Source: Carnegie

Kyoto could be Russia's ticket to Europe

By Anders Åslund

Originally published in International Herald Tribune, April 6, 2004.

WASHINGTON. Eleven years after Russia applied for membership in the World Trade Organization, the major outstanding issue is with the European Union, and involves Russian natural gas. The key to concluding could be Russia's ratification of the Kyoto Protocols. The EU's main complaint is that the Russian domestic price of natural gas is barely one-quarter of the price at which Russia exports gas to Europe. The EU also demands the deregulation of the Russian gas sector, including third-party access to the Russian pipeline system.
.
While deregulation is advantageous, the EU demand is on shaky ground. Russia argues that it goes beyond WTO rules. Moreover, the EU has not deregulated its own gas market, and its high gas prices are partly caused by inefficient domestic monopolies. Furthermore, Russian gas prices are barely subsidized even at today's low prices, as energy is abundant and therefore very cheap in Russia.
.
In fact, no world market price exists for natural gas, because transportation costs are huge, and prices vary with pipeline investments. For gas as well as for pipeline and railway services, price discrimination is standard in the world, and defensible, because there is often no alternative use for gas. The only way to store it is to turn it into liquified gas, a very costly process. President Vladimir Putin is right when he argues that Russia has a natural comparative advantage in low energy prices. Similarly, Norway has low electricity prices thanks to its abundant and cheap hydropower.
.
Still, the EU can justly claim that the domestic Russian gas price should fully cover all costs, which requires a limited increase in the domestic price. The natural compromise would be that Russia firmly commit itself to raise its domestic gas prices by about 20 percent annually for five to six years. Such commitments are standard at WTO accession. The EU can also demand transparent pipeline tariffs in Russia and possibly the separation of gas extraction and pipelines - but not much more.
.
This would amount to a substantial concession for the EU. But the alternative might be that Russia opts to stay outside the WTO. The question for Russia is how it can convince the EU to make that concession. It has a big, valuable card in the Kyoto Protocol on the limitation of emission of greenhouse gases till 2012.
.
Russia is the key to the Kyoto Protocol. Without Russian ratification, the protocol will not come into force. At the same time, ratification would not cost Russia anything, because the Kyoto Protocol limits emissions to the level of 1990, when the inefficient old Soviet smokestacks let out twice as much greenhouse gases as today. Thus Russia can earn billions of dollars from selling emission quotas.
.
Putin's main goal is economic growth, and the Russian government is suspicious of environmental regulations which may limit growth. But that is not true of the Kyoto Protocol for Russia. The Russian environmental lobby is weak, and global warming is no major concern, while nuclear and chemical pollution is.
.
For Putin, the question of ratifying the Kyoto Protocol comes down to pure foreign policy. Does he want to do the United States or the EU a favor? At present, the United States has hardly anything to offer in exchange, while Russia needs to give the EU something to convince it to allow Russia to enter the WTO.
.
The natural conclusion would be for Putin to tell the European Commission, which handles the WTO accession negotiations, that Russia will commit itself to higher gas prices and to ratifying the Kyoto Protocol in exchange for an EU agreement on Russia's accession to the WTO.
.
There is no need for delay. The European Commission president, Romano Prodi, and several of his ommissioners go to Moscow to see Putin on April 22, and an EU-Russia summit meeting will be held in Moscow on May 21. An agreement by then would enable Russia to enter the WTO this year; the Kyoto Protocol could come into force, and Russia could finally start its real integration with Europe.
.
Anders Aslund is director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace. WTO negotiations

WASHINGTON Eleven years after Russia applied for membership in the World Trade Organization, the major outstanding issue is with the European Union, and involves Russian natural gas. The key to concluding could be Russia's ratification of the Kyoto Protocols. The EU's main complaint is that the Russian domestic price of natural gas is barely one-quarter of the price at which Russia exports gas to Europe. The EU also demands the deregulation of the Russian gas sector, including third-party access to the Russian pipeline system.
.
While deregulation is advantageous, the EU demand is on shaky ground. Russia argues that it goes beyond WTO rules. Moreover, the EU has not deregulated its own gas market, and its high gas prices are partly caused by inefficient domestic monopolies. Furthermore, Russian gas prices are barely subsidized even at today's low prices, as energy is abundant and therefore very cheap in Russia.
.
In fact, no world market price exists for natural gas, because transportation costs are huge, and prices vary with pipeline investments. For gas as well as for pipeline and railway services, price discrimination is standard in the world, and defensible, because there is often no alternative use for gas. The only way to store it is to turn it into liquified gas, a very costly process. President Vladimir Putin is right when he argues that Russia has a natural comparative advantage in low energy prices. Similarly, Norway has low electricity prices thanks to its abundant and cheap hydropower.
.
Still, the EU can justly claim that the domestic Russian gas price should fully cover all costs, which requires a limited increase in the domestic price. The natural compromise would be that Russia firmly commit itself to raise its domestic gas prices by about 20 percent annually for five to six years. Such commitments are standard at WTO accession. The EU can also demand transparent pipeline tariffs in Russia and possibly the separation of gas extraction and pipelines - but not much more.
.
This would amount to a substantial concession for the EU. But the alternative might be that Russia opts to stay outside the WTO. The question for Russia is how it can convince the EU to make that concession. It has a big, valuable card in the Kyoto Protocol on the limitation of emission of greenhouse gases till 2012.
.
Russia is the key to the Kyoto Protocol. Without Russian ratification, the protocol will not come into force. At the same time, ratification would not cost Russia anything, because the Kyoto Protocol limits emissions to the level of 1990, when the inefficient old Soviet smokestacks let out twice as much greenhouse gases as today. Thus Russia can earn billions of dollars from selling emission quotas.
.
Putin's main goal is economic growth, and the Russian government is suspicious of environmental regulations which may limit growth. But that is not true of the Kyoto Protocol for Russia. The Russian environmental lobby is weak, and global warming is no major concern, while nuclear and chemical pollution is.
.
For Putin, the question of ratifying the Kyoto Protocol comes down to pure foreign policy. Does he want to do the United States or the EU a favor? At present, the United States has hardly anything to offer in exchange, while Russia needs to give the EU something to convince it to allow Russia to enter the WTO.
.
The natural conclusion would be for Putin to tell the European Commission, which handles the WTO accession negotiations, that Russia will commit itself to higher gas prices and to ratifying the Kyoto Protocol in exchange for an EU agreement on Russia's accession to the WTO.
.
There is no need for delay. The European Commission president, Romano Prodi, and several of his commissioners go to Moscow to see Putin on April 22, and an EU-Russia summit meeting will be held in Moscow on May 21. An agreement by then would enable Russia to enter the WTO this year; the Kyoto Protocol could come into force, and Russia could finally start its real integration with Europe.
.
Anders Aslund is director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace.