Policy Documentation Center

Poltavets, Ivan

Rovnyi, Ievgenii

Inside Ukraine No. 5 (February 18, 2010) 
Inside Ukraine: Yanukovych Uncovered

Roth, Felix

  
Felix Roth is a Research Fellow at the Centre for European Policy Studies (CEPS), Brussels. This 
commentary was first prepared for presentation at the Annual Seminar on "The economic crisis and the 
future of the Eurozone", of the Former Members Association (FMA) of the European Parliament, 
2 December 2010.  
 CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The 
views expressed are attributable only to the author in a personal capacity and not to any institution with 
which he is associated. 
Available for free downloading from the CEPS website (www.ceps.eu) ? © CEPS 2010 
Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ Fax: (32.2) 219.41.51 ▪ http://www.ceps.eu 
 
The Eurozone Crisis and Its Effects on 
Citizens’ Trust in National Parliaments 
Felix Roth 
8 December 2010 
U and national policy-makers should realise that the continuing crisis in the eurozone is 
inflicting not only severe economic costs but also significant political costs, as a 
consequence of the way in which the crisis has been handled. There is clear evidence that 
citizens’ trust in democratic institutions, in particular national parliaments, has been severely 
shaken. 
By focusing solely on how to avoid a sovereign default in order to protect the European (here in 
particular German and French) banking sector, policy-makers have caused severe damage to 
democratic and political stability in the periphery countries, as underlined by the current crisis in 
Ireland. The country’s leadership has risked the future of its citizens by bailing out its ‘private’ 
sector banking industry with ‘public’ money. To put the situation in the proper perspective: the 
country had a government debt-to-GDP ratio of approximately 25% before the financial crisis and is 
likely to end up having a ratio of approximately 98% at the end of 2010. The permissible 
corresponding figure under the Maastricht criteria is 60%. Moreover, the Irish budget deficit will 
reach about 32% of GDP this year, which is more than 10 times the limit for euro members under 
the Maastricht criteria and compared with a government projection of 11.6% in December 2009.  
Common sense suggests that the current situation in Ireland might provoke severe social and 
political instability.  
But how did the financial/eurozone crisis affect citizens’ trust in the parliaments in the four 
periphery countries – Spain, Greece, Ireland and Portugal – that were the most severely hit? Using 
data from the Standard Eurobarometer trends, it is possible to answer this question. As trust trends 
are best visualized by net trust measures (the percentage of citizens who trust minus the percentage 
of citizens who mistrust), Figure 1 shows the trends in net trust in national parliaments for the four 
periphery countries. Alarmingly, three out of the four periphery countries (Ireland, Spain and 
Greece) have reached net trust levels of -50%. This implies that less than a quarter of the population 
E 
2 | Felix Roth 
stills trusts their own parliament and approximately 70% do not trust it anymore. By way of 
comparison, net trust levels in the European Parliament range from -2% in Greece to + 23% in 
Ireland. Thus the overall level of trust in the European Parliament remains significantly higher than 
in the national parliament. 
The biggest drop occurred in Spain, where the population had previously revealed in the spring of 
2008, i.e. before the Lehman bankruptcy, a high net trust level (+20%) in its parliament. At the 
present level of -50%, the overall change in less than three years has been over 70%. Net trust in the 
Spanish national government has dropped even more dramatically by 76%, from +20 to -56%. 
In Portugal the decline in trust has been less severe (with a total drop of 25%), as the pre-crisis level 
of net trust was already -15, but the level reached now – a net trust of -40% – still indicates that less 
than a third of the population trusts its own parliament. The overall drop in both Greece and Ireland 
is still as high as 50%, with a temporary increase around the last elections, but the population does 
not seem to approve how its parliament has handled the crisis until early 2010.  
Figure 1. Net trust trends in the national parliaments, eurozone periphery countries 
 
Source: Standard Eurobarometer, Nos 69-73; Special Eurobarometer, No. 71.1. 
For purposes of comparison, Figure 2 depicts the trust trends in the two large centre economies 
Germany and France. In contrast to the four periphery countries, Germany’s net trust levels in the 
national parliament have returned to the same level as before the financial crisis in spring 2008. 
Before the crisis, trust in the national parliament has been lower in Germany than in the peripheral 
countries, and it is now much higher. Similarly to Germany, net trust in France has remained at the 
same level as before the crisis and has reached a significantly higher level of trust than the 
periphery countries. 
Figure 2. Net trust trends in the national parliament, Germany and France 
 
