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Southern Gas Corridor

Uncertainties for Europes Energy Policies

Croatia’s Accession with geostrategic Implications

Uncertainties for Europes Energy Policies Uncertainties for Europes Energy Policies
Collage: Energlobe

After just two and a half months being a new member of the EU, the EU has called a “serious breach” between Brussels and Croatia and has threatened Zagreb with sanctions by enhancing its critical monitoring of the country and by withholding much needed funds from Croatia to amend an extradition law that could shield suspected war criminals. As a key condition of the EU membership, Croatia is obliged to overhaul its criminal extradition laws to bring them in compliance with EU standards. But after the Croatian parliament subsequently amended those laws last June in the final weeks before Croatia’s official EU accession on July 1, 2013, accused or convicted war criminals before August 2002 could not be transferred abroad. Croatia has received 121 requests under the European arrest warrant.

The extradition dispute between the EU and Croatia highlights the insufficient domestic reform processes particularly in the justice sector by creating a full rule of law with politically independent courts. The lack of a full rule of law has also direct implications for the country’s energy policies, much-needed foreign investments in its energy sector and foreign investment protection. The dispute comes at a very critical time for both the EU and Croatia:

 

  1. Croatia’s accession to the EU is the first such entry since the beginning of the economic-financial crisis in 2008. Despite the present economic-financial crisis, the historical mission of the EU in its neighbourhood and on its borders continues into a new critical phase. The old question of widening or deepening is again on the EU’s political agenda with other candidate applications from the South-East European countries (the Western Balkans) and the special case of Turkey waiting in the years to come. But the economic-financial crisis in Greece and potentially in some other member states have highlighted that the haste at the expense of a deepening processes of economic and political reforms in previous enlargement processes of the EU to the east and south have created significant negative aftershocks with support of public opinion fading away by increasing weariness, skepticism, lack of support and inward looking due to the manifold origins of the economic-financial crisis in Greece and the wider Eurozone. While the confluence of geopolitical conditions and historic “windows of opportunity” have determined the past enlargement processes, the institutional and legal pre-conditions have been neglected, as long as the Copenhagen criteria were respected overall.
  2. Geopolitically and geo-economically, Croatia’s EU accession and the introduction of the acquis communautaire in the countries of the European Energy Community (EEC)is becoming ever more important for the EU’s future energy security. But the EU’s common energy policies in Central and South-Eastern Europe and its regional cross-border energy infrastructure projects such as the EU’s Southern Gas Corridor, its North-South Corridor (linking the energy sectors of the Baltic Region with Central Europe and the Western Balkan states), and bilateral gas as well as electricity interconnectors also make the EU’s future energy security ever more dependent on the political and economic stability of the countries in the Western Balkans and Southeastern Europe (SEE).
    After years of growing economic and geopolitical competition, tense corporate rivalry and intense debate about the future European energy supply security, on June 28, 2013, the Shah Deniz Consortium (SDC) announced the long-awaited decision of the competing Nabucco-West gas pipeline or the Trans-Adriatic Pipeline (TAP) for the final route of the EU’s strategic Southern Gas Corridor project. The chosen pipeline will be the westward onward addition to the Trans-Anatolia-Gas Pipeline (TANAP) of Azerbaijan and Turkey to southern Italy. In contrast to a chosen Nabucco-West-pipeline, with the exception of Greece and Albania, all other Southeastern European countries, which are still heavily dependent on Gazprom (Russia) as almost the only single regional gas supplier, the entire region will hardly be able to diversify their gas imports away from Russia, when its South Stream pipeline project may already start its construction at the end of this year and when at present no immediate alternative non-Russian gas supplies are available. 80% of TAP’s and TANAP’s supplied Azerbaijan from the Shah Deniz Consortium will end up in Italy and adjacent markets and not in Southeastern Europe, which is much less well supplied and diversified in comparison with Italy’s gas sector. Therefore, the long-planned and repeatedly delayed LNG-terminal at the Croatian Krk-island, its potential offshore oil and gas resources of the Adriatic Sea, with first tenders expected in the second half of 2014, and the plan of building a Ionian-Adriatic Pipeline from Albania to Croatia, linked to TAP and supplied gas from Azerbaijan have become ever more strategically important projects not just for Croatia’s future energy security, but also for the entire region as well as the EU’s energy security. Otherwise, the strategic objectives of the EU’s Southern Corridor project will not be achieved.

