Russian Energy Policy toward Neighboring Countries

Russian Energy Policy Toward
Neighboring Countries
Updated March 27, 2008
Steven Woehrel
Specialist in European Affairs
Foreign Affairs, Defense, and Trade Division

Russian Energy Policy Toward Neighboring Countries
Russian oil and natural gas industries are increasingly important players in the
global energy market, particularly in Europe and Eurasia. Another trend has been the
increasing concentration of these industries in the hands of the Russian government.
This latter phenomenon has been accompanied by an increasingly authoritarian
political system, in which former intelligence officers play key roles.
Russian firms have tried to purchase a controlling stake in pipelines, ports,
storage facilities, and other key energy assets of the countries of central and eastern
Europe. They need these assets to transport energy supplies to lucrative western
European markets, as well as to secure greater control over the domestic markets of
the countries of the region. In several cases where assets were sold to non-Russian
firms, Russian firms cut off energy supplies to the facilities. Russia has also tried to
build new pipelines to circumvent infrastructure that it does not control. Another
objective Russia has pursued has been to eliminate the energy subsidies former
Soviet republics have received since the fall of the Soviet Union, including by raising
the price these countries pay for natural gas to world market prices.
It is not completely clear whether the pursuit of Russian foreign policy
objectives is the primary explanation for the actions of its energy firms. Few would
disagree in principle that the elimination of subsidies to post-Soviet countries is a
sound business decision, even if questions have been raised about the timing of such
moves. Even the pursuit of multiple pipelines can be portrayed as a business
decision. On the other hand, many countries of the region are concerned that Russia
may use their energy dependency to interfere in their domestic affairs or to force
them to make foreign policy concessions. Countries of the region also fear that by
controlling energy infrastructure in their countries, Russian energy firms are able to
manipulate the internal political situation by favoring certain local businessmen and
Administration officials have repeatedly criticized what they view as Russian
efforts to use its energy supplies as a political weapon and have urged European
countries to reduce their dependence on Russian energy. The United States has
strongly advocated the building of multiple pipelines from Central Asia and
Azerbaijan to Europe. Members of Congress have also expressed concern about the
impact on European countries of their dependence on Russian energy. In the firstth
session of the 110 Congress, committees held hearings that have touched on the
issue. Congress has also passed resolutions that refer to worrisome aspects ofth
Russian energy policy. The second session of the 110 Congress may also hold
hearings and consider legislation on these issues. Related CRS products include
CRS Report RL33212, Russia Oil and Gas Challenges, by Robert Pirog, and CRS
Report RL33636, The European Union’s Energy Security Challenges, by Paul
Belkin. This report will be updated as events warrant.

In troduction ......................................................1
Russia’s Oil and Gas Industries and Russian Foreign Policy ................2
Gazprom .....................................................2
Russian Oil Companies.........................................3
Russia’s Objectives: Exploiting Dependency or Just Good Business?.....5
Selected Recent Cases..............................................7
Ukraine ......................................................8
Moldova ....................................................11
Georgia .....................................................12
Baltic States ................................................12
Belarus .....................................................14
Armenia ....................................................15
U.S. Policy .....................................................15
U.S. “Pipeline Diplomacy”.....................................16
Obstacles to U.S.-Supported Pipelines........................18
Other Policy Issues............................................19
Congressional Response.......................................21
List of Figures
Figure 1. Pipeline Map............................................23

Russian Energy Policy Toward Neighboring
In recent years, Members of Congress, Administration officials, and analysts
have noted the dependence of many European countries on Russian energy. They
have expressed concern that Russia is using this energy dependence as part of a larger
effort to limit the sovereignty and pro-Western orientation of vulnerable neighboring
countries such as Ukraine, Moldova, and Georgia. In addition to bolstering the
sovereignty of these countries, the United States has also had a vital interest in
keeping strong ties with NATO and EU member states. Some observers believe that
these relations could be harmed in the long term if many of these states became too
dependent on Russian energy.
At present, the European Union depends on Russia for 44% of its natural gas
needs and 18% of its oil.1 However, this figure conceals the fact that this dependence
is unequally distributed. Some EU countries, many of them in central and eastern
Europe, are dependent on Russia for most or all of the oil and natural gas they
consume. For example, the Baltic states are entirely dependent on Russia for natural
gas. Non-EU countries bordering Russia are also overwhelmingly or entirely2
dependent on Russian oil and natural gas.
This report begins with a brief discussion of the Russian oil and gas industries,
including their efforts to purchase energy infrastructure in central and eastern Europe
and reduce energy subsidies to neighboring countries. A second section deals with
the impact of recent Russian energy policy on neighboring countries, all of them
formerly part of the Soviet Union, de facto or de jure, and all heavily dependent on
Russian energy imports. Many of these countries are concerned about what they see
as Russian efforts to manipulate that dependency to achieve political goals. A final
section deals with U.S. efforts to promote the energy security of these countries and3

on Congress’s response to the issue.
1 Presentation of Jeff Piper, “Toward an EU-Russia Energy Partnership,” International
Conference on Energy Security: The Role of Russian Gas Companies, 2007.
2 U.S. Department of Energy, Energy Information Administration, Country Brief: Russia,
April 2007, from the EIA website [].
3 This report focuses on Russian oil and natural gas industries, due to their central
importance to the countries concerned. Other energy issues, such as Russia’s nuclear power
industry, as well as electricity and coal exports, are not dealt with in this report.

Russia’s Oil and Gas Industries and Russian
Foreign Policy
Russian oil and natural gas industries are increasingly important players in the
global energy market, particularly in Europe and Eurasia. Russia possesses over 30%
of world natural gas reserves and at least 10% of global oil reserves. Another key
trend has been the increasing concentration of these industries in the hands of the
Russian government. This latter phenomenon has been accompanied by an
increasingly authoritarian political system under the tight control of President
Vladimir Putin, a former officer of the Soviet KGB intelligence service. Both the
leadership of Russian oil and gas firms and the Russian government are dominated
by former members of the Russian intelligence service, now called the Federal
Security Service (FSB), or are personally close to Putin, or both. For example, the
head of the state oil company Rosneft is Igor Sechin, Putin’s deputy chief of staff and
formerly from the FSB. The head of the Russian oil pipeline monopoly Transneft is
a former FSB officer who served with Putin in East Germany in the 1970s. Key
posts at the state-controlled natural gas monopoly Gazprom are staffed by former
KGB/FSB men.
In late 2007, Putin designated First Deputy Prime Minister Dmitri Medvedev
(whose functions included overseeing Gazprom) as his successor. Medvedev was
elected president of Russia in March 2008, in a vote viewed by many observers as not
free and fair. Medvedev, although a close Putin associate, is not a former FSB
officer. Putin has said he will accept the post of Prime Minister after Medvedev
takes office in May. There has been speculation and uncertainty in Russia over what
impact the succession will have on the leadership of Russia’s state-owned energy
The personal and political fortunes of Russia’s leaders are tied to the energy
firms, as Russia’s economic revival is in no small part due to the massive revenues
generated by energy exports in a period of high global energy prices. However, many
experts believe that the Russian leadership’s state-oriented approach may be
counterproductive for Russia in the long run, as output growth in Russian oil and gas
fields is stagnating, despite rising international demand. They say Russia’s oil and
gas industries will likely need foreign investment and expertise, more efficient
management, as well as less government regulation and taxation.
Since the collapse of the Soviet Union in 1991, the largest firm in Russia has
been the state-controlled natural gas monopoly Gazprom. (The Russian government
holds just over 50% of its shares.) It has a monopoly on gas pipelines in Russia. It
controls nearly 90% of Russian gas production and over a quarter of the world’s
reserves of natural gas. Its impact within Russia is even more significant. It is the
single largest contributor to the Russian government’s budget, providing about 25%
of tax receipts. It also controls banks, industrial holdings, farms, and media outlets.
Gazprom has been useful domestically to Russian leaders. It provides 76% of
its production at a loss (at prices 15%-20% of those in Europe) to Russian companies