Source: Standard Eurobarometer, Nos 69-73; Special Eurobarometer, No. 71.1. 
The Eurozone Crisis and Its Effect on Citizens’ Trust in National Parliaments | 3 
 
Could it be that these trends in growing mistrust in EU national parliaments follow a common 
pattern? Could it be that the increase of debt over GDP in the EU27, strongly attributable to the 
bail-out of ‘private’ banking debt by ‘public’ money, has shattered citizens’ trust in the democratic 
structures of their countries and in their national parliaments?  
Figure 3 gives a first empirical validation to this argument. It shows a scatter plot between the 
increase of debt over GDP from 2008 to 2010 and the decrease of citizens’ net trust from spring 
2008 (Standard EB68) to May 2010 (Standard EB73).  
Figure 3. Changes in debt over GDP and net trust in national parliaments, EU27 
 
Source: Standard Eurobarometer, Nos 69-73; Special Eurobarometer, No. 71.1 and the AMECO. 
Thus the European and national policy-makers’ strategy of the three no’s – no bail-out, no default 
and no exit – seems to threaten political stability in the European periphery countries where citizens 
have lost trust in both national parliaments and governments.  
 
 
BE
DK
DE
EL
ES
FI
FR
IE
IT
LU
NLAT
PT
SE
UK
CY
CZ
EE
HU
LVLT
MT
PL
SK
SI
BG
RO
-1
00
-5
0
0
50
D
el
ta
 T
ru
st
 P
ar
lia
m
en
t
0 10 20 30 40 50
Delta Debt
Net Trust National Parliament Fitted values


The Eurozone Crisis and Its Effects on Citizens\u2019 Trust in National Parliaments

