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Continental Divides


As commercial disputes go, it hardly merited a headline. On Feb. 1, Belarus, wedged between Poland and Russia, stopped buying electricity from Unified Energy System of Russia (UES), after UES raised prices by 28%. The former Soviet republic then turned to its northern neighbor Lithuania to make up the shortfall, but electricity supplies in the Baltic state are also largely controlled by UES -- which refused to sell. Then, one by one, the Russian companies that supply natural gas to Belarus -- Gazprom, Itera, and Trans Nafta -- shut off shipments, accusing Belarus authorities of illegally siphoning off gas. The dispute meant that Poland, which gets Russian gas through pipelines transiting Belarus, saw vital gas supplies interrupted for almost a full day.

No one froze in Warsaw -- local stockpiles easily cushioned the shortfall. And the Russians have an explanation for their behavior. Russia's energy companies say they had simply raised prices after supplying subsidized energy to Belarus since 1991, and that Belarus was balking at the increased cost.

But the incident reignited a heated debate within Poland about the wisdom of depending on Russia for over 80% of the country's gas supplies. And for many around Europe, the appearance Russia gave of tampering with vital energy supplies to another country smacked of strong-arm tactics belonging to a more unpleasant era. "We have sensed a new Russian assertiveness," says Mircea Geoana, Foreign Minister of Romania.

The dispute is emblematic of a big shift on the Continent: Tensions are growing along what on May 1 will become one of the world's key political and economic frontiers -- between the European Union and Russia. That's the date 10 new member states formally join the European political club, including eight former members of the old Moscow-controlled Warsaw Pact, such as Poland. With this historic expansion pushing Europe's borders hundreds of miles to the east, the EU and Russia will be facing each other across a long frontier.

ALARM BELLS

It could be a more troublesome frontier than either side bargained for. Relations seemed decidedly chummier just 10 months ago, when Russian President Vladimir V. Putin and European Commission boss Romano Prodi clinked glasses in St. Petersburg after expanding a partnership agreement covering issues from energy to counterterrorism.

Since then, everything from the Oct. 25 arrest of Russian oil tycoon Mikhail B. Khodorkovsky to a series of bitter policy disputes over the World Trade Organization and the Kyoto Protocol have set off alarm bells in Brussels and the capitals of Europe. On Feb. 9 the European Commission issued an unusually frank critique of various aspects of Russian policy, from "its more assertive stance" toward former Soviet states to its failure to solve the conflict in Chechnya. And it questioned Putin's commitment to democratic values. "There's a very substantial dissatisfaction with the Russians on a number of issues," concedes a top commission official in Brussels.

The irritation is mirrored in Russia. In January, the Foreign Ministry presented the EU with a list of 14 demands, including an increase in quotas on Russian steel imports to the enlarged EU and visa-free travel between Russia and the new members. Moscow also is irritated with growing EU involvement in former Soviet countries such as Moldova and Georgia, where Russia now faces EU demands to withdraw its forces. "If previously people in the EU were talking about finding a solution on the basis of common interests, now [they] are talking about finding a solution on the basis of European interests," says Sergei Karaganov, chairman of the Council on Foreign & Defence Policy, a think tank in Moscow.

In Europe, the nervousness is most visible in the soon-to-be EU member states that were once under Soviet control. Many are worried about the rising prominence of well-heeled Russian oil-and-gas companies such as Gazprom, Lukoil, and Yukos. In tiny Lithuania, for example, the main Mazeikiu Nafta refinery is now majority-owned by Yukos, and Gazprom recently bought a 34% stake in the national gas distribution company, Lietuvos Dujos.

Officials in Warsaw, Prague, and Budapest point to statements made late last year by Anatoly Chubais, a former First Deputy Prime Minister of Russia and now CEO of UES, that Russian energy companies would work with Moscow in promoting Russian "liberal imperialism."

"We are concerned that Russia backs its oil-and-gas concerns not as commercial enterprises but as instruments of foreign policy," says Janusz Onyszkiewicz, a former Polish Defense Minister now at the Center for International Relations in Warsaw.

Russians see it differently. In their eyes, local companies are only leveraging the obvious comparative advantage of Russia's energy riches. Furthermore, the companies face capacity constraints in Russian ports -- one reason they've been buying up refineries in Eastern Europe. And the Russians have money. "The fact is that we and others in Eastern Europe are privatizing everything, and the Russians come in, and they are willing to pay the extra buck," says Romania's Geoana.

Despite the suspicions on both sides, officials point to some movement on a variety of EU-Russian issues recently. The EU and Russia, for example, have joined forces to look at new oil-and-gas pipeline designs. Stalled negotiations on visa-free access to the EU by Russian nationals seem ready to restart. And expectations are growing that a second Putin term following Presidential elections on Mar. 14 could lead to a breakthrough in other areas, such as Russia's eventual acceptance that it'll have to give up lucrative bilateral trade pacts it has long had with some eastern states. "My hope is that these problems will be sorted out before enlargement" on May 1, says Latvia Foreign Minister Sandra Kalniete.

The big unknown, in fact, could be Putin himself -- and which way he takes Russia. If he shows moderation in pursuing Russian foreign policy goals in surrounding regions, the upside in trade and political relations with an expanded EU could be enormous. But if there is increasing interference and bullying in Russia's "near-abroad," the benefits will be limited. Better relations with Europe "won't be possible if the price is a kind of silence about what Europeans see as very unacceptable human rights violations in Chechnya and lack of democracy at home," says John Palmer of the European Policy Centre in Brussels. Is that understood in Moscow? By John Rossant in Paris, with David Fairlamb in Frankfurt and Jason Bush in Moscow


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