Report

Let Slip the Bureaucrats of War

Let Slip the Bureaucrats of War

The people arguably doing the most to clip Russian president Vladimir Putin’s wings and neuter Russia’s ability to effectively wield its energy weapon are a bevy of largely bland and anonymous European bureaucrats.

While the European Union has never become a traditional, hard-power geopolitical player, it has deployed what gear it has in its limited toolkit to sometimes devastating effect in the current standoff with Russia. And thanks to the creation this week of a new European “Energy Union” — an effort to genuinely unify the energy policies of the 28 EU countries —  the gray-suited army looks poised to man the front lines of Europe’s resistance for years to come.

To wit: European regulators in December snuffed out Putin’s pet project, a $40 billion gas pipeline called South Stream that was meant to bypass Ukraine even while keeping big chunks of Europe subject to Russian energy bullying for decades to come.

In the “next few weeks,” Energy Union boss Maros Sefcovic said Wednesday, European Union antitrust officials will reopen a massive, and potentially historic, case against Gazprom, the big Russian energy firm. And Russia’s $13.6 billion plan to buy Hungarian support for its energy agenda by underwriting the construction of new nuclear power plants? Under investigation by EU competition officials, who could nix the deal entirely.

“The EU doesn’t send gunboats, it sends regulators,” said Andreas Goldthau, an energy expert at Harvard University’s Belfer Center. “And it’s proven pretty effective in doing that, probably much more effective than the hawkish policy proposals that come out of Washington and elsewhere.”

While top U.S. officials, from President Barack Obama to Secretary of State John Kerry, have touted the role that Western sanctions have played in reining in Moscow, in reality much of the heavy lifting has been done in recent years through a series of legal moves that have circumscribed Russia’s freedom of action. Brussels has only limited powers, mostly confined to competition policy and regulation. Functionaries are often lampooned for churning out thousands of pages of regulations detailing the permissible amounts of food coloring, for example, or micromanaging the labels on jars of olive oil. That is what has determined Europe’s legalistic approach, especially when it comes to energy questions, for the last two decades.

Regulators and competition officials have been toiling in the trenches of Europe’s economy since starting to pry open sectors such as telecommunications in the 1990s. That later expanded to include liberalizing state-dominated energy sectors, all with the goal of boosting the power of the market and making life easier for consumers.

It was a rough ride: National firms, from telephone monopolies to “national champion” energy concerns, fiercely resisted Brussels’s efforts to loosen their choking grip on the market. But Europe persisted — and, importantly, took aim first at powerful, politically connected Western European firms before turning their sights on companies outside the EU.

The European Commission, Europe’s executive body, “established a track record in successfully pushing the pro-market model at home before it turned to external companies such as Gazprom,” Goldthau said.

That approach came together in 2003, when Europe took the first big steps to liberalize the energy market. One big step, which is paying dividends today, was to ensure that Gazprom’s long-term gas supply contracts with European countries were free of restrictive clauses that would prevent the buyers from reselling the gas elsewhere. Thanks to that EU move, countries such as Poland and Slovakia can resell Russian gas they don’t need to beleaguered countries like Ukraine that do need it. Those so-called “reverse flows” have been important in helping insulate Ukraine from Russian gas pressure over the past year.

But the big culmination came in 2011, when a mind-numbingly arcane bundle of five new competition rules came into effect. The so-called “Third Energy Package” is today the epicenter of Europe’s ability to lay down the law — and make maverick companies play by the rules.

Essentially, the key elements in the Third Energy Package took direct aim at the business model used by national firms in the past and Gazprom today by mandating a separation between firms selling natural gas and those that transport it, in order to prevent abusive monopolies. Big gas producers, in other words, can’t also be the big gas pipeline operators — they have to share with other producers to inject competition into the market.

But despite plenty of Russian grumbling when the Third Energy Package came into effect, current and former U.S. and European government officials all say that Russia and Gazprom simply failed to understand the practical implications of the new EU regulations on Russia’s traditional approach to the energy business.

That helps explain Russia’s petulant cancellation of the South Stream pipeline in December, three years after the rules that made it a non-starter came into effect. Because South Stream’s pipes were meant to land in Bulgaria, an EU member state, the project had to comply with EU rules. Yet until a few months ago, Russia labored under the belief that EU law did not apply, perhaps because Russia first touted the project years before the new laws came into effect.

“The Commission played an instrumental role, and without it the project would not have been stopped,” said Julian Popov, a former Bulgarian environment minister. “That would have had massive security implications for Bulgaria, southeastern Europe, and for the EU as a whole, since the main know-how of Russia is the ability to destabilize countries.”

The European Commission’s hard line on South Stream came after another Russian pipeline, Nord Stream, successfully bypassed Ukraine. And Brussels cracked the whip, in part, because of European unease with Russian aggression in the Crimean Peninsula and eastern Ukraine; before then, European officials had hinted at the possibility of a negotiated solution.

But by killing one of Putin’s key projects, regulators also sent a signal to European countries tempted to cut side deals with Russia, such as Bulgaria and Hungary.

“The shelving of South Stream was a massive victory of the rule of law over the rule of Putin,” said Sijbren de Jong, an analyst at the Hague Centre for Strategic Studies. It also sent a signal to Sofia and Budapest to abide by European law. “Bulgaria learned the hard way, and [Hungarian Prime Minister Viktor] Orban is in for a very nasty surprise,” he said.

European regulators initially established their credibility by going after all offenders equally. But that doesn’t mean that competition rules can’t be applied strategically, Goldthau said. Brussels had earlier given an exemption to those competition rules for a similar pipeline project that it supported, the ill-fated Nabucco pipeline; South Stream, in contrast, was given no exemption.

“It clearly demonstrates a strategic element in the European Commission’s use of its regulatory power,” Goldthau said.

To be sure, plenty of other things have come together to erode Russia’s energy weapon. The boom in U.S. natural gas production meant gas supplies once earmarked for the United States made their way to Europe; that put Gazprom under pressure to renegotiate onerous contracts with consumers. The financial crisis and economic slump whacked Europe’s demand for natural gas, which further eroded Gazprom’s leverage. And U.S. and Western sanctions, by targeting Russian energy firms, have hamstrung their ability to raise funds in capital markets and actually pay for big, ambitious energy infrastructure projects in the first place.

But Brussels remains able and willing to curb Russian energy adventurism by lobbing legal briefs and directives rather than artillery shells. And despite the progress Europe has made in recent years, that legal approach will likely only become more important in years to come.

In laying out its blueprint for a new Energy Union this week, Brussels made clear that it does not consider Russia a strategic energy partner, despite the fact that Moscow supplies about one-third of its natural gas.

What’s more, Europe put special emphasis on the need to deploy the rule of law to protect the most vulnerable EU members, those in southeastern Europe. And it underscored that seemingly boring regulatory matters, such as public transparency about the financial terms in supply contracts, can play a pivotal role in parrying Putin’s intentions.

“In the absence of real guns, Brussels should stick to what it’s good at. Competition law is a pretty powerful tool — as Russia, Bulgaria, and Hungary now know,” de Jong said.

EMMANUEL DUNAND/AFP/Getty