that made them hard to compare or to check whether any of the promises were kept. Slovak prime minister Robert Fico used future gas prices as an excuse for all concessions he gave Russia. Another standard line has been the importance of transit revenues. Fico argued that his government’s decision to resell Transpetrol to a Russian company was necessary to make sure the Druzhba remained a significant pipeline. The Gyurcsany government of Hungary presented the Russian-sponsored Blue Stream pipeline as an important means to making Hungary a gas transit and distribution hub.

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Finally, all of these governments have said to have been promised preferred access to the Russian markets. Due to the region’s reliance on Russian hydrocarbons, it suffered a huge deficit in bilateral trade. Postcommunist governments were constantly trying to improve trade relations with Russia. This argument appeared in relation to almost every Russian takeover attempts in the region. The most extreme case took place during Gazprom’s attempt to take over Borsodchem. The Russian company’s Hungarian representative, Megdet Rahimkulov, warned in a television interview that the Russian company would reconsider buying Hungarian products in exchange for its natural gas deliveries if its interests were not taken into account. Rhetoric of Moscow Moscow emphasized that its energy companies’ activity was strictly motivated by business considerations. It was always the first to point out political motivations behind any project that it saw to conflict with its interest. A Duma member said that the Odessa-Brody pipeline’s extension through Poland was motivated by political, not commercial considerations. His statement came at the time of Moscow working towards building the Nord Stream pipeline which cost several times as much as a land version through Poland and Belarus. To prevent alternative pipelines, Moscow was eager to refer to them as unrealistic. It called unrealistic the Amber pipeline (alternative to Nord Stream) and the Nabucco pipeline (alternative to Blue Stream and South Stream), as well. The Kremlin frequently mixed business and public interests and presented public matters as business deals. Long-term contracts between companies were kept secret, reportedly for business concerns, even though their content many times was clearly in the public interest. SOVIET COMPARISON There were several similarities between the behavior of postcommunist Russia and the Soviet Union. Many historians argued that the Soviet Union was expansionist not because it wanted to spread world revolution, but because it behaved as Tsarist Russia did, relying on relative power considerations, and merely continued the foreign policy of Russia. Edward Crankshaw suggested ‘‘what was happening here, disguised by a smoke screen of Communistic terminology, was a resurrection of the old Russian strategic imperialism of Ivan the Terrible and Peter the Great.’’2 Christer Pursiainen said, ‘‘The view that the Soviet Union at a very early stage sacrificed the Marxist-Leninist utopian goal of world revolution in favor of national interests, seemed to be the dominant one in both the early and later tradition of historical research.’’3 Post-Soviet Russia pursued its foreign policy with its national interest in mind, just like its predecessors. Tools changed, though not as much as many believed. At the end of the 1970s, Moscow developed a plan to build six major pipelines between Urengoy, the world’s second-largest gas field, and Europe. The United States opposed the plan while European governments favored it, making for one of the

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biggest inter-Western disputes of the Cold War. West German chancellor Helmut Schmidt announced the Urengoy project when he returned from his state visit in Moscow in July 1980. The project entailed building a new pipeline with a full capacity of 40 billion cubic meters per year from Urengoy to Uzhgorod on the SovietCzechoslovak border. Moscow would use another social democrat chancellor, Gerhard Schroeder, to seal its deal on the Nord Stream pipeline 25 years later. During the Urengoy pipeline dispute in the 1980s, officials of the Defense Department and NSC ‘‘criticized the economics of the deal, insisting that the Europeans had been outnegotiated by Moscow,’’ Antony J. Blinken wrote.4 The complaint is more or less the same now. With the Nord Stream, Gazprom signed individual gas contracts with Germany, Italy, and Austria, bypassing the EU as a unified buyer. Twenty-five years before, In early 1980, as negotiations for credit arrangements began . . . European banks would form a single consortium to provide loans to the Soviets, six months later, however, Moscow abruptly changed its mind and insisted on separate negotiations with individual European banks or single-nation consortia.5

A Deutsche Bank official wrote that ‘‘as talks progressed [in 1980], the Soviet Union skillfully played the various countries off against each other.’’6 The Reagan administration proposed an embargo on all equipment for oil and gas production, but France, Germany, Italy, and the United Kingdom ordered suppliers to fulfill their obligations to the Soviet Union.7 Russia still needs Western technology, but Moscow has denied direct access to its gas and oil fields for non-Russian companies. Exploration licenses are granted only to joint ventures with a Russian company who follow certain rules that ensure Russian control over energy resources. Yet European and American companies are still investing in the Russian energy sector. Reagan’s predictions proved apt. The EU did become dependent on Russian energy import. Twenty-five years later, we are facing the problem created by decisions made in the 1980s. The future pipelines planned by Russia (Nord Stream, Blue Stream, and South Stream) and Russian acquisition attempts within the EU would create an even bigger dependency of Europe and make countries of Central Eastern Europe totally vulnerable to Russian mercy. Many decision points and tactics are exactly the same as 25 years ago. CONCLUSIONS Russia’s energy-centered foreign policy is not limited to the states of the former Soviet Union and is clearly designed to increase its leverage in key geostrategic theaters and over U.S. allies—Poland, Hungary, and Slovakia—and to achieve farreaching foreign policy goals. The study also shows that the phenomenon is a well-established practice of Russian decision makers that has been in play ever since the fall of the Soviet Union, and not an anomaly of the Putin era, as many observers seem inclined to believe.

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This book offers a corrective to the oversimplification that makes Putin solely responsible. It is not simply Vladimir Putin, the increasingly autocratic Russian president, who is behind the growing assertiveness of Russian foreign policy and its focus on energy. Rather, the fact that the Russian state has regained much of its power under Putin’s leadership has itself made possible the implementation of the long-standing aspirations and vision of the country’s foreign policy and security elites. To the extent that Russia’s energy-centered, neomercantilist foreign policy is based on the elite’s fundamental perceptions of national interests, it is here to stay—no matter how autocratic the Russian state or president is. As long as Russian leaders continue to perceive that Russia is losing influence in Central Europe and at the same time have enough state power to mobilize, Russian energy companies are expected to expand into the region. Moreover, supporting the Russian energy companies’ expansion became the primary motivation of Russian foreign policy toward Central Europe. Other than that, Russian foreign policy had not much to say to Warsaw, Bratislava, or Budapest. Moscow viewed its declining military influence in the region (NATO enlargement, Kosovo, antimissile bases, CFE Treaty) in the context of it losing influence vis-a`-vis the United States at the world stage. Besides one or two initiatives that remained at an embryonic stage, it did not offer any meaningful alternatives militarily to these countries. The Kremlin’s reaction was to counter the West’s military and political influence by economic expansion into the region. Russian–Central European relations became dominated by this goal. Russian interest in the strategic industries of the region became the number one agenda item at the bilateral meetings. Every other question was placed beneath this goal or was determined as a function of this goal. While aspirations are constant, their success depends on the receptiveness of the host government. Socialist governments of Poland and Hungary and populist governments of Slovakia tend to be more welcoming towards Russian expansion attempts than conservative governments of these countries. Moscow scored many more victories during times when the former were in power than during the latter.

RECOMMENDATIONS Implications for U.S. Foreign Policy The United States’ attempt to lessen its energy dependence after 9/11 made Central Europe even more dependent on Russia. Before 9/11, the United States had promoted access to energy resources in the Caspian Sea and tried to limit the further development of Russian export routes for hydrocarbons.8 After 9/11, it viewed Russian energy as an alternative to its dependence on Middle Eastern hydrocarbons. As a result, after 2001 Russia came close to secure an access for Russian oil via the Druzhba-Adria pipelines to the Adriatic Sea. In the long term, a growing dependence of Central Europe on Russian energy will have a detrimental effect on the United States. Central Europe tends to be one of the most pro-American regions of the continent; the countries have been particularly

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cooperative in the Iraq war and have been willing to host American antimissile bases. Increasing Russian influence may lessen these countries’ room of maneuver. Russian aspiration is to weaken Central Europe’s support for the United States. It may very well happen that in case they need to choose between a stable supply of energy or supporting American position in a global issue, they will opt for the former. The United States has already made its own concessions to Russia. Tom Lantos, chairman of the Foreign Relations Committee in the U.S. House of Representatives, noted: Consider, too, the latitude we grant to Russia, the second-largest oil producer after Saudi Arabia, with increasing amounts of that output coming to the United States. The Administration talks a great game about spreading democracy and promoting human rights abroad, yet refuses to pressure Moscow to reverse its brutal crackdown on political dissent. Is it because we have a financial stake in the reliability of the Russian oil supply, and its guarantee by the state? As long as Russia uses its energy sector as a foreign policy instrument, it will continue to enjoy the upper hand.9

Moscow also very consciously elevates the stakes for U.S. foreign policy in areas of primary importance for Washington, like Iran, by creating additional conflicts and issues of disagreement. Moscow would willingly give in in areas important for the United States in exchange for America’s closing eyes on Russian aspirations in Central and Eastern Europe. U.S. foreign policy should aim at vigorously countering this specific trend rather than more vaguely trying to convince Russia to behave differently. The United States needs to side with the fledgling democracies in Central and Eastern Europe in their disputes with Russia over energy policy. It needs to throw its full weight behind Nabucco and the Odessa-Brody oil pipeline. Central Asia and the Caucasus need to be directly connected with Europe by pipelines that do not cross Russian territory. American assistance needs to be financial as well. Washington’s stance is quite powerful in the region. American pressure forced the Hungarian government at one point to favor Nabucco. Washington needs to exercise its leverage over Central European governments that give in to Russian requests and make their respective countries vulnerable to Russian influence and pressure. It needs to be clear that it is not an acceptable policy within the alliance to do so. Finally, Washington also needs to promote democracy in Belarus and Ukraine, offering them NATO membership if necessary. Their integration into the Western structures would substantially decrease Russian influence over the broader Central and Eastern Europe. Implications for Central Europe Russian investment attempts in Central European strategic industries cannot be considered as purely motivated by business considerations. Central European leaders need to consider also the national security implications of those. The most costeffective deal in the short term, may prove disastrous in the long term. Some Central

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European politicians have a habit of pleading that their countries’ small sizes make them hopelessly vulnerable to Russia. This is simply not the case. As long as Russia does not respect the basic rules of market economies, Central Europe needs to close off their energy companies to further Russian investment. And the region must maintain its control over Russian energy companies who have already taken a foothold in its energy sectors. Poland needs to maintain control over Europol Gas, Hungary should pressure Eon not to sell more than 50 percent minus one vote to Gazprom in the Hungarian gas storage and wholesale business. Slovakia needs to keep its majority control over Transpetrol. Central European countries should increase their own energy production, if possible, and invest in using alternative energy resources. Central European countries need to coordinate their policies with each other, as Russia tends to apply the same tactics with each of them. Coordinating their policies would substantially increase their leverage over Russian aspirations. They need to develop regional cooperation on building pipelines and securing alternative sources of energy for the region. The Norway-Poland pipeline or the LNG terminal on the Adriatic coast may substantially decrease the region’s vulnerability to Russia. Countries of Central Europe need to integrate their pipeline infrastructure by North-South connections to further decrease their dependence on Russia. Ultimately Warsaw, Bratislava, and Budapest will feel the safest if Brussels manages to develop a strategy vis-a` -vis Russian energy that serves their interest. To enhance the chances of a unified EU policy, Central European decision makers need to show a unified support behind the European Union’s initiatives of building alternative pipelines, currently and most importantly Nabucco. They must refrain from supporting Russian pipeline projects, like Nord Stream, South Stream, or Blue Stream. Even if individual free riding may seem lucrative in the short term, it certainly hinders developing a unified EU policy and will prove rather disadvantageous in the long term. They should interconnect with the transmission infrastructure of the EU-15 as well. Finally, Central European countries should be active in Brussels in taking the lead on forming the EU’s Eastern policy. It is in their vital interest to have a democratic Ukraine and Belarus on their eastern borders.

Implications for the European Union The Economist noted, ‘‘the striking oddity is that just as in the last cold war, Europe’s security still depends so much on the Americans,’’10 which partly explains their incoherent policy in regards to Russian energy. During the Urengoy pipeline crisis in the 1980s, Antony J. Blinken wrote, ‘‘the United States must accept one given: Western Europe will not forego the benefits of trade with the East in conditions short of war or acute tension.’’11 If the looming danger of the communist Soviet Union proved inadequate for Western Europe to forego trade, it is unlikely that the specter of energy dependency will do so today. The EU failed to develop a

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unified policy that served the interests of all its members. Its lack of unity proved its biggest handicap when dealing with an increasingly autocratic Russia. In peacetime, differences emerge when a nation pursues its own particular vision of the alliance interest in conflict with the perception of its partners or when it ignores the group interest to serve its own. The very characteristic of the group relationship we most cherish—the sovereignty of each member—tends to emerge as a constant weakness in our competition with the communist world.12

Individual EU members have made separate deals with Russia, severely hindering the leverage of the European Union vis-a`-vis its key supplier of energy. Brussels needs to develop a new understanding on several fronts: • Brussels should understand that Moscow views the energy industry as a strategic industry. Its actions—not allowing non-Russian companies licenses to the energy fields and own the hydrocarbons they produce—prove this point. At the same time, Russian aspirations are increasingly assertive, and the Kremlin intends to use the energy weapon to further its goals. Dealing with Russia as an energy supplier and the impacts of Russian investments in EU energy transmission and distribution infrastructure go beyond the realm of economy; they impact the security and unity of the European Union. • Arguments about cheap Russian gas continue to lose ground. European capitals for short-term gains directly or indirectly supported pipelines whose routing was not the most economic one but followed Russian foreign political considerations (Nord Stream, Blue Stream, South Stream). Eventually their costs, which are several times as much as those of competitive pipelines, will be put on the European customers. The heavy reliance of the EU on Russian energy is not necessarily justified even in strictly business terms. • The EU is the largest customer of Russian hydrocarbons, taking over 60 percent of Russia’s crude oil exports and 50 percent of Russia’s natural gas exports. The export of energy products to the EU generates over $60 billion for Russia annually.13 Yet Brussels has failed to take advantage of the situation. If Brussels develops and implements a unified position on energy security despite Moscow’s displeasure, it will hinder Russia’s attempts to gain power over Central and Eastern Europe. • The new EU members are more dependent on Russian energy than the original 15 members of the organization. If the EU does not do anything to counter and even to roll back Russian influence already within the borders of the Union, the impact may be detrimental on countries of the EU encouraging nontransparent business practices that evade the rule of law. This certainly has a spillover effect on the EU economy as a whole and hinders the economic growth of the Union. The political influence of Russia would have an effect on individual countries’ policies, severely weakening the European Union’s room for maneuver.

Only a unified and determined EU has a chance to counter Russian influence. If this is not achieved, Russia will keep the upper hand. The EU needs to support alternative pipelines for the benefit of every EU member, such as the Amber pipeline. Any

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government, small or large, rich or poor, old or new, that breaks with EU’s energy policy should face harsh consequences. As soon as unity is established, Brussels needs to reserve the exclusive right to negotiate with Moscow in questions of energy supply and deal with Russian energy companies in the EU. Parallel to that, Brussels should work on lessening Russian influence in the European Union. It needs to focus on Russian supply and Russian acquisitions within the EU. Regarding the supply, Brussels should speed up construction of alternative pipelines (source and routes) to lessen the Union’s dependence on Russian energy supply, as a first project determined action is needed to build Nabucco. Brussels should encourage creating joint storage capacities and increasing the proportion of other energy sources than gas within the EU’s overall energy consumption. The EU should support by all means building LNG terminals. Brussels has to develop a strategy about Russian investments within the EU’s energy sector. Brussels already has antitrust, competition, and antimonopoly rules that can be used against Russian energy companies. The concept of unbundling, dividing the ownership of the production, transmission, and the distribution network, is worth a lot of attention. Practically, Gazprom might have to sell its stake in European gas distribution companies and the company building the Nord Stream pipeline, as well. The European Commission’s support of reciprocity is also important. If Russia does not allow Western companies to invest in its strategic industries then the EU would prohibit Russian energy companies from investing within the EU. Alexander Duleba suggests that Russia, like no other country, is a domestic political issue for Europe. No other country has such a profound influence on the EU.14 As such, it may be incorrect to treat Russia as part of the Union’s foreign policy. At the same time, the EU needs to develop a strategy toward Belarus and Ukraine, which may become susceptible to Russian influence before long. The EU needs to offer a credible alternative to Russia’s models of democracy and market economy, supporting democratic movements in these countries.

Chronology: Poland 1993 August

September 1995 February

1996 September

November 1998 January July 1999 February

April December

President Yeltsin visits Poland. The Hanna Suchocka government concludes the so-called ‘‘gas contract,’’ an agreement with Russia on long-term gas supply and building two gas pipelines, Yamal 1 and 2, through Poland. A Polish-Russian joint venture, Europol Gas, is established. It would build and own the Polish section of the Yamal pipeline. Polish industry minister Marek Pol concludes the executive protocol to the 1993 agreement with Russia determining the schedule for the construction of the Yamal pipeline. Polish gas company PGNiG and Gazprom agree on the details of the 1993 gas contract. Gazprom would supply 250 billion cubic meters of gas over a 25-year period to PGNiG. Polish prime minister Wlodzimierz Cimoszewicz visits Moscow. PGNiG and Norwegian company Statoil start talks about the latter supplying 4–5 billion cubic meters of gas to Poland. President Alexander Kwasniewski is on an unofficial visit in Moscow. Gazprom first hints that it would withdraw from constructing Yamal 2. Gazprom first hints at considering building a gas pipeline under the Baltic Sea connecting Russia with Germany. In order to complete the construction works of the Yamal 1 pipeline, Europol Gas borrows $1 billion from Gazprombank. Poland joins NATO. Yamal 1 starts operating with a capacity of 20 billion cubic meters. The idea of the inter-system connector gas pipeline (connecting the Yamal system with the Brotherhood system by circumventing Ukraine) is first entertained.

184

CHRONOLOGY: POLAND

2000 January February

March

April May July

October

November 2001 January March

May

June August

Poland expels nine Russian diplomats for spying. In retaliation, Moscow expels nine Polish diplomats. Several demonstrations are staged in Poland against the Russian war in Chechnya. Polish protesters storm the grounds of the Russian consulate in Poznan. The Russian Duma passes a resolution, accusing Polish authorities of harboring pro-Chechen separatists. Moscow recalls its ambassador to Warsaw, Sergei Razov. Russian foreign minister Igor Ivanov’s planned visit to Warsaw is cancelled due to the Poznan incident. Russian ambassador Sergei Razov returns to Warsaw. Gazprom issues an ultimatum to Slovakia and Poland: either consent to building the inter-system connector pipeline, or Gazprom would construct the undersea pipeline between Russia and Germany. A report from Polish security services, claiming an increase in Russian espionage in Poland since its accession to NATO, is leaked to the press. Gazprom announces intent to withdraw from the construction of the Yamal 2 pipeline and build the inter-system connector pipeline instead. Idea of a gas pipeline from Germany’s Bernau to the Polish town of Szczecin first occurs. Polish president Alexander Kwasniewski is on an unofficial visit in Moscow. Gazprom signs a deal with the German Ruhrgas and Wintershall, the French Gaz de France, and the Italian Snam about constructing the inter-system connector pipeline. The idea of a closer cooperation between Polish oil major PKN Orlen and the Hungarian oil company Mol occurs for the first time. Foreign Minister Igor Ivanov visits Warsaw. The fiber-optic cable scandal breaks out. Gazprom, two German companies, and the Finnish Fortum Oy sign a letter of intent to build the undersea pipeline connecting Russia with Germany. PGNiG, the Norwegian Statoil, and the Danish DONG enter a consortium to build a natural gas pipeline from Norway through Denmark to Poland. Gazprom head Rem Vyakhirev threatens Europol Gas with bankruptcy if it failed to pay back the loan given by Gazprombank. Russian prime minister Mikhail Kasyanov visits Warsaw. The two finalists at the privatization tender for Rafineria Gdanska are Rotch Energy, a UK-based company owned by two Arab sheiks, and the Hungarian oil company Mol. Finally Rotch is chosen to start due diligence of the Polish refinery. PGNiG signs an agreement with the Danish DONG about the supply of 2 billion cubic meters of gas per year. Poland signs an agreement with Norway about building a pipeline for supplying 5 billion cubic meters of natural gas per year from Norway to Poland. Mol proposes a merger with PKN Orlen.

.

CHRONOLOGY: POLAND

2002 January

February June

2003 February April June November

December

2004 January February May

July September 2005 January

185

President Putin pays a two-day visit to Poland. It is presented as a landmark opening of Russia towards Poland. Russia and Poland reopened discussions on the gas contract. PKN Orlen–Mol discussions about a potential merger break down. Gazprom announces that the North European Gas Pipeline (the pipeline connecting Russia and Germany under the Baltic Sea) would be a priority project of the company. The idea of the inter-system connector pipeline is dropped. President Kwasniewski visits Moscow to discuss the visa issue for Russian citizens of Kaliningrad after Poland’s accession to the EU. Polish prime minister Leszek Miller visits Moscow. The visit is dominated by the gas contract. Poland and Russia sign the renegotiated gas contract. Russian prime minister Mikhail Kasyanov visits Warsaw. The tender for Rafineria Gdanska is called off. PGNiG and Gazprom sign an annex to their original contract of 1996 based on the new terms of the renegotiated gas contract. Mol again receives exclusive rights to negotiate a merger with PKN Orlen. This round of negotiations break down, as well. Poland and Ukraine sign an agreement to connect the Odessa-Brody crude oil pipeline with the Polish pipeline system by extending it to Plock. Norway and Poland cancel a two-year-old agreement on the construction of a gas pipeline between the two countries. The European Commission gives the North European Gas Pipeline (NEGP) preference over Yamal 2. Russian prime minister Mikhail Kasaynov signs a resolution authorizing the start of the North European Gas Pipeline project. Gazprom turns off the tap on Belarus, causing a 30–50 percent decrease of gas supply for Poland. Poland joins the EU. Polish Supreme Board of Inspection (NIK), the state body in charge of evaluating all the agreements of the Polish state, concludes after examining the renegotiated gas contract that it was so unfavorable to Poland that it put Poland’s energy security at risk. A Polish-Ukrainian joint venture Sarmatia is set up to construct the Polish extension of the Odessa-Brody pipeline. President Kwasniewski visits Moscow. Putin postpones his arrival in Poland to the ceremony commemorating the 60th anniversary of the liberation of Auschwitz, most likely to avoid a oneon-one meeting with Polish president Alexander Kwasniewski due to their differences on the Beslan crisis and Poland’s involvement in Ukraine’s Orange Revolution.

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CHRONOLOGY: POLAND

April

May

July

August

September

November

2006 February 2007 July

Under the presence of Vladimir Putin and German chancellor Gerhard Schroeder, Gazprom signs a memorandum of understanding with the German company BASF about Gazprom increasing its share in their joint venture (Wingas) to 50 percent minus one share and this company connecting the NEGP to the German land gas pipeline system. The 60th anniversary celebrations of the Yalta conference take place in Moscow. Putin awards General Wojciech Jaruzelski, the last leader of Communist Poland, who introduced martial law in 1981, with the Medal of Victory. Putin’s adviser Gleb Pawlowski visits Warsaw. Three Russian teenagers are beaten up in Warsaw. Celebrations marking the 750th anniversary of Kaliningrad take place. Moscow fails to invite any Polish leader. Three Poles (two diplomats and a journalist) are beaten up on the streets of Moscow. Alexander Kwasniewski appeals to Putin to put an end to the attacks on Poles in Moscow. Gazprom enters into an agreement with BASF and another German company, EON, to establish the North European Gas Pipeline Company to build the pipeline. President Kwasniewski and Prime Minister Kazimierz Marcinkiewicz announce that they had agreed to house one interceptor missile base for an American antimissile shield on Polish territory. Polish minister of defense Radek Sikorski announces that Poland would declassify a significant part of its Warsaw Pact archives. The Russian Ministry of Agriculture introduces a ban on Polish meat and vegetable products. Russian presidential advisor Sergei Yastrzhembsky visits Warsaw.

November December

Ministers for economy of Poland and the Baltic states write a joint letter to the EU asking for Nord Stream to be replaced by the Amber pipeline. Poland, Ukraine, Georgia, Azerbaijan, and Lithuania sign an agreement in Vilnius to employ Sarmatia in building an extension of the Odessa-Brody pipeline to Poland. The Dutch company Gasunie joins the Nord Stream consortium. Moscow lifts the ban on Polish meat and vegetable products.

2008 February

Prime Minister Donald Tusk embarks on a working visit in Moscow.

October

Chronology: Slovakia 1993 August

President Boris Yeltsin pays an official visit to Slovakia.

1997 April

Russian prime minister Viktor Chernomyrdin visits Slovakia.

1998 March September

Russian-Slovak joint venture for Russian gas import, Slovrusgas, is established. Slovak prime minister Vladimir Meciar pays an official visit to Moscow.