Historically, Croatia has been influenced politically and economically by external powers such as Austria, Hungary, Italy and Turkey and was a battleground of competing interests of Catholicism and Orthodoxy, the Ottoman and Hungarian empires and communism versus capitalism in the second half of the 20 century. Croatia is strategically well positioned along newly planned regional and transcontinental road, rail and important energy infrastructure transit corridors. But exploiting this advantageous geographical position, the country needs to create a stable political framework with a supportive and attractive investment climate. Croatia and even more some other regional states, including the EU members Romania and Bulgaria, are still coping with widespread corruption, nepotism, excessive bureaucracies, lack of transparency, accountability and adequate compliance of financial investments and the rule of law.2 However, Croatia has made some significant progress and often more than its neighbouring states, including in its energy policies and energy sector reforms.3 Although the populations of Croatia and the other Balkan states still perceive corruption as increasing in their countries4, in the most recent ranking of the international corruption index of 2012, edited by Transparency International and comparing 180 countries, Croatia was ranked on number 62, but judged less corrupt than four of the EU’s member states: Romania, Bulgaria, Greece and Italy.5

With the EU coping with its crisis in Greece and the wider Eurozone, many West European countries were reluctant to admit a country that is coping with a recession and 21 percent unemployment (the third highest in the EU after Spain and Greece) and has not fully implemented the rule of law and legal security.6 But since the Greece crisis and its deeper roots in its political system as well as the experiences with continuing problems in this regard in the EU member states of Romania, Bulgaria and others7, those “softpower” pre-conditions of economic development and energy security can always become “hardpower” factors of political stability and energy security almost overnight. These “softpower” conditions belong to the very important “political risk” factors for large energy project investments, which need to be taken into account, particularly by foreign investors. These factors have become much more important also for the regional energy policies in the view of the European Commission and foreign investors for basically four reasons:

 

  1. the crisis in Greece and the wider Eurozone have highlighted that those softpower” factors such as the full implementation of the rule of law need to be taken increasingly into account for real sustainable economic developments and large-scale energy project investments;
  2. Croatia and the entire region of SEE have lacked substantial investments in modernising their energy sector and energy infrastructures during the last decade;
  3. the European Energy Programme for Recovery (EEPR), launched in 2009, has set aside more than 1.4 billion Euro to support these projects. In addition to the EU’s regional funds for investment, it is the first time that the EU is now investing itself or supporting private investments financially in national and cross-border energy infrastructure projects with its own funds.
  4. the EU’s own planned regional energy infrastructure projects as mentioned above are a pre-condition for an united and liberalized pan-European energy market by 2014. Without these cross-border energy infrastructure projects, the traditionally small and fragmented national energy markets cannot be transformed into the common pan-European energy market. A pre-requisite for the much needed investments by the European Commission and private investors, however, are a stable political environment, the rule of law and legal security.

 

The “soft factors” of energy security and a sustainable economic development are important for the question whether Croatia will use its membership for attracting more foreign investments, which decreased from 4.2 billion Euro in 2008 to 973.3 million Euro in 2012. Furthermore, Croatia will receive economic aid with approved 687.5 million Euro for the second half of this year and another 13.7 billion Euro between 2014 and 2020 from the EU.8 These investments are very much needed that Croatia with further domestic reforms in all sectors will return to an economic growth development. Its economy has contracted by 0.7% during the second quarter of 2013 compared to the same period in 2012. It faces a seventh quarterly economic contraction during the last years. Analysts do not foresee recovery before 2014.

The new importance of those “softpower” factors of economic and energy policies particular in this region can also be seen in the in the fact that the European Parliament has just approved new EU legislation (amending Directive 2004/109/EC and Directive 2007/14/EC) to combat fraud and tax evasion in the oil and gas industry. Under the new law, energy companies have to disclose payments made to national governments on a project-by-project basis. All payments above €100,000 (US$130,000) will have to be disclosed, including payments for production licenses, taxes, royalties, bonuses or other “creative book-keepings”. The new law will also cover EU companies operating in third countries outside the EU jurisdictions. The European Parliament also approved an anti-evasion clause to avoid that companies are able to artificially split or aggregate payments for disclosure. The new EU legislation is part of a global effort to combat corruption and tax evasion in the worldwide energy industry and follows the Extractive Industries Transparency Initiative (EITI) and similar legislation like the “Dodd-Frank Act” in the United States. Moreover, the reporting obligation covers all levels of governments.

