Analyst Briefing – Poland

101028

FACT BOX:

Population: 38 million (9 in Europe, after Ukraine and before Romania) GDP (2009): $430 billion (greater than Sweden but less than Belgium) Troops in Afghanistan: 2.600 Troops in Iraq (maximum figure, the troops were withdrawn in 2008): 2,400

WHAT POLES THINK OF POLAND TODAY:

Depends who you ask. Poland is an extremely split country, mainly between European oriented West and conservative East. Eastern Poles are more socially conservative, agrarian and anti-Russian. This is part of Poland that has existed under Russian Empire for most of its modern history. But unlike the Russophile Ukrainians, they do not see that period as a positive. They also want Poland to keep socialist economic system, especially a robust welfare state and are therefore hostile to privatizations of state enterprises and EU accession. They are represented strongly by the Law and Justice party, PiS.

Western Poland thinks that Poland can recreate a powerful sphere of influence in Central Europe by integrating economically in Europe, pushing Warsaw to become a financial capital of Central Europe. In their mind, Poland can maintain independence between Germany and Russia by bettering its economy and becoming an important EU member state with power of its own and a sphere of influence amongst the Visegrad 4 (Poland, Czech Republic, Slovakia and Hungary). In a way, this side of Poland is even more nationalistic as their program is about recreating the sphere of influence Poland had in the 17th Century.

Both sides have cooled off on Polish alliance with the U.S., although they both want to pursue it they do not see it as a silver bullet solution to the country’s strategic problems. most Poles do not differentiate between their relationship with the U.S. now and the relationship with France-UK in the interwar era. For Poles, there are no sure thing alliances. This was only further reinforced by Obama’s decision on the Bush-era BMD program.

WHAT POLES THINK POLAND WAS YESTERDAY:

All Poles see Poland as a former great European power. They will remind you that it was King Sobieski who saved Vienna – and thus Christendom – from the Turks on September 11, 1683 in the largest cavalry charge in history (until Desert Storm I). As thanks for saving Christianity, Austria, Prussia and Russia partitioned Poland in successive periods less than 100 years after Sobieski’s charge. A powerful, and independent, Poland is therefore a key to recreating its influence in the Baltic and Central European regions.

Bottom line is that Poles do not trust anyone, especially their neighbors. However, unlike Central/Eastern European states used to subservience (think Czech Republic or Bulgaria), Poles look at the period of their history when Poland stretched from the Baltic to (nearly) the Black Sea as a reality. In Polish minds, Smolensk and Kyiv are Polish cities, and Baltic people are bastardized Poles who have illusions of ethnic difference. Poles will tell you that Lithuanians invented their language during the Romantic period of the 19th Century.

KEY PERSONALITIES

Prime Minister: Donald Tusk

Prime Minister since 2007, Tusk is understood to be a supreme political organizer, not an ideological politician. He holds together Civic Platform (in Polish: Platforma Obywatelska – PO) with an iron grip. It is important to understand that PO is a conglomeration of minor parties and political splinter groups that unified in 2001. This means that it is not a completely ideologically coherent. It requires Tusk to balance a number of different viewpoints in his cabinet, from old

school Polish “Solidarity” conservatism (represented by current President Bronislaw Komorowski) and more “modern”, centrist pro-EU sentiments, especially liberal on economy. Where does Tusk fall himself? It is not clear. He definitely is more pro-EU than most politicians in Poland, but not to a point that he is willing to make Warsaw subservient. He is pro-EU to the extent that he feels the EU can be vehicle of Polish rise to prominence. Tusk considered running for President in 2010, but chose to remain the PM so that he can hold the PO together from his post as Chairman of the Party and PM. This was a key strategic move by Tusk, since it means he gives greater credence to his role as the organizer than the titular post of the President. Tusk has run for President against Lech Kaczynski in 2005 and lost handily (Kaczynski got 1.2 million more votes). This may have also influenced his decision to not challenge Kaczynski again.

Has a very good relationship with Vladimir Putin, he also has good relationship with Angela Merkel. Has managed to build strong relations with the two leaders despite considerable problems that his government has had with, especially early in his term.

Ethnically he is a Kashubian, Slavs who inhabited Pomerania region between Poland and Germany. They have been considered German by the Germans and Poles by the Polish. They were screwed over by both at various periods in history. Only around 50,000 remain in Poland. Poles consider them to be collaborators with the Nazis, even though that is not strictly true, but the implication is important to keep in mind. Most conservative nationalist Poles will tell you that they think Tusk is a “German man”. In an interview with Haaretz Tusk compared the Kashubians to Jews, saying that they were “like the Jews, people who were born and live in border areas and were suspected by the Nazis and by the Communists of being disloyal”. Note that he is fluent in German and speaks it far better than English. All this contributes to a very interesting perception of Tusk among Poles and why Tusk probably figured he needed someone with more “earthy Polish” qualities to run against PiS candidate in 2010, which is why he settled on Komorowski.

He is not knee-jerk pro-U.S politician by any means. He campaigned in 2007 against the BMD and later took a rather skeptical view towards it. He relented in 2008 to accept it as a policy, but was not overly concerned when Obama decided to “scrap” the Bush-era version of the BMD. He also withdrew Polish troops from Iraq in 2008 after getting elected.

Final point, Lech Walesa is considered a Tusk ally. Tusk has defended Walesa and demanded that he be cleared of any potential charges of collaboration with Soviets. Tusk sees Walesa as an important symbolic asset. Whoever has Walesa on their side can claim to be genuine Polish nationalist.

President: Bronislaw Komorowski

Bronislaw Komorowski has deep roots in the Polish dissident movements, he is old enough to have participated in opposition to the Communist rule. He comes from Polish aristocracy that held land in what is now Lithuania. He has often told Lithuanians that he considers himself a

Lithuanian. He is from a more socially conservative line of PO, but is loyal to Tusk. He was Marshall of the Sejm from 2007 to 2010. He has the requisite “earthy” Conservatism that made him the perfect candidate against Jaroslaw Kaczynski.

In previous governments he was the Minister of Defense (2000-2001). He was also instrumental in the early 1990s in setting up the WSI – (Military Information Service, formerly the Communist Military Intelligence that essentially ran the country from 1981 to 1989 under Jaruzelski’s Dictatorship). He did so in his role as a vice civil minister of defense from 1990 to 1993. WSI, even during early 2000s, had inordinate power in politics and business. Military intelligence was very heavily involved in state owned enterprises and especially construction. Some of its siloviki still have those links in business, particularly construction.

Komoowski was the only member of either PO or PiS to have voted against the dissolution of WSI in 2006. Why? (Following is definitely RUMINT from PiS sources of mine, so careful how you use it): There are rumors that he had killed someone during a hunting accident in the 1980s or that he had out-of-wedlock children – a no-no in super Catholic Poland – and that his close links with WSI allowed him to hush it up. However, it is far more likely that his involvement with one of the WSI controlled companies he was a shareholder in some company that the organization established. Overall, he is rumored to have been “sucked-in” by the very WSI he helped reform in the early 1990s and that he became their main political protector, gaining considerable financial benefits in return.

Note that the PiS government, when WSI was disbanded in 2006, argued that many military intelligence operatives had even until 2006 maintained their links with former Moscow based bosses. This was in part one of the reasons why PiS pushed for WSI dissolution.

Foreign Minister: Radoslaw Sikorski

He was involved in Solidarity as student and fled the country with the imposition of martial law, getting UK citizenship via asylum. Drinking buddy at Oxford of current UK PM David Cameron. From 1990 onwards he was a financial adviser to Rupert Murdoch on investments in Poland. He was resident fellow at American Enterprise Institute from 2002 to 2005, and also Minister of Defense of Poland from 2005 onwards, only to resign over conflicts with PM Jaroslaw Kaczynski. He left PiS at that time and joined Tusk’s PO.

He is considered the most pro-American of Tusk’s Cabinet members, was considered a neo-con at AEI. PiS members say he speaks English better than Polish. He is married to the American journalist Anne Applebaum. Rumors by the conservative right are also that he was an MI6 spy after Oxford, since his journalism took him to Afghanistan in the mid 1980s. He is a clear supporter of BMD (both under PiS and currently) and is considered rabidly anti-Russian by Lauren’s Kremlin sources.

Deputy Prime Minister / Econ Minister: Waldemar Pawlak

Former PM of Poland (1992 and from 1993-1995) he is the Chairman of the Polish People’s Party (PSL in Polish). He is a key parliamentary ally of Tusk. However, his PSL is currently not projected to even get into the Sejm in the next elections. His performance during Presidential elections in 2010 was also disastrous (only got 1.75% of votes).

The PSL is an agrarian party, so Pawlak is also of the more conservative members of the government. He holds the deputy PM post because his PSL – even though the smallest party in Sejm – gives Tusk his majority to govern.

He is an instrumental figure at this moment because as Econ minister he is in charge of the negotiations with Russia for the new natural gas deal. He has during these negotiations stressed that Russian-Polish relations are improving and that the European Commission is meddling in the negotiations process.

He has also engaged in sniping with Sikorski. Apparently it was the foreign ministry that forwarded the proposed Russian-Polish natural gas deal to Brussels that brought EU involvement in the first place. There is therefore an ongoing battle between economic and foreign ministry.

PiS people will tell you that he represents the “Russian agricultural lobby” in Poland. The farmers want to retain export links to nearby Russia and Pawlak is therefore seen as probably the most pro-Russian member of the government, despite his Polish nationalism. Certainly his statements and rhetoric during the natural gas negotiations could be considered as pro-Russian. He has staked his political future on successfully negotiating the natural gas deal.

He has according to our Next Hundred Years publisher been interviewed with George’s book in the background of his office.

Defense Minister: Bogdan Klich

One of the first Polish representatives at the European Parliament. Arrested during the Polish military dictatorship in 1981, has dissident roots. He is considered to be pro-US as well, has stood in opposition to Tusk on some issues, such as how long Polish troops would serve in Afghanistan (wants them to stay until 2013).

However, he was also instrumental in talks with Robert Gates recently when he brought a wish-list that the U.S. simply cannot fulfill. This was in our analysis a move to put U.S. commitment to Poland to the test (see STRATFOR analysis on the issue attached below).

He is considered by PiS and government’s opposition as a loyal Tuskiate. He has no real military experience and is considered to be ignorant of military issues. Has been in charge of defense reforms to create a professional military, which has not been going very well due to lack of funding.

