Russia and the Energy Charter Process: Which Way Forward?

August 3, 2015 | 00:00
Russia and the Energy Charter Process: Which Way Forward?
Russia and the Energy Charter Process: Which Way Forward?
The termination of Russia’s Provisional Application (PA) of the Energy Charter Treaty (ECT) in 2009 resonated in diverse expert discussions, ranging from seeing it as a highly predictable and justified - if not inevitable - decision [1] to declaring it an unfortunate step based on misinterpretations of the Treaty. [2]

When describing the weight of this event for the international energy community, some specialists consider it no less than “something of a contemporary watershed in terms of examining national obligations of investment provisions, the scope of international investment treaties, the meaning of provisional application and ultimately the role of energy in modern politics.” [3]
 

Milestones


On 20 October 2009, Russia officially withdrew from the PA of the ECT submitting a written notification of its intention not to become a Contracting Party to the Treaty, in line with the Art. 45 of the ECT. [4] Nevertheless, Russia has been participating in a number of Energy Charter meetings and events up to July 2014, while a Russian national was the Deputy Secretary General of the Energy Charter Secretariat until December 2013 (this used to make the de facto rejection of the Charter debatable, despite the political declarations and the discourse in the media). [5]

As of 18 July 2014, however, when the final award on the Yukos case was handed down by the Permanent Court of Arbitration (PCA), Russia stopped its direct involvement in Energy Charter activities. Such actions were taken to avoid any ambiguities in Russia’s engagement with the Energy Charter after the withdrawal from the PA, in the view of the on-going legal process and Russia’s appeal against the court’s decision.
 

The roots of tensions


Looking at the origins of the European Energy Charter (the predecessor of the International Energy Charter signed in the Hague on 20-21 May) and the ECT, which date back to the 1990s, it is clear that their establishment was instrumental in building the bridge in energy cooperation between the East and the West (see Article 2: The Road from the European to the International Energy Charter) and Russia was undoubtedly the key stakeholder to engage with.

Initially, after the ECT had been signed by Russia, it was passed to the State Duma (the Russian Parliament) for ratification in 1997; however, the Duma was reluctant to address the ECT case. [6] It became commonplace in Russian political circles to criticise the Charter for the perceived negative consequences that the country would face in case the Treaty was ratified (the stumbling block was arguably the ECT’s provisions on gas transit and pricing). [7]

The attitude of Russia towards the ECT has indeed not been unambiguous since the inception of the Treaty. To a certain extent, it is related to fact that the importance of security of demand was not explicitly emphasized in European Energy Charter. The opening paragraph of the European Energy Charter maintains that the “Energy Charter Treaty establishes a framework for international cooperation between European countries and other industrialised counties with the aim of developing the energy potential of central and Eastern European countries and of ensuring security of energy supply for the European Union [emphasis added].”

Therefore, Russia’s cautiousness and scepticism regarding the Energy Charter are indeed rooted in times quite distant from the 2006 and 2009 gas crises, which famously had an impact on the relations between the two.

According to some sources, the representatives of Russian energy majors were the key opponents to the ratification of the Energy Charter ever since the question was tabled at the state level. This had to do with a number of uncertainties in interpretation of particular clauses in the Treaty [8] and, most importantly, their possible implications for Russia’s energy companies and their operations in Europe.

After the first Russia-Ukraine gas crisis took place in January 2006, Russia put forward the political declaration on “Global Energy Security” at the G8 Summit held in St. Petersburg in July that same year. The latter was welcomed both on the international scene (see “IEA supports G8 energy security focus and calls for optimising Russian natural gas to enhance energy security and environmental benefits”) and in Russia. The declaration was therefore perceived as a milestone in terms of the development of Russia’s vision of international energy security.

According to some, the international acceptance of this political declaration gave Russia “a legal reason, formal grounds to implement its proposals to change the economic structure and the legal framework of the international energy trade.” [9] This is an important point to keep in mind when trying to understand Russia’s stance vis-à-vis international energy architecture.