But critics have argued that the new EU anti-corruption legislation will put EU companies at a disadvantage to other foreign competitors. Furthermore, EU companies may face sanctions for illegal disclosure and might be precluded from bidding for new contracts, licenses and other projects as the disclosure of payments is illegal with no exemptions in some countries’ jurisdictions. In their view, the only rapid growing industry in the EU at present is the compliance industry. Such another overregulation poses a serious threat to the European oil and gas industry.9

However, in a longer-term perspective, the EU may benefit from its strict monitoring process of new accession candidates and its recently newly adopted anti-corruption legislation. Even foreign energy companies, which want heavily invest in expensive infrastructures operating several decades in the energy sectors of Central and Southeastern Europe - all plagued by inefficiencies, old infrastructures, bureaucracy and high energy prices - , have become much more interested at those “soft factors” as a pre-condition of a more stable and sustainable economic development and investment protection rules based on independent courts and the rule of law.

Challenges of Croatia’s Energy Policies10

Croatia has a favorable strategic position given the planned regional and transcontinental road, rail and energy infrastructure transit corridors. Historically, Croatia’s energy sector and its energy resources were under state control. In the post-Yugoslav war period after the Dayton agreement of 1995, Croatia’s liberalization policies have been slow and controversial. But the energy policies have also been a fastening factor for regional integration with planned liberalized energy markets to promote trade and competition among the regional countries, such as those of the European Energy Community (EEC), which are obliged to implement the EU’s acquis communautaire. However, since its independence, investments for modernizing the country’s energy infrastructure have been insufficient.

In early 2008, the EU opened the chapter on energy negotiations as part of its accession process with Croatia. It forced Croatia to undertake a detailed analysis of its energy policies, problems, strengths and weaknesses. The integration policies of the EU, the EEC and its neighbouring countries are all aiming to increase the energy supply security of the Western Balkan states. More than 50% of Croatia’s energy consumption needs to be imported. Even its coal demand can only be met by imports. But Croatia has larger gas resources in the Adriatic Sea, partially shared with Italy. ExxonMobile, ConocoPhilips and General Electric have signaled their interest at oil and gas exploration projects in the Adriatic Sea, but are waiting on the implementation of a new law on hydrocarbon resources before committing to any concrete project.

In October 2009, the Croatian Parliament adopted a National Energy Strategy with three basic energy objectives: (1) security of energy supply; (2) competitive energy system; and (3) sustainable energy sector development. Alongside of the EU’s Energy Action Plan of 2007 and its three 20% goals and by harmonizing its energy policies with the EU’s ones, the new Croatian energy strategy has also set two 20% objectives for decreasing GHG-emissions by 2020 in comparison with 1990 and expanding renewable energy sources in gross final energy consumption by 2020. In addition, it defined a 10% target for the share of renewable energy sources in 2020, used in all types of the transport sector, as well as a 9% decrease of final energy consumption by 2016 applying energy efficiency measures.11

The Energy Strategy has also favored an increased use of nuclear power having “the greatest potential in decreasing the greenhouse gas emissions”. But whether the building of a new nuclear power plant makes economically still sense, has become a controversial issue among energy experts both in Croatia as well as internationally, when decommissioning and radioactive waste disposal costs are included in life-cycle cost-benefit analyses. Originally, it was foreseen in Croatia’s national energy strategy of 2009 that a decision to build a new nuclear power plant should be made by 2012.

The country’s total energy demand has been projected to increase by 71.4% between 2009 and 2030. Its total calculated investments for its energy sector have been calculated on 15 billion Euro by 2020.

