Is the 'paperless' office here at last?

By Thom Patterson, CNN

STORY HIGHLIGHTS

• Experts predicted paperless offices would be the norm by the 1990s

• Analyst: Printing for "read-and-discard purposes" must end to achieve paperless office

• Paperless office won't happen "for ages," says analyst, but the "less-paper office is coming"

(CNN) -- In the front offices of the trend-spotting network and online magazine TrendHunter.com, there are 15 workers wrangling 35,000 worldwide contributors -- but you'd be hard-pressed to find one filing cabinet.

Founder Jeremy Gutsche tells a story about how an accountant had finally put together all the numbers on a project and offered to send a paper report on his work. When Gutsche asked for an electronic copy instead, the accountant "just started looking at me, laughing."

According to Gutsche, the accountant asked, "These are your most important financial performance records -- don't you think you should have a hard copy?" "I said, 'I really don't know what I would do with it.'"

"Buy a filing cabinet," said the accountant.

The exchange goes to the heart of a cultural divide that may explain why businesses continue to print, copy and fax more than a trillion pages of office paper each year, according to the market research firm InfoTrends.

The dream of the paperless office started way back in 1975, when BusinessWeek magazine predicted "a collection of ... office terminals linked to each other and to electronic filing cabinets."

"It will change our daily life," said one bold technology expert quoted in the article. Said another expert: "By 1990, most record handling will be electronic."

Twenty years after that unmet deadline, a national survey found that businesses have chosen to use paper printouts to archive 62 percent of important documents.

The survey of 882 companies, released in February by the content management association AIIM, indicates that most businesses believe paper documents are needed for legal reasons.

So what happened? Where is this streamlined office of the future, free of clutter and file cabinets, that was promised back in the '70s?

By the mid-1990s, the nation was actually moving in the opposite direction.

More and more workstation computers and printers contributed to a big jump in office paper consumption well into the 2000s, according to industry experts.

Before taking a hit from the recession, the estimated number of office pages printed, copied and faxed annually in the U.S. peaked in 2007 at more than 1.019 trillion, according to InfoTrends, a Massachusetts-based market research and consulting firm.

InfoTrends analyst John Shane blamed the nation's love of office printing and copying on convenience.

Many people can't bring themselves to let go of the convenience of a printed hard copy, said Shane. For some, printed paper may be more portable, and easier to read in a cramped airliner seat than reading on a laptop. Some people may find paper more comfortable and preferable to read during a meeting, instead of reading a document on a tiny smart-phone display.

"Most of what people print now is for temporary read-and-discard purposes and for transactions," said Shane. "People like to read paper. Then they throw it away. Then they may want to read it and throw it away again. That behavior needs to change if we're really going to see a paperless office."

There are plenty of motivating factors that would push managers to adopt the idea of a paperless office. Cost saving is one. Paperless-office advocates say they save the cost of paper, envelopes, postage, couriers, printers, copiers and, of course, filing cabinets.

The idea of helping the environment also might push a change in behavior, Shane said.

That's the motivation behind Gutsche's paperless office, his second such system after going through the shift with his previous employer, Capital One.

Three major factors will drive the paperless office movement, says Gutsche: ecological, technological and generational.

"The world's getting more obsessed with eco," said Gutsche, in this case the idea of saving paper and conserving trees. "Eventually it's going to get to a point where it's going to seem awkward when you see someone having something printed."

The paper industry argues that recycling paper and managed tree growth make using paper cheaper and easier on the environment than the cost of recycling computer components.

The technology is available to give even home-based businesses the option of going paperless.

Scanners for electronically storing documents are getting smaller and more affordable. "You get back from a conference -- you drop off 15 business cards into a little scanner and it places them all digitally," said Gutsche.

Portable computer tablets, such as Apple's upcoming iPad, are also part of the equipment of a paperless office. "As soon as I switched to a tablet PC, that eliminated the need to be walking around with a pad of paper to meetings," said Gutsche. "I can write things down immediately on the tablet."

When he's giving someone feedback on a document -- whether it's on a PowerPoint Deck or in Microsoft Word -- it's much more tedious to mark it up on a keyboard, Gutsche said. "But if you use a tablet, you're drawing right on it, so there's no real shift from what you're doing."

Next-generation e-readers and tablets have spurred interest in the prospect of a paperless magazine market.

Bold new e-readers grab attention

For home offices, popular tech blogger Chris Pirillo recommends using a Web-based billing and payment system such as Freshbooks to eliminate paper created in the invoice process.

Kevin McNeil, CEO of Ontario-based Gore Mutual Insurance, said acceptance of the company's paperless office system in 2002 was "a generational thing."

More than half of his approximately 280 employees are under 35, he said.

Younger people -- especially those young enough to have grown up with home computers -- have adapted very quickly, McNeil said. Older workers took longer, but everybody was on board within six months.

"Everyone saw the benefits of being able to take care of their work faster, but young people don't want to deal with old technology. They paid more attention."

As a result, the workflow has gone from sometimes waiting days to retrieve records that were archived off site, to accessing the same files in two or three seconds -- saving time, creating efficiency and improving customer service, McNeil said.

An initial outlay of hundreds of thousands of dollars was well worth it, he said. "For every dollar that we spent on it, we saved that dollar plus another 85 cents."

Gutsche said the shift to reject all paper has already started, but Shane is more cautious in his predictions.

Although Shane does see offices in the near future reducing their printing and copying, he says, "I wouldn't call it the paperless office -- that's not going to happen for ages. But the less-paper office is coming."

By the way, that filing cabinet TrendHunter.com's accountant suggested? According to Gutsche, "it's still empty."

The Naked Euro

Robert Skidelsky

LONDON – Dramatic challenges, and mediocre responses: that is the history of the European Union. All too rarely does the EU rise to the level of events, which is why Europe is fading economically and geopolitically.

The 1958 Treaty of Rome, which established the European Economic Community, was Europe’s great leap forward. But the decision to create a common market without a common government was simply storing up trouble for the future. Everything since – enlargement to 27 member states and the creation of the 16-member euro-zone – has widened the gap between rhetoric and reality. Euroland has gone on promising far more than its history enables it to deliver.

The Greek financial crisis is the latest example of the gap between reality and rhetoric. At root, it is a crisis of “enlargement,” in this case enlargement of the euro-zone. Unprecedented effort at fiscal discipline in the 1990’s – helped in Greece by creative accounting – enabled Portugal, Italy, Greece, and Spain (disobligingly known as the PIGS) to meet the entry criteria in 2002. But once in, the pressure was off. Most of the Mediterranean countries continued on their spendthrift ways, confident that the markets would not call them to account.

Now Wolfgang Schauble, Germany’s Finance Minister, has said enough is enough. He advocates setting up a European Monetary Fund (EMF) to provide emergency lending to countries at risk of default on their sovereign debt. Emergency lending would come with a “prohibitive price tag,” “strict conditions,” and “mandatory penalties” in the event of non-compliance.

Translated into ordinary language, this means that the state finances of a country that was granted help from the EMF would be outsourced, for a time, to external commissioners, much as happened in the nineteenth century to Latin American states that wanted their debts re-financed.

Milton Friedman predicted the single currency would fall apart after a decade or two; this has now become more likely than not. After all, Schauble knows that the conditions he proposes would be politically unacceptable, so he says that any country unable to meet them “should, as a last resort, exit the monetary union, while being able to remain a member of the EU.” Germany might even exit itself, if it cannot bring its weaker partners to heel.

The Mediterranean crisis has exposed the euro-zone’s long-standing flaw: the absence of a single government. Because the euro-zone is not an “optimal currency area,” it needs tools to deal with so-called “asymmetric shocks” – shocks that affect some members more than others. But it lacks those tools, especially a Treasury with powers to tax and borrow, and a central bank that can act as lender of last resort to its member banks.

Schauble’s proposal has both an economic and a geopolitical dimension. Economically, it exposes the deep divide between those who believe that external imbalances are the fault of those who spend too little and those who believe that they are the fault of those who spend too much.

John Maynard Keynes wanted to force surplus countries to either spend or lend. But the older doctrine that it was a deficit country’s duty to “put its house in order” survived. The one concession to Keynes was the creation of the International Monetary Fund in 1944 in order to provide short-term assistance to deficit countries under strict conditions. This, in essence, is the German proposal today in the narrower context of the euro-zone.

Schauble’s view is an expression of Germany’s long-standing deflationary outlook. Germany’s fiscally conservative establishment would like other EU countries with large budget deficits to return to economic health through fiscal discipline, reduced domestic demand, and high export growth. The problem, German leaders believe, is not their country’s high saving rate, but other euro-zone members’ excessive spending.

Martin Wolf of The Financial Times disagrees. He also points the finger at China. Both countries have massive surpluses of savings over investment and huge trade surpluses. Both parade their fiscal virtue and insist that deficit countries stop their irresponsible spending.

Wolf rightly calls this argument economically incoherent. Piling up savings in one place imposes unemployment on the rest. High savers should consume more, allowing the big spenders to export more and start living within their means without dooming them to hair-shirted stagnation. Frugality is no virtue if no one is willing to spend.

But the main impact of Schauble’s bombshell is on the geopolitics of the EU. Europe’s political elite view the Union as one of the poles in a multi-polar world. But what is Europe? Less than a federation, more than a confederation, it lacks any center of gravity, any fixed frontiers. When an American, Chinese, or Russian leader wants to speak to Europe, whom does he call? Without internal coherence or external shape, Europe is little more than a geographical expression.

The implication of Schauble’s proposition, therefore, is that Euroland should shrink to a governable dimension. In essence, it recapitulates the contrast between the Greater Germany dreamed of by idealists in 1848 and the Smaller Germany created by Bismarck in 1871.