and consumers, who often cannot or will not pay, thereby helping to ease social
pressures. In exchange for subsidizing Russian domestic consumers, Gazprom
receives a virtual monopoly on exports to richer customers abroad. Two-thirds of
Gazprom’s revenue comes from European customers. Many experts say Gazprom
needs to substantially increase domestic prices for gas if it is ever to become a viable
business. Russia has agreed to gradually increase some domestic gas prices to bring
them closer to world market levels by 2011. The move was taken in response to EU
criticisms of the price subsidy in negotiations over Russia’s entry into the World
Trade Organzation (WTO).4
Gazprom’s key current gas fields are in decline, its infrastructure is aging, and
substantial investment will be needed just to maintain current, nearly stagnant
production levels. Most foreign observers believe Gazprom could use foreign
investment to provide expertise and capital. In late 2005 Russia abolished the “ring
fence” that barred foreigners from owning Gazprom shares. Current foreign
ownership of Gazprom shares is modest; the largest foreign investor is the German
firm E.ON, with a 6% stake.5
However, Gazprom’s actions in other areas appear to point toward more state
control and not toward more foreign investment. For example, in 2006, Gazprom
bought out half of the interest of Shell and other foreign companies in the Sakhalin-2
gas field project at a very low price after the Russian government found alleged
environmental problems in Shell’s management of the project. In June 2007, the
Russian-British TNK-BP oil firm was forced to sell its Kovytka gas field in Siberia
cheaply to Gazprom, after Gazprom refused to approve an export route for the gas.
Russia has also announced that it would develop its Shtokman field in the Arctic
without international participation.
Russian Oil Companies
In the 1990s, the Russian government did not have a large stake in Russian oil
production. The major oil companies were controlled by politically well-connected
businessmen, dubbed oligarchs. This policy changed in 2003, when Mikhail
Khodorkovsky, head of the giant Yukos oil firm, was arrested on tax evasion and
other charges. However, most observers believe that the real reason for the arrest
was that President Putin believed Khodorkovsky was showing unacceptable signs of
political independence from the Kremlin. Yukos was hit with government claims for
back taxes and declared bankrupt. In 2004, its key oil field assets were bought very
cheaply by the Russian state-owned oil firm Rosneft. The Yukos affair is not the
only example of this trend. In 2005, Gazprom bought another major oil company,
Sibneft, from oligarch Roman Abramovich, at a cut-rate price. The firm is now
called Gazprom Neft. The Russian government now controls over 30% of Russia’s
oil production.6

4 EIA Country Brief: Russia, April 2007, from the EIA website [].
5 “France Wants Stake in Russia Gas Giant,” Reuters news agency, October 10, 2007.
6 “Peter Finn, “Russian Giant Expands Control of Oil,” Washington Post, September 29,

In 2006, Putin said that the state would not take control of additional Russian
oil companies. However, the strengthening of state control over the industry may be
conducted by other means. The Russian government has placed pressure on foreign
oil companies to sell their stakes in lucrative Russian oil fields to Russian state firms.
The non-state oil firms that remain, such as Lukoil, are careful to retain close
connections to Russian political leaders, in order to retain control of their businesses.
For example, in July 2007, after more than a year of harassment by Russian
prosecutors and tax authorities, Mikhail Gutseriyev, the head of the modestly-sized
Russian oil firm Russneft announced that he would sell his stake to Oleg Deripaska,
a powerful businessman with close ties with the Kremlin.7
In March 2008, Russian government agencies announced they were
investigating the second largest Russian oil firm, TNK-BP on suspicion of violations
of taxation and environmental laws. Two Russian TNK-BP employees are under
investigation by the FSB for industrial espionage. TNK-BP was formed jointly by
Tyumen Oil Company and British Petroleum (BP) in 2003, with each holding a 50%
share. Observers have speculated on the reasons for the investigations. Part of the
reason may be deteriorating relations between Great Britain and Russia over the
assassination of former FSB officer Aleksandr Litvinenko in London and other
issues. They may also be the product of Kremlin infighting associated with the
Russian presidential transition. Some observers believe that the investigations could
be a prelude to a takeover of the Russian half of the partnership by Gazprom,
Rosneft, or others closely associated with the Russian government. Some speculate
that part or all of BP’s shares in company could also be targeted.
Despite increasing direct and indirect state control, Russian oil firms continue
to seek ties to foreign oil companies, provided that they are satisfied with a minority
stake. ConocoPhillips has a 10% share in Lukoil. The Italian firm ENI has a 20%
stake in Gazprom Neft. State-owned Rosneft floated shares on the London Stock
Exchange in 2006. BP, the Malaysia state firm Petronas, and China’s NCPC bought
shares accounting for 7.5% of Rosneft’s total capital.
In addition to increasing control over oil production, the government controls
Russia’s oil and refined product pipelines, through the state firm Transneft. This
monopoly gives the Russian government leverage against Russian private firms,
foreign investors and foreign countries, if needed. For example, Transneft is the
largest shareholder in the Caspian Pipeline Consortium (CPC). The CPC pipeline
carries oil from Kazakhstan to the Russian port of Novorossiysk on the Black Sea.
This gives Russia a near monopoly on the transport of Kazakh oil destined for
western markets. Other members include ExxonMobil and Chevron, which are
involved in the exploitation of the Kazakh oil fields. In addition, Moscow has
presented the Western oil companies with repeated financial demands, and

6 (...continued)

2005, D06.

7 “Russneft Ordeal Places Premium on Loyalty,” Oxford Analytica, August 2, 2007.

threatening them with legal proceedings for allegedly unpaid taxes to Russia if they
do not comply.8
Russia’s Objectives: Exploiting Dependency or Just Good
Through its energy firms, Moscow has pursued several objectives in recent
years. Russia has tried to purchase a controlling stake in pipelines, ports, storage
facilities, and other key energy assets of the countries of central and eastern Europe.
Russia needs these assets to transport energy supplies to Western European markets,
as well as to secure greater control over the domestic markets of the countries of the
region. In several cases where energy infrastructure was sold to non-Russian firms,
Russia cut off energy supplies to the facilities.
Russian firms have recently attempted to buy energy infrastructure in western
European countries, provoking unease in the EU. The EU has pressed Russia to open
up its pipelines to western firms and to provide stronger protections for foreign
investment in Russia’s energy sector. Russia has flatly rejected EU demands that it
ratify the 1994 Energy Charter Treaty, which enshrines these principles. EU efforts
to include the key components of the Energy Charter into a new Russia-EU
Partnership and Cooperation Agreement (PCA) have also been stymied. The EU
Commission has proposed a new EU energy policy that would prohibit energy-
producing companies from owning distribution networks. It would also bar foreign
companies from investing in EU distribution networks, unless that country permitted
such investment in its own networks. Russia has strongly criticized the Commission
EU countries have also been concerned about Russian actions to coordinate
export policy with other natural gas-producing countries such as Algeria, evoking the
specter of a cartel, or “gas OPEC.” Russia has also hinted that the bulk of Russian
energy exports could be provided to China instead of Europe in the future, once new
pipelines to Asia are completed. However, it is unclear whether the EU can adopt
an effective common policy on the Russian energy question. Central and eastern
European countries within the EU want the EU to take a stronger stance against
dependence on Russia for energy, but energy companies and other influential voices9
in countries such as Germany and Italy are reluctant to upset Moscow on the issue.
Facing difficulties in securing control of energy infrastructure in central and
eastern Europe, Russia has tried to bypass countries in the region entirely where
possible. It is expanding the use of the Baltic Pipeline system and its oil terminal at
the port of Primorsk and reducing the use of oil terminals in the Baltic states, such
as Butinge in Lithuania and Ventspils in Latvia. In addition, Russia is considering
pipeline projects involving Murmansk and other ports in northern Russia. Gazprom

