WE MAY have been basking in a heatwave last week but the cold chill of winter could still be felt in St Petersburg at the meeting of the G8. At the top of the agenda was the need to thrash out the security of Europe’s energy supply after the Russian Government’s “off-on” approach during its pricing row with Ukraine six months ago. The dispute led, for the first time in 40 years, to the disruption of Russia’s energy exports to Europe.
The implications of all this are still being evaluated. For example, Gillian Triggs, director of the British Institute of International and Comparative Law, says that she was “shocked” by Russia’s actions. Against a background of the row with Ukraine she interpreted it as an attempt by the Putin regime to signal that Russia remained a great power and that there were plenty of other markets out there.
Yet international trade cannot be conducted reliably on such a basis. Contracts had been signed and if commercial trust is to be maintained then these have to be observed whatever the tensions between governments. That was why the pressure was on Russia ten days ago to ratify the Energy Charter — something that has been on the agenda for years but never achieved.
For lawyers in the energy and international trade business, the Energy Charter (“A legal framework for international energy cooperation”) has enormous symbolic, as well as practical, significance. Created in the aftermath of the Cold War, it was designed to build confidence between former enemies in order to attract Western investment into the energy–rich states of the former Soviet Union. Its 52 signatories stretch across Europe into Asia and its goal is to open up markets and streamline the way that disputes are handled in this most sensitive of markets.
Fundamental to the Energy Charter is a commitment to the protection and promotion of foreign energy investments and free trade in energy based on World Trade Organisation rules. No wonder, you might say, the Russians have not ratified it. “Why should the state be indifferent to oil and gas fields that are, maybe, not the biggest in the world but still big enough to be significant?” Viktor Khristenko, the Russian Energy Minister, asked recently.
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Mark Saunders, an energy expert with BLP, has some sympathy with the Russian stance. “It’s very fashionable to knock the Russians but I understand what they are saying,” he says. “Their energy resources are the only ace they hold and Gazprom (the leading gas company) is crucial to the financial stability of the region. For Russians, it may seem that they are being asked to agree to a one-way street of opportunity for the West to buy up their resources.”
Yet whatever the posturing by politicians, Saunders adds, it is likely that business imperatives will win out in the end. “Russia will find a way to accommodate itself to the West,” he says. “It is not going to kill the goose that lays the golden egg.”
Andrei Baev, of Allen & Overy’s Russian practice, agrees. There are significant geopolitical problems facing Russia and he acknowledges that Gazprom’s status is a key issue. Nonetheless, he says, change is under way — as illustrated by the Finance Minister Aleksei Kudrin’s expression of support at the G8 for “the principles behind the charter”.
In any case, one of the key factors forcing Russia relentlessly towards the charter is that the principles embodied within it — especially in terms of dispute resolution — are increasingly the way the world of business wants to work. “In my view, the Energy Charter is a crucial instrument that provides powerful and effective energy investor protection,” Sophie Nappert, head of arbitration at Denton Wilde Sapte, says. “Historically, disputes would end up in the International Court of Justice but the new template offered by these treaties gives investors the right to take foreign states direct to arbitration.”
David Moss, of Lovells, confirms that the teeth of the Energy Charter (as with many recent bilateral trade treaties) lies in the arbitration provisions. By using the facilities of the International Centre for the Settlement of Investment Disputes, parties to the charter can obtain redress relatively quickly and effectively.
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By contrast, critics say, the kind of tactics adopted by Russia last winter look so 20th-century. If Russia is genuinely to join the global mainstream, it needs to sign up to the working methods embodied in the charter. Otherwise, as Professor Triggs points out, the effect on investment will be chilling — in every sense of that word.
“But you cannot just change things overnight,” Baev exclaims. “It will need a gradual process of transformation.” So how long? Like Tony Blair, President Putin is looking for a legacy. On that basis Baev believes that ratification of the Energy Charter — along with accession to the World Trade Organisation — will be accomplished by Putin within the next two years. In other words just before the end of his current presidency — and marking the conclusion to an era that started with a call for “socialism in one country”.