Like the little boy who was unafraid to declare the emperor naked, Schauble has pointed the finger of realism at the aspirational rhetoric in which all European leaders are still compelled to clothe their utterances. He has broken with the taboo against calling into doubt any aspect of the European project. For those who prefer solid construction to wishful thinking, his words are to be welcomed.

Copyright: Project Syndicate, 2010.

www.project-syndicate.org

Re-Repairing Bosnia

Morton Abramowitz and James Hooper

Bosnia’s future is becoming increasingly uncertain. An ethnic veto has long made the central government ineffective, and, most recently, Milorad Dodik, the leader of the Serb-controlled entity, Republika Srpska, has responded to efforts at reform with a threat to hold a referendum on independence.

Many consider secession unlikely, but Dodik’s threat does heighten fear that today’s fragile status quo could break down. While nobody expects the mass violence of the 1990’s to recur, that does not justify diplomatic indifference and inaction.

The Dayton Accords of 1995 ended Serb-instigated ethnic cleansing and established peace in Bosnia. But that agreement did not create a functional Bosnian central government with the capacity to undertake the reforms needed to meet the terms of accession to the European Union.

To appease Bosnian Serbs led by Slobodan Milosevic (who died while on trial for war crimes), Radovan Karadzic (who remains on trial for war crimes) and Ratko Mladic (who was indicted for war crimes and is still on the run in Serbia), the West accepted the territorial division of Bosnia at the war’s end. This acceptance was manifested in a constitutional structure that gave the Bosnian Serb region quasi-independence and the power to obstruct the emergence of an effective central government in Sarajevo.

The EU, having helped rescue Bosnia from its past by mortgaging its future, seems in no hurry to change the country’s purgatory-like status. European leaders have allowed their most useful tool for preserving the peace and leveraging change – the once-respected office of the High Representative – to be diminished to the point that many Bosnian officials treat the incumbent with disdain. But it should be recognized that, in post-Cold War Europe, it has proven highly dangerous to allow disrespect for European purpose and resolve to take root.

If the Bosnians lack the capability to modify the iron corset bequeathed to them at Dayton, the EU remains indifferent, and the United States is preoccupied with the Middle East, South Asia, and China, what lies ahead? Leaving Bosnians to explore the options that befall a failed state (with a Muslim plurality) – located within Europe but on the margins of its prosperity, unity, and relative social cohesion – is to acknowledge policy bankruptcy and let others roll the dice on ways to end the current stalemate.

Some in Europe assert that over time the parties may eventually see the benefits of greater cooperation, that dissolution will not occur, or that, if it does, it will likely be relatively tranquil. Such assumptions do not inspire confidence. Violence has been the traditional agent of change in the Balkans, and the level of frustration in Bosnia is growing.

Faute de mieux, the Americans have allowed the burden of dealing with these issues and sorting out the unfinished business of Dayton to fall to the EU. Indeed, it is past time for the EU to take the diplomatic lead in fixing what Dayton left undone. While the new EU’s governance structure seems, at least on paper, to lend itself to more robust efforts in the Balkans, diplomatic habits die hard, and the Union will need to overcome its continuing legacy of relying on carrots without sticks to deal with knotty Balkan problems.

Regardless of the EU’s unhappy diplomatic past in the Balkans, the most practical way forward is to seek political reform in Bosnia rather than hoping for the US to resume its leadership role. Any EU effort should be based on the following reinforcing elements:

• A conference of the three Bosnian parties this spring to fix the Dayton agreement by strengthening the central government sufficiently to enable Bosnians to fulfill the requirements of the EU accession process while maintaining the existing entities. This gathering should include both the US and Serbian governments as active observers. European and US leaders would have to convey to the Bosnians and others that failure is not an option and convince them of the EU’s bottom-line unwillingness to accept opposition from those in Bosnia who impede the EU accession process.

• Since Serbia is essential to the continued existence of Republika Srpska, pressure must be brought to bear on its government, which seeks EU membership, to make clear to obstructionist Bosnian Serb leaders that they cannot hold a referendum on independence, and that they must accept enhanced central-government powers.

• Support for civil-society groups and democratic parties prior to elections throughout Bosnia this October. The EU and the US should underscore the need for political change and for candidates who support EU accession as indispensable to Bosnia’s economic and political progress.

The alternative – tinkering with reform while hoping that time, EU money, and a watchful eye will move the three Bosnian communities toward political harmony – is not prudent policy.

Copyright: Project Syndicate, 2010.
www.project-syndicate.org

Europe’s Lost Decade

MILAN – “Never confess a failure. Whenever you are about to miss a target, just move the deadline. Sooner or later, you will make it.” This simple rule, largely followed in Eastern Europe in the socialist days, is also popular among European Union bureaucrats in Brussels today.

On March 24, 2010, what all observers of European affairs have long known will be written in stone: the EU failed to attain the targets for economic growth, efficiency, and modernization set ten years ago in Lisbon. Rather than becoming “the most dynamic economy in the world,” the EU is losing ground.

The gap in per-capita income of the EU15 (the membership prior to the accession of mainly post-communist states in 2004) relative to the United States – taken as a reference in many targets – is unchanged at 30-40%, depending on the adjustment to purchasing power parity. The EU as a whole has attained none of the 17 quantitative targets set in the Lisbon Strategy. And all the qualitative targets, added later in the process, have been used mainly to feed national bureaucracies preparing plans within the so-called “open coordination method.”

Rather than digging into the reasons for this general failure, the EU is now issuing a document that calls for new ambitious targets for 2020. For another ten years, it seems, we can talk big and dream.

What failed in the Lisbon Strategy? Basically, everything – and the method, above all. Rules without any monitoring and enforcement mechanism are merely empty rhetoric. The “peer pressure” that should have been exerted in the open coordination method has been a powerful tool to exert “peer protection” in justifying delays in attaining the targets.

Second, the targets themselves were wrong, and there were far too many. Those who bravely tried to list them came out with three-digit totals. The only justification for such a long list is that every government could claim to have attained at least one target – a trophy to exhibit at home.

Moreover, the targets mostly involved policies that do not require any supra-national coordination, such as labor policies, childcare, and pensions. Hence, the soft method, and the absence of sanctions for countries delaying the process. In addition, the targets were generally set in terms of outcomes rather than policy instruments. The government of a country hit by a positive shock could attain a target even without having done anything to achieve it.

For all of these reasons, postponing Lisbon to 2020 is a no-brainer. Rather than wasting time and public money to set up or maintain the Lisbon bureaucracy, the EU should closely monitor the attainment of those national and EU-wide targets that involve significant spillovers across jurisdictions. A clear case is environmental protection. The 2012 Kyoto targets are attainable. Any delay by one country in moving in that direction would jeopardize efforts made in other countries.

Another example is energy distribution. The EU is still very far from having a single energy market, which makes it more costly for business and households and reduces efficiency. Here, there is a strong case for having EU-wide targets rather than simply national objectives and sanctions for countries that do not liberalize their markets.

Other targets could instead be set at the EU level, rewarding those countries that contribute the most to attaining them. One such target is skilled migration. Europe is losing out in the worldwide race for talent, and the global recession is providing an opportunity to redesign the geography of human capital endowments.

Selective migration policies and talent-friendly environments supported at the European level could significantly improve the net skill migration balance, which is currently negative or zero in all EU countries. There is a pool of about 300 million graduates to build on, and, according to solid evidence, they react to changes in economic incentives with respect to their location choices.

In this context, there are clear spillovers across jurisdictions, not least because talents go where there is a critical mass of job opportunities for them. People often move as “power couples” looking for good jobs for both adult members of the household. With popular destinations like the United States and Canada cutting back on research and public education and facing the need to raise top tax rates, Europe has a unique opportunity to attract skilled migrants and reduce the exodus of European researchers.

The so-called “blue-card” process has so far been largely unsuccessful, because there was no incentive for individual states to coordinate their policies. How about conditioning EU support to national researchers on the adoption of selective migration policies? That would be the first serious step towards creating a single market for labor in Europe.

If Europe were to take such steps, it would look not only like the land of redistribution, but also like a place where the environment is taken care of, energy distribution is efficient, and talent is highly rewarded.

Copyright: Project Syndicate, 2010.

http://www.project-syndicate.org/

EUROPEAN ENERGY: THE ‘SOLIDARITY’ CONUNDRUM

European energy policy is critically flawed. It has proven impossible to square the circle between security of supply, greater sustainability, and affordable prices. Despite claims of ‘solidarity’, national politics still trumps the ‘European good’ on energy matters. Progressing liberalisation remains important for competition and resilience, but Europe’s real challenge is to re-level the low carbon technology playing field to properly realign global emission concerns and security of supply in future.

Despite brave attempts from the European Commission to craft a cohesive common energy policy, the Lisbon Treaty was only able to commit to a ‘spirit of solidarity’ across Member States. By way of confirma¬tion, the Treaty even notes that Union meas¬ures “shall not affect a member state’s right to determine the […] general structure of its energy supply”. This underlines the national political realities in play: a common policy framework is more virtual than operational¬ly real for European states, and despite best efforts, little solidarity actually exists.

Nowhere is this more evident than on the supply side: individual European capitals are still trying to beat their own path towards greater ‘energy security’ by striking bilateral deals with external supplies. This plays out well for some, but disastrously for others. The same problem is refracted through on¬going stubbornness to genuinely liberalise or integrate disparate European markets in order to drive competition, economic effi¬ciencies, and enhance demand side bargain¬ing positions. If anything, competition policy has paved the way for greater consolidation of national champions with GdF-Suez stand¬ing tall as the latest ‘mega-merger’ looming over the European energy landscape.