PiS (opposition) Chairman: Jaroslaw Kaczynski

Brother of former President Lech Kaczynski who died in the Presidential plane crash. He was the PM from 2006 to 2007. He was PiS candidate for presidential elections in 2010 – stepped in for his dead brother -- and did surprisingly well against Komorowski, campaigning as a centrist.

However, he is not centrist. He is considered to be even more conservative than his late-brother. He is ruling PiS with an iron fist. He is like Tusk considered to be a supreme political organizer, even if his image as a politician is rough around the edges.

He has taken his defeat in the Presidential elections as a sign that “centrism” is not the way to go for PiS. He has therefore turned on Centrists in PiS, Pawel Poncyliusz and Joanna Kluzik-Rostowska – who attempted to run his campaign in a Centrist manner -- and is expected to push for a greater ideological coherence of PiS ahead of the 2011 parliamentary elections (expected in October).

PiS will always do well in parliament. It represents the population in Poland that our confederation partner has called “losers of the transition”. These people do not like the EU, do not like the reforms that the EU has forced on Poland and are very much suspicious of both Russia and Germany.

Central Bank President: Marek Belka

Former prime minister of Poland (2004-2005) and former head of IMF’s European Department. He was appointed by Komorowski because the previous Central Bank president died in the Smolensk plane disaster. He is more pro euro adoption than the last National Bank President who was a PiS appointee, however he is also willing to go slow towards euro in light of Poland’s solid economic performance.

KEY POLITICAL PARTIES:

CIVIC PLATFORM (Platforma Obywatelska – PO)

- Socially conservative (there are no socially liberal parties, PO comes close, but it is still considered socially conservative by European standards – anti-abortion, anti-stem cell, etc.)

- Pro-EU, sees Polish EU membership as an opportunity to make Poland a leading European power.

- Pragmatic towards Russia, Tusk has been working on improving relations since day-1 in power.

- Pragmatic towards Germany, Tusk has defused some very touchy issues – such as the status of Germans deported from Poland post-WWII.

- Looking to privatize a number of state owned enterprises.

- In favor of euro accession, but willing to see where the current Polish mini economic miracle takes Warsaw with the Zloty.

- Without any real challenger on its side of the political spectrum.

LAW AND JUSTICE (Prawo I Sprawiedliwosc – PiS)

- Socially conservative. - Pro EU to a point. Sees EU as a useful tool against Russia, but not willing to commit

Warsaw to EU because it opens it to competition. Against a “federal” EU and against Franco-German axis in Europe.

- Anti-market reforms, committed to Polish social welfare state and believes in state led economy.

- Prominently anti-Russian, anti-German. - Sees U.S. alliance as far more of a necessary foreign policy than PO. - Rose to prominence in 2005 as an anti-corruption party that sought to also uncover

Communist era collaborators (referred to as “lustration”). Lech Kaczynski is the former mayor of Warsaw and former Justice Minister and was its main public figure.

- Many of its top politicians died in the Presidential plane crash near Smolensk.

DEMOCRATIC LEFT ALLIANCE (Sojusz Lewicy Demokratyczne -- SLD)

- Roots in the former communist regime. - Third largest party in the Sejm. - Ruled Poland in the early 2000s, PM Leszek Miller brought it into the EU. - Destroyed by corruption scandals – Rwing-gate – in 2004. It has not recovered since.

Fiscally left electorate has apparently swung to PiS, while socially/politically liberal urbanites have swung to PO.

POLISH PEOPLE’S PARTY (Polskie Stronnictwo Ludowe, PSL)

- Sometimes referred to as Polish Peasants Party, socially conservative agrarian party. Waldemar Pawlak is the leader. Currently the smallest of the four parties in Sejm, its polling is showing that it won’t even cross the threshold in 2011.

- It largely shares geographic constituency of PiS, but is more connected to farmers in the East, rather than urbanite conservatives of PiS.

- Has been stalling privatization efforts of PO as part of the governing coalition, it believes in state intervention.

SELF-DEFENCE OF THE REPUBLIC OF POLAND (Samoobrona RP, SRP)

- Was between 2005 and 2007 member of the PiS conservative government. Did well in 2005 elections, did not pass 5 percent threshold in 2007 – argument being that PiS has taken their votes.

- Very socially conservative, left wing populist. - Sexual scandal in 2006 – party leaders awarding government posts for sexual favors – has

diminished its popularity with its conservative electorate.

LEAGUE OF POLISH FAMILIES (Liga Polskich Rodzin, LPR)

- It was part of PiS led governing coalition between 2005 and 2007. - Right wing, ultra socially conservative party. - Considered anti-Semitic, made a name for itself by rejecting Polish participation in the

Jedwabne pogrom – murder of 300 Polish Jews by Poles in German occupied Poland. - Was one of the major parties in mid-2000, but has also lost votes to PiS in last few years.

MAJOR EVENTS

April 10, 2010 -- Smolensk Air Disaster

Polish Presidential plane crash near Smolensk. Along with the President, a lot of other government members were also killed including president of National Bank and one of the left-wing candidates for Presidential elections. PiS was also decimated, with most of its main experienced politicians on the flight.

Opened an opportunity for the Russian “charm offensive” which was going on already as STRATFOR has argued and led to early presidential elections during which PO capitalized on Lech Kaczynski’s death to take over Polish Presidency.

The actual investigation into the crash has been controversial, with Poles accusing the Russians of delaying handing over all documents. The Russians have only recently given Poles all the documents. Polish investigative committee will have the results of its investigation ready by January 2011.

June 23, 2010 – Weimar Triangle Meeting

Russia participated for the first time in the meeting of French, German and Polish foreign ministers – known as the Weimar Triangle meeting. This was a critical meeting at which Germany proposed to France and Poland the Russian-EU Security and Political Committee, a new forum for Russia and the EU to discuss security issues. Transdniestria was put up as a potential example of cooperation.

July 4, 2010 (second round) – Polish Presidential Elections

Bronislaw Komorowski won the early elections held because of the death of Lech Kaczynski (would have been held later in 2010). The main issues that were dealt with during the elections were government’s performance during the 2010 spring flooding – one of the worst in Polish recent history – response of the government to the global financial crisis – mainly PO and PiS

were competing to see who would take the credit for how Poland had stayed away from the crisis – and the government’s handling of the Smolensk disaster.

September 2, 2010 – Visit by Sergei Lavrov to Poland

Lavrov’s visit was an important way for Poland and Russia to display improving relations. He talked with Sikorski and Tusk, discussing everything from the ongoing Smolensk air disaster investigation, Russian bid to get on the EU visa-free list, Kaliningrad, the Russian-Polish commission to investigate troubled historical events (important part of the ongoing effort by Moscow to reduce tensions over issues like Katyn) and the natural gas deal negotiations.

ONGOING/UPCOMING EVENTS

End of November – Medvedev comes to Poland

Important visit that is supposed to coincide with successful end of Polish-Russian natural gas negotiations and also to follow the NATO-Russia council meeting after the NATO Lisbon summit on November 19-20.

November 21, 2010 – Local Elections

The local elections are always important in Poland because they determine a number of mayorships and key local positions. A lot of the local administrations determine how EU money – which Poland gets a lot of – is distributed. Furthermore, this will be a key event to understand where PiS stands. This election comes a year before the Parliamentary elections, so it will be a key test for the two parties to see how they do.

June 1, 2011 – Polish EU Presidency

Polish presidency will come after the Hungarian, which makes 2011 an important year for Central European EU Presidencies. Poland intends to make the following issues central during its Presidency:

The EU budgetary period 2014-2020. France and Germany want to reduce the number of funds that goes to new member states. Poland is going to use its presidency to set the budget debate since 2012 is going to be an important year for negotiations.

EU defense initiative. Poland intends to ally with France in boosting EU defense capabilities. The details are sketchy, but Warsaw wants the EU to have more teeth in military affairs and it wants to be at the forefront of that evolution. This was added to its program right after Obama pulled out the Bush era BMD in September 2009.

EU Energy Integration. Poland intends to get EU to fund even more energy initiatives, intention is to work close with Sweden here.

October 2011 – Polish Parliamentary Elections

Key moment for Tusk and his party. If they can hold off PiS at this point, it means 4 years of Tusk dominated Poland in 2010s baring crises and controversies.

FOREIGN AFFAIRS / REGIONAL TENSIONS

POLAND/US Relations:

Poland and the U.S. generally have a good relationship. The relationship has “matured”, as Sikorski pointed out recently, indicating that it is no longer as overwhelmingly Atlanticist in nature as during PiS leadership. Key issues:

Patriot missile deployments. This is not permanent deployment. It is a single, non-armed, battery that will be rotated on 3 month deployments until May 2011.

BMD. Poland is expected to be a host for the advanced ground based SM-3 interceptors by 2018.

Poland is the only EU member state, along with Bulgarians and Romanians, that needs visas for travel to the U.S. This is a very embarrassing issue for all Polish governments, since the alliance with the U.S. – including deployments in Iraq and Afghanistan – were supposed to bring benefits, such as visa-free travel to the U.S.

Poland has made it clear during the negotiations for the NATO Strategic Concept that it does not want Russia to be part of the NATO BMD. Poland has argued that the U.S. should not try to involve Russia in the negotiations over the BMD.

Poland is committed to the mission to Afghanistan, but the issue has thus far been how long. Defense minister Klich has said until 2013, but we have also had other government officials say not beyond 2012.

POLAND/EU Relations:

The current Polish government is considered pro-EU. Tusk and his cabinet see the EU as a vehicle through which Poland can again become a major EU member state. Key issues in the relationship:

The upcoming 2014-2020 EU budget period. Poland wants to maintain if not increase the amount of money it gets from the EU. Germany and France don’t want to give that to Poland or any other new member states. This is going to be a key issue of contention coming up.

Poland wants the EU to recognize its efforts to reform its pension system, which cost a lot of state funds, and therefore give Poland a pass on part of its state debt. This is something that Warsaw is fighting for right now with the Commission. The Commission is not budging.

Poland is opposed to the German-French agreement on budget deficit rules. Warsaw is not so concerned about the particulars of the deal, it is more concerned that Paris and Berlin decided on it behind closed doors.

Poland wants the EU to become more committed to coordinating military affairs. It has sought French help on this.

