Communication from the Commission to the Council and the European Parliament - The Energy Dialogue between the European Union and the Russian Federation between 2000 and 2004
Date: 2004-12-13
Institutions: European Commission
Subjects: EU relations, Russia, energy grid, energy policy, energy supply, energy-generating product, trade by product, trans-European network

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.12.2004 
COM(2004) 777 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

The Energy Dialogue between the European Union and the Russian Federation between 
2000 and 2004 

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1. 

INTRODUCTION 

The  energy  dialogue  launched  at  the  summit  between  the  European  Union  and  the 
Russian  Federation  in  October  2000  arose  from  the  notion  that  the  European 
continent  constitutes  a  broad  geopolitical  area  linked  culturally,  historically  and 
economically  and  that  the  complementarity  in  terms  of  energy  between  the  eastern 
and  western  parts  of  the  continent  should  be  developed  in  a  sustainable  way  in  the 
future. The Russian Federation not only is our most important supplier of fossil fuels 
and uranium, it could also to a certain extent play a moderating role in international 
markets, being in some ways the most promising - and geographically the closest – 
alternative to the Middle East as energy supplier to Europe. At the same time, the EU 
is particularly interested in having economic stability in a partner and neighbour like 
Russia  and  thus  continues  to  underline  the  importance  for  Russia  to  diversify  its 
economy and trade in order to assure sustainable economic development in the long 
term1. 

The  Partnership  and  Cooperation  Agreement2  (PCA)  (signed  in  1994  and  in  force 
since 1997), general in its design, set up institutional structures for the establishment 
of  cooperation  on  all  subjects  of  common  interest.  Despite  the  existence  of  the 
Agreement, some specific questions related to energy which have arisen in the course 
of the last ten years, or which have been suspended since 1994, as in the case of trade 
in nuclear materials, remain unresolved, , causing dissatisfaction to both sides. It has 
not been possible to find solutions through the Energy Charter Treaty – a multilateral 
treaty  signed  by  51  countries,  including  non-Europeans  –  as  Russia  has  stalled 
ratification of the Treaty since signing it in 1994. 

The sudden change in the international energy situation in 1999, the development of 
the internal energy market in Europe, Russia’s bid to join the WTO, enlargement of 
the  EU  by  10  Member  States,  of  which  8  from  central  and  eastern  Europe,  have 
increased the economic interdependence of Russia and the EU, as well as the number 
of energy-related questions which need urgent resolution, such as long term contracts 
or destination clauses. A bilateral dialogue was deemed complementary to the PCA 
in order to resolve concrete energy questions between the EU and Russia. 

The  energy  dialogue  set  out  above  all  to  resolve  “all  questions  of  common  interest 
relevant  to  this  sector”3.  Among  the  priorities  of  the  dialogue  was  cooperation  in 
order  to  improve  the  investment  climate  in  the  energy  sector,  including  Production 
Sharing Agreements (PSA). 

The  dialogue,  as  a  sui  generis  bilateral  initiative,  has  focussed  on  the  resolution  of 
problems. In four years, it has developed into a true partnership which today offers 
wider prospects which go beyond the narrow questions of energy trade, extending to 
transport-related problems and to the environmental impact of the energy sector. 

1 

2 
3 

On  this  point,  certain  commentators  believe  that  trade  relations  between  the  EU  and  Russia  could  be 
defined in two words: « energy and asymmetry” (The EU and Russia - Strategic Partners or Squabbling 
Neighbours?” Centre for European Reform, 2004) 
PCA = Partnership and Cooperation Agreement 
Joint Declaration adopted at the close of the EU-Russia Summit of October 2000 

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2. 

A  UNIQUE  STRUCTURE  FOR  THE  ENERGY  DIALGOUE:  INVOLVING 
ALL THE ACTORS 

As a bilateral dialogue, the energy dialogue has developed around concrete themes of 
interest to both parties and calling for shared “win-win” solutions. To succeed, such a 
dialogue must take into account all the stages of decision making. All relevant parties 
should  be  involved.  Thus,  the  working  structures  put  in  place  revolve  around  a 
flexible organisation and a permanent dialogue between actors from both the political 
and industrial areas.  

2.1. 

The “political” motor for a successful dialogue 

The  impulse  for  an  energy  dialogue  was  launched  by  Presidents  Putin,  Chirac  and 
Prodi during the EU-Russia summit of October 2000. Subsequent summits have been 
regularly  informed  of  the  state  of  development  (progress  reports4)  and  have  given 
guidance for future work. Two sole interlocutors designated by President Putin and 
President Prodi respectively have had the task of taking the dialogue forward5. These 
personal  nominations  have  helped  to  assure  continuity  in  the  dialogue.  Member 
States  have  been  regularly  consulted  and  informed  in  Council  by  reports  from  the 
Commission  services  (working  documents).  The  interest  shown  by  the  majority  of 
Member  States  in  the  evolution  of  different  dossiers  and  the  desire  of  the  current 
Council  Presidency  to  give  priority  to  the  energy  dialogue  demonstrates  the 
importance  and  usefulness  of 
in  2001  when 
Commissioners  (Patten  and  Lamy)  suggested  that  the  dialogue  serve  as  a  “pioneer 
for  wider  relations”6.  The  Dutch  Presidency  proposed  a  “non-paper”7  to  Member 
States including recommendations related to the institutional organisation and future 
priorities  of  the  dialogue.  These  have  been  incorporated  into  the  5th  report  of  the 
interlocutors which has been presented to the EU-Russia Summit in November 2004. 

this  exercise,  as  underlined 

2.2. 