Gumeniuk, Victoria

#10, 2010
Budget support from the EU: 
Unrealized potential
Victoria Gumeniuk
European
Focus
Poorly implemented foreign aid is actually bad for 
Ukraine. When carrying out numerous foreign aid 
projects and programs replaces the work of real re-
forms, the effect is a mere imitation of active reform 
work and the results just pie in the sky.
So far, foreign assistance has not helped Ukraine 
set up a system of transformation knowledge man-
agement because it failed to 
shape a critical mass of knowl-
edge and skills, it neglected 
to set up institutions to man-
age foreign assistance and ensure a breakthrough 
and systemic reforms, and it thus failed to catalyze 
systemic reform in Ukraine.
The European Union began to propose sectoral 
budget support to Ukraine back in 2007 and the first 
agreement was signed in September 2008. Accord-
ing to the European Commission’s formulation from 
2007, “…an important change in the modality of aid 
occurred in Ukraine, that is, a shift in the direction of 
Sectoral Budget Support (SBS) to strengthen politi-
cal dialog and increase the role of the government 
in this process. SBS programs are determined on the 
basis of a Sector Readiness Assessment that, in turn, 
is based on seven criteria, three of which are quali-
fication criteria: a strategy in the sector, a suitable 
macroeconomic environment, and an independent 
system for managing public finances. If one or more 
criteria are not fulfilled, the conditions for preparing 
an SBS are considered not satisfied.”1
The EU has a well-established practice of providing 
budget support to partner countries, especially in 
Africa. The decision to use this budget support in-
1 Outline of EC Concept on “Potential priority zones 
for national ENPI indicative programs in Ukraine,” 
2011–201, p. 14.
strument with Ukraine is a kind of political signal in-
dicating that the EU wishes to trust our country and 
support its reform processes. In an absolute sense, 
the amount of budget support allocated to Ukraine 
is modest. At the same time, the format of budget 
support adds an element of conditionality to this 
assistance, requiring the fulfillment of criteria even 
before money is handed out for budget support.
Budget Support – putting concepts to work
Budget Support (BS) is the primary type of fi nancial as-
sistance provided through the European Neighborhood 
and Partnership Instrument (ENPI).  It is defi ned thus: 
“...the transferring of funds by the agency that is pro-
viding external fi nancing to the partner country’s 
Treasury is on condition that the latter upholds the 
agreed terms of payment. Funding received in this 
manner is part of the overall resources of the part-
ner country, which should be used in accordance 
with the public fi nance management system of the 
partner country.”2
Budget support can be either general or sector-spe-
cifi c:
General Budget Support (GBS) involves transfer-
ring money for the execution of national devel-
opment or strategic reform plans.
Sectoral budget support (SBS) involved transfer-
ring money for the execution of programs aimed 
at the development of specifi c economic sectors.
Budget Support consists of a series of payments or 
tranches. The European Commission transfers the fi rst 
or “fi xed” tranche on condition that national executive 
bodies have met specifi c requirements in the prelimi-
nary assessment, while the receipt of subsequent or 
“ﬂ exible” tranches depends on meeting certain bench-
marks set within the support program.
2 OECD/DAC, Harmonizing donor practice to provide 
more effective assistance, Vol. 2, 2006 р.
◊
◊
Ineff ective foreign aid is 
actually bad for Ukraine
European Focus, #10, 2010
Shaping a European Vision for Ukraine
Budget Support, which makes up 70% of the nation-
al component of the ENPI in Ukraine for the period 
2007 through 2009, arises from the need to support 
national development priorities in the partner coun-
try. And indeed, the European Consensus on Devel-
opment specifies that: “The European Commission 
now has a more clearly defined coordinating and 
channeling role on behalf of the EU and its member 
states. Assistance may be given using any number 
of instruments, that is from technical assistance to 
general and sectoral budget support. The EU ex-
pects the overall amount of budget support to third 
countries to expand up to 50% in 2010.”
How Budget Support started in Ukraine
The story actually begins in 2005, when Ukraine 
and the European Union signed a Memorandum of 
Understanding (MoU) on cooperation in the energy 
sector on 1 December. In March 2006, the Govern-
ment of Ukraine adopted the Energy Strategy of 
Ukraine through 200.
After the preliminary assessment, an Agreement on 
Funding the EU External Assistance Program called 
“Support to Institute Ukraine’s Energy Strategy” 
was signed on 17 March 2008. The preliminary as-
sessment involved these seven criteria, the first 
three being the key ones:
strategy/sectoral development program;
macroeconomic situation;
system for managing public finances; 
budget and medium-term expenditure frame-
work;
coordination of donor assistance; 
performance assessment;
institutional assessment and capacity-building.
The European Commission did not publish the re-
sults of its preliminary assessment prior to deciding 
 The European Consensus (2006/C 46/01), a joint 
statement by the Council and representatives of mem-
ber-country governments on the Council, of the Eu-
ropean Parliament and the EC regarding the political 
future of the European Union.
•
•
•
•
•
•
•
to allocate funding for budget support purposes. 
But discussions with experts in launching Budget 
Support programs made it clear that Ukraine failed 
to meet two of the three main criteria!
The quality of the energy sector strategy underwent 
a severe critique by experts. Among others, Serhiy 
Yermilov, director of the Institute for Environmental 
Issues and Energy Conservation, noted violations of 
the principle of comprehensiveness in the develop-
ment of Ukraine’s Energy Strategy.4
The macroeconomic situation deteriorated in 2008 
because of the global financial crisis and panic on 
financial markets, a deterio-
rating hryvnia exchange rate, 
defaults in the banking sys-
tem, and hold-ups in wages 
and salaries.
Ukraine’s system of managing 
public finances, according to 
a SIGMA assessment,5 was not 
in line with international standards and remains so 
to this day. The process of harmonizing Ukraine’s 
