Friday, January 29, 2010

Pipeline politics: Why Nabucco is stuck

by Katinka Barysch

Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.

Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.

Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.

Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.

Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.

The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.

South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.

The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.

The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.

Katinka Barysch is deputy director of the Centre for European Reform.

Friday, January 22, 2010

China’s peaceful rise turns prickly

by Charles Grant

Have western attitudes to the rise of China been based on wishful thinking? China’s increasingly tough approach to diplomacy is leading governments in the US and in Europe to rethink their policies towards China. Western leaders are starting to question some of the optimistic assumptions on which those policies have been based.

Until very recently, many western bankers, business people and politicians were broadly optimistic about the rise of China. They assumed that as China became more developed it would become more western. As it integrated into the global economy its society would open up, it would play a constructive role in multilateral institutions, and it would help western governments sort out key foreign policy challenges. China’s leaders seemed to understand that their top priority – the economic development of their country – required friendly relations with other major powers, notably the US.

There has also been a pessimistic view of China’s rise, held by people in the US defence establishment, some right-wing think-tanks and the human rights lobbies. They have argued that as China develops it is becoming more assertive, less willing to compromise with the West, less welcoming to foreign investors and more repressive politically. Like other rising powers throughout history, the pessimists have thought, China would disrupt the international system. They have pointed to China’s soaring defence budget as support for their case.

Of course, both views have been based on truth. China is not a monolithic entity. Within the leadership, many institutions and personal and ideological factions compete for power. But until recently the optimists dominated western views of China. I was an optimist when, two years ago, I wrote (with Katinka Barysch) ‘Can Europe and China shape a new world order?’ ( Our report argued that China was evolving into the “responsible global stakeholder” that Robert Zoellick had urged it to become when he was US deputy secretary of state.

Over the past year the optimists have found it increasingly difficult to sustain their view. There are still examples of China being helpful – for example, it has sent ships to catch pirates in the Indian Ocean, and engaged in G20 discussions – but overall it has become a much pricklier partner.

China’s foreign policy has become more assertive. Its claims to the Indian state of Arunachal Pradesh have become more vociferous. It is being less helpful to the West over the Iranian nuclear problem – and has become more hostile than Russia to further sanctions on Iran. Its treatment of the EU is sometimes contemptuous – it cancelled one summit and regularly punishes countries whose leaders meet the Dalai Lama in an official setting. Western governments have suffered increasingly powerful cyber-attacks that have been traced to mainland China.

China’s political system has become more repressive. Moves to introduce greater democracy into local government and the Communist Party have faltered. Dissidents are facing a tougher time. In December Liu Xiaobo was sentenced to 11 years in prison for organising a pro-democracy petition.

China’s economic policies have become more nationalist. Many foreign investors in China complain about exclusion from key markets and unofficial forms of discrimination. China’s manipulation of its currency downwards, driven by a mercantilist desire to boost exports and foreign currency reserves, exacerbates the problem of global economic imbalances and is fuelling protectionist sentiment in other countries.

Recent events have brought home to public opinion in the West how China is changing. At the Copenhagen climate change conference in December, China worked hard behind the scenes to scupper the kind of deal that western countries and many poor nations wanted (at one point it sent a deputy foreign minister to negotiate with Barack Obama). And this month Google has said that it may leave China because of cyber attacks on its business and increasingly stringent internet censorship.

If one talks to people in China about the troubled state of relations between China and the West, many of them are baffled. They know little of the incidents that have caused problems, which are unreported in the Chinese media. They say that most Chinese people are focused on domestic issues – such as jobs, pollution and soaring house prices – rather than foreign policy.

So the source of China’s tougher line seems to be the leadership, rather than pressure from the people. Three factors may explain why hard-liners are winning more arguments within the leadership.

• China’s economy has performed impressively during the global recession, growing by 9 per cent in 2009. Meanwhile the western economic model is viewed as discredited. China’s leaders would not be human if they did not feel a bit cocky – especially since they have been on the receiving end of patronising lectures from western leaders about the superiority of western capitalism. The emerging super-power feels it has the right to assert its own interests more forcefully.

• Yet China’s leaders feel insecure. The unrest in Tibet (in 2008) and Xinjiang (in 2009) caught them by surprise. Rapid economic growth and urbanisation are creating huge social tensions. Endemic corruption makes local party bureaucrats unpopular. The booming housing market – fuelled by the government selling land to property speculators – means that many young middle class people cannot afford to buy flats. Few Chinese people want western-style democracy, but the leaders know their legitimacy is built on thin foundations. Hence their reluctance to allow a more open society.

• The current leadership, led by Hu Jintao and Wen Xiabao, is due to hand over to the ‘fifth generation’ of leaders in 2012. There is much manoeuvring for position. The machinations within Zhongnanhai, where the top communists live and work, are impossible to decipher. But some key figures seem to be pushing a nationalist line in order to boost their support among party cadres. In China, as in most countries, nationalist policies can be popular.

American attitudes to China are palpably hardening. At some point this year the US may declare China to be a currency manipulator and then apply protectionist measures. The EU finds it very difficult to get tough with anyone. But European leaders are increasingly critical of China, at least in private. China’s leaders should not assume that European markets will remain open to them indefinitely.

China’s attitude to international relations is ultra-realist. It will take what it can get, while respecting power and facts. But China’s leaders may have miscalculated by underestimating the impact of their harder line on Washington and European capitals. How well-informed are the people in Jonghnanhai? Do they receive objective reports on how Chinese words and actions impact on western political systems? And do they care what western leaders think?

Undoubtedly, there are Chinese leaders who stand by the premise of the ‘peaceful rise’ slogan – that China’s economic development requires some modesty in international affairs and good relations with the West. When the most senior leaders see that their current approach may spur several powerful countries to work together to contain China, they may wish to modify their course. But if they maintain the hard line for a prolonged period, China’s relations with the West will become very tense. Free trade and the world economy may well suffer.

Charles Grant is director of the Centre for European Reform.