Energy Leverage: Moscow’s Ace in the Hole

The Emerging Instrument of
Choice for Soviet Coercion

As Soviet troops begin to withdraw
from Eastern Europe, their value as
instruments of Soviet leverage over the
Warsaw Pact nations will begin to
decline. The Soviet Union, however, still
retains an immense capability to extort
cooperation from these countries through
another means.

Moscow enjoys enormous control over
oil and gas supplies to the region thanks
to the virtually complete dependency of
the countries of Eastern Europe on Soviet
exports of these energy resources. This
source of leverage is documented by data
compiled by the Center for Security
Policy and displayed in the three tables
in this analysis.

What is more, the Center has discerned
important evidence that the USSR is
prepared to use this leverage to
secure continued cooperation by East
European governments with select Soviet
objectives. As described below, Moscow
has threatened — and, in some cases,
acted — to restrict the availability of
energy supplies to wayward allied
regimes. It has also demanded hard
currency payments for its energy exports
to these countries, a development that
has the potential to siphon off a
substantial portion of the Western
economic assistance now beginning to flow
to Eastern Europe.

If the West is serious about assisting
the newly emerging democracies of Eastern
Europe in their efforts to shed the yoke
of Soviet imperialism, it must help
mitigate their present exposure to this
form of coercive leverage. This will
require policy actions designed to reduce
significantly East European dependence on
Soviet energy supplies and to preclude
steps now in the offing that might further
enhance Soviet energy-related
leverage over these countries.

East European Dependence on
Soviet Energy Supplies

Today, one of the most strategically
significant — yet least understood —
risks to East European political
independence and economic recovery
emanates from the inordinate reliance of
these countries on Soviet energy
supplies. Out of a total regional energy
consumption of approximately 9.0 million
barrels per day (b/d) oil equivalent,
only 6.7 – 6.8 million b/d oil equivalent
comes from indigenous sources.

Importantly, the bulk of the latter —
5.0 million b/d oil equivalent — is the
supplied regional coal production. The
remainder is met by hydroelectric,
nuclear and modest indigenous oil and gas
sources.

Consequently, oil and gas imports are
essential to satisfying roughly 25
percent of East European energy
needs. The Soviet Union is today for all
intents and purposes the sole supplier of
such imports. Moreover, as is starkly
illustrated by Table I,
these Soviet energy resources constitute
essentially all the oil needs of the
region (with the exception of Romania).
For example, in 1987, Soviet oil
deliveries constituted the following
estimated percentages of total oil
consumption in these countries: Bulgaria
– 88%, Czechoslovakia – 99%, East Germany
– 123%⁽¹⁾,
Hungary – 99%, and Poland 93%.

Overall, Eastern Europe consumes about
1.9 – 2.0 million barrels of oil per day
(b/d), produces about 315 thousand b/d
and exports roughly 400 thousand b/d. It
also imports small amounts of oil from
countries other than the Soviet Union.
The total daily volume of Soviet oil
deliveries to Eastern Europe for 1988 —
the last year for which complete data are
available — was in excess of 1.5 million
b/d.

Eastern Europe is even more dependent
upon the Soviet Union for imports of
natural gas. While several of the USSR’s
allies in the region are somewhat less
reliant on imported gas to meet
indigenous needs, as Table
II indicates, they tend to
obtain what gas they get from
non-national sources entirely from the
Soviet Union.

Does Such Dependency on
Soviet Energy Matter?

Unfortunately for the would-be
independent democracies of Eastern
Europe, their need for Soviet oil and gas
puts them at a particular disadvantage.
For one thing, with the growing awareness
of the devastating impact coal
consumption has on the European
environment, the countries of Eastern
Europe are going to come under growing
domestic and international pressure to
reduce that consumption. Oil and gas
will, consequently, become even more
important to the economic viability, not
to say growth, of the region.

Moreover, the sizeable investment in
fixed infrastructure already in place to
support Soviet natural gas imports means
that a cut-off from that source and
adaptation to other sources would entail
considerable dislocation and expense.

