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EU: Russia (EUC Report)

I, too, must thank the noble Lord, Lord Teverson, for his admirably clear presentation of the committee’s conclusions. As he indicated, one thing we have certainly learned in Sub-Committee C over the past 18 months is that you cannot carry out a major inquiry, put it on one side and think that you have finished. When we produced our first report on the European Union and Russia in May—we started in July 2007—the oil price was rising above $100 a barrel, the Russian economy was being buoyed up by high energy prices and foreign currency reserves were about $425 billion, with another $140 billion in a stabilisation fund. If the prospects for the medium and long term were uncertain, the immediate questions were about Russia’s use of its sovereign funds and the scale of its overseas investments. When we published the follow-up report nine months later, the oil price was around $50 a barrel and, as we stated: ""Russia’s economy has been severely affected by the financial crisis and global economic downturn"." In the first report, we identified the common neighbourhood, Russia’s "near abroad", as a particularly sensitive area that should be treated as such by both parties, but we did not foresee the war in Georgia that took place two months after its publication. Perhaps we should have done, or at least been more conscious of the possibility of an explosion in an area where causes for conflict can be traced back for generations, and which one witness described as a "very brittle, explosive country". There is also plenty of evidence that, whatever the provocation given it as its excuse, the Russian military had been preparing for its intervention for a considerable period. As the noble Lord, Lord Teverson, said, its response was disproportionate. While the EU’s reaction, led by President Sarkozy, was "rapid and reasonably successful", in paragraph 21 of our report we stated: ""We are seriously concerned that Russia has not complied fully with the ceasefire agreement … Full Russian compliance with the ceasefire plan should continue to be used as a measure of Russia's behaviour, even though such compliance is unlikely in the near future"." In paragraph 23 we added: ""It is essential that the mandate of the EU Monitoring Mission in Georgia (EUMM) is renewed later this year and is allowed to exercise its agreed tasks in full on both sides of the border"." The reality is that there have been and continue to be serious breaches of the ceasefire agreement and the monitoring mission has not been allowed to carry out all its agreed tasks. Russia is a hugely important trading partner; it is the provider of much of our energy resources and it has the potential to be an important ally on issues such as nuclear proliferation and terrorism. It is in Europe’s interests to be patient and show understanding of Russia’s feeling of humiliations suffered, but Europe has to be robust as well and make it clear that no progress can be made on matters such as the partnership and co-operation agreement or on other issues important to Russia while agreements that have been made continue to be breached. In this context I want to say a word, as both the other speakers have, about NATO’s role in the sensitive area of Russia’s "near abroad", which has become Europe’s "near abroad" as well. I refer to the evidence of Sir Roderick Lyon about the three questions that should be asked about potential NATO members:""would it be good for the country in question, would it be good for NATO and would it be good for European security?"" He did not think that, ""awarding Membership Action Plan (MAP) status to Ukraine and Georgia increased their security at all; rather it had the opposite effect"." Had Georgia already been a member of NATO, that would not have prevented the war. Sir Mark Lyall Grant’s view was that NATO was not ready to extend the Article 5 guarantee, which was fundamental to NATO, in circumstances where there were difficulties within Ukraine and attacks on Georgia’s territorial integrity. We suggested that the ongoing disputes over missile defence and NATO enlargement risked further complicating EU-Russian relations and that, without drawing back on the commitment to eventual membership, ""the focus should remain in the immediate future on practical cooperation"." In the event, this May we have had tit-for-tat expulsions of diplomats and a military exercise in Georgia that has provoked Russian anger, just at the moment that President Obama is seeking to improve relations with Russia. It does not appear obvious that the decision to hold this exercise, even if it was small in terms of numbers and aimed at disaster relief, was a good idea. However, perhaps Russia wants to respond positively to the President’s initiative, and last Friday Dmitry Rogozin, Russia’s envoy to NATO, made conciliatory remarks. Surely every effort should be made to respond in a positive way. We also stated in our report: ""The EU has an important role to play in strengthening the economies and democracies of both Georgia and Ukraine"." Last week, at a meeting in Prague, the EU sought to intensify political and economic ties with six former Soviet republics, including Georgia and Ukraine, while seeking to reassure Russia that it was not trying to assert itself in Moscow’s former sphere of influence. The Eastern Partnership programme announced in Prague, which pledged $799 million in aid from 2009 to 2013, was perhaps inevitably greeted with suspicion in Moscow and not with great enthusiasm by some of the countries which should benefit. They argued that it was insufficient at a time of political and economic distress. A majority of the leaders from Europe’s biggest nations, including France, Britain and Italy, stayed away from the meeting. Only Chancellor Merkel of Germany attended. I doubt if that is the right signal to send to our eastern neighbours and I hope that the Minister will explain Britain’s absence from a meeting which could have important consequences. The events in Georgia in August last year were followed by an interruption in gas supplies through Ukraine in January this year. That interruption resulted in significant reductions in supplies for a number of European countries. Martin Ríman, the Czech Minister for industry and trade, described the gas crisis as, ""unprecedented in the history of gas supplies to Europe"." Michael Davenport from the Foreign Office told us that the proximity of the Georgian conflict to key energy transit routes in the Caucasus had highlighted their fragility. He urged that the EU should be more proactive in bolstering the prospects for improving supply routes to the west from the Caspian Sea, and the proposed Nabucco pipeline was part of that picture, but that it would work only if it was commercially viable and there was sufficient gas available to channel through it from, in particular, countries beyond Azerbaijan, such as Turkmenistan. At paragraph 43 of