In the wake of President Obama's decision to scrap the U.S. missile defence shield in eastern Europe, many are pondering Russia's response. The relationship will remain in the spotlight this week, when President Medvedev heads to the U.S. for the G20 summit. Although the precise nature of Russia's reaction remains to be seen, it has a big incentive to improve relations. It badly needs American investment and co-operation to help solve serious economic problems at home.

Critics of Obama's decision worry that it will "embolden" Russia, causing more aggressive behaviour abroad. Yet they forget that the Bush administration's antagonistic policies failed to provide security to Russia's neighbours. These policies didn't prevent Russia's war with Georgia, the repeated gas disputes with Ukraine, and a serious cooling of relations with countries such as Poland. Far from being restrained, Russia's confrontational attitude had a lot to do with its perception that the U.S. was busy encircling the country with missile bases and alliances.

The critics also imply that Russia is preoccupied with external expansion, but that hardly seems appropriate today. Russia's GDP is set to plummet by 8 percent this year. Russian analysts estimate that the country needs up to $2 trillion to renovate its dangerously clapped-out infrastructure. In major industrial cities, Russia's dilapidated factories are mulling huge job losses. For the foreseeable future, Russia's leaders are likely to be preoccupied with thorny domestic problems.

Faced with such daunting challenges, it's entirely logical that both Medvedev and Putin say they are keen to kick-start American trade and investment. Responding to Obama's decision -- which he described as "brave and correct" -- Putin immediately linked it to economic issues. He called for the U.S. to back Russia's entry into the World Trade Organisation (WTO), and scrap Soviet-era trade restrictions against Russian companies, especially those that regulate technology transfer to Russia.

On the same day, at an investment summit in Sochi, Putin held well-publicized meetings with the CEOs of General Electric, Morgan Stanley and Texas Pacific Group -- all major U.S. companies. When it comes to the economic sectors that Russia says it is most eager to develop, American investment will be especially crucial. The crisis has underscored the need for Russia to wean itself off dependence on natural resources, and develop new high-technology sectors, such as IT and nanotechnology, where U.S. companies are at the cutting edge.

This means that the U.S. still has plenty of bargaining chips left as it seeks to gain Russia's cooperation on global issues. The bigger problem could be persuading U.S. investors to come. No matter how much Russia's leaders appear to welcome foreign investment, there remain huge obstacles, including corruption and bureaucracy, which they seem largely powerless to deal with.

Nor does the tentative thaw mean an end to diplomatic tensions. Russia's relations with its immediate neighbours may well remain stormy, potentially causing renewed strains with Washington. Still, it's hard to argue that by extending his olive branch to Russia, Obama increases the likelihood of such upsets. The evidence of the last few years implies just the opposite. The frostier Russia's relations have been with the U.S., the more determined Russia has been to resist U.S. encroachment in nearby countries, increasing regional tensions.

Now, Obama's gesture has opened up the possibility of a fresh start, creating prospects for mutually beneficial economic cooperation. The Russians would be foolish not to jump at that opportunity.

After just six weeks as NATO secretary-general, Anders Fogh Rasmussen has his first crisis. The alliance may be slowly bleeding in an intractable war in Afghanistan, but the immediate cause is the U.S. administration's decision to shelve a planned missile shield due to have been built in Poland and the Czech Republic.

The shield, energetically promoted by former President George W. Bush, was designed to intercept a small number of missiles fired by Iran or some other "rogue state". But Russia saw it as a threat to its own nuclear deterrent and NATO's new east European members saw it as a useful deterrent against Russian bullying, by putting U.S. strategic assets on their soil.

President Barack Obama's decision to drop plans to install it on Polish and Czech territory leaves those former Soviet satellites feeling betrayed -- because they expended political capital to win parliamentary support -- and more exposed to a resurgent Russia, especially after its use of force against Georgia last year.

Obama's move is clearly part of a warming of U.S. relations with Moscow from which Washington hopes to gain help in return on supply routes to Afghanistan, pressure on Iran to rein in its nuclear programme, and an agreement on radical cuts in nuclear arsenals. But this "reset" of U.S.-Russian relations has only exacerbated the rift within NATO over Russia.

The three Baltic states and Poland were particularly critical of NATO's low-key response to Moscow's military action in Georgia. Some said the refusal of west European allies led by Germany and France to agree at a NATO summit last year to putting Georgia and Ukraine on a path to NATO membership emboldened the Kremlin to act. President Dimitry Medvedev's harsh attack on Ukraine's leader in an open letter last month fanned their fears of Russian bullying of its neighbours.

East European officials cite Moscow's playing with the gas taps and trade disputes, and its apparent determination to keep its Black Sea fleet in the Crimean port of Odessa Sevastopol beyond a 2017 deadline agreed with Ukraine as part of a strategy of tension intended to reverse the "colour revolutions" in Kiev and Tbilisi, and bring other former Soviet republics to heel.