It is worth noting in this regard that
the Arab oil embargo of 1973-74 only
affected approximately five
percent of Western oil
requirements. And yet, the economic
impact of that cut-off was massive and
adverse — even on economies far more
robust than any in Eastern Europe today.

The Soviet Energy Situation

Worse yet for the East Europeans, even
if the Soviet Union were not disposed to
exploit energy leverage for political
reasons, Moscow may have no choice but to
cut back on its exports of oil and gas to
the region.

Signs of serious problems in the
Soviet energy sector are increasingly
evident.⁽²⁾
About seventy-four percent of total
Soviet energy production and seventy
percent of consumption are based on oil
and gas. (Coal constitutes an
additional twenty percent of both
production and consumption. Hydroelectric
and nuclear electric power provide the
remaining six percent of total energy
production.)

Soviet oil production has declined
from 12.6 million barrels per day at the
beginning of 1989 to 12.1 million barrels
per day by the end of the year. Causes of
the oil production decline include the
depletion of existing oil fields,
escalating costs, serious environmental
problems, and a chaotic administrative
situation, (e.g., wholesale dismissals
and disciplinary actions along with the
merger of the oil and gas ministries last
summer).

Production of natural gas has
similarly encountered spiraling costs as
well as environmental conditions that
present huge risks (e.g., pipeline
construction over permafrost in the Yamal
Peninsula). For its part, the coal
industry suffers from chronic and
exploitative neglect. This is
particularly true of its workforce.
Despite promises made by Mr. Gorbachev to
Soviet miners last summer, improvements
have not been forthcoming. As the winter
subsides, many experts expect that the
coal miners will again go on strike, in
defiance of new and more restrictive
legislation enacted following last fall’s
work stoppages.

Evidence of Soviet Use of
Energy for Political Leverage

While Moscow may thus have some
legitimate grounds for reducing energy
exports to Eastern Europe, there is
mounting evidence that it is prepared to
make a virtue of necessity by exploiting
its leverage for political ends in allied
capitals.

The Baltic states have already had a
strong signal that increased energy costs
would be the price of independence.
Soviet spokesman Gennadi Gerasimov said
as much when asked on NBC’s “Meet
the Press” on 31 December 1989, how
the Soviet Union could make the Baltics
remain part of the Soviet Union. He
replied:

By persuasion and by proving that
it’s better to stay in the Soviet
Union — the new union, the new
federation — than to go it
alone…[The Baltics] cannot
really be on their own in
economic terms. If you take
figures, you can see that these
Baltic republics are getting our
oil at very cheap prices, which
they cannot get from the West, if
they go it independently. href=”#N_3_”>⁽³⁾

Other indications of increased Soviet
willingness to exploit East European
vulnerabilities in the energy sector
include:

• Last fall, Moscow signalled to
  representatives of one of Hungary‘s
  opposition party, Democratic
  Forum, that a steady energy
  supply from the Soviet Union
  could be jeopardized if
  cooperation on other fronts was
  less than satisfactory. In
  January, Hungary was forced to
  buy oil from Iraq for hard
  currency because of
  reductions in Soviet oil
  deliveries.
• In January, the Soviet Union
  showed that it could also use
  energy resources as a
  “carrot,” by promptly
  bolstering Romania‘s
  energy supplies (390,000 tons of
  oil for January and 22 million
  cubic meters of natural gas
  daily) when Ion Iliescu, an old
  Gorbachev colleague from
  university days, emerged as
  Ceaucescu’s successor. Follow-on
  shipments of aid in unspecified
  amounts were also promised.
• The Soviet Union has recently
  told Czechoslovakia
  that it would only deliver 18
  percent of this year’s contracted
  total of crude oil in the first
  three months of 1990 due to
  “the political situation in
  the Soviet Union.” href=”#N_4_”>⁽⁴⁾
• Production from the Polish
  refinery in Plock has been
  reduced by one-third due to
  interrupted Soviet oil
  deliveries.

