Gas & gangsters

Energy is the key to Europe's new relationship with Russia - and supposedly Moscow's weapon of choic

Scoops and shocks are thin on the ground in Moscow these days. As events of 2 March should confirm, elections are hardly nail-biting affairs, and nobody expects journalists to publish revelations about Vladimir Putin or his anointed successor, Dmitry Medvedev, dallying with a lobbyist. So when police grabbed 61-year-old Sergei Schneider on Moscow's fashionable Arbat Street and bundled him into an awaiting Black Maria on 24 January, they also shook newsrooms across the Russian capital out of their torpor.

They weren't the only ones to register their surprise - eyes popped in law enforcement and intelligence agencies throughout Europe and North America when they learned that "Schneider" was none other than Semyon Mogilevich, one of the FBI's most-wanted on charges of money-laundering and racketeering. In the past few years, Mogilevich is suspected of acting as a pivotal figure in Russia's gas industry.

Getting gas out of the ground in central Asia or Russia to the homes of central and western Europe is an expensive and complicated business. And as capitalism emerged in Russia during the 1990s, it needed people to grease the wheels of mineral commerce. The big industry players needed energetic and persuasive fixers in order to ensure that they were paid their cut away from the prying eyes of any tax authorities or their competitors. Two companies, ETG and RosUkrEnergo, were consecutively given exclusive rights to negotiate transit deals for Russian gas travelling through Ukraine. They were widely considered the most notorious vehicles for this lucrative sideline to Russian organised crime's impressively diverse portfolio.

Details started to emerge in 2005 after the Orange Revolution brought Yulia Tymoshenko to power as Ukraine's prime minister. She ordered her then security minister to open a criminal investigation into these companies and specifically into Mogilevich's involvement with them. Later, the same minister asserted that Moscow connived in the successful movement to bring down Tymoshenko's government in order to prevent details about ETG and Mogilevich from being made public. Tymoshenko herself was threatened with arrest in Moscow on corruption charges.

Three years later, things have changed. Four weeks after Mogilevich's arrest in January, Tymoshenko pitched up in Moscow (charges and arrest threat long since forgotten) and announced that Ukraine had overcome its long-standing problems with Gazprom, Russia's state-backed energy behemoth, and negotiated payment of its outstanding debt to the company. Two days later she was happy to comment on Mogilevich's arrest: "As far as gas transit from Uzbekistan, Tajikistan and other countries is concerned, we don't need any shadowy intermediaries," she said. "There will be transparency in our government and society. It also concerns energy policy."

Winner takes all

The ghostly presence of figures like Mogilevich around the gas industry has reinforced the impression that Gazprom and Putin are playing fast and loose with its energy resources. This has bolstered the thesis, which has become fashionable very quickly, that Russia and the west have returned to the days of a winner-takes-all ideological competition. Indeed, the past few months has seen publication of two books devoted to the subject, most recently The New Cold War, by the Economist correspondent Edward Lucas. The blame for this development is invariably placed firmly on Moscow's shoulders.

Perhaps after the uncertainties of the 1990s and the Twin Towers, there is a hankering to get back to the grand chess game between the White House and the Kremlin, with Europe as the battleground. Nevertheless, the warnings of those who subscribe to the thesis are stark: Putin's Russia is bent on stifling all domestic opposition and restoring the omnipotence of the KGB. But special attention is paid particularly to how Russia intends to use its gas supplies to western Europe as a weapon. A week ago, Matthew Bryza, the US deputy assistant secretary of state, spelled out western concerns, warning against the creation of monopolies in the energy industry. "We especially don't like them when they threaten at least the economic security of our most important allies," he said in an explicit attack on Gazprom, the energy company that symbolises the revival of Russian might.

The cold wind blowing in from Moscow is especially chilly by the time it hits London. The murder of Alexander Litvinenko, with its tit-for-tat expulsions, and the closure of British Council offices in St Petersburg and Ekaterinburg, suggest the Russians are revisiting the sinister romanticism of the Cold War.

Of course, Russia has a very different perspective on this. It suddenly has very powerful American radar systems being placed close to its border (and also hosted by Britain) under Washington's missile defence system; and it awaits in vain the extradition of Boris Berezovsky. Moscow first requested the extradition of this Russian billionaire and prominent Putin opponent on charges of corruption, money-laundering and racketeering in 2003. At first the Home Office refused Berezovsky's application for asylum but several months later Whitehall changed its mind. The only reason that a number of senior sources in Washington and London can give for this turnabout is that Berezovsky has enjoyed a close relationship with British intelligence. That angers the Russians, and goes a long way to explaining why Andrei Lugovoi, Scotland Yard's number-one suspect in the Litvinenko murder, continues to enjoy the full protection of the Russian state. However, the arrest of Mogilevich in order to smooth the path of the Ukrainian gas deal suggests a pragmatism on Russia's part that is often overlooked in Britain. In important respects, the fate of Mogilevich is much more significant than Lugovoi's.