the report we pointed out that, ""little progress has been made to safeguard gas supplies to EU Member States in eastern, central and southern Europe through the diversification of supply and delivery routes. This policy failure needs to be remedied urgently"." At paragraph 44 we stated: ""Events since our last report have increased the importance we attributed to the EU’s having a unified energy strategy, including an interconnected and liberalised internal market in energy, especially gas"." At paragraph 45 we emphasised that: ""More vigorous action needs to be taken by the EU to diversify gas supplies, to increase gas storage capacity and to encourage the development of the Nabucco pipeline"." All these recommendations simply reinforced what we had urged in our original report. During our first inquiry, Professor Dieter Helm from Oxford had explained to us the Gazprom strategy of increasing its market power. The Baltic pipeline, Nord Stream, had been part of a strategy to reduce the pivotal role of Ukraine. Deals with the Caspian states to send gas north through Russia had undermined the alternative non-Russian pipeline proposals for Europe, and the special relationships with German and other large European companies had helped to secure the Russian position. In response, Europe failed to speak with one voice and EU member states pursued a strategy of bilateral relationships with Russia and Gazprom. The relationship of the German company E.ON and Gazprom is deep and the Baltic pipeline is essentially a German-Russian project. Other countries have followed by making their own separate deals. Faced with external dependency and market power the obvious strategy is to build up internal resilience. Completing the European electricity and gas networks would increase the ability to render mutual support while reducing costs. Strategic gas storage and diversification of sources of supply would add resilience. Although the Commission has been attempting to shift policy in this direction, progress has been slow and in the case of strategic gas storage practically non-existent. Russia at present cannot produce enough gas to meet its own demand, let alone supply Europe as well. In the short term it has solved the problem by taking Caspian gas north. Dieter Helm, responding to a question from me, pointed out that a pipeline from the Caspian through Turkey does not solve our security of supply problem. It just means that less gas is available in Russia to service its own market and that therefore less gas is available from Russia to come to Europe. However, it would increase Europe's bargaining power and reduce Russia’s ability to suddenly curtail supplies. All this is important for the United Kingdom as well as the rest of Europe. The UK faces increasingly critical security of supply problems. Gazprom has insisted that its European customers or partners sign long-term take or pay contracts. The Germans have done it, the Austrians have done it, and more recently the Italians and the French have done it. When we have a winter when there is a supply shortage, the price of gas to the UK rockets and no gas flows. When that happened a couple of years ago, the Prime Minister and the Energy Secretary talked about markets behaving irrationally. Dieter Helm commented: ""What did they expect to happen? These were long-term take or pay contracts and that is the form"." I emphasise that the UK has as great an interest as the rest of Europe in a concerted European approach based on the interlinking of supplies and storage. The gas companies will not find storage commercially attractive and may need substantial inducements to provide it, but the North Sea is a natural zone for gas storage and as a deposit for carbon sequestration, which also has to play an important part. While some of us were in Brussels last Thursday as part of our current inquiry into the EU’s relations with China, there was an interesting exchange at Questions in this House. I welcome the fact that the Minister, the noble Lord, Lord Davies of Oldham, announced that, ""the Government strongly support the development of the southern corridor, which would bring gas from the Caspian, via Turkey, into Europe. This would increase UK and EU energy security by diversifying both sources and routes of gas supply. The Nabucco gas pipeline has the potential to form a key part of the southern corridor and, as such, it has the Government’s strong support"." My noble friend Lord Howell of Guildford, who I am delighted to see in his place and who will speak shortly, was sceptical. He said: ""That, of course, depends on Russian willingness to see an under-Caspian pipeline from Turkmenistan, and that in turn depends on the attitude of the President of Turkmenistan and the President of Azerbaijan".—[Official Report, 7/5/09; cols. 661-62.]" He asked whether it would not be much wiser to develop our links with Norway, which has unlimited gas to supply us, and to develop our own storage systems and import more LMG. I hope that despite the difficulties we will throw our weight behind efforts to achieve a southern corridor route. Of course, we must press on with storage and do our best to get the gas we need from Norway. But it is not obvious why Norway, with a population of 4.5 million and with more cash coming its way than it can possibly use in the short term, should accelerate the depletion of its resources to assist a neighbour which has depleted its resources as fast as it possibly could and is now running short. If I were a Norwegian, I would expect my Government to extract a very good price for the additional supply. Norway also has other interests. A year or so ago it had to abandon all its rigs for a time because of Russian military activity in the area. With the opening up of the Arctic zone—my noble friend Lord Howell of Guildford has written very cogently on the importance of that area—and increasing disputes about who owns what in this potentially hugely important area, the Norwegians will want to talk to the Russians and remain on good terms with them. The trouble is that it is more expensive than gas delivered through pipelines and, when demand is high, the ships tend to get diverted to where the price is highest. In conclusion, it must be in the United Kingdom’s interest to back to the hilt the kind of European energy policy for which we pressed in both our reports. We cannot stand aside and say that these matters do not concern us. It will not be easy to find a way forward. Germany, with its Russian contracts, and France with nuclear power as well, may be reluctant to play the part that is required if Europe is to have a sensible energy strategy, but for such central players in the European project to leave their eastern and southern neighbours vulnerable, and Russia holding Europe in a potential stranglehold, cannot be good politics or sensible economics. It is time that Europe started to protect its own interests by acting together in this vital field of energy security.