Where the EU has seemingly found great¬er common purpose is on climate change; but this is also misleading. Not only has climate policy created major costs for con¬sumers to bear, it has vastly complicated the ‘security of supply’ equation with the net result of increased dependence on ex¬ternal gas supplies given that the ‘20 20 by 2020’ targets to reduce emissions and increase renewables and efficiency are un¬likely to be met. Things would not be quite so bad if such policies actually had a dis¬cernible effect in reducing net emissions, but this remains a function of economic and demographic fundamentals, not one of policy instruments given the conflicted approach Europe has taken to date.

In helping to pick ‘market winners’ by intro¬ducing multiple policy instruments rather than sticking to a single target and a sin-gle price instrument, the EU has arguably missed the biggest trick of all on clean en¬ergy production: trying to promote nuclear energy and carbon capture and storage (CCS). Both remain deeply flawed from a technology and costs based perspective, but they are arguably the most credible way the EU has of squaring the circle be¬tween security of supply and lower emis¬sions. Brussels is understandably transfixed with solving its economic woes of late, but it simply cannot afford take its eyes off en¬ergy policy. Unless Member States start thinking on a European rather than paro¬chial basis, little progress will be made.

Gas supply complacency?

Before the deep recession that gripped Eu¬rope in 2008/9, many analysts were warn¬ing of an imminent energy market failure. Capacity margins were tight, emissions continued to rise, and investment was lax as utilities sweated assets for all they were worth (even with oil and gas prices trading at historically high prices). The economic downturn not only pulled Europe back from this awkward brink, it has made pol¬icy look as though it is vaguely functional. Emissions actually fell, capacity looks plen¬tiful, commodity prices slackened, and with demand ebbing, structural dependence on Russian gas does not look as overwhelming as once thought, particularly as greater vol¬umes of Liquefied Natural Gas (LNG) pro¬vide greater elasticity of supply. ‘Shale gas discoveries’ in the US and emerging coal bed methane technologies are also start¬ing to seriously raise the specter of gas on gas competition. At a minimum, gas is once again a buyer’s market.

But far from rejoicing at such ‘policy hits’, this could actually raise serious problems for the EU down the line, not least because it creates a credibility problem for European ‘security of demand’ for gas. The ‘four cor¬ridors’ strategy to tap into Russian, Scandi¬navian, Middle Eastern, and Central Asian reserves was always politically shaky, but a physical lack of demand presents an even more formidable short-term challenge. If Russia, North Africa, and Middle Eastern pro¬ducers take dampened European demand forecasts seriously, they will need to rise to the challenge of diversifying their export routes and markets away from the EU.

Priming the Pacific Basin with LNG is an obvious and relatively easy move for Qa¬tar to make given collapsing Atlantic Basin spot prices – and is one that West African producers might follow. The outlook for Iran (which remains a net importer of gas despite sitting on massive reserves) is also now considerably more complex in terms of how, where, and when it should bring new gas to the market. Any additional supplies from the Middle East would not only rail against rising domestic demand, but the political intricacies of multiple transit states needed to feed gas to Euro¬pean markets via Iraq to Egypt and beyond.

This bodes badly for the nascent Nabucco pipeline; slumping demand will do little to enhance Europe’s prospects of sourc-ing either Middle Eastern or Central Asian reserves or a combination of both. China is clearly now the export market of choice for Central Asian players wanting to break the Soviet mould, with Europe little more than a useful negotiating tool as far as Turkmenistan, Azerbaijan, and Kazakhstan are concerned. Even if Europe could se¬cure an upstream stake, transit routes via Georgia (or more tangentially the legally contested Caspian Sea) would come with a major commercial (and political) premium. The same logic applies to Turkey, which is perfectly placed to leverage its position as a regional energy hub either from the Mid¬dle East or Central Asia. This would have a considerable impact, not only on transit agreements, but Ankara’s broader acces¬sion issues towards the EU.

But analysts should not get too hung up on Nabucco. Its capacity would never be more than 30 bcm/y in its wildest dreams by 2020, and in the short term, would strug¬gle to muster a meager 7 bmc/y – most of which would go through the old Soviet sys-tem across Central Asia. Rather, its signifi¬cance remains in the political realm in order to maintain pressure on Russia, not only in relation to the competing South Stream pipeline (a pipeline that many European states are taking a ‘spread bet’ by simulta¬neously backing both initiatives) but to es¬tablish Europe’s credibility in diversifying its supply. For Nabucco to happen, infrastruc¬ture investment would come first, the gas second. This can only be delivered by acts of political commission, not the ‘free hand’ of the market – a reality Brussels is slowly wak¬ing up to.

The inverse is true of Russia. Gas is in plen¬tiful supply, but major decisions need to be taken in Moscow on capital investment on liquefaction and new pipelines between eastern and western markets amid grow¬ing capital constraints. Many in Europe have finally conceded that getting Russia to rat¬ify the Energy Charter is simply not on the cards. It is not in Moscow’s economic or po¬litical interests. If anything, Russia has half an eye on perfecting its arbitrage poten¬tial between these markets while pushing Gazprom’s internationalisation strategies to influence the lion’s share of European supplies. The good news for Europe is that the sheer geographical size and infrastruc¬ture deficiencies make it close to impossi¬ble for Russia to switch gas flows between West and East at will, and rather like North African supplies, Moscow’s pipelines are hardwired towards European consumers through historical design and political prac¬tice of bilateral gas purchase agreements. But despite the mutual dependence this supposedly creates, the critical flaw is that such agreements tend to further under¬mine any notion of European solidarity in external energy policy. This was the case in 2006 following initial gas disputes, and re¬mains so now.

Nord Stream is a stellar example. The Ger¬man government has been pressing Fin¬land and Sweden hard to drop their ‘envi-ronmental’ opposition to construction of the 55 bcm pipeline linking further Russian supplies to German demand. The pipeline takes assiduous care to bypass Polish ter¬ritory: the more ‘favourable’ transit terrain across the Baltic Sea is the preferred politi¬cal option. Finland and Sweden have even gone to embarrassing lengths to underline the ‘very limited geopolitical impact’ this pipeline would supposedly have. The reality is that Russia would use this new found lev¬erage to maximum effect against Ukraine (depending on the hue of Orange at the time) and other former Soviet states, either to exact higher gas prices (given upstream revisions across Central Asia) or greater political influence. This is a strategic real¬ity the EU, and more importantly, individual Member States must face up to. Russia will be banking on EU members to look after their own bilateral energy security interests rather than safeguarding the autonomy of post-Soviet states in future pricing disputes. This is particularly true in countries where Russian cuts can be made without affect¬ing broader European supplies. Moscow even had the audacity to use its latest price dispute with Kiev in 2009 as strong evi¬dence to support Nord Stream to maintain Western European supplies at the expense of ‘problematic’ Eastern European states. What Germany might be offering Russia in ‘security of demand’, it is sorely taking away from Central and Eastern Europe, in terms of politically hanging them out to dry on energy related matters. Just look at the feeble launch of Europe’s ‘Eastern Partner¬ship’ to get a reference point for where this is heading.

Tortured liberalisation

On this basis, ‘security of demand’ is only really viable for Europe if it is applied across the board. Selective pipelines work well for some, but are politically disastrous for others. The great challenge for the EU is to secure diversified gas supplies for all, at a time when demand looks highly uncertain.

Europe could make its life considerably easier in this regard by properly integrat¬ing infrastructure and establishing a sin¬gle competitive energy market to reduce bilateral pressures from key suppliers. But as the tortured passage of the third leg¬islative package in 2009 shows, national politics remains a formidable problem. As the ink was drying on the deal, a number of states where still busy dragging their heels on proper implementation of the second package dating back to 2003. The European Commission has even launched infringe¬ments proceedings against 25 Member States for non-compliance on third party access and regulated energy prices.

With this backdrop, it is hardly surprising that the third package buckled to util¬ity interests by failing to drive through full ownership unbundling of energy produc¬tion from transmission, distribution, and storage in favour of an ISO type model. Putting the legal niceties of ‘independent’ entities to oversee transmission aside, na¬tional champions in Germany, France, Aus¬tria, and beyond remain vertically integrat¬ed. Implementing the agreement towards 2011 will thus be decidedly patchy, particu¬larly with Germany’s Günther Oettinger now holding the energy commission seat. This has already spurned calls for a fourth package from some of the more liberally minded states.

Perhaps more worryingly, Europe failed to stick to a strong ‘third party country’ position (dubbed the Gazprom clause) to prevent ex¬ternal players gaining a downstream stake in European transmission. In the absence of a European regulator, this will be left to national bodies to adjudicate, albeit taking ‘utmost account’ of the Commissions opin¬ion. This is unlikely to cut much ice with Eu¬ropean utilities searching for lucrative ‘swap agreements’ upstream in Russia.

Politics is not the only problem here though; irrespective of whatever agree¬ment the third package struck, it would still have foundered on insufficient investment in physical infrastructure. The Commission has put the competition cart before the connectivity horse throughout the 1990s, which means competition between Euro¬pean countries is inevitably limited. Where interconnections have been made, this has been on a bilateral and regional basis. The Commission knows this, so much so, that it even has started to ‘sell’ unbundling on grounds that it would promote the forma¬tion of regional grids to one day make a European whole. This helps to explain why trans-European energy networks (TEN-E) only has a €250 m budget for infrastruc¬ture provision: the political imperative is not to build a European grid, but to protect national champions. This is despite the fact that they cannot even get utilities to seri¬ously invest in gas storage to cushion sup¬ply side shocks: a clear European interest in the medium and long term.

