Ukraine, the Black Sea and critical energy issues

The security issues regarding Romania seem to be on the right track after the NATO summit in Newport, as a contingency plan is ready and NATO military are to be stationed in Romania. 99.9 percent there will be no aggression from the Russian Federation against Romania, said President Traian Basescu. Meanwhile, the ceasefire in Ukraine agreed on September 5 was standing only on paper, but in the field fighting was going on. Casualties registered were getting closer to 3,000. In this context, the EU and US new set of sanctions are ready to be implemented, while Moscow is looking for proper ways to respond. Besides the conflict itself, an economic conflict is pending between the West and Moscow, although there are several western countries very reluctant when it comes to spoiling their interests in Russia. The first sign of economic divergences felt by Romania is the cutting by 5-10 percent of natural gas deliveries from Russia starting September.

Fragile ceasefire in Eastern Ukraine, EU sanctions

The ceasefire agreed on September 3 was not observed in the field. Ukrainian forces and the pro-Russian separatists exchanged heavy fire near Lugansk and Donetsk airport. Moscow and Kiev changed allegations. However the agreement seems to be another step ahead for the separatists as is reads that the regions in eastern Ukraine could benefit a special status of autonomy, could organize early elections and have their own police forces.

In spite of the turmoil, on September 16 the parliament in Kiev has voted, simultaneously with the European Parliament, the politic and economic cooperation between Ukraine and the EU, the very agreement that had led to the Euromaidan protests after being rejected by the former leadership.

Within this context, the EU sanctions target the Russian economy in an attempt to reduce President Vladimir Putin’s appetite for further involvement in the region. The sanctions are aimed at blocking the foreign financing of Rosneft (the biggest Russian oil company), Transneft and the oil branch of Gazprom – Gazprom Neft, as well as defence companies such as OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod. There are 24 Russians and Ukrainians aimed by freezing their assets and the ban to travel to the EU countries. Among them Sergey Shemezov, a close character to President Putin, Yuri Vorobiov – Vice-president of the Council of the Russian Federation, Aleksei Naumets – Russian General suspected of being involved in the presence of Russian military in eastern Ukraine and Ukrainian separatists – the so-called premiers of Lugansk and Donetsk regions, Aleksandr Zaharchenko and Ghennadi Tsipkalov respectively.

Rumours are going by that the EU is to take into consideration the option to boycott the football World Cup in 2018 that is to take place in Russia. Even more, Russian teams might be excluded from European competitions such as Champions League and Europa League, while Russia could be also excluded from the Formula 1 calendar.

Last but not least, on September 16, Canada has extended the sanctions against the Russian Federation against five weapon producing companies and against Sberbank. Canada will ban loans for more than 30 days to limit the access of Russian banks to financial resources. Accounts were frozen and travelling ban was set for four Russian high rank military, raising the number of Russian citizens aimed by Canadian sanctions to 61.

The sanctions were regarded by Moscow with irony and contempt. President Putin said Russia is contemplating retaliation, while PM Dmitry Medvedev suggested a ban on civil air flights over the Russian Federation might be considered. The Russian Foreign Minister Sergey Lavrov pointed to the fact that “the EU has chosen to increase tensions in its political conflict with Moscow, Russia will act calmly and adequate to serve it own interests.”

What is Putin aiming at?

During talks with EC President Manuel Durao Barroso, it seems the Russian President Vladimir Putin had said he could ‘take Kiev in two weeks’. His statement was quoted around the world. His Ukrainian counterpart Petro Poroshenko seized the moment before the NATO summit in Newport to say the same thing could happen to other European capitals, including Bucharest, forgetting the different status as regarding the NATO alliance.

Ever since, all kinds of scenarios surfaced in the international media. Recently, a former adviser of President Putin during 2000 - 2005, economist Andrey Illarionov, stated in Riga that the Russian leadership had been planning the war in Ukraine for eleven years. Illarionov said this is in fact a war against Ukraine, coming after the ones in South Ossetia, Abkhazia and Crimea. He said the EU sanctions against Russia are ‘a joke’. Illarionov added the conflict could not be solved through negotiations. In March, Illaryonov told a Swedish newspaper that Putin will also want to conquer Finland, as he envisages Russia within the Old Russian Empire borders that would include Finland and the Baltic States.