Looking at the domestic business climate in Russia at that time, notably in 2008, two federal laws were adopted: the Federal Law (No57-FZ) On Foreign Investments in Business Entities of Strategic Importance for National Defense and State Security and the Federal Law (No58-FZ) On Amendments to Certain Legislative Acts of the Russian Federation and the Annulment of Certain Provisions of Legislative Acts of the Russian Federation in connection with the adoption of the Federal Law On the Procedures for Foreign Investments in Companies of strategic importance for national defense and security of the state.

Essentially, these laws were aiming at restricting access for foreign investors and non-state-controlled Russian energy companies to the upstream oil and gas sectors in Russia in pursue of maintaining the country’s sovereignty over its natural resources. Some also see the link between the adoption of these laws and peaking oil prices back in 2008, while others point to the cases when Russian companies were refused from being able to acquire stakes or equity in the oil and gas sectors of some EU member countries.

In the same year, Russia introduced another international initiative focusing on gas governance (the so-called ‘Gas OPEC’). Looking at the official documents and speeches at the inauguration of this platform, one may find a clear dichotomy between the ‘European’ framework (i.e. the Energy Charter) - described as consumer-oriented and ultimately, disadvantageous for Russia - and the need of building Russia’s own mechanisms, which would reflect the interests of energy suppliers in general and the county in particular. The launch of the ‘Gas OPEC’ took place in Moscow on 23 December 2008 and the media coverage of the event largely reflected - in an often-exaggerated manner - the general perception of it in the country (one may come across articles in Russian with titles such as “The Gas OPEC is ‘ours’” [10] or “The Nightmare of Europe: Gas OPEC” [11]).

Those were just a few examples to illustrate the tendency to distinguish between the ‘European’ Energy Charter and the new mechanisms put forward by Russia, which highlight the need for a balanced approach to energy governance and energy security, which would incorporate both the interests of energy consumers and energy producers.

The next important stepping-stone in Russia’s relations with the Charter is the gas crisis of 2009. The financial and, to a greater extent, reputational damages caused to Gazprom and Russia can hardly be underestimated: one could observe how the infamous references to the ‘gas wars’ have been invoked at every occasion in the context of European energy security ever since.

Although conclusions were drawn from this experience, and such tools as the Early Warning Mechanism were established in the framework of the EU-Russia Energy Dialogue back in 2009 (and updated in 2011), [12] the fact that the Charter wasn’t invoked by any of the parties involved in the crises became a point of reference and criticism, particularly from the Russian side (though the then Secretary General had offered the help of the Secretariat).

Some argue that governmental officials and relevant stakeholders in Russia have been contemplating two post-2009 scenarios: proposing amendment of the ECT or withdrawing from the PA.

In the view of some experts on the ECT, the statements of some Russian political officials and the narrative regarding the Charter in the media created a rather distorted picture of ECT provisions, as well as some principles of international law. This way, analysts argue that “eventually the discussion [around the ECT] moved to a virtual space, in which some inexistent provisions of the ECT were heatedly debated […]. This ‘virtual background’ created the informational background for Russia’s adoption of the decision to withdraw from the ECT.” [13]

It has to be noted that the uncertainties about some provisions of the treaty and the on-going discussion about the Transit Protocol did not contribute to improving the clarity of the Treaty’s content in the eyes of Russian stakeholders.

At the same time, just before its withdrawal and against the backdrop of the Yukos-related arbitration cases, Russia did emphasise its willingness to maintain international energy cooperation, yet again, under a different framework. In April 2009, the then Russian President Dmitry Medvedev put forward a “Conceptual Approach to the New Legal Framework for Energy Cooperation.” [14] This document explicitly states that the Energy Charter Treaty in its then ‘current form’ was not considered a satisfactory international energy governance framework. Therefore, the Conceptual Approach was presented as an alternative necessary to “efficiently improve the legal framework of the world trade in energy resources” and provide “a more sustainable long-term development model for the future [which] requires a modern global energy system which would be adequate to the current conditions.” [15] Further, its principles were envisaged as “equal and non-discriminating (without imbalances favoring certain categories of actors).” [16] Apart from that, a restricted draft document entitled “Treaty on the Management of Emergency Situations in Transit of Energy Materials and Products” was circulated, which develops on the Annex I of the Concept. [17]

Russia’s withdrawal and call for an alternative framework clearly served as a catalyst for the modernisation process of the Energy Charter. Ironically, when the first step of this process was completed and the new political declaration, the International Energy Charter, was endorsed (with a number of new countries coming on board, including China), Russia’s disengagement from the Charter reached its peak in view of the on-going Yukos case.

Although Russia’s withdrawal from the PA of the Energy Charter hardly affected the issues of energy trade, when it comes to transit of energy – and investment protection to some extent - one may argue that the Energy Charter’s provisions are difficult to substitute: the Charter remains to be the only legally binding energy agreement encompassing transit issues, and according to some legal experts, it provides a wider arbitration scope compared to that of the BITs.

Although Russia has a number of BITs with its energy partner-countries across the EU, it does not have a separate BIT with the European Union, while the latter is a signatory of the Energy Charter Treaty. Therefore, in principle, Russia could use the Treaty – had it ratified it – to defend the interests of the relevant foreign investors in Russia against some consequences of Western sanctions, as well as its own investments in Europe against the 3rd energy package provisions.

That being said, Russia has been actively invoking two other international legal instruments: the PCA with the EU and the WTO.

Since the 3rd energy package was signed in 2009, Russia has been pointing to Article 34 of the EU-Russia PCA (that came into force in 1997), which maintains that “the Parties shall use their best endeavours to avoid taking any measures or actions which render the conditions for the establishment and operation of each other's companies more restrictive than the situation existing on the day preceding the date of signature of the Agreement [emphasis added].” [18]

In pursue of defending its investments and interests against EU’s legislation, in May 2015 Russia requested the WTO’s Dispute Settlement Body (DSB) to establish a WTO panel in EU – Certain measures Relating to the Energy Sector (the complaint regarding measures relating to the energy sector through the 3rd package was submitted to the WTO on 30 April 2014). [19]

In its request “Russia claims that the EU’s Third Energy Package unjustifiably restricts imports of natural gas originating in Russia and discriminates against Russian natural gas pipeline transport services and service suppliers”. [20] Indeed, if Russia’s request “progresses to the panel and Appellate Body stages, the result could have major impact on the applicability of WTO law.” [21]
 

International Energy Charter: does the possibility for Russia’s involvement in the Energy Charter remain?


Moving back to Russia’s relations with the Energy Charter, both parties can well utilise the window of opportunity that has opened up with the modernisation process of the Charter. As the Secretary General Urban Rusnák stated at the International Energy Charter (IEC) Conference in the Hague on 20-21 May, "we have to be patient, to see how this legal battle will end up [the Yukos case] and I think it will be the most appropriate time for Russia to determine what kind of relation it wants with the Energy Charter Process – whether it would like to return or not – it is very much the sovereign decision of the country. The doors are open and all communication channels are open too."

In the '‘Global Energy Security’ declaration of 2006, Russia suggested that not only it “can”, but “has the responsibility” to be a protagonist in shaping the global energy order.

Now that the second phase of the Charter’s modernisation, put forward through the IEC, starts and some members of the Charter urge to work on updating the provisions of the Treaty, there is indeed a momentum for Russia to step in and get involved in the discussion over the improvement of the ECT, provided it becomes a member of the Treaty.

At the same time, abandoning the idea of the alternative legal framework altogether can hardly be an option at this point. A middle way could be conducting an internal study by the relevant Russian institutions to see if and how the key priorities of Russia’s energy strategy are mirrored in the IEC and the ECT and/or can be addressed through the second phase of the modernisation process.

