In the immediate future, on 1 May 2004 to be more precise, in connection with the European Union (EU) enlargement, the geopolitical situation for Belarus will objectively change: it will become "near abroad" not only for Russia, but also for the European Union. Approximately the same date is the target deadline for defining the shapes and parameters of the Common Economic Area (CEA) with Russia, Ukraine and Kazakhstan. When, back in September 2003, the Agreement on CEA was signed in Yalta by Russia, Ukraine, Belarus and Kazakhstan, many European experts began to speak about possible problems in the process of establishing the common area between Russia and the EU. Obviously, the "group of four" is presently just a framework agreement that cannot create any serious obstacles for the EU or for establishing the Common European Economic Area between Russia and EU (CEEA) - until its actions are assured not to counter bilateral obligations that already exist between these states and the EU. The EU verbally supports the aspiration of these countries to have larger economic and regional integration, but in practice it has been made clear that there are certain limits to integration between the "four".

Whether this situation will bring more good or evil to Belarus depends on numerous factors, but the present state of affairs testifies to the fact that conflicts and crises are inevitable. Both sides declare that the new EU borders after enlargement should not become new dividing lines. But in reality everybody understands that in many ways this will exactly be the case. As many political scientists see it, we currently witness the appearance of an alter-native model - "Europe of Two Empires," where the EU and Russia turn into two power centres because of their criss-cross spheres of influence and zones of colliding interests, primarily Ukraine, Moldova, Belarus, and Georgia. In other words, the EU gradually shifts from a policy of flirting with Russia towards traditional ways of solving conflicts of interests, primarily in the economic sphere. Further relations between Russia and the EU and their impact on the "no man?s land" between them will depend upon whether they learn to exist as two competing power centres. However, today we should admit that both sides are not easily adapting to the new situation and have not yet managed to accumulate experience in solving mutual conflicts on a large scale by diplomatic means.

In February 2004 we saw the deterioration of relations between the EU and Russia. There are three blocks of issues involved in the dispute: problems related to the EU enlargement, terms of Russia joining the World trade Organisation (WTO) and the Kyoto Protocol. Clearly, this is not an exhaustive list of disputable issues. For instance, the Russian requirements also include increasing Russian grain import quotas, revision of anti-dumping investigation policy with respect to Russian goods, the status of Kaliningrad, cancellation of the visa regime for Russian citizens during trips to Schengen states, the situation with the Russian-speaking population in the Baltic states, while the EU demands are reforming and liberalising Russia?s gas market, readmission of illegal immigrants, democracy and legal supremacy issues, support for free elections in Belarus and Ukraine, etc. However, these three key problems that were mentioned above should become the subject of deals to be finalised by 1 May 2004, i.e. by the beginning of the actual EU enlargement.

Priorities - CEEA, CEA, EU?

Establishing the CEEA between Russia and the EU was announced in 2001. The CEEA is

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Dr. Dmitry Kurochkin -Adviser to the Chairman of the Board, Belvnesheconombank (Minsk); member of the Board of Executive Directors of the European Business Congress e.V. (Berlin).

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under-stood as an open and integrated market between Russia and the EU that in the long run should encompass the majority of economic sectors. It envisages non- discrimination, transparency and corporate governance of economies, stimulating mutual trade and investments, as well as harmonisation of legislation. However, for clear reasons, the Energy Dialogue has made up the core of the CEEA discussion.

The idea of Energy Dialogue between the EU and Russia was firstly articulated by Prof. Romano Prodi, President of the European Commission, in 2001. In his view, Russia, in exchange for European investments, should act as a guarantor for growing EU needs in energy sources. It was intended to be a kind of testing ground for new approaches, organisational forms and financial mechanisms of bilateral co-operation.