Other analysts say President Putin is aiming at another frozen conflict that would serve him to keep Ukraine under Russia’s sphere of influence and prevent it from joining the EU and NATO.

Meanwhile, Russia, Abkhazia and South Ossetia may soon enter a trilateral treaty on friendship and cooperation with further formation of a joint military bloc that would oppose NATO. South Ossetia’s ambassador to Abkhazia, Oleg Botsiyev, told Russian daily ‘Izvestia’ that the planned coalition would be modelled on NATO’s structure and be allied with another Moscow-led military alliance on the post-Soviet space – the Collective Security Treaty Organization, which includes Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan (with Serbia and Afghanistan holding an observer status).

On the other hand, the Russian head of state is strengthening his position. According to sources, the control over the Russian Military Industrial Commission will shortly be transferred from the government to the president, with Vladimir Putin assuming the chairman’s post. The current head of the commission, Deputy PM Dmitry Rogozin, will become first deputy chairman. According to ‘Kommersant’ Deputy Defence Minister Yuri Borisov is set to become executive secretary of the commission. All current permanent members of the Military Industrial Commission will retain their posts, the newspaper reported. According to the source, the viability of the scheme has already been tested on the Commission for the Development of the Fuel and Energy Complex – this body is also chaired by Vladimir Putin and allegedly it works very effectively. Furthermore, ‘Kommersant’ reads that Russia is currently running a major program to rearm the military. It started in 2008 and will continue till 2020. By then 70 percent of all weapons in the military forces must be replaced by new models. The state is allocating significant sums for the purpose – in 2014 the total defence budget amounted to 2.3 trillion roubles (USD 60 billion), compared to just 600 billion roubles (USD 15 billion) in 2003. In a move meant to give another blow to Kiev, Russian authorities decided to cut ties with Ukrainian weapon makers and relocate all production in Russia.

Well, President Putin enjoys – in spite of the turmoil – a high popularity. When starting his third mandate as president in 2011 he was facing decreasing popularity, as opposition contested his moves and, on the other hand, by 2009 the Russian economy entered stagnation. His policies suddenly turned from focussing on economic growth to nationalism. Betting on the imperial nostalgia, on anti-Western rhetoric and Christian-Orthodox conservatism his agenda gained momentum and now Putin enjoys an 86 percent popularity (August 2014) as against 61 percent popularity (November 2013).

Russian companies face problems

Some say Vladimir Putin wants the neighbours to be weak more than he wants Russians to be prosperous and that he prefers vassals to allies. Whatever the truth may be, with or without the EU and US sanctions, the Russian economy is on a downward trend. It still stands better than the Ukrainian economy, which is expected to register a 10 percent GDP decrease by the end of the year after the blows it faced in 2014. But the Rouble had fallen by more than 12 percent against the USD, registering the lowest exchange rate of 38.24 units on September 15. Economic growth is expected to register 1 percent of GDP this year (down from initial forecasts of 2 percent), while the inflation rate might reach 7.2 percent.

The most important challenges are faced by the Russian companies such as Rosneft, aimed by the EU sanctions. As the Russian economy is supported by energy exports, we should mention that energy accounts for half of the budget revenues, of which 80 percent is coming from the oil sector. As Rosneft is the largest oil company in Russia, problems are imminent. Rosneft has a debt of some USD 40 bn, of which USD 26.2 bn must be repaid by the end of 2015. US, EU and Japanese firms own most of the debts.

