GENERAL CONCLUSIONS AND POLICY RECOMMENDATIONS 1. Flaws of Current Reulatory Framework of EU-Russia Energy Relations

The position of the EU in energy relations bears out the need for good relations with Russia. Indeed, the EU‘s position is particularly sensitive: it is a large energy importer, with few transit routes, relies mostly on eastward states for energy transit, and on top of all of this, its energy needs are growing. Consequently, the EU needs Russia to once again begin the process of modernising its energy cooperation. In particular, even though Russia withdrew from the ECT, it still could participate and even positively influence the Energy Charter process. As it follows from this study, not only could Russia participate in the Energy Charter process, but it should do so.

However, Russia does not appear being more enthusiastic to participate in the Energy Charter than it has been since the conclusion of the ECT. Nevertheless, improved international relations in the field of energy are in the interests of Russia and its economic development. Thus, given the current situation of the energy market, a decrease in oil and gas prices may negatively influence the Russian economy, since the latter is closely tied with the country‘s petroleum exports. In addition, Russian petroleum giants are eager to gain access to downstream assets in Europe, which count on selling their goods and providing their services to Europeans as final consumers. Then, the country needs more advanced technologies and investments from European partners, since Russia will explore its petroleum fields under ever more difficult geological and climate conditions.⁵⁹⁴ Though Russia recently expressed its intention to contribute to the creation of a new international energy order, for the moment its proposals are very general and lack details.⁵⁹⁵

Increasing amounts of all kinds of energy-related transactions between Russia and the EU clearly require a solid international legal basis. An international regulatory framework that intends to secure energy supplies has to take into account the strategic interests of both the EU and Russia. However, the international rules which are currently in force and that could apply to EU-Russia energy relations are in general not designed to either effectively resolve conflicts that may arise between the two parties, or to tangibly enhance their cooperation in the energy field. Moreover, some of them seem to reproduce the asymmetries between Russia and the EU, the former as an energy exporter and capital importer, and the latter as an energy importer and capital exporter.

More specifically, on the EU-Russia Energy Dialogue, this analysis demonstrated that while the Dialogue is coherent with the existing regulatory framework of EU-Russia energy relations, its binding character and its operational effectiveness are limited by its consultative nature. The previous PCA regulated the political and economic relations between the EU and Russia and was the legal basis for the bilateral trade and investment relations of both partners. However, based on GATT rules, the PCA did not address energy per se. Now Europe and Russia need to conclude the PCA‘s successor – a Partnership Agreement, which has to comprise a comprehensive energy chapter. Since the GATT does not contain provisions that address energy sector, this chapter has to be based on ECT rules and principles. Until recently, the ECT itself applied to EU-Russia energy relations.

The ECT was primarily designed by the Europeans to include Russia in at least one multilateral treaty on international trade and investment. Moreover, since the ECT is a unique treaty dedicated to trade and investment in energy, the fact that the energy sector is the most capital intensive and risky business field,

594 E.g., in April 2010 Russia and Norway signed off the pact to amicably divide oil and gas interests across a long-disputed Cold War border in the Barents Sea. Gazprom‘s stake which is now free to explore is huge Shtokman gas discovery on the Russian side, a reservoir that alone holds enough gas to meet the world's entire consumption for a year. See Dyomkin, Denis and Gwladys Fouche (2010). ―Russia and Norway strike Arctic sea border deal‖, April 27, 2010, Reuters. URL:

http://uk.mobile.reuters.com/mobile/m/FullArticle/p.rdt/eUK/CWORUK/nworldNews_uUKTRE63Q1NG2010042 7 , retrieved on April 27, 2010.

Also, global climate change brought unprecedented long freezing seasons to Russian North-East regions, where a lot of Russia‘s oil and gas fields are located.

595 See supra, pp.38-39.

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and that Russia is a very special European trading partner, makes the Treaty theoretically the best adaptation of the regulatory framework of EU-Russia energy relations. On investment and transit of energy, the EU values most the security of its energy supplies through protected diversification of sources and a safe route of energy transit. Russia, on the other hand, emphasises its sovereignty over natural resources. As such, the ECT appears to be the best option for governing EU-Russia energy business with regards to investment and transit.