In the long run, an integrated energy community between Russia and the EU is expected to emerge, which could satisfy the demands of European consumers. By 2020 the EU is planned to increase energy sources import from today?s 50 per cent to 70 per cent of the total consumption volume. Although the long-term energy strategies have been developed in Russia and the EU independently, with primary consideration of their own interests, it is no doubt that the energy sphere will eventually define the strategic competitiveness of both Russia and the EU. As a result, it is not by chance that these strategies were adopted simultaneously. The joint discussion of "Energy Strategy of Russia for the period up to 2020" and reports of the European Commission "Tendencies of European Energy and Transport Sector up to 2030", as well as the EU "Green Book" "Towards the European Strategy for Providing Energy Security" took place in 2003. The Russia-EU energy partnership opens new opportunities to be able to respond to an important challenge: reliability of consumers? power supply in EU countries following its enlargement in the environment of an open competitive market.

The leading role in the Energy Dialogue between the EU and Russia belongs to the largest Russian and German companies such as Gazprom, E.ON/Ruhrgas, UES of Russia, Lukoil, Wintershall, Ferrostaal, Siemens and some others. The majority of these companies are united into the European Business Congress e. V. (EBC) - an international non-governmental organisation existing within the framework of the economic dimension of Organisation for Security and Co-operation in Europe (OSCE). One of its objectives is to promote sustainable dialogue between politicians and business-men, and its efforts are aimed at prevention of asymmetry and asynchronisation of integration processes in European business landscape, in particular the EBC is seeking at least not to widen the gap between those countries that are directly involved in the EU enlargement and those who will stay, due to various reasons, beyond its new borders. The EBC closely co-operates with the UN Economic Commission for Europe, European Bank for Reconstruction and Development, European Commission, European Parliament, and European Investment Bank. Practical work is being realised by six working committees: Law, Banking and Finance; Energy; Information and Communication; Ecology and Health Care; Business Security; Industry and Construction. Now the EBC enters a new stage of its activity related to the gradual liberalisation of the energy markets in the EU and Russia. In general the European Business Congress possesses significant potential and rich experience to obtain positive results in facilitating the EU - Russia Energy Dialogue. In 2004 the "Energy Summit" of leading Russian and German companies is expected to be held to discuss the most urgent problems in the sphere.

During the Energy Strategy Conference on October 17, 2003, both parties emphasised the their growing interdependency and their commitment to harmonize their legislation in energy sphere. They also examined the sphere of norms and standards in the energy sector.

The fourth general report The Energy Dialogue Russia - EU (November 2003) provides information on the measures that are under way within the framework of the Energy Dialogue and defines priority guidelines: energy markets integration; joint projects in the sphere of energy infrastructure; nuclear materials trade and cooperation in the sphere of nuclear power; arbitration decisions fulfilment fund; reliability of energy sources transportation networks and issues of maritime security; establishing the joint centre of energy technologies; and energy efficiency problems. Thus, introduction of investment support mechanisms for lowering non-commercial risks may have a real impact on investment capital flows into the Russian energy sector. Therefore, the European Investment Fund in cooperation with the European Bank for Reconstruction and Development carries out the feasibility study of this scheme (research results are to be submitted later this year). A special fund is planned to be established to secure the fulfilment of arbitration decisions at the European Investment Bank (in case the Russian participants of the project are incapable of repaying the loan to the investor and the Russian Government refuses to implement the arbitration decision, the investor?s losses will be compensated by the fund). In 2003 the joint

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Centre for Energy Technologies began its work. Its main task is to intensify cooperation in the sphere of up-to-date energy technologies in oil, gas, coal, electricity, new and renewable energy sources and energy-saving mechanisms.

However, over the recent period the parties failed to implement any big investment project. This testifies to the fact that the real interests of Russia and the EU do not always coincide with the declared goals. According to European Commission member G. Verheugen, responsible for the EU enlargement, "in the dialogue between the EU and Russia there are many plans, but practically no deeds; many strategies, but almost no progress; many common views, but few concrete actions". As Dr. V. Milov, President of the Russian Institute for Strategic Development of the Energy Industries, sees it, the parties do not want to admit that Russian companies in most cases do not really crave European investments since this implies the sub-sequent arrival of foreign competitors. On the other hand, the EU fears excessive dependency on Russian energy sources and declares import diversification. In fact, in order to have energy dialogue filled with real content the EU should fix the long-term contracts in its legislation, while, Russia should, under equal terms, admit Europeans to raw materials extraction, Gazprom pipeline system and cancel export duties, and both seems to be unacceptable at the present moment for either party. Meanwhile, large Russian companies are able to attract loans outside the framework of the Energy Dialogue. For example, the "big five" Russian oil companies do not need the EU for realisation of the $4bn Western Siberia - Murmansk pipeline construction provided the Russian Government secures the stability of tariffs for oil pumping.