1999 March

July 2000 March

May

June

2001 January

The government of Mikulas Dzurinda withdraws from a contract signed during the Meciar regime to buy the S-300 rocket system as a means of settling Soviet-era debt. Russia approaches Slovakia about opening its airspace to transfer Russian troops to Kosovo. Bratislava denies the request. Slovakia adopts EU policy—though it was four years away from membership —and introduces visa requirements for Russian citizens traveling to and through Slovakia. Gazprom issues an ultimatum to Slovakia and Poland: either consent to building the inter-system connector pipeline, or Gazprom would construct the undersea pipeline between Russia and Germany. The Slovak government decides to sell 49 percent and management rights of the Slovak gas monopoly, SPP. Slovakia expresses interest in the Norway-Poland pipeline. It also entertains the idea of building a pipeline from the Czech Republic. Gazprom’s senior official responsible for export policy, Jurij Komarov, threatens Bratislava to cooperate with the inter-system connector pipeline or lose transit. Russian foreign affairs minister Igor Ivanov conducts talks with Slovak prime minister Mikulas Dzurinda in Bratislava. Ivanov says that Russia respected Slovakia’s aspiration to join NATO and EU. It is the first time Russia acknowledged Slovakia’s foreign policy aspirations since the Meciar era.

188

CHRONOLOGY: SLOVAKIA

August November

2002 January

March

June

2003 April July 2004 March May October

November

2005 February

March December

Ivanov welcomes Slovakia’s return to participate in the construction of the inter-system connector pipeline. The tender for the 49% stake of SPP is announced Slovak president Rudolf Schuster makes an official visit to Moscow. His meetings with President Putin and Prime Minister Kasyanov focus on the development of bilateral relations in the economic area, especially on Gazprom’s participation in the SPP privatization. Slovakia sells 49 percent shares and management rights of Transpetrol, the owner and operator of the Slovak section of the Friendship crude oil pipeline, to the Russian oil company Yukos. Slovakia sells a 49 percent stake and management rights of SPP to a consortium of Ruhrgas, Gaz de France, and Gazprom (each member having 16.33 percent of the shares). Slovak president Rudolf Schuster meets Russian president Vladimir Putin at the Kremlin. Their discussion focuses on the settlement of Soviet-era debt and the development of bilateral relations in the economic sphere. Slovak foreign affairs minister Eduard Kukan visits Moscow. He talked with his counterpart Igor Ivanov on strengthening cooperation between the two countries in the field of energy. Slovak prime minister Mikulas Dzurinda makes an official visit in Moscow. He meets with Russian prime minister Mikhail Kasyanov. Russian foreign minister Igor Ivanov visits Bratislava. Slovakia joins NATO. Slovakia joins the EU. During an official visit by Slovak foreign affairs minister Eduard Kukan to Moscow, his Russian counterpart Sergei Lavrov thanks him for the solidarity and assistance Slovakia gave following the Beslan school siege. Lavrov also says that the accession of Slovakia into NATO and the European Union had no negative impact on bilateral relations. Slovak economy minister Pavol Rusko expresses its ministry’s intention to be the first bidder for the 49 percent stake in Transpetrol should Yukos decide to sell it. Russia expresses its interest in Transpetrol stakes remaining in Russian hands. Putin pays an official visit to Slovakia and mentions that Tatneft is interested in buying Transpetrol. Gazprom announces it has given up on buying the 16.33 percent stake of SPP. Slovak economy minister Jirko Malcharek announces that Slovakia will not repurchase the 49 percent stake in Transpetrol but will support the sale of it directly to a Russian company. Russia names two Russian companies, Rosneft and Tatneft, as potential buyers for the Yukos stake.

CHRONOLOGY: SLOVAKIA

189

Russia’s deputy economic development minister, Andrei Sharonov, says that the government backed Russneft’s bid for the Transpetrol stake. 2006 February March

April July November 2007 May

June July August

October December

Russneft signs a contract with Yukos to buy the 49 percent stake in Transpetrol. Slovakia’s government postpones the decision on deciding about the sale of Transpetrol to the next government to come to office after the elections in June 2006. Slovak economy minister Jirko Malcharek admits in early April that the state might buy back the 49 percent stake in Transpetrol from Yukos. Gazprom expresses interest in buying Transpetrol. Slovak president Ivan Gasparovic is on a five-day official visit in Russia. Slovak prime minister Robert Fico pays a one-day official visit to Russia. The possibility of the acquisition of Transpetrol shares by Gazprom is raised at a meeting of Putin and Fico. Lawsuits start against Russneft. Russneft acknowledges that it gave up the idea to buy 49 percent of Transpetrol pipeline company in favor of Gazprom Neft. Auction on sale of the property of Yukos Finance, including the actions of Transpetrol, takes place. The winner is Promneftstroy, a company close to Rosneft. A verdict of an Amsterdam court states that the sale of foreign assets held by Yukos Finance in Moscow in August was illegal. Slovak economy minister Lubomir Jahnatek discusses the Transpetrol stake’s status with Russian deputy prime minister Sergei Naryshkin.

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Chronology: Hungary 1991 December 1992 November 1994 March May October December 1995 March May 1998 May 1999 April

2000 September

November

Hungarian prime minister of the conservative governing coalition Jozsef Antall visits Moscow. Russian president Boris Yeltsin visits Budapest. Russian prime minister Viktor Chernomyrdin visits Budapest. Hungarian parliamentary elections result in the victory of the Hungarian Socialist Party (successor party of the Hungarian Communist Party). Panrusgas, a Russian-Hungarian joint venture for Russian gas import, is established. Boris Yeltsin participates at the CSCE summit in Budapest. Hungarian prime minister Gyula Horn visits Moscow. Hungarian president Arpad Goncz participates at the 50th anniversary celebrations of the end of World War II. Hungarian parliamentary elections result in the victory of conservative parties. The new governing coalition is led by Fidesz. Hungary joins NATO. Convoy incident takes place at the Hungarian-Ukrainian border, where Hungarian border guards stopped a Russian convoy going to Serbia. An Ireland-based offshore company, Milford Holdings, buys 24.58 percent of the Hungarian petrochemical company Borsodchem. Milford acknowledges that it is owned by Gazprom. Russian MDM Bank and Vienna-based Central European Oil and Gas acknowledge that they acquired 8.15 percent and 17 percent of Borsodchem, respectively, earlier that year on behalf of Gazprom. Gazprom’s action against Borsodchem was a hostile takeover.

192

CHRONOLOGY: HUNGARY

2001 February 2002 February

May

September December

2003 May September November 2004 January March June August November

2005 February September 2006 February March June

July

Russian prime minister Mikhail Kasyanov cancels his visit to Budapest, referring to technical reasons. Hungarian foreign minister Janos Martonyi visits Moscow. Prime minister–designate of the Hungarian Socialist Party Peter Medgyessy goes to Moscow during the election campaign season and meets with former prime minister Yevgeny Primakov and Duma president Gennadiy Seleznyov. Parliamentary elections in Hungary result in the victory of the Hungarian Socialist Party. Russian president Vladimir Putin and Hungarian prime minister Peter Medgyessy conduct bilateral talks during the NATO summit in Rome. The first trip of the new Hungarian foreign minister abroad leads to Moscow. Peter Medgyessy is on an official visit in Moscow. Governments of Russia, Belarus, Ukraine, Slovakia, Hungary, and Croatia sign an agreement on connecting the Druzhba and Adria pipelines. Peter Medgyessy participates at the 300th anniversary celebrations of St. Petersburg and conducts talks with Putin. Russian prime minister Mikhail Kasyanov is on an official visit in Budapest. Peter Medgyessy and Vladimir Putin hold negotiations in St. Petersburg. Mol splits its gas operations into three companies. Gazprom announces that it would participate at the tender for Mol’s gas division. Nabucco Gas Pipeline International Ltd. is established. Gazprom submits its offer for Mol’s gas division. Mol chooses the German Eon Ruhrgas as winner of the tender for Mol Natural Gas Supply and Mol Natural Gas Storage. Gazprom and Eon start negotiations about the former getting involved in the Hungarian gas sector. Hungarian prime minister Ferenc Gyurcsany is on a working visit in Moscow. Russian prime minister Mikhail Fradkov is on a working visit in Budapest. Putin is on an official visit in Budapest. Eon becomes owner of 100 percent of Mol Natural Gas Supply and Mol Natural Gas Storage. Putin and Gyurcsany conduct a conversation over the phone. Mol and Gazprom sign an agreement about creating a joint company to study the feasibility of extending the Blue Stream Pipeline and building a gas storage facility with a capacity of 10 billion cubic meters in Hungary. Putin and Gyurcsany conduct a conversation over the phone.

CHRONOLOGY: HUNGARY

September December

2007 March

May

June

July September November December 2008 January

February

193

Eon and Gazprom reaches framework agreement about Gazprom receiving 50 percent minus one vote of both Mol Natural Gas Supply and Mol Natural Gas Storage. Ferenc Gyurcsany holds bilateral meetings with President Putin in Sochi. Gazprom signs a memorandum of understanding with the government of Serbia and the Serbian Srbijagas about building part of the Blue Stream pipeline in Serbia. In an interview, Gyurcsany calls Nabucco a ‘‘dream’’ and Blue Stream a ‘‘reality.’’ President Putin receives Gyurcsany at his residence in Novo-Ogaryovo. Former Gazprom manager Megdet Rahimkulov starts to buy up Mol shares. President Putin visits Austria. The two countries sign agreements on creating major storage and hub for gas distribution at the Austrian Baumgarten. Gazprom and Italian ENI sign a memorandum of understanding about the construction of the South Stream pipeline. Austrian state oil company OMV announces increase of its shares in Mol from 10 percent to 18.6 percent by acquiring a stake from Megdet Rahimkulov. Gazprom withdraws from the deal with Eon, allegedly wanting at least a 50 percent share in the two former Mol natural gas companies. Gyurcsany participates at the Finno-Ugric festival in Russia and holds bilateral talks with Putin. Hungary commits to the Nabucco project at a conference held in Budapest. OMV announces that it holds 20.2 percent of Mol’s shares. Russian president Vladimir Putin and Italian prime minister Romano Prodi sign an agreement on building the South Stream pipeline. The first Hungarian-Russian intergovernmental consultation takes place in Budapest. Bulgaria commits to South Stream. Gazprom acquires the Serbian oil and gas company NIS Serbia and signs an agreement about extending South Stream and creating a hub for gas distribution in Serbia. Hungarian prime minister Ferenc Gyurcsany and Russian president Vladimir Putin sign an intergovernmental agreement on extending the South Stream pipeline to Hungary.

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Notes CHAPTER 1 1. Antony J. Blinken, Ally Versus Ally: America, Europe, and the Siberian Pipeline Crisis (Westport, CT: Praeger, 1987), 36. 2. Ibid., 3. 3. Ibid. 4. ‘‘ ‘Low-carbon Economy’ Proposed for Europe,’’ Associated Press, January 10, 2007. Available at http://www.msnbc.msn.com/id/16560106/ (accessed March 3, 2008). 5. ‘‘EU-Russia Relations,’’ European Commission/European Union in the World/External Relations, http://ec.europa.eu/external_relations/russia/intro/index.htm (accessed July 8, 2008). 6. http://ec.europa.eu/energy/russia/reference_texts/doc/2006_10_trade_en.pdf (accessed July 8, 2008). 7. http://ec.europa.eu/energy/gas/publications/doc/OME_executive_summary.pdf (accessed July 8, 2008). 8. Eni WOGR 9. Eurostat 10. Vladimir Socor, ‘‘Controversial Aspects of Russian-Ukraine Gas Agreement Disclosed in Kyiv,’’ Eurasia Daily Monitor, vol. 3, issue 4 (January 6, 2006), http://www.jamestown.org /publications_details.php?volume_id=414&issue_id=3575&article_id=2370630 (accessed July 8, 2008). 11. The pipeline names of Friendship and Druzhba are used interchangeably throughout the text. 12. Slovakia was part of the Warsaw Pact as part of Czechoslovakia.

CHAPTER 2 1. Francis Fukuyama, ‘‘The End of History?’’ The National Interest 16 (1989): 5. 2. James E. Dougherty and Robert L. Pfaltzgraff: Contending Theories of International Relations: A Comprehensive Survey, 4th ed. (New York: Addison-Wesley, 1997), 3. 3. Fukuyama, ‘‘The End of History?’’ 18. 4. ‘‘In Clinton’s Words: ‘Building Lines of Partnership and Bridges to the Future,’ ’’ New York Times, July 10, 1997.

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5. Kenneth N. Waltz, ‘‘Structural Realism after the Cold War,’’ International Security 25, no. 1 (Summer 2000): 5. 6. John J. Mearsheimer, ‘‘Realism, the Real World, and the Academy,’’ in Realism and Institutionalism in International Studies, ed. Michael Brecher and Frank P. Harvey (Ann Arbor: University of Michigan Press, 2002), 23–33. 7. Joseph S. Nye Jr., ‘‘East Asian Security: The Case for Deep Engagement,’’ Foreign Affairs 74, no. 4 (1995): 90. 8. Representatives of the classical realist literature are: Hans J. Morgenthau, Scientific Man vs. Power Politics (Chicago: University of Chicago Press, 1946) and Politics among Nations: The Struggle for Power and Peace (New York: Knopf, 1948); Henry A. Kissinger, A World Restored: Castlereagh, Metternich and the Restoration of Peace, 1812–1822 (Boston: Houghton, Mifflin, 1957); Edward Hallett Carr, The Twenty Years’ Crisis (New York: Harper & Row, 1946); Raymond Aron, Peace and War: A Theory of International Relations (New York: Praeger, 1966); Reinhold Niebuhr, Christian Realism and Political Problems (New York: Charles Scribner’s Sons, 1953); George F. Kennan, ‘‘The Sources of Soviet Conduct,’’ Foreign Affairs (July 1947), Thucydides, History of the Peloponnesian War (Oxford: Clarendon Press, 1895); Niccolo Machiavelli, The Art of War (Indianapolis: Bobbs-Merrill, 1965); and Thomas Hobbes, Leviathan (Cambridge: Cambridge University Press, 1996). 9. Hans J. Morgenthau: Politics among Nations: The Struggle for Power and Peace, 6th ed. (New York: Knopf, 1985), 36. 10. Kenneth N. Waltz writes, ‘‘in anarchy, security is the highest end. Only if survival is assured can states safely seek such other goals as tranquility, profit, and power.’’ Waltz, Theory of International Politics (Reading, MA: Addison-Wesley, 1979), 126. Raymond Aron contends that ‘‘politics, insofar as it concerns relations among states, seems to signify—in both ideal and objective terms—simply the survival of states confronting the potential threat created by the existence of other states.’’ Aron, International Relations: A Theory of Peace and War (Garden City, NJ: Doubleday, 1973). Robert Gilpin asserts, ‘‘all these noble goals [truth, beauty, justice] will be lost unless one makes provision for one’s security in the power struggle among groups.’’ Gilpin, ‘‘The Richness of the Tradition of Political Realism,’’ in Neorealism and Its Critics, ed. Robert O. Keohane (New York: Columbia University Press, 1986), 05. John J. Mearsheimer writes that the international system is a ‘‘brutal arena where states look for opportunities to take advantage of each other . . . International relations is not a constant state of war, but is a state of relentless security competition.’’ Mearsheimer, ‘‘The False Promise of International Institutions,’’ International Security 19., no. 3 (Winter 1994–95): 10. 11. Dougherty and Pfaltzgraff, Contending Theories of International Relations, 68. 12. Morgenthau, Politics among Nations, 6th ed.,, 43. 13. Morgenthau, Scientific Man vs. Power Politics, 193. 14. Waltz: Theory of International Politics, 192. 15. Ibid., 131. 16. Robert G. Gilpin, War and Change in World Politics (New York: Cambridge University Press, 1981), 33. 17. Gideon Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ World Politics 51, no. 1 (October 1998): 155. 18. Charles P. Kindleberger, Power and Money: The Politics of International Economics and the Economics of International Politics (New York: Basic Books, 1970), 56. 19. Klaus Knorr, The Power of Nations: The Political Economy of International Relations (New York: Basic Books, 1975), 3–10.

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20. Dougherty and Pfaltzgraff, Contending Theories of International Relations, 28. 21. Hans J. Morgenthau, In Defense of the National Interest: A Critical Examination of American Foreign Policy (New York: Knopf, 1951). 22. Christer Pursiainen, Russian Foreign Policy and International Relations Theory (Aldershot, England, and Burlington, VT: Ashgate Publishing Company, 2000), p. 59. The quotation within the quotation is from A. A. Gromyko et al., eds., Diplomaticheskiy clovar. Tom III, (Moskva: Nauka, 1986), 457. 23. Strategiia dlia Rossii, Nezavisimaia Gazeta, August 19, 1992. 24. Morgenthau, Politics among Nations, 6th ed., 64. 25. Even though realists focused overwhelmingly on military power, they were far from being ignorant on economic power. Already, Thucydides talked about the interaction of international economics and politics in the History of the Peloponnesian War, as well as the political use of economic leverage and conflict over energy resources. Alexander Hamilton claimed that national power rests upon industrialization and economic self-sufficiency. E. H. Carr talked to a great extent about economic power. ‘‘The essential argument of most realists with respect to the nature and functioning of the international economy, I would venture to say, is that the international political system provides the necessary framework for economic activities. The international economy is not regarded as an autonomous sphere, as liberals argue, nor is it in itself the driving force behind politics, as the Marxists would have us believe.’’ In addition, ‘‘Economic forces . . . always work in the context of the political struggle among groups and nations. When the distribution of power and international political relations change, corresponding changes may be expected to take place in global economic relations.’’ Gilpin, ‘‘The Richness of the Tradition of Political Realism,’’ International Organization 38, no. 2. (Spring 1984): 293–94, 295. 26. Samuel P. Huntington, ‘‘Why International Primacy Matters,’’ International Security 17., no. 4 (Spring 1993): 71. 27. Ibid., 72. 28. Ibid., 72–73. 29. Ibid., 81. 30. In addition to Waltz, representatives of the neorealist literature are: Barry Buzan, ‘‘Peace, Power, and Security: Contending Concepts in the Study of International Relations,’’ Journal of Peace Research 21, no. 2 (1984): 109–25; Barry Buzan, Charles Jones, and Richard Little, The Logic of Anarchy: Neorealism to Structural Realism (New York: Columbia University Press, 1993); Robert G. Gilpin, War and Change in World Politics (New York: Cambridge University Press, 1981), 9–11; Joseph M. Grieco, ‘‘Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism,’’ International Organization 42, no. 3 (Summer 1988): 485–507; John J. Mearsheimer, The Tragedy of Great Power Politics (New York: W. W. Norton, 2001); Jack Snyder, Myths of Empire: Domestic Politics and International Ambition (Ithaca, NY: Cornell University Press, 1991); Stephen Walt, ‘‘Keeping the World ‘Off-Balance’: Self-Restraint and U.S. Foreign Policy,’’ in The Future of the Balance of Power, ed. John G. Ikenberry (New York: Cornell University Press, 2002); and ‘‘The Progressive Power of Realism,’’ American Political Science Review, 91, no. 4 (December 1997): 931–35. For analyses, see Robert O. Keohane, ed., Neorealism and its Critics (New York: Columbia University Press, 1986); and Barry Buzan, Charles Jones, and Richard Little: The Logic of Anarchy: Neorealism to Structural Realism (New York: Columbia University Press, 1993).

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31. Jeffrey W. Taliaferro, ‘‘Security Under Anarchy: Defensive Realism Reconsidered,’’ working paper, International Studies Association, 40th Annual Convention, February 16– 20, 1999, http://www.ciaonet.org/isa/taj01/, 3. 32. Dougherty and Pfaltzgraff, Contending Theories of International Relations, 86. 33. Waltz, Theory of International Politics, 71–72. 34. Stephen G. Brooks, ‘‘Dueling Realisms,’’ International Organization 51, no. 3 (Summer 1997): 453. 35. Kenneth Waltz, ‘‘The Spread of Nuclear Weapons: More May Better,’’ Adelphi Papers, no. 171 (London: International Institute for Strategic Studies, 1981). 36. Kenneth Waltz, ‘‘The Emerging Structure of International Politics,’’ International Security 18, no. 2 (Autumn 1993): 59. 37. Ibid. 38. Ibid., 50. 39. Ibid. 40. Ibid. 41. There are competing views in the literature about terms and the place of offensive and defensive realisms within the realist school. The terms offensive/aggressive realism and defensive realism were introduced by Jack Snyder in Myths of Empire: Domestic Politics and International Ambition, 11–12. There were later further attempts to recategorize the literature. Stephen Brooks calls defensive realism ‘‘post-classical realism’’ (see more about this below). Andrew Kydd introduces the term ‘‘motivational realism’’ for his and Randall Schweller’s work and compares that to offensive and defensive realisms. Kydd, ‘‘Sheep in Sheep’s Clothing: Why Security Seekers Do Not Fight Each Other,’’ Security Studies 7, no. 1 (Autumn 1997): 114–55. Furthermore, disagreement prevails about the place of offensive and defensive realist schools within realist theory. I deal with them in the neorealist section because they share the basic tenet of neorealist paradigm; that is, they start their analysis at the systemic level. 42. Mearsheimer, The Tragedy of Great Power Politics, 21. 43. Representatives of the offensive realist literature are: John J. Mearsheimer, ‘‘Back to the Future: Instability in Europe after the Cold War,’’ International Security 15, no. 1 (Summer 1990): 5–56., Mearsheimer, The Tragedy of Great Power Politics; and Randall L. Schweller, ‘‘Neorealism’s Status Quo Bias: What Security Dilemma,’’ Security Studies 5, no. 3 (Spring 1996): 90–121. 44. Stephen G. Brooks claims that offensive realists implicitly adhere to Morgenthau. While Morgenthau emphasizes aggression as human nature, offensive realists emphasize wariness and anxiety. According to Brooks, it is fear that drives states in the offensive realist theory to aspire for survival and security all the time. Offensive realists ‘‘may adopt a worst-case/possibilistic perspective precisely because they implicitly accept Morgenthau’s argument that actors are inherently aggressive.’’ According to Brooks, offensive realists rely as much on human nature as Morgenthau does, only they use a different aspect: fear, instead of aggression. Brooks, ‘‘Dueling Realisms,’’ 449–50. 45. Kenneth N. Waltz, ‘‘The Origins of War in Neorealist Theory,’’ in The Origin and Prevention of Major Wars, ed. Robert I. Rotberg and Theodore K. Rabb (New York: Cambridge University Press, 1989), 40. 46. Gideon Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ World Politics 51, no. 1 (October 1998): 149.