All that makes it a particularly awkward moment for Rasmussen to deliver his inaugural keynote speech on NATO-Russia relations on Friday in Brussels. The former Danish prime minister has put a few noses out of joint in his first weeks by making clear he intends to run NATO in a more results-oriented way, leaving less room and time for ambassadors in the North Atlantic Council to debate any idea to a standstill. He has set strict time-limits on council meetings, streamlined flabby agendas and outsourced the drafting of a new Strategic Concept to a group of 12 experts led by former U.S. Secretary of State Madeleine Albright, on which not all allies are represented.

His personal management style and high media profile (monthly news conferences, a blog and Twitter chatter) has sharpened the traditional Kabuki dance in which a new boss and the old board flex their muscles at each other in mutual suspicion, insiders say. It is the first time a former prime minister, used to running a government and to talking to fellow national leaders, has been picked for the job. Previous secretaries-general were former defence or foreign ministers, more accustomed to being servants of the member nations.

Both camps within NATO (which privately brand each other the "Friends of Russia", and the "Cold Warriors") will be watching every word of Rasmussen's Russia speech to ensure he does not depart from alliance policy. The fact is that NATO has been unable to agree on an overall policy towards Russia since the 1990s, when it declared that Moscow was no longer an adversary.

Rasmussen hopes to launch NATO's own modest "reset" of ties with Russia, offering closer cooperation on Afghanistan, a joint threat assessment and work on non-proliferation of nuclear weapons. NATO officials have received assurances that Moscow will respond positively and breathe new life into the NATO-Russia Council.

None of that will assuage NATO's east European members, who are likely to press harder now for practical steps to give credibility to the alliance's Article V mutual defence commitment. That could involve drafting military plans to reinforce the Baltic republics and Poland, and holding joint military exercises on those countries' territory. The French and Germans have resisted such ideas in the past as unnecessarily provocative to Moscow. If NATO cannot agree to such moves, the United States may have to do more on its own to compensate its jilted friends.

(note: corrects Odessa to Sevastopol in 6th paragraph)

By Gareth Evans, President, and Alain Délétroz Vice President (Europe) of the International Crisis Group. Any views expressed are the authors’ alone.

The biggest unresolved challenge facing the NATO countries’ leaders when they meet on the Rhine this week is how to manage the organization’s relationship with Russia. Nobody wants to relive the Cold War, but habits of mind from that era persist on both sides, continuing to influence behaviour and inhibiting the clean break from the past that would be in everyone’s interest.

Russia’s invasion of Georgian territory last year seemed to confirm every latent NATO fear about the aggressive resurgence of the beast-from-the-east which the organization was formed sixty years ago to counter. And it is hard to argue that Moscow’s response to the situation in South Ossetia was not an indefensible overreaction, whatever judgment one makes about President Saakashvili’s contribution to the course of events. But what was missing from nearly all the Western reaction was any thoughtful reflection on what its own leaders’ contribution might have been, over the years since the USSR collapsed, to Russia’s newly assertive posture.

It is not fully appreciated, even now, in most NATO capitals how strongly Moscow feels that the organisation’s expansion, deep into the former socialist camp and the former USSR itself, was a brutally insensitive and confrontational response to the quick and generous Soviet withdrawal from Eastern Germany and Central Europe. The West rightly argues that all new NATO members have joined freely, and certainly not under pressure from the U.S. or EU member states. But the vast majority of Russians see NATO as an offensive military alliance, bombing Belgrade in 1999 without UN Security Council approval and now trying to surround Russia in spite of promises made to Mikhail Gorbachev not to expand eastwards.

NATO has become an easy target for nationalists in Russia who want to buoy anti-Western sentiment and convince the population that they are facing a significant threat from outside - basically the same as that during the Cold War. It is unquestionably the case that in the present environment any new enlargement towards Russian borders, particularly to Ukraine and Georgia, will be universally perceived in Russia as an unfriendly act that will demand retaliation.

How can these tensions be defused in a way that will be constructive and forward-looking, but also acknowledge the political reality that neither NATO nor Russia will be very keen to fundamentally change its narrative of what has occurred so far? The best starting point, in our view, would be to acknowledge that the problem with NATO’s expansion was not so much that it extended to Russia’s borders, but that it stopped there.
 
The most helpful single step, accordingly, that NATO leaders could take at this Summit would be to make a very clear statement that NATO is an alliance of the free open for membership by all countries on the European continent, including Russia itself, and encouraging Moscow to seek membership at a time of its own choosing.

Making such an explicit public statement would have at least three positive consequences. It would place the ball in the Russian leadership’s court, forcing it to consider the offer seriously and articulate a response. It would ease tensions surrounding Ukraine and Georgia: possible NATO enlargement here could no longer be seen as inherently unfriendly act towards Russia if the door is open for Russia itself to join the alliance. And it would paint into a corner the most nationalist politicians in Russia who use NATO so flagrantly to undermine any serious move toward real democratization at home.

Crisis Group has recently tested this approach in private conversations with a number of senior officials in Moscow. Their reaction has been surprisingly uniform, and fascinating: Medvedev and Putin would think very seriously about it, and the military would probably be in favor. For the military, joining NATO would mean enhancing standards and being in the same game as the world’s most modern armies. For the Kremlin leadership, NATO’s transition to a visible new ‘collective security’ role, finally abandoning its Cold War ‘collective defence’ remit, might be a way of giving real content to President Medvedev’s call nine months ago for a new security architecture in Europe, as to which Moscow has not yet proposed any specific blueprint.

