The Atlantic Council of the United States
Nordic-Baltic Security in the 21st Century:
Continued Transformation Toward a Larger Role in the World?
Pillars of Security?
Economics and Energy in the Nordic-Baltic Region
Welcome and Moderator:
The Atlantic Council
Swedish Defence Research Institute
Bank of Finland
Date: September 7, 2011
Federal News Service
FRAN BURWELL: I’m Fran Burwell. I’m one of the vice presidents here at the Atlantic Council, and I run the Transatlantic Relations program. I’d like to welcome you all back into the room.
We have, I think, a very interesting group of analysts on a key topic. The question for this panel is energy and economics. How do they fit into the larger context of Nordic-Baltic security? There’s no doubt that they are important. in fact, the program refers to them as pillars of security.
The way energy and economics is structured affects not only the perception of security, but also, energy and economic ties can provide a basis for more freedom of action for a country, or less freedom of action, to be real.
But there are two differences, I think, when talking about energy and economics than when talking about security policy. One is that security policy – and some of my colleagues may object to this – but security policy is largely based on perceptions: Who will do what to whom, and how likely is that to be hostile? Capabilities are concrete, and they can affect this, but much of the discussion is about different views of the likelihood of conflict.
Energy and economics have to be grounded in reality. What percentage of your energy mix comes from country x versus country y? What percentage of your trade is with country x versus country y? For the Balts, in the – in 1990 the reality was total dependence on Russia. The last 20 years have seen significant change, especially because of the links with the Nordics and because the Balts have become part of the EU energy and economic markets.
But this is a process. It’s far from complete, and it raises many questions that we will address.
The second difference is that security policy is largely controlled by governments. In energy and economics, governments can provide a context, and here the EU regulations both in energy and in economics provide a – are a big factor, provide a very strong context, although an evolving one. But independent actors – the private sector – make crucial decisions. And these companies may have very different relations with governments. Some are totally independent. Others are national champions. Others are fronts for political groups in their particular country. It’s really very, very different. But it makes decision-making in these areas far more diffuse. And it makes it much more difficult for governments to simply put forward recommendations and to have something happen.
The consequences for the Nordic-Baltic cooperation are immense. As the papers make clear, the dependence on Russia or the change from dependence on Russia to participation in the EU markets has created new opportunities but also challenges.
And we have a great group to talk about this. Tomas Malmlof is a researcher at the Swedish defense research agency. Andris Spruds is associate professor at the Riga Stradins University and director of the Latvian institute of international affairs. And Pekka Sutela is principal adviser for monetary policy at the Bank of Finland, which must keep you very busy these days, and – as well as being a nonresident senior associate at the Carnegie Endowment.
We’re going to go in the same order as is on the program and start with Tomas. Your paper, Tomas, focuses on the Baltic efforts to move from what was the Soviet electricity grid to a European electricity grid in terms of generation and supply, and, at the same time, to liberalize their electricity and energy markets. Can you talk a bit about the challenges that they face and what the Balts have to do, what they are looking to the Nordic colleagues to help them with, and also what the EU can do to help them accomplish their goals? And is it even a realistic goal to both liberalize markets and move into a European electricity grid?
TOMAS MALMLOF: Well, thank you for that question. Nevertheless, I would like to start with to thank the ACUS for organizing this event. I think it’s very important. And as has been already pointed out by other people here, it’s some kind of a luxury that we can be here together and talk about the region, and not talking about acute crisis management.
Nevertheless, there are issues that we have to address, and that is what I’m going to do here when it comes to the electricity market.
I would also like to say that even if I’m working for the Swedish defense research agency, I’m here and talking from my personal capacity, not – and what I say is not necessarily part of Swedish official policy in this matter.
I want to talk about – (microphone noises) – oh – is it OK? Yup.
It’s no big secret for the audience here, I think, that the Baltic states has been very dependent on the energy systems that was built up during Soviet times and that they are a historical part of. Compared to the gas and oil sectors, the electricity sector has for or – more or less been left alone so far; and that in spite of that, the Baltic electricity grid, then, is a part of the – of the so-called EPS/UPS power grid that interconnects Russia, western Russia, Belarus and several other of the area’s countries.
So far, why it’s so? It’s because that the – it’s an abstention from extensive privatization and the relation of the electricity markets in three Baltic states that have protected them so far from Russian investments that they have not asked for. But this situation is about to change. And that is because currently the relation and the structuring of the Baltic energy markets in accordance with European Union legislation creates new opportunities for Russian inroads into Baltic electricity markets, which contradicts the energy security interests of the Baltic states.
And why is that? That is because that in a deregulated electricity market, consumers will have the right to choose their own suppliers, as they can take advantage of the same rights as EU power companies without the same obligations. The most serious issue is that power companies from third countries do not have to comply with the EU emission trading system, the EU ETS, the cornerstone in EU policy to reduce industrial greenhouse gas emissions. That means that they have a competitive advantage to companies that operate within the European Union.
And from the EU point of view, this is – also matters, because the Baltic region risks – (inaudible) – for substantial carbon leakage, which would undermine the very idea of the EU cap-and-trade system.
Another issue that is important for the region is the Lithuanian plan to build a new nuclear power plant, the Visaginas power plant that will be placed at the same time – at the same place as the old one, Ignalina. And that is because Lithuania now suffers of a very big energy deficit when they had to close Ignalina in – a couple of years ago.