system with international norms is currently under-
way with the support of several international techni-
cal assistance programs.6
Yet Ukraine’s failure to meet the criteria did not stop 
the EC from transferring the first tranche of EUR 
2mn in December 2008, as the first part of its SBS 
allocation of EUR 82mn to support he country’s en-
ergy strategy. However, no further money has been 
disbursed.
4 http://www.dt.ua/2000/2200/5482/
5 Support for Improvement in Governance and Manage-
ment (SIGMA). Source: http://www.oecd.org/datao-
ecd/4/58/829242.pdf
6 1) Assistance to the Main Oversight Administration of 
Ukraine in instituting a new system of internal financial 
control (Twinning Program), 18.09.2007–17.12.2009; 
donor: EU Commission.
 2) Project to modernize public finance, 2008–201, as 
part of a loan from the IBRD (World Bank).
The EC released funding 
for the energy sector 
despite Ukraine’s clear 
lack of capacity to use 
this money effectively
European Focus, #10, 2010
Shaping a European Vision for Ukraine
Sore points in the implementation 
process
In addition to the fact that the basic criteria hadn’t 
been met, a number of other problem areas were 
also uncovered:
Procedure for disbursing funds: This is done follow-
ing the rules and procedures of the recipient coun-
try, which are currently missing in Ukraine. The 
Ministry of Finance has just begun to work these up 
in partnership with the Ministry of Economy. So far, 
the money from the first BS program has not been 
used.
Awareness among officials: Because governmental 
civil servants are ignorant of the opportunities of-
fered by the BS program, they are unable to carry it 
out effectively.
Monitoring and evaluation: Although responsibil-
ity for managing funds lies with the recipient coun-
try’s government, there is no working mechanism 
on the Ukrainian side for monitoring and evaluating 
the progress of the BS program.
Formally, control over the execution of the program 
is the responsibility of a specially-formed Joint 
Monitoring Group (JMG). Although this group is 
required to meet every two months, so far it has met 
only twice: 8 September 2009 and 15 February 2010. 
Importantly, the JMG includes both Ukrainian offi-
cials and representatives of the EC, but there is no 
provision for representatives of the NGO sector to 
be involved at all.
Gap between EU requirements and the powers of in-
dividual ministers: Not all benchmarks for success-
ful execution of the BS program fall within the com-
petence of the Ministry of Fuel and Energy, such as 
the requirement to present and enact the Law “On 
state procurements” in line with EU norms.
The first BS program for Ukraine is a test for the Eu-
ropean Commission as an ef-
fective donor and for the Gov-
ernment of Ukraine as a reli-
able partner in terms of com-
mitments taken on. Should 
the program fail to be carried 
out properly, future BS programs that are currently 
in the planning stage are likely to be postponed.
EU Sectoral Budget Support 
for Ukraine 2008–2009
At this time, the EU and Ukraine are preparing to launch 
two BS programs:
Developing trade and commerce (norms and stan-
dards). EU support: EUR 45mn (Budget Support EUR 
39mn, Technical Assistance EUR 6mn)
Increasing energy efficiency. EU support: Budget 
Support EUR 70mn (Budget Support EUR 63mn, 
Technical Assistance EUR 7mn)
The European Commission also gave preliminary ap-
proval for joint financing of two more sectoral programs 
in 2009*:
Developing the transport sector. Planned EU sup-
port: EUR 40mn (Budget Support EUR 35mn, Tech-
nical Assistance EUR 5mn)
Environmental protection. Planned EU support: EUR 
77mn (Budget Support EUR 72mn, Technical Assis-
tance EUR 5mn)
* Funds are disbursed in the year following the 
planning year.
The value of the BS instrument depends entirely on 
the readiness of the Government in the partner coun-
try to effectively manage this resource. Ukraine’s 
unreformed government machine ipso facto is inca-
pable of carrying out strategies that are being drawn 
up in order to get funding rather than as a guideline 
to the actual execution.
◊
◊
◊
◊
The cost of failure  
of the first BS program: 
EUR 209mn
European Focus, #10, 2010
Shaping a European Vision for Ukraine
Yet responsibility for the ineffectiveness of aid can-
not be placed entirely at the feet of the Ukrainian 
side. Aid is a two-way street.
At the point where the recipient country is assessed 
according to EC criteria, an effective trap is set. Any 
compromise on the results of the assessment indi-
cates just one thing: support for the unreformed 
state of Ukraine today and the interest of European 
countries to any way issue funds in direct violation 
to their own requirements.
What next?
First of all, an honest and thorough assessment of 
the scale of unreformed government institutions in 
Ukraine by representatives of the European Com-
mission is needed. The EC has not been willing to 
acknowledge how unready Ukraine is for assistance 
such as Budget Support. Yet to propose a policy-
driven assistance to a country whose state institu-
tions are opaque and unreformed is the same as 
building a castle on sand. As long as the ineffec-
tive and corrupt system of public administration in 
Ukraine remains in place, no systemic reforms will 
be possible.
Secondly, the nature of as-
sistance should not be based 
on condescension and com-
promise but on strictness and 
conditionality, The EU knows 
how to reform countries as 
it succeeded in bringing the 
government institutions of 
countries that joined the Eu-
ropean family in the last six 
years up to standard.
Only after a major reconstruction of the foundation 
and roof will it be possible to consider cosmetic im-
provements in Ukraine. This means the most impor-
tant step right now is to direct foreign aid resources 
towards democratizing the public administration 
system in Ukraine and bringing it in line with EU 
standards.
Right now, Ukraine and 
the EU need to direct aid 
at democratizing the 
system of government 
in Ukraine
e-mail: office@icps.kiev.ua
www.icps.com.ua
Victoria Gumeniuk is a senior analyst, Head of For-
eign Aid Program at ICPS.
European Focus is an ICPS monthly that raises debate 
on key issues of European integration for Ukraine, 
EU policy towards Ukraine, and other important is-
sues connected to Ukraine’s European ambitions. 
This publication is financed by the Think-Tank Fund 
of the Open Society Institute.