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47. John J. Mearsheimer, ‘‘Power and Fear in Great Power Politics,’’ in One Hundred Year Commemoration to the Life of Hans Morgenthau (1904–2004), ed. G. O. Mazur (New York: Semenenko Foundation, 2004), 184–96. 48. Adam Smith, The Wealth of Nations, quoted in Mearsheimer, ‘‘Power and Fear in Great Power Politics,’’ 192. 49. Brooks, ‘‘Dueling Realisms,’’ 446. Brooks uses the term ‘‘neorealism’’ for ‘‘offensive realism’’ and ‘‘postclassical realism’’ for ‘‘defensive realism.’’ 50. Kenneth N. Waltz, Man, the State, and War (New York: Columbia University Press, 1959), 160. 51. Mearsheimer, ‘‘The False Promise of International Institutions,’’ 11. 52. John J. Mearsheimer, ‘‘Disorder Restored,’’ in Rethinking America’s Security: Beyond Cold War to New World Order, ed. Graham Allison and Gregory F. Treverton (New York: W. W. Norton), 222. 53. Mearsheimer: The Tragedy of Great Power Politics, 190. 54. Ibid. 55. Ibid. 56. Ibid., 378. 57. Ibid., 50. 58. Representatives of defensive realist literature are: Robert Jervis, ‘‘Cooperation under the Security Dilemma,’’ World Politics, 30, no. 2 (January 1978): 167–214; Stephen M. Walt, The Origins of Alliances (Ithaca, NY: Cornell University Press, 1987)and Revolution and War (Ithaca, NY: Cornell University Press, 1996); Jack Snyder, Myths of Empire; Stephen Van Evera, ‘‘Offense, Defense, and the Causes of War,’’ International Security 22, no. 4 (Spring 1998): 5–43; Barry Posen and Charles L. Glaser, ‘‘Realists as Optimists: Cooperation as SelfHelp,’’ International Security 19, no. 3 (Winter 1994–95): 50–90; Barry R. Posen, ‘‘The Security Dilemma and Ethnic Conflict,’’ Survival 35, no. 1 (Spring 1993): 27–47; and Thomas J. Christensen and Jack Snyder, ‘‘Chain Gangs and Passed Bucks: Predicting Alliance Patterns in Multipolarity,’’ International Organization 44, no. 3 (Spring 1990): 137–68. 59. Gideon Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ World Politics 51, no. 1 (October 1998): 149–50. 60. Brooks, ‘‘Dueling Realisms,’’ 446. 61. Ibid., 446–47. 62. Ibid., 456. 63. Ibid., 458–59. 64. Gilpin, War and Change in World Politics, 22. 65. Brooks, ‘‘Dueling Realisms,’’ 462. 66. Ibid., 462–63. 67. Snyder, Myths of Empire, 212. 68. Ibid., 215. ‘‘An exception is Herrmann, who does this only for the Brezhnev period.’’ 215n9. 69. Ibid., 252. 70. Alexander Gerschenkron: Economic Backwardness in Historical Perspective (Cambrdige, MA: Belknap Press, 1962) 71. Snyder, Myths of Empire, 252–53. 72. Ibid., 254. 73. Representatives of neoclassical literature include: Randall L. Schweller, Deadly Imbalances: Tripolarity and Hitler’s Strategy of World Conquest (New York: Columbia University

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Press, 1998); Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role (Princeton, NJ: Princeton University Press, 1998); Thomas J. Christensen, Useful Adversaries: Grand Strategy, Domestic Mobilization, and Sino-American Conflict, 1947–1958 (Princeton, NJ: Pinceton University Press, 1996); William C. Wohlforth, The Elusive Balance: Power and Perceptions during the Cold War (Ithaca, NY: Cornell University Press, 1993); and, to a certain extent, Aaron L. Friedberg, The Weary Titan: Britain and the Experience of Relative Decline, 1895–1905 (Princeton, NJ: Princeton University Press, 1988). 74. Fareed Zakaria, ‘‘Realism and Domestic Politics: A Review Essay,’’ International Security 17., no. 1 (Summer 1992): 197. 75. Wohlforth, The Elusive Balance, 4. 76. Aaron L. Friedberg, The Weary Titan: Britain and the Experience of Relative Decline, 1895–1905 (Princeton, NJ: Princeton University Press, 1988), 8. 77. Wohlforth, The Elusive Balance, 294. 78. Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ 160. 79. Cited in Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ fn16. Originally in Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role (Princeton, NJ: Princeton University Press, 1998), 9. 80. Thomas J. Christensen, Useful Adversaries: Grand Strategy, Domestic Mobilization, and Sino-American Conflict, 1947–1958 (Princeton, NJ: Pinceton University Press, 1996), p. 26. 81. Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ 146. 82. Ibid., 152. ‘‘Influence’’ is a key concept in the realist school in general. Influence is ‘‘the extent to which capabilities translate into the ability to shape the behavior of others to produce a desired outcome’’ (Dougherty and Pfaltzgraff, Contending Theories of International Relations, 70). Charles P. Kindleberger defines influence as „the capacity to affect the decisions of others.’’ (Kindleberger: Power and Money, 56.) 83. Cited in Rose, ‘‘Neoclassical Realism and Theories of Foreign Policy,’’ fn16. Originally in Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role. 84. William C. Wohlforth, ‘‘The Russian-Soviet Empire: A Test of Neorealism,’’ Review of International Studies 27 (2001), 213. 85. Ibid., 214. 86. Ibid., 216–20. About the role of Russian backwardness in the country’s role in great power politics, see Valerie Bunce, ‘‘Domestic Reform and International Change: The Gorbachev Reforms in Historical Perspective,’’ International Organization 47, no. 1 (Winter 1993): 107–38. ‘‘Russia’s pattern of adaptation to relative backwardness chronically exacerbated its relations with the more advanced states of Europe. This was not because Russia was an exceptionally aggressive state compared to the other Great Powers. It was because the distinctive nature of Russia’s power, institutions, and ideologies, arising from the pattern of late development, created a situation in which Russia and the West seemed inherently threatening to each other.’’ Jack Snyder, ‘‘Russian Backwardness and the Future of Europe,’’ Daedalus 123 (Spring 1994): 180. For discussions on how to exploit ‘‘the advantages of backwardness,’’ see economic historian Alexander Gerschenkron’s Economic Backwardness in Historical Perspective. 87. Wohlforth, ‘‘The Russian-Soviet Empire: A Test of Neorealism,’’ 228. 88. Ibid., 229.

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CHAPTER 3 1. An important note on methodology: The data for 1992–96 and 2001–4 come from the World Bank, which does not contain information for 1997–2000. The missing data was collected from the OECD, which in turn used a data from the Ministry of Economic Development and Trade, Ministry of Finance, Economic Expert Group, and Goskomstat. While the OECD published no data points for the years before 1997, it does provide corresponding figures for 2001–2. For 2001, it stated the points at 17.8 percent compared to the World Bank’s 17.6 percent. For 2002, it stated 17.2 percent compared to the World Bank’s 17.1 percent. This suggests that the OECD uses almost the same methods as the World Bank, and that this data can be used. Moreover, data for 2005–7 were obtained from a specialist website, http:// www.vedi.ru. There is reason to believe that figures from the latter source use a methodology that is likely to result in somewhat higher estimates than that of the World Bank. 2. Fiona Hill, Energy Empire: Oil, Gas and Russia’s Revival (London: The Foreign Policy Centre, September 2004). 3. Goohoon Kwon, The Budgetary Impact of Oil Prices in Russia (2003); available from http://www.imf.org./external/country/rus/rr/2003/pdf/080103.pdf, 8 (accessed September 30, 2006). 4. All price and production data are taken from BP Statistical Review of World Energy 2007; available from http://www.bp.com/ (accessed February 27, 2008). 5. Kwon, The Budgetary Impact of Oil Prices in Russia, 2.

CHAPTER 4 1. Alexander Duleba, From Domination to Partnership: The Perspectives of Russian– Central–East European Relations (Final Report to the NATO Research Fellowship Program, 1996–98), 25. 2. Zoltan Sz. Biro, ‘‘Oroszorszag es a kelet-kozep-europai terseg,’’ in Kelet-Kozep-Europa az ezredfordulon, manuscript version (Budapest: Hungarian Atlantic Council, 1999), 89–139. 3. The Council, which included 36 influential politicians, experts, and businessmen, had been established that summer, and its soberly worded reports have influenced the Russian political elite ever since. This was its first document. When NATO’s secretary general paid a visit to Moscow in the spring of 1996, he met with council representatives to discuss NATO-Russia relations. 4. ‘‘Strategiia dlia Rossii,’’ Nezavisimaia Gazeta, August 19, 1992 5. Ibid. 6. ‘‘Principi vnesnei politiki Rossiiskoi Federatsii,’’ in Vneshniaia politika i bezopasnost sovremennoi Rossii (Moscow, 1999), 33. 7. Biro, ‘‘Oroszorszag es a kelet-kozep-europai terseg.’’ 8. Duleba, From Domination to Partnership, 15–16. 9. Yutaka Akino and Adam Smith Albion, Russia–Ukraine–Visegrad Four: The Kozyrev Doctrine in Action (New York: Institute for East-West Studies New York/European Studies Center Prague, 1993). 10. Yuliy Kvitsinsky was the deputy foreign minister for foreign affairs of the Soviet Union between 1990 and 1991. He headed the delegations that negotiated treaties with former satellites.

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11. Laszlo Poti, From Subordination to Partnership: Hungarian-Russian Relations, 1990– 1997, Foreign Policy Papers, no. 7 (Budapest: Hungarian Institute of International Affairs, 1997). 12. ‘‘A jovo fontosabb vagy a mult?’’ Nepszabadsag, December 6, 2001 13. Poti, From Subordination to Partnership. 14. Nepszabadsag, November 12, 1992 15. Duleba, From Domination to Partnership, 31. 16. Ibid., 32. 17. Irina Kobrinskaia, ‘‘Rossiia—Tsentralnaia Evropa—NATO,’’ in Rossiia: novye parametry bezopastnosti (Moscow: Carnegie Moscow Center, 1995), 8–40. 18. Andras Deak, ‘‘Kelet-Kozep-Europa a ’90-es evek orosz kulpolitika´ja´ban,’’ Tarsadalmi onsimeret es nemzeti onazonossag Kozep-Europaban (Budapest: Teleki Alapitvany, 2002). 19. Diplomaticheski Vestnik, March 1994, 18–20. 20. ‘‘Strategiia dlia Rossii 2,’’ Nezavisimaia Gazeta, May 27, 1994 21. ‘‘Rossiia i NATO’’ in Strategiia dlia Rossii: 10 let SVOP (Moscow: SVOP, 2002), 125–35. 22. Biro, ‘‘Oroszorszag es a kelet-kozep-europai terseg.’’ 23. Andrei Zagorsky, ‘‘Russia and Europe,’’ International Affairs (Moscow), no. 1 (1993), 50–51. 24. Alexander Bykov, ‘‘At the Cross-Roads of World Development,’’International Affairs (Moscow), March 1993, 87–96. 25. Author’s interview with a senior official of the Miller government, Warsaw, March 2003. 26. Information about the gas contract comes from newswires, newspaper articles, interviews, and governmental press releases. 27. ‘‘Companies and Industries,’’ IntelliNews—Poland This Week, January 27, 2003, available from ISI Emerging Markets (accessed July 10, 2003). 28. ‘‘Poland Wants Russia to Free 40% of Yamal Gas Contract from ‘‘take-or-pay’ Rule,’’ IntelliNews—Poland Today, July 3, 2002. Accessed July 10, 2003. Available from ISI Emerging Markets. 29. Author’s phone interview with a former high ranking official of the Buzek and Kaczynski governments, March 2008 30. Ewa Paszyc, ‘‘The Russian Energy Policy,’’ chap. 2 in The Resource Wealth Burden—Oil and Gas Sectors in the Former USSR (Warsaw: Centre for Eastern Studies, December 2003), 22. 31. Originally reported by Rzeczpospolita, April 9, 2002. Cited in ‘‘Agreement Close on Eve of Gazprom Chairman’s Visit,’’ by PNB, April 9, 2002 (accessed October 22, 2002), available from ISI Emerging Markets. At the time, the average transit fee for natural gas transfer in Western Europe was $2.5 for 1,000 cubic meters and 100 km, but Gazprom paid $1.35 to Europol Gas. ‘‘State’s Budget Might Lose USD 1.4 bln by 2019 Due to EuRoPol Gaz’s Gas Transit Fees,’’ Internet Securities Businesswire, March 19, 2003 and ‘‘Russia Agrees to Cut Gas Deliveries to Poland by 35%,’’ Internet Securities Businesswire, January 24, 2003 (accessed October 24, 2002), available from ISI Emerging Markets. 32. The first Yamal pipe was officially opened in September 1999 and started operating in December 1999 with 20 billion cubic meters of capacity instead of 32 billion as planned. 33. Delivering 1,000 cubic meters of Norwegian gas to the German market costs $2.75, whereas 1,000 cubic meters Russian gas through the Blue Stream pipeline costs $3.62

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compared to $2.23 when the gas is delivered through Yamal. The cost of Middle Eastern gas varies from $2.72 to $3.31. Data from the Hungarian Energy Office. 34. In 1999, 127.6 billion cubic meters of gas, about 30 percent of Europe’s gas supply, was exported to Western Europe through the Ukrainian system. ‘‘Ukraine: Poland Snubs Alternate Russian Pipeline Scheme,’’ EIGOMI, July 27, 2000 (accessed October 27, 2002), available from ISI Emerging Markets. 35. ‘‘Gazprom Gas Company,’’ MosNews.Com, available from http://www.mosnews.com /mn-files/gazprom.shtml (accessed August 2, 2005). 36. IEA World Energy Outlook 2002. 37. SPP’s value was calculated based on the price the Slovak government received for a 49 percent stake offered for privatization in early 2002 and the estimated price the government intended to receive. 38. Slavia Capital, January 10, 1999; available from ISI Emerging Markets (accessed October 27, 2002). 39. Karel Hirman, Faktor ropy a plynu v suskej domacej a zahranicnej politike (Bratislava: Research Center of the Slovak Foreign Policy Association, 1998). 40. ‘‘Mol: The TVK Acquisition,’’ INSEAD Case Study, Draft Version (Fontainebleau: Insead, 2004), 4. 41. ‘‘Hungary—Energy Mix Fact Sheet,’’ European Commission/Energy. Available at http://ec.europa.eu/energy/energy_policy/doc/factsheets/mix/mix_hu_en.pdf (accessed July 8, 2008). 42. ‘‘Eni World Oil and Gas Review,’’ http://www.eni.it/wogr_2006/index.html (accessed July 8, 2008). 43. ‘‘Energy Policies of IEA Countries,’’ Hungary 1999 Review, International Energy Agency, 54; available at http://www.iea.org/textbase/nppdf/free/1990/hungary99.pdf (accessed March 10, 2008). 44. ‘‘Egy kis cegtortenet,’’ Figyelo, July 20, 1995 45. Cited in ‘‘Elkeszult a Volta gazvezetek tanulmanyterve,’’ Vilaggazdasag, September 25, 2006; available from ISI Emerging Markets (accessed March 10, 2008). 46. Vilaggazdasag, April 9, 1999; Available from ISI Emerging Markets (accessed October 28, 2002). 47. Author’s interview with a former senior official of Panrusgas, Budapest, September 2005. 48. Andras Deak, ‘‘EU Oroszorszag-politika es a visegradiak,’’ manuscript version, 2005, p. 9. 49. ‘‘Strategiai problema ertekes vezetekek,’’ Figyelo, November 9, 1995 50. ‘‘Olcsobb gaz a tranzitvezetekrol? A Panrusgaz csak a ‘folyosoban’ levo nagyfogyasztokat celozza meg,’’ Nepszabadsag, November 13, 1996; available from ISI Emerging Markets (accessed March 10, 2008). 51. ‘‘A Gazprom itthoni erdekei,’’ Nepszava, December 16, 1996; available from ISI Emerging Markets (accessed March 10, 2008). 52. ‘‘Elkeszult a Volta gazvezetek tanulmanyterve.’’ 53. Paul Goble, ‘‘Russia: Analysis from Washington—Primakov’s New/Old Line,’’ RFE/ RL, August 12, 1996. 54. See Samuel P. Huntington, ‘‘The Lonely Superpower,’’ Foreign Affairs (March–April 1999). 55. Goble, ‘‘Russia: Analysis from Washington.’’

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56. Cited by Thomas L. Friedman, ‘‘Foreign Affairs; Russia’s NATO Fax,’’ New York Times, July 24, 1996. 57. Dmitrii Trenin, ‘‘Baltiiskaia kontseptsia Rossii,’’ Nezavisimaya Gazeta, March 11, 1997. 58. ‘‘Tsentralnaia i vostochnaia Evropa i interesi Rossii,’’ in Strategiia dlia Rossii: 10 let SVOP (Moscow: SVOP, 2002), 154–71. 59. Duleba, From Domination to Partnership, 50. 60. ‘‘Gazprom Will not Halt Gas Supplies,’’ Polish News Bulletin, January 20, 1998; available from ISI Emerging Markets (accessed October 22, 2002). 61. Duleba, From Domination to Partnership, 50. 62. ‘‘Interview with Russia’s Foreign Minister,’’ Polityka, March 16, 1996, PNB, March 14, 1996; available at ISI Emerging Markets (accessed March 12, 2008). 63. ‘‘Why Are Russians Doing a Disservice to Oleksy?’’ Rzeczpospolita, January 9, 1996, PNB, January 9, 1996; available at ISI Emerging Markets (accessed March 12, 2008). 64. ‘‘Yeltsin to Visit Poland,’’ PNB, June 30, 1998; available at ISI Emerging Markets 65. Trend, April 22, 1998; available from ISI Emerging Markets (accessed October 25, 2002). 66. Duleba, From Domination to Partnership, 86. 67. Trend, May 5, 1998; available from ISI Emerging Markets (accessed October 25, 2002). 68. Trend, July 22, 1998; available from ISI Emerging Markets (accessed October 25, 2002). 69. Vladimir Shlapentokh: ‘‘Monica Highlights Russian Culture’’; available from http:// www.msu.edu/~shlapent/monica.htm (accessed August 5, 2005). It should be noted that April 1999 was the time of NATO bombing of Serbia, the lowest point in Russian-Western relations for a long time. 70. Originally reported by Russian NTV, January 22, 2000. Cited in ‘‘Polish Embassy in Russia, Russian in Poland on Diplomatic Expulsions,’’ BBC Monitoring, January 22, 2000. 71. Originially reported by ITAR-Tass News Agency, January 21, 2000. Cited in ‘‘Russians Have Proof Expelled Polish Diplomats Were Spies,’’ BBC Monitoring, January 21, 2000. 72. ‘‘Tinker, Tailor, Diplomat, Spy,’’ Warsaw Voice, January 30, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 73. ‘‘Russian Spy Remarks Raise Storm,’’ Warsaw Voice, April 9, 2000; vailable from ISI Emerging Markets (accessed November 2, 2002). 74. Originally reported by PAP News Agency, February 24, 2000. Cited in ‘‘Polish Ambassador Summoned over Russian Consulate Incident,’’ BBC Monitoring, February 24, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 75. Originally reported by PAP News Agency, February 28, 2000. Cited in ‘‘Poland Concerned over Incidents at Polish Embassy in Moscow,’’ BBC Monitoring, February 29, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 76. Originally reported by PAP News Agency, February 25, 2000. Cited in ‘‘Russian Foreign Minister Cancels Polish Visit,’’ BBC Monitoring, February 25, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 77. Originally reported by PAP News Agency, March 17, 2000. Cited in ‘‘Poland: Recalled Russian Ambassador Returns to Warsaw,’’ BBC Monitoring, March 17, 2000; available from ISI Emerging Markets (accessed November 2, 2002).

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78. Originally reported by Wprost, March 19, 2000. Cited in ‘‘Polish-Russian Relations: Is Poland Doomed to a Cold War with Russia?’’ PNB-Weekend Supplement, March 30, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 79. ‘‘Opinion on Polish-Russian Relations,’’ PNB-Weekend Supplement, April 13, 2000; available from ISI Emerging Markets (accessed November 2, 2002). 80. ‘‘Orosz-feherorosz segelyszallitmany: embargos anyagok, katonai jarmuvek,’’ Nepszava, April 12, 1999; available from ISI Emerging Markets. 81. ‘‘Sojgu vadjai,’’ Magyar Hirlap, April 12, 1999. Accessed October 27, 2002. Available from ISI Emerging Markets. 82. ‘‘Zahonynal elakadt az orosz segely,’’ Nepszabadsag, April 12, 1999; available from ISI Emerging Markets (accessed October 27, 2002). 83. ‘‘Orosz-feherorosz segelyszallitmany.’’ 84. ‘‘Zahonyi viharocska,’’ Vilaggazdasag, April 13, 1999; available from ISI Emerging Markets (accessed October 27, 2002). 85. ‘‘Hazarendeltek az orosz kovetet,’’ Nepszabadsag, April 21, 1999; available from ISI Emerging Markets (accessed October 27, 2002). It should be noted that Orban, the prime minister of Hungary from 1998 to 2002, is of no relation to the author. 86. ‘‘Egyezseg az orosz atrepulesrol,’’ Nepszabadsag, July 6, 1999; available from ISI Emerging Markets (accessed October 27, 2002). 87. Globe and Mail, October 29, 1999 88. ‘‘Moszkva komolyan aggodik-Orban kijelentesenek ujabb visszhangja,’’ Magyar Hirlap, November 3, 1999. Accessed October 27, 2002. Available from ISI Emerging Markets (accessed October 27, 2002). 89. Statement of the Hungarian Ministry of Foreign Affairs regarding worries of the Russian Ministry of Foreign Affairs about an eventual deployment of nuclear weapons in Hungary, November 4, 1999; available from http://www.kulugyminiszterium.hu (accessed July 23, 2004) 90. Originally in The Foreign Policy Priorities of the Slovak Republic from 2000 to 2003. A Medium-Term Concept (Bratislava: Program Declaration of the Government of the Slovak Republic, 1998). Cited by Alexander Duleba, ‘‘Slovakia’s Policy towards Russia, the Ukraine and Belarus,’’ in Eastern Policy of the Enlarged European Union: A Visegrad Perspective, ed. Katarzyna Pelczynska-Nalecz, Alexander Duleba, Laszlo Poti, and Vladimir Votapek (Bratislava: Slovak Foreign Policy Association, 2003), 154. 91. Michael Shafir, ‘‘Yugoslavia: The Kosovo Crisis and the NATO Hopefuls,’’ RFE/RL, March 30, 1999 92. Duleba, ‘‘Slovakia’s Policy towards Russia, the Ukraine and Belarus,’’ 155. 93. Sme, July 7, 1997; available from ISI Emerging Markets (accessed October 20, 2002). 94. Trend, March 17, 1999; available from ISI Emerging Markets (accessed October 20, 2002). 95. Nepszava, December 22, 1998; available from ISI Emerging Markets (accessed November 11, 2002). 96. Magyar Hirlap, February 19, 1999; available from ISI Emerging Markets (accessed November 11, 2002). 97. Vilaggazdasag, April 9, 1999; available from ISI Emerging Markets (accessed November 11, 2002). 98. Author’s interview with a former senior official of Panrusgas, Budapest, September 2005

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99. Originally reported in Gazeta Wyborcza, May 29, 2001. Cited in ‘‘In the Steely Embrace of the Pipeline,’’ PNB, May 31, 2001; available from ISI Emerging Markets (accessed October 22, 2002). 100. PNB, February 2, 1999; available from ISI Emerging Markets (accessed October 21, 2002). 101. Ibid. 102. ‘‘Gazprom Looking for Alternative Pipeline Routes to Europe,’’ Poland AM, January 26, 2001; available from ISI Emerging Markets (accessed October 20, 2002). Also at http://www.europolgaz.com.pl/english/finanse_naklady.htm 103. If both Yamal pipes were built, they would deliver 67.4 billion cubic meters of gas annually. 104. Author’s interview with a senior official of the Miller government, Warsaw, March 2003 105. Paszyc, ‘‘The Russian Energy Policy,’’ 21. 106. ‘‘Polish Stretch Is Ready: Yamal-Europe Gas Pipeline,’’ Warsaw Voice, October 3, 1999; available from ISI Emerging Markets (accessed October 28, 2002). 107. ‘‘What’s New,’’ Prawo i Gospodarka, October 12, 1999; available from ISI Emerging Markets (accessed October 29, 2002). 108. ‘‘Heard in Passing,’’ Warsaw Voice, October 24, 1999; available from ISI Emerging Markets (accessed October 29, 2002). 109. ‘‘Gazprom Points the Finger at Ukraine,’’ EIG—Energy Compass, December 10, 1999; available from ISI Emerging Markets (accessed October 29, 2002). 110. Author’s interview with a senior official of the Miller government, Warsaw, March 2003 111. ‘‘Hungarian Mol Agrees Entry into Slovnaft,’’ TASR – Export Service, April 3, 2000; available at ISI Emerging Markets (accessed January 29, 2008).

CHAPTER 5 1. Crude oil price statistics; available at http://www.eia.doe.gov/emeu/aer/pdf/pages/ sec11_15.pdf (accessed August 12, 2005). 2. The Russian Federation; available at http://www.worldbank.org.ru/ECA/Russia.nsf /ECADocByUnid/0CF40EF2E501A275C3256CD1002B7D90/$FILE/RER7_eng.pdf (accessed September 3, 2005). 3. The CIA World Factbook: Russia; available at http://www.cia.gov/cia/publications/factbook/geos/rs.html (accessed October 1, 2005). 4. Zoltan Sz. Biro, ‘‘Moszkvai dilemmak,’’ Nepszabadsag, November 3, 2001; available from http://www.nol.hu/cikk/35425/ (accessed July 30, 2004). 5. RFE/RL, July 12, 2002; available from http://www.rferl.org (accessed July 10, 2004). 6. ‘‘Putin Outlines Main Planks of Russian Foreign Policy—TV Reports,’’ originally in Russia TV, July 12, 2002, cited by BBC Monitoring, Johnson’s Russia List #6353, July 13, 2002; available from http://www.cdi.org/russia/johnson/6353.htm (accessed September 15, 2003). 7. Oksana Yablokova, ‘‘Putin Tells Diplomats to Do PR for Russia,’’ Moscow Times, July 13, 2004. 8. Mark A. Smith, Russian Business and Foreign Policy (Conflict Studies Research Centre, May 2003), 2.