What Medvedev has done is launch a very bold reform of the Armed Forces that, if carried out as presented, would mean that the Russian army will cease to be an broad defensive block facing the West, and instead become a modernized, quickly deployable outfit, capable of acting in regional or global hot spots, very much like its Western counterparts. There is a potentially significant message here which NATO should not ignore.

If Barack Obama in Strasbourg this Friday were to state publicly that NATO at 60 is also there to welcome Russia should it decide to join, subject to satisfying the same conditions as every other new member, he would press a major “reset” button indeed in US-Russian relations. The risk for the alliance in such a statement is negligible. Russia could say “no, thank you”, but will have difficulty thereafter in claiming that NATO enlargement is targeted against Russia. Or it could respond positively, in which case it will have to start working hard on, among other things, creating the necessary democratic controls on its armed forces and its intelligence services - something that many Russians and people in the West have long been waiting for.

A chaotic world demands bold leaders capable of taking bold historical steps. Two decades ago, Ronald Reagan made a vibrant call in Berlin to Mikhail Gorbachev to put his words into deeds by tearing down the Berlin wall, and he answered by doing exactly that. Opening the door for NATO membership now to Medvedev’s Russia is another step that would have profoundly positive implications for the future stability of Europe and the wider world.

– Willis Sparks is a Global Macro analyst at the political risk consulting firm Eurasia Group. The views expressed are his own. –

Few things in life amused my dad more than a good karate movie. I once asked what he found so funny about Bruce Lee’s jaw-dropping display of poise and power. “Nice of the bad guys to attack him one at a time,” he said. In the real world, threats don’t arrive single-file, like jets lining up for takeoff.

President Barack Obama’s toughest foreign-policy challenge will be in managing the sheer number of complex problems he’s inherited and their refusal to arrive in orderly fashion. In addition, the still-metastasizing global financial crisis will exacerbate several of these problems, by depriving a number of governments of the funding they need to maintain social stability and to meet internal and external threats to their security.

AFGHANISTAN AND PAKISTAN

There is clearly a risk of collision at the intersection of Afghanistan and Pakistan, both of them plagued with floundering elected governments and deteriorating security environments. In Afghanistan, once Obama keeps his promise to provide thousands more U.S. troops, he must decide whether his team can afford to work around President Hamid Karzai (who may win reelection in August) and more directly engage tribal leaders and willing members of the Taliban to restore stability.

But Afghanistan’s security continues to depend on the ability of U.S. forces to stem the flow of militants and supplies into the country from tribal areas in Pakistan. Aware that Pakistan’s armed forces are neither reliably willing nor able to help, the Obama team must find a way to neutralize Pakistani militants without arousing broad public anger across the country and destabilizing its cash-strapped government.

IRAN

The new president also inherits a central role in the international conflict over Iran’s nuclear program. Publicly committed to warnings that a nuclear Iran is “unacceptable,” some within the Obama team say the steep recent drop in oil prices fueled by the financial crisis will further hobble Iran’s already unsteady economy, adding bite to U.S. sanctions and raising hopes that direct engagement might bear fruit.

But however sharp the sticks or sweet the carrots, a broad consensus has developed within Iran in favor of the nuclear program, one that has so far proven immune to external pressure. Obama will eventually face a tough choice: He can accept the need for military action against Iranian nuclear sites or tacitly accept that no one can prevent Iran from becoming a nuclear power.

IRAQ

Across the border in Iraq, recent local election results generally bolstered moderates at the expense of radicals. But the inability of Iraqi lawmakers to forge durable compromises on the equitable distribution of political power and oil revenue, on the disputed status of energy-rich Kirkuk, and on the balance of power between federal and provincial governments leave Obama in a tough spot. He can hold to campaign promises of a near-term withdrawal of all U.S. combat troops or accept the political fallout that comes with approving Pentagon requests for a go-slow approach meant to protect recent security gains.

RUSSIA

There are plenty more potential flashpoints, but the most important international relationships Obama must cultivate are those with newly insecure Russia and increasingly self-confident China. Some within the Kremlin fear that U.S. influence in Russia’s neighborhood threatens the country’s long-term security, even as the global recession thins its (still considerable) financial reserves. A series of recent confrontations—over Kosovo, U.S. missile defense systems in Central Europe, Russia’s war with Georgia—have allowed Russian officials to capitalize on domestic anti-American sentiment and have pushed U.S. policymakers in search of a new approach.

But willingness to “press the reset button,” as Vice President Biden recently suggested, might breed misunderstanding. If Russians believe this signals that Obama will turn a blind eye toward Kremlin bullying at home or abroad, a luxury the new U.S. president cannot afford, his administration may have to reboot again—and sooner rather than later.