Russia’s reserves amount to some USD 644 bn. But the government had already had to support VTB and the Agricultural Bank by some USD 6.6 bn. In August Rosneft has applied for a governmental support of USD 42 bn in order to pay its debts. PM Medvedev said the government may meet the bailout from the National Wealth Fund. Rosneft also has USD 20 bn in banks, but analysts say that more than half of the amount is prepaid loan-for-oil deals with Western trading firms. It seems the companies have called on Rosneft to return the payments in view of the new sanctions. On the other hand Rosneft would get USD 63 bn by 2018 from its deal with China National Petroleum Company, however it’s a long way to that target.

But Rosneft needs to invest some USD 21 bn every year by 2017 to launch new fields and upgrade refineries. Its’ earning amount to some USD 30 bn per annum. More than that, it needs to repay USD 12 bn by the end of 2014 and USD 17 bn in 2015 as it borrowed greatly to buy rival TNK-BP for USD 55 bn in 2013. The deal included BP taking a 20 percent stake in Rosneft.

As a first effect on its assets comes the need to lay off personnel. According to ‘Kommersant’ Rosneft’s Moscow headquarters would see cuts of up to 25 percent from the current 4,000!

As Rosneft is one of the targeted Russian companies by the EU and US sanctions, the lack of liquidity comes from the EU and US ban to access crediting lines for more than 90 days. And Rosneft is not the only company facing difficulties. Other state owned Russian companies are more or less facing the same problems.

Gorbachev blames it on the breakup of USSR, former ambassadors to Moscow blame Western policies

Former Soviet President Mikhail Gorbachev has blamed the developments in Ukraine on the breakup of the USSR, stressing the need for dialogue between Washington and Moscow to solve it. In the afterword to his latest book of memoirs ‘After the Kremlin’ that is to be published soon he points out that leading nations were largely to blame for the current situation, as from the very beginning they were testing Ukraine’s integrity. Leaders of these nations should stop dragging Ukraine into NATO because these attempts would result in nothing but strife between Ukraine and Russia.

On the other hand, two former UK and US ambassadors to Moscow, Tony Brenton and Jack Matlock respectively say the Western policy regarding the Ukrainian conflict is irrational and not pragmatic. They blame the 2008 moment when NATO ‘seduced’ Ukraine to become member of the alliance. Matlock said the US would not remain static if China supposedly forms an alliance with Mexico and Canada... He further says the West should not take part to the dialogue between Kiev and Moscow as “this is a family problem and the current situation does not concern third parties.” Matlock also says the EU sanctions would only extend the agony and the impoverishment of Ukraine. Both former envoys say the sanctions will have no impact on Russia’s stand.

Crimea’s example – Russia gets hold on huge resources

As Russia annexed Crimea it got hold also of its natural resources in the Black Sea and the Sea of Azov. Not to talk about the fact that it doesn’t need to pay ‘rent’ for using the military base in Sevastopol. Even more, Moscow may ask for money reimbursement for the amounts already paid, sources say. Referring to energy resources, let’s say that before the annexation Ukraine’s state-owned Chornomornaftogaz owned 17 hydrocarbon fields, including 11 natural gas fields, four gas condensate fields, and two oil fields, along with 13 offshore platforms in the Black Sea and Sea of Azov. Among foreign companies interested in Crimea’s offshore hydrocarbon assets were ExxonMobil, Royal Dutch Shell and Petrom (all of them have withdrawn from the projects since). It also held a 100 percent interest in five offshore license blocs – Vostochno-Kazantipskoe in the Sea of Azov and Odesskoe, Bezymiannoe, Subbotina and Palasa in the Black Sea.

After the referendum, the Crimean Parliament nationalized both Chornomornaftogaz and state-owned Ukrtransgaz. It set up a new company, the Crimean republican enterprise (PKK) Chernomorneftegaz. The Crimean Parliament also claimed the peninsula’s ‘continental shelf and exclusive economic zone’ in the Black Sea.

Deputy Natural Resources and Ecology Minister Denis Khramov said March 19 that Crimean offshore projects are to become subject to Russian law. According to some sources, the Black Sea and Azov Sea shelf are thought to contain around 1.61 trillion cubic metres of gas. Russia has taken, along with Crimea, no less than 93,000 square kilometres of sea surface. Furthermore, the annexation treaty reads in Article 4, Section 3 that international law would govern the drawing of boundaries through the adjacent Black and Azov Seas.