The problem is that Russia has countered this project by suggesting to build a new nuclear power plant in the Kaliningrad region. Some people have – questioning the seriousness of this project, as they haven’t made clear who their real customers are and so on. But so far we can see that there is some serious building work that is going on in the region.
And just in order to underline this fact, Russia has also agreed with Belarussia (sic) to finance a Belarusian nuclear power plant, or give loans to this power plant, not far from Vilnius. And this means that there is a huge or potential overcapacity of electricity in this region. And that means that the Visaginas project may be put into question, in spite of that there is now an agreement that this power plant should be built.
But to conclude, in spite of all these challenges, I think that it should be possible to enhance Baltic energy security and to dissuade Russia from taking unfair advantage of the liberalization of the Baltic electricity markets. And I think that there are two things that has to be done.
The first one is that we should continue to encourage Estonia, Latvia and Lithuania to adopt a joint, pragmatic and nonpartisan approach to energy strategy planning and market development. And I think that the best approach would be if the Baltic states themselves started to look at the energy markets as a whole, not as national markets, because then you – it should be possible to get some scale advantages of this matter.
The second approach, I think, is that we have to persuade the European Union to further support the Baltic quest for better energy security, and to reinforce reciprocal principles in trade and investment with non-European-economic-area countries – that is, for instance, Russia – and in this way obtain support for this policy also from the international community.
MS. BURWELL: Thank you very much. I think Tomas has given us a great start by looking at the narrow field of electricity. And now we’re going to broaden this with Andris, who’s going to speak about energy supplies generally, including oil and gas. How have these markets changed? Tomas has painted a picture of really islands – Baltic islands, if I can – in electricity. Is that the case in oil and gas? And how can we expect this to change as we see changes in the global LNG market, availability of that, and the Baltic Energy Market Interconnection Plan?
And then what are the wild cards we should be looking for in the future that might really change the oil and gas situation for the Baltic states?
ANDRIS SPRUDS: Thank you. First I would like to express my gratitude to the organizers, Atlantic Council, and especially (Bob ?) personally. Bob never let me fail to deliver the paper, and it was a great motivating encouragement.
At the same time, since I – on a more probably personal note – since I spent here a half-year as a Fulbright in the Center for Transatlantic Relations and it was quite recently, I really have the pleasure of coming back to the town. And I have the impression that I never left the city. And I see the many colleagues in the room, and it’s really the great pleasure.
Last week, actually, I was also participating – I had the chance to participate in a ministerial meeting, Nordic-Baltic ministerial meeting in Helsinki. And one of the expressions, ideas, summarizations of the discussion was that actually, the Baltic-Nordic region is becoming a security community. There was a reference to Karl Deutsch, who said that Nordic community is a security community. And now those five countries have expanded, so it’s Baltic region, and you might speak already about eight countries of the security community.
And I think in political terms, in recent years – it was also mentioned already previously – in the recent years, solidarity, which we envisage, which – what we seen during the economic crisis – and I think as a representative of Latvia I can even underline it – the solidarity pinpointed to common values, common understanding, a common way of looking at many things – including also not only in political things, but also in economic things.
Nevertheless, in energy the situation has been more complicated, and I think you rightly, in the beginning, in your introductory remarks, mentioned about how diverse the region is, how diverse the spectrum of different involved actors are. And in this case there are definitely the structural differences among the countries involved. And security community in terms of energy is still very much in making.
What are those structural elements and structural divergences within the region? Least probably important aspect is the different mixes of energy sources. If you say it is not a consolidated, solid region in terms of – in terms of what we see, even though increasingly popular are ideas about the green laboratory, about the green testing grounds, clean energy – at same time, still, it’s in the making. And there are different countries whose different parts of proportions of green energy was in their primary energy bubbles.
It’s more important – and again, you had referred to this – are the mixes of dependents. And clearly here some of the countries come out as more – I would use the word “sensitive,” probably “vulnerable,” not to use the word “insecure.”
If you look – and probably I would not go too much now into the details and date – but at the same time, if you look about Russian gas, the Russian gas proportion in Europe, in primary energy balance it’s 7 percent. In Latvia it’s more than 30 percent; in Lithuania it’s more than 40 percent. So it’s quite considerable portions coming from one resource and one source of – one source of supply.
Additionally to this, you might also see that there are quite a presence of monopolistic structures. And in Latvia and Lithuania and Estonia – and it is also in the context of – we can see it very clearly in the context of liberalization of third energy package – that downstream has been dominated by a couple of companies.
This also means that – and somehow leads to the mixture of different perceptions in the region. So there are different security perceptions about energy. It has been combined by both. It has been combined by historical and political experiences, which definitely has, still, influence on the region and on political and security thinking. But at same time, of course, structural factors in the energy sector also influence how the security is being perceived in energy field.
And you might speak that the Baltic countries for long time have securitized the energy field as one of the important security aspects as well. But, as I mentioned, it – the region is in making. And definitely there are some very positive, positive developments in the region. Region is dynamic.