CHINA

The Bush administration’s first international test came in April 2001, when a U.S. spy plane collided with a Chinese fighter jet, killing the Chinese pilot and provoking a diplomatic standoff over detention of the U.S. flight crew. But China has become a status-quo power in recent years, as the leadership’s reliance on strong growth to bolster its domestic political capital has given Beijing a growing stake in global stability. Over time, the Bush team helped cultivate steady and predictable bilateral ties with China by focusing negotiations on subjects its leaders are willing to talk about—currency conflicts rather than human rights.

Obama says he means to broaden the conversation—a shift that will require plenty of patience on both sides. The stakes are high, particularly as the global financial crisis provokes anxiety in both capitals. This is the world’s most important bilateral relationship. Investing it with predictability and mutual trust will take considerable time and care.

So far, the new president has been lucky. He’s been able to devote time and energy to the stimulus package and financial rescue plan that he hopes will help refloat the U.S. economy. But the administration should recognize that this same financial crisis will add to the complexity of the foreign-policy challenges it faces—challenges that won’t come one at a time.

– Peter Schechter is an author and an international political and communications consultant. A founder of one of Washington’s strategic communications consulting firms, he has spent twenty years advising Presidents, writing advertising for political parties, ghost-writing columns for CEO’s, and counseling international organizations out of crises. “Pipeline” is his second novel. The views expressed are his own. –

After an eighteen year sabbatical, we fiction writers have recently put Russia back foursquare into its role as a novelist’s favorite fierce antagonist.  For decades, thrillers were dominated by the threatening Soviet imagery spun by John Le Carré, Tom Clancy and Frederick Forsythe.  Now, recent offerings like Daniel Silva’s “Moscow Rules”, Ted Bell’s “Tsar”, and my own “Pipeline” again reassign Russia its place of concern for political leaders, intelligence agencies and military planners.

That Russia provides good material is no surprise. The non-fiction Russia uses natural resources for coercion.  It militarily overwhelms a small neighbor. It crushes domestic dissension through physical or psychological intimidation. It suffers from near-obsessive mistrust of foreigners’ intentions.  Oligarchs and Kremlin bureaucrats are locked in a maze of corruption, mafia and violence.

So, how does America reconcile this reality with its foreign policy needs? As it considers its options with Russia, the new administration must wrestle with two potentially contradictory considerations.  On the one hand, no matter how good the fodder for fiction, Washington must ”reset” relations that have gone badly off track with this prominent nuclear-tipped, 11 time-zone behemoth.

On the other hand, events in the financial and energy markets may have inadvertently exposed an uncomfortable quandary: Does the New Russia actually matter all that much?

As demand and prices for its commodities soared, Russia has gotten rich without making much of anything.  When is the last time you bought something with a ‘Made in Russia’ label?  No textiles.  No computers.  No cars of any worth. No refrigerators or washing machines. No services. Even Stolichnaya is now bottled in Latvia.

Depressed energy prices and weak demand means that petro-states have lost the saber they used to rattle.  As the Kremlin’s finances flounder, some see a possibility that Vladmir Putin could even lose his hold on power – but not before Putin’s Siloviki (security bureaucrats) apparatus fights tooth and nail to hang on to money and clout.

Worsening matters for Russia, western environmental and national security concerns are accelerating technologies that could reduce the west’s dependence on hydrocarbons.  When the United States announces a serious conservation policy that reduces fossil fuel consumption – and with President Barack Obama this will happen – Moscow could find its long term geostrategic position increasingly eroded.

Yet, notwithstanding its difficulties, let’s remember that engaging Russia is better policy than the previous administration’s pinballing between infatuation and thoughtless antagonism.  Yes, Moscow hasn’t exactly been a reliable ally.   But as Professor Dimitri Simes says: “Nor has it acted like an enemy, much less an enemy with global ambitions and a hostile and messianic ideology.”

It is clear now that the Bush administration’s desire to place advanced warning missile defense systems so close to Russia’s borders was a miscalculation.  Similarly mistaken was the willy-nilly rhetoric of NATO expansion.

At a time of so many competing financial, military and political priorities, U.S. policy must first and foremost prevent Russia’s return to the top of America’s international worries.  U.S. policy needs breathing space to tackle priority number one: the growing arc of Mideast violence from the Mediterranean to the Hindu Kush.

Perhaps the place to start is to communicate a willingness to revisit missile defense. Iran’s early February satellite launch may now have impeded the removal of the Polish-based anti-missile sites.

But the United States can agree to provide Russia ongoing, verifiable reassurances that the systems will remain directed at “rogue states” and have nothing at all to do with Russia.

Given the regime in Moscow, this is a relationship fraught with difficulty. But it can be kept on track through pragmatic engagement.  Both countries will benefit from meaningful cooperation on Iranian nuclear advances, terrorism, non-proliferation and the spread of nuclear materials.

Turning down the rhetoric and finding a few areas of real joint interest would bring an welcoming respite to the frost in Russo-American relations.

Pity us authors, though.  We risk losing this fascinating subject all over again.

— Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Arms control is back and will thaw icy relations between the United States and Russia this year, but how far the new detente goes depends on the truculent mood in Moscow.