Some of these interruptions are no
doubt caused by serious Soviet production
and transportation problems, but some
were distinctly political. Two recent
events further signal likely Soviet
intentions concerning future use of the
energy “stick”:

First, at the recent COMECON meetings,
the Soviet Union indicated that if the
East European countries intend to break
away from COMECON arrangements
prematurely and without Soviet
concurrence, payments for energy supplies
from the Soviet Union would be
immediately due in hard currency. This
statement had an immediate impact on
representatives from Czechoslovakia,
Hungary and Poland, producing a dramatic
softening of positions about promptly
dismantling COMECON and pleas for a
“phase in” period for hard
currency energy payments to Moscow.

Second, in February, West Germany
reportedly agreed to support payment by
East Berlin to the Soviet Union in
deutsche marks for East Germany’s energy
imports from the USSR effective
immediately after monetary union.
This means that overnight a major market
for Soviet energy exports would be
transformed from a barter relationship to
one denominated in hard currency.

Implications for U.S.
Policy

In the months ahead, pressure will
likely intensify to offer large-scale
assistance to the Soviet Union to help it
overcome its energy production
bottlenecks. Soviet authorities have
launched an all-out campaign to sign up
Western oil companies for joint
exploration and production ventures. For
example, U.S. firms such as Chevron,
Combustion Engineering and Dresser
Industries are actively exploring joint
venture operations with a view to
expanding Soviet energy production
capabilities.

Given the strategic importance of the
energy sector and the Soviet Union’s
capacity — and willingness — to apply
leverage in this area on the emerging
democracies of Eastern Europe, it
is clearly not in the interest of
the West or the governments of Eastern
Europe to enhance that capability.

Instead, immediate attention should be
given to developing and implementing the
following policy approach:

• On a coordinated, multilateral
  basis the West should assist
  Eastern Europe in diversifying
  its energy supplies. The Soviet
  shares of total oil and gas
  consumption respectively should
  be limited to about 30%,
  mirroring the intent of the
  International Energy Agency
  Agreement of May 1983 pertaining
  to West European dependency on
  Soviet gas supplies.
• At the same time, East European
  governments might approach Arab
  energy suppliers with the
  suggestion that, in exchange for
  receiving below-market prices on
  oil (and perhaps gas) deliveries
  for a period of time, the
  producer-countries can gain
  important new energy markets. The
  East European nations could
  pledge to pay full market prices
  for such energy supplies as soon
  as their respective economic
  revivals permit.
• During the vulnerable period of
  supply diversification, a hedge
  against potential energy supply
  short-falls could be created
  through the creation of an
  alliance-wide Contingency
  Energy Fund for the
  countries of Eastern Europe and
  the Baltic states. Middle East
  producers could help lead this
  important Western assistance
  effort and absorb some of the
  costs which may be levied should
  Soviet supply shortfalls occur
  for either economic or political
  reasons.
• In addition, the USSR should be
  obligated to make purchases from
  Eastern Europe in hard currency
  commensurate with its demand for
  hard currency payment for energy
  deliveries.
• There should be no waiver of the
  Stevenson amendment which
  effectively caps U.S. subsidized
  credits to the Soviet Union for
  oil and gas exploration and
  development.
• Large-scale Western joint
  ventures in the energy sector
  should be deferred, at least
  until East European dependency on
  the Soviet Union has been
  successfully reduced.

The Center believes that the
strategic, political and economic
implications of Soviet energy leverage
are of sufficient importance as to
warrant a full-scale interagency review
by the U.S. government including
senior-level discussions with allied
nations. At the very least a National
Security Council meeting should be
convened at the earliest possible time to
consider the foregoing recommendations
and other policy options.

The address on March 14th by Deputy
Secretary of Energy Henson Moore before
the American Committee on U.S.-Soviet
Relations entitled, “Soviet Energy
in the 1990s” offers an excellent
opportunity to illuminate for the public
the results of such cabinet-level
deliberations as well as U.S. objectives
for the forging of
“risk-sensitive” alliance
policies. The Center urges Secretary
Moore to demonstrate in his remarks that
the Bush Administration is cognizant of
the substantial risks for Eastern Europe
involved in Moscow’s energy leverage and
that it will be following a prudent and
comprehensive approach toward minimizing
the exposure of both new and older
democracies to Soviet exploitation
of this leverage.