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Bloomberg: Putin to Spurn EU Demands for More Access to Oil, Gas (Update5)

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 said they will push Putin at a summit in Lahti, Finland, tonight 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.

“We need Russia, but Russia needs us,” Italian Prime Minister Romano Prodi told reporters in Lahti before Putin joined the EU leaders for dinner. “Who needs the other more? I think Russia.”

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.

“We expect reliable general conditions and that things don’t change legally again,” German Chancellor Angela Merkel told reporters in Lahti.

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.

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.”

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.

The Ukraine crisis “was a wake-up call for western Europe,” Prime Minister Andrus Ansip of Estonia, which was under Soviet control from 1944 to 1991, said in an interview in Lahti.

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.

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.

Putin “will meet the European Union standing together,” Swedish Prime Minister Fredrik Reinfeldt, attending his first EU meeting since taking office this month, said today in Lahti.

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.

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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