I would call – and again, not go too much into different aspects, but I would call two conceptual things: EU-ization and Europization. EU-ization meaning that there are more and more EU institutional formal presence in the region. It was mentioned, BEMIP – Baltic Energy Market Integration Plan. There is financial support for infrastructure interconnection projects, very important. There is more thinking that the Baltic island – energy island should be connected to the energy mainland of European Union. And I would call even – (inaudible) – already answering your question – that the Baltic energy island is gradually becoming European energy peninsula, at least partly, and in some – in some domains, as electricity definitely might be one of them.
Europization means that probably also the countries within the region, especially the Baltic companies, I think start to desecuritize aspects of energy. Increasingly there is perception that we are – we are safe, we are part of European union, we are part of NATO. And it means that, actually, energy is increasingly becoming as a field, which is perceived as also the business field, not only the security field. And I think this is – this is important. Of course the reset with Russia – U.S. reset with Russia, Polish reset with Russia, to some extent Latvian reset with Russia – has contributed to more, I would say, peaceful attitude towards energy security as such.
One of the game changers – now I’m gradually finishing – of course important one is EU and where EU goes with its policies. EU is important in this regard. If you speak about military security, political security, NATO plays a very crucial role. If you speak about economics and especially energy, European Union directives, European Union initiatives are important in this regard.
Important element is Baltic activities and Baltic homework, I would call it. Visaginas, LNG terminal, Latvian-Lithuanian border agreement, all of these can contribute also to development of the Baltic energy security, and at the very end integration into the regional energy structures, increasing the perceptions of energy security within the region.
One of the interesting things, what might develop in the future, might become some – a game-changer, even though probably it’s not a short-term perspective, it’s Polish unconventional gas. We also speak about unconventional gas in Lithuania and Latvia, but Poland is a frontrunner in this regard. And as Polish official position is that potentially, 10 years, that Poland could produce – of course, very optimistically, but still 50 billion cubic meters of gas.
Just to remind that Poland at the moment consumers 14 billion cubic meters, so that regional supplies could be abundant.
And here already you can also see the transatlantic link and connection with U.S. companies: They’re playing extremely important part in providing the expertise and finances to develop the – develop the unconventional gas resources in the region.
So to conclude, very shortly, 20 years, it’s still not an energy-security community. It’s still developing. There are still many structural challenges. There is still structural challenges with our neighbor to the east, which comes out, actually, still, of the Soviet legacy. At the same time, 20 years past and you can see also quite considerable development in both in terms of structural bridging of different gaps and also in terms of bridging those security or insecurity perception of gaps which probably existed some years ago.
Thank you very much.
MS. BURWELL: Thank you.
Now I’d like to broaden this even further and bring in trade and investment, as well as still talking about energy. And I want to say that there’s often an assumption in the security community that Russia has a strategy in the Nordic-Baltic region and that part of that strategy is to maintain the dependence of this region on them in terms of energy and economics. We’ve seen great shifts. And the question is, is Russia responding to that with a different kind of strategy?
Pekka Sutela, you heark back in your paper to Finnish-Russian economic relations as a symptom of a privileged foreign policy relationship at the time prior to the end of the Cold War. And I wondered if you see evidence now of a different kind of strategy developing on the Russian part towards the Balts. And is it even possible to have such a strategy in the Russia of today? What do you see?
PEKKA SUTELA: Thanks. First, I no longer work for the central bank of Finland. I did that for 20 years; I no longer do.
It’s – the answer to your question is, in short, that I have severe problems in seeing Russia behaving strategically, meaning setting goals and pursuing rational policies to try to reach those coals – goals in almost anything. And I have not seen any major consistency in their, say, economic diplomacy or economic foreign relations vis-à-vis the Baltic Sea rim area.
And actually, we used to talk about the Baltic Sea rim. Now we talk, here, at least, about the Nordic-Baltic community – that is, the Baltic Sea rim minus not only Russia but also Poland and Germany. So we are leaving three of the largest European economies out of the discussion, which I find quite interesting but which has a rational basis, in the sense that the deep integration that the Balts – Estonians perhaps most consistently, as we earlier discussed – took upon themselves 20 years ago is unique in Europe and in the neighborhood, and then can therefore not easily be replicated anywhere.
Because these nations, as (if ?) decided that they don’t wish to have independent national economies. As a defensive measure against the perceived threat of Russia, they decided that they have to integrate as fast, as fully, with northwestern Europe as they can. And there were other reasons as well, among – the fact that four very small nations with distant parts in the market economy, it’s very difficult to develop, establish the whole set of institutions necessary for well-functioning market economy in the time frame that they thought they had available.
The best example of – (inaudible) – is finance. The Balts never tried to develop independent, sovereign financial systems. They did not want to be dependent on Russia, obviously. They did not have the Viking courage of the Icelanders to take over markets that nobody else wanted (working ?). (Laughter.) Fortunately, what they could do was to integrate with Nordic financial systems. And that actually paid very well out in the recent crisis.
The only two non-euro countries to which the European Central Bank offered credit lines during crisis were Denmark and Sweden. And they were certainly not offered for the case that the Danish and the Swedish financial systems would get into trouble, because they were – the central banks of these countries have deep pockets of their owns. They were a cautionary safeguard in case there would be some major problems in this field in the Baltic countries.
Now, could we have a similar integration concerning energy? And here my answer is no. Because I don’t believe that there will be a joint common European energy market. I wish there will not be a common European energy market. I wish that the EU never will talk with one voice about energy matters.