Competitiveness will of course suffer, as will effective management of excess capacity to reduce CO2. But it is the political dimension that will remain Europe’s biggest Achilles heel, as it leaves upstream supplies to be brokered on a bilateral, and therefore politi¬cally vulnerable, basis. Assuming European demand rebounds and pressures towards emissions targets grow towards 2020, this could be a costly mistake indeed.

Security vs. sustainability

For despite its good intentions, European climate policy is likely to result in more gas, less coal, and at best, aesthetic window dressing of minor increases in renewable-installed capacity. The reason for this is that the Commission did not understand securi¬ty of supply implications when it rolled out its 2008 climate package. It was merely as¬sumed that setting ‘20 20 by 2020’ targets would deliver the desired market results. The snag is that renewables prescribe a share of a specific technology, whereas the EU Emission Trading System (ETS) leaves it to the market to divvy up renewables, nu¬clear, energy efficiency, cleaner coal, and gas. Advocates of such an approach see merit in this kitchen sink strategy (i.e. chuck everything into the policy mix), but this comes with major implications, not least because of definition of what constitutes a renewable technology is likely to stretch. This creates uncertainty for investors. At the very least, they remain unlikely to plump for low carbon technologies given the failure of ETS thanks to economic rents and po¬litically lax credits to date. This has merely made gas (spark spreads) a better option than coal (dark spreads), rather than driving investment into renewables. Even now, the carbon price stands at a paltry €12/mt.

But amid this policy mish-mash, it is the re¬newables targets that lack most credibility. The 20 per cent relates not to generation, but total energy demand. In some coun¬tries this would actually mean seeing 35-40 per cent of renewables in the space of ten years. To ‘decarbonise’ generation to that extent would require massive intervention that European utilities are simply not will¬ing to make. It is also spending that govern¬ments could have directed towards energy demand measures that would arguably have a greater effect. The overall impact of a renewables laden approach will see an¬other ‘dash for gas’ to backup renewable in¬termittency, and could even feasibly see an expansion of coal to ensure security of sup¬ply and replace old plant. As the ETS shows, nobody really wants to price coal out of the market for fear of seeing the lights go out. If anything, Member States will start push¬ing for derogation from the Large Combus¬tion Plant Directive (LCPD) should capacity margins begin to tighten. New coal build is by no means off the radar in Eastern or Western European markets either.

Indeed, european leaders (particularly in the CEE states close to the Russian line of fire), have few doubts that burning plentiful coal supplies remains the obvious choice to make. Western European states face a simi¬lar dilemma. While they will rhetorically couch new coal build under the prospect of CCS one day becoming a reality to ‘capture’ the carbon impact on their soil, this actually points to one of the biggest missing links in European climate policy: the EU erroneously believes that a volatile carbon price will de¬liver CCS technologies. This flies in the face of previous funding pumped into CCS from Washington under the FutureGen initiative that failed to make discernible progress, and the fact that the EU had to sponsor twelve demonstration plants just to get the CCS ball rolling.

The other ten tone elephant in the room for Europe is nuclear. The fact that the 2020 targets or the EU ETS have no direct corre¬lation to nuclear new build given the time horizons involved is not particularly helpful, nor indeed surprising given the national politics in play. Nuclear would clearly bene¬fit from a long-term carbon price, and long-term contracts to bind consumers to the considerable sunk costs involved. Alas, any kind of European nuclear licensing remains in the long grass; for all the states looking to embrace nuclear, there are just as many firmly committed to phasing nuclear out, or at least have a moratorium on future devel¬opment.

What to do?

This all begs a major question as to what new measures should be put in place to improve matters? The standard ‘fix list’ normally starts with calls towards a genu¬inely integrated and liberalised market to increase elasticity of supply and reduce bilateral pressures from key suppliers. This is operationally obvious, but remains po¬litically tortuous, and if anything, will take many years before Europe is willing to start putting together a ‘fourth package’ raising thorny issues of a much needed European regulator. This leaves the Com¬petition Commission in the driving seat for now. If competition is to have any mean-ing, Joaquín Almunia must pick up where Neelie Kroes left off: using the full extent of Commission powers to push through unbundling provisions with the threat of massive fines for utilities that do not com¬ply. This is where the liberalisation agenda can be most effective in the short run and indeed, must also be applied to third coun¬try companies to take the political sting out of Gazprom’s tail. But relying on the Com¬petition Commission must not be used as an excuse for Europe to stop directly scaling up infrastructure investment as it has done through the European Economic Recovery Plan. Physical interconnection is critical for a credible single market in the long term, while greater LNG and storage capacity would do much to enhance resilience and elasticity of supply in the interim.

On the supply side, Brussels needs to seri¬ously integrate energy policy into foreign and security policy. Even though political support will remain lacking for such a move, it would certainly make compelling sense for a politically bereft Baroness Ashton (as the new European foreign policy chief) to take ownership of such areas having already effectively ‘lost’ neighbourhoods. Progress¬ing Nabucco would be an important test case (for political leverage rather than sheer volumes) for Ashton’s External Action Serv¬ice to cut its geopolitical teeth.

Brussels should also consider tabling a buyer’s cartel to enhance the European negotiating position, rather than being selec-tively bought off on a bilateral basis vis-à-vis Russia. Where Europe still has some edge here is in its buying power: producers – be they in Russia, Central Asia, North Africa, or the Middle East – want nothing more right now than to hear that oil price indexation to prevent gas on gas price competition remains the order of the day in the midst of a gas glut. Although few believe that a global spot market for gas is just around the corner, the EU should still give them a reassuring message. The basic rationale would be to tie up long-term indexed sup¬ply contracts, to ensure that demand se¬curity blips now do not turn the lights out and put emissions up in a few years. More importantly, it would reduce Europe’s politi¬cal exposure to producer states that could haunt them in future. Gas on gas competition could clearly have short-term price benefits for consumers as E.On’s, Eni’s, and Gdf-Suez’s recent contractual revisions with Gazprom attest, but Europe should be care¬ful what it wishes for. Not only could this jeopardise upstream Russian investment in Shtokman and Yamal, it would see Moscow redouble its efforts to co-ordinate prices with Middle Eastern and African suppli¬ers, while strengthening its grip on Central Asian reserves. In effect, the prospect of gas on gas competition could be the glue need¬ed to stick ‘Gaspec’ together (or at the very least strengthen bilateral price collusion) in order to maintain ‘healthy’ spot prices over competing consumers. In ‘net present value terms’, continuing to play the energy game now will be politically cheaper for Europe than trying to pick it up later, even if this ironically means playing to a Russian tune.

On reneweables, the EU can either continue the charade of assuming the 20 per cent (sic 40 per cent targets) will be met as it has with other previously failed targets dating from 1997, or take drastic measures to push towards such ends. This would more likely than not need to come through some form of subsidy or feed-in-tariff. But even this fails to take into account manufacturing ca¬pacity constraints or the investment needed to link new capacity into pre-existing grids. Readjusting targets towards a more cred¬ible figure might be the wiser option now, to avoid disappointment and indeed, major supply side consequences later.

Put more bluntly, Europe needs to re-level its low carbon technology playing field. Those who worry that this will raise the political risk bar for investors in future have half a point, but in reality, it was starring them in the face ever since the renewables targets were set. If anything, pressures will grow towards a carbon tax to provide greater cer¬tainty for the private sector to invest, or at the very least to provide a ceiling and floor for the EU ETS. This would enable some of the costs of renewable programmes to be absorbed through taxes, and could under¬pin the economics of nuclear investments given the considerable capital expenditure costs upfront and waste legacies out back. Common European licensing for new nucle¬ar build would certainly help in this respect. Perhaps more importantly, revenue streams could help to fund CCS, particularly if an imports tax was put into the mix. This may sound draconian, but it should be borne in mind that the EU only measures home carbon production rather than total con¬sumption, which would have to consider Europe’s ‘outsourced’ carbon footprint to Asian manufacturing. This is why technology really matters, and why supporting large-scale carbon capture and storage is critical if the ‘magical’ 550 parts per million stabilisation goals are ever to be met globally.

The bottom line is that Europe has a torrid hand to play that will make it very hard, if not impossible to address availability, afford¬ability, and sustainability concerns all under the same roof. If policy is not set across the board, at a pace that all members can keep up with, the chances are that the wheels could totally fall off – be it on security of supply or climate agendas. If it becomes a choice of keeping the lights on or the emis¬sions low, it is clear where the main impera¬tive still resides. European leaders cannot even come clean to consumers on what the real costs associated with more sustainable forms of energy would be. Europe has to start picking its ‘least bad’ policy options if disastrous outcomes are to be avoided. Brus¬sels is not only a long way off this mark, it is not sure what target it is truly aiming for to align the state, markets, and law towards a well-rounded energy policy. New found ‘solidarity’ from Member States is unlikely to help in this regard, with stability of capi¬tal market and reducing fiscal pressures the order of the day. Once these are ‘fixed’ and economic demand rebounds, Europe will as¬suredly find its energy policy broken.

CSS Analysis in Security Policy
No. 69 • March 2010
Author: Matthew Hulbert
© 2010 Center for Security Studies (CSS), ETH Zurich

Russia-Europe Energy Relations: Implications for U.S. Policy

author Keith C. Smith

About CSIS

In an era of ever-changing global opportunities and challenges, the Center for Strategic and International Studies (CSIS) provides strategic insights and practical policy solutions to decisionmakers. CSIS conducts research and analysis and develops policy initiatives that look into the future and anticipate change.

Founded by David M. Abshire and Admiral Arleigh Burke at the height of the Cold War, CSIS was dedicated to the simple but urgent goal of finding ways for America to survive as a nation and prosper as a people. Since 1962, CSIS has grown to become one of the world’s preeminent public policy institutions.