Yet, in practice the stakes come out much more complicated. On investment, recent rulings on the Yukos cases confirmed that Russia is bound by the ECT for the next 20 years regarding investment made there during its provisional application of the Treaty. Notably, Russia did not agree with the complainants‘

arguments in, and was not at all satisfied by the preliminary ruling of, the three related ECT cases. This fact highlights that the ECT, while representing a solid legal framework for the investment exchanges of the contracting parties, including the EU and Russia, does not contribute to the entente and further cooperation of the two antagonists.

But whereas the investment provisions of the Treaty are designed generally to protect investments in all ECT member states, and thus challenge any contracting party that fails to respect them, Russia including, the transit arrangements within the Energy Charter seem to be designed expressly to regulate energy transit between Russia and the EU. This time it is not the Energy Charter that challenges Russia, but vice versa. For instance, the draft of the Transit Protocol was the main focus of EU-Russia quarrels over the ECT. The delay in the Protocol negotiations became a stumbling block to the entire Energy Charter process. Then, during the provisional application of the Treaty, Russia was persuaded that the freedom of transit might have brought about third-party access for Central Asian producers. Consequently it warned against a transit corridor from Central Asia to Europe through Russia, as the latter corridor would result in Russia losing control over energy flows. Finally, the tensions mentioned above resulted in Russia‘s declaration that it was not satisfied with the Energy Charter in its present state, mostly because of the Charter‘s transit regime.

Thus, the energy investment and transit-related asymmetries between two partners are unfortunately present on different levels. That is, while the EU-Russia Energy Dialogue and the PCA had not been able to offer an efficient legal basis to EU-Russia energy relations in general, the ECT seems to reproduce disagreements between Russia‘s government and European private investors – on investments, as well as between the two parties on a governmental level regarding energy transit. The latter issue also involves additional actors, namely the governments of other contracting parties to the ECT, transit states, as well as Energy Charter bodies, such as Energy Charter Secretariat.

Finally, recent legal developments demonstrate that in the energy investment and transit field both Russia and the EU tend to implement restrictive instruments and separate unfriendly actions. During Russia‘s provisional application of the ECT, the lack of progress on new possible international regulatory frameworks seemed to keep the situation deadlocked. It could be seen from this angle exactly due to the fact that at that time energy investment and transit through Russian territory was formally governed by the ECT, which perhaps made Russia feel the need to ―exempt‖ itself from negotiating seriously other relevant international agreements relevant for trade in energy. Today, energy investments and transit between Russia and the EU are not governed by any multilateral agreement, and this should not be seen as an even greater impasse, but, on the contrary, a moment of impetus. Indeed, such a situation could urge Russia to seriously consider negotiating an agreement which would create a solid legal basis for its external energy relations. In addition, it could drive both Russia and the EU to think more about mutual interests, to make more mutual concessions, or at least, not to continue unfriendly proceedings of the époque of the ECT‘s provisional application on Russian territory.

2. Prospective Solutions for the Future Regulatory Framework of EU-Russia Energy Relations

As it was stated above, if the EU and Russia aspire to finally create an efficient regulatory framework for their energy relations, the stakes for both partners should be taken into account, as well as some mutual concessions are needed to be done.

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In doing so, at the outset several important issues have to be taken into account. First, gas pipelines have remained a problematic issue with respect to ensuring security of supply for both the producer, i.e. Russia, who bears loss of income, and the consumer, that is the EU, who undergoes energy supply disruptions.

For both of them this implies losses in diverse sectors of their respective economies. As it follows from the analysis of this study, various instruments and actions undertook by the two parties individually in the field of energy transit, create shortcomings which do not match convergent interests of the EU and Russia. Nor do these guarantee the stability and security of energy flows between them. Therefore, in addressing the question of what legal alternatives exist to date for securing energy supply in view of EU-Russia energy cooperation, it appears that such alternatives were not yet developed.