Why? Because I don’t want the Germans to have anything to say about our nuclear policies.
MS. BURWELL: (Chuckles.)
MR. SUTELA: The Poles do not want to have the French to have anything to say about their policies on unconventional gas. And I don’t understand why the Balts would wish the same guys who make the catastrophic decision of forcing the end of the nuclear plants, not only in Lithuania but also Slovakia, why would these countries give any additional voice to the people, good people in Brussels who make decisions like this?
OK. So there was – but where is the limit? I think the limit – or the first thing that at least we can do is to have a look at some of the introduction economics textbooks, like the one I used to write, and look what it says about price discrimination. Price discrimination is the rational economic behavior of anybody who has market power, the ability to estimate the demand curve or the customers, and to separate the customers into different, so to say, islands, to prevent resale of the commodity.
So you wish to sell commodities at the higher price for those who have more purchasing power or who are forced to pay higher price because they don’t have any alternative, really. And in the case of gas, this gets a bit complicated, but the general idea is self-evident.
That’s Adam Smith. Gazprom is doing Adam Smith, as they should, as a commercial company. And they have been badly hurt and damaged by Mr. Putin and others, who follow pre-Adam Smith policies in some of these respects.
OK. What has – what can a customer do in this situation? The customer can blur the picture that the supplier has of the demand curve. So he can or she can develop all kinds of alternatives, potential alternatives and presumed alternatives about alternative supplies and things like that – all very fine. The more rational thing is to try to abolish the borders between the different islands of customers. And that’s the interconnectors, that’s these kinds of things, if somebody’s found to pay for it.
But beyond that, I really don’t believe that there is very much on either possibility or desirability of Europe having a common energy policy, because of the different paths, decisions (sunk ?) investment courts that different countries have, because of the different resources that countries have and because of different policies that countries have.
Finland would very much wish to have gas pipeline to Norway. But there is a country in between, which I won’t name –
MR . : Sweden.
MS. BURWELL: (Chuckles.)
MR. SUTELA: – which for some reason doesn’t want to have too much to do with natural gas. And I suppose this is because there are all these blurry, nice, small animals in gas which get killed if they are transferred in pipeline by Sweden or something like that. (Laughter.)
So there are limits about what can be done in these respects.
Finally, a few words about Russia. Up until about 2006, official Russia used to believe that Russia’s future is based on natural resources – oil, gas in particular. That thinking, which was very much Mr. Putin’s thinking from ’99 to 2000-something as well, was abolished when people looked at the long-term production forecasts for hydrocarbons in this country.
Hydrocarbons production in Russia will not be increasing, not, at least, to an (audible ?) amount. Let’s say it’s increasing by one person and nearly for the next 20 years, it will be declining after that. The Russian economy will be growing by 4 percent annually during this time. It will become the largest single European economy in a few years.
So Russia’s energy efficiency has to improve by 3 percent annually for Russia to be able to maintain current volumes of energy exports, minus what they thought they would be able to buy from Central Asia and what they will not be able to buy from Central Asia.
So in about 2006, when the Russians made this very simple arithmetic, they change their attitude to innovation, modernization, diversification – simple – in this connection, the simple contents is increased energy efficiency. They will be struggling to maintain the volumes of the energy exports. That will be their major problem in the future, and not to try to conquer new markets and to make them dependent on themselves to – for supplying something that they will be unable to supply.
That’s one of the reason(s) why the next government which comes to power in Russia after the elections, one of the things in the economic policy that they will try to do is a limited liberalization of the gas market, to help it to become a bit more – bit more Russian. I don’t understand, as an economist, what that limited liberalization should look like. And I even less understand what it could be – could look like. But that is something which they are going to try to do.
The position of Gazprom inside the country will be weakening somewhat. But I’m almost certain that Gazprom will remain the monopoly exporter of Russian gas. And it will be acting economically rationally in the way it should be acting when it has some market power. But its market power in Europe will not be increasing. Probably will be – will be decreasing.
So it’s pushed from some need for rationalization from inside the country. And it’s squeezed by European market, which will not be getting easier for it, from any point of view. They will be – they will be remembering bitterly the days when Mr. Putin abolished, destroyed their commercial reputation with his non-policies vis-à-vis some of these countries.
MS. BURWELL: Thank you very much, Pekka, for a very interesting talk.
And I think before we open the floor to questions, what I’d like to do is actually come back to Tomas and Andris on one key point that was raised. And I was going to ask you whether Russia has a strategy. But I think instead I’ll ask whether Europe has a strategy in terms of the energy – the overall energy market. Do you share the same concerns that Pekka has put on the table of –
MR. : No, I said that Europe shouldn’t have.
MS. BURWELL: Yes, you said it shouldn’t have.
MR. : Yes.
MR. SUTELA: So do you share the same concerns that he has about, for example, the future of nuclear power in an EU market that might have very strong German decision-making involved? In a way, the papers – your two papers kind of present the EU market as the mechanism through which the Baltics and the Nordics can integrate their energy and build new structures and get a new regulatory framework for their energy. But if that’s not desirable, is that the way to go?
So Tomas, let’s start with you.