Today, CSIS is a bipartisan, nonprofit organization headquartered in Washington, DC.

More than 220 full-time staff and a large network of affiliated scholars focus their expertise on defense and security; on the world’s regions and the unique challenges inherent to them; and on the issues that know no boundary in an increasingly connected world.

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CSIS does not take specific policy positions; accordingly, all views expressed herein should be understood to be solely those of the author(s).

© 2010 by the Center for Strategic and International Studies. All rights reserved.

Center for Strategic and International Studies

Summary

It is my thesis that the national security risk posed by Russian energy policies are only tangentially related to Europe’s dependency on Russian energy imports. The primary energy risk to Europe, and especially to the newer EU members, stems from the corrosive effect this dependency has on governance and on transatlantic cooperation. Moscow’s divide-and-conquer tactics have successfully prevented greater inter-European cooperation on both economic and security issues. As we shall see, these factors have added to already existing strains in the U.S.- Europe relationship. Further NATO enlargement has been stopped, in part, due to Moscow’s energy ties with the wealthier Western European states. It is in the U.S. interest to assist those Eastern and Central European (ECE) states that are highly dependent on Russian energy imports and are most susceptible to imported corruption. Kremlin officials, supported by 60 percent of Russian public opinion, favor reestablishing Soviet-era control or influence over ECE countries. The threat to the sovereignty of these new democracies cannot be dismissed. Since the collapse of the Soviet Union, Russian officials have attempted to exert influence on their immediate neighbors by withholding or threatening to withhold vital oil and gas shipments. This occurred as early as 1990 and most recently took place with the well-publicized gas cutoff to Ukraine in 2009. A variety of Central European countries have been targeted as a result of Moscow’s ire, including the three Baltic States, Belarus, Poland, the Czech Republic, Ukraine, and Georgia. Much of Europe, however, only saw this as a threat to its own interests when in early 2009 Western Europe and the Balkans were directly hit by the disruption in gas shipment to Ukraine. This latest energy disruption and the recent election of a new EU Commission and Parliament may bring an opportunity for more fruitful dialogue among the United States, European Union, and Russia regarding energy questions.

The U.S. government’s ability to influence European energy policy has significantly diminished over time, although it was never as great as some members of Congress or the State Department officials believed it to be. The United States must be realistic about its ability to influence energy policies in Europe, Russia, and Central Asia. There is certainly no one policy that will improve the energy security situation in Eastern and Central Europe. Technological breakthroughs and incremental advances in energy efficiency may have more of an impact in the region than U.S. or European government policies. Nevertheless, there are some steps that the United States can take that might help Eastern and Central Europe achieve greater energy efficiency and import diversification and could possibly temper Moscow’s willingness to use energy exports for coercive purposes.

Recommendations

1. The United States should use the long moribund U.S.-Russia Energy Forum to push for an enforceable code of conduct for international energy firms, for greater accounting transparency and enforcement of competition laws, and for more reciprocity in foreign investment policies. The code would apply to importers outside the Organization for Economic Co-operation and Development (OECD), as well as companies from OECD member states. Any breakthrough on transparency and good governance would set an example that would be easier for others to duplicate in their own energy relations with Moscow. It would also improve Russia’s ability to reach long-term contracts with ECE states.

2. The energy game changer in U.S. energy relations with Russia (and others) has been the rapid developments regarding shale and tight gas. Similar production of unconventional gas in Europe, and particularly within the ECE countries, would increase Europe’s bargaining position with the monopoly exporters Transneft and Gazprom. Although several U.S. energy companies are already busy exploring possible nonconventional gas fields, particularly in Poland, the United Kingdom, and Hungary, the U.S. Geological Survey has technical expertise that could help speed the geological mapping in many of the Central European states. Many of these countries lack the technological skills that would allow them either to

compete or cooperate effectively with large multinationals in utilizing the new extraction technologies.

3. Joint research and development (R&D) funding by U.S. and ECE companies in search of cleaner and more environmentally acceptable drilling techniques in the hunt for nonconventional gas might speed public acceptance in an already environmentally skeptical Europe. New “cleaner” drilling techniques of the type being developed by some U.S. oil service companies, would have to be widely used in Europe in order to gain support for field development in the more built-up areas of Eastern Europe.

4. The Energy Council could also be a forum for the United States to press for more transfer to Eastern and Central Europe of technology on carbon capture and sequestration (CCS), energy efficiency, introduction of more renewable energy, and development of “smart grids.” While Europe may already be ahead of U.S. industry and Department of Energy (DOE) labs in some of these areas, the United States could offer to support “twinning programs” in ECE countries in conjunction with Western European governments. The goal would be to more rapidly transfer the latest technology to ECE countries, while at the same time securing project financing by the international financial institutions (IFIs).

5. Another subject for the U.S.-EU Energy Council discussion could be U.S. and EU reaction to political changes in Turkey and Ukraine and how to integrate the two countries into a transparent and commercially viable system of energy transit, particularly from Caspian region fields. While it is understandable that there is a high degree of “Ukraine fatigue” in Brussels, the United States should continue to provide technical expertise to Ukraine and back financing of energy infrastructure projects by the European Bank for Reconstruction and Development (EBRD) and World Bank. Ukraine is just too important to ignore.

6. At the same time, the United States should explore the idea of offering Russia technical help in developing its own nonconventional gas industry and in capping and utilizing the enormous amount of flared gas emanating from a variety of Siberian fields. This good faith offer, whether accepted or not, might act as a carrot to secure better behavior on the part of the energy czars in the Kremlin and at the same time add to Russia’s stock of gas available for both domestic use and export. Larger stocks of Russian gas would not likely undercut the market for alternative sources for Europeans. It might, however, help keep export prices from rising more steeply than they would otherwise.

7. U.S. officials can work cooperatively (and quietly) with their European counterparts to persuade major gas exporters not to turn their present informal discussion forum into a “gas OPEC.” U.S. and European leaders could also play a more active role in developing closer relationships with Central Asian leaders. Governments could encourage major Western energy companies to provide more scholarship funding for young professionals from these countries, particularly for those studying energy-related disciplines.

8. The Department of State should work more effectively to build a corps of foreign affairs energy specialists, both in Washington and in European capitals. Too often in Central Europe, the energy officers in U.S. embassies are either first or second tour Foreign Service officers, with only limited experience in energy matters. Information gathering on energy issues by embassies should be made a higher priority. In addition, many U.S. energy companies are too often reluctant to ask for support from embassies, not recognizing that the government can assist in developing local business contacts and helping surmount the bureaucratic hurdles that have to be overcome in energy ventures in ECE countries.

9. The United States should encourage the European Commission and major member states to more vigorously support the territorial integrity and sovereignty of Georgia and Ukraine — both countries being key transit routes to Europe. The present EU policy toward Tbilisi only encourages those in the Kremlin who seek to destabilize Georgia and discourages the construction of non-Russian controlled pipelines through that country.

10. The United States could encourage the European Commission to undertake a new feasibility study regarding the commercial viability of the Odessa-Brody pipeline. Russian supply disruptions in the Baltic Sea region, the opening of new refineries in Baltic countries, and decreasing crude oil supplies from the North Sea warrant a new look at the project.

11. Prime Minister Vladimir Putin recently stated that Russia would return to a policy of encouraging foreign investment in the energy sector. He added the caveat that Western firms would be required to trade ownership in their downstream facilities for the right to participate in upstream ventures in Russia. U.S. officials should hold consultations with EU officials and individual European governments regarding a possible response to Putin’s demand. If the Kremlin secures control over key Western energy assets, ECE countries could become even more dependent on Russian “good will” since many Western European firms own substantial shares in ECE energy companies, including vital refineries and pipelines.

National Security Implications of Russian Energy Policies in Europe

A decade ago, U.S. power was overwhelming and any administration would have been able to persuade the large alliance members to follow Washington’s lead on enlargement issues. Today, Berlin, Rome, and Paris show greater reluctance to pursue any alliance policy strongly opposed by Moscow. In addition, U.S. support for greater diversification of energy supplies for the more vulnerable countries of Eastern and Central Europe has been undercut by resistance from major Western European states. More important than European energy solidarity is their hope for a larger financial stake in energy projects promoted by Russia. These ventures may only increase Europe’s vulnerabilities.

Even with Russian oil production flattening and gas exports in temporary decline, Moscow has continued to use its energy revenues to buy downstream energy facilities in Europe. At the same time, Gazprom representatives have strengthened their influence with political leaders in key transit and consuming countries. The Nord Stream and South Stream gas pipeline projects, opposed by many of the United States’ closest friends in Europe, is gaining momentum, thanks in part to Moscow’s ability to recruit and pay substantial salaries to at least two former European leaders. Additionally, in some European countries, officials reportedly benefit from their financial ties to Russia’s Gazprom, thereby furthering European acceptance of Moscow’s pipeline projects.

These ventures are designed primarily to tie Europe closer to Russia politically, while decreasing the possibility that competitive non-Russian pipelines, such as Nabucco, will be constructed. Although a case has been made that Nabucco is not and will never be commercially viable, it is not less viable than the Nord Stream and South Stream projects, and it adds to, rather than decreases, Europe’s dependency on Russia. The security implications of these ventures should be examined in more detail by U.S. and European policymakers.

In recent European and U.S. commentary regarding Moscow’s coercive use of its energy exports, there has been a tendency to downplay the security and political impact of Russian policies on the United States’ European allies. Decreased world prices for oil and gas, coupled with the increased availability of liquefied natural gas (LNG) from the Middle East and Africa, are pointed to as factors that will reduce European dependency on imports from Russia. Other factors being cited are the expected decline in Russian oil exports beginning in 2010 or 2011, a possible reduction in European energy demand as a result of improved efficiencies, and the greater introduction of renewable energy sources. Another possible consideration mentioned is the weakening dominance by the Kremlin of Central Asian energy producers, particularly as these countries complete new gas and oil pipelines to China. It is possible that this would make Russia even more financially dependent on its energy sales to Europe, thus forcing Moscow to adopt a more constructive (i.e., less political) posture toward the energy consuming countries in Europe, including the ECE states.

