Neo-Realism Meets Neo-Liberalism: Nord Stream and its Implications for EU-Russia Energy Relations

Bachelor Thesis, 2011

24 Pages, Grade: 2,0


Table of Contents

1. Introduction

2. Theorizing International Relations in the Light of Energy: Neo-realism and Neo-liberalism

3. Energy in Russia and the EU

4. Assessing Nord Stream: Diversification of Gas Supply or Segmentation of the EU Energy Market?
4.1. The Neo-Liberalist Perspective: Nord Stream - A Pan-European Project
4.2. The Neo-Realist Perspective: Nord Stream - Dividing the EU

5. Conclusion



1. Introduction

Europe needs gas. Russia has this gas. Europe wants to buy gas. Russia wants to sell gas. So Europe, take that gas!” (Krestyanov, 2009).1

On 11 April 2005 at a trade fair, Russia and Germany officially announced their agreement on the construction of the North European Gas Pipeline, short, Nord Stream. This announcement triggered a Europe-wide debate not only on the pipeline as such, but also on relations between the EU and Russia as a whole. In the aftermath, mainly officials from Eastern European countries, most of which were ignored during the negotiations leading to the agreement, expressed their profound discomfort.2 Thereby, aspects such as European overdependence on Russian Gas, disintegration of the EU internal energy market as well as the awakening of historical fault lines between Europe and Russia came to the fore.

In this context, this paper examines in what ways the Nord Stream pipeline affects energy relations between the EU and Russia. It is assumed that the pipeline, which should have its first supply of gas in 2011 according to the information provided by the constructors, will have a major impact on the energy markets of the EU and Russia.3 These markets are the main units of analysis of this paper. They are not randomly chosen, in contrast, it is arguable that they are at the core of EU-Russia relations. First, considering Russia’s role in international relations and therefore also its position vis-á-vis the European Union, one can observe that it is highly determined by its economic resurgence. More accurately, as can be seen in reports from the International Energy Agency, Russia is the world’s number one producer and exporter of natural gas (IEA, 2010, p.12). In turn, Russia’s resurgence is almost perfectly correlated with the re-nationalization of its energy industry as well as the sharp increase of energy prices, since the year 2000 (Goldman, 2008, p.80). This gives Russia a significant leverage in international affairs. As Goldman puts it, “with a flick of a switch, those dispatchers sitting in this Moscow room could freeze- and indeed have frozen- entire countries” (ibid., p.2). Second, with regard to European integration, the creation of a common market was one of the initial goals since the beginnings.4 Even though the issue of an internal energy market came comparatively late on the agenda, major steps such as the electricity and gas directives of 1997, 2003 and 2007 proved to foster integration in this domain, too (Buchan, 2010, p.378). Notwithstanding these developments, the EU energy market is far from being fully integrated. Indeed, especially when looking at the dimension of energy security and thus, at EU energy relations with third countries, one can identify “the biggest gap between potential (what EU states could do together) and performance (what they actually do together)” (idem, p.374). With regard to policies on Russia, from which the EU imports the greatest amounts of its energy fuels,5 it was observed that instead of speaking with one voice, EU policies rather tend to reflect the product of individual Member State preferences, which succeed in uploading them on the EU agenda (Schmidt-Felzmann, 2008, p.173). Therefore, one can assume that the second unit of analysis, the EU energy market, is fragmented due to distinctive interests of EU Member States particularly when it comes to external relations.

The Nord Stream pipeline would potentially directly connect these two markets, and has therefore major implications on EU-Russia energy relations. In order to understand the consequences of this pipeline, two main theories of international relations are employed: neo- realism and neo-liberalism. These theories provide different lenses through which relations between states and international organizations can be seen. Neo-realism is a theory constructed mainly by Kenneth Waltz and concentrates on the anarchic international structure, which leads states to be concerned primarily about their own security. Thus, international relations are characterized as a zero-sum game, emphasizing the belief that one party can only make profits at the expense of a loss from the other party. In contrast, the theory of neo- liberalism, which was developed by Robert Keohane and Joseph Nye, considers international cooperation through international organizations and regimes as a tool to alleviate international anarchy. This school holds that mutual gains from cooperation are possible. On the basis of the Nord Stream case, this paper adopts a complementary approach and analyzes the pipeline from two perspectives. It is assumed that such an approach helps to investigate the pipeline in a more balanced way. This assumption derives from the unique nature of energy in international relations, as will be shown below. On the one hand, the pipeline is studied from a neo-liberalist stance. More concretely, it is examined how and why Russian and German government officials as well as the involved companies Gazprom or E.ON/BASF frame the pipeline as a pan-European project. On the other hand, the pipeline is also discussed from a neo-realist perspective. Thereby, underlying motives determining the position of states on the pipeline are revealed. It is shown why some EU Member States - most notably the Baltic States and Poland - hold that this project divides the EU and increases dependence on Russia. By examining these two accounts, it will be disclosed that geopolitical positions as well as historical experiences with Russia have a major bearing on the perception of this pipeline. Other aspects of the pipeline such as environmental concerns are treated only marginally.