The full participation of industry  

From the start of the energy dialogue, industrial representatives were invited to take 
part  in  bilateral  thematic  groups  on  the  themes  of  strategies,  technology  transfer, 
investments,  environmental  questions  and  energy  efficiency.  These  groups, 
comprising  Russian  and  European  experts  from  the  private  sector  and  national 
administrations, were charged with examining common areas of interest and defining 
priority  sectors  for  cooperation.  Their  work  has 
to  conclusions  and 
recommendations, included in the synthesis report presented by the two interlocutors 
at the EU-Russia Summit of October 2001. These groups are committed to meeting 
again in the future to make progress on more specific subjects, as requested by the 
Dutch  Presidency.  Four  themes  have  been  identified  for  the  thematic  groups: 
investments, infrastructures, energy efficiency and trade flows. 

led 

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To date, five joint progress reports by the interlocutors have been sent to the EU-Russia Summits – to 
the 8th Summit of 3 October 2001, the 9th of 29 May 2002, the 10th of 11 November 2002, the 12th of 6 
November 2003 and the 14th of 25 November 2004. 
The Russian Federation nominated Victor Khristenko (Deputy Prime Minister, then minister for energy 
and industry). From the Commission, the Director-General of the Directorate-General for Energy and 
Transport, Mr Francois Lamoureux, was nominated. 
Financial Times, 5 December 2001 
Non-paper adopted by the Council (COREPER), 26 October 2004 

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The EU-Russia Industrialists’ Round Table is a useful complement to these thematic 
working  groups.  Industry  has  taking  the  initiative  of  participating  actively  in  the 
integration  of  markets  within  a  “pilot  group  on  energy”8  (created  in  December 
20039), comprising senior representatives of European and Russian companies. This 
structure  will  be  the  central  core  and  coordinating  body  of  a  wide  participation 
mechanism for companies within the energy dialogue. Industrial participation is one 
of  the  ways  of  guaranteeing  the  long  term  success  of  the  energy  partnership.  A 
meeting of the pilot group and the sixth meeting of the Industrialists’ Round Table 
was held on 10 November 2004, attended by the two sole interlocutors and the Dutch 
Presidency  (Mr  Zalm,  Deputy  Prime  Minister  and  Finance  Minister  of  the 
Netherlands). Among other things, it was agreed that the four thematic groups would 
each make a report to the pilot group which would synthesise them. . 

2.3. 

Structures for implementing the dialogue 

The  working  method  put  into  place  since  October  2000,  based  on  the  personal 
commitment  of  the  sole  interlocutors,  the  organisation  of  the  round  table  and 
brainstorming  conferences  involving  all  stakeholders  has  been  demonstrated  to  be 
fruitful. Support structures have recently been created which enrich and give a new 
impulsion  to  the  dialogue.  These  support  structures  complement  those  of  the  PCA, 
that  is,  the  EU-Russia  Permanent  Partnership  Council  (which  can  treat  energy 
questions),  the  Cooperation  Committee  and  subcommittees  which  can  treat  energy 
issues at the technical level. 

a) A flexible working method 

– 

regular meetings between interlocutors 

The  two  parties  meet  regularly  to  discuss  the  evolution  of  current  questions.  A 
coordination  cell  made  up  of  interested  Commission  services  has  had  36  meetings 
since the dialogue began. The members of this cell have regular meetings with their 
Russian counterparts on various topical subjects  covering gas and uranium trade or 
electricity exchanges. 

– 

round tables 

A  number  of  round  tables  on  topical  issues  have  been  organised  bringing  together 
European  and  Russian  partners  from  the  public  and  private  sectors  at  the  highest 
level. A conference on natural gas was held in Brussels on 10 December 2003, and 
one was held on electricity in Moscow on 16 October 2002. These brought together 
the principal actors from the private sector, various Russian ministries, Commission 
services  as  well  as  Commissioners  de  Palacio  and  Monti  and  the  Council 
Presidency.10 

8 

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10 

Among  the  active  members  of  this  group  are  Messrs  Tchubais  (CEO,  RAO  UES),  Miller  (CEO, 
Gazprom), Vekselberg (BP-TNK), Bernotat (CEO, E.ON), Sutherland (BP) and Verberg (GasUnie) 
EU/Russia Industrialists’ Round Table, Moscow, December 2003 
http://www.europa.eu.int/comm/energy/russia/reference_texts/industrialists_en.htm 
Other  round  tables  at  the  technical  level  held  or  about  to  be  held  are:  conference  on  a  comparative 
analysis  of  energy  strategies  (Moscow  17  October  2003),  round  table  on  the  quality  of  petroleum 
products (2004), seminar on energy efficiency (2004) 

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Finally, a continuous comparison of analyses, scenarios and strategies takes place at 
the  highest  level  with  the  participation  of  European  and  Russian  industry. 
Industrialists  such  as  A.  Tchubais,  president  of  the  Russian  electricity  giant  RAO 
UES and A. Miller, president of Gazprom, are very active in the dialogue. 

b) Support structures 

Two concrete structures support the work of the dialogue – a joint energy technology 
centre and a market observatory. 