POLAND/GERMANY Relations:

Tusk has improved relations with Berlin since coming to office. He has especially managed to diffuse the key point of contention between Warsaw and Berlin, the issue of German expellees. The issue rose to prominence when prominent CDU politician and president of the Federation of Expellees, Erika Steinbach began criticizing Poland for not recognizing expellee rights. When she was appointed to the board of the German Center against Expulsions – in February 2009 -- the Poles went up in arms. This is a serious emotional issue between the two countries. Tusk has largely been able to diffuse it by ignoring it, but it also appears that Merkel has helped by telling Steinbach to keep quiet.

Poland is wary of the developing Russian-German relationship. The negotiations for the new natural gas deal with Russia, for example, were so cordial between Warsaw and Moscow because Poland feels that the new Nordstream pipeline will allow Russia to avoid Poland and ship natural gas directly to Germany. Poland therefore moved to guarantee that it would receive Russian gas well into the future.

Nonetheless, Tusk has also moved Poland significantly towards Germany and France by reinstituting the Weimar Triangle meeting concept. Warsaw does not want to be isolated as it was during PiS rule. Tusk has therefore made it a point to have a very good relationship with Merkel. He has also brought Poland on board with German initiated eurozone rescue fund – the European Financial Stability Fund (EFSF) – even though Poland is not in the eurozone.

An important point about German-Polish relations is that Germany has become the overwhelming largest investor in the country. It also invests immensely in Polish think tanks and political organizations. During my trip to Poland last year, it was obvious that most think tanks and policy institutes were receiving money from Germany, whereas in the past it was the U.S. that invested in Poland. Only my PiS contacts and their policy institutes did not receive funding from Germany. The U.S. has essentially had a “mission accomplished” attitude towards Central Europe since it got into NATO and the EU. There has been very little effort to follow that up with investment in the region, either business or intellectual/policy oriented. Germans have wholeheartedly filled the void.

POLAND/SWEDEN Relations:

Poland and Sweden have very good relations. They feel that they are both middle powers, extremely suspicious of Russia and opposed to German-French domination of EU foreign policy.

They cooperated on setting up the Eastern Partnership agenda, purpose of which is to slowly start weaning countries like Belarus and Ukraine from the Russian sphere of influence. Although Polish enthusiasm for Eastern Partnership has soured, they are still very much committed towards their relationship with Sweden. Many Poles see Sweden as a model to follow, particularly its strong defense industry and military independence.

POLAND/RUSSIA Relations/Tensions:

Since Tusk has come to power, the relations between Warsaw and Moscow have significantly improved. In one of his first acts in the office, Tusk managed to get Moscow to reverse its ban on Polish meat imports, a key issue for Warsaw and especially for Deputy Prime Minister Pawlak whose party base is agrarian.

Putin and Tusk have a good personal relationship. The relations between the two countries started to turn when Putin made a visit to Gdansk in September 2009 to commemorate the 70 years since the start of WWII for Poland. Since then, Russia has also made a point to recognize Soviet crimes in Katyn, with Putin attending a Tusk ceremony in Katyn forest a few days before Kaczynski’s plane crashed there. The crash, as is well noted, then led to a considerable charm offensive.

Russia has also relatively muted its opposition to the Patriot missile deployment in Poland, and has sought to treat Warsaw as one of the big European states, attending the Weimar meeting during which Germany presented the Berlin-Moscow proposal for a EU-Russia Political and Security Committee to France and Poland.

Both countries have also concluded a new natural gas agreement that enhances the amount of natural gas Poland gets from Russia, deal that will last until 2037. The deal was negotiated relatively calmly and even though it was not concluded in time – by Oct. 20 – Russia made sure that it kept pumping gas to Russia regardless.

Poland has also stopped supporting Ukrainian and Georgian EU/NATO membership, at least vocally. They have also muted their participation in Eastern Partnership, which used to be the EU’s main thrust eastward. Warsaw is also pushing for a NATO BMD system that minimizes Russian participation, which goes against German and French demand that Russia be brought to the table on this issue.

POLAND/LITHUANIA Relations/Tensions:

Poland sees Lithuanians as long lost cousins, whereas Lithuanians are as paranoid about Polish cultural domination as about Russian geopolitical domination. Polish minority in Lithuania wants to use Polish letters in Lithuanian passports and Vilnius has not allowed that. This irks Poles. Poles don’t really consider Lithuanians to be a true ethnic group, but rather as Poles who were turned into Lithuanians in the 19th Century by nationalist Lithuanian activist. Furthermore, the

Poles view the Lithuanian-Polish Commonwealth as something that was beneficial for both groups – and will therefore refer fondly to it in joint meetings -- whereas the Lithuanians remember it less fondly, as a period of domination by Polish landed elites. These attitudes have soured the relations between the two. The main issue now is the PKN Orlen ownership of the large Mazeikiu refinery in Lithuania. Poland believes that it did Lithuania a favor by purchasing the refinery and thus preventing Russia from owning a key piece of Lithuanian infrastructure. However, the Lithuanians have refused to give PKN Orlen access to a key oil import terminal, nor to fix a strategic piece of railroad that leads from the refinery to Latvia. PKN Orlen is losing a ton of money and has threatened to sell, even to Russians. This is a hot topic issue right now and one that has destroyed relations between Lithuania and Poland. It came to a point where Deputy Prime Minister Pawlak called the Lithuanian relations Poland’s worst relations with a European country.

MAJOR ONGOING ISSUES

The following is a list of major issues ongoing right now in Poland that you should be aware of in case they are brought up in your meetings. The collection of non-STRATFOR (and some STRATFOR) reading below is focused so as to inform about these issues.

POLISH IPOs

Poland is in the midst of an IPO craze. The state intends to sell a 64 percent stake in the Warsaw Stock Exchange (WSE) as well as other state owned enterprises in a bid to raise $8.8 billion to cover the budget deficit gap. The purpose of the IPOs is threefold. First is obviously to raise cash. Second, is to wean the state off of its reliance on state enterprises and allow PO to therefore vet any old political-business links that they were not privy to setting up in the 1990s. Tusk is a newcomer and he is using privatizations to weed out potential old establishment links between business and government. Third, to illustrate that Poland is an attractive emerging market location and that it is as committed as ever to free market capitalism.

I think this is an interesting story geopolitically for two reasons. First, it is interesting who buys the IPOs. That is difficult to discern since the information is not public, plus many investment houses intend to buy IPOs and then resell them to customers. But this could help us gauge the level of interest in Polish businesses by Germany, U.S. and Russia. Second, Poland is choosing IPOs instead of auction style privatization to illustrate its commitment to free market principles at the time when most Europeans are locking down into a much more state driven capitalist model. This is Warsaw trying to show that it is not worried about the recession – which never hit Poland in the first place – and going forward with its decades long commitment to presenting itself as an investor friendly locale (it was Poland that invented “shock therapy” reforms, not Russia, under deputy prime minister / finance minister Leszek Balcerowicz in 1989.

OVERALL ECONOMIC SITUATION

Poland has not experienced a recession in either 2008 (grew 5 percent) or 2009 (grew 1.7 percent) and it is expected to grow 3.3 percent in 2010 (only Germany will have higher growth in the EU at 3.4 percent). The short argument for why this has happened is because Poland is a relatively “closed economy”. It has a domestic market of nearly 40 million consumers – no other Central European state comes even close – and exports account for 40 percent of GDP (in Czech, Slovakia and Hungary it is over 70 percent). Bottom line is that Poland is not as reliant on Germany and Western Europe for growth. It can engender growth via its own internal market.

Furthermore, when the Zlotty crashed initially in the early days of the crisis – during the Central European crisis in late 2008 / early 2009 – Polish consumers were not really affected. Even though the Zloty fell more than the forint, leu or any other Central European currency, Polish consumers had not been dependant on foreign currency for lending. Only about 30 percent of all household and 25 percent of all corporate loans were foreign denominated. This even though Polish banking system is 70 percent foreign owned. Poland had very strong capital controls that prevented overreliance on foreign lending.

Bottom line is that the Zloty crash did not really affect the economy in the early going and later Polish isolation allowed it to avoid following the eurozone down the tubes. Furthermore, as the euro started weakening, investors saw Poland as a safe haven and a bright spot among the emerging market economies. This has now allowed the government to try to capitalize on the “story” that Poland avoided the recession by doing privatization via IPOs. You will certainly hear many stories of how Poland has avoided the recession and how well its economy is doing.

However, unemployment is at 12 percent and Tusk’s government is seen imposing austerity measures to trim the budget deficit at the expense of the “common people”. This is a story that PiS intends to use to get back to power.

We should also note that Poland is not in any hurry to adopt the euro. By EU law Poland is supposed to eventually adopt the euro, however its performance during the recession and since has convinced even the pro-euro Tusk to consider waiting a bit on euro entry (see the WSJ blog entry on the “vagueness” of Polish gov’t stance towards the euro). The government has set out the Strategic Guidelines for National Euro changeover this week, but it intends to present details of how the actual changeover would happen only at the end of 2011. This illustrates that Poland under Tusk is committed to a wait and see approach on the euro and has realized that there are benefits to staying out of the eurozone after the 2010 sovereign debt crisis.

WARSAW STOCK EXCHANGE

The upcoming WSE IPO is a very prominent theme in Warsaw today. Poles see the WSE as a potential NYSE of Central Europe. Our confederation partners have told me that NYSE is supposedly interested in getting in on the IPO. German Deutsche Borse was interested in getting

it last year, but apparently the government wanted WSE to retain a degree of independence that the Germans were not willing to provide.

From our confed partner:

A couple of more things about the "geopolitical" nature of the Warsaw Stock Exchange and its position. Firstly, it is fighting for relevance. It is doing really well, for a small bourse, but just like everything else about Poland, it wants to be seen as an important European and then global, player. Poles want the WSE's WiG20 to be mentioned on CNN, et al, in the financial updates when they talk about the LSE, the CAC 40, the DAX, etc. It is, quite frankly, a long way from that.

But there is no dominant bourse between Scandinavia and the Mediterranean and Frankfurt and Moscow, and the WSE aims to be it. Its biggest challenger is the Vienna Stock Exchange, which has been eating up local stock exchanges in the region: Prague, Budapest and Ljubljana. The WSE wins in terms of number of companies, big IPOs and turnover (I believe), Vienna wins in terms of capitalization, when all of its bourses are taken together as a group (which is how it is marketing itself).