MR. MALMLOF: Well, I think that – we’re talking about the EU energy policies. We really should have to defer between what’s the internal energy policies and what’s the external energy policies. That is, when it comes to internal energy policies, of course the European Union suffers from the fact that energy policy in general is a national issue and, as Pekka rightly said, that of course different countries, for different political, historical, other reasons, have a different take on this one – for instance, that we have this problem if the French were to say anything about the Poles’ interest now in unconventional gas, for instance.
That’s one of the points. Then if we look at – and before the EU foreign energy policy, I would like to say that to me it seems that this is an issue that the EU has not thought over the way it should. And that is why we have these problems in the Baltic states when the EU, instead of being a facilitator in order to improve the situation, sometimes then had turned out to make the situation worse.
If we’re talking about the Ignalina power plant that had to close down and we’re talking now about the third energy package that open us up for Russian companies to enter the energy market. And the – we don’t really know if they enter them just for economic reasons, which would be welcome and which would probably be very sound, or if there is some kind of political undertones that can be used against the Baltic states and that we have to make assurances that this will not happen.
MS. BURWELL: Thank you.
MR. SPRUDS: Yes, my first reaction is actually sort of answering the question with a question, probably a rhetorical one: Does United States have a common energy policy? Because if you look at the 50 states, a quite – diverge approach to energy supplies and energy mixes. And California, I think, stands out here. And states have also different legislations on this. And primaries always start in Iowa because everybody goes to underline how important it is to have subsidies for biofuel. (Laughter.)
So you can see – and Obama now have announced a new energy strategy into 2035 (for ?) about 80 percent of clean energy. But still there are different perceptions in different states.
So actually, I think, yes, this is sort of natural in energy sector. Again, I would refer to you, where are so many diverse interests, would be very difficult to achieve a single voice speaking about energy on different issues. It’s even difficult to achieve among the Baltics. And probably again I would repeat what I like to repeat, one of my Estonian colleagues, he says that, you know, they only come and think for Estonians and Lithuanians. It’s Latvians. (Laughter.) Actually, nothing else is there.
So there are so different perceptions of different things. And of course European Union also consists of 27 countries with different energy mixes, different energy backgrounds, in a sense, yeah?
MS. BURWELL: Yeah.
MR. : So the result is quite contradictory policies on many – on many issues. And one might say the EU energy policy is about three pillars: Kyoto climate issues, Lisbon competitiveness, and Moscow security supplies. How does it come out? Not always in harmony with each other, not always consolidated.
But still, I think the energy policy – the common energy policy for European Union, it is a desirable thing. Why? Because this still makes a region and the whole – the whole European Union act as – at least as a – as a common interest on many issues. Of course, the extent of supplies, it’s a difficult one.
But you look again, the Baltic region and the liberalization package – I think the Baltics would never start to deal with liberalization package without EU incentives. There would not be chance for Baltics to interconnect without supplies from outside, especially without the BEMIP – without financial, also, and political support. The LNG terminal, now it’s in the thing saying that EU plays some kind of Baltic role in the whole issue because the EU Commission says U-Balt (ph) should sit together and find a common language on many issues.
MS. BURWELL: Right.
MR. : Actually, so I would not deny the limits of EU common policy, because they are structural, they are natural, they are political. There will be always different backgrounds. But same time, I think it’s starting to bite. It’s starting to develop. There are certainly progress observable, if you look EU energy policy in 2005, in 2011, there has been progress made. And it is still also desirable because Baltic-Nordic regional integration very much also depends on a (puddle ?) of more successful processes within EU as well – not denying the limits.
MS. BURWELL: Right.
Let’s take some questions from the floor. Back there to start.
Q: Thank you. Ramunas Vilpisauskas, Vilnius University. I would like to follow up with Pekka’s point, which I like. Usually when people say you should speak with a single voice, they presume that this voice is their voice – (laughter) – and they don’t think about the intergovernmental negotiations which should lead to this common position. And we know from (status ?) that these negotiations often reflect Germany’s and France’s position.
That’s also – but I would go one step further. That’s the reason why I think EU will miss again its target of having a common energy market in 2014, which was declared this winter so bombastically. And this is the third energy package, not the first or the second. One of the reasons why it is the third is because the first and the second did not achieve this goal of common market.
And the third package itself has several alternatives, which will – if they continue to exist, will mean that there will be a diversity of regulatory regimes, for example, in Germany and France and in the Nordic countries and Britain.
So what’s out of this for us? I think for us the conclusion is clear. The Baltic states should integrate into the Nordic energy market. We should continue this regional emphasis – and Poland, if possible. In Poland, again, there are discussions about electricity bridge with Lithuania currently and so on.
But I think for us, we should integrate with what is geographically and economically sensible and what is considered as a good practice in Europe. Because I think Nordic electricity market is a good practice, even though in natural gas, as you said, there are gaps in integration – infrastructural integration.
So I think the lack of EU’s common position means there should be more common Nordic-Baltic energy position. And I think this is feasible and economically sensible.
MS. BURWELL: Can I ask the – I just want to ask the panelists – there is a difference between the Baltics, who emerged from communism with an energy structure oriented towards this – then Soviet Union, and Finland, which had an orientation there but also a lot more resources, a lot more mature energy sector, if I can put it that way.