Currently, experts from Russia and the European Commission together with European companies are studying the opportunities to intensify integration in three leading sectors of the Energy Dialogue: electric power (including nuclear power), oil and petrochemical industry, and the gas industry.

Electric Power Industry

A real breakthrough in the electric power industry is the basis for development of other aspects of economic relations between Russia and the EU. In 2003 a joint decision to begin preparation of power supply systems for synchronisation (the EU has four power supply system zones while Russia has one common system) in order to provide a free overflow of electric power and establish a free market. The idea of parallel work of power grid systems from Lisbon to Vladivostok has entered its practical realisation. In 2004 the parties should finalise the schemes for EU and Russia movement towards the establishment of the common energy community. The technological aspect of this step should increase the reliability of the power system at the expense of capacity redundancy. A tentative date for synchronising the work of power systems is 2007 (by this time liberalisation of the EU energy market should be finalised and reformation of the Russian electric power industry are supposed to be completed). Starting in 2004 the EU power systems have begun legal documentation of the process of dividing the activity of power systems into production and sale of electric power. By July 1, 2007 the networks are expected to be fully separated.

During the Power Energy Round Table held in Moscow on 16 October 2003 it was noted that reaching some progress in this sphere requires a prompt development of common view with respect to the equivalency of existing and envisaged market and ecological rules of the EU and Russia. Taking into consideration the needed unity of the two systems the parties called upon representatives from the Union for the Coordination of Transmission of Electricity (UCTE) and the Unified Energy System (UES) to apply joint efforts toward carrying out all necessary studies aimed at studying conditions that enable unification of networks and their stable operation.

Nowadays the common power system managed by Moscow includes as many as fourteen independent states. Beside economic benefits for all participants of the process related to an increase in reliability, there is a basis for synchronisation with EU states. The synchronisation has political, economic and technological meaning. First of all, this is a cheaper alternative to construction of the direct current links that cost $40-50m. The technological aspect is that capacity redundancy will allow improvement of reliability of work of the two power supply systems. After system break-downs in a number of EU countries in 2003 this factor has become more relevant. In the political context, synchronisation leads to openness and transparency of the economy.

The nuclear power policy makes up an integral part of the energy strategies of Russia and the EU. One of the main elements of such interaction is the Co-operation Agreement in Nuclear Security signed in October 2001. In 2003 the parties agreed to extend co-operation in the sphere of nuclear power in general, including its development, security enhancement, fuel cycle improvement, non-proliferation, registration, control and physical safety of nuclear materials. Negotiations on the issues

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related to the trade of nuclear materials began in January 2004.

Oil and Gas Industry

In the oil industry Russia and the EU recognise the necessity to increase co- operation by means of information exchange about production, consumption, prices and forecasting. The European Commission intends to appoint an oil market monitoring supervisory service in which Russia could also be involved. As far as the possibility to transfer of settlements for Russian oil and gas export into the euro is concerned, Russia stated in 2003 that it is within the competence of individual suppliers and their clients.

Within the framework of the Energy Dialogue both parties set the task to provide the maximum possible level of ecological security of crude oil and oil products transportation, including infrastructure and equipment of oil terminals and sea tanker stability in difficult climatic conditions. Europe is deeply concerned with this problem since 90 percent of oil is imported mainly by seaway. To secure the high level of reliability of transportation of hydrocarbon materials, the opportunity of using a regional satellite monitoring system is being studied that could be deployed on the basis of Russian navigation satellite system GLONASS and future European navigation system GALILEO.