– 

the Russia-EU Joint Energy Technology Centre 

A joint Energy Technology Centre11 was set up in Moscow on 5 November 2002. It 
is  managed  by  two  co-directors,  one  Russian  and  one  European.  The  centre  is  a 
platform aimed at promoting advanced energy technologies in the sectors of oil, gas, 
coal, electricity , new and renewable energy sources and energy savings. It works in 
partnership with industry and seeks to facilitate investments in priority projects. 

With the purpose of fulfilling this task, the Centre:  

– 

– 

– 

Promotes the necessary conditions for exchange of information about advanced 
energy  technologies  and  organises  and  co-ordinates  activities  which  will 
facilitate  contacts  between  EU  and  Russian  energy  sector  actors,  including  in 
research and technology development; 

Identifies,  evaluates,  facilitates  and  assists  in  promoting  concrete,  large-scale, 
technology co-operation projects in the above-mentioned energy sectors; 

Liaises  and  co-ordinates  joint  activities  with  other  Russian  and  EU  energy 
centres,  and  promotes  the  creation  of  a  common  information  space  for 
disseminating energy technologies.  

In order to do all this, the centre has organised various round tables and proposals for 
mutually beneficial energy technology projects are starting to come forward. 

The activities of the centre will help to attract mutually beneficial investments in the 
areas in which it is active. 

–  market observatory 

In order to facilitate and speed up the integration of Europe’s energy markets and to 
assure security of energy supply, the observatory system for the energy market will 
make  it  possible  to  monitor  data  and  issues  crucial  to  the  proper  functioning  and 
security of supply of the internal energy market, acilitate the completion of necessary 
infrastructure  projects  and  identify  potential  risks  to  internal  and  external  energy 
supply to the EU. . The observatory mechanism will cover notably the oil, gas and 
electricity sectors. 

11 

For more details see http://www.technologycentre.org/ 

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This internal service of the Commission will provide a central and reliable source of 
quantitative  and  qualitative  information.  It  will  help  the  Commission,  Member 
States, industry and other interested parties to take decisions relating to energy policy 
and new investments. It will thus help to improve the EU’s energy supply security in 
the short, medium and long term. The support of competition and the need to ensure 
energy supply in good cost-benefit terms are in line with the strategy defined by the 
European Council at Lisbon (23-24 March 2000). 

Given the mutual interests of the EU and Russia in improving security and stability 
in energy supply, as well as the importance of Russia as a supplier of energy to the 
EU,  the Commission intends  to associate  Russia in the work of  this  observatory as 
soon  as  possible  and  to  establish  a  link  with  the  hydrocarbons  observation  system 
which the Russian Federation plans to create. 

3. 

RESULTS OF THE ENERGY DIALOGUE 

The  three-pronged  approach  announced  in  the  Green  Paper  “Towards  a  European 
strategy  for  the  security  of  energy  supply”  adopted  by  the  Commission  on  30 
November 2000 – to strengthen competition in the internal energy market, to defend 
sustainable development and guarantee external supply security – has been translated 
into concrete action in the framework of the energy dialogue with Russia. 

It has been possible to resolve difficulties faced by Russian companies in the internal 
energy market by establishing clear and predictable rules for companies operating in 
the  single  market.  It  has  created  a  path  for  European  companies  seeking  to  enter 
Russian markets. During this period, companies such as BP, Shell, Total or ENI have 
made  significant  investments.  The  dialogue  has  made  it  possible  to  resolve  certain 
problems  which  European  companies  could  have  encountered.  Likewise,  Russian 
investments in the EU have forthcoming, essentially through stakes which Gazprom 
has bought. 

Finally, the dialogue has put in place the conditions for long term energy supplies in 
Europe  by  supporting 
transport 
infrastructure and establishing safety rules. 

the  building  and  modernisation  of  energy 

Such results would not have been possible without the mutual interest of the parties 
to produce them. Russia and the EU are broadly interdependent in the energy area. 
For  the  EU  of  25  Member  States,  Russia  is  the  EU’s  main  supplier  of  energy 
products:  half  of  EU  gas  imports,  one  quarter  of  oil  imports,  one  third  of  uranium 
imports.  For  Russia,  the  EU  is  its  principal  economic  partner.  It  is  the  natural 
destination  for  its  energy  exports  (all  its  export  infrastructure  is  directed  towards 
Europe – oil and gas pipelines, waterways, railways and road routes). Sales of its raw 
materials provide foreign currency and almost 40% of the federal budget. 