In order to answer the research question, the paper is structured as follows. First, the theoretical framework of this study is provided by introducing the theories of neo-realism and neo-liberalism and by deriving main assumptions for the case study. Second, the paper investigates and contrasts the energy markets of the EU and Russia. Third, the Nord Stream case is explored by using the two different perspectives of neo-liberalism and neo-realism. The paper concludes by assessing in how far the findings made on the Nord Stream case can be generalized for EU-Russia energy relations.

2. Theorizing International Relations in the Light of Energy: Neo-realism and Neoliberalism

This section presents the two orthodox schools of international relations and shows which assumptions for the energy relations between the EU and Russia can be derived from them. The theory of neo-realism was developed by Kenneth Waltz in his work Theory of International Politics (1979). The core assumption of his theory is that in international relations there are only “two kinds of system possible - hierarchical or anarchical” (Brown et al, 2009, p.42). As there is arguably no world regulating government since the Middle Ages, he concludes that nowadays international relations have to be seen under the latter. From this point of view, Waltz draws three main conclusions on the functioning of international relations. Firstly, he stresses that the international system of states is a ‘self-help’ system. This term deduces that because of the international anarchy, there is nobody to look after a state’s security than the state itself. In turn, the international system obliges states to set security on the top of their agenda. Secondly, Waltz holds that “the number of states that are a serious threat to each other’s basic survival” determines the balance of power in international relations (ibid.). As a consequence, power in neo-realist terms is limited to hard currency, that is, strong military and great economic capabilities. This approach is often seen as being pragmatic in the sense that it concentrates on materialist aspects and disregards genuine international cooperation. Indeed, neo-realists argue that states work together only to coordinate their own policies and that the outcome of this coordination is always dependent on the particular balance of power (Little, 2010, p.305). Consequently, relations between states are always zero-sum games. If states coordinate their policies, one state gains at the expense of the other, reflecting the doctrine of relative advantage.6 Finally, neo-realism assures that states are rational actors, which are merely concerned about maximizing their own welfare. Therefore, states pursue “aggressive, expansionist policies” (Brown & Ainley, 2009, p.45).

The second orthodox school of international relations is neo-liberalism, which was developed by Keohane and Nye in the early 1980s. The theory is not completely opposing the neo-realist school as it makes two main concessions. First, neo-liberals acknowledge that the international system can generally be claimed to be anarchical and that “co-operation under anarchy was always liable to be fragile” (idem., p.46). Second, it is also admitted that states are rational actors and do not trust each other. In that regard, the prisoner’s dilemma is employed, showing that states do not pursue collaborative strategies, which would produce the optimal outcome for both, because they assume the other state to defect. Taking the same assumptions as neo-realists, however, the neo-liberals arrive at different conclusions. That is to say, international regimes are regarded as a possibility to mitigate anarchy and to establish international collaboration. According to this school, such a form of international collaboration is strongest when there is a hegemonic power establishing regimes.7 Moreover, regimes are more durable even after the decline of the hegemonic power when states are symmetrically interdependent on each other (Keohane & Nye, 1987, p.729). In other words, states would rather pursue collaborative strategies when they are reciprocally dependent on each other, to the same degree.8 As regimes bind states together, the prisoner’s dilemma game will be played repeatedly and thus “it becomes worthwhile taking a risk and pursuing a collaborative strategy” (Little, 2010, p.303). Consequently, when regimes are established and collaborative strategies are chosen, states profit from absolute gains instead of gaining at the expense of the other. Finally, neo-liberals not only focus on hard power (e.g. military strength), but also regard soft power as an important element in determining power in international relations. In this regard, Nye posits that “proof of power lies not in resources but in the ability to change behavior of states” (1990, p.155). Hence, power is also determined by the perception of states in the international arena, that is, in how far its actions are seen to be legitimate.

As this paper deals with international energy relations, one has to outline the unique features of energy as an international good to draw assumptions for the Nord Stream case. Energy is an increasingly scarce good, which is moreover distributed unevenly between regions (see Appendix).9 This is mainly because predominant fuels such as oil, coal and gas are intensively exploited and the installment and wide use of renewable sources, progresses rather slowly (World Energy Council, 2010, p.3). The uneven distribution of energy resources thus causes a clear separation of net exporters and net importers. On the one hand, regions, which are less abundant in resources, are in need of importing energy to guarantee security of energy supply for industries and citizens, alike.10 On the other hand, countries, which are more abundant in energy resources, have to specialize in this industry. Specialization in the field of energy requires substantial investments as fuels such as oil and gas are extracted under complex geological and climatic circumstances and are transported via costly pipelines (Eden et al, 1981, pp.278-285). Therefore, a country, which wants to be a global supplier of energy, has to steer its investments into this industry, inducing it to rely on security of demand. Giving this equation of security of supply and demand, importers and exporters are dependent on each other, or in other terms, they are interdependent. It is exactly this point of view, from which a neo-liberalist would look at the international energy situation, highlighting the need for cooperation to secure global supply. Therefore, one would assume that the Nord Stream pipeline is regarded from a neo-liberalist stance as a project, which increases mutual interdependence between supplier and demander, mitigating international anarchy. Moreover, one would assume that this lens allows explaining the position of the proponents, as it emphasizes the need of interconnecting energy markets, thus legitimizing such a project from a global perspective.