All of the supply and demand factors cited above are happening, although the political impact on the energy market of these changes is not yet clear. First, while energy demand in Europe is essentially flat, some traditional sources of non-Russian energy are slowly drying up. Norway’s oil production is decreasing at a rapid pace, as is output in the areas off the coasts of the United Kingdom, Holland, and Denmark. Natural gas output in the United Kingdom, Holland, and Denmark is also quickly declining, and Norway must eventually explore new fields in the difficult and expensive Arctic region in order maintain present gas production levels. With new giant fields more difficult to find and develop off the coast of Norway, that country’s Statoil Company is developing closer ties with its Russian counterparts in developing the Russian Arctic and with oil and gas fields in locations as far away as Iraq. The implications of Norway’s energy ties with Russia are unclear at this point.

LNG imports into Europe from Qatar and from Africa will probably increase significantly in the next five to seven years, and this could add to Europe’s energy security, although not as much in the ECE countries as in Western Europe. If Russia speeds up development of new fields, it may be in a position to undercut LNG imports through deeper price discounts and the use of cheaper pipeline systems. This could benefit Europe if it increases price competition, but it would be detrimental if it is used to squeeze out competitors, thereby adding to its present near monopoly role in several markets. It should be noted that the International Energy Agency (IEA) recently announced that “peak oil” production could occur as early as 2020, although this conclusion is disputed by several respected energy specialists. If the dire warning were to occur, it may increase pressure on Europe to shift some energy production and even transportation fuels from oil to natural gas, while at the same time being forced to move from coal to natural gas as a result of climate change agreements. All these factors may work to the advantage of Russia and other suppliers. While Russian domestic demand for energy is growing, vigorous efforts by Moscow to improve domestic energy efficiency and to utilize the large quantity of gas now being flared could significantly increase Russia’s export capability and exert a downward pressure on European gas prices, by itself not a bad development.

The big “known unknown,” however, is the implication that development of nonconventional natural gas (shale and tight gas) will have on Europe. This advancement has substantially changed the energy equation in the United States, virtually eliminating Moscow’s hope that the United States would become a significant market for Russian LNG. It could also decrease Russian pricing power in other markets (assuming no wholesale shift from oil and coal to gas).

This may result in more gas from Russia, Nigeria, and the Middle East being available for European consumption, thereby undercutting Moscow’s political leverage and price advantage. At this point no one has come forth with a good estimate as to what impact nonconventional gas production will have on Europe. Although exploration is being ramped up in several European countries, early indicators are that this will not have as large an effect on Europe’s energy supplies as it will in the United States. A recent joint exploration project by ExxonMobil and MOL in southern Hungary failed to recover any gas at all (although there may be gas at deeper depths). Environmental resistance to production from Europeans will be stronger than in the United States. The exploration for unconventional gas in Europe is, however, a promising development.

Therefore, it is difficult to estimate whether Europe’s dependency on Russian energy resources will increase or decrease over the next 10 to 20 years. Most projections show an increasing dependency on Russia between now and 2030, but supply dependency is only one of the issues.

Also important to consider, in addition to demand levels, are Gazprom’s monopoly and pricing policies, the degree to which Russian economic transfers remain highly nontransparent, and even Russian commercial and security policies. The projected completion of the Nord Stream pipeline by 2015 will increase German dependency on Russia. This might not occur, however, if an oversupply of LNG on the world market results in gas landed in the United Kingdom that can compete price-wise with more expensive gas expected in the next 5 to 10 years from Russia’s Yamal and Shtokman fields.

What we do know is that many Western European investors and their governments are anxious to profit from Russia’s energy resource base. The governments, however, should consider whether specific investment decisions by their companies might, in the long run, increase their national political dependency on Moscow, thereby undermining European and transatlantic security interests.

The Challenge to Eastern and Western Europe Differs—A Factor in U.S.-Europe Relations

The large EU members of Western Europe, those who are the most resistant to a binding energy policy for all member states, are less dependent on Russian imports, have access to pipelines and LNG terminals connected to non-Russian suppliers, and have strong energy companies that can offer Moscow access to financing, technology, and large markets. The countries of Eastern and Central Europe have fewer alternatives and are from 70 to 99 percent dependent on gas and oil imports from a single market. Not surprisingly, they tend to favor a common EU energy market. In spite of their greater dependency on and vulnerability to Russian supplies, the ECE governments receive less EU funding for energy projects such as interconnectors than do the wealthier member states to their west. EU energy solidarity remains surprisingly weak in spite of two natural gas cutoffs by Russia in the past four years.

Although one would expect the Eastern and Central Europeans to be more concerned than others about the imperial tendencies of their large eastern neighbor, their worry is compounded by their high degree of energy reliance on Russia. It is well documented that the ECE states’ greater dependency has been used repeatedly by Moscow over the past 19 years in attempts to intimidate, punish, or blackmail governments over a variety of political and commercial disputes. Until the Western Europeans were directly affected by the Russia-Ukraine gas dispute of January 2009, the mantra they repeated constantly was that Russia was “always a reliable source of energy.” One hears this less often than in the past, but there is still a greater faith in Russian “good sense” and its willingness to abide by commercial agreements with the “old” European Union than with the “new” ECE member states.

Western Europe’s greater wealth, military strength, and physical distance from Russia only adds to its confidence in dealing with Kremlin leaders—and to a feeling that the protection the United States once supplied, including the “nuclear umbrella,” is of little importance in this day and age.

However, the ECE countries continue to feel the need to have a strong U.S. presence, including permanent military forces, in Europe. At the risk of angering Moscow, the Baltic States, Poland, Hungary, and the Czech Republic have at various times expressed a desire to have U.S. and/or NATO forces on their territory for long periods of time. They are also the NATO member states most supportive of further NATO enlargement. Five years of EU membership has amply demonstrated the failure of the larger member states to provide the ECE countries with the “soft security” that they had hoped to receive when they joined in 2004.

Some have been disappointed that the European Union’s loudly promised military force has failed to materialize. The more anxious of the ECE countries, however, are relieved that an EU force has not come into being, believing that it would only have reduced NATO protection against a resurgent Russia. Worth noting is the fact that if one takes into account the per capita military contributions of individual EU member states to the wars in Iraq and Afghanistan, it is obvious that the ECE countries are “punching above their weight” in supporting U.S. military policy. ECE leaders readily acknowledge that their greater military contribution to U.S.-led efforts is a trade-off for U.S. protection in the event of a serious threat from Russia.

The ECE countries are well aware of who would and would not provide strong military and other support in the event of a conflict of any kind with Russia. No group of EU countries is more conscious of the failure of the Europeans to enforce the military disengagement agreement regarding Georgia signed in August 2008 by Russian president Dmitry Medvedev and French president Nicolas Sarkozy than the ECE states. They have also noticed Western Europe’s refusal to help rebuild Georgia’s military forces. ECE countries hoped that the European Union and the OSCE would have pressed harder, after the Sarkozy-Medvedev agreement, for neutral peacekeepers to be allowed into Abkhazia and South Ossetia. The ECE states have noticed that Western Europeans have also reacted passively to the Duma legislation of October 2009 that allows force to be used outside its territory to “protect Russian citizens” who are allegedly endangered. While the EU presidency has dismissed Russia’s claim to a special zone of influence in Eastern and Central Europe, the Caucasus, and Central Asia, the negative reaction in Washington was noticeably sharper than that coming out of Brussels. The failure of the European Commission to politically defend Latvia and Lithuania in the face of Russia’s arbitrary cutoff of oil imports was also a clear sign to the ECE states that they cannot count on EU support when Russia uses economic coercion against them.

U.S. Policy on European Energy DiversificationThe United States has long had a strong interest in the source of energy supplies directed to its European allies. However, with the end of the Cold War, U.S. leverage over European policy has increasingly diminished. The strengthening of the European Union has, not surprisingly, also reduced political cooperation between the United States and much of Western Europe, including a greater reluctance to take U.S. advice regarding Russia-Europe relations. Accordingly, U.S. attempts to reduce Moscow’s ability to use energy exports as coercive tools have had only mixed success.

Most of the ECE countries, however, are supportive of U.S. efforts to open direct energy routes to Europe from Central Asia, particularly since these nations are the most highly dependent on the Russian monopoly suppliers Transneft for oil and Gazprom for natural gas. U.S. policymakers have been more attuned to Russian energy pressure on Eastern Europe than the major countries in Western Europe, with the exception of Sweden and the United Kingdom. Within NATO, a block of countries led by Germany has resisted U.S. and Polish efforts even to put the issue of energy security up for debate. The same group has also prevented an agreement on a common EU security strategy and a unified energy market. There is no strong evidence so far of a Western European backlash against U.S. support for energy diversification. Russia’s press, however, have labeled U.S. pipeline policies as interference in European internal affairs.