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9. Speech at Gazprom’s 10th Anniversary, February 17, 2003; available from http:// www.gazprom.ru/text/article/article6182.shtml (accessed February 27, 2003). 10. ‘‘President Putin: Gazprom’s New CEO’s task is to Uphold State Interests at that Company,’’ Pravda, June 20, 2001; available from ISI Emerging Markets (accesseed November 13, 2002). 11. Murmansk pipeline (accessed September 30, 2005); available from http://www. yukos.com/RM/Murmansk.asp 12. ‘‘New Yukos Head: Western Ally Not Necessary,’’ Russia Journal, November 10, 2003. 13. Ibid. 14. Kommersant, November 17, 2003 15. Originally reported by ITAR-TASS, quoted by Edward C. Chow, ‘‘Russian Pipelines. Back to the Future?’’ Georgetown Journal of International Affairs, Winter/Spring 2004, 32; available from http://www.carnegieendowment.org/pdf/files/chowarticle-jan04.pdf (accessed August 10, 2005). 16. ‘‘Russian President Accepts Aleksander Kwasniewski’s Invitation to Visit Warsaw,’’ Poland AM, July 11, 2000; available at ISI Emerging Markets (accessed July 11, 2000). 17. Author’s interview with Russia analyst Marek Menkiszak, OSW (Centre for Eastern Studies), February 2003, Warsaw. 18. ‘‘Varso oroszbarat szerepben,’’ Nepszabadsag, January 18, 2002; available from http:// www.nol.hu/cikk/43098/ (accessed September 7, 2002). 19. Kai-Olaf Lang, Ein neues polnish-russisches Verhaltnis? Putins Polenbesuch im Januar 2002, SWP-Aktuell 1, Stiftung Wissenschaft und Politik (Berlin: Deutsches Institut fuer Internationale Politik und Sicherheit, January 2002), 6. 20. ‘‘The Bison and the Bear: Bilateral Relations,’’ Warsaw Voice, January 27, 2002; available from ISI Emerging Markets (accessed October 28, 2002).. 21. Ibid. 22. Originally in Zycie, ‘‘President Kwasniewski Says Visas Are the Answer to Kaliningrad Question,’’ Poland AM, June 7, 2002; available from ISI Emerging Markets (accessed February 13, 2008). 23. ‘‘President Polshi—protyiv vizovovo rezsima s Rossiej,’’ http://www.regions.ru, June 30, 2003; available from ISI Emerging Markets (accessed February 13, 2008). 24. Quoted in ‘‘Kwasniewski Favors Removal of Russian-EU Visa Barriers,’’ New Europe, November 23, 2003; available from ISI Emerging Markets (accessed February 13, 2008). 25. ‘‘Hungary-Russia: New Old Partners,’’ Trud, December 17, 2002; available from ISI Emerging Markets (accessed January 29, 2008). 26. Moszkva es Budapest hatteralkuja a vegyiparban?’’ Magyar Hirlap, October 9, 2002. 27. ‘‘Vengerskomu premyeru po dushe moskovskaya zima,’’ Rossiyskaya Gazeta, December 19, 2002; available from ISI Emerging Markets (accessed January 29, 2008). 28. Ibid. 29. ‘‘Budapesht zhdet rossiyskogo premyera,’’ Rossiyskaya Gazeta, September 5, 2003; available from ISI Emerging Markets (accessed January 29, 2008). 30. ‘‘Predpriyatiya Rossii rasschitivayut prinyaty uchastie v konkursah po privatizacii vengerskih predpriyatiy,’’ Rossiyskaya Gazeta, September 9, 2003; available from ISI Emerging Markets (accessed January 29, 2008). 31. Quoted in ‘‘Medgyessy Confers with Putin on Trade Ties Reinforcement,’’ New Europe, December 14, 2003; available from ISI Emerging Markets (accessed January 29, 2008).

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32. ‘‘Mit igert Medgyessy Putyinnak?’’ Magyar Nemzet, December 1, 2003, 9. 33. Sergey Veselov, ‘‘Slovakiya bez viz dlya VIP-person,’’ Rossiyskaya Biznes-gazeta, February 6, 2001; available from ISI Emerging Markets (accessed February 1, 2008). 34. ‘‘President Schuster Continues his Visit to Russia,’’ SITA, November 13, 2001; available from ISI Emerging Markets (accessed November 7, 2002). 35. ‘‘Schuster Meets Putin in Kremlin,’’ TASR – Export Service, November 12, 2001; available from ISI Emerging Markets (accessed February 1, 2008). 36. Alexander Kuranov, ‘‘I v ES uznayut, chto takoe slivovica,’’ Nezavisimaya Gazeta, April 7, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 37. Ibid. 38. ‘‘Slovakia Wants to Strengthen Relations with Russia—Dzurinda,’’ CTK—Daily News (SK), April 8, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 39. Regarding Gazprom’s acquisition of SPP, it should be noted that 1) Gazprom was part of a consortium together with Gaz de France and Ruhrgas which won the privatization tender of 49 percent of SPP shares; 2) Gazprom did not pay for its part, as a result, it does not have any shares in SPP; GdF and EON Ruhrgas are the only co-owners of SPP—they control 49 percent of the Slovak gas company. The SPP privatization and Gazprom giving up its option of buying one-third of the 49 percent stake is discussed in great detail in this chapter below and in Chapter 6. 40. ‘‘Rossiya gotova prinyaty uchastie v rasshirenii atomnoy elektrostancii v Slovkaii,’’ SKRIN—Novosty, April 9, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 41. ‘‘Dzurinda Tells Putin Slovakia Wants to Build on Special Relationship,’’ TASR— Export Service, April 8, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 42. Originally in Rzeczpospolita, July 6, 2001, cited in ‘‘Gas: Defending Gudzowaty, the SLD Is Protecting Russian Monopolist Gazprom’s Interests,’’ PNB—Economic Review, July 10, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 43. ‘‘Gazprom Might Seize Europol Gaz,’’ PNB—Economic Review, May 4, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 44. A subsection, Natural Gas Pipeline System to, through and around Poland, discusses the issue of the Yamal 2 pipeline. 45. IntelliNews—Poland This Week, January 14, 2002; available from ISI Emerging Markets (accessed January 14, 2002). 46. ‘‘Poland to Guarantee for USD 180mn Investments in Yamal Gas Pipeline,’’ IntelliNews-Poland Today, January 14, 2002; available from ISI Emerging Markets (accessed October 27, 2002). 47. ’’State’s Budget Might Lose USD 1.4bln by 2019 due to EuRoPol Gaz’ Gas Transit Fees,’’ Internet Securities Businesswire, March 19, 2003; available at ISI Emerging Markets (accessed March 13, 2008). At the time of the agreement, Gazprom used to pay $1.35 for 1,000 cubic meters for 100 km. 48. Rafal Kasprow, originally in Rzeczpospolita, cited by PNB-Economic Review, April 29, 2003; available from ISI Emerging Markets (accessed July 8, 2003). 49. Author’s interview with former high-ranking official of PGNiG, March 2003, Warsaw. 50. Originally in Rzeczpospolita, January 23, 2002, cited in ‘‘ ‘We Stick to Contracts,’ Gazprom Head Comments on Polish Hopes,’’ PNB, January 23, 2002; available from ISI Emerging Markets (accessed October 27, 2002).

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51. ‘‘Poland Wants Russia to Freelance 40% of Yamal Contract from Rule ‘take-or-pay,’ ’’ Internet Securities Businesswire, July 2, 2002; available from ISI Emerging Markets (accessed November 2, 2002). 52. ‘‘Poland Likely to File for International Arbitrage Concerning Russian Gas Supplies,’’ Internet Securities Businesswire, October 28, 2002; available from ISI Emerging Markets (accessed November 2, 2002). 53. ‘‘Companies and Industries,’’ IntelliNews—Poland This Week, December 9, 2002; available from ISI Emerging Markets (accessed July 11, 2003). 54. Originally reported by PAP News Agency, February 12, 2003, cited in ‘‘Poland, Russia Sign Agreement on Gas Supplies,’’ BBC Monitoring, February 12, 2003; available from ISI Emerging Markets (accessed July 11, 2003). 55. Originally in Rzeczpospolita, April 19–21, 2003, cited in ‘‘Re-negotiation of Gas Contract to Strengthen Gazprom Monopoly,’’ PNB, April 22, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 56. Author’s interview with a senior official of the Miller government, Warsaw, March 2003. 57. ‘‘Energy Sector—Gas Reduction,’’ Warsaw Voice, February 23, 2003; available from ISI Emerging Markets (accessed February 23, 2008). 58. Author’s telephone interview with a former high-ranking official of the Buzek and Kaczynski governments, March 2008. 59. Rafal Kasprow, originally in Rzeczpospolita, cited in ‘‘Energy Security: Hailed as a Great Success, the Results of Russian Gas Talks Are Frightening,’’ PNB-Economic Review, April 29, 2003; available from ISI Emerging Markets (accessed July 8, 2003). 60. Ibid. 61. Author’s telephone interview with a former high-ranking official of the Buzek and Kaczynski governments, March 2008. 62. ‘‘Pol: Gas Issues No Longer Burden Polish-Russian Relations,’’ PNB—Economic Review, February 14, 2003; available from ISI Emerging Markets (accessed July 12, 2003). 63. Originally in Rzeczpospolita, May 6, 2004, cited in ‘‘NIK: Contract for Gas Supplies Puts Poland’s Security at Risk,’’ PNB, May 6, 2004; available from ISI Emerging Markets (accessed February 1, 2008). 64. Originally in Rzeczpospolita, April 19–21, 2003, cited in ‘‘Re-negotiation of Gas Contract to Strengthen Gazprom Monopoly,’’ PNB, April 2, 2003; available from ISI Emerging Markets (accessed February 1, 2008). 65. Just before Steinhoff ’s announcement, the press was speculating about the recent resignation of Deputy Economy Minister Jan Szlazak, claiming it was related to his February letter stating that Poland ‘‘supports in principle’’ Gazprom’s proposal about the new track. It is unclear why Szlazak resigned, but on May 20, 2000, Steinhoff called Szlazak’s letter a mistake. Originally in PAP News Agency, May 21, 2000, cited in ‘‘Poland to Table Yamal Gas Pipeline Stance in Talks with Gazprom—Minister,’’ BBC Monitoring, May 21, 2000; available from ISI Emerging Markets (accessed October 28, 2002). 66. Oiginally in Gazeta Wyborcza, July 8, 2000, cited in ‘‘Ukraine’s Failure to React to Polish Goodwill Gestures on Gas Transit Analyzed,’’ BBC Monitoring, July 22, 2000; available from ISI Emerging Markets (accessed October 26, 2002). 67. ‘‘Ukraine: Kiev Woos Western Partner for Pipeline Venture,’’ EIGOMI, June 15, 2000; available from ISI Emerging Markets (accessed October 27, 2002).

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68. ‘‘Ukraine: High-Stakes Game,’’ EIGOMI, June 16, 2000; available from ISI Emerging Markets (accessed October 27, 2002). 69. ‘‘Poland Opposes Russian Gas Pipeline That Bypasses Ukraine: Minister,’’ Agence France Presse, July 21, 2000; available from LexisNexis (accessed January 5, 2003). 70. Originally in PAP News Agency, August 9, 2000, cited in ‘‘Russia Sends Letter to Polish Premier on Gas Pipeline Issue,’’ BBC Monitoring, August 9, 2000; available from ISI Emerging Markets (accessed October 22, 2002). 71. ‘‘Escaping Russia’s Shadow,’’ Warsaw Business Journal, July 17, 2000; available from ISI Emerging Markets (accessed October 22, 2002). 72. ‘‘Political Overview,’’ ISI BOSS Business News Poland, July 31, 2000; available from ISI Emerging Markets (accessed October 27, 2002). 73. Originally reported in Gazeta Wyborcza, August 5–6, 2000, cited in ‘‘Gas Imports: Government Chooses More Costly Solution,’’ PNB, August 7, 2000; available from ISI Emerging Markets (accessed October 27, 2002). 74. ‘‘Gazprom and Ruhrgas—Partnership with a Promising Future,’’ Moscow International Petroleum Club; available from http://www.mmnk.org/ruhrgaz-gazprom.htm (accessed July 31, 2004). 75. ‘‘Bergmann Burckhard: Chairman of the Executive Board of E.ON Ruhrgas AG, Member of the Executive Board of E.ON AG’’; available from http://www.gazprom.com /eng/articles/article8831.shtml (accessed August 7, 2005). 76. ‘‘Pipeline a Political Issue for Poland,’’ The Industry Newsletters, October 30, 2000; available from ISI Emerging Markets (accessed October 30, 2002). 77. Originally in Gazeta Wyborcza, November 6, 2000, cited in ‘‘Yamal Natural Gas Project May Threaten Poland’s Energy Diversification Plans,’’ PNB, November 10, 2000; available from ISI Emerging Markets (accessed October 29, 2002). 78. ‘‘Pipe Schemes,’’ Warsaw Voice, November 12, 2000; available from ISI Emerging Markets (accessed October 27, 2002). 79. Originally reported by PAP News Agency, November 22, 2000, cited in ‘‘Poland: Russian Foreign Minister Says Pipeline Proposals Economically Justified,’’ BBC Monitoring, November 22, 2000; available from ISI Emerging Markets (accessed October 27, 2002). 80. Originally reported by ITAR-TASS News Agency, November 30, 2000, cited in ‘‘Russian Gas to Bypass Poland if Politics Interfere—Foreign Minister,’’ BBC Monitoring, November 30, 2000; available from ISI Emerging Markets (accessed October 25, 2002). 81. ‘‘Gazprom Looking for Alternative Pipeline Routes to Europe,’’ Poland AM, January 26, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 82. ‘‘Companies and Privatisation,’’ ISI BOSS Business News Poland, December 4, 2000; available from ISI Emerging Markets (accessed October 28, 2002). 83. Originally in Gazeta Wyborcza, August 27, 2001, cited in ‘‘New Law Gives Government Control over Yamal Fibre Optic Cable,’’ PNB, August 27, 2001; available from ISI Emerging Markets (accessed October 28, 2002). 84. ‘‘Yamal Data Cable Controversy: Who Gets the Profits?’’ PNB—Weekend Supplement, December 7, 2000; available from ISI Emerging Markets (accessed October 28, 2003). 85. Author’s interview with a computer technology expert, Warsaw, March 2003. 86. Originally in Gazeta Wyborcza, August 27, 2001, cited in ‘‘New Law Gives Government Control over Yamal Fibre Optic Cable,’’ PNB, August 27, 2001; available from ISI Emerging Markets (accessed October 27, 2002).

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87. Originally reported by Rzeczpospolita, December 21, 2000, cited in ‘‘When Nobody Knows What’s Going On, Then It’s About Money and Power,’’ PNB—Weekend Supplement, December 28, 2000; available from ISI Emerging Markets (accessed October 28, 2002). 88. ‘‘Poland Industry: Petroleum and Gas Updates,’’ EIU—Country Economic News, March 6, 2001; available from ISI Emerging Markets (accessed October 28, 2002). 89. ‘‘PGNiG Signs Deal with Denmark’s DONG and Norway’s Statoil,’’ ISI BOSS Business News Poland, March 31, 2001; available from ISI Emerging Markets (accessed October 28, 2002). 90. Originally in PAP News Agency, March 21, 2001, cited in ‘‘Poland: Russian Security Council Secretary Arrives for Visit,’’ BBC Monitoring, March 22, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 91. Ibid. 92. Originally reported by Rzeczpospolita, July 6, 2001, cited in ‘‘Gas: Defending Gudzowaty, the SLD Is Protecting Russian Monopolist Gazprom’s Interests,’’ by PNB—Economic Review, July 10, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 93. ‘‘Privatisation and Companies,’’ BOSS Business News Poland, July 6, 2001; available from ISI Emerging Markets (accessed October 28, 2002). 94. Originally reported by PAP News Agency, January 28, 2003, cited in ‘‘PolishNorwegian Gas Contract Deadline Extended,’’ by BBC Monitoring, January 28, 2003; available from ISI Emerging Markets (accessed July 11, 2003). 95. Originally in Rzeczpospolita, December 12, 2001, cited in ‘‘PGNiG Dismissal Weakens Government Position before Moscow Visit,’’ PNB, December 12, 2001; available from ISI Emerging Markets (accessed October 28, 2002). 96. Originally reported by Gazeta Wyborcza, February 21, 2002, cited in ‘‘Economy Minister: Gazprom Taking Its Time over Calculations,’’ PNB, February 22, 2002; available from ISI Emerging Markets (accessed October 27, 2002). 97. ‘‘PGNiG, DONG Discuss Reduced Gas Deliveries,’’ PNB, December 4, 2003; available from LexisNexis (accessed July 31, 2004). 98. ‘‘Gazprom to Rule on Gas Pipeline Bypassing Ukraine after Study,’’ Agence France Presse, February 6, 2002; available from LexisNexis (accessed January 6, 2003). 99. The market for LNG (liquified natural gas), which is carried in tankers, is still developing, but does not yet account for a significant portion of the natural gas market. Daniel Yergin and Michael Stoppard, ‘‘The Next Prize,’’ Foreign Affairs (November–December 2003). 100. At this time, Hungary, Slovakia, and Poland were not members of the European Union; therefore, pipeline operators were not obliged to provide access to third parties. When the EU liberalization regulations take effect in these countries, such denial of access would be harder, yet not impossible. 101. ‘‘3.2. Struggle for Assets in the European Countries,’’ CCPR—Analytical Reports, June 5, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 102. Todd Prince, ‘‘Pipeline Monopoly a Power in Its Own Right,’’ Moscow Times, June 25, 2002; available from ISI Emerging Markets (accessed February 1, 2008). 103. Orlen in Poland; available from http://www.petrochemia.pl (accessed August 11, 2008). 104. Rafineria Gdanska—company profile; available from http://www.polishproducts.pl/ org.asp?on=657&c=276 (accessed August 11, 2004). There were three more refineries in Southern Poland, but their capacity and role on the Polish oil market were insignificant. 105. See more about this issue below.

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106. ‘‘Final Decisions on Orlen, RG Sale Expected in February,’’ PNB, January 30, 2002; available from ISI Emerging Markets (accessed October 29, 2002). 107. Originally in Puls Biznesu, February 6, 2002, cited in ‘‘Rotch to Team Up With Russian Partner to Vie for Gdansk Refinery,’’ PNB, February 6, 2002; available from ISI Emerging Markets (accessed October 29, 2002). 108. Rotch Energy and Lukoil Most Likely to Take Over Gdansk Refinery,’’ PNB, May 10, 2002; available from ISI Emerging Markets (accessed October 28, 2002). 109. Originally reported in Rzeczpospolita, September 26, 2002, cited in ‘‘(Another) Up and Down Week in Refinery Saga,’’ PNB-Weekend Supplement, October 3, 2002; available from ISI Emerging Markets (accessed October 28, 2002). 110. Most governments in Central and Eastern Europe would have preferred Western investors in their oil, gas, and petrochemical sectors, but Western companies tended to avoid privatization tenders for two reasons. The general tendency in both the gas and oil industries is for consolidation of all parts of the industry. As Russian companies tend to be the major suppliers of raw materials—they tend to either partly or wholly own or operate pipelines—the region serves as a natural area for their expansion. Refineries tend to turn a profit only if they run at full capacity, and Europe at that moment had a surplus of refineries. Buying a refinery in Central and Eastern Europe was only profitable for crude oil suppliers, such as Lukoil and Yukos, which can then operate it at full capacity. 111. ‘‘Poland to Consider Political Risk of Lukoil Investment in Refinery,’’ Agence France Presse, July 26, 2002; available from LexisNexis (accessed January 6, 2003). 112. Author’s interview with a former high ranking official of PGNiG, Warsaw, March 2003. 113. ‘‘Rafineria On My Mind—Russians Set to Dominate Polish Fuel Sector?’’ PNB— Weekend Supplement, August 8, 2002; available from ISI Emerging Markets (accessed October 28, 2002). 114. Ibid. 115. Originally in Gazeta Wyborcza, September 5, 2002, cited in ‘‘Neither Polish Nor Russian Oil Holdings Give Up Fight for Gdansk Refinery,’’ PNB, September 10, 2002; available from ISI Emerging Markets (accessed October 28, 2002). 116. ‘‘Russia vs. Orlen,’’ Wprost, April 20, 2004; available from ISI Emerging Markets (accessed September 8, 2005). 117. ‘‘Lukoil and Seversteel Still Want to Invest in Poland, Russia’s PM Says,’’ Internet Securities Businesswire, February 21, 2003; available from ISI Emerging Markets (accessed July 8, 2003). 118. Originally reported by ViewsWire Eastern Europe, cited in ‘‘Eastern Europe Industry: Oil Abroad?’’ EIU-Regional Economic News, August 24, 2001; available from ISI Emerging Markets (accessed October 27, 2002). 119. Author’s interview with a senior executive of Mol, Budapest, August 2005. 120. CES is a think tank set up in the early 1990s in Warsaw, specializing in countries east of Poland. The confidential report about the impact of a potential merger of Mol and PKN Orlen was written in the spring of 2004 and not made public until October 2005. All references and quotations from the report are taken from the Polish paper Gazeta Wyborcza. 121. Originally reported by Gazeta Wyborcza, April 17, 2004, cited in ‘‘Gov’t Report Warns of Russian Factor as Preparations for Orlen/Mol Merger Gather Pace,’’ PNB, April 20, 2004; available from LexisNexis (accessed August 30, 2002).

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122. Originally reported by Parkiet, May 13, 2004, cited in ‘‘Former Nafta Polska President on Orlen-Mol Merger,’’ PNB, May 13, 2004; available from LexisNexis (accessed September 5, 2005). 123. ‘‘Economic News Summary, June 14. Yamal II will Increase SPP’s Transit Revenues by Ten Percent,’’ SITA—Economy and Business, June 14, 2001; available from ISI Emerging Markets (accessed November 9, 2002). 124. ‘‘Company Operations,’’ Slavia Capital—Company Highlights, February 7, 2001; available from ISI Emerging Markets (accessed November 9, 2002). 125. Ibid. 126. ‘‘Investors Losing Patience with Cabinet over Nafta Gbely Sale,’’ The Slovak Spectator, May 17, 1999; available from ISI Emerging Markets (accessed November 9, 2002). 127. SITA, March 4, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 128. Trend, March 14, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 129. ‘‘Harach: New Pipeline Will Raise SPP’s Value,’’ TASR Export Service, March 9, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 130. ‘‘Slovakia: Sell-Off Beckons for Oil and Gas Companies,’’ EIGOMI, May 11, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 131. Originally in Kommersant, June 15, 2000, cited by SITA—General News, June 16, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 132. ‘‘Minister Harach Does Not Rule Out Gazprom’s Entry into SPP,’’ SITA—Economy and Business, June 16, 2000; available from ISI Emerging Markets (accessed November 9, 2002). 133. Ibid. 134. Originally reported by Tribuna, March 4, 2000, cited in ‘‘Gazprom to Revise Schedule of Gas Pipeline Construction from Russia to Western Europe,’’ WPS—CIS Oil & Gas Report, March 8, 2000; available at ISI Emerging Markets (accessed March 4, 2008). 135. ‘‘Russian Gazprom Ready to Make a Final Bid for Slovak Gas Monopoly SPP,’’ IntelliNews—Slovakia Today, November 14, 2001; available from ISI Emerging Markets (accessed November 9, 2002). 136. ‘‘Corrected: Summary of Last Week’s Major Economic Happenings,’’ SITA— Economy and Business, November 18, 2001; available from ISI Emerging Markets (accessed November 9, 2002). 137. Peter Barecz, ‘‘Russia to Be Only Slovak Crude Source?’’ The Slovak Spectator, December 21, 2001; available at ISI Emerging Markets (accessed March 4, 2008). 138. ‘‘State Will Have to Agree Decisions with SPP Investor,’’ TASR Export Service, March 12, 2002; available from ISI Emerging Markets (accessed November 9, 2002). 139. ‘‘Slovakia Industry: Petroleum and Gas Updates,’’ EIU-Country Economic News, October 10, 2001; available from ISI Emerging Markets (accessed November 9, 2002). 140. ‘‘District Court Precaution May Endanger Transpetrol Privatisation,’’ TASR Export Service, October 29, 2001; available from ISI Emerging Markets (accessed November 11, 2002). 141. ‘‘Russian Giant Takes Transpetrol,’’ The Slovak Spectator, December 17, 2001; available from ISI Emerging Markets (accessed November 11, 2002). 142. ‘‘Russian Yukos Won the Tender for Transpetrol,’’ Slavia Capital—Corporate Update, January 7, 2002; available from ISI Emerging Markets (accessed November 11, 2002).