English

Budget Support From the EU: Unrealized potential

Henry, Fran\ue7ois-Lo\uefc

  
Research for this paper was carried out in the context of the SECURE project (Security of Energy 
Considering its Uncertainties, Risks and Economic Implications), funded by the European Commission 
under the Seventh Framework Programme. The project develops appropriate tools for evaluating the 
vulnerability of the EU to the different energy supply risks, and for promoting the optimisation of EU 
energy insecurity mitigation strategies, including investment, demand side management and dialogue 
with producing countries.  
François-Loïc Henry is a researcher at the Gulf Research Center Foundation in Geneva. CEPS Policy Briefs 
present concise, policy-oriented analyses of topical issues in European affairs, with the aim of 
interjecting the views of CEPS researchers and associates into the policy-making process in a timely 
fashion. Unless otherwise indicated, the views expressed are attributable only to the authors in a 
personal capacity and not to any institution with which he is associated.  
 
Available for free downloading from the CEPS website (http://www.ceps.eu)  
and the Secure website (http://www.secure-ec.eu) ? © CEPS 2010 
 
No. 220/November 2010 
Europe’s Gas Supply Security: Rating Source Country Risk 
François-Loïc Henry 
 
Introduction: Abundance at risk 
Europe is surrounded by abundant natural gas 
resources; physical availability is not in question. 
Beyond each EU country’s own supply vulnerability 
issues,1, the actual availability of supply in source 
countries might be hindered by their production 
policies, transit issues, or domestic or international 
conflicts. Geopolitical risks to future gas supplies from 
source countries to the EU exist both in theory and in 
reality, but basically two major types of risks need to be 
taken into account: source risks and transit risks. 
1. Source risks & ‘resource nationalism’ 
The term ‘source risks’ refers to armed conflicts, coups 
d’état, social disorder and so-called resource 
nationalism. These risks remain rather low in countries 
that already supply the EU, except in a few cases, such 
as Nigeria. In broad terms, the EU’s principal suppliers 
can be considered safe partners. The issue of resource 
nationalism in particular must be approached with care 
and understood factually rather than perceived through 
                                                     