The potential exists for a grand bargain encompassing cooperation on the global financial crisis, Iran, Afghanistan, nuclear disarmament, missile defense, conventional armed forces and NATO enlargement.

But there are plenty of landmines on the road. Differences over the future of Georgia and Ukraine, two former Soviet republics on Russia’s borders, are the most obvious obstacles.

After eight years of disdain for arms treaties under George W. Bush, U.S. President Barack Obama is set to propose a radical negotiated reduction in nuclear missiles and warheads.

Expect an initiative before Obama’s first visit to Europe in April for a pact to replace the U.S.-Soviet Start-1 strategic arms reduction treaty, which expires at the end of this year.

Vice President Joe Biden may give a foretaste of U.S. ideas at the Munich Security Conference next weekend.

“The prospects for forward movement are reasonably good because we now have an administration in Washington which actually believes in arms control,” says Strobe Talbott, president of the Brookings Institution think-tank.

Talbott, the leading U.S. government official on relations with Russia in the 1990s, expects Obama to postpone deployment of a planned missile shield in Poland and the Czech Republic, which has infuriated Russia.

But he is skeptical of a broader rapprochement because of what he calls Moscow’s “sour geopolitical mood”.

DISARMAMENT

Russian President Dmitry Medvedev and Prime Minister Vladimir Putin have fiercely opposed the missile shield, as well as U.S.-led efforts to bring Georgia and Ukraine into NATO. They see both moves as attempts to encircle and marginalize Russia.

Obama cannot abandon either policy without alienating key constituencies at home and in eastern Europe, but he has good grounds to put both on hold while he explores the prospects for cooperation with Moscow and for direct talks with Iran on its nuclear program.

Russia would be expected in return to allow a tightening of U.N. sanctions on Iran and to suspend deliveries of S300 air defense missiles to the Islamic Republic, which could make any U.S. or Israeli air strike more difficult.

This is important in a year when the major powers will be focused on trying to persuade Iran to halt uranium enrichment, which the West is convinced is aimed at developing a bomb.

One of Tehran’s arguments is that the nuclear powers have failed to fulfill their pledge in the 1968 Non-Proliferation Treaty to work towards general nuclear disarmament.

Almost 20 years after the Cold War ended, the United States and Russia still have arsenals of more than 10,000 warheads each that are costly to maintain and make no military sense since modern wars mostly involve precision air power, highly mobile strike forces and paramilitary police.

They can afford to scrap at least 90 percent of their stockpiles while maintaining a credible nuclear deterrent.

They should seek to abolish short-range missiles which are the most destabilizing because they leave the shortest warning time and require split-second “use-them-or-lose-them” decisions by military commanders.

A bold nuclear disarmament initiative would have bipartisan support in the United States, where a quartet of elder statesmen including former Republican Secretaries of State Henry Kissinger and George Shultz has advocated such a step.

Their goal is to try to halt the spread of nuclear weapons to states such as Iran and to terrorist organizations by having major atomic powers set the example while tightening global controls on technology and fissile materials.

INSUFFICIENT?

Whether such an initiative will launch a new era of U.S.-Russian detente is uncertain.
Oksana Antonenko, senior fellow on Russia and the former Soviet countries at the International Institute for Strategic Studies, says arms control alone cannot be the engine of a better relationship because suspicion on both sides is so deep.

“It is hard to see who in the Obama team will advocate a strategic rapprochement with Russia. Russia isn’t on their radar screen at all,” she said.

Moscow is more concerned about stabilizing its economy and ensuring its place in the new world order arising from the financial crisis, in which the big emerging economies will have more sway at the expense of the Group of Eight including Russia.

Oil prices have fallen from $147 to $40 a barrel since last July, the Russian stock market has lost 75 percent of its value and the Kremlin faces street protests over its economic policy.

This could make Russia’s leaders more inclined to seek accommodation with the West, to reassure investors including Russian businessmen, or it could prompt them to play the nationalist card.
Putin’s speech in Davos raised hopes of the former but his tone and behavior at home, including plans for a big increase in military spending, point towards the latter.

Obama cannot make that choice for Russia, but he can give its leaders reasons to choose the former over the latter.

For previous columns by Paul Taylor, click here.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The gas dispute between Russia and Ukraine that has left hundreds of thousands of Europeans shivering in the winter cold is bound to accelerate plodding European Union efforts to build a common energy policy.

The cut-off of Russian gas supplies to Europe via Ukraine highlighted how little progress the 27-nation EU has made in connecting national energy networks and diversifying supplies since the first such crisis three years ago.

“A similar situation occurred in 2006 and we Europeans now feel guilty about not having done what we said we would do,” said an EU energy official, who declined to be identified because of the sensitivity of his position.

Unlike 2006, when the Europeans broadly sided with Ukraine’s pro-Western, democratic government, the EU has remained strictly neutral this time in what it regards as mostly a commercial dispute over gas pricing and unpaid bills.

Both sides broke undertakings to Brussels on continuity of supply. The lack of transparency on contracts, the role of murky intermediaries and coalition feuding in Kiev all made it harder to sympathise with Ukraine this time, the EU official said.