8 For more on Russia’s oil and natural gas industries, see CRS Report RL33212, Russia Oil
and Gas Challenges, by Robert Pirog.
9 For more on EU energy policy, see CRS Report RL33636, The European Union’s Energy
Security Challenges, by Paul Belkin.

has started preliminary work on the North European Gas Pipeline (NEGP), which
would transport natural gas from Russia to Germany via a pipeline under the Baltic
Sea starting as early as 2011, bypassing the states of central and eastern Europe.
In November 2007, Gazprom and the Italian firm ENI signed an agreement to
build a “South Stream” gas pipeline that would run from Russia to Turkey, through
the Balkans, with branches to Austria and Italy. Bulgaria, Serbia, and Hungary have
also signed on to the project. In February, Russia hopes to complete South Stream
in 2013. South Stream would bypass Belarus, Ukraine, Poland, and other central
European countries.
Another possible project is Yamal-Europe 2. This long-proposed pipeline,
which would parallel a currently-operating one, would run through Belarus and
Poland, bypassing Ukraine. The pipeline is unlikely to be built, as the Russian
government and Gazprom have rejected Belarusian proposals to reactivate the
Yamal-Europe 2 plans. However, if NEGP does not come to fruition, it is at least
possible the Yamal-Europe 2 plan could be reactivated.
By seeking a range of transit routes through the region, Russia may be trying to
reduce the leverage that transit countries, including those in central and eastern
Europe, have in negotiations with Russian energy firms. Experts note that the
capacity of these new routes, if built, would likely outstrip Russia’s capacity to
produce oil and gas to fill them, allowing Russia to allocate scarce production to
“favored” transit countries. Russia may also be trying to reduce the attractiveness of
other routes for oil and gas pipelines from Azerbaijan and Central Asia to Europe and
Asia that would bypass Russia.10
Another objective Russia has pursued has been to eliminate the energy subsidies
former Soviet republics have received since the fall of the Soviet Union, including
by gradually raising the price these countries pay for natural gas to world market
prices.11 These actions may be seen as paralleling the reduction of subsidies to
Russian domestic consumers. However, Russia has also used the withdrawal of price
subsidies and the unpaid energy debts of countries in the region as leverage to try to
secure key energy infrastructure in those countries.
It is not completely clear whether the pursuit of Russian foreign policy
objectives is the primary explanation for the actions of its energy firms. Few would
disagree in principle that the elimination of subsidies to post-Soviet countries is a
sound business decision, even if questions have been raised about the timing of such
moves. In support of their actions, Russian leaders point to the fact that Russian
allies such as Armenia and Belarus have also been subject to energy price hikes. The
pursuit of multiple pipelines can also be portrayed as a business decision, although
some analysts disagree about its wisdom. They assert that Russia would do better to

10 Vladimir Socor, “South Stream; Gazprom’s New Mega-project,” Jamestown Foundation
Eurasia Daily Monitor, June 25, 2007.
11 Keith C. Smith, “Russian Energy Pressure Fails to Unite Europe,” CSIS Euro-Focus,
January 24, 2007.

invest in boosting production rather than building pipelines that it may not be able
to fill as its current oil and gas fields decline.
On the other hand, many countries of central and eastern Europe are concerned
that Russia may use their energy dependency to interfere in their domestic affairs or
force them to make foreign policy concessions. Gazprom’s recent increases in
energy prices to Georgia and Ukraine came after elections brought to power pro-
Western leaders in what were termed respectively the “Rose” and “Orange”
Revolutions, in reference to their campaign symbols. Analysts have asserted that
Russian leaders feared so-called “color revolutions” elsewhere in the former Soviet
countries that could reduce Russia’s influence, and even perhaps threaten Russia’s
own increasingly authoritarian regime. Countries of the region also fear that by
controlling energy infrastructure in their countries, Russia is able to manipulate the
internal political situation by favoring certain local businessmen with participation
in local business ventures of Gazprom or other Russian energy firms. These
businessmen are in a position to assume a powerful political role themselves or bribe
politicians to do Moscow’s bidding.12
Critics of Russian policy say Moscow’s motives become even clearer when
viewed in the context of other actions to apply pressure to neighboring states. For
example, Moldova’s economy has been seriously harmed by a wine import ban
Russia has imposed, ostensibly for health reasons. Georgia has been hurt by Russian
immigration restrictions and a wine ban. Both countries have also faced problems
with Russian support for breakaway regions on their territories. NATO and EU
member Estonia suffered a reduction in transit traffic from Russia, as well as
cyberattacks that may have been instigated by Russia, in the wake of a controversy
over the removal of a Soviet-era military statue from Estonia’s capital in April 2007.
While Moscow is often charged with using energy policy to pursue foreign
policy goals, it may also at times use foreign policy issues to benefit its energy firms.
In January 2008, the Russian natural gas monopoly Gazprom reached an agreement
with Serbia to buy NIS, the Serbian national oil company at what some observers
believed to be a below-market price. Gazprom may have been able to achieve this
in part due to Serbian Prime Minister Vojislav Kostunica’s appreciation for
Moscow’s strong opposition to independence for Serbia’s Kosovo province.
Selected Recent Cases
The countries discussed in this report have all faced the impact of Russian
energy policy recently. All are heavily or entirely dependent upon Russia for their
natural gas and oil imports. They face common issues of cost (transition to world
market prices), reliability of supplies, and Russian efforts to control downstream
infrastructure such as pipelines, refineries, and domestic distribution networks. The
countries differ in their geopolitical orientation. Ukraine, Moldova, and Georgia are
non-EU, non-NATO countries that have had or have recently adopted a pro-Western

12 Testimony of Zeyno Baran before a House Foreign Affairs Committee hearing on “Central
and Eastern Europe: Assessing the Transition,” June 25, 2007.

orientation that Moscow opposes. The Baltic states are EU and NATO members, but
Russia maintains a strong hold on their energy sectors. On the other hand, Belarus
has been Russia’s most loyal supporter in Europe, while Armenia has been a strong
ally of Moscow in the south Caucasus region.
Although it possesses modest oil and natural gas reserves of its own, Ukraine
is dependent upon Russia for most of its oil and natural gas, both from Russia’s own
oil and natural gas fields and from Russian-controlled pipelines from Ukraine’s
suppliers in Central Asia, especially gas from Turkmenistan. In 2004, these imports
account for 80% of Ukraine’s oil consumption and 78% of its natural gas
consumption. Natural gas accounts for half of Ukraine’s energy usage. Most
Ukrainian homes are heated by natural gas. Ukraine’s steel and other heavy
industries, which play a key role in Ukraine’s exports, are highly inefficient users of
energy. However, Ukraine’s vulnerability to Russian pressure has been mitigated by
the fact that the main oil and natural gas pipelines to central and western Europe
transit its territory. Ukraine owns the sections of the pipelines that run through its
territory as well as large gas storage facilities Ukraine has received transit fees from
Gazprom, paid partly in gas and partly in cash. Seventy-eight percent of Russia’s gas
exports pass through Ukraine.13
Energy issues have played a key role in Russian-Ukrainian relations since the
breakup of the Soviet Union in 1991. Russian firms supplied energy to Ukraine at
prices far below market rates. In the early 1990s, these firms cut off supplies to
Ukraine at times due to unpaid energy debts. Energy sales have been conducted by
non-transparent intermediary institutions, offering the elites of both countries
opportunities to profit.
Until recently, Ukrainian foreign policy tried to strike a balance between
improving ties with the West, including nominal support for Euro-Atlantic
integration, while not offending Moscow. However, in early 2005, Viktor
Yushchenko was elected President of Ukraine, overcoming the previous regime’s
attempts at electoral fraud, in what was termed the “Orange Revolution.” Russian
leaders, who had strongly backed his opponent, Prime Minister Viktor Yanukovych,
reacted angrily to Yushchenko’s victory. Yushchenko, Ukraine’s first clearly pro-
Western leader, said Ukraine would conduct serious reforms so that it could join
NATO and the European Union as soon as it was ready.
Soon after Yushchenko took office, Gazprom started to demand a sharp increase
in the price of natural gas that it supplied to Ukraine. By the end of 2005, Gazprom
demanded a price increase for its natural gas from $50 per thousand cubic meters
(tcm) to $230 per tcm, the current market price. When Ukraine rejected this
proposal, Russia cut off natural gas supplies to Ukraine on December 31, 2006.
Ukraine then diverted to its own use some of the gas that Gazprom intended for
European customers. After western European governments protested sharply,

13 U.S. Department of Energy, Energy Information Administration, Country Brief: Ukraine,
March 2006, from the EIA website [].