I’m wondering – this discussion about the benefits or the minuses of the EU energy market, how much of what you have been able to accomplish in the energy markets – I mean, one big benefit of the EU effort in this area is the provision of structural funds and other funds that are helping to build pipelines and perhaps someday an LNG terminal, et cetera, things like that.
Would this have been possible? I mean, are we looking at different situations here between Finland, Sweden – the Nordic countries – and the Baltic countries and what the Baltic countries need, as opposed to what these countries need? Is this a division between the Nordics and Baltics that plays differently in terms of your need for an EU energy policy?
MR. SPRUDS (?): Well, if I may, I would say what is – what is necessary for the efficiently functioning energy markets – what are the sort of preconditions for this. The conditions of – and also the Baltic – sort of by extension looking a little bit more regionally, Baltic-Nordic energy market integration, what are those elements?
One is of course you’ll need third-party access, which is possible if you have interconnections, because you mentioned rightly that Baltic energy markets have been very monopolistic. And this has been a structural problem with consequences for politics, for economics if there is no competition in gas energy market in Baltic countries.
That’s why the third-party access is crucial for the markets to function. And this is one of the major objectives of EU, not, again, very efficiently still being implemented. I think Ramunas rightly said, still first and second (package is ?) actually sort of lagging behind its deadlines and full implementation.
Infrastructure interconnections – there has been some progress done, especially in electricity sector. Gas is again lagging behind because it’s more difficult, it is hugely capital – the huge capital investment is necessary, and of course this seems to be still lower in terms of progress.
Second thing – what is necessary – you need a – also transparent markets that the companies can come in. I think here also the Baltic countries are adjusting, if you look (in all ?) transparency indexes and good governance businesses, Baltics are adjusting. And I think that here, EU and especially Nordic, the knowledge and experience is very important, the anti-monopolistic structures and authorities.
Here with Finland and Sweden, if I’m not mistaken, is first or second or third in the world. Estonia is – again, I’m probably slightly mistaken in the data but pretty much conceptually right – 35th in the world, Latvia something around 17th in the world. Lithuania is almost 100 in the world. This is very important also to do the homework and to do those anti-monopolistic authorities which can actually also enforce competition.
So these are the aspects where (are ?) you could see the regional dimension, national dimension, EU dimension. Of course there is no – some silver bullet at one level.
MS. BURWELL: Yeah.
MR. SPRUDS (?): It is a multilevel approach, and so that (on ?) each level you might not expect results just if you do it on the one level of – (those things ?).
MS. BURWELL: Thank you.
Pekka, do you want to add?
MR. SUTELA: Yeah, one half of all energy consumed in Finland comes from Russia, and this is an outcome of free choice. And one has to look at the different kinds of energy carriers to understand why that is so.
The hundred percent dependence on gas need not be handled by LNG, because it’s all consumed industrially or in combined heat and power plants, which have the obligation to be able to switch in a few days to an alternative fuel, if the need arises.
Oil – it makes sense to transport oil from Primorsk 200 kilometers to Porvoo rather than from somewhere in the – in the Gulf, say, around thousands of kilometers. But it can be imported – transported from the Gulf as well. But logistics is important. And by the way, distance – transport cost and logistical costs are still important. They explain to a large degree why today the European gas market is divided into three parts. You have the Russia-dependent part, we have the North Sea-dependent part and we have the North African-dependent part. And transport cost is important.
By the way, there is a study from the Cambridge University, which claims that the Nord Stream will be commercially profitable enterprise just because of transport costs and the depressing level – depressing pressure on transit fees in Ukraine because of the existence of the alternative. These things are important in the future as well. And therefore I don’t think that the third-party access to the very small Finnish natural gas pipeline network will ever have any importance whatsoever.
I don’t understand in these circumstances what sense unbundling of ownership makes. It’s completely devoid of economic rationality in these consequences. But it’s one of these funny games that we have to follow the Brussels with, because in some other countries, if you are a Central European country, it makes prominent sense —
MS. BURWELL: Yeah.
MR. SUTELA: – because there the possibility of several-party access may be a real one, but not in these peripheries.
MS. BURWELL: (Inaudible.)
MR. SUTELLA: It’s a — it’s a polonaise. No, it’s not a polonaise, it’s a French waltz.
MS. BURWELL: I think I saw a question over here.
Q: Milton Davis (ph) – my question really relates to a related topic to what you’ve been talking about but also related to what was discussed earlier. We talked about this Finnish – and Sweden joining NATO. But we haven’t talked about Norway and Iceland joining the EU. We’ll take Iceland as not really important in this picture related to the Baltics. Norway obviously is. Is this — and when we’re talking about economics, then we need to be looking at Norway’s part. And when we’re talking about energy, we definitely need to be looking at Norway’s part. And will the movement that Finland really likely or might likely join NATO, will that open doors up, meaning that – assuming that Sweden follows, will that open doors up that – the only country that’s left out of the whole picture then will be Norway – Norway and Iceland? But Iceland’s already got a sheet on the table now –
MS. BURWELL: Yeah.
Q: – to join the EU. I’m not sure where that’s going to go. But the Norwegian situation – as everybody in this room knows, this is the – will be their third attempt to join. And I just want – I think this is very significant on energy and on economics in general and on making the whole Nordic-Baltic region unified.