This has been a really fun story to cover - the rivalry between Warsaw and Vienna, and it is definitely heating up. With the WSE's privatization, it is moving closer to getting out of gov't control (though not completely after this upcoming IPO, but perhaps later). That will be a big factor in it making more regional takeovers, as both Prague and Ljubljana rebuffed the WSE on the grounds that it was state-owned.

I find this competition fascinating because the competition between Warsaw and Vienna for control of Central European investments in the 21st Century is not unlike the competition between the two in the 17th Century for political domination of the same region.

ENERGY MATTERS – Poland-Russia natural gas deal

The Polish government has been negotiating a natural gas deal with Russia for the past two years. It managed to conclude a deal in February 2010 that would extend gas supplies to 11 bcm from current 7bcm and last until 2037. The deal was nearly complete, but the Ministry of Foreign Affairs then forwarded the draft to Brussels – to the chagrin of Economic Minister Pawlak – for review. Brussels stated that the deal did not comply with EU’s unbundling regulation. Brussels wants the Yamal-Europe pipeline, which carries Russian gas to Poland and then on to Germany, to be overseen by an independent regulator, GAZ-SYSTEMA, and not a joint Gazprom-PGNiG venture called EuRoPol GAZ.

The solution seems to have been found by which GAZ-SYSTEMA will only have the ability to oversee any excess capacity of Yamal-Europe pipeline. At the moment, there is no such spare capacity. It is unclea yet if Brussels will accept this change.

Bottom line of the negotiations – see our diary on the topic I included below – is that Brussels is trying to draw a line in the sand with these negotiations. It wants to get its unbundling regulation – which seeks to separate producers from transportation assets – implemented in a key deal in Central Europe so that it can begin eroding Gazprom monopoly in Central/Eastern Europe. However, Poland just wants natural gas.

Poland is expecting that its natural gas needs are going to skyrocket. The EU is forcing it to abandon its coal dependency because of environmental regulation. As such, Poland is going to have to turn to natural gas for electricity generation. It needs a steady supply of natural gas from Russia and wants to lock terms down before NordStream pipeline comes online and starts taking Russian gas directly to Poland. EU’s meddling – even though it is aimed at reducing Gazprom monopoly – has therefore been highly unwelcome from Poles’ perspective. The involvement of the EU has actually brought Russia and Poland closer together on this issue.

The other important issue is the building of the 2.5-4 bcm a year LNG facility at Swinoujscie. The LNG facility is close to the German border and has been opposed by the German government on environmental grounds. The construction is supposed to start in late 2010 and complete by 2013.

The other issue that is very exciting to Poles is the possibility that Poland becomes a natural gas producer, and even exported, due to the introduction of fracing technologies (see STRATFOR analysis below on the topic). Poles are very excited about this opportunity and feel that it will lead to energy independence. However, the introduction of technology is still far out in the future, which is why Poland wanted to get its supplies from Gazprom locked down first.

UEFA 2012 EURO CHAMPIONSHIPS

Poland is supposed to co-host the 2012 European football championship with Ukraine. The preparation for the championship has been a disaster in Ukraine, and in Poland the stadium building has been surrounded by corruption and scandals. When the decision was awarded to Ukraine and Poland it was motivated by the Orange Revolution and the pro-EU government in Ukraine. It was meant as a reward for Yuschenko and his pro-West government. Now it is an embarrassment to both the EU and Poland.

SOME ECONOMIC/ENERGY FIGURES:

Imports % of Total

GERMANY 28.09%

RUSSIAN FEDERATION 8.64%

ITALY 6.51%

NETHERLANDS 5.59%

CHINA (PEOPLE'S REPUBLIC OF) 5.27%

Exports % of Total

GERMANY 26.08%

ITALY 6.85%

FRANCE 6.78%

UNITED KINGDOM 6.37%

CZECH REPUBLIC 5.84%

Crude Oil Imports % of Total

RUSSIAN FEDERATION (RUSSIA) 92.27%

ALGERIA 2.46%

BELARUS (BELORUSSIA) 1.77%

NORWAY 1.54%

UNITED KINGDOM 1.04%

Russian Natural Gas as % of Total Consumption

2008 Gas Consumption (bcm) 13.89641851

2008 Gas Imports Russia (bcm) 7.2

% of Consumption from Russia 51.81%

Coal

Coal Consumption in 2008 59.38212

Coal Production in 2008 60.45515374

Coal as % of Total Energy 60.96%

Investments from specific countries and regions 2009

Country Value in EUR mn Share

Germany 1619 16.24%

Netherlands 1605 16.10%

Luxembourg 1340 13.44%

Sweden 1111 11.14%

France 567 5.69%

Cyprus 471 4.72%

Austria 455 4.56%

Iceland 435 4.36%

USA 364 3.65%

UK 318 3.19%

Other 1382 16.92%

PERCEPTIONS OF STRATFOR

STRATFOR has very strong brand recognition in Poland. George’s visit to the country in 2009 and his book are very well known, and if they are not well known people generally associate George’s name and that of STRATFOR in positive light. I met several Polish government officials during my trip to the country in late September 2009 and they all knew of STRATFOR. Most were not clear exactly what STRATFOR was and many associated us with a shadowy intelligence network in the U.S. That has its downsides and upsides.

We are often in the media and usually in the positive light. With our partnership with the WBJ we have also been given prominent coverage recently in the Polish English language media, including our videos.

NON-STRATFOR PUBLICATIONS (I have steered these towards recent important foreign media articles on current events in Poland)

Wall Street Journal article detailing the Russian-Polish natural gas deal.

Gazprom Keeps Grip on Polish PipelineOctober 27, 2010Poland and Russia appear to have phrased their new gas agreement in a way that will only formally observe European Union rules on third-party access to the pipeline. In reality, Russia’s Gazprom will keep nearly full control of the Yamal-Europe pipeline that supplies Poland and customers in Germany.Poland and Russia took nearly two years to negotiate the new deal — formally, an amendment to their long-term gas agreement. In the final stage of negotiations, the European Commission stepped in to enforce compliance with EU laws, which guarantee third-party access to pipeline infrastructure and is intended to make the continent’s natural gas market more flexible.The Polish government Tuesday approved a new natural gas deal with Russia and expects the signing of the agreement within the next few days.To meet the European Union requirements, Polish state-owned pipelines operator Gaz-System has been charged with managing the Yamal-Europe gas pipeline, owned by a joint venture between Gazprom and Polish gas firm PGNiG. European Commission officials said earlier this week, however, they hadn’t had a chance to review the contract between Gaz-System and the pipeline’s owner EuRoPol Gaz to make sure the deal allows third-party access to the Yamal-Europe pipeline.The fig leaf was partially lifted by the chief executive of EuRoPol Gaz on Wednesday.According to Miroslaw Dobrut of EuRoPol Gaz, the state-owned operator will only manage any excess pipeline capacity, while it will effectively be EuRoPol Gaz and its owners deciding when that capacity appears. As of now, there isn’t any.“The agreement [between EuRoPol Gaz and Gaz-System] is mainly about managing free capacities that may appear on the pipeline,” Mr. Dobrut said in an interview with television channel TVN CNBC. How much free capacity there is will effectively depend on the pipeline’s owners and users — in essence, Gazprom and PGNiG.“It will depend on owners and current users of the pipeline. If they don’t use up all capacities, we’re obliged as the owner to report this to Gaz-System, which will have them at its disposal and offer it on the market,” Mr. Dobrut said.And are they fully used today? Yes, they are.“As of today, they’re 100% used. There are brief moments when they’re not used fully, and we will be reporting it to Gaz-System,” he added.So in effect, it will be for Gazprom and PGNiG to decide among themselves if there’s any capacity to sell to a third party, and most of the time there won’t be any.But is getting a better deal — one that would fully observe EU laws — even attainable in Poland’s delicate position? Hardly. The country imports two thirds of its annual gas consumption from Russia and is yet to build any other viable option for importing gas from other directions. Gazprom is powerful enough, and the Polish government can’t risk leaving the country without gas right as the winter cold is about to begin.

“It’s a compromise,” said Will Pearson, a London-based energy analyst at Eurasia Group, a political risk consultancy. “Gazprom would have wanted a fully-subscribed deal to 2037, while the EU wanted a shorter deal and more flexibility.”“What they got was a shorter, but still rigid system,” Mr. Pearson said.Since EU internal natural gas policy is a work in progress, this deal should be considered a real compromise, not a loss for the EU or Poland, Mr. Pearson added.“Europe is moving slowly towards a more unified energy market, but progress is halting,” Mr. Person said. The year 2022, when the new Polish-Russian deal expires, fits into the timelines of when Europe’s complex international gas infrastructure and regulatory system may be ready and also when Poland’s shale gas production may come on stream, he said.There are already some interconnectors and swaps deals would have been possible even today that would allow Poland to buy German gas in the Yamal pipeline before it reaches Germany. So a more flexible deal would have been technically implementable.In that sense, it’s a compromise.====================================================================

A good overview from WSJ on how Tusk government maintains that it is still in favor of euro adoption, but how it is actually non-committal on the issue.

Polish Government Goes Vague on EuroOctober 27, 2010 – Wall Street JournalThe Polish government, having earlier suspended talks on adopting the euro, Tuesday approved the long-awaited Strategic Framework for the National Euro Adoption Plan. The name is as big as the document is disappointing.The new strategic piece of paper doesn’t set any targets or goals for meeting the Maastricht criteria for new euro zone entrants. Instead, it presents “a balance of benefits and costs of euro adoption” and technicalities on the path toward the European Union’s single currency.It won’t be before the third quarter of 2011 that the government, after weighing costs and benefits, will adopt another document — the National Euro Adoption Plan, with “strategic framework” dropped from the title. The document still won’t set any dates.It seems the government is doing the work backwards — it’s now dragging its feet and planning to consider the consequences of a move it was ready to make hastily more than two years ago.In September 2008, Poland’s Prime Minister Donald Tusk surprised economists and the market with his declaration that Poland would adopt the euro in late 2011 or Jan. 1, 2012, at the latest. At least at that point Poland still had a relatively low general government deficit, and low inflation and interest rates — all required by the EU. But the global financial crisis hit shortly afterwards leaving Poland with rising deficits and debt.Yet the government for months continued insisting that Poland is still determined to join the euro zone in 2012. It finally dropped the target in 2009. Two years after announcing its euro plan, it’s preparing to do basic math to see if a plan for the euro is even worth drafting.===================================================================

This article is from a contributor to our confederation partner WBJ, and appeared on STRATFOR’s “Other Voices” website. It gives a good overview of how Poles perceive their economic “miracle” and how much pride they have for the Warsaw Srock Exchange.