214

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143. ‘‘From the Slovak Press,’’ CTK—Daily News, December 14, 2001; available from ISI Emerging Markets (accessed November 11, 2002). 144. Ibid. 145. ‘‘Russian Giant Takes Transpetrol.’’ 146. ‘‘Yukos Guarantees Diversification of Transpetrol Supplied Crude Oil,’’ SITA— Economy and Business, December 4, 2001; available at ISI Emerging Markets (accessed March 4, 2008). 147. Barecz, ‘‘Russia to Be Only Slovak Crude Source?’’ 148. ‘‘A Borsodchem cseh vallalatot vett,’’ Magyar Nemzet, April 4, 2000; available at ISI Emerging Markets (accessed March 4, 2008). 149. ‘‘Tulajdonosi harc a TVK-ert,’’ HVG, November 26, 1999; available from ISI Emerging Markets (accessed November 14, 2002). 150. MTI, September 20, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 151. ‘‘Saber Rattling over Borsodchem,’’ Business Hungary, February 2001; available from ISI Emerging Markets (accessed November 14, 2002). 152. ‘‘Kuzdelem a vegyiparert: Davidok es Goliat—A Borsodchem a Gazprome, a TVK a Mole,’’ Bank es Tozsde, September 29, 2000; available at ISI Emerging Markets (accessed March 4, 2008). 153. ‘‘BC-tulajdonosok a kapcsolataikrol—Tovabb folytatodik a harc a menedzsment es a nagy reszvenyesek kozott,’’ Magyar Hirlap, November 29, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 154. ‘‘Harc a TVK iranyitasaert,’’ Vilaggazdasag, September 20, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 155. ‘‘A Mol lehet a nyertes,’’ Vilaggazdasag, September 21, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 156. Author’s interview with a private equity company executive, Budapest, June 2002. 157. ‘‘A Gazprom felulvizsgalja magyarorszagi vasarlasait—Meg bizonytalan a MolBorsodchem uzlet,’’ Magyar Hirlap, September 22, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 158. ‘‘Az irek vizsgaljak a Milfordot,’’ Nepszabadsag, October 14, 2000; available from ISI Emerging Markets (accessed November 14, 2002). 159. ‘‘Tobbseget szerezhet a TVK-ban a Mol,’’ Nepszabadsag, September 25, 2000; available from ISI Emerging Markets (accessed November 15, 2002). 160. The connection between Oriana and TVK was a heritage of Soviet times. It was not used after 1991. Plans in 2000 aimed at recreating the Soviet technological chain. Author’s interview with Andras Deak, research fellow, Hungarian Institute of International Affairs, Budapest, March 2008. 161. ‘‘Vegkifejlet elott a TVK-ert folyo kuzdelem,’’ Nepszabadsag, September 23, 2000; available from ISI Emerging Markets (accessed November 15, 2002). 162. Author’s interview with a senior executive of Mol, Budapest, August 2005. 163. The Hungarian daily business paper Vilaggazdasag wrote on September 30, 1998, that ‘‘the statute of Mol prevents anybody to own more than 25% of its shares directly or indirectly. It means that Gazprom does not have the opportunity to acquire the majority of the shares. However, according to market rumors, Gazprom would like to acquire a majority share in the Hungarian oil company.’’ The Hungarian daily Magyar Hirlap wrote on December 14, 1999, that ‘‘it is an open secret that Gazprom owns a significant amount of Mol’s shares. It was

NOTES

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the former CEO of Mol, Laszlo Pal, who admitted the presence of the Russian gas giant. He added that according to his information, Gazprom does not aim at managing Mol. Answering a question of Magyar Hirlap, Gazprom’s representatives reinforced the above information. When asked whether they have increased their package of about 10% lately, they answered only with a mysterious ‘mozhet bity,’ i.e. it is possible.’’ There was, of course, a major denial. ‘‘There was never direct Gazprom-share in any of the Hungarian gas companies,’’ said Mihail Rahimkulov, the CEO of Panrusgas and AEB Bank, to the Hungarian weekly Figyelo. ‘‘The bank trades with Mol and TVK shares, but only for speculative purposes.’’ Note that AEB Bank was entirely owned by Gazprombank, a daughter company of Gazprom, at that time. AEB also bought BC shares on behalf of Gazprom in 2000. 164. Author’s interview with a former board member of Borsodchem, Budapest, June 2002. 165. Author’s interview with former senior executive of Mol, Budapest, September 2005. 166. Author’s interview with a former board member of Borsodchem, Budapest, June 2002. 167. ‘‘Harc a TVK iranyitasaert,’’ Vilaggazdasag, September 20, 2000; available from ISI Emerging Markets (accessed November 15, 2002). 168. ‘‘Egyelore nem jegyeznek BorsodChemet—Kivar az EBRD,’’ Vilaggazdazdasag, November 17, 2000; available from ISI Emerging Markets (accessed November 14, 2002). EBRD was one of BC’s major shareholders. BC, of which EBRD at one point, had a 12.5 percent share, was the first petrochemical company in the region in which the European Bank had invested. After the Russian takeover, EBRD, having lost control of their investment, gradually sold all its shares in the company. 169. Author’s interview with a private equity company executive, Budapest, June 2002. 170. Author’s interview with a former board member of Borsodchem, Budapest, June 2002. 171. ‘‘Tobbseget szerezhet a TVK-ban a Mol.’’ 172. Author’s interview with a former board member of Borsodchem, Budapest, June 2002. 173. ‘‘SIBUR Elects Non-Residents to Board of Directors,’’ Novecon Press Digest, July 3, 2001; available at ISI Emerging Markets (accessed March 4, 2008). 174. Author’s interview with a former board member of Borsodchem, Budapest, June 2002 175. ‘‘Pipeline Linkage to Empower Russian Companies,’’ STRATFOR Strategic Forecasting, May 2, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 176. Catherine Belton, ‘‘Putin: Move Faster on Pipelines,’’ Moscow Times, May 27, 2004; available at ISI Emerging Markets (accessed February 5, 2008). 177. ‘‘Russia to Develop 4 Export Pipeline Systems,’’ New Europe, December 14, 2003; available at ISI Emerging Markets (accessed February 5, 2008). 178. Originally reported by Izvestiya, February 22, 2002, cited in ‘‘Russia, Ukraine, Hungary, Slovakia and Croatia Will Sign Agreements on Oil Transit via Druzhba-Adria Pipeline,’’ WPS—CIS Oil & Gas Report, February 25, 2002; available at ISI Emerging Markets (accessed February 5, 2008). 179. Author’s interview with a senior executive of Mol, Budapest, August 2005. 180. ‘‘Horvat garanciara var a Mol,’’ Magyar Hirlap, June 14, 2002; available from ISI Emerging Markets (accessed November 15, 2002).

216

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181. Peter Trafalgar and Vladimir Kozlov, ‘‘Producers Pin Hopes on New Oil Pipelines,’’ Russia Journal, November 16, 2001; available from ISI Emerging Markets (accessed February 5, 2008). 182. ‘‘Influence in a Pipeline Is Why Rosneft Wants Croatian Oil Group,’’ Oil & Capital, February 21, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 183. Originally in Vedomosty, April 12, 2002, cited in ‘‘Russia Implements Croatian Project,’’ Novecon Press Digest, April 12, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 184. Anna Raff, ‘‘Croatia Puts Hitch in Druzhba,’’ Moscow Times, April 18, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 185. ‘‘Croatia’s Janaf Joins Druzhba-Adria Project,’’ Business Communications Agency— Russian Company News, May 6, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 186. ‘‘Struggle for Assets in the European Countries,’’ CCPR—Analytical Reports, June 5, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 187. ‘‘Struggle for Assets in the European Countries,’’ CCPR—Analytical Reports, June 5, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 188. ‘‘Influence in a Pipeline Is Why Rosneft Wants Croatian Oil Group,’’ Oil & Capital, February 21, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 189. Originally in Vedomosty, July 11, 2003, reported in ‘‘Rosneft Gave Up Struggle for State-owned Stake in Croatian INA,’’ WPS—CIS Oil & Gas Report, July 14, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 190. Originally in Vedomosty, June 26, 2003, reported in ‘‘Position of Croatian Pipeline Company Janaf Blocking Implementation of Druzhba-Adria Project,’’ WPS—CIS Oil & Gas Report, June 27, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 191. Originally in Rusky Focus, July 14, 2003. Reported in ‘‘Yukos is the Leader in Buying Up of Foreign Oil Transportation Infrastructure,’’ WPS—CIS Oil & Gas Report, July 21, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 192. Originally in Vedomosty, November 21, 2003, reported in ‘‘Ukrainian Parliament Opposed to Oil Transit,’’ Novecon Press Digest, November 21, 2003; available from ISI Emerging Markets (accessed February 5, 2008). 193. ‘‘Verkhovna Rada Ratifies Druzhba-Adria Agreement,’’ New Europe, August 2, 2004; available from ISI Emerging Markets (accessed February 5, 2008). 194. ‘‘Russia to Develop 4 Export Pipeline Systems.’’ 195. ‘‘Croatia Ready to Give Up Participation in Druzhba-Adria Oil Pipeline Project,’’ WPS—CIS Oil & Gas Report, January 14, 2005; available from ISI Emerging Markets (accessed February 5, 2008).

CHAPTER 6 1. Sz. Biro Zoltan, ‘‘Oroszorszag valasztas utan—Putyinisztan,’’ Magyar Narancs, December 13, 2007. 2. ‘‘Speech by Russian Minister of Foreign Affairs Sergey Lavrov at MGIMO University on the Occasion of the Start of a New Academic Year,’’ Ministry of Foreign Affairs of the Russian Federation, September 3, 2007; available at http://www.mid.ru (accessed January 27, 2008). 3. Quoted in ‘‘Russia Unconvinced with U.S. Reasons for Missile Defense in EU,’’ RIAN, February 3, 2007; available from ISI Emerging Markets (accessed January 27, 2008).

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4. Quoted in ‘‘Russia’s Ivanov Slams U.S. Missile Shield Plans in Europe,’’ RIAN, February 9, 2007; available from ISI Emerging Markets (accessed January 27, 2008). 5. Ibid. 6. ‘‘U.S. Antimissile Launch May Provoke Counterattack—Army Chief —2,’’ RIAN, December 15, 2007; available from ISI Emerging Markets (accessed January 27, 2008). 7. Marcin Kaczmarski and Andrzej Wilk, ‘‘Russia Hardens Its Rethoric in Relations with the West,’’ East Week 109 (December 19, 2007). 8. Quoted in ‘‘Putin Vows ‘Effective’ Response to US Missile Plans,’’ AFP, February 1, 2007; available from ISI Emerging Markets (accessed January 27, 2008). 9. Marcin Kaczmarski, ‘‘Russia on the Kosovo Problem,’’ East Week 71 (February 8, 2007). 10. ‘‘Statement by Russia’s Ministry of Foreign Affairs on Kosovo Settlement,’’ Ministry of Foreign Affairs of the Russian Federation, December 17, 2007. Available at http://www. mid.ru (accessed January 27, 2008). 11. ‘‘Speech at the 43rd Munich Conference on Security Policy,’’ February 10, 2007. Available at http://www.securityconference.de (accessed January 27, 2008). 12. Originally in Rzeczpospolita. Cited in ‘‘Poland Wrestles with Yalta Legacy as World Leaders Prepare to Celebrate,’’ Poland AM, February 17, 2005; available from ISI Emerging Markets (accessed December 28, 2007). 13. Adam Eberhardt, ‘‘Poland’s Relations with Russia,’’ in Yearbook of Polish Foreign Policy (Warsaw: The Polish Institute of International Affairs, 2006), 117. 14. ‘‘Kommentarii Departamenta informacii i pechati MID Rossii v sviazi s poiavivshimisia v pol’skih SMI ocenkami itogov i posledstvii Krymskoi (Jaltinskoi) konferencii soiuznyh derzhav,’’ February 12, 2005; available at http://www.ln.mid.ru (accessed December 28, 2007). 15. Originally in Gazeta Wyborcza, cited in ‘‘Poland’s Contribution to Victory in WWII Ignored in Latest Russian Monument,’’ Poland AM, February 16, 2005; available from ISI Emerging Markets (accessed December 28, 2007). 16. ‘‘Kwasniewski’s Visit to Moscow Fails to Improve Ice-Cold Relations,’’ PNB—Weekend Supplement, October 7, 2004; available from ISI Emerging Markets (accessed December 28, 2007). 17. Eberhardt, ‘‘Poland’s Relations with Russia,’’ 117. 18. Quoted in Wilhelm Unge et al., Polish-Russian Relations in an Eastern Dimension Context (Swedish Defense Research Agency, June 2006), 25; originally in Waclaw Radziwinowicz, ‘‘Rozjuszony Kreml, przyjazni Rosjanie’’ [Enraged Kremlin, Friendly Russians], Gazeta Wyborcza, September 20–21., 2005 19. Ibid. 20. ‘‘Memory and Politics: Press Comments on Significance of Moscow Celebrations,’’ PNB—Weekend Supplement, May 19, 2005; available from ISI Emerging Markets (accessed December 8, 2007). 21. ‘‘Russia Bans Polish Meat Imports Citing Veterinary Problems,’’ IntelliNews—Poland Today, November 10, 2005; available from ISI Emerging Markets (accessed December 29, 2007). 22. Unge et al., Polish-Russian Relations in an Eastern Dimension Context, 26. 23. Quoted in Gazeta Wyborcza, November 12–13, 2005, cited in ‘‘Source: Russian Authorities Determined to Persecute Poland,’’ PNB, November 14, 2005; available from ISI Emerging Markets (accessed December 29, 2007).

218

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24. Adam Eberhardt, ‘‘Relations between Poland and Russia,’’ Yearbook of Polish Foreign Policy (Warsaw: The Polish Institute of International Affairs, 2007). 25. Originally in PAP, November 23, 2006, cited in ‘‘European Commission Urges Russia to Lift Ban on Polish Meat,’’ BBC Monitoring, November 23, 2006; available from ISI Emerging Markets (accessed December 29, 2007). 26. Ibid. 27. ‘‘Tusk Confident Poland Will Lift Veto on EU-Russia Talks,’’ AFP, December 14, 2007; available from ISI Emerging Markets (accessed December 30, 2007). 28. Wojciech Kosc, ‘‘Poland-Russia: Colder than Cold,’’ TOL Magazine, October 4, 2004; available from ISI Emerging Markets (accessed December 28, 2007). 29. ‘‘Love and Hate: Polish-Russian Relations Marred by Russian Unpredictability and EU and NATO Uncertainty,’’ PNB—Weekend Supplement, February 3, 2005; available from ISI Emerging Markets (accessed December 28, 2007). 30. Originally in Gazeta Wyborcza online, December 23, 2004, cited in ‘‘Cold Breeze from Russia as Putin Criticizes Kwasniewski,’’ PNB, December 24, 2004; available from ISI Emerging Markets (accessed December 28, 2007). 31. Press Conference for Russian and foreign journalists, Kremlin, Moscow, December 23, 2004; available at http://www.kremlin.ru (accessed December 28, 2007). 32. Ibid. 33. Simon Saradzhyan, ‘‘President Lashes Out at the West,’’ Moscow Times, December 24, 2004; available from ISI Emerging Markets (accessed December 28, 2007). 34. ‘‘Poland Drops the Bomb?—Controversy,’’ Warsaw Voice, December 7, 2005; available from ISI Emerging Markets (accessed December 30, 2007). 35. Quoted in ‘‘Moscow Baffled by U.S. ABM Plans for Europe,’’ RIAN—RNS Analysis, February 28, 2007; available from ISI Emerging Markets (accessed December 30, 2007). 36. Ibid. 37. Simon Saradzhyan, ‘‘Missile Shield Proves a Tough Sell in Moscow,’’ The Moscow Times, April 24, 2007; available from ISI Emerging Markets (accessed December 30, 2007). 38. Andrzej Wilk and Marek Menkiszak, ‘‘Russia Suspends Its Membership of the CFE Treaty,’’ East Week, 107 (December 5, 2007);available at http://osw.waw.pl (accessed January 3, 2008). 39. Unge et al., Polish-Russian Relations in an Eastern Dimension Context, 24. 40. Eberhardt, ‘‘Relations between Poland and Russia.’’ 41. Press Conference, Kremlin, Moscow, January 31, 2006; available at http://www. kremlin.ru (accessed December 30, 2007). 42. Originally in Gazeta Wyborcza, March 11, 2004, cited in ‘‘President’s Ostentatious Absence in Moscow Would Only Help Marginalise Poland, Says Foreign Minister,’’ PNB— Weekend Supplement, March 17, 2005; available from ISI Emerging Markets (accessed December 29, 2007). 43. Press Release on the Telephone Conversation between Russian Minister of Foreign Affairs, S. Lavrov and Polish Minister of Foreign Affairs, A. Rotfeld, March 11, 2005; available at http://www.ln.mid.ru (accessed December 29, 2005). 44. Unge et al., Polish-Russian Relations in an Eastern Dimension Context 23. 45. Stenograficheskiy otchet o soveshtanii s chlenami Pravitelystva, Kremlin, Moscow, August 1, 2005; available at http://www.kremlin.ru (accessed December 29, 2007). 46. Unge et al., Polish-Russian Relations in an Eastern Dimension Context 25.

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47. Marek Menkiszak, ‘‘Russia’s Policy Towards Central Eastern Europe after the EU Enlargement,’’ expert article, Baltic Rim Economies, June 2007; available at http:// www.tse.fi (accessed July 31, 2008). 48. ‘‘Russian President Putin Will Negotiate Economy in Slovakia,’’ SITA – General News, February 25, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 49. ‘‘Slovak President Wants Russia to Join EU,’’ The Slovak Spectator, November 7, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 50. ‘‘Slovak President Wants Russia to Join EU,’’ Newnations, January 10, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 51. Viktor Yadukha, ‘‘The Bratislava Window: Slovakia is Russia’s Last Remaining Window to Europe,’’ RBC Daily, May 7, 2007, cited in WPS—What the Papers Say, May 7, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 52. ‘‘The Standpoint of Mr Putin,’’ The Slovak Spectator, May 8, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 53. ‘‘Slovak President Wants Russia to Join EU,’’ The Slovak Spectator, November 7, 2006. 54. ‘‘Slovakia Needs Cooperation with Russia, Slovak President,’’ BBC Monitoring, November 7, 2006; available from ISI Emerging Markets (accessed October 28, 2007). 55. ‘‘Putin: Moscow Might Point Rockets at the Czech Republic and Poland,’’ SITA— General News, May 4, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 56. Ibid. 57. ‘‘Slovak Analyst Slams Premier for Statements on US Military Base,’’ BBC Monitoring, May 4, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 58. ‘‘Czech Minister Rejects Slovak Premier’s Criticism of US Radar Plans,’’ BBC Monitoring, May 7, 2007; available from ISI Emerging Markets (accessed October_14, 2007). 59. Viktor Yadukha, ‘‘The Bratislava Window: Slovakia is Russia’s Last Remaining Window to Europe,’’ RBC Daily, May 7, 2007, cited in WPS—What the Papers Say, May 7, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 60. ‘‘SMK MP Berenyi: Fico’s Trip to Russia Wasn’t Successful,’’ TASR—Export Service, May 6, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 61. ‘‘Fico Finds Common Cause with Putin,’’ The Slovak Spectator, May 8, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 62. Ibid. 63. Originally in Sme, May 31, 2007, cited in ‘‘Slovakia Not to Ratify Arms Treaty Before Russia Meets Conditions,’’ BBC Monitoring, May 31, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 64. ‘‘Companies and Industries,’’ IntelliNews – Slovakia This Week, May 18, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 65. ‘‘Slovakia Energy: Resources and Regulation,’’ EIU Industry Wire—News Analysis, August 23, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 66. ‘‘Dzurinda Seeks to Lure Russian Investors to Slovakia,’’ TASR—Export Service, April 8, 2003; available from ISI Emerging Markets (accessed November 12, 2007). 67. ‘‘Russia Wants to Build New Nuclear Facility in Jaslovske Bohunice,’’ SITA—General News, May 4, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 68. ‘‘Fico Finds Common Cause with Putin,’’ The Slovak Spectator, May 8, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 69. Ibid.

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70. Originally in Sme, May 21, 2007, cited in ‘‘The Russian Superpower Cudgel,’’ The Slovak Spectator, May 22, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 71. ‘‘Cabinet Says Broad Gauge Track Talks Are on the Right Track,’’ The Slovak Spectator, May 29, 2007. Accessed on November 12, 2007. Available from ISI Emerging Markets (accessed November 12, 2007). 72. Stefan Wagstyl, ‘‘Slovak Leader Urges Talks on Missile Bases,’’ Financial Times, June 12, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 73. ‘‘Mukincsalku a lathataron,’’ Nepszabadsag, February 4, 2005. 74. ‘‘Rossz lora tett a kulugy,’’ Magyar Nemzet, December 10, 2004. 75. December 1991, Hungarian prime minister Jozsef Antall visits Moscow; November 1992, Russian president Boris Yeltsin returns the visit; March 1994, Russian prime minister Viktor Chernomyrdin visits Budapest; March 1995, Hungarian prime minister Gyula Horn visits Moscow. For further information, see the Web site of the Embassy of the Russian Federation in Budapest at http://www.hungary.mid.ru/russia_hu.html. 76. ‘‘NBH-Evkonyv 2006’’ (Annual Report 2006), Nemzetbiztonsagi Hivatal, March 2007; available at http://www.nbh.hu (accessed January 12, 2008). 77. ‘‘Moszkva visszaadja a sarospataki konyvtarat,’’ Nepszabadsag online, February 17, 2004. 78. ‘‘Gyurcsany Ferenc beszede Vlagyimir Putyin orosz elnokkel tartott megbeszeleset kovetoen,’’ February 28, 2006, http://www.miniszterelnok.hu. 79. ‘‘Magyarorszag erositi a katonai egyuttmukodest Oroszorszaggal,’’ Nepszabadsag Online, December 2, 2005. 80. ‘‘A multon tullepve kell fejleszteni a ketoldalu kapcsolatokat,’’ February 28, 2006. http://www.miniszterelnok.hu (accessed January 12, 2008). 81. ‘‘Gyurcsany Ferenc beszede Vlagyimir Putyin orosz elnokkel tartott megbeszeleset kovetoen.’’ 82. ‘‘Putyin lobbizott a Malevert?’’ Nepszabadsag, March 7, 2006. 83. ‘‘Beginning of the Meeting with Hungarian Prime Minister Ferenc Gyurcsany,’’ NovoOgaryovo, March 22, 2007. http://www.kremlin.ru (accessed January 12, 2008). 84. ‘‘Rossiyskie voennie nachali obstrukciyu NATO,’’ Nezavisimaya Gazeta, June 28, 2007. Accessed on January 12, 2008. Available from ISI Emerging Markets 85. ‘‘Government Would Rather Support the EU-backed Nabucco Pipeline,’’ Budapest Sun Online, May 2, 2007; available at http://www.budapestsun.com (accessed March 5, 2008). 86. ‘‘Tallin sem akart bojkottot. Gyurcsany Ferenc utolag tajekoztatta az eszt kormanyfot a finnugor talalkozorol,’’ Nepszabadsag, July 21, 2007; available from ISI Emerging Markets (accessed January 12, 2008). 87. Gabor Stier, ‘‘Gyurcsany a bizalomra epit,’’ Magyar Nemzet, December 8, 2007. 88. Menkiszak, ‘‘Russia’s Policy Towards Central Eastern Europe after the EU Enlargement.’’ 89. Author’s telephone interview with a former high ranking official of the Buzek and Kaczynski governments, March 2008. 90. ‘‘Russian Pipeline Plans Prevent Pilfering,’’ STRATFOR Strategic Forecasting, March 17, 2000; available from ISI Emerging Markets (accessed December 8, 2007). 91. Gazprom/About/Major Projects/Nord Stream; available at http://www.gazprom.com (accessed December 11, 2007).