At  the  same  time,  the  EU  will  continue  to  underline  the  importance  for  Russia  to 
diversify 
to  assure  sustainable  economic 
in  order 
development. 

its  economy  and 

trade 

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3.1. 

The energy dialogue as an instrument of the single energy market 

As the internal energy market is intended to rationalise the European energy sector 
for  the  benefit  of  consumers,  it  should  as  a  consequence  have  an  impact  on 
preexisting  links  with  international  markets  for  energy  products.  It  is  impossible  to 
dissociate the two, given the certain rise in coming years in the EU’s dependence on 
imported  fuels.  Russia  can  help  the  EU  to  diversify  its  fossil  fuel  supplies.  It  is 
therefore  inconceivable  that  the  EU  should  impose  quantitative  restrictions  on  its 
imports.  Market  transparency  and  healthy  competition  are  what  will  secure  stable 
supplies into Europe. 

In  this  respect,  the  gas  sector,  on  which  the  EU  economy  will  become  most 
dependent  in  the  future,  appears  particularly  vulnerable.  Russia  should  remain  the 
EU’s principal external supplier12. It is therefore important that  exporting countries 
do not distort the rules of the internal market by contracts which are inconsistent with 
Community law. 

Indeed,  internal  market  rules  needed  to  be  clarified  in  view  of  long  term  contracts 
which included territorial restriction clauses running counter to EU rules governing 
free movement and competition. Thanks to the dialogue, these questions have been 
discussed and solutions have emerged. The principle of long term contracts has been 
quite  rightly  upheld.  They  can  help  security  of  supply  by  improving  investment 
planning for production or infrastructure projects necessary for EU supplies. On the 
subject of destination clauses incompatible with internal market rules, an agreement 
was reached on 6 October 2003 between ENI and Gazprom. This should be followed 
in the near future by agreements over contracts with Germany and Austria.  

3.2. 

The energy dialogue as an instrument of sustainable development 

Since  the  start  of  the  energy  dialogue  with  Russia,  the  Commission  has  underlined 
the  importance  which  it  attaches  to  commitments  under  the  Kyoto  Protocol  on 
climate  change.  In  the  framework  of  the  dialogue,  the  Commission  has  insisted  on 
raising  the  question  of  Russian  ratification  of  the  Protocol,  without  which  the 
Protocol could not come into force13. Russia’s implementation of the Kyoto Protocol 
should help Russia move towards a more efficient use of its energy resources. 

Sustainable  economic  development  in  Russia  depends  on  putting  in  place  key 
reforms, among others in the energy sector, and notably regarding the structure and 
management  of  natural  monopolies,  pricing  structures  and  the  taxation  of  natural 
resources. On the one hand, these reforms should promote trade stability in the future 
as  they  will  have  a  positive  effect  on  future  investments  and  the  improvement  of 
energy efficiency. On the other hand, they should contribute to the diversification of 

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The  share  in  the  EU  economy  of  gas,  a  fuel  with  wide  applications,  is  growing  noticeably.  Between 
2000 and 2030, its share will rise from one fifth to one third of total energy supply, and from one third 
to one half of electricity. 80% of our gas needs could be covered by imports in 2030. The volume of gas 
imports from Russia is bound to increase, even if the 50% share is maintained. 
In  October  2004,  the  Duma  approved  the  ratification  of  the  Kyoto  Protocol,  allowing  the  Russian 
Federation to take benefits from the Kyoto Protocol. The European Commission will provide technical 
assistance through the TACIS programme (2 Meuros) starting in early 2005. 

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the  Russian  economy  by  promoting  restructuring  and  the  development  of  sectors 
other than that of energy. 

The  modernisation  of  the  Russian  economy,  support  to  its  high  rate  of  growth 
(around 7% p.a.) makes it all the more essential that Russian industry adopts efficient 
energy practices in order to increase capacities for export, including towards the EU. 
Energy  transport  (by  land  or  sea)  between  the  EU  and  Russia  will  become  more 
intense, which is another cause of environmental concern for EU countries.  

a) a more environmentally conscious use of energy 

Increasing  energy  efficiency  is  one  of  the  priorities  of  the  Russian  Federation’s 
energy  strategy.  In  this  area,  industrial  cooperation  between  Russia  and  the  EU, 
notably  through  exchange  of  good  practice  and  technology,  could  be  fruitful.  A 
round table on energy efficiency in buildings took place in Moscow in October 2004 
and a second at Nizhny Novgorod with a view to agreeing projects which could be 
developed with the support of the Energy Technology Centre.  

Joint pilot projects on energy efficiency have been launched in the north and south of 
Russia:  Arkhangelsk,  Astrakhan  and  Kaliningrad.  The  last  is  of  particular  political 
importance  for  energy  cooperation  due  the  city’s  character  as  a  Russian  enclave 
within the territory of the EU.  