Gazprom resumed gas deliveries on January 2. Two days later, the Russian
government and Gazprom reached an agreement with Ukraine for ensuring gas
supplies to Ukraine. The agreement called for gas to be purchased by Ukraine
through an intermediary firm, RosUkrEnergo. This firm pays for gas from Central
Asia at a price lower than market levels, and adds gas from Russia at market prices,
and provides it to Ukraine at an average price of $95 per tcm. The agreement also
provides for higher transit fee payments to Ukraine (now entirely in cash rather than
partly in gas).
Perhaps more troubling for Ukraine, the accord called for the creation of
UkrGazEnergo, a joint venture between RosUkrEnergo and the Ukrainian state-
controlled gas firm Naftogaz that grants the former access to one-half of Ukraine's
domestic market. Ukraine’s intelligence service reportedly believes the owners of
RosUkrEnergo are using their control over energy supplies to secure ownership of
energy intensive industries such as fertilizer plants and a titanium plant.14 Naftogaz
has teetered on the verge of bankruptcy, in part because UkrGazEnergo has been
allocated more solvent customers in the industrial sector, while Naftogaz has been
left mainly with less well-off residential consumers.
Some analysts are concerned about possible involvement of organized crime
groups in RosUkrEnergo, as well as corrupt links with Russian and Ukrainian
officials. The U.S. Justice Department has reportedly investigated the firm.15
Nominally, Gazprom owns 50% of RosUkrEnergo, Ukrainian businessman Dimitry
Firtash owns 45%, and another Ukrainian businessman owns 5%. In 2005, Ukranian
Prime Minister Yuliya Tymoshenko, who was an important player in the natural gas
industry in the 1990s, called for the elimination of RosUkrEnergo as a middleman.
She was dismissed by Yushchenko in September 2005, in a move that some
observers believed was aimed in part at appeasing Gazprom and its supporters within
the Ukrainian government.
Yanukovych’s party won Ukraine’s March 2006 parliamentary elections, and
Yanukovych once again become Prime Minister. Gazprom’s discussions with the
Yanukovych government in late 2006 went more smoothly than those of the previous
year. In 2007, Russia and Ukraine agreed on a moderate increase in the natural gas
price. The two sides agreed to gradually increase the price of Russian natural gas to
Ukraine over the next five years, until it reaches the world market price. Some
observers have seen Gazprom’s tough attitude toward Ukraine in the 2005
negotiations and its relatively benign stance in 2006 as evidence that Russia has
manipulated the gas issue to undermine Yushchenko. In September 2007, Putin

14 Roman Kupchinsky, “Russia/Ukraine: Pipeline Conflict Resurfaces,” Radio-Free Europe
Radio Liberty Newsline, June 28, 2007.
15 Glenn R. Simpson and David Crawford, “Supplier of Russian Gas Draws Investigation,”
Wall Street Journal, April 21, 2006, 1. For background on the gas crisis, see CRS Report
RS22378, Russia’s Cutoff of Natural Gas to Ukraine: Context and Implications, by Bernard
Gelb, Jim Nichol, and Steven Woehrel.

appeared to verify this view when he said that Russia had no desire to provide cheap
energy to “Orange” forces.16
On September 30, 2007, Ukraine held closely contested parliamentary elections.
On October 2, as the vote count showed a narrow victory by “Orange” parties,
Gazprom announced that it would reduce gas supplies to Ukraine, if Ukraine did not
pay outstanding debts to Gazprom by the end of the month. Gazprom officials hinted
that Ukraine’s energy debts could be solved if it turned over shares in the gas pipeline
system to Gazprom as payment. However, the crisis was resolved when the
Ukrainian government agreed to provide gas in Ukrainian storage facilities as
payment. Gazprom and the outgoing Yanukovych government agreed to a natural gas
price of $179.50 per thousand cubic meters (tcm) for 2008, a 38% increase over
2007, but still well short of world market levels. Nevertheless, the percentage
increase is double that given to neighboring Moscow ally Belarus.
In December 2007, Yuliya Tymoshenko was elected by the new Ukrainian
parliament as Prime Minister. She has vowed to remove RosUkrEnergo and
UkrGazEnergo from Ukraine’s gas market. In January 2008, Prime Minister
Tymoshenko took a first step in this direction by sharply reducing the amount of gas
UkrGazEnergo can sell to Ukrainian consumers. The role of middlemen in the
Ukrainian gas market may also be reduced by market forces. RosUkrEnergo’s profits
are based on selling cheap Central Asian gas at higher prices to Ukraine. In March
2008, Gazprom agreed with Central Asian gas supplies to pay “European prices” for
their gas in 2009.
Gazprom reduced gas supplies to Ukraine by 50% on March 3-5, 2008, over
disagreement on the price Ukraine should pay for gas delivered in January and
February 2008. Ukrainian gas company officials warned that they might divert gas
intended for Western Europe to offset Gazprom’s supply cut. The two sides reached
agreement on March 5 and supplies were restored. On March 12, the two sides
agreed to eliminate UkrGazEnergo from the domestic gas trade, but gave Gazprom
direct access to the most lucrative part of Ukraine’s domestic market – supplies to
large enterprises. The agreement said the fate of RosUkrEnergo would be determined
by future negotiations. However, Tymoshenko appeared dissatisfied with parts of the
accord. She remains determined to eliminate RosUkrEnergo as soon as possible. The
Ukrainian government made significant unilateral changes to the agreement,
including barring RosUkrEnergo from the profitable practice of re-exporting Central
Asian gas from Ukraine to other markets.
Gazprom has said that Ukraine will have to pay “European prices” for its gas
in 2009, as a result of Gazprom’s agreement with Central Asian countries to pay full
price for their supplies. This would cause the price Ukraine pays for gas to more than
double next year, dealing a heavy shock to Ukraine’s economy. Tymoshenko is
likely to try to resist a sharp price increase and is seeking a steep rise in transit fees
from Gazprom. The clash could result in further “gas crises” this year.