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92. ‘‘Russia Industry: Major Gas Companies to Build Russia-Germany Pipeline,’’ EIU— Country Economic News, May 1, 2001; available from ISI Emerging Markets (accessed December 8, 2007). 93. Originally reported by Vremia Novostei, July 26, 2001, cited in ‘‘Construction of North European Gas Pipeline to Begin in Five Years,’’ WPS—CIS Oil & Gas Report, July 27, 2001; available from ISI Emerging Markets (accessed December 8, 2007). 94. Originally reported by Vedomosti, cited in ‘‘North European Gas Pipeline, Gazprom’s Priority Project,’’ Novecon Press Digest, January 25, 2002; available from ISI Emerging Markets (accessed December 8, 2007). 95. Originally reported by Kommersant, October 31, 2002, cited in ‘‘Polish Territory May be Excluded from the Project of Construction of the Yamal-Europe Gas Pipeline,’’ WPS—CIS Oil & Gas Report, November 1, 2002; available from ISI Emerging Markets (accessed December 8, 2007). 96. ‘‘Gazprom to Build Big Baltic Pipeline,’’ SKRIN News, November 19, 2002; available from ISI Emerging Markets (accessed December 8, 2007). 97. Originally in Vedomosti, February 25, 2003, cited in ‘‘Gazprom Actually Closes All Gas Transportation Projects in Poland,’’ WPS—CIS Oil & Gas Report, February 26, 2003; available from ISI Emerging Markets (accessed December 8, 2007). 98. ‘‘Gazprom Actually Closes All Gas Transportation Projects in Poland.’’ 99. Vedomosti, January 25, 2002; Izvestia, January 25, 2003. 100. Originally reported by Vedomosti on November 19, 2002, cited in ‘‘Gazprom Opts for Baltic Route,’’ Novecon Press Digest, November 19, 2002; available from ISI Emerging Markets (accessed December 8, 2007). 101. Originally in Kommersant, October 22, 2003. Cited in ‘‘Ruhrgas Has Difficulties With Entrance into the Project of North European Gas Pipeline,’’ WPS—CIS Oil & Gas Report, October 24, 2003; available from ISI Emerging Markets (accessed December 8, 2007). 102. ‘‘Energy Dialogue with Russia. Update on Progress’’ (Commission Staff Working Paper, Commission of the European Communities, Brussels, January 28, 2004), 12; available at http://ec.europa.eu/ten/energy/revision_2003/index_en.htm (accessed December 9, 2007). 103. Originally in Rzeczpospolita, July 2–3, 2005, cited in ‘‘The Baltic Pipeline Will Seriously Impair Poland’s Energy Security but Warsaw is Doing Little About It,’’ Polish News Bulletin, July 8, 2005; available from ISI Emerging Markets (accessed December 8, 2007). 104. ‘‘The Baltic Pipeline Will Seriously Impair Poland’s Energy Security but Warsaw is Doing Little About It.’’ 105. Originally reported by Puls Biznesu, July 19, 2005, cited in ‘‘Celebration as Poland’s Yamal Gas Plants Completed,’’ Poland AM, July 19, 2005; available from ISI Emerging Markets (accessed December 8, 2007). 106. Originally in Vremia Novostei, March 17, 2003, cited in ‘‘North European Gas Pipeline Under Question,’’ Novecon Press Digest, March 17, 2003; available from ISI Emerging Markets (accessed December 8, 2007). 107. Originally in Vremia Novostei, March 25, 2003, cited in ‘‘Foreign Companies Do Not Wish to Build the North European Gas Pipeline,’’ WPS—CIS Oil & Gas Report, March 26, 2003; available from ISI Emerging Markets (accessed December 8, 2007). 108. ‘‘EU to Participate in North Transgas Pipeline Financing,’’ New Europe, October 26, 2003; available from ISI Emerging Markets (accessed December 8, 2007). 109. ‘‘Energy Dialogue with Russia. Update on Progress,’’ 12.

222

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110. Originally in Rzeczpospolita, July 2–3, 2005, cited in ‘‘The Baltic Pipeline Will Seriously Impair Poland’s Energy Security but Warsaw is Doing Little About It.’’ 111. ‘‘Russia Restores Its Gas Supplies to Belarus,’’ New Europe, February 29, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 112. Vladimir Socor, ‘‘Gazprom Eyes Takeover of Beltransgas,’’ EurasiaDaily Monitor, May 20, 2004; available at http://www.jamestown.org (accessed December 13, 2007). 113. Marta Koblanska, ‘‘PGNiG Wants to Attract Investors to Company’s IPO by Offering Emergency Plan for Gas Supplies,’’ Internet Securities Businesswire, March 4, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 114. Marta Koblanska, ‘‘Poland May Be Most Affected if Russia Cuts Off Gas Supplies to Belarus Again,’’ Internet Securities Businesswire, February 19, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 115. ‘‘Kicking the Habit,’’ Warsaw Business Journal, February 28, 2004; available from ISI Emerging Markets (accessed December 8, 2007). 116. ‘‘Gazprom Stops Supplies to Belarus; Poland Talks with Statoil,’’ IntelliNews—Poland Today, February 20, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 117. Originally reported by Gazeta Wyborcza online, cited in ‘‘Poland Lost $1.5 million when Gazprom Closed the Tap,’’ Polish News Bulletin, March 19, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 118. Originally in Parkiet, March 3, 2004, cited in ‘‘Gazprom Willing to Talk About Compensation,’’ Polish News Bulletin, March 3, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 119. Kamil Tchorek, ‘‘Gazprom Offers Muffled Reassurance,’’ Warsaw Business Journal, March 6, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 120. Originally in Gazeta Wyborcza Online, cited in ‘‘Russians Reluctant to Pay for February’s Gas Shortage,’’ Polish News Bulletin, March 10, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 121. ‘‘Bartimpex Could Build Bernau-Szczecin Gas Pipeline by End of 2005,’’ Internet Securities Businesswire, February 26, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 122. ‘‘Polish Monopolist Seeks to Reverse Yamal Pipe in Case of Gas Disruption,’’ Internet Securities Businesswire, February 27, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 123. ‘‘Ukraine to Up Transit of Russian Gas to Europe,’’ New Europe, February 29, 2004; available from ISI Emerging Markets (accessed December 11, 2007). 124. Originally reported by Rzeczpospolita. Cited in ‘‘Russian Baltic Sea Gas Pipeline Not To Compete With Yamal Pipeline Second Line via Poland,’’ Business Digest, July 18, 2005; available from ISI Emerging Markets (accessed September 30, 2007). 125. ‘‘Kicking the Habit,’’ Warsaw Business Journal, February 28, 2004; available from ISI Emerging Markets (accessed December 8, 2007). 126. ‘‘Gazprom to Launch North Transgas Pipe in 2010,’’ New Europe, February 21, 2005; available from ISI Emerging Markets (accessed December 8, 2007). 127. Gazprom Web site, Major Projects, Nord Stream; available at www.gazprom.com http://www.gazprom.com/eng/articles/article22901.shtml (accessed July 9, 2008). 128. Judy Dempsey, ‘‘Russian Gas to Flow to Europe via Baltic Sea,’’ International Herald Tribune, April 12, 2005; available at http://www.iht.com (accessed December 13, 2007).

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129. Ibid. 130. Originally reported by Reuters, cited in ‘‘Getting Pumped Up Over Gas Pipeline,’’ Warsaw Business Journal, July 4, 2005; available from ISI Emerging Markets (accessed September 30, 2007). 131. Originally reported by Rzeczpospolita, cited in ‘‘Russian Baltic Sea Gas Pipeline Not To Compete With Yamal Pipeline Second Line via Poland,’’ Business Digest, July 18, 2005; available from ISI Emerging Markets (accessed September 30, 2007). 132. Originally in Puls Biznesu, March 30, 2007, cited in ‘‘Alexander Gudzowaty Fighting for His Return to Gas Premier League,’’ PNB—Economic Review, April 3, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 133. ‘‘Gazprom May Start Building 2nd Spur of Yamal-Europe Pipe in ’08,’’ Prime-TASS Belarus Newswire, March 23, 2007; available from ISI Emerging Markets (accessed December 28, 2007). 134. Gazprom Web site, Major Projects, Nord Stream. 135. Vladimir Socor, ‘‘Russo-German Gas Pact in the Baltics,’’ Eurasia Daily Monitor, September 13, 2005; available at http://www.jamestown.org (accessed December 17, 2007). 136. Vladimir Socor, ‘‘Growing Risks to Baltic Sea Safety from Russian Energy Projects,’’ Eurasia Daily Monitor, January 31, 2007; available at http://www.jamestown.org (accessed December 17, 2007). 137. Vladimir Socor, ‘‘Putin-Schroeder Gas Deal Timed to German Elections,’’ Eurasia Daily Monitor, September 13, 2005; available at http://www.jamestown.org (accessed December 13, 2007). 138. Reported by Parkiet, September 20, 2005. Cited in ‘‘New Gas Pipelines Under Scrutiny,’’ Polish News Bulletin, September 20, 2005; available from ISI Emerging Markets (accessed December 15, 2007). 139. ‘‘Baltic Pipeline: Damage is Done but Poland’s Fight for Diversification Is by No Means Over,’’ Polish News Bulletin, September 15, 2005; available from ISI Emerging Markets (accessed September 30, 2007). 140. Gazprom Web site, Major Projects, Nord Stream. 141. Originally in Gazeta Wyborcza Online, February 8, 2007, cited in ‘‘Poland’s Consent Necessary for EIB to Engage in NEGP Project,’’ Polish News Bulletin, February 9, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 142. ‘‘Poland to Demand More Leverage Over Russian-German Gas Pipeline Project on Territorial Claims,’’ Interfax—Poland Business Weekly, February 16, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 143. Originally in Gazeta Wyborcza, April 18, 2007. Cited in ‘‘Northern Pipeline Investors Did Not See Polish Zone,’’ Polish News Bulletin, April 18, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 144. ‘‘Agency Says Alternative Routes for Baltic Sea Pipeline Should Be Considered,’’ AFP, February 16, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 145. ‘‘Russia May Consider Building 2nd Strand of Yamal Pipeline,’’ New Europe, October 29, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 146. Originally in Itar-TASS, March 23, 2007, cited in ‘‘Gazprom May Add Gas Pipeline via Belarus to 2008 Investment Programme—Official,’’ BBC Monitoring, March 23, 2007; available from ISI Emerging Markets (accessed December 28, 2007).

224

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147. ‘‘PRESS: Russian Gas Giant Gazprom Announces Possible Yamal 2 Pipeline Investment in 2008,’’ Interfax—Poland Business Weekly, March 31, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 148. ‘‘Polish Gas Monopolist PGNiG Wants Possible Second Yamal Gas Pipe Only for Transit Operations,’’ Interfax—Poland Business Weekly, June 29, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 149. Vladimir Socor, ‘‘Questions Multiply on the Baltic Seabed Pipeline Project’s Viability,’’ Eurasia Daily Monitor, April 23, 2007; available at http://www.jamestown.org (accessed December 17, 2007). 150. Vladimir Socor, ‘‘Resistance Growing to the Baltic Seabed Pipeline Project,’’ Eurasia Daily Monitor, April 23, 2007; available at http://www.jamestown.org (accessed December 17, 2007). 151. Vladimir Socor, ‘‘Baltic Seabed Gas Pipeline Project: Far from a Done Deal,’’ Eurasia Daily Monitor, April 23, 2007; available at http://www.jamestown.org (accessed December 17, 2007). 152. ‘‘Estonia Denies Permit to Study Sea Zone for Nord Stream Baltic Gas Pipeline Construction,’’ Interfax—Poland Business Weekly, April 21, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 153. ‘‘Nord Stream Gas Pipeline Could Be Rerouted Away from Polish Coast,’’ Interfax— Central Europe Energy, July 13, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 154. ‘‘France’s Total to Get 25% Stake in Shtokman Gas Field, Russia’s Gazprom to Keep Full Control,’’ Interfax—Poland Business Weekly, July 13, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 155. Originally in Ria Novosti, October 27, 2007. Cited in ‘‘Russia: Gazprom, StatoilHydro Sign Deal on Joint Shtokman Development,’’ Euclid Infotech—Utilities News, October 28, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 156. Originally in Parkiet, July 25, 2007, cited in ‘‘Amber Gas Pipeline Lives Again,’’ Polish News Bulletin, July 25, 2007; available from ISI Emerging Markets (accessed December 15, 2007). 157. Originally at http://www.pulsbiznesu.pl, cited in ‘‘EU to Finance Amber Visibility Study—Poland Econ Min,’’ Business Digest, July 26, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 158. ‘‘Baltics, Poland Want EU to Seek Options to Nord Stream Pipeline,’’ AFP, July 24, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 159. ‘‘Poland Will Not Alter Stance on Baltic Sea Pipeline Due to Potential Gas Transit Problems via Belarus,’’ Interfax—Poland Business Weekly, August 3, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 160. ‘‘EU Calls Gas Group Meeting Over Russia, Belarus Supply Row,’’ AFP, August 2, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 161. ‘‘Russian Gazprom Threatens to Cut Gas Exports to Belarus by 30% if Remaining Debt not Settled,’’ Interfax—Poland Business Weekly, August 3, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 162. Nord Stream Re-routes Pipeline North of Bornholm,’’ August 21, 2007, press release; available at http://www.nord-stream.com (accessed December 20, 2007). 163. ‘‘Poland Won’t Block the Pipeline?’’ PNB—Economic Review, August 24, 2007; available from ISI Emerging Markets (accessed December 17, 2007).

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164. ‘‘Estonia Refuses Surveys for Nord Stream Baltic Sea Gas Pipeline,’’ AFP, September 20, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 165. Ibid. 166. ‘‘Estonia Blocks Key Baltic Sea Gas Pipeline,’’ AFP, September 20, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 167. ‘‘State’s Resistance Could Threaten Pipeline Project: Russia,’’ AFP, October 16, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 168. Originally at Gazeta Wyborcza Online, October 17, 2007, cited in ‘‘Election Pipeline Problem,’’ PNB, October 18, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 169. ‘‘Russia May Consider Building 2nd Strand of Yamal Pipeline.’’ 170. ‘‘Belarus to Pay Russia to Avoid Gas Cut-off,’’ AFP, August 2, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 171. ‘‘Gazprom Will Surprise PGNiG with Yamal Pipeline?’’ PNB, October 22, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 172. ‘‘PRESS: Russia’s Gazprom May Propose 2nd Stretch of Yamal Gas Pipeline Running Through Poland,’’ Interfax—Poland Business Weekly, October 26, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 173. ‘‘Europe: Russia Drops Second Leg of Gas Pipeline via Belarus.’’ 174. ‘‘Russia’s Ministry Doubts Feasibility of Yamal-Europe-2,’’ Prime-TASS Belarus Newswire, November 1, 2007; available from ISI Emerging Markets (accessed December 28, 2007). 175. ‘‘Russia Drops Second Leg of Gas Pipeline via Belarus—Minister.’’ 176. ‘‘Poland Press—Top Business Headlines, November 21, 2007’’ PAP Market Insider, November 21, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 177. Originally in Puls Biznesu, November 14, 2007, cited in ‘‘’’PGNiG Cannot Withdraw from Diversification of Gas Supplies,’’ Interview with CEO Krysztof Glogowski,’’ PNB—Economic Review, November 23, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 178. ‘‘Russian/German Nord Stream to Propose New Baltic Sea Gas Pipe Route to Sweden Before ’08,’’ Interfax—Poland Business Weekly, November 3, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 179. ‘‘Germany, Russia Could Modify Nord Stream Natural Gas Pipeline Poland’s Likely Future PM Tusk,’’ Interfax—Poland Business Weekly, November 9, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 180. ‘‘Dutch Gasunie Joins Russian-led Baltic Gas Pipeline Project,’’ AFP, November 6, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 181. Originally in Itar-TASS, December 18, 2007, cited in ‘‘Russian Presidential Aide Comments on Relations with Poland, EU, US ABM Plans,’’ BBC Monitoring, December 18, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 182. ‘‘Swedish Protest Against Pipeline Boosts Chances of Polish Idea,’’ Polish News Bulletin, November 21, 2007. Accessed on December 17, 2007. Available from ISI Emerging Markets 183. Originally in RosBusiness Consulting News, November 26, 2007, cited in ‘‘Russia: Nord Stream Construction in Line with Plan,’’ Euclid Infotech—Utilities News, November 27, 2007; available from ISI Emerging Markets (accessed November 27, 2007).

226

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184. ‘‘Finland Will Not Join Nord Stream Baltic Sea Gas Pipeline Project Finnish PM,’’ Interfax—Central Europe Energy, November 30, 2007; available from ISI Emerging Markets (accessed November 30, 2007). 185. The breakdown of Gaz Trading’s shareholders at the beginning of 2007 complicated the situation. PGNiG owned 43.41 percent; Bartimpex, a company owned by Polish oligarch Alexander Gudzowaty, controlled 36.17 percent; Gazexport owned 15.88 percent; Weglokoks owned 2.27 percent; and Wintershall owned 2.27 percent. 186. Originally in RBK Daily, December 13, 2006, cited in ‘‘Europe Is Once More Worried About Russian Gas Supplies,’’ WPS—CIS Oil and Gas Report, December 15, 2006; available from ISI Emerging Markets (accessed December 28, 2007). 187. Originally on Rzeczpospolita Web site, http://www.rzeczpospolita.pl, November 28, 2007, cited in ‘‘Gazprom Official Says No Change in Transit Rates for Poland,’’ BBC Monitoring, November 28, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 188. Originally in Rzeczpospolita and Puls Biznesu, cited in ‘‘Gazprom Tries to Gain Total Control over EuropolGaz,’’ Poland AM, June 22, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 189. ‘‘Polish Pipeline Operator Europol Gaz’s Plans to pay Back Debt to Gazprom Seen as Unrealistic,’’ Interfax—Poland Business Weekly, March 23, 2007; available from ISI Emerging Markets (accessed December 27, 2007). 190. ‘‘Gazprom Official Says No Change in Transit Rates for Poland.’’ 191. Originally in Puls Biznesu, January 16, 2007, cited in ‘‘Battle for Europol Gaz Continues,’’ PNB, January 16, 2007; available from ISI Emerging Markets (accessed December 27, 2007). 192. ‘‘Russians, Poles ‘Deadlocked’ over Gas Transit: Polish Firm,’’ AFP, January 17, 2007; available from ISI Emerging Markets (accessed December 27, 2007). 193. Originally in Parkiet, cited in ‘‘Gazprom Pays Lip Service to URE Energy Tariffs,’’ Poland AM, March 20, 2007; available from ISI Emerging Markets (accessed December 27, 2007). 194. ‘‘Gazprom Eyes Control over Pipe Operator Europolgaz—PGNiG,’’ PAP Market Insider, June 21, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 195. Quoted in ‘‘Countries Interested in Caspian Oil Will Talk about International Consortium Soon,’’ Internet Securities Businesswire, February 12, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 196. ‘‘Odessa-Brody Pipeline Will Pump Caspian Oil,’’ PNB—Economic Review, February 6, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 197. Quoted in ‘‘Chevron Texaco Interested in Odessa-Brody Pipeline Use,’’ New Europe, February 22, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 198. Quoted in ‘‘Countries Interested in Caspian Oil Will Talk about International Consortium Soon,’’ Internet Securities Businesswire, February 12, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 199. Ibid. 200. ‘‘Kiev and EBRD to Finance Odessa-Brody-Plock,’’ New Europe, February 22, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 201. ‘‘Chevron Texaco Interested in Odessa-Brody Pipeline Use,’’ New Europe, February 22, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 202. ‘‘Total Fina, Shell, Lukoil, KazmunaiGas Eye Odessa-Brody-Plock Pipeline,’’ Internet Securities Businesswire, March 26, 2004. ‘‘Chevron Texaco Interested in Odessa-Brody Pipeline

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Use,’’ New Europe, February 22, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 203. Quoted in ‘‘Chevron Texaco May Speed Up Odessa-Brody-Plock Pipeline Project,’’ April 26, 2004, New Europe; available from ISI Emerging Markets (accessed January 1, 2008). 204. Ibid. 205. ‘‘Ukraine’s Kuchma: Use of Odessa-Brody to Pump Caspian Oil Is Economically Unsound,’’ Internet Securities Businesswire, April 29, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 206. Quoted in ‘‘Action Needed for the Odessa-Brody Oil Pipeline Project.’’ 207. ‘‘Government Permits Reverse Usage of Odessa-Brody Pipeline,’’ IntelliNews— Ukraine Today, July 6, 2004; available from ISI Emerging Markets (accessed January 5, 2008). 208. ‘‘Ukraine Opts for Two-way Use of Odessa-Brody Oil Pipeline,’’ Internet Securities Businesswire, July 6, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 209. ‘‘Treasury: PERN and Ukrtransnafta Set Up Joint Venture Sarmatia,’’ Internet Securities Businesswire, July 15, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 210. Kostis Geropoulos ‘‘Todiychuk Sees No Reason for Odessa-Brody Reversal,’’ New Europe, July 18, 2004; available from ISI Emerging Markets (accessed January 1, 2008). 211. Ibid. 212. Quoted in Vladimir Socor, ‘‘Ukraine Seeking Partners for Odessa-Brody Oil Pipeline Extension,’’ Eurasia Daily Monitor, March 22, 2005; available at http://www.jamestown.org (accessed December 13, 2007). 213. Ibid. 214. Vladimir Socor, ‘‘Surge of Interest in Odessa-Brody Oil Pipeline,’’ EurasiaDaily Monitor, March 17, 2005; available at http://www.jamestown.org (accessed December 13, 2007). 215. Vladimir Socor, ‘‘Odessa-Brody-Europe Oil Transport Project Shelved Indefinitely,’’ Eurasia Daily Monitor, December 12, 2006; available at http://www.jamestown.org (accessed December 13, 2007). 216. ‘‘Pipeline from Odessa to Poland’s Gdansk Will Not Compete with Russian Pipelines Transneft Chief,’’ Interfax—Central Europe Energy, November 3, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 217. Quoted in ‘‘Poland Should Welcome Ukrainian PM’s Support for Pipeline Extension to Import Caspian Oil to EU,’’ Interfax—Central Europe Energy, January 27, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 218. Ibid. 219. ‘‘The European Commission Maintains Interest in Extending Odessa-Brody Oil Pipeline to Poland,’’ Interfax—Central Europe Energy, February 17, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 220. Originally in Itar-TASS, February 26, 2007, cited in ‘‘Ukraine, Slovak Premiers Discuss Pumping Oil to Europe,’’ BBC Monitoring, February 26, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 221. Ivan Stulajter, ‘‘Russian Nights,’’ Sme, May 7, 2007, cited in ‘‘Pundit Argues Against Letting Russians Buy into Slovak Oil Carrier,’’ BBC Monitoring, May 7, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 222. ‘‘Polish Oil Pipeline Operator PERN to Update Strategy in Light of Druzhba Pipeline Shutdown Rumors,’’ Interfax—Central Europe Energy, February 17, 2007; available from ISI Emerging Markets (accessed January 1, 2008).

228

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223. Originally in Rzeczpospolita, February 19, 2007, cited in ‘‘Poland Unable to Play Role of Transit State Between Russia and Rest of Europe,’’ PNB—Economic Review, February 20, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 224. Originally in Puls Biznesu online, February 19, 2007, cited in ‘‘Ukraine Complains about Poland’s Claims to Pipelines,’’ PNB, February 20, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 225. Sergey Sklyarov and Sergey Kulikov, ‘‘Polsha i Rossia Podelili Ukrainu,’’ Nezavisimaya Gazeta, February 19, 2007; available at http://www.ng.ru (accessed January 3, 2008). 226. ‘‘Boiko Says Poland Did Not Propose Ukraine Entrusting Privatization of Ukrtransnafta to PERN Przyjazn,’’ Ukrainian News—on-line, February 19, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 227. ‘‘Odessa-Brody Pipeline to First Be Extended to Czech Republic—Ukrainian PM,’’ Interfax—Central Europe Energy, March 31, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 228. ‘‘Russian Participation a Must to Send Caspian Oil West, Kazakhstan’s President Says,’’ Interfax—Central Europe Energy, March 31, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 229. ‘‘Poland Sees Launch of Caspian Oil Deliveries via Ukraine Possible in 2011— President Kaczynski,’’ Interfax—Central Europe Energy, April 6, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 230. ‘‘Too Early to Guarantee Oil Supplies for Odessa-Brody-Gdansk Pipeline Kazakhstan, Azerbaijan,’’ Interfax—Central Europe Energy, May 14, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 231. ‘‘Azerbaijan Looks to Supply Europe with Crude via Odessa-Brody-Gdansk Pipeline,’’ Interfax—Central Europe Energy, May 14, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 232. ‘‘PRESS: Poland’s President Expects Caspian Oil, Gas Deliveries via Ukraine Pipeline to Start in 2012,’’ Interfax—Central Europe Energy, May 18, 2007; available from ISI Emerging Markets (accessed January 1, 2008). 233. Originally in Wall Street Journal Polska, August 16, 2007, cited in ‘‘Pipeline Operator PERN Shows Little Sign of Fearing Druzhba Shutdown,’’ PNB—Economic Review, August 17, 2007; available from ISI Emerging Markets (accessed December 30, 2007). 234. ‘‘Azerbaijan-Poland Caspian Oil Pipeline Project Bypassing Is Political Russian Politician,’’ Interfax—Central Europe Energy, October 12, 2007; available from ISI Emerging Markets (accessed November 4, 2007). 235. ‘‘Ukraine, Poland Aim to Start Pumping Oil to Poland via Odessa-Brody in May 2008,’’ Interfax—Central Europe Energy, December 7, 2007; available from ISI Emerging Markets (accessed January 1, 2007). 236. Originally in Kommersant, February 9, 2005, cited in ‘‘Government of Slovakia Protects Transpetrol,’’ WPS—CIS Oil & Gas Report, February 11, 2005; available from ISI Emerging Markets (accessed November 4, 2007). 237. ‘‘Transpetrol Has Lower Profit, Sales Despite Bigger Production,’’ CTK— Business News (SK), April 25, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 238. ‘‘Is a Deal Finally in the Pipeline?’’ The Slovak Spectator, November 14, 2006; available from ISI Emerging Markets (accessed October 14, 2007).

