EUR/RUS DIRECTOR WARLICK DISCUSSES ENERGY

C O N F I D E N T I A L SECTION 01 OF 03 BRUSSELS 001154

SIPDIS

DEPT FOR EUR/RUS

E.O. 12958: DECL: 03/28/2016
TAGS: PGOV PREL ENRG EPET RS XH EUN USEU BRUSSELS
SUBJECT: EUR/RUS DIRECTOR WARLICK DISCUSSES ENERGY
SECURITY, G-8, AND FOREIGN POLICY WITH EU OFFICIALS

Classified By: POLCOUNS LEE LITZENBERGER FOR REASONS 1.4 (B,D)


1. (C) Summary: The European Commission has three main
priorities with Russia on energy: 1) Russian ratification of
the Energy Charter Treaty; 2) third-party access to Russian
pipelines and; 3) a reduction in state interference in the
oil and gas sector. On Belarus, Russian officials have told
the EU that they are "pressing ahead" with a Russia/Belarus
Union State and Russian presidential advisor Sergei
Yastrzhembsky has said that Russia will raise gas prices for
Belarus starting in early 2007, a move the EU thinks will
test the Putin/Lukashenko relationship in the year to come.
Expectations are low for energy security at the G-8 Summit,
but Russian Energy Minister Khristenko had recently signaled
to Commissioner Borosso that Putin intends to "give
something" in this area in advance of the Summit.. Putin is
reportedly pushing the EU on two energy initiatives: "market
reciprocity" and nuclear energy. The EU believes Putin wants
Russia to be the nuclear fuel provider to the rest of the
world and will push this theme at the G-8. End Summary.

Energy Security
--------------


2. (C) In meetings with EUR/RUS Director Mary Warlick on
March 23, EU Council and Commission officials discussed the
challenges of energy cooperation with Russia. EU Council
Deputy Director-General for Policy Planning and Early Warning
Helga Schmid said that in all her years working in the
offices of successive German Foreign Ministers, the issue of
energy security vis-a-vis Russia was never discussed. That
has completely changed now, she said, and everybody realizes
that the EU needs more unification on
energy policy. However, the North European Pipeline is not
the model for future projects, she said. The challenge for
the EU is to move internally on energy first while persuading
Moscow of the need for Gazprom reform and infrastructure
investment. The issue of energy efficiency also needs to
"sink in" with the Russians and there is a chance this topic
will be discussed at the May EU/Russia Summit, Schmid said.


3. (C) While the EU focus is on security of energy supply,
Schmid said, the Kremlin raised the issue of security of
demand in meetings with European Commission President Jose
Manuel Barrosso during his March 16 trip to Moscow. With the
recently concluded deals on natural gas deliveries and oil
cooperation reached during Putin's visit to China, Carl
Hallergard, EU Council Russia policy advisor, said he expects
to hear the message from the Russians at the EU/Russia Summit
that, "look -- we can sell to China too!" Hallergard added
that Gazprom wants EU Member States to commit "to buy a
trillion cubic meters of
gas for the next 150 years -- and then maybe Russia will
build a pipeline." This is not "how it works," Hallergard
said, and negotiations on energy cooperation with Russia
should not proceed with this mindset.


4. (C) Hugues Mingarelli, European Commission Director for
Eastern Europe, Central Asia, and the Caucasus, said that,
from the Commission's perspective, it has three main
priorities with Russia on energy: 1) ratify the Energy
Charter Treaty (even though Russia has consistently refused
to do so); 2) ensure third-party access to Gazprom's
pipelines (even though the Kremlin does not want to hear this
message) and; 3) reduce state interference in the oil and gas
sector. Mingarelli commented, however, that he expects to
see Russia use energy more and more as a foreign policy
instrument. He noted that EU Commissioner Borosso, in recent
meetings with President Putin and others in Moscow, had
pressed for a more predictable investment environment for
investors in the oil and gas sector, but saw little hope for
near-term progress Mingarelli also expressed frustration
with the Russian lack of willingness to engage in serious
discussions on an EU assistance initiative to de-commission
Russia's dangerously obsolete
first-generation nuclear reactors and replace them with
newer, safer reactors. He indicated that Russia only
appeared interested in finding way to extend the life of
these obsolete reactors.