The Warsaw Stock ExchangeOctober 25, 2010 – Warsaw Business Journal.

As the Warsaw Stock Exchange (WSE) is currently working towards going public, it is worth reflecting on its preeminence in the Central European corporate finance world. In November 2010, the WSE is itself going to be listed on the WSE. The Polish government is selling 63.82 percent of the outstanding shares, but still plans to keep 52 percent of voting rights. With a price range of zł.36-43 per share, the WSE is valued at zł.1.5-1.8 billion (€382-456 million).With a total market capitalization of some zł.715.8 billion (€174 billion) – 30 percent more than that of the Vienna exchange, and five times the market capitalization of the Budapest Stock Exchange –, the WSE was the third-largest stock exchange in emerging Europe, after Moscow and Istanbul, at the end of 2009.The WSE has expanded the fastest in the region, more than doubling the number of traded companies and almost tripling daily turnover in the past decade. Over the past five years, there have been over 200 Initial Public Offerings (IPOs) on the main floor of the WSE. In 2009, a year of global doom and gloom internationally (but when GDP in Poland powered forward with a 1.8 percent annual growth rate), 38 IPOs raised approximately €1.6 billion on the WSE and the alternative exchange for small companies, NewConnect. This is a remarkable achievement and today there are a total of 364 Polish and 23 non-Polish entities listed on the WSE, including MOL, CEZ, UniCredit, Astarta, Immoeast, and the Orco Group. Cheap equity has been one of the growth drivers of the WSE. For many years, the Polish government has required that Polish pension funds invest their funds into Polish equities. Given that the supply of Polish equities has been limited, this means that their prices have been driven up considerably (e.g. enterprise value has often exceeded 20 to 25 times EBITDA for companies listed on the WSE). This has been a boon to Polish entrepreneurs, who have strengthened their balance sheets with the cheap equity raised on WSE IPOs. (This may, however, raise the question of whether Polish pension funds are sufficiently diversified in their equity holdings. It also raises the question of whether all of these small companies should be on a stock exchange, as they may not be in a position to meet growth expectations and, given their low capitalization, may find it difficult to maintain a following among analysts and shareholders, causing their share prices to languish over time.)Listing on the WSE is also simple for non-Polish companies. After Poland’s accession to the EU, listing a foreign company on the WSE is as simple as listing a domestic company. Poland has adopted the EU single-passport rule, which states that any company registered in any EU member country may make its debut on either the WSE main floor or the NewConnect market without applying for consent from the Polish Financial Supervision Authority. In keeping with the single passport rule, the prospectus of the candidate company may be approved by the capital market regulator in any EU country. The prospectus does not even need to be translated into Polish in its entirety: an English-language version is sufficient. The WSE has been a phenomenon. Over the past decade, it has been a fantastic advantage to those companies which have been able to raise capital on favourable terms. The IPO reflects the fact that the WSE itself has become big business. However, it will be interesting to see how the next decade plays out, with widespread consolidation of Central European stock exchanges expected. For how long will the EU continue to allow rules forcing Polish pension funds to invest in local equities, and for the Polish government to control the WSE with a type of “golden share” ownership?=====================================================================

Recent Wall Street Journal Article on how Poland is branding itself as the financial capital of Central Europe.

Poland's Treasury Hustles to Rebrand Warsaw as a Mini-Wall Street

October 25 – Wall Street Journal

WARSAW— Krzysztof Walenczak is trying work himself out of a job.

As undersecretary of Poland's State Treasury, which manages state-owned economic assets, he wants eventually to shut down his ministry. "Then our post-communist transition will be over," Mr. Walenczak says.

Two decades after the fall of the Iron Curtain, Poland is still trying to deal with the legacy of 40 years of communism, when the state owned the commanding heights of the economy—the large swathes of strategic industry still in government hands. Mr. Walenczak is a key player in the government's privatization process. But he seeks to be more than an auctioneer of public assets. He wants to be the architect of a new European financial center.

The two goals reinforce each other, Mr. Walenczak said in an interview.

“Warsaw will never be a City [of London] or a Wall Street, but it doesn't need to be," Mr. Walenczak says. "It's a financial center for the region, with regional leadership in the European Union coming our way."

Warsaw's potential as a financial center, he says, stems from a reform of the country's pension system completed a decade ago that created a group of private retirement funds. All Poles born after 1968 are required to join, and the funds—which as of September held assets valued at 209.47 billion zlotys (about $74 billion), according to Poland's financial oversight office—are legally bound to invest 95% their assets in Poland, mainly in Polish equities and Treasury bonds. The value of the pension fund assets is equal to over a quarter of the entire market capitalization of the Warsaw exchange.

The 42-year-old Harvard Business School-educated Mr. Walenczak first came to prominence in 2008, while he was working as an investment banker for Lehman Brothers and later for Nomura International, advising the Polish Treasury in a long-running dispute with a Dutch investor over the privatization of insurer PZU SA.

In 2009, the dispute was finally resolved in the biggest success to date for a ministry where privatization had ground to a halt—saving the exchequer a possible $12.1 billion payout in an international arbitration case. The settlement also went a long way toward repairing Poland's reputation among foreign investors, bolstering confidence that, when a new political party comes to power, it won't grab back control of assets sold off under a previous administration.

Also last year, Poland's decision to cut its income tax rate, and the resultant economic stimulus, helped it become the only European Union country to dodge recession. But it also sowed the seeds of a ballooning budget deficit. And when this, in turn, prompted the Treasury to undertake an ambitious, new program to sell off billions of dollars in state assets through 2011, the man charged with the task was Mr. Walenczak.

Many analysts doubted the feasibility of the plan when it was first announced. It included selling stakes in heavily unionized KGHM Polska Miedz SA, Europe's No. 2 copper producer by output, and refiner Grupa Lotos SA, seen as strategic to Poland's energy security.

But part of the Treasury's job is promotion, Mr. Walenczak says. The ministry team is out in front of investors, constantly selling Warsaw as the place to be and addressing investors' concerns.

This role as promoter also involves dispelling prejudices against Poland, whose currency suffered in tandem with others in the region following the collapse of Lehman Brothers because some investors lumped together various Central European countries.

"Investors need to be reassured that [Poland] is a normal Western European country, with a normal legal and political framework," Mr. Walenczak says. "Not all global investors are sophisticated enough to know the difference between Poland and Ukraine."

To attract investor interest, Polish Treasury Minister Aleksander Grad does the rounds to New York, Boston, London, Frankfurt, Zurich, and Paris about every three weeks, with slightly less frequent visits to Singapore and Abu Dhabi in between, Mr. Walenczak says.

The ministry also organizes "field trips" to Warsaw for portfolio managers. "We schedule them to meet all the main decision makers in Poland, the central bank governor [Marek Belka], Finance Minister [Jacek Rostowski], Prime Minister [Donald Tusk], Warsaw Stock Exchange Chief Executive [Ludwik Sobolewski], and Grad himself."

"The conversion rate after these meetings has been amazing," Mr. Walenczak says. "It has dispelled a lot of the bias and prejudices."

In a two-week interval in January this year, the ministry sold a 10.8% stake in oil refiner Grupa Lotos and a 10% stake in KGHM Polska Miedz, the heavily unionized copper miner that supports a whole region in southwest Poland.

"We've been able to conduct so many transactions because Poland's economic prospects are attractive and because investors realize we conduct transactions like on Western exchanges," Mr. Walenczak said. "And it's getting easier."

The privatization pipeline is still pumping. Next up is the 1.15 billion zloty initial public offering of the Warsaw Stock Exchange itself, which the ministry sees as a unique opportunity to promote not just the exchange, but Warsaw, and the Polish economy as a whole. And after that, the Treasury's stake in Bank BGZ, in which the Netherlands' Rabobank holds 59.35% stake, goes on the block. In 2011, privatization revenue is seen at 15 billion zlotys.

Mr. Walenczak says each asset sale is evaluated according to two criteria: strengthening the Polish capital markets and raising the competitiveness of the economy. Some companies require a single buyer that can add value by contributing know-how; others are mature enough to be sold through an initial public offering.

Each listing makes the Warsaw Stock Exchange more liquid and encourages large funds to take part in successive privatizations.

"In the first half of 2010, 47% of turnover on the Warsaw Stock Exchange came from non-domestic sources," Mr. Walenczak says. "Funds from 22 countries were represented as buyers of PGE [Polska Grupa Energetyczna SA] shares" when the Treasury sold a 10% share worth €1 billion ($1.39 bilion) in mid-October, he said.

Some market participants say the investment banks currently opening offices in Warsaw, such as Goldman Sachs Group, UBS and J.P. Morgan Chase, won't have anything to do once privatization deals finish up. Mr. Walenczak disagrees.

"PGE will remain on the stock exchange and will have huge financing needs in the future," he says. "We're creating companies which, once they become private, will be dependent on and linked to global financial institutions.

"They'll be issuing bonds, shares and conducting mergers and acquisitions," he says.

The Treasury Ministry is even advising other countries on how to privatize and develop their capital markets, Mr. Walenczak said, but declined to specify which ones.

"Ask New York why it's good being a financial center," Mr. Walenczak says. "It creates the highest-paying jobs, the most comfortable lifestyles, and it's where the intellectual capital is created."

Our confederation partner, Warsaw Business Journal (WBJ), looks at the Polish-Russian natural gas deal and a number of other important energy matters for Poland. They consulted us while writing this story.

Burning questions

25th October 2010

Poland has struck a new gas deal with Russia, but the country remains stuck between the proverbial rock and hard place. What to do?

“There is no risk of disruptions in natural gas supplies to Poland,” the Economy Ministry declared last week following the resolution of protracted talks over Russian gas supplies. But the negotiation process illustrated, yet again, Poland’s dependence on Russian natural gas.

Energy insecurity is one of the great bugbears of Polish foreign policy and a source of major apprehension in relations with Russia. And this year’s gas negotiations, as in the past, were unpleasant.

“I would like this discussion to be the last one,” said Tomasz Chmal, an energy expert at the Sobieski Institute, a Warsaw-based think tank, summing up the general feeling in Poland.

That’s an understandable desire, but one which will likely go unfulfilled.

