At Friday’s summit between President Vladimir Putin of Russia and JosÊ Manuel Barroso, president of the European Commission, the words «tension» and «energy» will once again be heard in the same breath. For today the biggest issue dividing Europe and Russia is natural gas, the same commodity that tied them together through even the tensest days of the cold war.

Over 40 years, the trade in gas has brought benefits to all concerned. It enabled Europe to limit its coal use and diversify its energy supplies. Natural gas has also been the major enabler in Europe for limiting carbon dioxide emissions. For Russia, long the largest supplier of gas to Europe, it has been the second largest export earner.

But now the gas trade is the subject of contention and suspicion. The reasons go beyond single events, such as the New Year 2006 interruption of gas supply from Russia to Ukraine, and result from three fundamental changes. These call for a rethinking of what needs to be done to avoid a degradation of the relationship, which would threaten investment in and commitment to the long-term flow of gas that serves both sides’ interests.

The first set of changes is within Russia, involving not only the organisation of the industry but also the need for investment to offset the decline of Soviet-era gas fields. In addition, customers today pay for their gas – not as in Soviet times, when gas was a «free good», or in the 1990s, when customers often did not pay. In those times, the economic incentive was always in favour of exporting gas, if there were willing buyers. This automatic «preference for exports» is likely to disappear in a few years’ time, as value is increasingly generated inside Russia by Russian customers.

The second factor is that Europe itself has profoundly changed, as the European Union has expanded to 27 countries. Many new members are highly reliant on Russian energy imports and have a complex set of non-energy relationships and histories with Russia. This gives a new colour to the discourse on questions of gas trade, energy security and ownership of gas assets. The European Commission’s liberalisation agenda adds complications. Russians – and some European governments and companies – say some of the current proposals, if not amended, will diminish security of supply.

Third, Russian-European gas trade has been conducted on the old model, under stable, long-term contracts. Increasingly, as the gas industry shifts towards shorter terms, trading and risk management, the trade will have to adapt to new ways of doing business.

We propose four areas for response. First, within the EU, concern about competition and market dominance looms large. Yet at the same time care needs to be taken in drafting a new directive for the gas industry, to ensure that supply security, including relations with suppliers and the long-term character of gas investment, as well as the environmental benefits that flow from the gas trade, is taken into account along with competition policy.

Second, with a rapidly evolving economy growing at 7 per cent, the Russian government could constructively review the future needs of Russia’s own gas industry, especially in terms of the relationship between the ever more important independent gas producing companies and Gazprom, the monopoly exporter of gas. In adapting its own industry to the changing needs of its domestic market, Russia may find more common ground with Europe. Moreover, reciprocity in terms of investment is likely to remain a significant consideration.

Third, both parties could seek to depoliticise what is essentially a commercial relationship. The less political, the better for the future. Perspective counts: Europe’s neighbourhood policy sometimes looks like a desire to impose European rules on countries outside the EU. Russia’s timing of gas an­nouncements to coincide with political developments outside its borders contributes to the tensions and concerns about reliability.

Fourth, the two parties need to work together to address the issue of the transit of Russian gas through third countries, both for new projects and existing major transit routes.

A gas relationship of the scale that exists between Europe and Russia requires confidence – both in its operations today and in the availability and reliability of future investment, development and transit. In terms of this historic gas trade, the sustainability, efficiency and security of European energy supply will best be served through the creation of a carefully and co-operatively managed interdependence between Europe and Russia. The starting point is to recognise that there are real structural reasons for the new stresses, but that there are also reasonable ways to address them.

"The Financial Times"