Although Moscow denies interest in energy resources (“Compared to all the potential Russia has got, there was no interest there,” Dmitry Peskov, spokesman for the Russian presidency said) one can’t deny the huge benefits for Russia and the great economic loss for Ukraine.

One could notice that through this annexation the Russian influence in the Black Sea is growing significantly. Older treaties still stand because they haven’t been challenged yet. What if Moscow decides to challenge some of them?

Romania’s Black Sea drillings

Romania has become maritime neighbour with Russia, and some say this could be a potential source of conflict. The Sevastopol Russian navy base is only 160 km away from Romanian soil. And yet, despite the tensions in Ukraine and in the Black Sea (related to the presence of western ships), for the time being things seem to be calm.

The Exxon and OMV Petrom drillings in Domino-1 and Domino-2 of Neptun block are going on, and results are expected soon as regards gas pressure and exploitability. The Ocean Endeavour platform is carrying on operations. During his visit on the platform in August, president Traian Basescu said USD 4-5 bn investments will be needed but the results will be welcomed. Estimated gas reserves in the perimeters licensed by OMV Petrom and Exxon are of about 84 billion cubic metres, i.e. some seven years of Romania’s consumption by today’s standards.

Transgaz has already concluded an agreement to transport the gas from the Black Sea on shore and further on to Arad to be exported. Estimated costs for the transport infrastructure are of EUR 300 million until 2019. According to a Transgaz report, the gas will be transported through the National Transport System (SNT) on two routes: Podisor – Corbu - Hateg – Horia or Isaccea-Onesti – Coroi – Hateg – Horia, both of them connecting SNT with the international routes at Arad.

Gazprom reduces gas deliveries to Romania

On September 11 Gazprom informed Transgaz that natural gas deliveries to Romania are to be cut down by about 5 percent for the next three days. No explanation was offered, according to local officials. But the lower deliveries continued indefinitely. The move came just days after Gazprom had cut the gas deliveries to Poland by 24 percent as well as for other eastern European countries.

Delegate Minister for Energy Razvan Nicolescu said there is no reason for concern due to the lower quantities of gas delivered, as imports from Russia are limited (during the summer period). “There is no reason for concern and there’s nothing to surprise us. Romania’s daily consumption reaches 16 million cubic metres of gas, while the domestic output is of 31 million cubic metres,” Nicolescu mentioned. Anyway the European Commission was informed according to the standard procedure.

Later on Minister Nicolescu gave assurances that even if Gazprom further cuts deliveries during the winter period, Romania will face no difficulties. “We do hope that energy is not going to be used as political weapon,” he added.

Related or not to this issue it comes the Ponta government decision to suspend on indefinite term the natural gas price liberalization that would lead to at least two and a half years delay in deregulating the gas price for companies. Minister Nicolescu said recently that this issue is worrying due to the fact that during recent years the average salary has dropped while gas prices have gone up by 16 percent. It seems the pending problems related to gas imports from Russia have added to the concerns already existing on the domestic plane.

Let’s note that Romania’s annual consumption is of some 12.5 billion cubic metres, while its domestic output is of 11 billion cubic metres, the difference being covered by imports from the Russian Federation. In order to reduce the dependency of Russia imported gas, recently Romgaz has finalized a EUR 27 million investment at Urziceni (Ialomita County) to increase by 40 percent (from 250 million cubic metres to 360 cubic metres) the natural gas storage capacity.