16 The Times of London, September 15, 2007, 4.

Russia has continued to pursue its long-standing goal of ownership of Ukraine’s
natural gas pipelines and storage facilities, as well as its local gas distribution
network. In February 2007, Putin announced that he and Prime Minister
Yanukovych had agreed on joint Russian-Ukranian control of Ukraine's natural gas
assets, in exchange for a Ukrainian stake in Russian natural gas fields. However, this
statement provoked a strongly negative reaction in Ukraine, and the parliament
quickly approved a law banning any transfer of control of the pipelines by a vote of
430-0. Russia has tied possible support for building new pipelines in Ukraine to
greater Gazprom ownership of Ukraine’s pipeline system. Russia is also working on
developing new energy export routes through the Baltic Sea (Nord Stream) and the
Balkans (South Stream) to western Europe that could bypass Ukraine in three to five
years, at least in part. If successful, these efforts could reduce Ukraine's leverage
over Russia on energy issues.
Moldova is the poorest country in Europe, according to the World Bank. It is
entirely dependent upon Russia for its energy resources, and also as a market for the
wine and agricultural products that are its main exports. In 2005, Russia restricted
wine and other agricultural imports from Moldova, allegedly over health concerns,
dealing a very heavy blow to the country's economy. Russia has stalled on
implementing pledges to end its embargo on Moldovan wine, still citing health
concerns. In addition, Russia has supported a breakaway regime in the Transnistria
region of the country, including by deploying 1,500 troops there.
In part due to its vulnerable position, Moldova has tried to balance ties between
Moscow and Western countries. However, since 2003, Moldovan leaders, despairing
of striking a deal with Moscow over the Transnistria problem, have sought greater
engagement with the West, irritating Russia. Perhaps even more irksome to
Moscow, in 2005, Moldova, with EU help, began to tighten its customs policies to
stop profitable smuggling operations from Transnistrian territory. Powerful groups
in Ukraine and Russia have profited from the Transnistria regime's activities. Russia
provides subsidies to Transnistria, which include grants and loans as well as
subsidized energy. In return, Russian firms have received stakes in Transnistrian
Russia has pressured Moldova on the issue of energy supplies. On January 1,
2006, the Russian government-controlled firm Gazprom cut off natural gas supplies
to Moldova, after Moldova rejected Gazprom's demand for a doubling of the price
Moldova pays for natural gas. Gazprom restored supplies on January 17, in exchange
for a price increase from $60 per 1,000 cubic meters to $110. Moldova also agreed
to give Gazprom, already the majority shareholder, Transnistria’s 13% stake in
MoldovaGaz, which controls Moldova's natural gas pipelines and other infrastructure
(Moldova had earlier ceded majority control to Gazprom in exchange for settling
Moldova’s gas debts). As a result of the agreement, Gazprom now holds 63.4% of
MoldovaGaz's shares and has control of Moldova’s domestic gas infrastructure.

17 International Crisis Group, “Moldova’s Uncertain Future,” August 17, 2006, from the ICG
website [].

Gazprom increased the price of its gas to Moldova to $170 per 1,000 cubic meters
in 2007. Moldova expects to pay about $190 per tcm in 2008. It is planned that the
price will be increased until it reaches the price paid by EU member states in 2011.
However, as the price is set yearly, Moscow could increase prices more quickly if
desired, for political or other reasons.18
Georgia began to follow a clearly pro-Western orientation after the “Rose
Revolution” of November 2003, which swept out of power political forces with close
ties to Russia after they had tried to use electoral fraud to win legislative elections.
Mihael Saakashvili won presidential elections in early 2004. Georgia is seeking
NATO membership. Georgian-Russian relations deteriorated in the wake of the Rose
Revolution. Russia has many ways to pressure Georgia, including supporting the
breakaway regions of South Ossetia and Abkhazia, and disrupting economic ties
between Georgia and Russia, including in the energy sphere.
In late 2005, Gazprom announced substantial increases in the price of gas
shipped to Georgia. In the winter of 2005-2006, unknown saboteurs bombed gas
pipelines in Russia, temporarily cutting off supplies to Georgia. Gazprom announced
in November 2006 that it would cut off gas supplies to Georgia by the end of the year
unless Georgia agreed to a 100% price hike or sold its main gas pipeline to Gazprom.
However, Georgia’s geographical position neighboring energy-rich Azerbaijan
has allowed it to counter Russian pressure more effectively than other countries.
Georgia is a transit state for a pipeline completed in mid-2006 carrying one million
barrels per day of Azerbaijani oil to the Turkish port of Ceyhan (the Baku-Tbilisi-
Ceyhan or BTC pipeline). Another pipeline completed in early 2007 initially carries
2.2 billion cubic meters of Azerbaijani natural gas to Georgia and Turkey, lessening
their dependence on Russia as a supplier. Another pipeline carries oil from Baku to
the Georgian port of Supsa.19
Baltic States
The Baltic states of Lithuania, Latvia, and Estonia are members of NATO and
the EU. They have often had difficult relations with Moscow. About 90% of their
oil comes from Russia, and 100% of their natural gas. They faced Soviet energy
supply cutoffs in the early 1990s, as they were trying to achieve independence and
shortly thereafter. They pay world market prices for their energy supplies.
In the past few years, the main concern in the Baltic states has been Russian
efforts to increase control over the energy infrastructure in their countries. Gazprom

18 Eurasia Daily Monitor, January 4, 2007.
19 For more on Georgia, see CRS Report RL33453, Armenia, Azerbaijan, and Georgia:
Political Developments and Implications for U.S. Interests, CRS Report RL30679, Armenia,
Azerbaijan, and Georgia: Security Issues and Implications for U.S. Interests, and CRS
Report 97-727, Georgia [Republic]: Recent Developments and U.S. Policy, all by Jim

has a large equity stake in domestic natural gas companies of each of the three Baltic
countries.20 When Russian takeover efforts have failed, Russia has cut off energy
supplies to Baltic energy facilities. One striking case involves the Mazeikiai oil
complex in Lithuania. Mazeikiai includes a large refinery, the Butinge maritime
terminal, and a pipeline. It is the largest enterprise in Lithuania (accounting for about

10% of Lithuania’s GDP) and provides vitally-needed tax revenue. In 1999, the U.S.

firm Williams International bought a large stake in Mazeikiai and also received the
operating rights. In response, the Russian oil firm Lukoil, which supplied the oil to
the refinery, slowed deliveries to a trickle, making Mazeikiai unprofitable. This led
Williams, which had financial problems of its own, to sell its stake to Yukos in 2002.
Under Yukos, the refinery became profitable again. However, when Yukos later
fell afoul of Russian authorities, and was driven into bankruptcy, Yukos attempted
to sell its stake in Mazeikiai. The Polish oil firm PKN Orlen agreed to buy out
Yukos, despite an effort by the Russian government-controlled oil company Rosneft
to purchase the refinery. At the end of July 2006, the Russian government-owned oil
transport company Transneft announced that the part of the Druzhba oil pipeline that
supplies Mazeikiai was temporarily shutting down for repairs following an oil leak.
Transneft later said that it would not reopen the pipeline, due to its unprofitability.
Transneft has blocked Lithuania’s efforts to secure supplies from Kazakhstan through
Transneft’s pipelines. Critics charged that once again Russia was manipulating
energy supplies to punish Lithuania for seeking to diversify ownership in its energy
sect or. 21
Another example of a Russian company using its control over energy supplies
in an effort to strong-arm a Baltic country into handing over key infrastructure
occurred in January 2003. The Russian-government controlled Transneft oil pipeline
company cut off all oil shipments to the Latvian oil terminal at the port of Ventspils,
after having decreased shipments in late 2002. The move was a large blow to Latvia,
as Ventspils has been important to Latvia’s economy. Transneft diverted the oil
shipments to its own Baltic Pipeline System and the Russian port of Primorsk, which
it controls. Transneft claims that there is no demand for using Ventspils, a claim
viewed with skepticism by outside observers. Most saw the move as a power play by
Transneft to secure a controlling share of the firm Ventspils Nafta, which operates
the oil terminal.22
Estonia has also felt the effects of Russian pressure on its energy supply. On
May 2, 2007, Russia’s state railway monopoly halted delivery of oil products and
coal to Estonia in the midst of a political furor over the relocation of a Soviet war
memorial statue from a square in central Tallinn, Estonia’s capital.23

20 U.S. Department of Energy, Energy Information Administration, Baltic Sea Regional Fact
Sheet, July 2006, from the EIA website [].
21 Eurasia Daily Monitor, Volume 3, Issue 161, August 18, 2006.
22 Keith C. Smith, “Russian Energy Pressure Fails to Unite Europe,” CSIS Euro-Focus,
January 24, 2007 from the CSIS website [].
23 Russian authorities cited track repairs and a shortage of wagons. RFE/RL, Newsline, May