1 See Andrew Macintosh (2010), Europe’s Gas Supply 
Security: EU Vulnerability, CEPS Policy Brief No. 222, 
CEPS, Brussels, November. 
an ideological lens. The biggest losers with regard to 
this phenomenon are international oil companies and 
not necessarily European end-consumers. The 2009 gas 
shortage in the Balkans can be considered an exception, 
although its main cause is more economic and 
commercial than political.  
Resource nationalism is no different from any other 
foreign policy issue in the sense that countries protect 
their interests, as they always have, in order to control 
their revenue flows and to meet social and political 
priorities. Thus they do not necessarily aim to use 
resources as weapons. The European Union must take 
this fact into account and integrate it in its foreign 
policy, and not consider resource nationalism a major 
threat. For the moment, there is no sign that a viable, 
OPEC-like natural gas cartel is emerging. Nor is one 
likely to in the future, for three main reasons. First, gas 
markets are likely to remain local (at the continental 
level) and dominated by long-term contracts, while a 
limited quantity will be traded freely on a spot market 
(which is a precondition for the formation of a cartel). 
Second, gas supplies are ample and it will likely remain 
a buyer’s market. Third, the countries that could form 
such a cartel do not share common interests and none of 
them has the capacity to play the role of adjustor, as 
Saudi Arabia does with oil. Parallel to these three 
reasons, it should be noted that source risks do not 
2 | François-Loïc Henry 
encompass the depletion rates and R/P ratios of 
producer countries’ reserves, factors that obviously play 
a role in the formation of any cartel. 
2. Transit risks 
Transit risks are much trickier to handle. They have 
been the cause of great concern in recent years and are a 
direct consequence of the physical nature of the gas 
trade. It could be argued that institutional frameworks 
are critical and necessary to address these risks. 
INOGATE and the European Charter Treaty, if properly 
implemented and respected, are appropriate tools that 
could prove effective at eliminating many uncertainties. 
Dealing with transit risks to Europe’s supply requires 
taking into account not only its own decreasing 
domestic resources but three external factors: 
• potential commercial conflict between Russia and 
Ukraine; 
• politics in Central Asia (the ‘Fourth Corridor’); 
• the evolution of global gas markets (the liquefied 
natural gas, or LNG, market and discoveries of 
unconventional gas in the United States). 
2.1 Russia and Ukraine 
In the Russo-Ukrainian crisis, it seems extremely 
difficult to untangle the legal responsibilities of each 
country. Aside from its bilateral contract with Russia, 
which must be made more stable over the long term, 
Ukraine did not fulfil the conditions of the Energy 
Charter Treaty (ECT). By refusing to resume the flow 
of gas before the contract with Russia was renegotiated, 
Ukraine breached its obligations. EU countries and 
institutions share responsibility for the escalation of the 
crisis, as they did not invoke the ECT. Such action 
would have been doubly effective: it would have sent 
the message to Ukraine that it was not behaving in the 
interests of all parties to the treaty, and it would have 
sent the message to Russia that the ECT can indeed be 
an enforceable and powerful tool. 
A solution to the problem could take the form of a 
tripartite consortium composed of Gazprom, Naftogas 
Ukrainy and public or private entities from the EU. The 
consortium would have the primary task of monitoring 
independently the volumes of gas entering Ukraine 
from Russia and leaving Ukraine. It could also mobilise 
funds to repair and improve the Ukraine section of the 
network and storage infrastructure. The most important 
point, however, is to emphasise the need for the EU to 
maintain stable relations with Russia, as the latter will 
remain the EU’s largest external supplier. As for Russo-
Ukrainian relations, they have drastically improved 
since the accession to power of the new Ukrainian 
president, Viktor Yanukovich. 
2.2 The Central Asian question 
In Central Asia, despite European and American 
eagerness to open up the region, the physical and 
geopolitical variables at play seem to have established a 
tripartite game between China, Russia and the Central 
Asian states, thus excluding European interests, as 
highlighted by the recent completion of the Atyrau-
Urumqui pipeline and its southern branch towards 
Uzbekistan and Turkmenistan (Turkmenistan-China 
pipeline). As the region’s main resources are located on 
the eastern side of the Caspian Sea, only three 
possibilities are on the table to supply Caspian gas to 
Europe over the long term: 
• through Russia, which is the case presently; 
• through Iran, as a pipeline connecting 