Its share of self-sufficiency is feared to gradually decline further, making the country ever more dependent on energy imports. In 2009, Croatia’s share of natural gas consumption was around 25%, with a forecasted annual growth rate of 4.2% in average till 2020. But with the EU’s planned North-South Corridor, its Southern Gas Corridor project, new cross-border gas interconnectors to its neighbouring countries and Croatia’s plan to build an LNG-import terminal at the island of Krk (“Adria LNG-Project”), its future gas and energy supply security would tremendously increase, when the projects have been implemented. In 2012, Croatia’s gas consumption declined slightly to 2.82 bcm from the levels of 2011. Production amounted to 2.7 bcm in 2010. Last May, Croatia’s and Poland’s state-owned natural gas pipeline operators signed a cooperation project to connect their LNG-import terminal projects, allowing the country to import gas from the Polish LNG-terminal at the Baltic coast near the German borders. The country has also expressed its interest at both joining the EU’s Nabucco-gas pipeline project and Russia’s very expensive South Stream gas pipeline, albeit it would only make sense by benefitting from their transit gas because Croatia does not need additional large imports in the future.

Table: Gas Demand and Supply Forecast for Southeastern Europe

Source: IHS CERA 2013
In bcm20102030
DemandSupplyDemandSupply
Albania0.00.00.10.1
Montenegro0.00.0N/AN/A
Croatia2.93.13.23.2
Bosnia & Herzegovina0.20.20.80.8
Serbia2.12.15.15.1
Macedonia0.10.11.11.1
Bulgaria2.82.74.94.9
Total8.18.215.215.2

The prospect of greater regional competition in its energy markets also offer the perspective that the oil and gas prices won’t increase so much or may even be reduced. The integration of the different energy markets in the Balkans and Central Eastern Europe (CEE) and South Eastern Europe (SEE), presently still hampered by different regulatory regimes, transmission rules and tariff systems, will reduce transaction costs at the international borders and make foreign investments much more attractive and realistic.

Croatia’s electricity market has also undergone significant structural changes. It has been opened to private investors and to strengthen liberalization after it experienced adverse disintegration effects after the end of Jugoslav wars. Today, Croatia’s production of electricity is separated from transmission and distribution and overviewed by an independent regulatory authority. At present, the main source of electricity generation is still based on the country’s coal and thermal power plants, but with an increasing use of natural gas due to domestic production. As a net importer of electricity, Croatia’s connection to “The Union for the Co-ordination of Transmission of Electricity (UCTE) has already allowed electricity trading beyond its borders. But the formal separation needs still fully to be implemented as the functional unbundling problem, for instance (separation of managerial teams), highlights and confirms.

Transparency and the opening of markets have also been difficult during the last years due to bureaucratic procedures, traditional political interventions and the monopolistic position of Hrvatska elektroprivreda (HEP) as the parent company dealing with electricity production, imports and exports. Thus the introduction of the EU’s third party access to the electricity networks has been considered as major instrument for creating a more competitive market environment.

The outlook for expanding renewables is seen as ambiguous. On one hand, Croatia power generation is based primarily on hydropower (35% of total electricity consumption) as an environmental clean energy resource. On the other hand, its aging hydroelectric plants are now viewed as environmentally and economically unsustainable. Beyond hydropower, the share of renewables was just 0.7% in 2007. But in 2010, Croatia’s 14.6% share of renewables in gross energy consumption (including hydropower) was above the EU’s average of 12.4%. By 2020, Croatia’s target is 20% of renewables and 35% of renewables in its electricity production (including hydropower), albeit it may ambitious and presently rather difficult to achieve as long as the liberalization of the energy market is not fully achieved and the unclear as well as complex land registration procedure is existing (land use permits are hard to obtain). Nonetheless, its wind, solar energy, geothermal resources and biomass from wood and waste wood capacities along the Adriatic coast have been identified as considerable.

Enhancing energy efficiency has also become a major topic in its new energy strategy of 2009 because Croatia used in 2009 some 16.5% more primary energy per GDP than the average of EU-27 countries. Given these difficulties, Croatia adopted a first National Energy Efficiency Action Plan in April 2010. The document suggested to create a transparent legislative framework that favors an increasing reliance on renewables and a functional industrial energy efficient network (IEEN) programme. By 2016, Croatia seeks to decrease its final energy consumption by 9% and by 2020 by 10% in relation to average final consumption for the period 2001-2005.

In November 2012, the Croatian Parliament passed the new Energy Act for the implementation of the .EU’s Third Energy Package. The government had six months time for the implementation of appropriate rules and regulations for a full open market and non-discriminatory access to all kind of energy networks, including smart grids and smart metering.