Statements heat up retorts with Moscow

The electoral campaign for presidency is making way for all kinds of statements, some aggressive against opponents, some meant to attract voters either by economic promises or by nationalistic ones. Anyway, candidates should ponder their enthusiasm when it comes to sensitive international issues in this complicated context in the region. It seems PM Victor Ponta got carried away on September 12 at Alba Iulia, during an electoral meeting, as he called for a second union for a Greater Romania. “I want us all to take a commitment: in 1918 here at Alba Iulia, after hundreds of thousands of Romanians had sacrificed their lives during WWI, we achieved the most important national objective – the Great Union. I want you to come beside me so that, after one hundred years, to become again the country our ancestors wanted. This is my commitment, my appeal to all Romanians, to succeed in making a second Great Union of Romania.”

The Russian Foreign Ministry reacted promptly, calling the statements regarding the eventuality of a union between Romania and the Republic of Moldova as ‘irresponsible’ and ‘inacceptable’. It also requested a reaction from the European Union. “Some political circles in Bucharest are continuing to draw up annexation plans for a neighbouring and sovereign state. Russia considers such statements as irresponsible and inacceptable,” a statement from the Russian Foreign Ministry reads.

In another development, US General Philip Breedlove, commander of the allied forces in Europe, warned that Russia is starting to use the ‘hybrid war’ scenario from Ukraine also against R. of Moldova. “We’ve clearly now seen the script play out in Crimea, we’ve seen the script play out in eastern Ukraine. We’re beginning to see some of the script in Moldova and Transdnestria,” Breelove said during a discussion at the Atlantic Council. Russia conducted military exercises in Transdnestria at the beginning of 2014. The president of Moldova warned Moscow against annexing Transdnestria on the scenario of Crimea. Russia’s deputy PM Dmitry Rogozin said last year a closer cooperation between Moldova and the EU could cause Chisinau to lose control of Transdnestria and lead to an increase in prices of energy from Russia. “This hybrid war, if it kicks off, [...] is not a NATO issue, it is an internal to the nation issue,” the general said.

Looking ahead

In the context of such a complicated conflict as the one in Ukraine, Romania’s foreign policy should be carried out in soft but firm voice. Any skidding from the political or economic point of view with Russia might have unfortunate consequences. After all, during the latest years Romanian-Russian relations were not at the top. Moscow’s contempt and Romanian officials’ position have driven the bilateral relation to a standstill. Recalling some of the moments, we might point to President Basescu’s statement that Russia is regarding the Black Sea as a Russian lake; by following the EU sanctions, Bucharest is targeted by the Russian propaganda as the rest of the union’s countries; in May 2014, Russian deputy prime minister Dmitry Rogozin was not pleased when Romania refused to let his flight enter its airspace and forced his plane to divert back to Moscow. In response, Rogozin said that if he would ever find himself flying over Romania again, he would be on a plane packing a lot more firepower. “Upon U.S. request, Romania has closed its air space for my plane. Ukraine doesn’t allow me to pass through again. Next time I’ll fly on board TU-160.” Four months later it was PM Ponta’s turn to stir up passions.

To all these it adds the anti-missile shield in Deveselu, which is not on Moscow’s liking and other issues. It could be expected that Russia would use the energy weapon, but from this point of view Romania is the least vulnerable eastern-European country. Gazprom has started tests against eastern-European countries. Recently PM Ponta was saying that the real battle in the region will not be one with conventional weapons, but on energy and that Romania needs to assure its energy independence - easier said than done. Great steps were made in this regard, along with R. of Moldova and the Iasi - Ungheni pipeline is a good example in this direction. But many other challenges lie ahead. When learning about Crimea’s annexation, one should take into consideration the speculations in the international media saying the Odessa region might be next on Moscow’s agenda and maybe Transdnestria - more frozen conflicts to serve Russian interests. But the Odessa region is more sensitive than any other one. Such a move would turn upside down the entire scaffold in the Black Sea in regard to the continental plateau. Russia’s sea waters would get right to the edge of the Danube Delta. Strangely enough for this supposition, recently the chairman of the European Parliament Committee on Foreign Affairs, Elmar Brok, said it in an interview with Evropeiska Pravda that it seems that Russia will continue its aggression, which will include an attack on Odessa and the seizure of the Black Sea coast and the region of the Danube Delta.

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October 2014

June 2017