“The Russians were having a good gas war until they overreacted by cutting supplies to the EU. As in the war with Georgia last year, they could not resist the urge to teach former Soviet republics a lesson,” he said.

Russian giant Gazprom’s demand for Ukraine to pay market prices is not unreasonable, but television images of Prime Minister Vladimir Putin ordering the company to turn off the taps to Europe belies talk of a purely commercial issue.

Several EU states have increased gas stocks since 2006 and avoided major disruption. But Bulgaria, the poorest EU newcomer, and western Balkans states Croatia and Bosnia were caught with no stocks at all. Supplies to 18 countries have been affected.

That prompted the EU to intervene. Czech Prime Minister Mirek Topolanek, the EU presidency holder, persuaded Moscow and Kiev to sign a deal allowing EU monitors to check the transit of gas across Ukraine to get supplies to Europe flowing again.

MUTUAL MISTRUST

Progress on integrating the European gas market by linking up national pipeline systems has been very slow, partly due to mutual mistrust among EU nations, as well as divergent business interests and political differences on relations with Moscow.

Member states still do not share information with each other about the price their energy companies pay Gazprom for gas. The executive European Commission and the EU Council secretariat have been struggling to collate such data since 2006.

“We preach transparency but we do not practice it among ourselves,” the EU energy official said.
Poland has led a chorus of new members from central and eastern Europe calling for energy “solidarity” within the EU to reduce the former Soviet satellites’ dependency on Moscow, which provides a quarter of the EU’s gas.

But Germany, Europe’s biggest gas consumer, opposes any emergency EU pooling arrangement for gas stocks, arguing that this is a commercial matter for utility companies.

Berlin is keen to manage its energy relationship with Russia without the involvement of Brussels. It resisted any EU involvement in the Ukraine dispute until the leaders of Bulgaria and Croatia appealed personally to Chancellor Angela Merkel.

EU officials say the crisis should spur European leaders at a March summit to put political momentum and public money behind plans to build cross-border energy interconnectors in Europe.

They may also agree on minimum requirements for gas storage as the EU has for national oil stocks.
And they will likely give higher priority to diversifying gas suppliers, supply routes and delivery mechanisms in particular to develop liquefied natural gas (LNG) facilities.

Among suppliers, the EU is eyeing Qatar and Nigeria for LNG as well as Algeria, Norway, Azerbaijan, Iraq and Central Asian countries for piped gas.

Russia is using the crisis to underline the cost for its NordStream and South Stream projects to carry Russian gas directly to European consumers via pipelines under the Baltic and Black seas, bypassing Ukraine, Belarus and Poland.

The dispute will also add political weight to the Nabucco project, backed by both the EU and the United States, to pipe Caspian and Middle East gas to central Europe via Turkey, but there are doubts about finding enough gas to fill the pipeline.

None of these projects offers an early solution, given the long lead times and high cost. EU officials say they are not an “either/or”. There will be enough demand and enough gas to justify all three extra pipelines, they say.

In the shorter term, the capacity of existing pipelines can be expanded. But the main quick gains for European gas security would come from linking national networks into a single market and improving energy efficiency, especially in central Europe.

For previous columns by Paul Taylor, click here.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The European Union is entering a lame duck year just as new challenges are mounting from Israel’s assault on Gaza, Russia’s gas cut-off to Ukraine and the impending inauguration of U.S. President Barack Obama.

The EU’s active crisis management in the Georgia war and the global financial meltdown last year under the energetic leadership of French President Nicolas Sarkozy was an exception, not the dawn of a new, more effective Union.

Europe now faces 12 months of stasis with two peripheral small countries - the Czech Republic and Sweden — holding the six-month rotating presidency, EU legislation on hold because of European Parliament elections in June, and the European Commission winding down to the end of its term in November.

Domestic politics in key member states will also constrain EU initiatives. Germany, the biggest member state, has a general election in September in which the two major parties in its ungainly grand coalition will be fighting each other.

That seems to preclude agreement on bold economic stimulus measures or foreign policy risk-taking.
Europe will also be held in check for most of the year by a second Irish referendum, expected in October or November, on the EU’s Lisbon treaty on institutional reform designed to give the bloc stronger leadership and a fairer decision-making system.

EU leaders will be careful not to do or say anything that could jeopardize the chances of reversing last year’s “No” vote.

LACK OF LEVERAGE

The first few days of the year have highlighted the EU’s divisions and lack of leverage in dealing with Israel, the Palestinians, Russia and Ukraine.

The Europeans exposed themselves to ridicule with two separate diplomatic missions touring the Middle East - an official EU delegation led by Czech Foreign Minister Karel Schwarzenberg and a French one led by Sarkozy, behaving as if he were still president of the Union.

The dual missions also reflected policy differences. While France, Britain and EU foreign policy chief Javier Solana demanded an immediate ceasefire, the Czechs and Germans blamed the Palestinian militant group Hamas squarely for the fighting and showed more sympathy towards Israel.

The EU has little leverage with either side, since the Israelis consider the United States to be the sole power broker in the region, and the Europeans will not talk officially to Hamas, which they have declared a terrorist organization.