On July 30, 2013, Croatia’s New Hydrocarbon Exploration and Exploitation Regime became effective after it had been approved by the Parliament. While it is an important step forward for attracting foreign investors, it needs to be fully implemented in practice and is dependent on the condition to overcome traditional bureaucratic inertia and corruption.

Regional Energy Policies

The overall strategic and geopolitical importance of the EU’s Southern Gas Corridor for the European energy security can hardly be overstated because it will open a fourth gas corridor in addition to Norwegian, Russian and North African gas supplies and break the Russian pipeline monopoly of supplying Caspian gas to Europe. Croatia can now play a key role if it can fasten to build the long-planned LNG-terminal on the Krk-islands, to develop its offshore oil and gas resources and to build the Ionian-Adriatic Pipelines (IAP) from Albania.

The building of new cross-border gas and electricity interconnectors have the potential to dramatically change the region’s energy mix, diversification of supplies and imports as well as regional energy security.

But the bilateral gas interconnectors should be considered as ‘resilience facilitators’ rather than real gas supply security or diversification solutions. Their strategic importance is ultimately dependent on the availability of non-Russian gas supplies such as the long discussed LNG-terminal at the Croatian coast. But it appears that parts of the Croatian government are playing on time depending on the final route of South Stream, decreased gas prices of Russian gas via South Stream (for its 2.82 bcm consumption in 2012) and its potential transit fees Croatia can earn from South Stream. Russia seeks to pre-empt both the Croatian LNG-project and its planned exploration of its own offshore oil and gas reserves in the Adriatic Sea and their commercial profitability by starting the South Stream pipeline construction as soon as possible in order to oversaturate the CSEE gas markets.

Croatia can also be a key factor for the EU’s implementation of its Strategy for Danube Region12 and the energy strategy of the EEC in Southeastern Europe (Treaty of Athens of 2005).13 Those regional energy policies and the EU’s extension of the acquis communautaire to the member states of the EEC aim to overcome the region’s small national energy markets and the different regulator regimes, transmission rules and tariff systems as well as the distinct stages of national market liberalization in order to enhance regional energy security and to reduce its high energy prices. But these regional energy strategies and transnational, cross-border infrastructure projects (such as electricity grids and gas pipeline interconnectors) are also based on the idea and assumption of creating a vast pan-European commonwealth based on a common idea of the rule of law as well as justice as a pre-condition for higher foreign direct investments in their economic sectors and the common regional energy market.

Moreover, Croatia with its 4.5 million population was one of the founders and active supporters of the European Energy Community (EEC or just Energy Community).14  The EEC was established in October 2005 and entered into force in July 2006 - ten years after the end of the Balkan conflict. It seeks to promote investments, economic development, security of supply and social-political stability in the Western Balkan states and Southeastern Europe. Its new energy strategy of 2012 of the Energy Community is following the same principles and objectives as the EU’s “Energy 2020” such as an energy efficient and low-carbon economy. It will create a common legal and regulatory framework for the individual national energy markets to overcome their fragmentation and limited territorial space, constraining investments and energy security.

Attracting timely investments in line with economic development and environmental needs are seen as a pre-condition for delivering uninterrupted energy at affordable prices. The overall objective of the energy Strategy is the implementation of the EU acquis communautaire in its contracting countries and to facilitate the creation of a Pan-European Energy Market. It includes to implement all EU regulations of the internal energy market legislation like the Third Energy Package and the unbundling rules.

Developing a coherent regional energy strategy and harmonized approaches is also for South-Eastern Europe and even for the Western Balkan states difficult due to the fragmentation of the individual national markets..

The regional energy mix is heavily dependent on hard and lignite coal, particularly in Serbia (with 52% of the energy mix in 2009), Macedonia (50%), Kosovo (48%) and Montenegro (48%). The biggest natural gas producer are Ukraine with an annual production of 21 bcm in 2009 and Croatia with 2,71 bcm. Together with Serbia, both countries have also the most developed gas markets, whereas the other Energy Community countries (Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Moldova) have either small gas markets or no access to gas at all (Albania, Montenegro and Kosovo).

Another challenge is the modernization and investments needs of the regional electricity sector. Power generation capacity is forecasted to grow by 64% (or 13.23 GW) between 2009 and 2020. Its total investment costs for this additional generation capacity is calculated with 44.6 billion Euro by 2020.