Belarus, under the authoritarian leadership of President Aleksandr Lukashenko,
has been Moscow’s most loyal ally in Europe since the collapse of the Soviet Union.
Belarus’s unreformed, largely Soviet-style economy is heavily dependent on cheap
Russian natural gas and oil. Gazprom long supplied Belarus with energy at Russian
domestic prices, providing a large indirect subsidy to the Lukashenko regime.
However, in 2006, it appeared that Russia had decided to reduce its subsidies
to Lukashenko. In late 2006, Gazprom strongly pressured Belarus to sell to it control
of the Beltransgaz natural gas firm (which controls the pipelines and other
infrastructure on Belarusian territory) and other key Belarusian energy firms, or face
the quadrupling of the price Belarus would pay for Russian natural gas. Gazprom
threatened a cut-off in supplies on January 1, 2007, if Belarus did not agree to pay the
higher price. Just hours before the deadline, however, the two sides reached an
agreement that averted a gas shutoff. Belarus agreed to pay $105 per 1000 cubic
meters in 2007, more than double the $46.48 it paid in 2006. Belarus’s natural gas
prices are scheduled to rise steadily over the next few years, reaching world market
levels in 2011. Belarus also agreed to sell Gazprom a majority stake in Beltransgaz.
Gazprom will pay for its share in installments between 2007 and 2010.
After settling the gas dispute, the two countries were soon embroiled in conflict
over oil supplies. In addition to receiving cheap natural gas, Belarus has also
benefitted from inexpensive and duty-free crude oil supplies that are processed at
Belarusian refineries. Belarus then sold the bulk of these refined products to EU
countries at a hefty profit. In January 2007, Russia moved to sharply reduce this
subsidy to the Belarusian economy. Russia imposed a tariff on oil exports to Belarus.
Belarus retaliated by increasing transit fees for Russian oil supplies to Western
Europe. When Russia refused to pay, Belarus cut off oil supplies to Western
European countries, angering their governments.
Belarus and Russia ended the crisis by agreeing that Belarus would raise its
export duty on crude and refined oil products to Western Europe to match that
imposed by Russia. Russia would then exempt Belarus from most of the new
Russian oil export duty. Perhaps most significantly, Belarus agreed to hand over to
Russia 70% of the proceeds that it receives from its exports of refined oil products
to the Western market. This figure will be gradually increased to 85% in 2009. The
drop in support from Moscow has caused Lukashenko to cut some government
spending and to look to Western banks for loans.24 Increased capacity at its oil
terminal at Primorsk may also lead to Russia reducing its use of the Druzhba
pipeline, which runs through Belarus.
In late December 2007, after a Putin-Lukashenko summit meeting, Gazprom
and Belarus agreed on a price of $119 per tcm for gas, well below the $160 per tcm
that Gazprom reportedly had demanded shortly before. (Gazprom later increased the

23 (...continued)

3, 2007.

24 Economist Intelligence Unit, Country Report: Belarus, March 2007.

gas price to $128 per tcm for the second half of 2008.) Belarus also received $1.5
billion stabilization loan from Russia to offset increased energy costs. Russian
officials say Belarus may receive an additional $2 billion in the future. The two
leaders did not disclose a reason for Russia’s generosity, leading observers to
speculate that Lukashenko may have concessions on issues such as opening Belarus’s
economy to more Russian investment. In 2009, Belarus may have to pay triple or
more for gas as a result of Gazprom’s decision to pay market prices to Central Asian
countries for gas that it transports to Europe, unless Russia decides to continue to
subsidize Belarus.
Armenia and Russia have close political and military ties, in large part due to
Armenia’s desire for support in its struggle with Azerbaijan over the Nagorno-
Karabakh region of Azerbaijan. However, in early 2006, Russia informed Armenia
that it would sharply increase the price it would have to pay for gas. In May 2006,
Armenia agreed to relinquish various energy assets to Russian firms as partial
payment for this price increase. Some critics have alleged that Russia now has
virtual control over Armenia’s energy supplies.
In October 2006, Armenian officials announced that Gazprom would assume
effective management control of an Iranian-Armenian gas pipeline. According to
some experts, this acquisition may indicate Russia’s intent to block use of Armenia
as a pipeline route independent of Russian control. The first segment of the gas
pipeline was completed in March 2007, with the rest to be completed in 2008. Some
of the gas will be used to generate electricity for Iran and Georgia, but the remainder
may satisfy all Armenia's other consumption needs, removing its dependence on
Russian gas transported via Georgia.25
U.S. Policy
The United States has repeatedly criticized what it has viewed as Russian efforts
to use its energy supplies as a political weapon. During the January 2006 natural gas
standoff between Russia and Ukraine, State Department spokesman Sean
McCormack criticized Russia for using “energy for political purposes.” He stressed
that while the Administration supported a gradual increase in prices to market levels,
it disagreed with a “precipitous” increase and cutoff. Secretary of State Condoleezza
Rice likewise on January 5 stated that Russia had made “politically motivated efforts
to constrain energy supply to Ukraine.”26 In May 2006, Vice President Dick Cheney
criticized Russia’s tactics of “supply manipulation or attempts to monopolize

25 For more on Armenia, see CRS Report RL33453, Armenia, Azerbaijan, and Georgia:
Political Developments and Implications for U.S. Interests, and CRS Report RL30679,
Armenia, Azerbaijan, and Georgia: Security Issues and Implications for U.S. Interests, both
by Jim Nichol.
26 The State Department. Statement, January 1, 2006; Daily Press Briefing, January 3, 2006;
Secretary Condoleezza Rice, Remarks at the State Department Correspondents Association’s
Breakfast, January 5, 2006.

transportation” against vulnerable countries in the region as “blackmail” and
In testimony before Commission on Security and Cooperation in Europe,
Administration in June 2007, Administration officials cast doubt on the reliability of
Russian oil and natural gas supplies to Europe and criticized Moscow’s
“nationalistic interventions in its energy sector.”28 On October 23, 2007, Secretary
Rice noted that “we respect Russia’s interests, but no interest is served if Russia uses
its great wealth, its oil and gas wealth, as a political weapon, or that if it treats its
independent neighbors as part of some old sphere of influence.”29 A State
Department spokesman reiterated U.S. opposition to the use of energy supplies as a
political weapon after the March 3-5, 2008 gas supply incident between Gazprom and
While the Administration has been active on this issue, skeptics might argue that
key U.S. interests are not at stake, given the fact that the problem is one of European
dependence, not that of the United States. Moreover, the EU and other European
countries will have to be the main players in finding a solution (if they have the will
to do so), with the United States playing a secondary role.
U.S. “Pipeline Diplomacy”
The United States has urged European countries to reduce their dependence on
Russian energy supplies. The United States has strongly advocated the building of
multiple pipelines to supply energy from Central Asia and Azerbaijan to Europe.
These projects include the Baku-Tbilisi-Ceyhan (BTC) pipeline), which carries one
million barrels per day of Azerbaijani oil to the Turkish port of Ceyhan. Another
important project supported by the United States has been the South Caucasus Gas
Pipeline (SCGP), which taps Azerbaijan’s Shah Deniz gas field.
In the longer term, through about 2020, the United States supports expanding
the SCGP. The United States also supports the Nabucco pipeline, an EU-sponsored
project that would supply natural gas from Central Asia and Azerbaijan to Europe
through Turkey, Bulgaria, Romania, Hungary and Austria. The EU hopes
construction of the pipeline will begin in 2008, and be completed by 2011. Another
U.S.-backed proposal is a Turkey-Greece-Italy (TGI) gas pipeline. The connection