The one card Europe can play is the possibility of deploying European monitors to help secure Gaza’s southern border with Egypt and prevent arms smuggling into the Palestinian area.

The offer of an EU monitoring presence helped achieve a ceasefire between Russia and Georgia last August.

France and Turkey have offered monitors to support an Egyptian ceasefire plan put forward by President Hosni Mubarak after talks with Sarkozy.

But there are snags: Israel does not trust the Europeans to enforce an arms embargo, Egypt does not want European forces on its soil, and Hamas does not want its hands tied by Europe.

If the monitors do go in, they could end up caught in the crossfire between Palestinian militants and Israeli troops.

European forces already run that risk in southern Lebanon, where they deployed in a buffer zone in 2006 to help end a conflict between Hezbollah fighters and the Israeli border.

WRONG-FOOTED

The EU has also been wrong-footed by Russia’s gas cut-off to Ukraine, which has now led to severe reductions in gas supplies to EU member states in central and southeastern Europe.

The European Commission and the Czech presidency have so far scrupulously avoided taking sides in what they describe as a commercial dispute.

But Czech Prime Minister Mirek Topolanek said if supplies to Europe were not restored by Thursday, the talks should be escalated to the top political level and the EU would intervene.

While many European governments, especially in former communist central Europe, suspect Moscow is playing with the gas taps to intimidate Ukraine’s pro-western government and send a message to other European countries dependent on Russian supplies, the EU has no common position.

The German election is a factor here too. Foreign Minister Frank-Walter Steinmeier, the Social Democratic candidate for chancellor, is widely seen as sympathetic to Russia, while Christian Democratic Chancellor Angela Merkel is more critical.

The same paralyzing factors may make it difficult for the EU to respond to challenges it is likely to receive from Obama.

Germany seems set to resist joining any massive fiscal stimulus of the kind the U.S. president-elect is planning.

Germany, Italy and Austria, with strong commercial interests in Iran, are unlikely to accept much tougher sanctions against Tehran’s nuclear program, especially without U.N. approval.
Berlin has also made clear it will not send more troops to Afghanistan or commit its forces to frontline combat missions.

The one issue on which a lame-duck Europe will be an eager partner for Obama is in fighting climate change. But EU hopes that the new U.S. leader may join an international agreement on curbing greenhouse gas emissions in Copenhagen at the end of this year may be over-optimistic.

For previous columns by Paul Taylor, click here.

Could it be that the gas dispute between Moscow and Kiev broke out because Russian Prime Minister Vladimir Putin felt personally slighted by his Ukrainian opposite number, Yulia Tymoshenko?
It may seem far-fetched that two countries would risk leaving half of Europe without gas over something so apparently petty. But a look at the sequence of events that led up to this crisis suggests there just might be something in it.

Rewind back to Oct. 2, and Tymoshenko is meeting Putin at his Novo-Ogaryovo residence outside Moscow. It is a lodge in forested parkland where, as a rule, he only invites people on whom he wants to make a good impression.

The portents were not good. Tymoshenko, often called the "Gas Princess" for the gas business she used to run in eastern Ukraine, has been a driving force behind Kiev’s push to integrate with the West and once wrote an article in a U.S. journal saying Russia had “imperial designs” on its neighbours.

Yet Putin and Tymoshenko seemed to hit it off. The Ukrainian Prime Minister, dressed in a designer outfit and looking much younger than her 47 years (she has since turned 48), radiated charm as she sat opposite her Russian colleague. Putin, the gruff former KGB spy, smiled and cracked jokes at a press briefing with Tymoshenko afterwards. And later that same evening, Putin took Tymoshenko to Gorki, where his boss Dmitry Medvedev has his own out-of-town residence, and they talked late into the night.

Most importantly, the visit ended with a deal on gas: Russia said it would not charge Ukraine market prices for gas straight away, and they agreed a memorandum which would serve as the basis for a new gas contract for 2009.

Now fast forward to December last year and – at least from the Russian perspective – Tymoshenko was going back on her word. The Russian theory goes that Tymoshenko, watching world prices for oil plummet and knowing that gas prices would eventually follow suit, decided that Ukraine should pay less for its gas than she had agreed back in October at Novo-Ogaryovo.

It should be noted that neither side ever made public what was agreed in October so it is impossible to judge if anyone has welched on the deal, and in fact Ukraine says it is Russia that is now failing to honour that agreement.

Either way, the indications from Russian officials are that Putin felt Tymoshenko had betrayed him, and was angry about it. Angry enough to start a gas war? It was probably not the only reason. It is impossible to dismiss the fact that there is a business dispute at play here. And then there is Russia’s well-known dislike for Ukraine’s pro-Western policies. But the theory is at least worth adding to the mix. We already know Putin is a man who takes politics personally. He did, after all, threaten to hang Georgian President Mikheil Saakashvili up by his genitals.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

It’s time to get Russia back into proportion.

Moscow’s resurgence as a major power, determined to be treated with respect and to stamp its influence on its neighborhood, has been one of the big stories of 2008.