Second, in respect to the Treaty of Lisbon, the competence of the EU institutions in the area of the FDI is under a process of expansion. In applying these to the matter of investment protection in EU-Russia energy relations, the expanding Union‘s competence on inward FDI-related matters could create conflicts in the future. Namely, the Commission‘s growing decision-making power regarding negotiations on different phases of investment in BITs with third countries, as well as the Council‘s related ―police‖ power, could affect not only future investment negotiations, but also existent BITs with third countries.⁵⁹⁶ If conflicts arise, they could be brought to the appropriate international investment arbitrations. When it concerns energy FDI, these could be settled under the ECT dispute resolution mechanism, if both the claimant‘s and the defendant‘s countries are parties to the Treaty. That is, Russian investors for instance could not benefit anymore either from the ECT investment protection, or from its investor-state dispute settlement mechanism.

Third, Russia has its own legislative ambiguities to address regarding its international relations in the field of energy. Aside from some uncertainties relating to contractual provisions and enforcement of arbitral awards, which are brought about with recent legislative modifications,⁵⁹⁷ Russia‘s energy policy papers seem to omit an important issue. Namely, it seems that they do not pay enough attention to transportation. In other words, they aim to introduce competition into branches of energy supply such as exploitation and extraction, but not into the transportation system. On the other hand, as Andrews-Speed noticed, the most powerful of state-privileged entities are those that possess and operate transportation infrastructure, because in the absence of an effective regulatory regime, they can deny access to the infrastructure by other companies.⁵⁹⁸ This theoretical observation is confirmed empirically, particularly in Russia. That is, it is worth recalling that in Russia by law 15 percent of the pipeline capacity is reserved for independent producers, but Gazprom for example could claim a lack of spare capacity which is quite difficult to verify, and by this means, refuse the access to the transportation pipelines.⁵⁹⁹

Therefore, on the first issue, namely, developing regulatory instruments to foster EU-Russia energy cooperation through securing energy transit, Russia‘s recent proposal point in the ―new Energy Charter‖

related to new investments should be taken into consideration with several details. It should be reminded that Russia suggested to formalise the idea of non-discrimination at the pre-investment phase. The exact wording of this proposal is as follows: ―non-discriminatory investment promotion and protection, including new investments in all energy chains‖. It could be argued that ―all energy chains‖ comprise energy transit. On the other hand, the original text of the ECT contains in respect of the pre-investment phase such words as ―encourage‖ (ECT art.10 para.1) and ―endeavour‖ (ECT art.10 para.2). If the text of ECT art.10 could be incorporated in a new agreement, and such words could be replaced in relevant parts

596 For details see supra, pp. 61-62.

597 For details see supra, pp.44-48.

598 Most ECT signatory states, even those in Western Europe, have either given or allowed some of their energy companies to attain a privileged status (Electricite de France, ENEL of Italy, RuhrGas of Germany, Gazprom and Transneft of Russia, MOL of Hungary, and Rompetrol of Romania). Whether fully or partially privatised or wholly state owned, each will continue to use political and economic means to defend its access to resources, transportation, and markets on its

―home‖ territory. The ECT unambiguously gives the home state the responsibility of preventing this behaviour. At the same time, these enterprises are now in the position to invoke the terms of the Treaty to gain access to opportunities and infrastructure in other signatory states. See box 2, namely on p.69.

599 See supra, p.29.

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by ―guarantee‖ and ―secure‖, this could constitute more robust protection with regards to a non-discriminatory regime for new investments in petroleum, including transit.