The EEC has also adopted National Energy Efficiency Action Plans with a minimum target of 9% saving energy by 2018.

One of the major challenges is the overall regional energy network infrastructure, which is largely outdated and needs to be upgraded for increasing regional energy security of supply. The small national energy markets could only developed with small projects in the past, but they are not very attractive for foreign investors.

Croatia’s Admission Process to the EU – Progress and Remaining Insufficiencies of the Rule of Law

The admission of the new member Croatia has demonstrated again that on one side the applicant state has made significant progress of introducing reform steps and the acquis communautaire (increasing up to 35 chapters meanwhile). On the other side, however, those reforms in the sectors of the rule of law and justice are still seen as insufficient and often exploited for political purposes and appear as a personal revenge as evidenced by trials in Croatia, but also Romania and Bulgaria. Successive governments in Central and Eastern European countries have developed political-economic systems of “crony capitalism” with designated friends of the ruling party as managers of local banks and national champions, leading to endemic corruption, nepotism, clientelism, questioning accountability and a dependent judiciary system with corresponding non-independent courts, which can undermine the rule of law.

For the European Commission, the negotiations with Croatia during the last six years were the most demanding entry ones with an applicant state. In addition to the negotiations for the reforms in Croatia’s energy sector, the European Commission’s closely monitoring process had focused in particular on competition policy, judiciary and fundamental rights, and freedom of security and justice. In all these fields, Croatia has made some significant progress.

On June 30, 2011, all 35 negotiations chapters were closed successfully. On 9 December 2011 Croatia and the EU signed the Accession Treaty. In 2012, Croatia voted with 2/3 of its population in favour of the full EU membership. In October 2012, it completed the ten priority actions identified in the European Commission’s Comprehensive Monitoring Report, including in the area of competition, the judiciary and fundamental rights and justice.

For the period 2007-2013, the EU has been invested 1 billion Euro under its “Instrument for Pre-Accession (IPA)” to support the country’s social, economic and political development. The IPA Transition Assistance and Institution Building Instrument also directly supports the strengthening of justice and home affairs and fundamental rights in Croatia. In 2011, 19.2 million Euro were allocated to those projects, including to support the rationalization of the Croatian court-network and an active civil society in order to ensure the sustainability of policy reforms after the accession.15

During the negotiations for Croatia’s accession to the EU as the most intensive one of the European Commission, it had agreed to a number of commitments. The European Commission had learned some painful lessons from the insufficient accession preparations of Romania and Bulgaria to the EU and the recent crisis economic-financial and political crisis in Greece and the wider Eurozone by devising a new cooperation and monitoring system. The European Commission’s closely monitoring process has been focused in particular on competition policy, judiciary and fundamental rights, and freedom of security and justice. In all these fields, Croatia has made some significant progress, albeit some of these fields, like the liberalization and competition policies have always been highly controversial in Croatia’s public discussions.

The implementation of its judicial reform strategy and action plan has been continued generally in line with the Commission’s foreseen deadlines. But the entry into force of the new system of public bailiffs as part of its enforcement reform had been postponed. Most important for its judicial reform are efficient measures to strengthen the independence, accountability, impartiality and professionalism of the judiciary. The reforms are aiming that the State Judicial Council (SJC) and State Prosecutorial Council (SPC) are function independently and by appointing judicial officials based on transparent, uniform and objective criteria. The Commission’s monitoring report on Croatia’s accession preparation and progress in 2012 had still identified as insufficient and demanded more improvements. The report has also criticized that further administrative resources are needed that both SJC and SPC function more effectively. Various measures had been considered as necessary for improving efficiency of the judiciary, in particular to ensure rates of case handling and reductions in the number of old, unresolved cases. The general trend of the increase of unresolved civil, commercial, misdemeanors and enforcement cases has been stated as a matter of concern in the Commission’s view of Croatia’s progress toward the EU accession in 2012.16

In regard to fight the widespread corruption in the country, particularly on the local level and procurement cases, increased transparency, improved and stricter conflict of interest legislation as well as a further police reform (to depoliticize it and increase its professionalism) were identified as pre-conditions to improve Croatia’s track record of strengthened preventive measures in the fight against corruption and conflict of interest. A particular concern of the Commission has been the weak system for preventing corruption in state-owned companies. But it has only highlighted the insufficient track record of an efficient, effective and unbiased investigation, prosecution and court rulings in organized crime and corruption cases on all levels, including on the highest levels.