Further integration in the gas industry based on coordinated principles of regulation and long-term contracts will allow the improvement of stability of supplies and creation of mechanisms for funding important infrastructure projects. The parties fixed that long-term export contracts will play an important role in providing stable and reliable supplies of natural gas to the EU market, while Russia expects that the EU enlargement should not influence the existing long-term agreements and hamper the conditions for existing supplies.

Recently the most discussed gas project, both in Russia and in Europe, is the Northern European gas pipeline (NEGP). Its realisation will allow direct connection of the Russian gas transport networks with European ones. The pipeline should be routed through the Baltic Sea area from Vyborg to the German coast and then to the United Kingdom. Its approximate capacity is estimated at 20 to 30 billion cubic metres of gas per annum. Construction cost is estimated at $5.7 bn. Following preliminary forecasts, the first supplies of gas through this pipeline should start in 2007. In case of successful implementation, Gazprom plans to get rid of some of traditional problems that have plagued its transit with countries like Ukraine and Belarus. In general, the EU manifests commitment to realize the project and intends to take part in funding research and construction works. In 2000 the European Com- mission assigned TEN (Trans-European Networks) status to the project. Some German (Ruhrgas and Wintershall) and Dutch (Gasunie) companies have shown intention to participate in financing construction of the system, while Dresdner Bank (Germany) and ABN Amro (the Netherlands) were officially approved as financial consultants, while Linklaters - the legal consultant of its feasibility study development.

Among the most important problems to be settled in the sphere of the Energy Dialogue are the legal issues, since the energy sector is regulated mainly by specific legislation. Another problem is setting up instituted relations between Russia and the EU in the sphere of power energy, which should prepare the foundation for establishing a common energy community. In fact the European Energy Charter Treaty signed by Russia in 1994 has lost its historical significance and even the EU Energy Strategy gives practically no reference to it. Never-theless, it remains the only international legal document regulating energy problems, in particular, the problem of energy resources transit. Russia remains one of the five countries not yet to ratify the document due to linkage of the Energy Charter Treaty and the Transit Protocol.

Problem of Transit of Russian Energy Resources to the EU Member States

The problems Russian companies experience in transportation of their energy resources into the EU are related to transit tariffs. Meanwhile, 95 percent of Russian energy sources are supplied to the EU through the third countries. The EU initiated the "Regional Integration Amendment" to the Transit Protocol which proposes withdrawal of energy sources transportation through the territory of EU member states from the sphere of Transit Protocol regulation, having announced it to be "domestic transportation" through the territory of the European Union.

In the context of the EU enlargement the main problem for Russia transit-wise is four non-candidate countries: Ukraine, Belarus, Moldova and Croatia (with consideration of the project on Druzhba and Adria oil pipeline integration and possible arrival of Russian oil to the Croatian port Omisalj). Three of them have ratified the Agreement, while Belarus has signed it. Russia fears losing control over the goods flow in the conditions of Trans-Caspian, Trans-Afghan and other strategic gas pipelines. Thus, the gas pipeline from Iran via Turkey lobbied

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by the EU is expected to provide Iranian and Turkish gas supplies to Western Europe.

It is not a secret that discord in the Russian and EU views on the necessity to make Russia undertake obligations to reform the Russian gas industry as a condition for joining the WTO still remain the key "stumbling block" on Russia?s way to the WTO. The EU insists that domestic Russian gas prices should cover expenses for its production, supports cessation of Gazprom?s monopoly in gas export, puts forward the requirement on freedom of gas transit, demands permission for foreign investors to con-struct pipelines, speaks in favour of levelling domestic and export gas transit prices, suggests cancellation of export duties for gas set by Russia. Terms of the Energy Charter are rather close to the WTO rules and coincide with EU requirements to Russia for joining the WTO regarding the freedom of energy resources transit. If Russia refuses to ratify the Transit Protocol, it will be obliged to undertake more strict transit obligations unilaterally upon joining the WTO.