Turkmenistan and Iran and one connecting Iran 
and Turkey already exist (with small capacities) – 
but as of today this solution cannot be considered 
safe, owing to Iran’s political situation and its 
historical record of failed gas pipeline projects;  
• across the Caspian Sea (Turkmenistan-Azerbaijan) 
and into Turkey, a possibility which is not likely to 
become reality soon because the Sea’s legal status 
has not been settled. 
Moreover, most Caspian Sea bypass options require 
Central Asian countries to commit themselves to 
directly supplying the West, which cannot happen as 
long as no infrastructure is built, resulting in a double-
bind. Thus it is difficult to foresee a positive outcome to 
the Nabucco pipeline project in the short term, as it 
requires more supply than from Azerbaijan alone. 
Another option is a Nabucco pipeline through Iraq, but 
Iraq’s instability and the fact that such a pipeline would 
have to cross Turkish Kurdistan suggests its completion 
would be achieved in the far too distant future. 
2.3 The future of the global gas market 
The global gas market is likely to be influenced by two 
main factors: the development of the LNG market and, 
subsequently, the production of non-conventional gas in 
the US. LNG trade already represents 30% of the global 
gas trade and is likely to increase. The direct 
consequence of this will be the integration of regional 
gas markets and the creation of major in-take basins: 
the Atlantic basin and the Asia-Pacific basin. Resource 
competition between Europe and the US or East Asian 
countries could emerge, but as today’s resources are 
ample and likely to increase, this is not very probable.  
The characteristics of gas, its transportation 
requirements, and the cost of its exploitation are likely 
to favour close relationships between producer and 
customer – and hence long-term contracts – at the 
expense of the spot market. Consequently, an LNG spot 
market will certainly emerge and grow but will not 
replace traditional contracting processes. On the other 
Europe’s Gas Supply Security | 3 
hand, such a market could play the role of gas price-
setter, which could accelerate the decoupling of oil and 
gas and the decreasing of the share of oil prices in gas 
contracting formulas. 
The last months have seen a radical change in the LNG 
market with the decrease of American imports. The 
rapid exploitation of unconventional gas in the United 
States has already profoundly modified the face of the 
market and will continue to do so in the foreseeable 
future. Providing that the rate of both discovery and 
production of the American shale gas is sustainable, 
certain LNG projects in traditional producers (Russia 
and Qatar), could be postponed or abandoned. 
However, it seems wise to withhold long term 
conclusions from North American unconventional gas, 
as new environmental standards or geological realities 
could potentially put a halt to the expansion of this 
industry; this is particularly true if new environmental 
laws are voted. 
The global gas market’s evolution is therefore open to 
possibility, but the main trends affecting Europe 
(leaving aside the potential exploitation of its own 
unconventional gas) are likely to remain unchanged: 
diminishing domestic reserves and increasing 
dependency on imports (especially from Russia). 
3. Rating source country risk 
We rate producer country source and transit risks using 
a five-point scale representing risk levels of very low, 
low, medium, high and very high. Attributing numerical 
probabilities would prove inaccurate, not to mention 
unnecessary for establishing which sources are safe and 
which are not. 
In Table 1, most countries or pipelines rated as highly 
risky either do not supply the EU or are not active yet. 
However, certain projects that have received attention 
from the EC might prove hazardous and could involve 
significant geopolitical insecurity. This is the case of 
the Fourth Corridor, where countries or regions seen as 
important future sources can be considered unsafe, such 
as Iran and Iraq, or unreliable, such as Central Asia. We 
are therefore of the opinion that Nabucco might not be a 
viable project given current conditions. 
Table 1. Ratings of source country risk 
Country Source risk Transit risk Total risk
Algeria medium low low
Azerbaijan low medium medium
very high if via Iran high
high if via Russia high
high if via Trans‐Caspian high
Egypt low low low
medium if via Turkey high
low if LNG high
Iraq very high high if via Turkey high
Libya low very low low
low if LNG medium
very high if via Trans‐Saharan very high
Norway very low very low very low
Qatar very low low very low
high if no change medium
medium if either NordStream
 or South Stream 
or both are completed
medium
low if sustainable solution is 
found with Ukraine 
(consortium)
low
Russia low
Central Asia
(Turkmenistan,
Kazakhstan, Uzbekistan)
medium
Iran very high
Nigeria very high
 