In general, Croatia has made undoubtedly progress by implementing preventive legal instruments against corruption, but is still in the process of fully implementing the new legislation into real effective measures in judiciary and to bring national legislation in line with the EU acquis as the insufficient implementation of the conflict of interest legislation has highlighted. It will be a long-standing challenge and task not just for Croatia, but also for the European Commission when it won’t have cascading negative boomerang effects in neighbouring countries and regional energy policies.

No one can hardly be surprised that Croatia as other Western Balkan and Southeastern European countries need a longer way to reform the judicial system by increasing efforts to strengthen the rule of law and to fight as well as to prevent corruption effectively even after its accession to the EU next July 1.

In March 2013, the Commission’s last reporting on Croatia’s accession progress of commitments has welcomed the new legislation in the competition field of antitrust, mergers and State aid. The Croatian Competition Agency (CCA) has been assessed as fully operational and functionally independent. The Commission has also welcomed the implementation of the present judicial reform strategy for the period 2011-2015 and the new strategy for 2013-2018, which was adopted by the Croatian Parliament in December 2012. But further reforms with new mechanisms for judicial review of decisions, public sessions and an extended obligation to provide reasoned decisions have still be considered as  much needed for the forthcoming years. A new courts act was adopted by the Parliament just last February to strengthen the supervisory authority of courts presidents. Further amendments have been made to the State Judicial Council Act also last February in order to increase transparency of the transfer of the judges. The newly established Conflict of Interest Commission as an effective mechanism for detection, prevention and sanctioning of conflict of interest as well as the amended new anti-corruption action plan need time to prove their effectiveness.17 But the challenges of the rule of law and independent courts as well as their  judgements aren’t over by Croatia’s accession to the EU on July 1, 2013.

Those initiated reforms are hampered by widespread corruption on all state levels. But an insufficient rule of law questions the prospects for sustainable foreign investments as a pre-condition of new jobs, higher living standards and regional economic as well as political stability.

The case of the former government head of Croatia (2003-2009), Ivo Sanader, has highlighted some of the insufficient progress towards the rule of law and the effectiveness of the new judicial reforms. He was found guilty of corruption in an affair involving the takeover of Hungarian energy company MOL, as well as some German-Austrian banks. While the case has been hailed by the EU and the public opinion as progress towards the rule of law and the fight against corruption, the judicial procedure of the trial has been criticized as unfair and biased with expert opinions being arbitrarily overlooked, denied or marginalised. Indeed, the European Union already called in 2006 before the accession of Romania and Bulgaria as full members of the EU on acceding countries to ensure “professional, non-partisan investigations into allegations of high-level corruption”.18 The ruling and its argumentation in the Sanader case condemned more the political decision to liberalise and privatize the sale of the leading national energy company to a foreign competitor rather than to prove the corruption charges in detail. In the view of independent observers, the trial rather proved and highlighted the insufficient independent judiciary in line with European standards. Thus the Court dismissed expert reports from the global auditing company KPMG as well as the official investigation of the Hungarian public prosecutors on the alleged bribery, based on a 1,000 pages documentation produced by the Hungarian investigation in detailing the relationship between MOL and the legal entities alleged to be involved in the financial transfer of the bribe.19 In Hungary, MOL was cleared of any criminal charges by Hungary’s state prosecutors, which have closed their investigation in the alleged corruption case.

But the alleged corruption case against Sanader and the linkage to MOL appears to be linked with much wider ambitions of the Croatian government. Croatia sold a 25% share of its energy utility INA to MOL in 2003 and then let to raise MOL’s stake to almost 50%. MOL had invested 3 billion Euros in INA and saved it from bankruptcy in 2009. Meanwhile, Croatia’s government seeks to reverse the 2009 contract and regain the management control at INA: Reportedly, Croatia approached the Russian oil and gas company Rosneft to take over INA - albeit Croatia’s government has denied any negotiations with Rosneft or the Russian government. But since Croatia’s signing to participate at the South Stream project last January, Russia has increased the pressure for participating at various other energy projects in Croatia, which would challenge Gazprom’s gas monopoly, including the LNG terminal. If implemented, Croatia and the entire region could be even more dependent on Gazprom and Russia.20