Co-operation, not confrontation

Elsewhere in the European Union, a different picture is emerging where the emphasis in relations with Moscow is placed on co-operation, not confrontation. Germany's economic links with Russia are expanding with the explicit backing of Chancellor Angela Merkel. Nicolas Sarkozy started his presidency by securing a huge deal for Total to develop the Shtokman gas field in the Barents Sea in a deal with Gazprom that Putin personally approved.

Energy is the key to the new relationship with Russia and supposedly Moscow's weapon of choice in its plan for European domination. Yet this assumption ignores a more fundamental reality: the European Union currently consumes 480 billion cubic meters (bcm) of gas a year and that is set to rise to about 600bcm by 2020; Russia can provide most of that need either with its own gas or by transporting Turkmen and Kazakh gas. There is no better customer for Russia than the European Union. Gazprom is also developing its markets in Japan and China but the EU remains by far the most lucrative and reliable consumer. Why would the Russians seek to promote a conflict with its best revenue stream? The converse is true - given that the alternative supplies to the EU come from Iran or elsewhere in the Middle East, there is no better supplier for the EU than Russia.

Such is the fear of Russia's dominance of the EU gas market that, for several years, a European consortium has been attempting to diversify its gas suppliers. To lessen the dependency on Russian gas, and with American support, the EU came up with Nabucco, a gas pipeline that would bring supplies from Kazakhstan, Turkmenistan, Azerbaijan and Iran across Turkey and into the Balkans. But last summer President Putin managed to scupper this by persuading the Kazakhs and Turkmens, without difficulty, to sell their gas to Gaz prom instead, knocking the stuffing out of the Nabucco plan overnight. American sanctions on Iran did the rest.

Already signed up

More recently, Bulgaria and Serbia have signed up to Gaz prom's alternative to Nabucco called South Stream which will bring 30bcm of gas from Russia under the Black Sea. But before the new cold warriors raise the alarm, it is worth remembering that this is not a Russian monopoly - ENI, the Italian energy giant, owns 50 per cent of South Stream while Austria's OMV and Hungary's MOL have recently signed deals with Gazprom despite their involvement in Nabucco.

Ironically, Nabucco looks as though it might be saved by the intervention of Gazprom. The Russian firm has said it will consider diverting some of its gas away from South Stream and into Nabucco - after all it all makes money.

To the north, Germany and its former chancellor, Gerhard Schröder, are enthusiastic participants in the Nord Stream project that will bring gas to Germany direct from Russia across the Baltic Sea. Schröder, who actually chairs the consortium building the pipeline, dismissed the objections of Poland and Ukraine who detected a Russo-German plot (familiar from their histories) to squeeze the two countries out of the lucrative transit market. Brussels is trying desperately to fashion a coherent pan-EU policy on gas supply to head off disputes within the Union over access to Russian gas. But so far the needs of individual countries, whether large like Germany and Italy or small like Bulgaria and Hungary, have been decisive in determining the course of pipeline politics.

The new Russia knows how to exploit internal European squabbles to its advantage. In the old days, the Soviet Union was run by a gerontocracy clinging to the ideology of communist state power. These days the young energy advisers around Putin have Harvard MBAs and perfect English - they are not driven by ideology, but by money and market share.

The resurgent Russian state and its repressive mechanisms are distasteful and a matter of real concern. It is important to remember that while we in the west made hay in the 1990s, the Russians faced chaos and economic misery. Their introduction to capitalism, inspired by oligarchs like Berezovsky, was deeply unhappy, and it is essential to take this into account when assessing Putin's growing authoritarianism. This may not yet amount to the rule of law but for most Russians it is an improvement on the rule of gangsters that preceded it.

Clearly the deployment of missile defence and the recog nition of Kosovo confer a sense of Cold War panic on proceedings, but that should not obscure the fact that gas and oil are the substances underpinning Europe's relationship with Moscow. If this mutual dependency were handled properly (a big if), both sides should benefit in equal measure. The relationship between Russia and the west is driven not by the old Cold War ideologies but by the carving up of profits. If, however, we start guiding our policies by the new Cold War thesis, this may become a self-fulfilling prophecy. Present circumstances would look benign by comparison.

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