For  Kaliningrad,  estimations  of  energy  savings  as  a  result  of  an  energy  efficiency 
programme are in the order of 35-40%.This potential is significant considering that 
90% of the enclave’s primary energy comes from Russia (gas pipeline) and 95% of 
its electricity comes from the Russian network IPS/UPOS. Now that the Baltic states 
are  EU  Member  States  and  as  they  integrate  in  due  course  into  the  European 
electricity network, this will raise a necessity to look for technical solution regarding 
Kaliningrad’s  electricity  system..  This  calls  for  a  mutual  solution  to  be  found 
between the EU and Russia in this area.  

Energy  efficiency  programmes  should  be  accompanied  by  the  development  of 
renewable  energy  sources.  A  round  table  on  renewable  energy  organised  by  the 
Energy Technology Centre was held in Moscow non 22 June 200414. This aimed to 
encourage  the  establishment  of  a  framework  favourable  to  renewable  energy 
development  in  Russia.  A  work  programme  for  2004  was  adopted  jointly  by  the 
Commission  and  the  Russian  Ministry  for  Industry  and  Energy.  More  focussed 
seminars  on  fuel  cells,  CO2  sequestration  and  biomass  have  been  organised  with  a 
view to Russian participation in the Community Research Framework Programme.  

With the ratification of the Kyoto Protocol, the EU/Russia Technology Centre should 
explore  opportunities  for  EU  private  sector  investments  under  the  project-based 
mechanism  called  Joint  Implementation.  The  existing  projects  in  Archangelsk, 
Astrakhan and Kaliningrad could serve as pilot areas for such an exercise. 

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b) a less polluting transport system 

The physical security of transport networks is another important area of cooperation. 
The energy dialogue has studied the feasibility of a regional surveillance system by 
satellite  to  prevent  accidents  and  detect  leaks  in  oil  and  gas  infrastructure.  It  was 
decided to provide technical assistance under TACIS 2004 to evaluate the need for 
rehabilitation  and  investment  to  improve  the  security  and  effectiveness  of  Russia’s 
hydrocarbon export network. 

Marine  pollution  is  a  serious  concern  for  all  the  countries  bordering  the  Baltic  Sea 
and  the  North  Sea.  Recent  maritime  accidents  and  the  growing  density  of  traffic 
along  the  EU  coast  give  maritime  safety  a  special  significance  in  the  EU’s 
cooperation with Russia. The Commission has had reassurance from Russia that she 
will reinforce controls on tankers unloading in its ports and that she will support the 
EU’s  efforts  within  the  International  Maritime  Organisation  (IMO),  in  particular  to 
eliminate single hulled tankers. On this last point, a compromise was accepted in the 
IMO  on  December  4th  2003,  which  will  come  into  force  in  April  2005.  In  the 
meantime, many meetings with Russia are being organised by the EU to encourage 
the rapid implementation of IMO standards. Particular emphasis is also being given 
to the role that should be played by land transport (oil pipelines and rail transport). 

Transport,  as  an  energy  consuming  sector,  should  not  be  ignored  in  the  energy 
dialogue. Transport accounts for about one third of Russian CO2 emissions. Greater 
efficiency,  particularly  of  urban 
the 
environmental  impact  of  the  sector.  Closer  cooperation  in  this  field  could  be 
profitable for both parties. A first seminar on transport took place in Moscow in May 
2004. It helped to define areas for co-operation in coming years. A second seminar 
looking at urban transport was held in October 2004.  

transport,  could  significantly 

improve 

3.3. 

The energy dialogue as an instrument of stable and predictable supply 

As stated in the Green Paper on security of energy supply, European energy supply 
policy  is  aimed  less  at  maximising  energy  autonomy  or  reducing  dependence  on 
imports,  more  at  reducing  the  risks  associated  with  the  latter.  Thus,  with  regard  to 
Russia,  on  which  dependence  is  inevitably  going  to  rise,  cooperation  must  aim  to 
establish a relation of constructive interdependence: establish predictable trade rules, 
improve  networks  and  encourage  investments  by  promoting  a  more  stable  and 
transparent legal framework and encourage key reforms in the Russian energy sector. 

a) trade in energy products 

Trade  in  hydrocarbons  has  been  one  of  the  primary  subjects  for  clarification  in  the 
energy dialogue. Following long discussions  with the Russian partners, particularly 
at  the  time  of  the  recent  enlargement,  a  Joint  Declaration  on  EU  enlargement  and 
relations between Russia and the EU stated that there were no longer any restrictions 
on imports of gas and oil into the EU. 

In  the  framework  of  the  bilateral  agreement  in  May  2004  between  the  European 
Union  and  Russia  on  Russia’s  accession  to  the  World  Trade  Organisation  (WTO), 
the two parties reached agreement on certain questions in the energy sphere. Russia 
made  WTO  commitments  related  to  the  price  of  gas  to  industrial  users  and  export 

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duties  on  energy  products.  In  addition,  the  two  parties  agreed  to  intensify  their 
cooperation on questions relating to energy infrastructure. 