Source: Own calculations. 
On the other hand, Norway, Algeria and Libya, which 
are already partners, can be considered safe. Russia is a 
special case, as its associated risk is mainly a transit risk 
and depends on infrastructure and political solutions put 
in place. Source risks are low, as Russia is not 
threatened by armed conflicts on its territory, faces 
limited instability, and has medium to low incentive to 
divert its supply away from Europe. Conversely, transit 
risks are likely to remain a characteristic feature of 
consuming Russian gas, owing to transit via Ukraine. 
Nord Stream will have a capacity of 51 bcm/yr and 
South Stream could have around 60 bcm. Even if these 
4 | François-Loïc Henry 
two pipelines are built, a sizeable share of the gas will 
still have to cross Ukraine. As mentioned above, the 
most desirable solution would be for the EU to engage 
in a tripartite consortium overseeing transit and to 
impose the resolution of disputes through the ECT. This 
could certainly allow Russia to be considered once and 
for all a reliable partner. The risk that Russia might 
increase exports to Asia at the expense of the EU should 
not be considered too seriously, as Europe has provided 
reliable and necessary cash flow to Russia, and building 
up export capacity to Asia to match that to Europe 
would take decades and require considerable 
investment. Moreover, the discovery and exploitation of 
new fields in Eastern Siberia is likely to produce 
enough gas to meet East Asian needs. 
Meanwhile, Nigeria should be treated with some 
caution, despite its potentially significant reserves. At 
the opposite end of the spectrum, Qatar offers all the 
advantages one could hope for; increasing imports from 
Qatar, if possible with long-term contracts, could foster 
diversification and security. 
4. Conclusions and recommended 
mitigation policies 
Considering the geopolitical risks, the overall situation 
of EU gas imports seems rather sound, but smaller 
Eastern European members face a more difficult 
situation. Several steps could be taken to alleviate the 
most negative effects of supply disruptions. These steps 
involve both upstream and downstream actions. 
• Diversification of gas supply sources should be 
promoted only to a moderate extent, as vigorous 
promotion could provoke a deterioration of 
relations with present suppliers. Qatar should be 
regarded as an attractive opportunity for 
diversification. The Fourth Corridor needs 
extensive political promotion upstream in Central 
Asia and requires that the geopolitical conditions 
in Iraq and Iran greatly improve. Alternative 
sources of energy (renewable) should also be 
promoted to increase the share of domestic 
energy sources. 
• LNG imports should be promoted and new re-
gasification plants built to allow greater 
flexibility of imports. This is particularly the case 
with Eastern Europe and the Balkans, where 
countries with sea access could play the role of 
receiving station for the rest of the region. For 
instance, the Gdansk-Athens axis is the most 
prone to disruptions. Therefore, if larger re-
gasification plants were present at both ends of 
the axis, and a gas grid was well connected to the 
landlocked countries, the situation could improve 
dramatically. Indeed, if necessary, additional gas 
flows provided by LNG imports could reach 
them quickly and securely. Either the South 
Stream pipeline or Nabucco and Yamal-Europe 
could also contribute additional capacity at both 
ends of the axis. 
• The EU’s internal gas network should be 
extended and storage facilities created. If the 
ensemble of EU legislative proposals known as 
the Third Energy Package is to exert broad 
influence, and if liberalisation of the gas market 
is to be effective, asymmetric capacities and 
possibilities of arbitrage need to be removed. 
Many EU border countries are not connected by 
pipeline. Reverse flow often does not exist, and 
as the major storage reservoirs are located in 
France, Italy and Germany, these stocks cannot 
be made available to Eastern Europe. 
Consequently, intra-European pipelines and 
equipment allowing reverse flows and 
supplementary storage capacities should be 
constructed. The Third Energy Package could 
only become reality if these steps are taken. 
Moreover, points 2 and 3 are decisive measures 
for the successful implementation of the N-1 
standard. Each member state should also draw up 
a list of entities (private firms, energy-intensive 
plants, public institutions) that should never 
suffer a gas disruption and those that could 
eventually be deprived of gas momentarily 
without negative consequences for the economy 
and the population. This would help redirect 
energy to where it is most vital. 
• The Energy Charter Treaty should be strongly 
supported and EU countries should be the first to 
appeal to it, which will prove its effectiveness to 
unconvinced third countries such as Russia. In 
certain cases, ad hoc legal frameworks and 
regimes could be employed, such as an 
international body controlling gas transit in 
Ukraine. 
• Finally, dialogue with producer countries is 
essential. The EU will become 80% dependent on 
imported gas in the coming decades. While 
relations based on mutual dependence can bear 
fruit, trust should also be present. Analysis has 
shown that Russia, which shares responsibility 
for the events of the 2009 winter, has much to 
lose in a degraded relationship with the EU. The 
latter should thus consider Russia a special 
partner and work with it to insure that no 
disruptions occur and that necessary investments 
in Russia are delivered. The EU should also 
prove itself a reliable customer. Indeed, it cannot 
ask Russia to be more committed to constant gas 
exports and at the same time claim that it wants 
to diversify away from Russia. Platforms 
allowing dialogue would be beneficial to the 
EU’s energy security and would help undermine 
producer countries’ motivations to form a cartel. 


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