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239. Viktor Yadukha, ‘‘The Bratislava Window: Slovakia is Russia’s Last Remaining Window to Europe,’’ RBC Daily, May 7, 2007, cited in WPS – What the Papers Say, May 7, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 240. ‘‘Chronology is based on Wojciech Kononczuk, ‘‘The ‘Yukos Affair,’ Its Motives and Implications,’’ Centre for Eastern Studies, Warsaw, August 2006; available at http://www. osw.waw.pl/files/PRACE_25.pdf (accessed November 4, 2007). 241. ‘‘Tatneft Has Shown Interest in Acquisition of 49 Percent of Shares of Slovak Transpetrol Belonging to Yukos,’’ AK&M—Financial Markets and Issuers News, February 25, 2005; available from ISI Emerging Markets (accessed November 4, 2007). 242. ‘‘Two Companies Want to Acquire Yukos Stake in Transpetrol,’’ SITA – Economy and Business, February 25, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 243. Ibid. 244. ‘‘Slovak-Russian Trade Has Growth Potential,’’ TASR—Export Service, February 25, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 245. ‘‘Two Companies Want to Acquire Yukos Stake in Transpetrol.’’ 246. ‘‘Russia’s Tatneft Interested in Yukos Share in Transpetrol—Putin,’’ CTK – Business News (SK), February 25, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 247. ‘‘Russian Tatneft Wants to Buy Yukos Shares in Transpetrol,’’ TASR—Export Service, February 25, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 248. ‘‘Yukos Doesn’t Want to Sell Stake in Slovak Transpetrol,’’ CTK—Business News (SK), February 28, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 249. ‘‘Unnamed Slovak Officials and Tatneft Negotiate for Transpetrol Shares,’’ TASR – Export Service, March 2, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 250. Originally in Vedomosti, October 4, 2005, cited in ‘‘The Government of Slovakia to Buy Out a 49% Stake in Transpetrol from Yukos,’’ WPS—CIS Oil and Gas Report, October 5, 2005; available from ISI Emerging Markets (accessed October 23, 2007). 251. ‘‘Vchera ‘‘Russnefty’’, kotoraya v 2006 godu soobshtila o priobretenii u Jukosa 49% v slovackoy truboprovodnoy kompanii Transpetrol, rasskazala chto vela eti peregovori s pisymennogo razreshenia MERT, no zatem ‘‘po prosybe bivshego prezidenta OAO ‘‘Gazprom nefty’’ Aleksandra Ryazanova ‘‘Russnefty’’ otkazalasy ot nih v polyzu ‘‘Gazprom nefti,’’ WPS—Business Oil, July 26, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 252. Originally in Kommersant, October 11, 2005, cited in ‘‘Yukos is Prohibited to Manage its Foreign Property,’’ WPS—CIS Oil and Gas Report, October 12, 2005; available from ISI Emerging Markets (accessed October 23, 2007). 253. Originally in Vedomosti, November 25, 2005, cited in ‘‘Assets of Yukos Are Unfrozen,’’ WPS—CIS Oil and Gas Report, November 28, 2005; available from ISI Emerging Markets (accessed October 23, 2007). 254. ‘‘Slovakia Wants to Discuss Transpetrol,’’ The Slovak Spectator, October 17, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 255. ‘‘Transpetrol Going to Russians,’’ The Slovak Spectator—Flash News, December 6, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 256. ‘‘Slovakia Not Interested in Re-Purchasing Share in Transpetrol,’’ TASR – Export Service, December 6, 2005; available from ISI Emerging Markets (accessed November 12, 2007).

230

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257. ‘‘Malcharek: New Company Should Own Yukos’ Share in Transpetrol (17:29),’’ TASR—Export Service, December 12, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 258. ‘‘Pipeline Shares Stay in Russia,’’ The Slovak Spectator, December 12, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 259. Beata Balogova´, ‘‘Crisis? What Crisis?’’ The Slovak Spectator, January 9, 2006; available from ISI Emerging Markets (accessed November 12, 2007). 260. ‘‘Pipeline Shares Stay in Russia.’’ 261. ‘‘Russia’s Rosneft or Tatneft to Obtain Stake in Transpetrol—Press,’’ CTK—Business News (SK), December 6, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 262. ‘‘Russian Yukos to Transfer Stake in Transpetrol to Tatneft or Rosneft,’’ IntelliNews— Slovakia Today, December 7, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 263. ‘‘Economy Minister Informs the Cabinet about Situation in Transpetrol,’’ SITA— Economy and Business, December 14, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 264. ‘‘Russneft is Officially Interested in Transpetrol’s Shares,’’ SITA—Economy and Business, December 20, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 265. ‘‘12:29 Yukos Sells 49% of Transpetrol Shares to Russneft,’’ AK&M—Financial Markets and Issuers News, February 7, 2006; available from ISI Emerging Markets (accessed October 23, 2007). 266. ‘‘Russia Economy: Russneft’s Arrival,’’ EIU Economy—News Analysis, February 10, 2006; available from ISI Emerging Markets (accessed October 23, 2007). 267. ‘‘Russneft Interested in Buying 49-Percent Stake in Transpetrol,’’ TASR – —Export Service, December 20, 2005; available from ISI Emerging Markets (accessed November 12, 2007). 268. ‘‘Is a Deal Finally in the Pipeline?’’ 269. ‘‘Yukos Confirms Transpetrol Sale to Russneft,’’ The Slovak Spectator, February 13, 2006; available from ISI Emerging Markets (accessed November 12, 2007). 270. ‘‘EcoMin Positively Views Sale of Transpetrol’s Stake to Russneft,’’ SITA – Economy and Business, February 15, 2006; available from ISI Emerging Markets (accessed November 12, 2007). 271. ‘‘Transpetrol Sale Hindered by Govt’s Fear of Opposition—Press,’’ CTK – Business News (SK), March 2, 2006; available from ISI Emerging Markets (accessed November 12, 2007). 272. ‘‘Decision on Transpetrol Sale to be Made by New Slovak Government,’’ CTK – Business News (SK), March 22, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 273. ‘‘Cabinet not to Decide on Oil Transit Transpetrol Stake Transfer,’’ IntelliNews— Slovakia Today, March 23, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 274. ‘‘Malcharek: Slovakia Needs Legislation on Nuclear Fund,’’ TASR—Export Service, April 3, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 275. ‘‘Is a Deal Finally in the Pipeline?’’

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276. Originally in Vedomosti, October 11, 2006, cited in ‘‘Transpetrol Rises in Price,’’ WPS—Russian Business Monitor, October 11, 2006; available from ISI Emerging Markets (accessed October 23, 2007). 277. ‘‘Receiver Seeks to Replace Some Directors at Yukos-affiliated Transpetrol,’’ PrimeTASS Business Newswire, October 23, 2006; available from ISI Emerging Markets (accessed October 23, 2007). 278. RBK daily, March 6, 2007, cited in ‘‘Gazprom Neft Conducts Negotiations about the Purchase of Transpetrol,’’ WPS—Russian Business Monitor, March 7, 2007; ‘‘Gazprom Neft Caught the Fancy Transpetrol,’’ Foreign Trade News, March 6, 2007; ‘‘Yukos is Judged for Transpetrol,’’ WPS—Business Reputation, March 20, 2007; ‘‘Sale of the Share of Yukos into Transpetrol Will Be Realized in the Interests of Russia and Slovakia, Stated Premier Mikhail Fradkov. 49% of Transpetrol Will Purchase the Government of Slovakia in order to Sell Packet to Gazprom,’’ WPS—Business Oil, May 7, 2007; reported by Vedomosti, cited in ‘‘An In-Depth Look at the Russian Press, May 7,’’ RIAN—Events in Russia, May 7, 2007; ‘‘Gazprom to Buy Yukos Stake,’’ Izvestiia Bizekon Report, May 8, 2007. Available from ISI Emerging Markets (accessed October 23, 2007). 279. ‘‘Russneft Forewent the Purchase of Transpetrol on the Request of Ryazanov,’’ AK&M Novosti Online, July 25, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 280. ‘‘Russia Industry: Mikhail Gutseriyev Resigns Position as President of Russneft,’’ EIU Business—News Analysis, August 7, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 281. Ibid. 282. Miriam Elder, ‘‘Russneft Sale Likely, as State Seen Closing In,’’ Moscow Times, July 25, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 283. ‘‘Vchera ‘‘Russnefty.’’ 284. Cited by Anatoly Medetsky, ‘‘Tax Service Launches Russneft Suits,’’ The Moscow Times, June 14, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 285. Miriam Elder, ‘‘Russneft Sale Likely, as State Seen Closing In,’’ The Moscow Times, July 25, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 286. ‘‘Press: Russneft’s President, Controlling Shareholder Leaving Co.,’’ Prime-TASS Business Newswire, July 4, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 287. ‘‘Timeline of Events,’’ Press Centre for Defence Attorneys of Mikhail Khodorkovsky and Platon Lebedev; available at http://www.khodorkovsky.info/timeline (accessed November 4, 2007). 288. ‘‘Is a Deal Finally in the Pipeline?’’ 289. ‘‘Buyback of Transpetrol Shares is at Deadlock,’’ SITA—Economy and Business, October 11, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 290. ‘‘State Wants Transpetrol Shares Back Despite Yukos Problems—Fico,’’ CTK— Business News (SK), November 5, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 291. ‘‘Slovakia or Russia to Buy Transpetrol Stake from Yukos, Says Minister,’’ SITA— Economy and Business, November 7, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 292. ‘‘Gasparovic: Russia or Slovakia to Acquire 49% of Transpetrol,’’ TASR—Export Service, November 7, 2006; available from ISI Emerging Markets (accessed October 14, 2007).

232

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293. ‘‘Survey: Majority of Population Support Efforts to Enhance Energy Security,’’ IntelliNews—Slovakia Today, November 6, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 294. ‘‘Slovak Govt May Block Arrival of New Owner at Transpetrol—press,’’ CTK Business News (SK), August 24, 2007; available at ISI Emerging Markets (accessed March 13, 2008). 295. ‘‘Shareholders in Transpetrol Reshuffle Board Members,’’ SITA—Economy and Business, November 20, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 296. ‘‘Ownership of a Minority Stake in Transpetrol is Still Contested,’’ SITA—Economy and Business, November 21, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 297. ‘‘Slovakia Allegedly Out of Play for Transpetrol Shares—Aktualne.sk,’’ CTK Business News (SK), November 30, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 298. ‘‘Minister Jahnatek Supports Joint Ownership of Transpetrol,’’ SITA—Economy and Business, January 13, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 299. ‘‘Minister Jahnatek Discusses Transpetrol Ownership in Russia,’’ SITA—Economy and Business, February 19, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 300. Originally reported by Sme, May 7, 2007, cited in ‘‘Czech Minister Rejects Slovak Premier’s Criticism of US Radar Plans,’’ BBC Monitoring, May 7, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 301. Ivan Stulajter, ‘‘Russian Nights,’’ Sme, May 7, 2007, cited in ‘‘Pundit Argues Against Letting Russians Buy into Slovak Oil Carrier,’’ BBC Monitoring, May 7, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 302. ‘‘Jahnatek Discusses Transpetrol Shares with Gazprom,’’ TASR—Export Service, February 19, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 303. ‘‘Jahnatek to prolong Right to Veto Sale of 49-percent of Transpetrol,’’ TASR—Export Service, March 14, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 304. ‘‘Slovak Econ Min to Meet Russian Yukos Reps Over 49% Stake in Pipeline Operator Transpetrol,’’ Interfax– Central Europe Energy, March 24, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 305. ‘‘From the Slovak Press,’’ CTK—Daily News (SK), March 12, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 306. ‘‘Fico no Longer Insists on Transpetrol Buyback,’’ SITA—Economy and Business, May 4, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 307. ‘‘Baltic Pipeline to Bypass Belarus is ‘‘Priority’’ for Russia—Energy Ministry,’’ Excerpt from report by Russian news agency RIA Novosti, posted on Red Orbit, April 17, 2007; available at http://www.redorbit.com/news/business/905058/baltic_pipeline_to_bypass_ belarus_is_priority_for_russia_/index.html (accessed November 4, 2007). 308. ‘‘Russian Firm Could Acquire 49% Stake in Transpetrol,’’ The Slovak Spectator, May 8, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 309. ‘‘Slovakia’s PM Discusses Oil and Gas Issues with Russian President,’’ SKRIN—News, May 8, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 310. Originally in ‘‘Gazprom to Buy Yukos Stake in Transpetrol,’’ Vedomosti, cited in ‘‘An In-depth Look at the Russian Press, May 7,’’ RIAN—Events in Russia, May 7, 2007; available from ISI Emerging Markets (accessed October 23, 2007).

NOTES

233

311. ‘‘Slovak Premier Says Fate of Russian-owned Oil Pipeline Undecided,’’ BBC Monitoring, May 5, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 312. Originally reported by Sme, May 7, 2007, cited in ‘‘Czech Minister Rejects Slovak Premier’s Criticism of US Radar Plans,’’ BBC Monitoring, May 7, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 313. ‘‘Russian Firm Could Acquire 49% Stake in Transpetrol.’’ 314. ‘‘Yukos Denies Agreement on the Transpetrol Stake Transfer to Gazprom,’’ SITA— Economy and Business, May 10, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 315. ‘‘Gazprom Neft Caught the Fancy Transpetrol,’’ Foreign Trade News, March 6, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 316. ‘‘Vchera ‘‘Russnefty.’’ 317. Ibid. 318. ‘‘Yukos’ Receiver Call for Auction of Assets – Including Transpetrol,’’ TASR – Export Service, July 13, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 319. ‘‘Breaking News,’’ Weekly Slovak a.m., SITA, July 16, 2007; ‘‘Polish PERN Wants to Bid for Transpetrol Shares in an Auction,’’ SITA—Economy and Business, July 17, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 320. ‘‘Transpetrol Protected by Court,’’ TASR – Export Service, July 26, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 321. ‘‘Yukos Receiver Mulls Appeal to Get Transpetrol Shares Certificate,’’ Prime-Tass Business Newswire, July 18, 2007; available from ISI Emerging Markets (accessed October 23, 2007). 322. ‘‘PERN Hunts for Transpetrol,’’ Vedomosti—Business News Media, July 18, 2007, available from ISI Emerging Markets (accessed October 27, 2007); ‘‘The Polish Pipeline Operator of PERN Forewent the Attempt to Purchase 49% of Actions of the Slovakian Transpetrol . . . ’’ WPS—Business Oil, August 15, 2007, available from ISI Emerging Markets (accessed October 27, 2007). 323. ‘‘Rosneft to Compete for Yukos Foreign Assets,’’ FIS News, August 14, 2007; available from ISI Emerging Markets (accessed October 27, 2007). 324. ‘‘Somewhat, Still Barely,’’ Vremya Novostey, August 14, 2007; available from ISI Emerging Markets (accessed October 27, 2007). 325. ‘‘Transpetrol Saga Continues,’’ The Slovak Spectator, August 14, 2007; available from ISI Emerging Markets (accessed October 14, 2007). 326. Ibid. 327. ‘‘Russia’s Rosneft Denies Link to Winner of Auction for Yukos Finance,’’ Prime-Tass Business Newswire, August 15, 2007; available from ISI Emerging Markets (accessed October 27, 2007). 328. ‘‘Little-known Company Buys Yukos Overseas Assets for $307 mln,’’ RIAN – Events in Russia, August 15, 2007; available from ISI Emerging Markets (accessed October 27, 2007). 329. ‘‘Monte Valle Owner Says His Co-affiliated with Buyer of Yukos Finance,’’ Prime-Tass Business Newswire, August 15, 2007; available from ISI Emerging Markets (accessed October 27, 2007). 330. ‘‘Dutch Court Rules that Auction of Yukos Dutch Assets Was Illegal,’’ AFP, October 31, 2007; available from http://www.khodorkovsky.info/timeline/135778.html (accessed January 7, 2008).

234

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331. ‘‘Ministry Still Wants to Discuss Transpetrol Stake with Yukos Finance,’’ SITA – Economy and Business, November 2, 2007; available from ISI Emerging Markets (accessed November 12, 2008). 332. ‘‘Minister Jahnatek Focused on Natural Gas and Transpetrol in Russia,’’ SITA – Economy and Business, December 23, 2007; available from ISI Emerging Markets (accessed January 7, 2008). 333. Anna Raff, ‘‘Miller Sheds Light on his Plan for SPP,’’ The Moscow Times, April 3, 2002; available from ISI Emerging Markets (accessed October 28, 2007). 334. ‘‘Gazprom Executive Board Considers SPP Privatization,’’ SKRIN News, February 27, 2004. 335. ‘‘Gazprom Withdraws Plan for Acquiring 16.3% of Gas Utility SPP,’’ IntelliNews— Slovakia Today, March 29, 2005; available from ISI Emerging Markets (accessed October 14, 2007). 336. ‘‘Foreign Affairs Ministry Offers no Comment on Baghdad Bomb Attack,’’ The Slovak Spectator—Flash News, June 13, 2005; available from ISI Emerging Markets (accessed October 14, 2007). 337. ‘‘Gazprom No Longer Interested in SPP Shares,’’ TASR—Export Service, February 21, 2006; available from ISI Emerging Markets (accessed October 14, 2007). 338. ‘‘Flat Tax: Many Say It Has Not Helped,’’ The Slovak Spectator—Flash News, May 23, 2005; available from ISI Emerging Markets (accessed October 14, 2007). 339. ‘‘Baltic Sea Nord Stream Gas Pipeline Very Serious Ecological Problem Polish PM Kaczynski,’’ Interfax—Poland Business Weekly, June 1, 2007; available from ISI Emerging Markets (accessed December 17, 2007). 340. ‘‘Baltic Sea Nord Stream Pipeline to Reduce Gas Transited via Slovakia by 10 bln Cubic Meters a Year,’’ Interfax—Central Europe Energy, November 17, 2007; available from ISI Emerging Markets (accessed December 20, 2007). 341. ‘‘EU Unified in Support of Nabucco Pipeline Project – EU Energy Commissioner,’’ August 22, 2007; available at http://www.abcmoney.co.uk (accessed January 15, 2008). 342. ‘‘Europai lapok Budapest es Moszkva uj baratsagarol,’’ Nepszabadsag online, March 1, 2006. 343. ‘‘Gyurcsany felhivta Putyint: merre menjen a gaz?’’ Index, July 10, 2006. 344. ‘‘Gazprom-Mol: keszulodes az uj gazvezetekre,’’ MTI, September 14, 2006. 345. ‘‘Putyin: Lesz gaz es olaj,’’ Nepszabadsag, September 19, 2006. 346. ‘‘Gazprom Export, Government of Republic of Serbia and Srbijagas Ink Memorandum of Understanding,’’ Gazprom News, December 20, 2006; available at http://www. gazprom.com (January 11, 2008). 347. Quoted in Judy Dempsey, ‘‘Hungary Chooses Gazprom over EU,’’ International Herald Tribune, March 12, 2007; available at http://www.iht.com (January 18, 2008). 348. ‘‘Hernadi: Az EU vallaljon kockazatot,’’ Index, March 23, 2007 349. Quoted in Judy Dempsey, ‘‘Largest Energy Company in Hungary Takes Practical Approach to Russia,’’ International Herald Tribune, March 28, 2007; available at http://www. iht.com (January 18, 2008). 350. ‘‘Eto nye romanticheskiy film,’’ Vremya Novostey, March 23, 2007; available from ISI Emerging Markets (accessed January 11, 2008). 351. Oxana Gavshina, ‘‘Hungarian Turn,’’ Gazeta, April 23, 2007; available from ISI Emerging Markets (accessed January 15, 2008).

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352. Gabor Lambert and Jozsef Martin, ‘‘Goncz Kinga a geopolitikai realitasokrol,’’ Figyelo, April 11, 2007; available from ISI Emerging Markets (accessed January 17, 2008). 353. ‘‘Szekeres Imre: Magyarorszag, ha lehet, a Nabuccot valasztja,’’ HVG, April 27, 2007. 354. ‘‘Hungary’s MOL Says Either Planned Gas Import Pipeline Beneficial for Company,’’ Interfax—Central Europe Energy, April 28, 2007; available from ISI Emerging Markets (accessed September 9, 2007). 355. ‘‘Gazprom Delegation Takes Part in XI St. Petersburg International Economic Forum,’’ June 8, 2007. http://www.gazprom.ru (January 11, 2008). 356. Matthew Brunwasser and Judy Dempsey, ‘‘Russia Signs Deal to Bring Natural Gas Pipeline through Bulgaria,’’ International Herald Tribune, January 18, 2008; available at http:// www.iht.com (accessed February 20, 2008). 357. ‘‘Hungary Sews the Gas Piping Systems,’’ Kommersant, December 6, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 358. ‘‘Minister of Economy of Austria: Russia Invited Austria to Participate in the Project ‘South Stream,’ ’’ RBC Novosti, August 16, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 359. ‘‘Speech by Prime Minister Ferenc Gyurcsany delivered at the Nabucco Conference,’’ Budapest, September 14, 2007. http://www.miniszterelnok.hu (accessed January 15, 2008). 360. ‘‘Mindenki a Nabuccot akarja,’’ Index, September 14, 2007. 361. ‘‘Great Prospects for Gazprom in Serbia,’’ RBC Daily, October 10, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 362. ‘‘Gas-Main Games,’’ Neftegazovaya vertical, October 30, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 363. Tibor Kis, ‘‘Merre tovabb, orosz foldgaz?’’ Nepszabadsag, December 7, 2007. 364. ‘‘United Gas Transport Front,’’ Vremya Novostey, December 6, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 365. ‘‘Hungary Sews the Gas Piping Systems.’’ 366. Yevgenyiy Belyakov, ‘‘Za dvumya trubami,’’ Gazeta, December 10, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 367. ‘‘Gosregulirovanie,’’ Kommersant, December 10, 2007; available from ISI Emerging Markets (accessed January 15, 2008). 368. ‘‘Megsem tett ajanlatot a Mol a Gazpromnak,’’ MTI, December 13, 2007; available at http://www.origo.hu (accessed January 15, 2008). 369. ‘‘Russia Signs Deal to Bring Natural Gas Pipeline though Bulgaria’’ 370. ‘‘Magyarorszag energiapolitikaja 2007–2020,’’ December 2007, 16; available at http://www.gkm.hu (accessed February 10, 2008). 371. Reported by MTI, cited in ‘‘Gazprom: Ukrajnat szorongatjak, nekunk szallitanak,’’ Privatbankar.hu—Hirek, February 8, 2008; available at ISI Emerging Markets (accessed February 18, 2008). 372. ‘‘Magyar vonatkozasu hirek,’’ MTI Reggeli Monitor, February 11, 2008; available at ISI Emerging Markets (accessed February 18, 2008). 373. ‘‘Gazprom: eleg az 50 szazalek—Megegyezes varhato a Deli Aramlat hazai szakaszarol,’’ Vilaggazdasag, February 14, 2008. 374. Istvan Marnitz, ‘‘A kormany megegyezne Oroszorszaggal az uj vezetekrol, de szamos reszlet tisztazatlan,’’ Nepszabadsag, February 25, 2008. 375. ‘‘Medvedev vozmozsno poedet v Belgrad,’’ Gazeta, February 22, 2008; available at http://www.gazeta.ru (accessed February 23, 2008).