The sight of Russian tanks rolling into Georgia in August, coupled with a Kremlin drive to extend its control over energy supply routes to Europe, sent shivers through former Soviet satellite countries and drew loud condemnation from Washington.

President Dmitry Medvedev’s threat to site short-range missiles in Kaliningrad aimed at Poland if Warsaw deploys part of a planned U.S. missile shield raised the rhetorical stakes.

Yet the global financial crisis, the collapse of oil prices, the aftermath of the Georgia war and U.S. President-elect Barack Obama’s victory have all cast doubt on Russia’s real weight.

The credit crunch has hit Russia harder than other emerging economies, hammering confidence in its stocks, bonds and the rouble and forcing the central bank to spend some of its huge foreign currency reserves to stabilize the financial system.

Foreign portfolio investors have fled and many Russian investors have parked more of their money in foreign currency abroad, at least partly due to heightened political risk since the military action in Georgia.

State gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research, Stock Buzz), feared in many parts of Europe as a predator seeking a stranglehold on the continent’s gas supply, has lost more than two-thirds of its market capitalization since May.

SHRINKING POPULATION

With oil prices down from a peak of $147 a barrel in July to below $50 now, the heavily oil-and-gas-dependent economy looks more vulnerable, especially since Russia needs Western technology to boost its energy extraction.

Alexander Shokhin, president of the Russian Union of Industrialists and Entrepreneurs, says that after a 10-year boom, growth will fall to between 0 and 3 percent next year.

Russia remains a lucrative market for Western consumer goods, but concerns about state meddling in business, widespread corruption and shortcomings in the rule of law have contributed to its failure to diversify away from hydrocarbons and minerals.

Compounding the weakness of its non-energy economy, Russia’s demographics are among the worst in the world, with a life expectancy of just 67 (60 for men) and the combination of a low birth-rate, an aging population and a public health crisis.

The Organization for Economic Cooperation and Development (OECD) projects the population could shrink by nearly one-third by 2050 to 100 million from 143 million.

Diplomatically, Russia overreached itself after its lightning military victory in Georgia by recognizing the breakaway regions of South Ossetia and Abkhazia as independent.

Only Nicaragua followed suit. Major allies such as China and India, fearing the precedent, pointedly declined.

The European Union, the main customer for Russian gas, has responded by accelerating efforts to reduce its dependency, planning an alternative supply corridor through Turkey and seeking new suppliers in Africa, the Middle East and Central Asia.

Other former Soviet republics, including Azerbaijan, Belarus and Turkmenistan, have sought closer ties with the West.

True, the U.S.-led NATO alliance has gone no further toward giving Georgia and Ukraine a roadmap to membership — the issue is off the agenda for now — and it has now resumed some frozen contacts with Russia, as has the EU.

But Moscow’s efforts to reshape the security architecture of Europe, sidelining the role of the United States and of the Organization for Security and Cooperation in Europe, loathed by Moscow for its election monitoring, have gained little traction.

STATUS QUO POWER?

Russian analysts insist the Georgia war was a defensive action responding to pro-Western Georgian President Mikheil Saakashvili’s bid to retake control of South Ossetia by force.

“Russia is a status quo power, not a recidivist aggressor on the prowl,” says Dmitry Trenin, head of the Moscow office of Carnegie Endowment for International Peace.

Moscow has taken a number of steps recently to suggest it wants peaceful solutions to other “frozen conflicts” in its neighborhood, brokering the first summit talks between Armenia and Azerbaijan over Nagorno-Karabakh, and seeking a deal between Moldova and its breakaway region of Transdniestria.

In Ukraine, the biggest former Soviet republic where a democratic “Orange Revolution” in 2004 infuriated the Kremlin, Russia has other political and economic levers it can pull to maintain influence without having to use force.

Getting Russia into proportion does not mean ignoring Moscow or its security interests. Its location and the fact it supplies 40 percent of Europe’s gas imports mean it cannot be neglected.

The United States and the EU have an interest in binding Moscow rapidly into rule-based international bodies such as the World Trade Organization and the OECD, although they put both processes on hold in reprisal for the Georgia war.

Some Western analysts believe a weak Russia could be more dangerous, if mishandled, than a strong one.

In NATO circles, some see a risk of the “Weimarisation” of Russia, comparing it to Germany’s economically enfeebled Weimar Republic that was swept away by the rise of Hitler’s Nazi party.

Political humiliation and economic instability could lead to a surge of aggressive nationalism.

After the collapse of the Soviet Union in 1991, wags branded Boris Yeltsin’s rump Russian Federation “Upper Volta with nukes,” capturing the paradox of a failed state with a ruined economy sitting on a huge arsenal of atomic weapons.

When Vladimir Putin succeeded Yeltsin in 2000, he was determined to restore Russia’s power and pride after a decade in which many Russians felt the West ignored their interests by expanding NATO in ex-communist eastern Europe.

Today, it sometimes seems that Russophiles and Russophobes in Europe and the United States have become objective allies in exaggerating the importance of or the threat from Moscow.

A more self-confident Europe and a less unilateralist America need to find a way of engaging with Russia according to its true weight, without treating it as a giant.