The gas, at last

The preliminary intergovernmental agreement reached by Polish and Russian officials secures annual deliveries of 10.2 billion m3 of natural gas for Poland through 2022. The increase (up from 7.4 billion m3) will fill a supply gap of two billion m3 left by a cessation of deliveries from Ukraine in 2009.

Gazprom deputy CEO Alexander Medvedev said the contract, which still needs to be signed at the government level, as well as between gas monopolists Gazprom and PGNiG, would be finalized next week.

Polish PM Donald Tusk has backed the deal, while the Polish energy sector watchdog (URE) has given its official green light.

The EU, whose complaints halted a gas deal back in February, had a representative present at the negotiating table and should see some of its requirements satisfied. The bloc had insisted that the infrastructure transporting gas through Poland be accessible to third parties, and that the pipeline itself be run by an independent entity.

The price of gas in the contract is not yet known but, according to Mr Chmal, they will probably be above market prices. In the short term, however, Poland has no other choice.

A game of influence

The political map of Central and Eastern Europe might have changed a great deal since 1989, but its network of gas pipelines is still a stark reminder of Soviet dominance.

Simply put, Poland is utterly reliant on Russian gas and pipelines. “In the short term there are no other options comparable in volume,” Andrzej Szczęśniak, an independent energy market analyst, stated bluntly.

There’s a commonly held belief in Poland – and elsewhere – that Russia wields Gazprom as a foreign policy tool. And the under-construction Nord Stream pipeline, which is to carry 55 billion m3 of gas directly from Russia to Germany annually, bypassing Poland, makes many in the latter country nervous.

“When the Nord Stream is completed, Russia won’t be pressured by German consumers [to maintain deliveries to Poland] anymore. This is the game,” commented Mr Chmal.

But is it? According to Mr Szczęśniak, Poland’s prime concern should be to improve business relations with Russia and to keep gas supplies out of the realm of politics.

“Poland has weak leverage on Russia because it cut business contacts with Russia four years ago,” he said. “Normally good sense tells you to have the best contacts possible with suppliers. In Poland we have done the opposite,” he lamented.

Marko Papic, an analyst at American intelligence company Stratfor, added that Russia actually has a strong interest in making sure that its relationship with Poland is accommodating.

“Russia needs the EU to stay out of its business as it tries to lock down Ukraine, Belarus and the Caucasus,” he explained. “To do that, Russia needs good relations with major EU countries. Poland has leverage there,” he added.

Proof of this leverage, according to Mr Papic, can be seen in Russia’s “magnanimous” declaration that Poland would not lack gas if the contract was not signed in time.

Alternative options

Poland’s new contract with Gazprom is no substitute for investment in alternative sources, however, as gas consumption is set to rise at a pace that even the increase to 10.2 billion m3 of Russian gas will not cover.

According to Mr Chmal, “14.4 billion m3 [of combined Russian imports and local production] is just the bottom line for Polish demand in the next few years. If the economy grows, and I am optimistic about this, then demand will increase, too.”

For now, the bulk of Poland’s annual gas consumption goes to the chemical and oil-refining industries. Only one-third is used by Polish households, mainly for heating, and almost none goes towards electricity generation.

But this last point might change. Currently around 95 percent of Polish electricity is generated using coal. Although this dependency on coal won’t end any time soon, the country is under pressure from the EU’s climate change package to reduce its percentage in the energy mix.

Gas-fired power plants, although virtually unheard of in Poland, produce only half as much CO2 as coal-fired plants and provide a good balance with less-reliable energy from renewable sources like wind, according to Mr Chmal.

“I think there is room for at least a few gas-fired power plants in Poland,” he said. “If we decide to build them, then 10.2 billion m3 will not be enough.”

Betting on LNG

The option with the best prospects to help meet demand, according to all experts consulted by WBJ, is the liquefied natural gas (LNG) terminal being built on the Baltic coast in Świnoujście.

Construction is going smoothly and the 2.5 billion m3 capacity terminal should be functional in 2014. Supply should not be a problem, as one contract with Qatar has already been signed by PGiNG and other partners appear to be interested.

Another reason to bet on LNG, according to Mr Papic, is that shale-gas production in the US may reduce that country’s demand for gas imports to the point that market prices drop, making new sources more attractive for countries like Poland.

“Instead of buying from Qatar, Poland might want to buy from the Caribbean, which could in the future be looking for new clients,” hypothesized Mr Papic.

Cash flows east, gas flows west

The Baltic Pipe and the Świnoujście LNG terminal are among 43 projects funded by the EU to bolster Europe’s energy infrastructure and lower its dependence on energy imports from Russia. The Nabucco pipeline, designed to pump gas from the Caspian Sea, is another, and one which could in theory benefit Poland. It’s unlikely to be built soon, though, if ever.

“Nabucco for Poland is a fairy tale,” said Mr Szczęśniak. “There is interest, but the product is not viable.”

EU-funded projects that stand a better chance of improving Poland’s energy security include plans to install connections between neighboring countries and enable the reversal of the gas flow in pipes that transport gas from Russia to Europe.

According to Mr Papic, “Central Europe currently has myriad unconnected national networks, with almost every country essentially a separate market, only connected via a main trunk line, which is usually controlled by Russia and only flows in one direction.”

Poland is no exception. Over 30 billion m3 flows through it to Germany every year via the Yamal pipeline, according to Mr Chmal. One option to consider in case of a force majeure would be to reverse the flow, which is technically impossible at the moment.

The lack of interconnectors between markets has also been described by experts as a major obstacle to quick relief in case of a crisis.

But the problem is not only a technical one. Mr Chmal was unconvinced that the situation would be much different for Poland even with the right technology. Although it is not said openly, no one is willing to make any move that Gazprom could see as hostile, he explained.

Deal with the present

There are also steps that Poland could and should take at home. Today, one-third of Polish gas is produced internally. There is plenty more, but the current monopoly in the gas sector means there is a lack of incentive to search for it.

The country has a lot to do when it comes to drilling at home, according to Mr Szczęśniak. “In Poland there are a lot of reserves, but they are not used because of low competition in production,” he lamented. Indeed, he believes that the state monopoly on the sector should be dissolved, but said the government had no intention of doing so for now.

Despite this, state-owned companies regularly make headlines with new projects and storage facilities. But according to a source who wished to remain anonymous, many of these projects boil down to PR operations by state-owned energy companies wanting impress the government.

The Polish gas sector can’t pressure the goverment to behave in a more business-like fashion, said Mr Szczęśniak.

“PGNiG is state-owned – it’s a conflict of interest, and there is no question that the privatization process in the sector should be accelerated,” he added.

Shale drilling could be a game-changer but, according to most estimates, its true potential will not be apparent for another 10 years. Indeed, for Tomasz Chmal, there are still too many question marks.

“I would not make predictions. It’s like a lottery ticket,” he said.

So it all comes down to Russian gas. But Gazprom’s deputy CEO recently hinted that Poland and Europe’s reticence to comply with Russian conditions might have endangered supplies.

“The reliability of European gas supplies will be determined by competition with other global gas markets, primarily in Asia,” Alexander Medvedev said in an interview posted on his company’s website. “The [EU anti-monopoly] reform poses a real risk of underinvestment in the European gas industry.”

Is this a sign of problems to come or simply rhetorical posturing?

According to Mr Chmal, it’s closer to the latter. Although Gazprom might be unhappy with Europe, Asia doesn’t want to pay as much for gas, he said.

Thus Europe, Poland and Russia seem set to continue their uncomfortable partnership for the foreseeable future. Assuming there are no new problems in the pipeline.

Our Confederation partner – Warsaw Business Journal (WBJ) – take on the upcoming local elections, a key upcoming event in Poland. The article makes the argument that the local elections are more important than we may think, especially because of all the money that is involved in local government.

The business of politics

October 19, 2010 – Warsaw Business Journal

It's campaign time again. Over the weekend, the two major parties, the ruling Civic Platform (PO) and the opposition Law and Justice (PiS) held conventions heralding the start to their campaigns for the local-government elections due to be held in roughly a month's time.

Although they usually inspire less public excitement than parliamentary or presidential campaigns, local-government elections in Poland are actually more crucial to a political party's survival and well-being than the first two. 

While in parliamentary ballots no more than a few hundred candidates have a chance to go home smiling on election day, local-government elections involve tens of thousands of candidates from each party with thousands having a realistic chance of winning seats. 

Just to give a picture, this November, 107 city presidents will be elected along with 796 mayors, 1,576 municipality (gmina) executives and over 46,000 councillors.

Naturally, each of these positions means potential local government-related jobs for the party faithful and for the victorious politician's family and friends. The reality is that the amount of largesse a party is able to dole out after local government elections to a large extent determines the level at which it can keep its grassroots members satisfied and motivated. 

Thus, for the overwhelming majority of political party activists, this November's elections are indeed the most important in the political calendar.

A lot of money at stake

The outcome of this November's vote is particularly important as those elected now will be in charge of distributing the EU funds through 2013, when the current EU budget period expires. Poland is set to receive a net figure of over €60 billion in this period.

By all indications, the next EU budget will be nowhere near as generous as the current one, and thus the new local-government officials will have to get the most out of the funds Poland receives this time around.

The ministry of regional development states on its website that as of October 10 this year, it had signed contracts with beneficiaries for zł.193.5 billion (of which zł.135 billion will be “supplied” by the EU). 

This constitutes about 51.9 percent of the total allocation for the 2007-2013 period. Fair enough – but a signed contract is not the same as a completed highway or bridge. Some badly-needed

infrastructure projects seem to take forever to get off the ground, even with funds already approved. This must be improved.

Also, the new local government officials would do well to make sure the number of “white elephant” projects built with EU funds are kept to a minimum (it would be naive to think they can be eliminated altogether) and that the rest of the money goes as far as it can in preparing Poland for 21st century capitalism. That will demand a highly skilled and innovative workforce, as well as top-notch infrastructure in order to attract investment and develop.

A battle for the capital?

It will be interesting to see how the presidential race in Warsaw plays out. Of the eight candidates, only two have a realistic shot at the job. Warsaw's current president Hanna Gronkiewicz-Waltz from PO and the independent candidate (though he is backed by PiS), Czesław Bielecki.

Most polls today show the current Warsaw president with over 50 percent support, meaning she could cruise to victory in the first round. But the campaign has just started and Mr Bielecki should not be ruled out or underestimated. 

He is in fact a very interesting candidate.