In parallel, the agreement on trade in nuclear materials, currently at the negotiation 
stage, aims to establish transparent, stable and predictable trade rules in the interests 
and for the viability of the nuclear industry of both parties. The new agreement will 
take into account not only the new market conditions in the newly enlarged EU, but 
also the need to maintain the viability of the nuclear industry of both parties. 

Trade relations in the area of nuclear material between Russia and the new Member 
States represent more than $200 million per year to Russia, and correspond to 80% of 
the  market  in  the  new  Member  States  (or  12%  of  the  market  in  EU  25).  Russian 
export companies had concluded long term agreements to supply the nuclear reactors 
in  the  new  Member  States,  some  of  which  went  well  beyond  May  2004.  A 
diplomatic exchange of letters between the two interlocutors, signed in April 2004, 
made  it  possible  to  define  rules  which  would  apply  in  this  area,  to  confirm  the 
validity of these contracts in accordance with Euratom Treaty (Article 105) and thus 
to avoid complications involving the new Member States. 

It  is  therefore  important  that  general  rules  and  principles  covering  energy  trade 
should  be  predictable  and  transparent,  such  as,  on  the  one  hand,  the  rules  of  the 
Partnership and Cooperation Agreement and the World Trade Organisation and, on 
the  other  hand,  in  the  future,  arrangements  to  facilitate  trade  and  the  protection  of 
investments in the framework of the European Economic Area. 

b) Transeuropean Energy Networks 

The  reliability  of  energy  transport  is  one  of  the  pre-conditions  for  a  stable  and 
continuous energy supply in the EU. Hydrocarbons coming from Russia pass either 
by land route (oil or gas pipeline) or by sea route (see above). If land transport is to 
be preferred, networks must be reinforced. 

In  2001,  the  Russia-EU  Summit  identified  a  list  of  priority  projects,  on  which 
feasibility studies could be co-financed by the European Union in the framework of 
the Trans-European energy networks programme. 

The  revised  guidelines  for  the  Trans-European  energy  networks,  adopted  on  26th 
June 2003, include a number of electricity and gas infrastructure projects involving 
the Russian Federation. The new guidelines15 have designated as a priority axis the 
gas pipeline project connecting the United Kingdom and continental northern Europe 
with Russia.. 

The  importance  of  cooperation  in  infrastructure  development  must  be  underlined 
given the interest of oil pipelines as an alternative to maritime transport in the Baltic. 
Both  Scandinavian  and  Baltic  countries  are  particularly  concerned  by  the  growing 
number of tankers crossing the Baltic, multiplying the risk of an oil spill for countries 
with a coastline.  

15 

Proposal for a decision of the European Parliament and of the Council laying down guidelines for trans-
European energy networks and repealing Decisions No 96/391/EC and No 1229/2003/EC 

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The energy dialogue does not replace the private sector in carrying out the projects, 
which  are  based  on  commercial  and  economic  considerations.  Projects  are  labelled 
“common interest” only to ease their implementation, notably in the light of reticence 
on the part of investors to invest in Russia, given the degree of commercial risk. 

Other  ways  should  be  explored  for  oil  transport  to  avoid  overuse  of  the  Baltic  Sea 
and further congestion in the Bosphorus. One  of the solutions would be  to develop 
transport  by  rail,  particularly  given  the  current  upward  trend  in  oil  prices.  It  could 
also contribute to improving interoperability between the railway systems. 

3.4. 

The  energy  dialogue  smoothes  the  way  towards  market  harmony  across  the 
continent 

The energy dialogue has enabled the two parties to move closer and set the scene for 
closer relations in the future. It has opened the way for the convergence of strategies 
in the Russian and EU markets. The principles of the internal energy market, such as 
energy  efficiency,  reform  of  internal  industrial  structures,  reform  in  the  electricity 
sector  and  unbundling,  could  provide  part  of  the  reference  framework  for  the 
restructuring  of  Russia’s  energy  sector.  Even  if  the  two  markets  are  separate,  they 
should be inspired by shared principles.  

a) an interconnected electricity network 

Discussions  on  the  reform  of  electricity  systems  are  being  pushed  most  strongly. 
Indeed,  consideration  should  be  given  to  involvement  of  the  Russian  electricity 
supply  industry  in  the  Community  electricity  market,  given  forecasts  of  European 
electricity  needs16.  Thus  the  synchronous  interconnection  of  the  Russian  electricity 
network  with  the  EU  continental  network  was  entered  on  the  list  of  “common 
interest” projects agreed on at the EU-Russia summit of October 2001. 

To achieve this, many related issues will need to be resolved, notably those relating 
to  the  respect  of  environmental  standards,  nuclear  safety  in  Russia  and  reciprocal 
access  to  electricity  markets  with  due  respect  to  relevant  international  obligations 
incumbent on each party. 

16 

According to IEA and Eurelectric forecasts, between now and 2030, the EU could need to invest in new 
electricity capacities of almost 600GW in order to cover consumer needs. 