Russia?s "gas obligations", however, are not considered regular WTO rules. Why does the EU categorically demand Russia to fully liberalise its domestic energy resources market, while the EU itself has taken it up? According to the words of European Commission member Pascal Lamy at his negotiations in Moscow in October 2003, the EU "insists on making you divide your natural energy monopolies simply to make it convenient and profitable for our (i.e. European) companies."

Problem of Liberalisation of Energy Markets in the EU and Russia

Liberalisation of the energy (primarily, gas) market in the EU has become a serious test for the Energy Dialogue. Back in 2000 the EU issued so called Gas Directive stipulating access to transport networks for the third companies. In other words, any gas producer will be entitled to gain access to the pipeline irrespective of its property. The Gas Directive was aimed at lowering gas prices by multiplication of suppliers. It creates an absolutely new situation on the market. As before, a key element of Gazprom export policy was, and actually still remains, long-term contracts in the form of inter-governmental agreements. Now, more an more functions for management of economic processes are being shifted from national governments to the EU structures that, in the future, will define the rules of the game on various markets.

The process of EU energy market liberalisation began in 2002, while finalisation in planned for 2005. For instance, since 1 October 2003 pursuant to EU Directives new game rules were introduced at the German market. Now German companies having gas pipelines in their property should provide their transport capacities to other suppliers that have contracts for gas supplies to consumers. Moreover, in case the share of gas supplies exceeds 50 percent of the total volume of gas purchased by the gas distribution company, the latter has the right to cut this share by 20 percent despite the existence of a long-term contract.

Under the existing contracts, countries that purchase Russian gas cannot re-export it. On the contrary, a new EU doctrine allows gas buyers to do with it whatever they want, including re-exportation. Gazprom plans to gradually withdraw from the legal formula of prohibition of gas re-exportation in order to replace it with economic sanctions that would make it unprofitable. On the other hand, Gazprom may obtain profit from German gas market liberalisation: today it sells gas to gas pipeline owners, but later it will be able to make direct supplies. Due to the appearance of new players on the market Gazprom, whose 90 per cent of export falls to Europe, will be forced to cut export prices under its long-term contracts.

Belarusian Direction of the EU - Russia Energy Dialogue

In the context of existing energy policy of the EU and Russia the persistence of Belarussian government to retain the ownership of the main gas transport system and electrical industry at any price cannot but generate questions among experts. For them it is obvious that rapidly aging pipe-lines, machinery and equipment without cheap energy resources and investments for their main-tenance under present conditions is nothing but an illusion of energy security. It is the experiences of many EU member states, where generating and transmitting capacities are in the hands of large transnational companies, that testify to the fact that there are no threats to national economy. As modern energy policy is based on energy-saving, energy efficiency and high ecological standards, it is only its inefficiency that could be a real threat to the Belarusian economy energy-wise.

We cannot but agree with the opinion of some Belarusian experts (Dr. Vladimir Dashkevich, to mention just a few) that the problem of energy security for Belarus lies not so much in where the country would get energy resources and who generates the electricity, but how these resources are used. Therefore, Belarus should work out its energy strategy in the pan-European context, while a good option could be a sustainable alliance of

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Gazprom and UES of Russia with their leading Western partners, to whom a part of the state share stocks could be sold.

Energy sources price growth up to 80 per cent of the European level for Belarusian enterprises is inevitable in the forthcoming years. As far as the future European gas prices are concerned, they may make up € 130 per one thousand cubic metres by 2008, according to Boston Consulting Group recent research. Meanwhile, consumption could grow by 30 per cent as a minimum. In the majority of expert opinions, liberalisation of the gas market will encourage prices to be lowered only for a short period of time. By 2010 Europe could face a deficit of gas supplies in connection with increased consumption and closing of a number of nuclear power stations in Germany, Sweden and other EU states, and exhaustion of North Sea gas deposits.

Thus, the only reasonable strategy in the sphere of energy resources for small transit countries like Belarus is an economic restructuring and sub-sequent adjustment to the common European energy market, where the role of Russian energy resources and energy companies will steadily increase. Otherwise, its competitive advantages and investment attractiveness will be impeded.

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