However, one can also analyze the international energy situation from a neo-realist point of view. From this standpoint, the above-described interdependence would rather be seen as a balance of power between exporting and importing countries. Indeed, even if these two parties are dependent on each other, there are ways to bring the balance of power in one’s own direction. Importing countries, for example, can band together in order to increase the size of their market. In fact, such a form of integration would augment the importance of this outlet market for the supplier, shifting the balance of power into the direction of the importers.11 On the contrary, an exporter can counteract such a policy by trying to segment the integrated market, leading to more diversified trade possibilities. One has to notice here that especially small countries would be affected by this segregation, as their influence on the world energy market would decrease significantly. Regarding the Nord Stream case from this neo-realist viewpoint, one would assume that state preferences are determined by their geopolitical position as well as their economy size. Consequently, one would assume that each state promotes the position most favorable to its own interests, implying a coordination of policies.

The two above-presented perspectives will be used complementary to analyze the Nord Stream case. While such an approach helps to obtain a multifaceted insight into the dynamics behind this project, it does not provide a clear-cut answer to the question whether one theory is more appropriate than the other. This approach is taken because it sheds light on the project from different angles, enabling one to have a more balanced view on the implications of Nord Stream for EU-Russia energy relations, in general.

3. Energy in Russia and the EU

This section gives an overview of the energy markets of Russia and the EU. As historical backgrounds and contemporary approaches towards energy from either side are revealed, this lays the ground for understanding the implications of the Nord Stream case analysis. Russia possesses one third of the world’s natural gas reserves, one tenth of the world’s oil reserves and one fifth of the world’s coal reserves.12 This said, energy is not only Russia’s main industry determining the economic growth of the country, but also does it determine the countries’ position in global politics.


1 Statement by the deputy head of the mission of the Russian Federation to the European Union at a Debate on Mutual Dependence: Securing Europe’s energy supply. supply/?st=russia accessed on 08.06.2011.

2 The negative perception was declared by officials of countries such as Lithuania, Estonia and Poland. The Polish minister of defence at that time, Radoslaw Sikorski, in particular, revealed his inconvenience by comparing the agreement with the Molotov-Ribbentrop pact. Stream_is_a_geopolitical_d.htm accessed on 09.04.2011

3 Information provided by Nord Stream the official company constructing this project. accessed on 09.04.2011

4 It was the pooling together of Coal and Steel, which provided the first step of European integration in the 1950s.

5 According to Eurostat, 34 % of the net oil imports and 40,8 % of the net gas imports of the EU27 are from Russia, representing the main share of imports. Russia is followed by Norway and Libya. accessed on


6 The theory of relative gains was derived from early economic scientists such as Thomas Mun, who stressed that in international trade, one state wins proportionally the same amount its trading partner loses. In contrast, later economists such as Adam Smith introduced the concept of absolute advantage, emphasizing the possibility of gains for the two trading states.

7 An example posed in this regard is the establishment of the Bretton Woods regime in 1945 which was highly influenced by the United States. See more Keohane, R. (1984). After Hegemony: Cooperation and Discord in the World Political Economy. Princeton University Press

8 The concept of basic interdependence is not interchangeable with the concept of complex interdependence introduced by the same authors. See more: Keohane, R. & Nye, J. Complex Interdependence Revisited. International Organization, Vol 41, Issue 4, p.730

9 According to a study by the International Energy Agency, energy demand will rise by 36 % between 2008 and 2035. See more: accessed on 07.06.2011. At the same time, the most important sources of energy, fossil fuels such as coal, oil and gas, are declining and/or entail significant negative externalities for the environment. See more: accessed on 07.06.2011 accessed on 07.06.2011.

10 Energy security can be defined as the ability of a nation to guarantee its citizens and businesses “access to sufficient energy resources at reasonable prices for the foreseeable future free from serious risk of major disruption of service” (Barton et al, 2004, p.5).

11 Such a process is known in international economics as the “terms of trade effect”. See more: Salvatore, D (2010). International Economics, 10 th edition. Wiley & Sons, inc.

12 According to the Energy Strategy 2020 issued by the Russian government. See more: accessed on 17.04.2011 8

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Neo-Realism Meets Neo-Liberalism: Nord Stream and its Implications for EU-Russia Energy Relations
Maastricht University
European Studies
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ISBN (Book)
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Energy Politics, European Energy Integration, Pipeline Race, EU-Russia Relations
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Ilya Levelev (Author), 2011, Neo-Realism Meets Neo-Liberalism: Nord Stream and its Implications for EU-Russia Energy Relations, Munich, GRIN Verlag,


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