27 “Vice President’s Remarks at the Vilnius Conference,” May 4, 2006, from the White
House website [].
28 Testimony before the Commission on Security and Cooperation in Europe of Gregory
Manuel, Special Advisor to the Secretary of State and International Energy Coordinator,
Matthew Bryza, Deputy Assistant Secretary, Bureau of European Affairs, and Steven Mann,
Principal Deputy Assistant Secretary, Bureau of South and Central Asian Affairs, June 25,


29 Secretary of State Condoleezza Rice, “Opening Remarks at the Office of the Historian's
Conference on U.S.-Soviet Relations in the Era of Détente, 1969-1976,” from the State
Department website, [].

of the Turkish and Greek gas pipelines was completed in November 2007. The
Greek and Italian gas transport systems are scheduled to be connected by 2012.
Turkey plays a central role in all of these pipeline projects. Turkey limits
shipping in the Bosporus Strait due to environmental concerns. This reduces the
potential for tankers to use the Black Sea to ship oil and gas to European markets.
Therefore, supplies from the Caucasus and Central Asia must cross Turkey’s territory
or transit across the Black Sea from the Caucasus in the east to the Balkans in the
west. The United States has supported the American Macedonian Bulgarian Oil
pipeline (AMBO), another Bosporus bypass project. It could supply Caspian oil from
the Bulgarian Black Sea port of Burgas through Macedonia to Albania’s Adriatic port
of Vlore. It is expected to begin construction in 2008 and be completed in 2011.
The United States has advocated extending an existing oil pipeline that currently
runs from the oil terminal at Odesa in Ukraine to Brody, on the Polish border. This
pipeline could then be extended to Gdansk in northern Poland. However, the project
remains stalled due to a lack of financing. At present, the Odesa-Brody pipeline runs
in the reverse direction, pumping Russian oil to Odesa. In October 2007,
representatives of Lithuania, Latvia, Estonia, Poland, Ukraine, Romania, Georgia,
and Azerbaijan met with EU and U.S. officials at an Energy Security Conference in
Vilnius, Lithuania to discuss how to reduce the dependence of vulnerable countries
on Russian energy resources and pipelines. Azerbaijan, Georgia, Lithuania, Ukraine,
and Poland signed an agreement to fund a feasibility study on the Odesa-Brody
extension project. Another proposal at the conference was a gas pipeline dubbed
White Stream, which would provide gas from the Caspian through a pipeline under
the Black Sea from Georgia to Crimea, in Ukraine. The pipeline would have to pass
over Russia’s Blue Stream pipeline on the seabed.30
U.S. officials have criticized the North European Gas Pipeline (NEGP) project,
which would traverse the Baltic Sea floor, supplying Germany and other western
European countries with natural gas, and bypassing the central and eastern European
countries through which the main current pipelines run. The U.S. has supported
discussions by Poland, the Nordic countries, and the Baltic states on alternatives,
including delivering Norway’s expanding gas production to northern Europe via
Danish pipelines and by developing liquified natural gas terminals in Poland and the
Baltic states.31 Administration officials have also criticized South Stream, saying that
it will not reduce dependence on Russian supplies, as would the Nabucco and TGI
projects, which are supported by the United States and the EU.
Germany supports the NEGP, as it is looking for a dependable source of natural
gas, particularly after the natural gas and oil crises between Russia and Ukraine and
Belarus, which briefly interrupted supplies in 2006 and 2007. Gazprom owns 51%
of the NEGP project, while two German firms and a Dutch firm own the rest.
Former German Chancellor Gerhard Schroeder is chairman of the NEGP consortium.
On the other hand, the Baltic countries, Poland and Ukraine have expressed

30 Eurasia Daily Report, October 12, 2007.
31 Testimony of Gregory Manuel, Matthew Bryza, and Steven Mann in a hearing before the
Commission on Security and Cooperation in Europe, June 25, 2007.

opposition to the NEGP, fearing that it will give Moscow more leverage on energy
issues with them. Estonia has blocked NEGP requests to conduct surveys in the
waters of its exclusive economic zone for the pipeline. Sweden has objected on
environmental grounds to the current path the pipeline would take through its own
waters, forcing the consortium to submit to it another proposed route for approval.
The pipeline would also run through the economic zones of Finland, and Denmark.
South Stream has garnered the support of Italy, Bulgaria, Hungary, and Serbia.
Obstacles to U.S.-Supported Pipelines. These U.S. efforts at “pipeline
diplomacy” face challenges. The success or failure of these projects will likely
depend more on whether private energy firms find them profitable than on U.S.
diplomatic skill and energy. A particular concern is whether there is enough oil and
natural gas to supply the various pipelines. Russian-supported pipelines appear to
have the upper hand because they have copious supplies available. Their potential
profitability makes them tempting even to central and eastern European countries that
are trying to reduce dependence on Russia. In addition, Moscow can offer them and
western European firms participation in exploiting oil and natural gas fields in
For example, the prospects for Nabucco are clouded as Moscow has proposed
alternative pipelines on similar routes in order to steer European countries away from
full support for the U.S. and EU-backed projects. South Stream appears to be a direct
challenge to Nabucco, and already has the support of Bulgaria, Serbia, and Hungary.
The Austrian state-controlled energy firm OMV has agreed to sell a 50% stake in its
Baumgarten gas storage and distribution center. The move could allow Moscow to
block Nabucco, as Baumgarten is the planned terminus of the project.32
Russian firms will hold a majority stake in an oil pipeline under the Black Sea
connecting Russia to Bulgaria’s port of Burgas, then on to Alexandroupolis on
Greece’s Aegean coast. It is scheduled to begin construction in 2008 and be
completed by 2010. This project could compete with the U.S.-backed AMBO
pipeline project, scheduled for construction in 2008 and completion in 2011.
It is less clear whether sufficient oil and gas supplies exist for U.S.-supported
alternative routes. The United States is strongly opposed to tapping Iran’s energy
resources, due to Iran’s support of terrorism, its nuclear ambitions, its policy in Iraq,
and other factors. Turmoil in Iraq makes it unlikely supplies can be drawn from there
in the near future. The main U.S. hopes lie with Central Asia and Azerbaijan.
However, Moscow retains strong levers of influence over oil-rich Kazakhstan and
key natural gas supplier Turkmenistan, including control over the pipelines
transporting most of their current output. In December 2007, Kazakhstan,
Turkmenistan and Russia signed an agreement to build a new natural gas pipeline
from Central Asia along the Caspian Sea to Russia, in yet another apparent effort to
eclipse U.S.-led alternatives.
Russia and Iran have imposed another obstacle to U.S.-supported efforts. They
have asserted that no country bordering the Caspian Sea can legally undertake