With regards to this argument, two aspects of the new IEC are key:

1) the holistic vision of energy security put forward by the IEC, which is in line with the `Global Energy Security’ declaration proposed by Russia in 2006, as it incorporates security of energy supply, security of energy demand, security of energy transportation/transit, as well as goes further and adds the alleviation of the energy poverty as a priority;

2) the geographical expansion of the membership of the Energy Charter and its active cooperation with strategic partners of Russia such as China and Central Asian countries.

According to some experts, alienating from the Charter Process might lead to the replication of the WTO story, [22] when a crucial international legal framework was developed without the active participation of the country (and it took 19 years until Russia joined that organisation).

In order to influence the evolution of the ECT, the first step for Russia would be to resolve the questions related to its status and commitments to the Charter, and then resume the dialogue on the the Energy Charter Conference platform.

As more than 70 countries (including the Central Asian countries and China) see the IEC as an emerging global energy governance framework, the need for a dialogue between Russia and the Charter is evident.

The latter however, will certainly be conditioned by the final results of the Yukos case, as well as the outcomes of Russia’s WTO claim.
 



1. Kaveshnikov N. (2010) ‘The issue of energy security in relations between Russia and the European Union’ Energy Security 19: 585-605’
2. Konoplyanik (2011) Energeticheskaja hartija: otmenit nelzya modernizirovat’ [suggested translation of the article’s title: ‘Energy Charter: to abolish impossible to modernize’], Russian National Economic Journal, No 2 (440): 118-136
3. Hadfield A., Amkhan-Bayno A. (2012) ‘From Russia with Cold Feet: EU-Russia Energy Relations, and the Energy Charter Treaty’, International Journal of Energy Security and Environmental Research, p.2
4. The applicability of ECT’s provisions to Russia after its withdrawal from the PA remains to be subject to the ongoing legal debate.
5. For example, see: Le Figaro (2009) Russie: rejet de la charte sur l'énergie, EU-RUSSIA Centre (2009), ‘Russia formally rejects EU’s energy charter: Putin’, Voice of Russia (2009).
6. Seliverstov S. (2011) 'Draft convention on international energy security - a new energy world order?' The 'Yurist' Journal, No.11.
7. Inter alia, see Jazev V. (2006) 'I am opposed to Russia's ratification of the ECT' interview in the 'Kommersant', 15 November.
8. Seliverstov S. (2011), op.cit.

9. Seliverstov S. (2011), op.cit.
10. Sergey Zikov (2009) The Gas OPEC is ‘ours’, 16 December.
11. Alla Luneva (2007) The Nightmare of Europe: Gas OPEC, the Russian Journal, 06 February,
12. Subsequently, the new multilateral Model Energy Charter Early Warning Mechanism was approved at the 25th Energy Charter Conference in Astana in November 2014 (based on the good practices of international independent dispute prevention and resolution procedures).
13. Konoplyanik (2011) Energeticheskaja hartija: otmenit’ nelzya modernizirovat [suggested translation of the article’s title: ‘Energy Charter: to abolish impossible to modernise’], Russian National Economic Journal, No 2 (440): 118-136
14. Dmitry Medvedev (2009), President of Russia, Official Web Portal, Conceptual Approach to the New Legal Framework for Energy Cooperation (Goals and Principles), 21 April.
15. Ibid.
16. Ibid.
17. Clingendael Briefing Paper (2009) Tabula Russia. Escape from the Energy Charter Treaty.
18. investmentpolicyhub.unctad.org
19. wto.org
20. FRATINIVERGANO European Lawyers, Trade Perspectives, Issue No 13: 26 June 2015.
21. Ibid.
22. Konoplyanik A. International mechanisms of investment protection of foreign investment in energy and expanded & updated package of the ECT and related documents, ‘Neft, gaz I pravo’ Journal (‘Oil, gas and law’), April 2014, pp.51-53

Image: Panorama of Moscow Kremlin from Bolshoi Kamenny bridge by Минеева Ю. (Julmin). CC-BY license
Loading comments...
related items