236

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376. ‘‘Hungary Backs Russian Pipeline,’’ Financial Times, February 26, 2008, 2. 377. ‘‘Allami aramlat—Felesben epitjuk a Gazprommal a vezeteket—Bryza: A Nabucco a legfontosabb,’’ Nepszabadsag, February 26, 2008. 378. ‘‘Magyar vonatkozasu hirek,’’ MTI Reggeli Monitor, February 27, 2008; available at ISI Emerging Markets (accessed February 18, 2008). 379. Daniel Fried, ‘‘Amerika nem akar ‘gazvezetek-haborut,’ ’’ Nepszabadsag, February 28, 2008. 380. ‘‘Gyurcsany Putyinnak: Onok gyorsabbak voltak,’’ http://www.inforadio.hu, February 28, 2008. 381. ‘‘Putin Mocks US-backed Gas Pipeline Project,’’ Thomson Financial, AFX News Limited, February 28, 2008. 382. ‘‘Magyar-orosz gazvezetek megallapodas,’’ Moscow, February 28, 2008; available at http://www.kulugyminiszterium.hu (accessed February 29, 2008). 383. ‘‘Gazprom-E.ON reszvenycsere—uj korszak hajnala?’’ Energia.hu—Energiainfo´, July 18, 2006. 384. Information obtained from http://www.fgszallitas.hu. 385. ‘‘Moszkva es Budapest hatteralkuja a vegyiparban?’’ Magyar Hirlap, October 9, 2002. 386. Dmitriy Butrin, ‘‘Vengerskie gazovie seti lovyat russkih investorov,’’ Kommersant, March 3, 2004; available from ISI Emerging Markets (accessed January 20, 2008). 387. ‘‘Jobb felni?’’ Figyelo, July 1, 2004. 388. ‘‘Panrusgaz vibiraet mezhdu Rossiey i Ukrainoy,’’ Kommersant, August 5, 2004; available from ISI Emerging Markets (accessed January 20, 2008). 389. ‘‘Negy erdeklodo van gazuzletugyben—A Mol varhatoan a heten nevezi meg, kikkel kivan targyalni,’’ Vilaggazdasag, August 31, 2004. 390. ‘‘Egyedul tul nagy a gazuzlet—Konzorciumban palyazik a Mol-nal a Gazprom,’’ Napi Gazdasag, September 2, 2004. 391. ‘‘Mol otlozhila gazoviy tender do novovo goda,’’ Kommersant, September 3, 2004; available at http://www.kommersant.ru (accessed January 18, 2008). 392. ‘‘Gazprom: csak a Mol gazuzletagabol csak a szallitas erdekes,’’ September 3, 2004; available at http://www.portfolio. hu (accessed January 18, 2008). 393. ‘‘Mol es E.ON Ruhrgas International partnerseg a gazuzletben,’’ Mol press release, November 4, 2004; available at http://www.mol.hu (accessed January 18, 2008). 394. Rodion Levinskiy, ‘‘Industriya/Energoresursi/‘Gazprom’ rvetsya v Vengriyu,’’ Vedomosty, November 15, 2004; available from ISI Emerging Markets (accessed November 15, 2004). 395. ‘‘ ‘Gazprom; mozhet vernutysya v Vengriyu,’’ Kommersant, November 15, 2004; available at http://www.kommersant.ru (accessed January 19, 2008). 396. ‘‘Atszivargas,’’ HVG, April 6, 2006. 397. ‘‘ ‘Gazprom’ vistavil E.On schet za mestorozhdenie,’’ Kommersant, March 14, 2006; available from ISI Emerging Markets (accessed January 19, 2008). 398. ‘‘Uzletet hozott a Gazprom: Vitte a Sinopec az Udmurtnyeftyet, ismet teriteken a reszvenycsere az E.Onnal,’’ Vilaggazdasag, June 21, 2006. 399. ‘‘Telefonos megbeszeles a gazrol,’’ Magyar Hirlap, June 6, 2006. 400. Richard Hlavay, ‘‘Nemzetkozi csere,’’ Figyelo, July 20, 2006. 401. Istvan Marnitz, ‘‘Huzodik a magyar E.on-Gazprom-frigy,’’ Nepszabadsag, May 22, 2007.

NOTES

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402. ‘‘ ‘Gazprom’ i E.On vosli drug v druga,’’ Kommersant, July 14, 2006; available at http://www.kommersant.ru (accessed January 19, 2008). 403. ‘‘Hazank miatt nyugtalan a Gazprom,’’ Menedzsment Forum, June 26, 2007. 404. ‘‘Novemberre varhato az E.on-Gazprom megallapodas,’’ Menedzsment Forum, October 30, 2007. 405. ‘‘OMV and Gazprom Step Up Cooperation in Gas Business,’’ May 23, 2007. Corporate News 2007; available at http://www.omv.com (accessed January 9, 2008). 406. ‘‘Orosz vasarlas a Mol-ban—jon a Gazprom?’’ http://www.portfolio.hu, May 25, 2007. 407. ‘‘Russian Born Hungarian Businessman Rahimkulov Sells 6.2% Stake in Hungarian Oil Firm Mol,’’ Interfax—Central Europe Energy, June 30, 2007; available from ISI Emerging Markets (accessed September 8, 2007). 408. ‘‘Orosz vasarlas a Mol-ban—jo¨n a Gazprom?’’ 409. ‘‘Orosz helyett osztrak kero a Mol-nal,’’ Index, June 25, 2007. 410. ‘‘Hungary: Gazprom’s Subtle Attempt to Take Over Mol,’’ July 5, 2007, Stratfor, www.stratfor.com 411. ‘‘OMV and Gazprom Step Up Cooperation in Gas Business.’’ 412. Ibid. 413. Paul Betts, ‘‘Hungary’s Mol Vary of a Russian Checkmate,’’ FT.com—Local Selections, October 10, 2007; available from ISI Emerging Markets (accessed January 12, 2008). 414. Zeyno Baran, Senior Fellow and Director of the Center for Eurasian Policy, Hudson Institute, ‘‘Central and Eastern Europe: Assessing the Democratic Transition,’’ testimony in front of the House Committee on Foreign Affairs, July 25, 2007; available at http://www. hudson.org (accessed January 9, 2008). 415. ‘‘Central and Eastern Europe: Assessing the Democratic Transition,’’ Testimony of Zeyno Baran. 416. Vladimir Socor, ‘‘An Austrian Back Door for Russian Takeover of Hungary’s Energy Sector? (Part One),’’ Eurasia Daily Monitor, July 24, 2007; available at http://www. jamestown.org (accessed December 13, 2007). 417. ‘‘De kinek kene annyira a Mol?’’ Index, June 27, 2007. 418. Originally in Sme, July 10, 2007. Cited in ‘‘Slovak Paper Sees Austrian Takeover Bid for Hungarian Oil Firm as ‘Economic War,’ ’’ BBC Monitoring, July 10, 2007; available from ISI Emerging Markets (accessed November 12, 2007). 419. Originally in Anastasiy Krasinskaya, ‘‘Window into Eastern Europe,’’ RBK Daily, August 9, 2007. Cited by WPS—Business Oil, August 9, 2007; available from ISI Emerging Markets (accessed January 12, 2008). 420. ‘‘PRESS: Russian Giant Gazprom Wants to Take Over Austrian Oil and Gas Cocnern OMV,’’ Interfax—Poland Business Weekly, June 29, 2007; available from ISI Emerging Markets (accessed September 8, 2007). 421. ‘‘Medvedev: Gazprom Can Sooner or Later Purchase Share in Austrian OMV, but not Now,’’ RBC Novosti, May 25, 2007; available from ISI Emerging Markets (accessed January 12, 2008). 422. Betts, ‘‘Hungary’s Mol Vary of a Russian Checkmate.’’ 423. ‘‘Hungary: Gazprom’s Subtle Attempt to Take Over Mol,’’ July 5, 2007, Stratfor, http://www.stratfor.com (accessed July 8, 2008). 424. Istvan Marnitz, ‘‘Hernadi: Egyetlen ervet sem tudok az OMV es a Mol egyesulese mellett,’’ Nepszabadsag, July 17, 2007.

238

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425. Istvan Marnitz, ‘‘A Lukoil szamol a Mollal, de nem tervez vele,’’ Nepszabadsag, September 14, 2007. 426. ‘‘Gyurcsany es Putyin egyutt utik a vasat,’’ Index, July 20, 2007. 427. ‘‘Tallinn sem akart bojkottot,’’ Nepszabadsag, July 21, 2007. 428. ‘‘Declaration of Intent to Combine OMV and Mol,’’ September 25, 2007, Corporate News 2007; available at http://www.omv.com (accessed July 8, 2008).

CHAPTER 7 1. Available at http://www.eustream.sk (accessed July 8, 2008). 2. Edward Crankshaw, ‘‘Russia’s Imperial Design,’’ in Readings in Russian Foreign Policy, ed. Robert A. Goldwin et al. (New York: Oxford University Press, 1959), 713. 3. Christer Pursiainen: Russian Foreign Policy and International Relations Theory (Ashgate Publishing Company, 2000), p. 37. 4. Antony J. Blinken, Ally Versus Ally: America, Europe, and the Siberian Pipeline Crisis (Westport, CT: Praeger, 1987), 36. 5. Ibid. 6. In Axel Lebahn, ‘‘The Yamal Gas Pipeline from the USSR to Western Europe in the East-West Conflict,’’ Aussen Politik 34 (3rd Quarter 1983). Cited in Blinken, Ally Versus Ally, 38. 7. Blinken, Ally Versus Ally, 10–11. 8. ‘‘Pipeline Linkage to Empower Russian Companies,’’ STRATFOR Strategic Forecasting, May 2, 2002; available from ISI Emerging Markets (accessed February 5, 2008). 9. House Committee on Foreign Affairs, remarks of Chairman Tom Lantos at hearing, ‘‘Foreign Policy and National Security Implications of Oil Dependence,’’ March 22, 2007. Available at http://foreignaffairs.house.gov (accessed July 8, 2008). 10. ‘‘A Glimmer of Hope: The Struggle for Energy Independence from Russia,’’ Economist, July 12, 2007 11. Blinken, Ally Versus Ally, 154–55. 12. Ibid., 154. 13. ‘‘EU-Russia Relations,’’ European Commission/European Union in the World/ External Relations, http://ec.europa.eu/external_relations/russia/intro/index.htm (accessed July 8, 2008). 14. Author’s interview, Budapest, December 2007.

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NEWS WIRES/NEWSPAPERS Agence France-Presse AK&M–Financial Markets and Issuers News Associated Press Bank es Tozsde BBC Monitoring Budapest Sun Business Communications Agency—Russian Company News

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Business Digest Business Hungary CCPR—Analytical Reports CTK Diplomaticheski vestnik East Week Economist Economist Intelligence Unit EIG—Energy Compass EIGOMI Euclid Infotech–Utilities News Eurasia Daily Monitor Figyelo Financial Times FIS News Foreign Trade News Gazeta Wyborcza Globe and Mail Heti Vilag Gazdasag (HVG) The Industry Newsletters Info Radio IntelliNews Interfax International Herald Tribune Internet Securities Businesswire ISI BOSS Business News Poland ITAR-TASS News Agency Izvestia Kommersant Magyar Hirlap Magyar Nemzet Moscow Times MTI Napi Vilaggazdasag Nepszabadsag Nepszava New Europe Newnations Nezavisimaya Gazeta Novecon Press Digest Oil & Capital PAP News Agency Parkiet Poland AM

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Polish News Bulletin Pravda Prawo i Gospodarka Prime-TASS Belarus Newswire Puls Biznesu RBC Daily Reuters RIA Novosti News Service RFE/RL Rossiiskaia Gazeta The Russia Journal Rzeczpospolita SITA SKRIN (Database for Russian companies) Slavia Capital The Slovak Spectator Sme STAT-USA—Country Commercial Guides Stratfor TASR Tol Magazine Trend Trud Vedomosty Vilaggazdasag Vremya Novostey Wall Street Journal Polska Warsaw Business Journal Warsaw Voice Wprost WPS–Business Oil WPS–CIS Oil & Gas Report WPS–Russian Business Monitor

WEB SITES European Commission: http://ec.europa.eu ABCmoney: http://www.abcmoney.co.uk Center for Disease Information: http://www.cdi.org Hungarian Energy Office: http://www.eh.gov.hu Eni: http://www.eni.it Europol Gaz: http://www.europolgaz.com.pl eustream (formerly SPP): http://www.eustream.sk FGSZ Natural Gas Transmission: http://www.fgszallitas.hu

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BIBLIOGRAPHY

Gateway to the European Union: http://www.europa.eu.int Gazprom: http://www.gazprom.com Hungarian Ministry of Foreign Affairs: http://www.kulugyminiszterium.hu Index.hu: http://www.index.hu International Energy Agency: http://www.iea.org International Monetary Fund: http://www.imf.org Lukoil: http://www.lukoil.ru Michigan State University: http://www.msu.edu Mikhail Khodorkovsky: http://www.khodorkovsky.info MOL: http://www.mol.hu Moscow International Petroleum Club: http://www.mmnk.org Munich Conference on Security Policy: http://www.securityconference.de National Security Services of the Republic of Hungary: http://www.nbh.hu Nord Stream: http://www.nord-stream.com Organization for Economic Co-operation and Development: http://www.oecd.org OMV Group: http://www.omv.com Origo.hu: http://www.origo.hu Osrodek Studiow Wschodnich (Centre for Eastern Studies): http://www.osw.waw.pl PKN Orlen: http://www.petrochemia.pl Polish Products: http://www.polishproducts.pl Portfolio.hu: http://www.portfolio.hu President of Russia: http://www.kremlin.ru Prime Minister of Hungary: http://www.miniszterelnok.hu Radio Free Europe/Radio Liberty: http://www.rferl.org Regions.ru: http://www.regions.ru Russian Ministry of Foreign Affairs: http://www.mid.ru Slovak Foreign Policy Association: http://www.sfpa.sk Stratfor: http://www.stratfor.com Transpetrol: http://www.transpetrol.sk U.S. Central Intelligence Agency: http://www.cia.gov U.S. Department of Energy: http://www.fe.doe.gov U.S. Energy Information Administration: http://www.eia.doe.gov Vedi Econometric Unit: http://www.vedi.ru The World Bank: http://www.worldbank.org Yukos: http://www.yukos.ru

Index Adria pipeline, 85, 103, 169; connecting with Druzhba, 67, 98–101, 171, 178 Amber pipeline, 122, 123, 125, 126, 128, 176, 181 Antall, Joseph, 36, 171 Antimissile base, 104, 105, 109, 111, 112, 163, 164, 167, 178, 179 Beltransgas, 117, 119, 121, 126, 127 Bernau-Szczecin pipeline, 74, 76, 78, 80, 82, 120 Blue Stream pipeline, 115, 159, 160, 171, 174, 175, 177, 180, 181; Nabucco vs., 148–54, 165, 169, 176 Borsodchem, 6, 65, 86, 88, 101, 103, 156, 160, 171, 172, 174, 176; takeover of, 92–98 BPS-2 (Baltic Pipeline System), 135, 144, 145 Brezhnev, Leonid, 19; doctrine, 33, 34, 35 Brotherhood pipeline, 44, 45, 58, 59, 69, 74, 75, 117, 147, 148, 155, 164, 169 Buzek, Jerzy, 70, 75, 81, 82, 87, 174 Chernomyrdin, Viktor, 50 CFE Treaty (Treaty on Conventional Armed Forces in Europe), 105, 109, 112, 115, 164, 167, 178 COMECON, 34, 96 Council on Foreign and Defense Policy, 35, 39; report on ‘‘East Central Europe and the Interests of Russia,’’ 49, 51, 61 CSCE, 37, 39, 40. See also OSCE

Defensive realism, 15, 17–20. See also Neorealist theory; Offensive realism Denmark, 79, 81, 82, 122, 124, 125, 126 DONG, 79, 81, 82 Druzhba, 2, 85, 162; connecting with Adria, 67, 98–101, 171, 178; and Odessa-Brody, 133–36. See also Friendship pipelineand Transpetrol, 91, 102, 111, 137, 143, 144, 145, 164, 169, 172, 174, 175; Dzurinda, Mikulas, 50, 56, 68, 69, 92, 111, 139, 141, 142, 168, 170, 172 EON, 122, 147, 156; exchange of Mol shares with Gazprom, 157–60, 165, 169, 170, 172, 173, 180. See also Ruhrgas Europol Gas, 50, 73, 76, 81, 101, 117, 127, 169, 171, 174, 175, 180; creation of, 42–44; financing of Yamal pipeline construction, 69–71, 175; Gazprom’s attempts to gain more leverage over, 121, 122, 128–30, 147, 164, 173 Fico, Robert, 111–13, 134, 137, 164, 170; involvement in the Transpetrol case, 141–45, 174, 175 Fradkov, Mikhail, 108, 132 Friendship pipeline, 2, 85, 92, 98, 130, 137. See also Druzhba Gas contract, 41, 43, 171, 172, 173, 174; renegotiation of, 66, 70, 71–73, 75, 79, 81, 83, 168, 171

250

INDEX

Gasparovic, Ivan, 111, 142, 143 Gaz de France, 75, 76, 78, 91, 147, 157, 164 Gazprom, 2, 5, 6, 40, 49, 60, 64, 65, 102, 144, 168; and Blue Stream and South Stream, 148–57and Borsodchem, 92– 98, 101, 103, 174, 176; and the gas contract, 41, 71–73, 170, 173; and joint ventures, 42–47, 50, 51, 57, 61, 62, 69– 71, 101, 128–30, 164, 169, 173, 175; and Mol, 67, 68, 88, 157–60, 160–63, 165, 169, 170, 172, 173, 180; and Nord Stream, 107, 116–28, 164, 177, 182; and SPP, 69, 89–91, 102, 147–48, 164, 169, 170; and Transpetrol, 141, 143, 144, 145, 146, 147; and Yamal, 44, 58– 60, 61, 62, 73–83, 89, 108, 116–28, 174; Gazprombank, 69, 70, 71, 129, 175 Gazprom Neft, 4, 141, 143, 162 Gaz Trading, 42, 43, 71, 121, 128, 175 Gorbachev, Mikhail, 16, 19, 33, 34, 36 Gudzowaty, Alexander, 42, 76, 120, 121, 175 Gyurcsany, Ferenc, 96, 113, 114–16, 159, 163, 165, 168, 174, 175; and Nabucco vs. Blue Stream and South Stream, 149, 150, 151, 153, 156 Horn, Gyula, 40 INA, 99, 100 Inter-system connector pipeline, 51, 58, 59, 69, 74, 75, 76, 77, 78, 80, 81, 82, 83, 89, 90, 117, 118, 175 Ivanov, Igor, 53, 64, 66, 68, 76, 90 Ivanov, Sergei, 65, 82, 105 Janaf, 99, 100 Kaczynski, Lech, 81, 110, 135, 136 Kasyanov, Mikhail, 66, 67, 68, 69, 87, 119, 174 Khodorkovsky, Mikhail, 64, 100, 146 Komarov, Jurij, 51, 58, 90, 118 Kosovo, 52, 56, 104, 105, 112, 164, 167, 168, 178

Kovacs, Laszlo, 67 Kozyrev, Andrei, 34, 35, 36, 39, 40, 47, 166 Kwasniewski, Alexander, 50, 66, 67, 75, 106, 107, 108, 109, 130 Lukashenko, Alexander, 2, 110, 117, 122, 126, 127 Lukoil, 4, 67, 68, 97, 100, 131, 153, 162, 163, 174; in the privatization tender for Rafineria Gdanska, 83–89 Marcinkiewicz, Kazimierz, 108, 109 Martonyi, Janos, vii, 55, 56, 67 Meciar, Vladimir, 45, 50, 51, 56, 68, 111, 143, 168, 170 Medgyessy, Peter, 67, 68, 101, 113, 114, 149, 157, 168, 174 Medvedev, Alexander, 120, 121, 124, 127, 147, 150, 151, 159, 163 Medvedev, Dimitry, 155, 156 Miller, Alexei, 64, 71, 90, 96, 121, 128, 147, 150, 154, 155, 158, 159 Miller, Leszek, 41, 58, 60, 66, 71, 72, 82, 88, 120, 170, 173, 174 Mol, 43, 60, 84, 85, 86, 91, 116, 134, 137, 140, 143, 169; and Borsodchem takeover, 92–98, 103, 168, 174; gas division of, 67, 68, 157–60, 165, 169, 170, 171, 174; merger with PKN Orlen, 87–89, 102, 173; and Nabucco vs. Blue Stream, 148–57; OMV’s move against, 160–63, 165, 170and Panrusgas, 45–47, 57; and reversing the flow of Adria, 98, 100, 103; Nabucco pipeline, 113, 115, 179, 180, 182; vs. Blue Stream and South Stream, 148–57, 165, 168, 173, 176 Naimski, Piotr, vii, 133 NATO, 2, 7, 35, 40, 48, 50, 51, 56, 65, 67, 105, 110, 111, 112, 113, 116; bombing of Yugoslavia, 24, 52, 54, 55; enlargement of, 3, 4, 12, 16, 17, 20, 22, 24, 35, 37–40, 48, 49, 51, 52, 53, 54, 55, 56, 60, 61, 62, 68, 69, 104, 111, 115, 163, 166, 167, 168, 178, 179

INDEX

NEGP (North European Gas Pipeline), 118–23, 128, 147, 164. See also Nord Stream Neoclassical realist theory, 9, 10, 20–23, 24, 166–67 Neorealist theory, 9, 10, 12–15, 18, 19, 21, 22. See also Defensive realism; Offensive realism Nord Stream, 4, 78, 80, 117, 121, 123–28, 135, 147, 148, 149, 152, 157, 159, 164, 170, 176, 177, 180, 181, 182 Odessa-Brody pipeline, vii, 117, 130–37, 138, 164, 169, 171, 173, 176, 179 Offensive realism, 15–17, 18, 19. See also Defensive realism; Neorealist theory OMV, 85, 88, 147, 148, 151; its move against Mol, 160–63, 165, 170 Orban, Viktor, 55, 67, 156, 168, 174 OSCE, 37, 40, 116. See also CSCE Panrusgas, 42, 43, 45–47, 50, 57, 94, 157, 158, 159, 171, 175 PERN, 85, 132, 135, 136, 143, 146, 169 PGNiG, 43, 77, 79, 81, 83, 119, 120, 121, 124, 127, 169; and Europol Gas, 42–43, 70, 121, 129–30, 175and the gas contract, 41, 69, 70, 71–73, 81; PKN Orlen, 101, 135, 163, 169, 170; merger with Mol, 87–89, 102, 173and Rafineria Gdanska, 85–87; Pol, Marek, 44, 72 Primakov, Yevgeny, 24, 47, 48, 50, 55, 67 Putin, Vladimir, 2, 14, 24, 75, 76, 90, 96, 100, 101, 102, 103, 117, 164, 165, 166, 167, 174, 177, 178; and Blue Stream and South Stream, 149, 150, 151, 152, 154, 156, 165; and Eon-Gazprom swap deal, 158, 159; foreign policy under first term, 63–69; foreign policy under second term, 104–16; and Nord Stream, 116, 119, 121, 122, 127, 128; and OMV, 160, 161, 163and Transpetrol, 137, 139, 141, 143, 145; Rafineria Gdanska, 83–87, 101, 169, 170, 171, 173, 174

251

Rahimkulov, Megdet, 47, 94, 95, 157, 160, 176 Realist theory, 8–12, 20, 21 Rosneft, 92, 100, 102, 138, 139, 140, 141, 142, 145, 146, 162, 163 Rotch Energy, 86 Ruhrgas, 74, 76, 78, 91, 122, 147, 157, 158, 164, 170. See also EON Russneft, 140, 141, 142 Schroeder, Gerhard, 65, 66, 107, 121, 122, 127, 149, 177 Schuster, Rudolf, 68, 90 Sibur, 64, 94, 96, 97, 98 Slovnaft, 60, 85, 91, 92, 133, 137, 147, 161, 162, 165, 169, 173 Slovrusgas, 43, 51, 57, 171 South Stream pipeline, 4, 113, 116, 171, 174, 177, 180, 181; vs. Nabucco 151– 57, 165, 169, 173, 176 SPP, 43, 44, 45, 50, 51, 57, 69, 102, 144, 171; privatization of, 89–91, 147–48, 164, 169, 170 Statoil, 72, 77, 79, 81, 83, 119, 120, 125 Suchocka, Hanna, 41, 172 Szazhalombatta, 93, 96, 98, 161, 162, 163, 165, 170 Tatneft, 111, 139, 140, 141 Transneft, 2, 64, 84, 98, 99, 100, 135, 144 Transpetrol, 69, 85, 100, 101, 102, 162, 164, 169, 171, 173, 174, 180; privatization of, 91–92; resale of, 111, 113, 134, 137–47, 175 Tusk, Donald, 108, 110 TVK, 67; and Borsodchem, 92–98, 103, 168 Vyakhirev, Rem, 49, 57, 58, 64, 69, 75, 82, 117 Warsaw Pact, 3, 33, 34, 36, 48, 105, 109 Wintershall, 42, 43, 76, 78, 121, 122 Wozniak, Piotr, 72, 147 Yamal, 4, 61, 69, 74, 76, 77, 79, 81, 82,

252

INDEX

83, 89, 101, 108, 117, 120, 122, 127, 147, 169, 171, 174; and Europol Gas, 42, 43, 44, 69–71, 128, 129, 164, 169, 174; and the gas contract, 41, 43, 44, 50, 71–73; Yamal 2 pipeline, 58, 60, 62, 73, 74, 75, 76, 77, 79, 81, 90, 117–19, 121, 124, 127, 128, 171 Yeltsin, Boris, 4, 35, 36, 37, 38, 40, 45, 47, 48, 49, 50, 51, 52, 55, 65, 66, 111

Yukos, 64, 65, 68, 69, 84, 85, 86, 88, 138, 140, 142, 144, 145, 146, 174; and Transpetrol, 91–92, 101, 102, 111, 134, 137, 138, 139, 140, 141, 143, 145, 146, 164, 171, 175; and reversing the flow of Adria, 98–101 Yukos Finance, 139, 142, 143, 145, 146 Zubkov, Viktor, 116, 127, 154

About the Author ANITA ORBAN is the Executive Vice President of the International Center for Democratic Transition in Budapest. She is a foreign affairs columnist for Valasz, Hungary’s leading political weekly, and served as the editor of its foreign affairs section. She has advanced degrees in international relations from Tufts University and taught economics at the University of Economic Sciences in Budapest. Fluent in English, Russian, German, Polish, Slovakian, and Hungarian, Orban is a frequent speaker on foreign policy issues and contributor to journals published in Hungary, Poland, Estonia, the U.S., and the UK.