The energy sectors of Croatia and other South-Eastern European countries, including of EU members such as Romania and Bulgaria Corruption are plagued by widespread corruption. The increasing competition between of new pipelines projects such as Nabucco-West, TAP and Russia’s South Stream pipeline has offered new opportunities on all levels, between all decision-makers and lobbying vested interest groups. Russia is often seen as a major bribery source in this region as it has to lose at most with its traditional gas supply monopoly for the region as well as its export monopoly for transporting natural gas from central Asia and the Caspian region to Europe. In Bulgaria, for instance, representatives of the Democrats for Strong Bulgaria (DSB) opposition Party have just called Russia’s South Stream project as the “second huge corruption-ridden project of the Bulgarian Socialist Party, the Kremlin and the energy mafia”.21

Sanader’s case is not the only one in the region as the conviction and an unfair trial of Adrian Nastase, who was Prime Minister from December 2000 to December 2004, have shown already before when the independence, integrity and professionalism of Romania’s judicial system had been questioned with a judiciary reaching decisions based on interference from the new government.22 The European Commission had also criticized and underlined in its progress report of last January on Romania under the Co-operation and Verification Mechanisms the need “to put in place a new leadership in the prosecution and the National Anti-corruption Directorate (DNA) which can demonstrate the independence, integrity and professionalism needed to enjoy the confidence of the public and continue to deliver effective results.” It also reminded Romania that “protecting the rule of law and protecting the ability of the judiciary to reach decisions without interference will remain central to the Commission's approach in the future.”23 In both cases, the procedure and methods employed by the Court raised critical questions about the quality, professionalism and independence of the judges. But the insufficient implemented rule of law and independent courts may deter rather than attract the much needed foreign investments in its energy and other economic sectors.

Perspectives: Remaining Challenges of a Longer Way to Go and to Monitor for the EU

Croatia and the entire region of South Eastern Europe and its regional countries will become ever more strategically important for the EU’s future energy security as well as its Common Foreign and Security Policies (CFSP). Croatia is strategically positioned, astride planned regional and transcontinental road, rail and energy infrastructure transit corridors. Croatia’s admission to the European Union (EU) on July 1, 2013 can enhance the energy security of both the country as well as the EU. Croatia’s new EU membership can boost the implementation of the regional EU “Strategy for Danube Region” of 2010, the “Energy Strategy of the Energy Community” of 2012 and in EU’s Southern Gas and North-South Gas Corridor projects aimed at strengthening the regional energy supply security and the diversification of its gas imports. But to exploit its geographical position, it must create a stable political framework with a supportive and attractive investment climate, dependent on further political, economic and judicial reforms of Croatia as well as of the other regional countries, especially Romania and Bulgaria.

The corner stone and pre-condition of democratic political and sustainable economic developments are the full application of the rule of law and an efficient, independent, accountable, impartial as well as unbiased professional judicial and court system. With the unprecedented financial and economic crisis of the EU and the revelations about the Greek crisis, the deepening processes and the identified insufficiencies of the new member states in regard to their rule of law have re-emerged on the political agenda with a new urgency if the EU won’t lose the support of its richer citizens and their solidarity to support reform policies in the affected poorer member states as well as the credibility of both European and national institutions. Croatia is just an example for the difficulties of some EU member states having with their existing rule of law by overriding it and unduly pressurizing judicial systems to their own benefit and vested rather than creating independent efficient institutions for a sustainable political and economic development of the entire country.

Without the full application of the rule of law and independent professional courts, Croatia’s economic development in general and its energy policies’ objectives of energy supply security as well as reasonable energy prices for competitive industry policies in particular are in doubt that it can be achieved realistically under those circumstances.

Its comprehensive structural reforms in its energy sector are not only important for the country itself and for attracting much more needed foreign investments in the modernization of its energy sector. But these reforms are also an important pre-condition for the EU’s regional energy policies, its liberalization efforts and the creation of a pan-European energy market as well as its cross-border infrastructure projects, which need common rules, regulations and tariffs in line with the EU’s aqcuis communautaire.

»THE CRISIS IN THE CONCEPT OF THE

WORLD ORDER (IS) THE ULTIMATE

INTERNATIONAL PROBLEM OF OUR DAYS.«

Henry Kissinger,„World Order“, August 2014