U.S. attempts to influence Europe-Russia energy relations go back some time. In 1984–1985, Washington pressured the Europeans, including Margaret Thatcher’s United Kingdom, not to supply steel pipe for Russian oil and gas shipments to Europe. General Electric was barred by the Reagan administration from selling compressors and pumps for a gas pipeline to the Soviet Union or Germany. The U.S. effort was not particularly successful, however; it only delayed somewhat the sale of German pipe and other equipment to Moscow for the construction of a gas line to Europe. The major factor influencing Soviet energy revenues, however, was a direct result of the sharp decline in production between 1988 and 1992. This had little to do with U.S. policies and was, in part, due to deepening inefficiencies in Soviet energy production and a quick drop in world oil prices. Soviet government income decreased considerably as a result of these factors, undermining support throughout the Soviet Union for the tottering Communist leadership in the Kremlin. Decades of selling oil at giveaway prices to its Warsaw Pact allies added to the drop in Soviet revenue and only aggravated the existing inefficiencies in production. The world oil crisis that stemmed from Middle East shutoffs in the 1970s, plus the new power of the Organization of the Petroleum Exporting Countries (OPEC), added to the determination of Europeans to diversify their supplies of energy to new areas, and none was more apparent as a ready alternative than the huge energy base in the neighboring Soviet Union. Pipelines from nearby non-OPEC member, the Soviet Union, were viewed as more reliable than shipments through the Suez Canal, which were reliant on politically unstable Middle Eastern governments. From a European vantage point, increasing diversification of oil and gas imports from Soviet production fields made economic and political sense in the 1980s. For the United States, the Arab-Israeli conflict reduced Washington’s ability to influence oil production in the Middle East and diminished its already declining influence over energy issues in the capitals of our closest European allies. At one point, the Washington turned to NATO in an attempt to influence European energy policy. Even there, however, the United States’ sway over strategic economic issues had declined since the early 1980s. Once Soviet president Mikhail Gorbachev came to power, major European leaders rushed to provide bank loans and other financial incentives to the new Soviet leadership. Beginning in 1990, the U.S. government had an active program to assist the new ECE democracies in developing self-sustaining energy efficiency projects. This was initiated long before a comparable effort was begun by European donors. This program was one of the most successful U.S. assistance efforts directed toward the region. It contributed to a measurable reduction in the growth of energy intensity as these countries developed an industrial base that would allow their standards of living to approach Western European levels. For example, Poland, where a significant push was made by the United States, today has a per capita energy intensity level half that of neighboring Ukraine, where energy efficiency has been adopted at a slower pace. Although U.S. assistance cannot be credited for all of Poland’s energy progress, the demonstrated effect of these U.S. projects played a significant role. Unfortunately, one can see from the EU assistance budget that energy diversification for the most vulnerable of member states is a relatively low priority item. The recent 3.8 billion earmarked in 2009 for energy infrastructure projects went largely to the less vulnerable Western Europeans. The likelihood is that Europe and the rest of the world will have a surplus of LNG for several years because of new production in the Persian Gulf and Africa and as a result of new regasification terminals coming on stream in the United Kingdom, Germany, Greece, Bulgaria, and Poland. This should, at a minimum, provide some price competition to Gazprom’s monopolistic export role. It might also encourage resistance to take-or-pay energy contracts and provide time for the most vulnerable countries to find non-Russian energy supplies. It is conceivable that this could convince Russians that it is in their country’s interest to conduct more transparent and strictly commercial energy policies with their European neighbors. If Vladimir Putin returns to the presidency in 2012, however, the chances are more likely that Russian energy policies will retain their lack of transparency.

Russia’s prime minister appears to be the most aggressive advocate of using energy to coerce the consuming countries. Russia, led by Putin, is presently attempting to make the Gas Exporting Countries Forum (GECF) a more aggressive body that would operate similarly to the OPEC cartel in setting natural gas export volumes and prices. With the emergence of unconventional gas technology and a larger LNG spot market, this could now be more difficult for the Kremlin than it would have been two years ago.

U.S. Role in Pipeline Politics

The Baku-Tblisi-Ceyhan (BTC) oil pipeline was first proposed by Turkey in 1992 and garnered the strong support of the United States in the late 1990s. Completed in 2005, the pipeline was designed to bypass Russia and the Bosporus strait in delivering crude oil from the Caspian region to Europe. Washington strongly backed the project even though it was initially met with a high degree of skepticism in Europe regarding its economic and commercial viability. Washington recognized early on that European and U.S. security interests would be better protected by having at least one oil route out of Central Asia that would not be dependent on the political whim of the Kremlin. The United States also appears to have recognized earlier than many Europeans the need to court the growing energy producers of Central Asia. Although U.S. relations with Russia were relatively good in the late 1990s, there was early recognition in Washington, and later in some European capitals, that our long-term interests would be better served if the Central Asian states achieved a greater degree of economic and political independence even from a non-Communist Russia. Eventually, a consortium of major European and American companies developed enough support in order to make the venture economically viable. Today, the BTC is the only pipeline delivering crude oil from the Caspian region’s fields to European consumers, although the oil has to be transshipped by tankers from the Turkish port of Ceyhan to Europe. Nevertheless, Moscow is continuing to devise new pipeline routes in the Caspian region that might eventually undercut the profitability of the BTC pipeline and Western-supported gas pipeline schemes. Another major project supported by the United States is the long-discussed Nabucco gas pipeline, designed to transport Caspian gas to European markets via Turkey and the Balkans. It was promoted as early as 2002 by Turkey and later supported by a large consortium then led by Austrian oil and gas company OMV. The terminal for the Caspian gas is in Austria. Although the project was designated as a priority by the European Union, it has received little support from the European Commission. Part of the hesitation in Brussels has been the lack of a fully identified source for the gas, but pressure from Russia has been a significant factor in the lack of backing by the Commission, Germany, Italy, and even Austria.

There is even less identification of the source for gas, or even a realistic price tag, for the Russian-proposed South Stream project, in which pipe would be laid on the bottom of the Black Sea before entering any European country. This has not, however, prevented Italy, Austria, Serbia, Bulgaria, Hungary, and the last EU energy commissioner from announcing their backing for the South Stream project. Proposals by Turkey and some Europeans that Russia join the Nabucco project will not likely change Moscow’s strategy of controlling all of the gas export routes from Central Asia. Nevertheless, if the Nabucco project goes ahead, it is highly likely that Russia will want to participate, although in a way that would give it a high degree of control. Moscow is reluctant to participate in projects in which it is a junior partner. South Stream was clearly designed with the intention of killing the Nabucco project, thus leaving Europe with no access to Caspian or Central Asian gas except via Russia. U.S. officials have made numerous trips to the region attempting to drum up support for Nabucco. Unfortunately, there has been less activity on the part of the Europeans, and particularly lacking has been significant involvement by the European Commission president and the former energy commissioner. Their failure to back this “priority” EU project is difficult to explain. The Azeris have reportedly questioned visitors as to why the United States has appeared to be more supportive of diversifying Europe’s gas supplies than have the Europeans. They also complained to U.S. officials that the European Commission seemed to dismiss Nabucco as a hopeless effort, while providing support for the more ill-defined South Stream. At the “Nabucco Summit” in Budapest in January 2009, the Commission and the German delegation conspicuously failed to offer their backing for this alleged major priority project. At the conference, the Azeris and the Kazakhs appeared to be disappointed with the lack of European support for a project that they were prepared to support, even at the risk of annoying Moscow.

The August 2008 war in Georgia also was a signal directed from Moscow to Washington and Brussels that any new or existing pipeline running through Georgia will be highly vulnerable to Russian military action or to sabotage. At this point, it is difficult to say whether European reluctance to support either Georgian sovereignty or the Nabucco project is related in any way to fear of angering Moscow or of renewed Russian military action. However, the European Union’s passive approach to the project and the lack of interest by major EU member states preceded the August war. There was a tendency in Western Europe to overlook Moscow’s campaign to destabilize Georgia and to goad Tbilisi into taking reckless military action against the two enclaves. Therefore, the U.S. effort to build support for Nabucco and other non-Russian pipelines has been hampered, and to some degree undermined from the beginning, by a lack of allies within the European Commission and major Western European governments. A similar reaction occurred within the European Commission and in Berlin when Washington raised questions about the potential damage to collective European security by the construction of the Nord Stream gas pipeline. Concerns expressed by U.S. government and nongovernment officials were brushed aside by key officials in the Commission and the German government. The commercial interests of Germany’s industrial and energy companies were strong enough to override the economic and security apprehensions of the ECE countries and those of the United States. Worry in Washington that the United States is seen as more supportive of European

energy security concerns than the Europeans themselves, however, has not prevented U.S. efforts to build a coalition for more gas supply diversity. Over the entire Cold War period, the United States was a more vigorous advocate of European security than were many of our allies. No continental European NATO country ever matched the defense spending of the United States, even as they were on the front line facing a well-armed Soviet military. Today, America’s traditional allies see little or no threat from an authoritarian Russia. In the wake of the Iraq invasion, the United States has occasionally been viewed by some of our oldest allies as a greater threat to world peace than Putin’s Russia. On the other side of the ledger, however, the membership of former Soviet Republics and Warsaw Pact states in NATO and the European Union has changed the dynamics somewhat within both organizations. The opportunity for U.S. policymakers to build a more supportive coalition of countries within NATO, however, has often been distracted by crises outside of Europe. Due to the non-responsiveness of our major NATO allies on the issue of energy security and the need for pipelines that bypass Russia, much of the U.S. discussion in Europe in support of Nabucco and energy diversification has been with the newer members in Eastern and Central Europe, particularly the Poles, Hungarians, and Czechs. It is a case of “preaching to the choir.” At the same time, State Department officials have been traveling extensively to Ankara and Baku to consult with the Azeris in order to ensure that there will be sufficient natural gas available for Europe from Caspian fields. The United States has also been more active than the Europeans in promoting the project with the Kazakhs, Turkmen, and Iraqis. It appears, however, that the new U.S. administration is making a greater effort to enlist the support of Western Europeans, although it will be tough going with Germany, France, and Italy. A consistent U.S. push has been directed over the past several years to convince the Turks to allow Nabucco to pass through their country without it being hindered by commercial roadblocks, nor by Turkey’s tense relationship with Azerbaijan—in spite of the fact that the project was first floated by Ankara. A successful agreement on Nagorno-Karabach, perhaps brokered by the United States, would help the project’s prospects. As of early 2010, however, there is still no Western commercial company willing to take a strong lead in putting the project together in a way that demonstrates its financial viability. It would help if Western companies were allowed to operate in Turkmenistan, a possible source of considerable natural gas.