MS. BURWELL: Let me ask any of the panelists if in dealing with Nordic-Baltic cooperation on energy issues do you feel like it – is it apparent that Norway is not an EU member. There’s been so many questions that have to do with economics. Norway behaves as an EU member, even though they don’t have a seat at the table, quite literally. And so I was wondering if you feel like there’s a missing piece, or whether they are part of this structure that is emerging.
MR. SPRUDS: Well, I can begin with a short answer, then. Of course, as Norway is not a European Union member, they lack some opportunities. But at state layer, part of the European economic area, which means that they have a good access to European Union markets and so on. This summer – if you’re talking more specifically about energy – Sweden and Norway, for instance, made an agreement about energy certificates for renewable energy. That means that we will have a common market for these kind of subsidies for renewable energy. That means that it is possible for a European Union member to work quite closely together with a country that is not part of the European Union.
MS. BURWELL: Yes.
Q: Maybe I’ll just say a few words. I’m the ambassador of Iceland.
MS. BURWELL: Yes, please.
Q: (Inaudible) – the situation with Iceland and Norway is the same. It has been calculated that through the membership in the EEA that we are really without having the political influence as members have, but we are really having the Four Freedoms. We are also two countries outside of the EU within the Schengen, just to give you an example of very close integration between Iceland, Norway and the EU.
It’s been calculated by Gro Harlem Brundtland and her experts that the situation today is somewhere between 75 percent and 80 percent membership of these two countries in the EU without being members and without having the – (inaudible) – political influence of those sitting at the table.
As concerns the Icelandic EU accession negotiations that were mentioned, neither do I know where that is going to lead us. The nation seems to be, according to opinion polls, very much opposed to joining, but the negotiations are ongoing, to be continued for – I don’t know – two, three years or more. But things change quickly, as we know.
MS. BURWELL: Thank you, Mr. Ambassador. And I understand that in terms of the accession that the question is not so much the opening and closing of chapters. You are already up to par on a lot of the key “communautaire.” It is these political questions that you’ve talked about with –
Q: (Off mic) –
MS. BURWELL: Yes. (Chuckles.) That will be the hard chapter.
Q: – (off mic) –
MR. MALMLOF: This will be over in two years when you have fished out all the fish. (Laughter.)
MS. BURWELL: I would like to ask the panel – one of the things that Pekka has alluded to is Russian investment. And I wonder whether Russian investment, as the opportunities now – and someone mentioned how EU liberalization now actually presents some opportunities for Russian investment in the energy markets, because there’s more being privatized. Is this a bad thing? Is it a good thing? Is Russian investment in the energy sector by its nature something to be avoided, or is it – are there standards that can be set that we can realistically uphold? I think you mentioned reciprocity, Andris. What does that mean, and can it be enforced, given what we’ve seen in the BP experience, for example?
So what are your thoughts about Russian investment, not necessarily government investment, in your energy markets as they liberalize?
Tomas, do you want to say a few words?
MR. MALMLOF: Well, as I said, that – I think that it’s nothing necessarily wrong with Russian investment in Baltic energy markets, provided that they are constrained by the same check and balances that applies to other companies. And this of course is that we have to make the market rules quite clear within the European Union but also that we probably should pursue this reciprocity in a much more offensive way – that is that if we allow Russian companies to invest in our energy infrastructure, then why shouldn’t we be allowed to invest in Russia in the same structure?
MS. BURWELL: Go ahead.
MR. SUTELA: Just a couple – a couple of words, the first one being that the foreign investment in Russian energy sector is larger than for investment in the energy sectors of most large energy producers.
MS. BURWELL: (Off mic.)
MR. SUTELA: The Russian energy sector is also more privately owned than the energy sectors in most other large energy producers.
MS. BURWELL: In the Arab states, for example –
MR. SUTELA: In the Arabic states in particular – and Venezuela and a few countries as well.
MS. BURWELL: Mexico –
MR. SUTELA: So Russia is – it’s an exception of the general picture to the positive, not to the negative.
And the second thing – as an economist, I understand reciprocity as a political concept, though I don’t know what it means, but I understand it as a concept. Back in the 1950s, a very famous economist once said about reciprocity, if you see that your neighbor is throwing stones into her harbor, should you also start throwing stones into your harbor?
If Moscow does not allow good Russians to earn money by selling their lands to foreign investors, why should we prevent our citizens from earning money by selling their lands to whoever happens to want to buy them, if there are not any obvious reasons to think otherwise? I mean, this is the economic logic of a case. So reciprocity as an economic, diplomatic concept does not make economically any sense whatsoever.
MS. BURWELL: Go ahead, Andris.
MR. SPRUDS: Actually, very, very short – definitely Baltic countries are – they’re neighboring Russia. And in this case of course (they’re the ?) southern neighbor. And it will always – (inaudible) – paraphrase Madeleine Albright, indispensable energy nation –
MS. BURWELL: (Laughs.)
MR. SPRUDS: – in terms of supplies, in terms of also investments. But answer I think is very short and coming back that for Russian investments, not to create any risks and to be perceived also in terms of – as a normal investments, actually they should be fully, transparently functioning markets – namely that Russian investments are not dominating one particular domain. Once it takes place and once a business environment is equal for all in world players, including Russian energy companies, in this case I don’t see any risks that Russians are also taking part in the Baltic or wider European communities – (inaudible).
