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Bloomberg: Putin to Spurn EU Demands for More Access to Oil, Gas (Update2)

By Sebastian Alison

Oct. 20 (Bloomberg) — President Vladimir Putin is likely to defy calls to give European companies more access to the Russian energy market, using state control of the oil and gas industry to boost Russia’s economic clout.

European Union leaders will push Putin tonight in Lahti, Finland, to let western energy producers build up operations in Russia in exchange for promises of increased sales of Russian gas to European customers.

Russia is using its status as the world’s largest fuel exporter as an economic weapon, shutting off the natural gas tap to Ukraine at the start of the year and threatening to scrub a $22 billion Royal Dutch Shell Plc project in September.

Russian producers “want the EU market but they don’t want to be constrained by legally binding rules,” said Michael Emerson, a senior research fellow at the Centre for European Policy Studies in Brussels. “Russia prefers to be able to do what it wants in the energy field.”

Energy is at the heart of EU-Russian ties, with oil and gas making up more than 60 percent of Russian exports to Europe. The EU became Russia’s largest market when 10 countries, including seven former Soviet satellites, joined the bloc in 2004.

“I hope Russia will commit itself to the principles of transparency, reciprocity, open markets,” European Commission President Jose Barroso told reporters today in Lahti. “It is important for all of us. It is also important for Russia to be seen as an reliable partner.”

EU leaders meet at 1 p.m. local time in Lahti today to discuss energy and innovation policy. Putin joins for dinner. Final press conferences are scheduled for 9:30 p.m.

Gas Monopoly

OAO Gazprom, the world’s biggest natural-gas producer, has a monopoly on Russia’s gas network and exports. Russia supplies a quarter of the gas in the EU, which relies on imports for half its energy.

Russia cut off Ukraine’s natural gas supplies for two days in January, the route taken by 80 percent of Russian gas destined for Europe. The clash with Ukraine led to gas shortages in EU countries including Italy, France and Hungary.

Gas transit lines were also briefly cut to Moldova and Georgia, leading to speculation that Putin was trying to reassert control over the former Soviet states and stirring European doubts over Russia’s reliability.

“We have to discuss the total range of problems that exist between the European Union and Russia,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday in Helsinki. “Russia is a strategic partner of the European Union, which won’t prevent us from making remarks and observations.”

Battle for Control

Shell, BP Plc, Exxon Mobil Corp., and Total SA are among the western energy companies facing pressure to cede some control over oil and gas fields to companies owned or run by the Russian government.

Russian environmental regulators in September threatened to cancel Shell’s permit for an oil and gas project, prodding Shell into negotiations to give a stake in the venture to Gazprom.

Russia will probably become a net power importer for the first time this winter as the country struggles to avoid blackouts after years of underinvestment, Anatoly Chubais, chief executive officer of OAO Unified Energy System, the national utility, said last week.

Almost half of Unified Energy’s exports of 22.1 billion kilowatt-hours went to Finland last year. This year, Chubais warned, Russia will “minimize exports and maximize imports” of electricity to meet domestic demand.

The EU is pushing for an energy agreement with Russia, saying a free-market framework would bring in foreign capital to upgrade Russia’s energy production.

Missed Opportunities

The EU is trying to make up for lost time. Trade Commissioner Peter Mandelson said in March that Europe lost influence over Putin by backing Russia’s bid to join the World Trade Organization in 2004 without gaining concessions on energy.

“Our message is: we want to have transparency, we want to have reciprocity,” EU External Relations Commissioner Benita Ferrero-Waldner said Oct. 17 in Luxembourg.

Wrangles inside Europe over national energy markets risk undercutting the EU’s message. Spain, for example, is trying to prevent Germany’s E.ON AG from taking over Endesa SA, a Spanish utility, while France is seeking to keep its gas supplies in national hands by orchestrating the merger of Suez SA and Gaz de France SA.

Civil Liberties

Dependence on Russian energy also lessens the EU’s leverage to promote civil rights in Russia, an issue that flared up this month with the unsolved murder of Anna Politkovskaya, a journalist critical of the Kremlin.

Amid worldwide outrage over the Oct. 7 murder in central Moscow, Putin waited three days before declaring the crime “abhorrent” and vowing to track down the killers.

“We are concerned because this murder was also an attack against freedom of the press,” Finnish Prime Minister Matti Vanhanen, the host of today’s summit, said in an Oct. 17 interview in Brussels. He promised that the EU will send “a clear message” to Putin.

While Putin doesn’t view the killing as a subject for the summit, he is an “open and transparent leader” willing to discuss any issues the EU brings up, his spokesman Dmitry Peskov said.

To contact the reporter on this story: Sebastian Alison in Moscow at [email protected]

 

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