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A  Round  Table  held  in  Moscow  in  October  2003  analysed  the  conditions  which 
would  be  necessary  to  move  towards  a  common  electricity  market.  Among  the 
difficulties which were cited are:  

– 

– 

– 

The absence of a sufficient regulatory framework in Russia was observed in a 
report  from  March  2004.  Accordingly, 
in  September  2004,  Russian 
representatives  were  invited  to  take  part  in  the  Florence  Forum  of  electricity 
regulators.  A  greater  understanding  of  the  system  which  the  internal  market 
puts in place will enable an integration in due course of both markets. 

There  is  a  need  to  adopt  similar  environmental  and  safety  standards  for 
electricity production, such as clean coal combustion rules and the guarantee of 
nuclear safety17. 

The effective integration of markets requires the putting in place of necessary 
infrastructure for the joint use and synchronisation of the electricity systems of 
Russia  and  of  Member  States.  A  working  group  on  network  interconnection 
has been charged with analysing the current situation in this area. A feasibility 
study of the synchronous interconnection of the UCTE and IPS/UPOS systems 
is being carried out, financed by the European Commission and RAO-UES. It 
should be completed by 2007. 

The adoption of a financial guarantee scheme could ease the reform process in both 
the electricity and hydrocarbon sectors. 

b) reinforcing the security of infrastructures 

Energy is one of the principal fields that will benefit from satellite navigation. Its use 
in  the  sector  includes  the  whole  activity  chain:  exploration,  construction,  transport, 
and  including  site  monitoring.  Russia  is  carrying  out  an  ambitious  programme  of 
modernisation  of  its  GLONASS  system,  which  it  plans  to  open  up  for  civilian 
purposes.  The  European  programme  GALILEO  aims  to  set  up  by  2008  the  first 
global satellite  navigation system specifically designed for civilian and commercial 
applications. 

The  joint  use  GLONASS  and  GALILEO  is  an  objective  pursued  since  1999.  The 
complementary  use  of  the  two  networks  will  significantly  reinforce  the  safety  of 
energy transport infrastructures and energy production. 

The energy dialogue has helped to revive negotiations over the interoperability of the 
two systems. Progress to date suggests that an agreement on this matter is likely to be 
adopted by the end of 2005. Apart from discussions about the technical compatibility 
of  GLONASS  and  GALILEO,  co-operation  covers  the  joint  development  of 
receivers,  as  well  as  specific  applications  in  the  energy  field  (exploration, 
construction and maintenance of transport infrastructure). 

17 

The setting up of an independent nuclear safety control system should be welcomed. 

EN 

12 

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c) Providing investment guarantees 

The general investment climate in Russia must become more transparent, stable and 
predictable.  The  EU  continues  to  encourage  Russia  to  put  in  place  the  necessary 
reforms to this end. 

Russia’s accession to the World Trade Organisation will have a beneficial impact in 
this regard. Moreover, the objectives and action to facilitate trade and the protection 
of investments already underway in the framework of the European Economic Area 
should  also  make  a  positive  contribution  to  improving  the  investment  climate  in 
Russia.  

The  issue  of  the  improvement  of  the  financial  framework  for  energy  relations 
between  the  EU  and  Russia  has  stimulated  a  range  of  initiatives.  During  the  first 
phase (2002), the idea arose for a “guarantee fund for international arbitral awards”. 
This idea sought to remedy the latent insecurity of European companies faced with 
the  possibility  that  Russian  courts  would  not  transpose  international  arbitrational 
sentences  made  in  the  context  of  trade  disputes  between  European  and  Russian 
companies.  A  Commission-funded  feasibility  study  concluded  that  there  was  a  real 
problem, but that the idea would be financially extremely heavy for the Community 
budget  (in  the  order  of  500  million  euros),  even  without  giving  the  funds  the 
necessary  critical  mass  to  cover  adequately  the  projects  envisaged.  From  the  legal 
point of view, ratification by 25 Member States and by Russia would be necessary, 
and, moreover, providing such a guarantee would only prolong the poor functioning 
of the Russian legal system. 

Given  the  lack  of  viability  for  this  system,  an  alternative  initiative  was  developed, 
one which would be cheaper and in accordance with market rules, in the framework 
of a study the European Investment Fund carried out on behalf of the Commission. 
This approach was based on the observation that Russian operators - even at a time 
of  crude  oil  price  rises  -  do  not  have  satisfactory  access  to  international  monetary 
markets  and  particularly  to  very  long  term  financing.  The  development  of  eligible 
projects, with estimated costs of around 200-300 billion euros, would require access 
to financing beyond the current typical 5 year terms. Ideally, terms should extend up 
to  10  to  15  years,  even  more.  To  make  this  possible,  a  new  mechanism  was 
envisaged which would put in place an “Energy Desk”, possibly associated with an 
international  development  bank,  which  would  have  a  special  status  to  serve  the 
energy  dialogue.  In  particular,  it  would  play  an  active  role  in  setting  up  banking 
syndicates. The aim would be to bring in resources for developing projects in Russia 
over the longer term and at a lower cost by sharing the risk among several syndicated 
banks. 