Although some ECE countries would like the United States to put assistance money into alternative pipelines and/or to pressure U.S. energy companies to commit funds to various projects, this option is not in likely to succeed. Energy projects have to be commercially viable in order to interest the private sector or even to garner parallel funding from the World Bank or the EBRD—and this is assuming a reliable and sufficient source of oil or gas has been secured. Of course, a project can receive national funding if seen as sufficiently necessary for national security purposes.

Although the United States has lent its backing to the long-discussed Odessa-Brody oil pipeline, bypassing Russia from the Black Sea to European consumers, Russian opposition alone has not been responsible for its incomplete state. A stable supply of Caspian oil has never been firmed up. Russian and Iranian opposition to sea boundary delimitation of the Caspian has prevented progress in building trans-Caspian oil and gas pipelines to Georgia. There is very little that the United States can do to change this until its commercial viability can be demonstrated. A ramping up of Iraqi oil exports over the next few years might revive the dream of Ukrainians and Poles to complete the Odessa-Brody pipeline and make it a reliable source of oil for new and existing Polish and Lithuanian refineries along the Baltic Sea. Some ECE officials argue that it could possibly replace some of the expected decline in Russian oil production, but the project still appears to be a long shot. The Odessa-Brody project may, however, now be worth reevaluating. Iraqi gas exports could also make the Nabucco gas pipeline plan more commercially viable. China’s rapid economic growth and its increasing need for energy imports have reduced U.S. and European ability to influence the Central Asian suppliers. At the same time these countries are slowly moving out from under Moscow’s control over the region’s energy supplies. China has enormous financial resources to dangle in front of the Turkmen, Kazakhs, and Uzbeks, and the recent opening of a 40 billion-cubic-meter gas pipeline from Turkmenistan to China is a stark indication of the changing power relationships in Central Asia. While the three suppliers want to diversify their gas and oil shipments away from Moscow’s monopoly hold, they also see much greater new energy demand, financial resources, and political decisiveness from Beijing than from Europe or the United States. The Central Asians may still, however, want to supply some oil and gas to Europe in order to improve their political standing in European capitals and to diversify their own export markets.

The likelihood is slim that the European Commission or any major Western allies, such as Germany, Italy, or France will take over the present U.S. role of advocate for ECE energy security. Berlin, Paris, and Rome are more interested in short-term commercial opportunities for their “national champions.” There is even less interest in Western Europe than in the United States of demanding that Russian companies adhere to transparent accounting and disclosure rules, or that the export monopolies of Transneft and Gazprom be required to heed EU competition and antitrust laws and regulations.

There is, however, the recent case of a Dutch court having declared that Russia was bound by its signature on the Energy Charter Treaty, at least for agreements reached before Moscow formally renounced its commitment in 2009. The European Commission has up to now accepted Moscow’s claim that it is not bound by the treaty because it was never ratified by the Duma. The United States should not, however, expect any significant change in EU policy on Russian energy imports, except in the unlikely event of another shutoff of Russian gas to Europe. The Kremlin, however, apparently learned a good lesson from the January 2009 gas cutoff. Their tough approach to Ukraine only drew attention to the issue of energy security on the part of Western Europe and increased interest in greater supply diversity.

Can the United States Help Eastern and Central Europe Ward off the Kremlin’s Divide-and-Conquer Tactics?

Any effort by the United States to check Russian side deals with individual countries is bound to be next to impossible without the support of the European Commission. German chancellor Angela Merkel, French president Nicolas Sarkozy, and Italian prime minister Silvio Berlusconi are not likely to react positively to U.S. entreaties to be more supportive of the energy concerns of the ECE countries. The economic stakes for the three countries, particularly for German industry, and the lure of campaign financing from these same companies, outweigh any effort by Washington to either stop the construction of the Nord Stream or to build support for more EU funding for alternative energy projects for the newer member states. As a matter of fact, Germany was one of the strongest proponents of the shutdown of nuclear plants in Eastern Europe, whether or not there was any convincing evidence of a health risk in allowing them to keep operating.

The aquis communitaire agreements signed by all of the aspiring new EU members in Eastern and Central Europe obligate them to take steps to close existing energy facilities, thus making them even more dependent on Russian imports. An attempt by Lithuania, quietly supported by the United States, to allow for a few more years of operation of the Ignalina II reactor, was swiftly rebuffed by the European Commission. Most European and U.S. reactor specialists believe that Ignalina II’s continued operation for at least five more years poses no greater hazard than do those operating in Western Europe. This argument got nowhere with the EU “anti-nuke” club of countries.

Italy’s rush to sign on to South Stream was reportedly driven mostly by the prospect of profits by politically connected business interests. Otherwise, why sign up for a project with no identified gas source and with open-ended cost estimates? France’s Total is closely linked to Russian companies in a variety of ventures. Even smaller states, such as Austria, appear to be more than willing to agree to Gazprom deals that will only make Central Europe more rather than less dependent on Russian natural gas. It is alleged by some Hungarians that Austria’s OMV energy company is quietly supporting Gazprom’s effort to take control of Croatia’s pipelines, a step that would block non-Russian shipments of oil and gas from the Adriatic into Central Europe. The Kremlin’s goal is to stop non-Russian exports from competing for Central European markets, in this way eliminating the only real source of competition. This would also effectively block the growing influence of Hungary’s MOL, the most successful energy company in Central Europe and checkmate MOL’s attempt to stitch together an energy coalition of ECE energy companies.

Conclusions

Moscow’s ability to move fast and effectively in reaching bilateral energy deals in countries like Croatia, Serbia, and even Bulgaria is impressive. The speed and agility on the part of Russia’s planners make it difficult or even impossible for the United States to mobilize sufficient European opposition to Moscow’s maneuvers, particularly when faced with EU lethargy. The inability of transparent and democratic governments and of the European Commission to compete with the experienced former intelligence officers in the Kremlin, who are trained in the art of kompromat and bribery, is increasingly evident. It may be that the United States and its supporters in Europe will always lack the nimbleness of Moscow in creating European energy alliances. It is also likely that the Kremlin will always view U.S. efforts to promote EU import diversity as a major threat to their economic interests and a challenge to their influence in Europe, the Caucasus, and Central Asia. Even protestations by U.S. officials to the effect that their energy policies are not “anti-Russian,” will have little effect on Russian perceptions of U.S. policies in the areas of “special interest” to Moscow.

A key problem for U.S. policymakers is the lack of energy reform in the major transit country of Ukraine. Political turmoil, corruption, and the strong position of a small group of economic oligarchs prevent the implementation of reforms that would benefit all of Europe. As long as Ukraine’s finances are in shambles, there will be continuing doubt in Europe as to Kyiv’s ability to pay for gas imports from Russia, thereby keeping alive the fear of another gas pipeline shutoff to Europe. Moscow’s argument to the Europeans that Ukraine is an unreliable transit state is widely accepted in Europe, even though Russia itself is equally if not more responsible for the gas crisis with Ukraine. The U.S. government has for the past 10 years expended funding on several energy policy assistance projects in Ukraine. Although the policy recommendations of U.S. consultants have been excellent and well grounded economically, they have, unfortunately, had little impact on Ukrainian government reform. U.S. energy companies operating in Ukraine have either been squeezed out by pro-Russian oligarchs, or the companies themselves have been corrupted by domestic business interests. Transparent European companies have not fared any better. Since 70 percent of Europe’s gas imports come via Ukraine, the European Union has offered to help finance the renovation and expansion of Ukraine’s gas pipeline system, but to date, the lack of political and economic reform in Kyiv and Russian opposition have stopped progress on this crucial artery. Until there is greater political will in Ukraine for energy reform, there is little that the United States can do on the macro level. Europeans appear equally frustrated by the situation in Kyiv, and their proposal to assist in modernizing the major gas artery to Europe has made little progress.

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About the Author

Keith C. Smith is currently a senior associate in the CSIS New European Democracies Project. He retired from the U.S. Department of State in 2000, where his career focused primarily on European affairs. From 1997 to 2000, he was U.S. ambassador to Lithuania, with additional posts in Europe, including Hungary (twice), Norway, and Estonia. In addition to several other State Department assignments, he most recently served as director of policy for Europe and senior adviser to the deputy secretary of state for support of East European Democracies (SEED Program). From 2000 to the present, Smith has been a consultant to several energy companies and has lectured on Russia-Europe energy issues in the United States, Poland, Belgium, Norway, United Kingdom, Germany, Czech Republic, Estonia, and Lithuania. He has been interviewed by

the New York Times, Wall Street Journal, Los Angeles Times, Economist, Financial Times, and several European papers. His articles have been published by the International Herald Tribune, Georgetown Journal of International Affairs, Center for European Policy Studies, and Norwegian Atlantic Committee. He has appeared on BBC World, CNN, and CSNBC. His most recent CSIS publications include Russia and European Energy Security: Divide and Dominate (October 2008); “Russian Energy Pressure Fails to Unite Europe,” CSIS Euro-Focus (January 2007); “Current Implications of Russian Energy Policies,” CSIS Issue Brief (January 2006); and Russian

Energy Politics in the Baltics, Poland, and Ukraine (December 2004).