MS. BURWELL: Are there any – do I see any more questions?
We have one last question, and then we’ll (wrap up ?).
Q: Everett Lilya, U.S.-European Command. My question is for Pekka and it has do with the work that Russia’s been doing with their own interconnects for the gas with – to move gas around within Russia. And I’ve seen – I’ve seen some writing in here there that talks about making gas in a way more fungible in the way that oil is to be able to play off the different buyers against one another.
With that in mind – and you alluded to Russia’s own issues with their own energy efficiency in that their domestic gas market is heavily subsidized and that Gazprom is the – is the only company that’s allowed to export. Do you see problems where they might try to leverage being able to play off buyers outside on the external markets to continue to subsidize their own inefficiencies – and of course recognizing that there’s an interesting intersection between politics and business, especially when you start dealing with Gazprom and the revenues that go to the Russian government as a result of energy exports.
MS. BURWELL: Pekka, before you start, let me – we’ll use that as the final wrap-up, but let me ask each of the panelists – and we’ll go in reverse order starting with you. This question and the questions before have gone to the heart of this question of securitization of energy.
And Andris, you mentioned earlier that you thought this was lessening the security.
But this is a conference on security in the Nordic-Baltic area. And in the conference panel, in the title, we refer to energy as a pillar of security. Is energy a special part of the economy that is inevitably part of the security structure? Or are we moving away from that so it’s just, like, normal economic? And of course all of us who’ve watched the European financial crisis wonder whether there is a part of the economy anymore that is irrelevant for security. But energy has always held kind of this special place: halfway economic, halfway security. Are we moving away from that? And is it a good thing? So if you would respond to those questions about Russia and the changes there, but also make a few comments –
MR. SUTELA: Now, these are wonderful, wonderful questions. I sometimes try to provoke a few audiences by asking, what’s actually the difference between watches, and gas or energy as a commodity, because I mean, this is – we couldn’t live without watches. We can’t live without energy, so where actually is the difference? If you start going from – start seriously to think about where the difference is, it’s an interesting and useful exercise of capacity – (inaudible) – concerning me.
I think the key is here in Russia concerning interconnectors and others is – the first thing is that they will never have a common market inside the country, because they will never have the pipeline network that would facilitate real exports of Yamal gas to China or Korea or something like that. The distances are simply too big.
So when they wanted – shift more of their exports to the East, and that makes huge sense from their point of view. They are so dependent on the European markets that nobody wants to be in that situation if she can avoid that. What they do in the East will have to come from new fields, and that’s, again, a very expensive proposition for pipelines and for everything else as well. That’s one point.
The second underlying, important fact is that they must have a much better energy efficiency than they have today. Otherwise, they will be unable to finance their consumption and their investment, and that is something that they don’t obviously want to have. So there’s no alternative to higher gas prices inside the country. And the timetable that was passed, I think, in November 2006 has basically been followed, give and take. It’s a difficult timetable because it’s tied to the European market, the German border price, and nobody knows what the German border price will be in two years or five years or anything like. But they don’t have any alternative. Otherwise, they will not be able to earn – to earn a livelihood.
MS. BURWELL: Thank you.
Andris, on securitization –
MR. SPRUDS: Yes.
MS. BURWELL: – and anything else you wish to comment on.
MR. SPRUDS: Yes, very – but again, trying to be short – even though we differed with Pekka on some couple of issues, I guess, at the same time, I think here I’m in full agreement that energy is just one commodity. It’s a commodity as anything else. But just the, probably, difference again here is this commodity, which has been used also sometimes instrumentally to achieve – not even to say political – but economic gains if you look at the prices to – regards, for instance, in the Baltic region. What is the answer?
Answer is on the one hand that commodities should – how do you say – rotate – act within a(n) energy market. At the same time, we had a strategy – and security comes in – that market insurance, it is very much a responsibility of the government. And here the political, strategic and, to some extent, security element comes in. Where do you put the emphasis, how you insure energy markets, how you develop your own domestic resources, how you – what is written in advisement report, NB8, that – how you develop your energy efficiency as well. This is – (inaudible) – strategic choices by the government. So actually the government should securitize their approach to ensure that a transparent, good-governed market is in effect and functioning also regionally.
MS. BURWELL: Thank you.
MR. MALMLOF: Well, in a theoretical economic world, I think it’s – well, it – I think it would be possible to securitize any commodity, even if I admit that in real life it would be hard to find an example when it’s – would be necessary to securitize the issue of watches – maybe something in relation with Switzerland. I don’t know. (Laughter.) But what I think – it’s important if a commodity is going to be securitized, I think it’s – depends on two issues.
The first is, what impact does this commodity have for the – for the society. And energy demand of course is a very important issue for most countries.
The second thing that decides if it’s going to be securitized of course is if there is any viable alternatives that could be possible to use in the short run. And that’s it.
MS. BURWELL: Good. Thank you very much.
I think we’ve had a great discussion here and really gotten to the heart of energy and economics and the role they play in the Nordic-Baltic cooperation and as well as the issue of how closely tied they are or should be to security, which I think is a fascinating topic where we could go on for quite some time. And a lot will depend upon what happens in the future and how – what happens not only in the Nordic-Baltics but in Russia. So I’d like to thank everyone.