The  costs  for  this  “Energy  Desk”  for  the  EU  would  be  limited  to  start-up  costs. 
Russian companies and authorities would not need to contribute. The initiative would 
form  part  of  the  PCA.  This  idea  would  have  to  be  developed  in  more  depth  with 
banks  and  companies  active  in  the  energy  area  to  ensure  its  full  complementarity 
with their activities. 

Other initiatives could be developed in parallel, notably an investment or guarantee 
fund  for  energy  efficiency,  which  would  seem  justified  given  the  size  of  energy 

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losses  (around  40%)  in  Russia.  This  fund  could  be  focused  on  targeted  support  for 
European companies active in this field in Russia. In any case, the design of such an 
instrument  requires  a  detailed  assessment  including  a  market  analysis  prior  to  its 
launching. It would require however a significant input from the Community budget, 
though it could be linked to the implementation of the Kyoto Protocol by Russia. 

Following  the  ratification  of  Kyoto,  as  well  as  preparing  an  investment  guarantee 
fund for energy efficiency, synergies could be considered to be achieved by putting 
in place flexible mechanisms linked to the Kyoto Protocol. 

4. 

CONCLUSIONS 

The  dialogue  has  demonstrated  its  usefulness  through  concrete  and  commendable 
results. The strategies and policies of both parties are leading to a closer relationship 
which is to be welcomed.  

The  Community  acquis  could  become  a  reference  framework  for  a  reform  of  the 
energy  sector  to  be  implemented  in  Russia.  This  reference  framework  is  more 
sensitive for the electricity sector than for the gas sector. The EU considers that this 
reform should be a priority for Russia as it is necessary in order to enable sustainable 
development  not  only  in  the  Russian  energy  sector,  but  also  in  the  whole  of  the 
Russian economy. 

Nevertheless  it  remains  the  case  that  many  questions  still  need  to  be  resolved  to 
enable  a  better  integration  of  both  markets.  In  the  future,  it  will  be  necessary  to 
emphasise such priority subjects as: 

– 

– 

– 

– 

– 

encouraging the process of reform in the Russian energy sector; 

developing  energy  efficiency,  technology  exchange,  the  environment  and  the 
implementation of the Kyoto Protocol; 

promoting and protecting investments; 

establishing a pan-European natural gas market; 

reinforcing  the  transport  of  oil  over  land  (by  pipeline  and  rail  rather  than  by 
sea). 

The  achievement  of  these  objectives  will  contribute  decisively  to  the  creation  of  a 
large continental market. 

Growing  economic  interdependence  between  the  EU  and  Russia  calls  for  more 
intense cooperation, particularly in the energy sector. The energy dialogue and those 
aspects specifically related to the implementation of the Kyoto Protocol contribute to 
the Common Economic Space and fall within the framework of the Partnership and 
Cooperation Agreement. 

EN 

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ANNEX  

Russian Federation 
2000                                      2020 
120 à 125 

146 

220 

6,3 % 

586 

4 

65 billion brl 
323 Mtoe 
+ 205 Mtoe 
+ 126 Mtoe 
or 60 % 
47 trillions m3 
490 Mtoe 
+ 175 Mtoe 
+ 90 Mtoe 
or 36 % 
157 billion ton 

116 Mtoe 

+ 12 Mtoe 

+ 4 Mtoe 
or 33 % 
158 000 ton 

2 500 ton 

 +16 000 ton 

4.200 ton 

/ 

900 

7,2 

/ 
500 Mtoe 
+ 330 Mtoe 
: 

/ 
 600 Mtoe 
+ 216 Mtoe 

/ 

190 Mtoe 

+ 23 Mtoe 

/ 

5 000 ton 

- 

- 

: 

Population  (million) 

PNB  (billion €) 

Growth p.a. 

Demand ( Mtoe) 

Demand per capita (toe/h) 

Oil  :     Reserves 

  Production 
  Export + /Import - 
Trade EU/Russia 

Gas        Reserves 
  Production 
  Export + / Import 
   Trade EU/Russia 

Carbon  Reserves 

   Production 

   Export + / Import  

   Trade EU/Russia 

Uranium Reserves 

   Production 

   Export + / Import 

   Trade EU 
15/Russia 

EU 25 
2000                                      2020 

453 

8 940 

2 % 

1650 

3,6 

6, 5 billion brl 
164 Mtoe 
- 518 Mtoe 
- 126 Mtoe 
or 25 % 
3 trillions m3 
197 Mtoe 
- 186 Mtoe 
- 90 Mtoe 
Or 50 % 
100 billion ton 

203 Mtoe 

- 91 Mtoe 

- 4 Mtoe 
or 5 % 
15 000 ton 

711 ton 

-15.800 ton  

- 4.200 ton 

462 

14 460 

2,4% 

1895 

4,1 

/ 
102 Mtoe 
- 632 Mtoe 
: 

/ 
147 Mtoe 
- 450 Mtoe 

/ 

124 Mtoe 

- 128 Mtoe 

/ 

0 

- 

- 

: 

: 

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