On the second issue, the compliance of European law, including recent modifications with the current and future international agreements in energy investment and transit, remains unclear. This applies equally to the existent EU‘s obligations under the ECT, and also to possible Union commitments in the context of prospective EU-Russia agreements on energy cooperation. Indeed, in the case when a state adheres to an international treaty, the international law is normally incorporated into this state‘s legal order, either immediately (monism)⁶⁰⁰ or through a transposition/reception process (dualism)⁶⁰¹. In both cases, if a state ratified an international treaty, the legal rules of the latter prevail over domestic ones. However, these theories could not be applicable with EU law. Indeed, the EU itself was initially founded by an international treaty, i.e. the Treaty of Rome, and from this standpoint it is originally an RTA. However, recent attempts to adopt a constitution of the EU, as well as latest modifications to the Treaty of Lisbon aiming for example to represent the EU as a unity, make things less obvious. The subject of conflicts of laws between international and European law, or, more simply said, treaty conflict, is of great interest but is beyond the scope of this study. However, it would be practical to observe that the Russian Federation has to carefully consider all the provisions of current European law discussed in this paper, when it negotiates a new energy–related EU-Russia agreement, especially in cases of conflict between such agreements and EU law, since there is little chance that the former would prevail over the latter.

Regarding the particular issue of energy transit infrastructures, two correlated observations should be made. First, since transportation is apparently not viewed as a potentially competitive sector, Russian energy policies seem to not going to introduce competition in that sector. In this respect, contrary to its recent steps backward in the field of FDI, in the field of energy monopolies the European legislation provides a constructive example. This cannot be translated into Russian legislation, due to the ―legislation gap‖ with the acquis, although in general it would be recommended to Russia to consider some of its points. Namely, since the 1990s the Commission has started advancing policies regarding energy monopolies by segment, including monopolies-suppliers and monopolies-owners of transit infrastructure.

More specifically, since the 1990s, numerous directives and regulations are dedicated to the transit of gas and electricity through grids, and concerning common rules for the internal market in gas and electricity.⁶⁰² Notably, in the latest related gas regulation ((EC) No 715/2009), namely its art.18, it is stated that gas suppliers have the right of access to transportation infrastructures, but in order to access they have to pay fixed tariffs. Moreover, the directive implies that infrastructure owners have to publish data on tariffs, availability, etc. of the access to their infrastructure, and that such data should be easily available Secondly - and consequently -, the study recommends establishing an international system for determining pipeline spare capacity and non-discriminatory terms of access needs, and to make it easily available for interested parties. It should be done for the sake of effectiveness of interpretation of the current international rules referred to energy transit during arbitral investigations, if transit-related cases arise, as well as of such prospective rules of the EU-Russia energy-related agreements. In addition, a unified international database on pipelines spare capacity, availability, and tariffs per country and/or per company-owner of infrastructure could constitute a practical clarification.

Next, as it results from the first chapter analysis, and more specifically, from the assessment of Russia‘s current energy strategies,⁶⁰³ it could be argued that Russia demonstrates an ambition to be considered an equal partner in EU-Russia energy affairs. Through the whole study, the analysis was inviting, among others, to reflect whether, in energy policy the country‘s withdrawal from a unique international agreement specifically dedicated to energy, i.e. ECT, promoting fundamental principles of international law, really corresponds to Russia‘s stated above ambition. The answer is: probably not. This is due primarily to the fact that growing Russian outward FDI is not shielded any more by the ECT provisions; nor is it so for

600 The theory which does not separate international and internal legal orders, but rather sees them as a unique order.

601 The theory which separates international and internal legal orders, and requires a transposition of international legal rules into the domestic legal order, and their reception in this order.

602 See supra, note 116.

603 See supra, pp.28-29.

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the energy transiting through some countries as Ukraine, which used to exploit its position as a transit state.

Rhetoric aside, the biggest current practical problem to resolve in the context of this study, taking into account that Russia is no longer a party to the ECT and is not yet a member of the WTO, is what are the best remained alternatives to frame and enhance EU-Russia energy cooperation, especially with regards to

Rhetoric aside, the biggest current practical problem to resolve in the context of this study, taking into account that Russia is no longer a party to the ECT and is not yet a member of the WTO, is what are the best remained alternatives to frame and enhance EU-Russia energy cooperation, especially with regards to