The life partner of Poland's most successful screenwriter, Ilona Łepkowska, Mr Bielecki was born in Warsaw to a family that was part of the intelligentsia and of Jewish background. He is an architect by profession but no newcomer to politics. He served as an advisor to Lech Wałęsa when he was president from 1990 to 1995 and was also an MP in the years 1997-2001. 

As an architect, he is best known for co-designing the headquarters of Polish public television, TVP, which earned him mixed reviews.

Mr Bielecki is known to be something of a maverick, but he is also a sharp intellectual. As an architect based in Warsaw, he has first-hand knowledge of the investments going on in the city, the tender processes for big projects as well as the bureaucratic obstacles that stand in the way of potential investors. 

Mr Bielecki says he can run Warsaw more efficiently than Ms Gronkiewicz-Waltz and can relieve the city residents of some of their biggest headaches, such as the ever-present traffic jams and the perennial lack of parking space, especially in the city center.

In an eventual debate, Mr Bielecki has what it takes to outshine Ms Gronkiewicz-Waltz. She is not the most eloquent of speakers, has a smile that often seems artificial, and isn't terribly photogenic.

Warsaw residents might however, not be in the mood to rock the boat right now as the city has indeed developed under Ms Gronkiewicz-Waltz, albeit slowly. And besides, she represents PO, which is decidedly the most popular party in the capital.

The presidency of Warsaw is certainly hers to lose.

=====================================================================

Bloomberg article on the upcoming IPOs boom. Good ground level details. Written for investors, but will give you a good overview of what the Poles are thinking of selling.

Warsaw Exchange Starts Share Sale, Extending Polish IPO BoomBy Pawel Kozlowski and Marta Waldoch - Oct 14, 2010 Poland seeks to raise as much as 1.15 billion zloty ($415 million) from the initial public offering of the Warsaw Stock Exchange, the first bourse operator in emerging Europe to go public. The government, which is selling 26.8 million shares, or a 64 percent stake of the country’s sole stock exchange, set the maximum price for individual investors at 43 zloty a share, the Treasury Ministry said on its website. Orders will be taken for institutional investors starting tomorrow and ending on Oct. 28, based on a prospectus published on the exchange’s website today. The shares will begin trading Nov. 9, based on the prospectus. The IPO is part of a plan to raise 25 billion zloty ($8.8 billion) this year to help finance the budget gap and curb borrowing. Poland has sold stakes in the nation’s biggest insurance, energy, copper and phone companies this year. “The words ‘stock exchange’ alone are electrifying for investors in Poland, so we may have solid demand,” said Jaroslaw Lis, who helps manage the equivalent of $2.5 billion at Union Investment TFI SA in Warsaw. “Current market sentiment will help the sale, as will the exchange’s monopoly position.” Based on the maximum offer price, the Warsaw exchange is valued 17.9 times its 2009 net income, according to Bloomberg calculations. NYSE Euronext, the biggest operator of U.S. stock exchanges, trades at 12 times reported earnings for the past 12 months, while Nasdaq OMX Group Inc. is valued at 11 times reported profit, according to data compiled by Bloomberg. Most IPOs The Polish stock exchange is the third-largest in emerging Europe after those of Russia and Turkey, with a market capitalization exceeding $193 billion. It has expanded the fastest in the region, more than doubling the number of traded companies and almost tripling daily stock turnover in the past decade, according to data on its website. Poland has had the highest number of IPOs annually in central Europe since at least 2004, Bloomberg data show. Companies have raised $4.36 billion in 52 IPOs this year, with the largest coming from state-owned energy utility Tauron Polska Energia SA and insurer Powszechny Zaklad Ubezpieczen SA. Czech betting company Fortuna Entertainment Group NV, Polish television broadcaster 4Fun Media SA as well as property developers Robyg SA and ED Invest SA are among companies holding IPOs in Warsaw this month as the market’s benchmark WIG20 Index climbed to the highest level in more than two years. ‘Beating Heart’

“The bourse is the vibrant beating heart of our economy and its IPO is just another step in our plan to build a strong financial hub in Warsaw,” Treasury Minister Aleksander Grad said at a news conference today. Accelerating state-asset sales and rising stock turnover on the Polish exchange have prompted international banks to expand. Goldman Sachs Group Inc., Morgan Stanley and UBS AG this year announced plans to set up offices in Warsaw. Credit Suisse Group AG reopened a brokerage this year after shuttering its Warsaw stock-dealing business in 2003. The bourse is the second exchange IPO this year, following a June listing by CBOE Holdings Inc., the last major U.S. securities exchange owned by its members. Individual investors will be offered as much as 30 percent of 26.8 million shares being sold in the IPO and the government is to decide on the sale of its remaining 35 percent stake in the next three to five years, according to the prospectus. There are more than 550 companies trading on Warsaw’s main market and NewConnect platform for smaller companies. The CEE Stock Exchange Group, which includes regional peers in Vienna, Budapest, Prague and Ljubljana, had 259 companies last month, according to the Federation of European Securities Exchanges. Citigroup Inc., Goldman Sachs, JPMorgan Chase & Co. and UBS are global coordinators of the Warsaw exchange’s IPO. Ipopema Securities SA, KBC Groep NV, Societe Generale SA, PKO Bank Polski SA, Bank Ochrony Srodowiska SA, Alior Bank SA, Banco Espirito Santo SA, IDM SA and Wood & Co. are helping manage the sale. =====================================================================

Eurasia Daily Monitor writes an analysis after Lavrov’s early September visit to Poland.

Lavrov’s Visit to Poland: Is Russia’s Rapprochement with Poland Real?

Eurasia Daily Monitor – October 5, 2010

Stephen Blank

In the last couple of years, Russia has engaged in a rapprochement policy with Poland preceding the death of Poland’s President, Lech Kaczynski and many leading members of the government in a fatal air crash on April 10, outside Smolensk.

However, this policy certainly received a tremendous impetus from that event as demonstrated by Russia’s seemingly openly emotional response to the tragedy. Russian foreign policy has in fact gradually shifted, expressed in a leaked foreign policy document, towards improved relations with Europe (Russky Newsweek, May 11). Foreign Minister, Sergei Lavrov’s recent visit to Poland intended to carry that process even further.

Lavrov’s talks with Polish Foreign Minister, Radoslaw Sikorski, and Prime Minister, Donald Tusk, covered issues of European security, Moscow’s perspectives as expounded in its draft treaty on the subject, future relations between Russia and the EU as Poland will be the EU president in 2011, as well as visa-free travel for Russians to EU member countries. They also discussed Kaliningrad, the progress of the commission to investigate troubled events in Russo-Polish history, and energy relations. Lavrov used the occasion to bring up the prospects for the Russian-EU Partnership for Modernization (Ministry of Foreign Affairs of the Russian Federation,

www.mid.ru, September 3). He then delivered a speech to a gathering of Polish ambassadors. Both before and after the talks, Lavrov expressed general happiness with recent trends in bilateral relations and noted that several agreements with Poland are being drafted (www.mid.ru, August 30, www.mid.ru, September 5). At the same time the discussions, particularly with Poland’s ambassadorial corps, were “detailed and frank,” suggesting points of disagreement, particularly as regards the Partnership for Modernization. Equally, both sides apparently strove to enhance bilateral relations and move in the direction of a more genuine partnership. In that context, Warsaw expressed its desire for a “demilitarization” of the perennially troubled bilateral relationship (www.mid.ru, September 3; www.itnsource.com, September 3).

The good feelings expressed here certainly tally with the Tusk government’s efforts to establish a lasting demilitarized relationship and genuine partnership with Moscow. Thus, an energy agreement was also recently concluded between the two states. From the Polish government’s standpoint, this agreement will ensure the continuation of direct gas supplies from Russia to Poland for the long term. Specifically, this contract between Gazprom and the Polish Gas and Oil Company (PGNiG) increases their previous contract for gas exports from Russia, extending its duration from 2022 to 2037 and writing off Gazprom’s debts from 2008-09. Gazprom will also acquire a monopoly through the Yamal pipeline across Poland until 2045 (even as it is undermining that pipeline by building North Stream pipeline to Germany) along with very low gas transit fees. Not surprisingly, the EU initially opposed this deal (Gazeta Wyborcza, September 6). Yet, on September 14 the EU retracted its opposition to the deal that had been generated by the European Commission’s doubts about the operator of the Yamal pipeline supplying gas directly to Poland and through to Europe. An independent operator must supervise the gas deliveries to Poland in conformity with EU requirements, so that all market dealers have equal access to the infrastructure. Evidently those concerns were satisfactorily resolved by September 14 (ITAR-TASS, September 21).

Warsaw’s concerns about being bypassed for gas supplies due to the forthcoming operation of the Nord Stream pipeline clearly provided Russia with favorable terms. Nord Stream allowed Moscow to expand its power over recipients of its energy. Nevertheless, a more cynical interpretation of this deal and of the incentive for the rapprochement with Poland as part of the general turn to the West should be looked at. would cite not only the ongoing economic crisis in which Russia and Europe find themselves but also the potential that Poland might contain huge deposits of shale gas that would eliminate any need for Russian gas at least in large quantities (Gazeta Wyborcza, September 6).

Indeed, critics of this deal and of the policy of rapprochement stepped up their attacks. They noted that Lavrov’s annual speech to the Moscow State Institute of International Relations (MGIMO) on European relations omitted any mention of Poland (www.mid.ru, September 1). Thus, Marcin Kaczmarski of the Center for Eastern Studies (www.osw.waw.pl) charged that the new moves in Russian foreign policy merely represent efforts to find more efficient ways to implement old strategic goals. Certainly, despite rhetoric to this end, there have been no signs of genuine modernization or domestic reform. Therefore in foreign policy the changes are similarly atmospheric rather than substantive (Center for Eastern Studies, September 1). This criticism radically diverges from the more welcoming responses to Russian diplomacy pursued by the

government and recommended by such veterans as Adam Rotfeld (Eastern Approaches, www.economist.com/blogs, September 6). Ultimately, only time will tell who is correct, but from the practical standpoint, Gazprom, using Nord Stream has secured extraordinarily generous terms in Poland tangible benefits for Poland remain unclear.

=====================================================================

An interesting blog post recommended to me by our confederation partner on how to look at the divided Poland and the East-West split. Note the reference to the railroad development, lack thereof, between West and East.