32 Eurasia Daily Monitor, November 19, 2007.

projects such as building a pipeline on the seabed or drilling for oil and gas there
without the consent of all Caspian littoral states. Although the other littoral states
reject the Russo-Iranian view, this position could make potential investors leery of
investing in such a project. Shipments via oil tanker across the Caspian to Baku can
be increased, but would be more expensive.
On the other hand, given the fact that Moscow has often struck a hard bargain
with Central Asian countries on the use of Russian pipelines, alternative routes may
be tempting to them in the future. For example, Turkmenistan has been forced to sell
its gas to Gazprom for less than half of the price that Gazprom gets when it resells
it to European countries. Nevertheless, the dissatisfaction of Central Asian energy
producers with Russia may not necessarily mean that they will opt for U.S.-supported
pipelines to Europe. They have decided to develop pipelines eastward, toward China
and the rest of Asia. Increased transport of energy to Asia through non-Russian
pipelines could have a significant impact on the energy plans of the United States, the
European Union, and Russia.
In March 2008, Gazprom agreed to bring prices it pays for Central Asian gas to
European market levels, starting in 2009. This will likely lead to increased gas prices
for Ukraine and other countries, as well as make it more difficult for the United
States and the EU to persuade Turkmenistan and other Central Asian countries to
provide gas for Nabucco.
Azerbaijan is the most eager participant in the U.S.-supported pipeline plans,
but has the disadvantage that it has only modest amounts of oil and natural gas to
export at present. The United States hopes that this will change by 2015 or 2016 as
Azerbaijan develops its gas fields.33
Other Policy Issues
The Europeans, supported by the United States, may be able to take other steps
to diversify their energy supplies. Oil and natural gas pipelines in Europe run in a
mainly east-west direction. More north-south interconnections within Europe could
help to buffer any shortfalls in a particular region. Larger storage facilities could also
be helpful in this regard. European leaders have endorsed European Commission
proposals to enhance interconnections within Europe and increase storage, but the
initiatives remain in the planning stage.
In the longer run, given continued high energy prices, liquified natural gas
(LNG) delivered to terminals throughout Europe may be an economical substitute for
natural gas from Gazprom pipelines. Natural gas may become more easily
transported and traded, making it easier for a country to diversify its supplies, rather
than rely on long-term contracts signed with Gazprom. Already, LNG (largely from
North Africa) makes up 15% of Europe’s gas imports, and is particularly important
for some western European countries. For example, 65% of Spain’s gas imports are

33 Testimony of Gregory Manuel, Matthew Bryza, and Steven Mann in a hearing before the
Commission on Security and Cooperation in Europe, June 25, 2007.

LNG.34 Poland intends to build an LNG terminal on the Baltic Sea in order to
diversity its supplies. U.S. and European officials have also stressed the need for
countries of the region to improve energy conservation and develop alternative fuels,
although they acknowledge that these efforts will take time.
Some experts have proposed that the United States and the EU block Russia’s
accession to the World Trade Organization unless it stops political manipulation of
energy dependency in Europe.35 However, negotiations between Russia and the U.S.
and EU on Russia WTO membership have focused on other concerns, such as
Russia’s subsidized domestic energy prices and Russia’s protection of intellectual
property rights. On the other hand, countries from the region that are already WTO
members, such as Georgia and Moldova, can block Russia’s WTO membership if
they choose. Moldova has declined to do so, while Georgia used another issue,
Moscow’s refusal to set up customs checkpoints between Georgia’s breakaway
regions of Abkhazia and South Ossetia and Russia, to block Russia’s WTO entry.
Ukraine will likely join the WTO before Russia, possibly giving it leverage over
In the long run, Russia’s statist manipulative approach to energy policy may
eventually be moderated by its own needs. Some observers believe that Russia will
need Western investment and expertise to fully exploit new oil and natural gas fields
as current ones decline over the next decade. This may provide an opening for the
United States and other countries to persuade Russia to liberalize its energy sector.
Russia’s current control of Central Asian supplies has allowed it to postpone the
massive investments needed to exploit remote areas of its own territory, such as
Eastern Siberia, the Arctic, and the Far East. However, this may change due to
increasing worldwide demand for energy and the diversification of export routes by
Central Asian countries. On the other hand, the current statist system has provided
Russia’s leaders with immense personal wealth and power, and afforded them the
satisfaction of overseeing Russia’s renewed international strength. They may not
want to change this system, even if it might be in Russia’s long-term interest to do
Some experts and Members of Congress have said that the United States needs
to restore the post of full-time envoy to deal with Eurasian energy issues. From 2001
to 2004, Steven Mann was Special Advisor for Caspian Energy Diplomacy. Since
that time, the responsibilities of this post have been divided among several persons.
Currently, Gregory Manuel is Special Advisor to the Secretary of State and
International Energy Coordinator. Matthew Bryza is Deputy Assistant Secretary of
State in the State Department’s Bureau of European Affairs. Both have worked on
European pipeline diplomacy, but each has other responsibilities as well. Robert
Deutsch, Senior Advisor on Regional Integration, Bureau of South and Central Asian
Affairs, has focused on electricity and transport links between Central and South

34 See CRS Report RL33636, The European Union’s Energy Security Challenges, by Paul
35 Testimony of Keith C. Smith before the Commission for Security and Cooperation in
Europe, June 25, 2007.

Asia. Deputy Assistant Secretary of State for South and Central Asian Affairs Evan
Feigenbaum also focuses on these issues, but has other responsibilities.
In addition to diplomacy, the United States has other tools to deal with the
energy dependency question. The United States has funded feasibility studies for
some pipeline routes through the Trade and Development Administration (TDA).
For example, in August 2007, the TDA provided $1.7 million for feasibility studies
on building both an oil and a gas pipeline across the Caspian Sea to link to the BTC
pipeline and the South Caucasus gas pipeline.36 The Export-Import Bank has also
provided funds for pipeline projects. The United States and EU are working with
Ukraine to develop an energy efficiency action plan for that country. The United
States provides small amounts of aid to the countries of the region to help build their
energy security.
Congressional Response
Members of Congress have expressed concern about the impact of Russian
energy dependency on the countries of central and eastern Europe. Members have
sharply criticized Russian policy and called on the European Union to work with the
United States in helping these countries diversify their energy supplies. Senator
Richard Lugar has called for a greater NATO role in energy security issues, including
providing emergency energy assistance to member states facing a sudden energy
cutoff.37 Administration officials have said NATO could play a greater role in the
security of pipelines and other energy infrastructure, but that broader energy issues
are best dealt with in other venues.
Senator Joseph Biden, Chairman of the Senate Foreign Relations Committee,
and Senator Lugar have called for the Administration to re-establish the post of high-
level envoy within the State Department to deal with Eurasian energy issues. The
Energy Independence and Security Act of 2007 (P.L. 110-140) requires the
establishment of a Coordinator for International Energy Affairs within the State
Department. In a hearing before the committee on February 13, 2008, Secretary Rice
said that she planned to appoint a such an energy coordinator who would “especially
spend time” dealing with Central Asia and Kazakhstan.38
In the 110th Congress, committees have held hearings that have touched on the
issue. In January 2007, the Senate Committee on Energy and Natural Resources held
a hearing on “The Geopolitics of Oil,” during which Russian manipulation of its oil
resources for political purposes was discussed. In June 2007, the Commission on
Security and Cooperation in Europe held a hearing on “Energy Security in the OSCE

36 “Promoting Technology in the Oil and Gas Sector,” TDA website,
[] .
37 “Remarks to the German Marshall Fund Conference,” Congressional Record, December
7, 2006, S11483-S11485. For a discussion of NATO’s role in Western energy security, see
CRS Report RS22409, NATO and Energy Security, by Paul Gallis, updated regularly.
38 Transcript of a hearing of the Senate Foreign Relations Committee on FY2009 Foreign
Affairs Budget, February 13, 2008.

Region.” In July 2007, the House Foreign Affairs Committee held a hearing entitled
“Central and Eastern Europe: Assessing the Democratic Transition,” during which
witnesses and Members viewed the dependency of the countries of the region on
Russian energy as a threat to their democracies.
Congress has also passed resolutions that refer to concerns about Russian energy
policy. S.Res. 530, in a list of criticisms of Russian policies on the eve of the St.
Petersburg G-8 summit in July 2006, expressed disapproval of Russian energy policy
toward Ukraine, Georgia, Moldova, and other countries. H.Res. 500, passed in July
2007, charged that Russia and other countries in creating a gas OPEC, and criticized
Russia’s use of its gas supplies as a political tool against Georgia, Ukraine, Belarus,
and other countries. The second session of the 110th Congress may also consider
legislation on these issues.
Congress may have the ability to address Russian energy policy in the future if
it considers the issue of permanent Normal Trade Relations (PNTR) for Russia. If
Russia is granted membership in the World Trade Organization, the United States
will have to grant Russia PNTR for Russia to enjoy the benefit of WTO membership
in its relations with the United States.

Figure 1. Pipeline Map