5. (C) Schmid and Hallergard also indicated that there is an
ongoing EU discussion on creating a regional electricity
market with Europe for the countries of Eastern Europe,
especially Moldova and Ukraine. Such an initiative would
more firmly anchor these countries in Europe, making them
less vulnerable to disruptions by Russia. They added that
one of the biggest problems for Ukraine is energy efficiency;
a proposed EU/Ukraine energy treaty, that would a framework
for cooperation, is currently under active consideration and
will be on the agenda at the forthcoming EU/Ukraine Summit.
Schmid said that she raises EU concerns about the
Russia-Ukraine gas deal every time she talks with Ukrainian
officials and believed that she had achieved some success in
doing so, at least certain factions of the Ukrainian
government.

Russia's 'Neighborhood' Policy
--------------


6. (C) Jukka Leskela, EU Council Head of Unit for East Europe
and Central Asia, said he was "worried about Russia's
neighborhood policy -- particularly regarding Transnistria."
On Transnistria, Hallergard suggested that it was best not to
react to Russian propaganda after the recent customs
declaration implementation by the Ukrainian government,
commenting that it would "blow over" eventually. Hallergard,
Schmid, and Leskela all said that it was clear, given the
reaction in Moscow over the implementation, that the
"wallets" of at least some in the Kremlin had been hit.
Because Russian business interests are involved on the
Transnistria issue, it made working towards a settlement that
much more difficult for the EU, according to Schmid.

7. (C) On Belarus, March 23 had EU Heads of Government
meeting to debate possible restrictive measures against
Belarus for its fraudulent elections. Schmid, Mingarelli,
and Leskela privately told EUR/RUS Director that they favored
including President Lukashenko on a visa ban list and, in the
words of Leskela, "our credibility is on the line with this
given what we have said." (Comment: On March 24, the EU
Council subsequently issued a statement announcing
restrictive measures against President Lukashenko. End
Comment.) According to Schmid, German Intelligence Service
contacts had advised that Lukashenko is very much hated even
within the Belarusian elite on account of his erratic and
mercurial behavior.


8. (C) Schmid also noted that the Russians had told her that
they are "pressing ahead" with a Union State of
Russia/Belarus. In addition, Russian presidential advisor
Sergei Yastrzhembsky had advised her that Russia will raise
gas prices for Belarus starting in early 2007. As Russia
makes a push to get more firm control of the Belarusian gas
pipelines, as it inevitably will, combined with higher gas
prices and
movement on Union -- all of these factors would combine to
test the Putin/Lukashenko relationship in the year to come,
Hallergard said.


9. (C) On Georgia, Hallergard commented that Russia "wants to
be nasty right now." He was pessimistic on any short or
medium-term progress on South Ossetia as the Georgians, he
said, had lost any of the good-will they had in Moscow
following their harsh reaction to the gas and electricity
disruptions in January. On South Ossetia, Hallergard said,
"there is the full spectrum of Russian irresponsibility."
On Ukraine, Leskela said the EU will be looking at three
primary issues after the March 26 elections: 1) status of
reforms; 2) whether Ukraine will be able to keep its
commitments and continue to play a constructive role on
Transnistria; 3) continued Ukrainian alignment with EU
foreign policy statements.

Anticipating the G-8
--------------


10. (C) Laurent Muschel, Head of Unit for Inter-Institutional
Relations, Enlargement, and
International Relations in the Directorate General (DG) for
Energy and Transport of the European Commission, told Warlick
that his expectations are low for energy security at the G-8
Summit. However, Russian Energy Minister Khristenko had told
EU Energy Commissioner Borosso in recent meetings in Moscow
that he was waiting for a decision from Putin, who he
believed was prepared to "give something" on energy at the
Summit. Muschel outlined two ideas that Putin is pushing with
the EU on energy: 1) "Market
reciprocity" (including claims that Gazprom is being
prevented from acquiring certain distribution assets in the
EU); and, 2) nuclear energy (Russia wants to be the nuclear
fuel provider to the rest of the world and would like this
to be a big initiative at the G-8).


11. (C) Muschel indicated that he would welcome Russian
nuclear initiatives at the G-8, but expressed frustration
that the energy security statement being negotiated for
leaders at the Summit was thus far very weak, with no real
commitments on the important issues of transit, the Energy
Charter Treaty or third party access. Muschel also
expressed concern that Russia might try to "buy" the West,
with some industry concessions at the G-8 (e.g. on the
Shtokman LNG transaction) without really getting to the heart
of the matter on industry reform. He expressed the view that
it was a reasonable goal to push hard for the end of the
Gazprom export monopoly; while the push not be successful, he
believed it could lead to the reform necessary for Russian
energy industry to be a better supplier for Europe.
GRAY
.