EUROPEAN DIARY/JAMIE SMYTH:WHEN MIKHAIL Khodorkovsky was arrested on fraud charges at an airport close to the town of Ob in Siberia in October 2003, he was Russia's richest man.
The giant oil company that he controlled, Yukos, produced about a fifth of Russia's oil and about 2 per cent of the world's oil. Now, 4½ years later, Khodorkovsky remains locked up in a Siberian jail while Russian prosecutors continue to level new charges against him. Meanwhile, his firm has been driven into bankruptcy by a massive tax bill imposed by the Russian tax authorities.
"Khodorkovsky wanted the company to become more westernised and was seeking investment from the US firm Exxon . . . [ Russian president Vladimir] Putin was also worried that he was a potential political opponent. That was the reason for the political attack against Yukos and its shareholders," Tim Osborne, director of GML, Yukos's biggest shareholder, said on a trip to Brussels last week.
Osborne was on a mission to the European Commission to try to persuade it not to undermine the Energy Charter Treaty (ECT) in upcoming negotiations on a new partnership and co-operation agreement (PCA) between the EU and Russia.
Former Dutch prime minister Ruud Lubbers came up with the idea of the ECT at an EU meeting in Dublin in June 1990 as a way to promote a more secure, open and competitive energy market for the EU, Russia and eastern Europe. Signed in Lisbon in December 1994 by the European Communities and 51 states, including Russia, the ECT created a legal framework for trade, transit, competition and investment in energy. It recognises the energy interdependence of the EU and Russia, which supplies more than a quarter of the EU's gas and oil.
One of the key attractions of the charter was that it was meant to provide foreign investors in Russia's energy sector with legal protection. But despite being signed at a time when Russia was desperately in need of foreign capital to update its creaking oil and gas infrastructure, the Duma never ratified the treaty. And with rising oil prices in recent years and a much more politically assertive regime led by Putin, the Kremlin has declared the treaty "stillborn" and refused to honour it.
"Gazprom [ the giant state gas company] was concerned the charter would erode its monopolistic power by providing a right of passage for third parties over its pipelines carrying gas to the EU," says Michael Emerson, an expert at the Centre for European Policy Studies think tank. "But it had as much to do with politics as economics."
Yukos is not the only firm to fall foul of the Kremlin's strong-arm tactics. According to European experts, Royal Dutch Shell was forced to halve its stake in a $22 billion (€13.9 billion) oil project on Russia's Sakhalin Island in December 2006 for fear of losing its entire investment. Faced with environmental concerns raised by Russia, Shell sold down its investment to 27.5 per cent from 55 per cent to Gazprom, which now holds a controlling stake.
It is against this background that Osborne came to Brussels to lobby in defence of the energy charter. His firm, GML, is fighting a legal battle with Russia over its decision to break up Yukos and sell it off piece by piece to cover a tax bill, which GML says was massively inflated to put it out of business.
An arbitration panel in The Hague will hear the $28.3 billion case in November, in which GML will argue Russia is bound by the ECT regardless of the Duma's decision not to ratify it. It argues the signature was legally binding.
The nightmare scenario for GML is that EU officials, who will soon begin negotiating a PCA with Russia, would renounce the charter in search of a new wideranging political agreement. "The decision will be ultimately made by the judges in The Hague, but clearly it wouldn't be helpful," says Osborne.
EU foreign ministers are expected to agree the final wording of the mandate for the PCA talks shortly, following a decision by Warsaw to end its year-long veto over the talks, which had been prompted by a Russian embargo on Polish meat products. (Only Lithuania still has some objections to beginning the talks.)
The agreement is expected to touch on all EU-Russia relations, including trade, migration, security and human rights, but there is no doubt that energy is the primary EU concern. Since Gazprom turned off the gas supply to Ukraine in January 2006, which in turn led to gas shortages in several European states, the commission has become keenly aware of the EU's reliance on Russia energy.
The commission says it considers the ECT a useful tool that could settle legally binding rules for energy investment and transit between the EU and Russia. It is likely to push for the same kind of legally binding rules in a new PCA agreement. But whether Russia under new president Dmitry Medvedev is ready to relinquish political control over its own the energy sector, perhaps to enable companies like Gazprom to acquire more energy firms in the EU, remains to be seen.
Gas and oil in Russia are now as important a tool of foreign policy as its missiles were during the cold war.