Poland Still Divided

The first round of the Polish presidential elections are behind us. Civic Platform (PO) candidate Bronisław Komorowski manages 41% while Law and Justice (PiS) candidate Jarosław Kaczyński gets 37%. These two candidates will now battle it out for the Polish presidency in the second round on July 4. For many, Komorowski’s lowly 41% and Kaczyński’s impressive 37% are surprising but we have to take a few factors into consideration. Firstly, both candidates are substitutes: Komorowski was elected after Tusk decided not to run in the presidential elections whereas Jarosław Kaczyński only decided to run after the death of his brother, the then President. Secondly, the Smolensk tragedy has played its part in dulling the campaign. Thirdly, the recent floods have done little to help raise the profile of the elections.

Interestingly, year-in-year-out, the polls seem to be out of touch with reality. Every time we see the newest surveys and exit polls they all seem to suggest a greater margin of victory for PO over PiS. Every time, the margin of error is greater than we might expect. In other words, polls in Poland simply cannot be trusted, as come every election, PiS always manages to get around 5-10% more than the polls suggest.

Rail Network Division of Poland

However, it is neither Komorowski’s disappointing result or Kaczyński’s first-round turn-around that is intriguing. What is really thought-provoking is the fact that after centuries of turmoil and upheaval, Poland is still a country divided. In a previous post, we saw how the Polish partitions had done much to create ‘two Polands’ – Eastern and Western. Poland’s rail network can be divided along these lines with the east far less ‘dense’ than the west. These borders almost exactly match the partition borders of 1795!

2010 Division of Poland

Some of you may wonder what this has to do with the elections? Quite a lot. Poland was partitioned along the 1795 demarcation lines given above; Poland’s current rail network mirrors, almost perfectly, these same borders. What is surprising is the fact that after 215 years this East-West division still persists. When we look at the regions in which Komorowski  and Kaczyński were victorious, we see this same pattern is repeated. West voted for Komorowski, East voted Kaczyński. Not only is this East-West divide economic in nature but also political. Both candidates and parties should think long and hard about why this is happening and what can be done to address the ‘problem’.

====================================================================

Piece from out confederation partners – Baltic Times -- on the relations between Lithuania and Poland and how they have gone south.

The last foreign visit for Kaczynski

April 15, 2010 – Baltic Times

The former Lithuanian Grand Duchy’s town of Smolensk will have a mysterious meaning in the Polish language now. On April 10, Polish President Lech Kaczynski, his wife Maria

Kaczynska (whose mother was from the Vilnius region) and several dozen members of the Polish political and military elite were killed in a plane crash near the Russian town of Smolensk. The delegation intended to honor 22,000 Polish army officers who were killed by Stalin near Smolensk during WWII. On April 8, Kaczynski made his last foreign visit. It was made to Lithuania. On April 11, the Lithuanian government announced April 12-14 and Kaczynski’s funeral day of April 18 as four days of national mourning in Lithuania for those who died in the plane crash of April 10.

On April 10, the Polish Parliament Speaker Bronislaw Komorowski became the interim president of Poland. Within 14 days he must announce the presidential election, which should be held within 60 days from the date of that announcement. According to social surveys, Conservative Liberal Komorowski was the leading candidate for the post of president in the presidential election which, before Kaczynski’s death, was scheduled for the fall of this year (though now he can face strong competition from Jaroslaw Kaczynski, twin brother of Lech Kaczynski, in case he would decide to run for the post of president). “I’m Lithuanian,” Komorowski was always saying to Lithuanian delegations, emphasizing that he is the offspring of the Lithuanian nobility with roots in the northern Lithuanian town of Rokiskis. He does not hide his pro-Lithuanian sympathies and it means that Lithuanian-Polish relations should not worsen despite the death of Kaczynski, who used to visit Lithuania several times per year. Komorowski stated that if he will be elected, his first foreign visit will be to Lithuania

On the day of the plane crash, Lithuanian public TV changed its program to broadcast Mass from the Vilnius Cathedral, with the participation of President Dalia Grybauskaite, former President Valdas Adamkus and all other state leaders of Lithuania as well as to show interviews with Lithuanian politicians who knew Kaczynski well. Adamkus, who took many flights with Kaczynski in the plane of the Polish president, said that Kaczynski had a fear of heights and avoided watching out the plane’s window. Kaczynski could not speak any other language than Polish, and it allowed Adamkus, who speaks many languages, including Polish, to be his mediator during EU states’ sessions. Adamkus also stated that Kaczynski was a great friend of Lithuania. Grybauskaite and Adamkus will go to Krakow to participate in the Polish president’s funeral ceremony on April 18.

On April 8, two days before his tragic death, Kaczynski met with Grybauskaite in Vilnius. It was his last foreign visit. Both presidents mostly discussed the gas pipeline construction which would connect Poland and Lithuania.

“We have decided to seek that the construction of the gas connection between Poland and Lithuania is declared a priority project of the European Union and that this project receives full European support. Our bilateral cooperation was very significant for the whole of Europe already as early as 600 hundred years ago. I would be very happy if the strategic partnership between Lithuania and Poland benefits our countries, nations and the whole of Europe,” Grybauskaite said during the press conference of both presidents.

Recently, shale gas was found in Poland. The expectations are that the amount of gas could be so huge that Poland will have no need for Russian gas supplies anymore. In case this finding will be confirmed in a coming months, Poland itself will become a gas exporter, which can diminish the exports of Russian Gazprom to the EU by one-third.

During the last visit of Kaczynski, on April 8, the Lithuanian parliament rejected the proposition by the Lithuanian government to allow the writing of Latin letters, which are absent in the Lithuanian alphabet, in Lithuanian passports and ID cards. Emanuelis Zingeris, MP of the ruling Homeland Union - Lithuanian Christian Democrats and supporter of this government’s proposal, described the proposition as “the W issue.” The letter “w” is absent in the Lithuanian alphabet and is replaced with the letter “v” in Lithuanian passports. The issue is important not only for women who are married to foreigners, but also to the Polish minority in Lithuania. The people, who describe themselves as Poles, make up 6.2 percent of the Lithuanian population. They are the second largest ethnic group in Lithuania, leaving the ethnic Russians, who make five percent of the Lithuanian population, in the third place.

“Our linguists say that a name is a sign of the individual, which should be protected by law. It is a European tradition. Lithuanians in Poland have such a right,” Prime Minister Andrius Kubilius said, trying to convince MPs to support the proposal.

“Do you also want to legalize Chinese, Arabic and Slavic letters in Lithuanian passports?” Social Democrat MP Andrius Sedzius shouted ironically, probably having in his mind the Cyrillic alphabet by saying “Slavic.”

Most of the MPs were taking into account historical animosities related to the fact that in 1920, the Polish army, breaking the Lithuanian-Polish truce agreement, entered Vilnius and created the small pro-Polish state named Middle Lithuania. In 1922-1939, the Vilnius region, where Lithuanian culture then was harshly persecuted by the Polish authorities, belonged to Poland. In 1920-1939, Lithuania considered the Polish occupation of the Vilnius region as illegitimate.

“My family’s four generations lived in Vilnius. My grandfather was experiencing various limitations under the Polish rule. However, we should not behave with Poles as they behaved with us,” Mantas Adomenas, MP of the Homeland Union - Lithuanian Christian Democrats, said, supporting Kubilius.

However, only 30 out of 104 MPs who attended the session in the parliament supported Kubilius’ proposal. The proposal got no “yes” vote, even from Audronius Azubalis, who is foreign minister and MP of the Homeland Union - Lithuanian Christian Democrats. A big part of this party’s MPs decided that they should not irritate that part of their electorate, which has rather primitively nationalistic views. “I would like to thank those 30 MPs who voted in favor of moving westwards, not eastwards,” said Jaroslav Narkevic, MP of the small political party named the Polish Electoral Action, which joined the Order and Justice Party’s faction in the parliament. He is known as Jaroslaw Narkiewicz in the Polish-language Lithuanian press, but he is Jaroslav Narkevic, according to his Lithuanian passport.

The most passionate opposition to Kubilius’ proposal came from his party colleague, MP Gintaras Songaila, who registered his own law draft which would allow the writing in passports of Polish and other non-Lithuanian-origin names in their original forms, in case they are in Latin letters, with certain restrictions: this could be done not on the main page of passport, but on another passport page, while the main page would be written in Lithuanian letters only, according to Songaila’s proposal. “Such practice exists in Latvia. Poland has no criticism of Latvia,” Songaila said. Songaila’s dissatisfaction with Kubilius’ liberalism on this

issue was so big that last month, he even unsuccessfully attempted to initiate removal of Kubilius from the post of prime minister during the meeting of MPs of the Homeland Union - Lithuanian Christian Democrats.

“It would even be impossible to think about banning for Lithuanians and other minorities in Poland writing their names in their native language,” Kaczynski said during a press conference in Vilnius on April 8.

There are very few ethnic Lithuanians, living in Poland, who decided to write their original Lithuanian name in their passports because it could be related to making changes in many documents. The same would be the story with Poles in Lithuania in case of success of Kubilius’ proposal. However, such a move would be a highly symbolic gesture of goodwill.

RECENT STRATFOR ANALYSES ON POLAND

The EU Threatens Gazprom's Monopoly in EuropeOctober 15, 2010 | 1055 GMTGazprom Deputy Chairman Alexander Medvedev (no relation to the Russian president) used the Russian gas giant’s website Thursday to publish a strong condemnation of EU initiatives to reform the European natural gas industry. Medvedev called EU efforts to separate production and transportation assets a “threat” to both Gazprom and its European customers. Medvedev was referring to the EU’s attempts to force its member states to transfer ownership of energy infrastructure from producers, such as Gazprom, to independent regulators who would guarantee equal access to the energy infrastructure for other, smaller producers — a process that the EU refers to as unbundling. At the heart of Medvedev’s comments is the Russian-Polish long-term natural gas deal negotiations, held up since February 2010 by European Commission — the union’s bureaucratic wing — insistence that the unbundling of production and transportation be applied to the deal.

The episode has pitted the EU against Poland and Russia, leading the two countries, traditionally suspicious of one another, to join in vociferously attacking the commission’s meddling. The natural gas deal itself is a rather mundane affair. Poland needs natural gas — a lot of natural gas — and Polish consumption is expected to rise as the EU pushes Central European states to use less coal based on environmental grounds. Warsaw was therefore attempting to pre-empt the shift from coal to natural gas by looking to secure supplies from Russia, particularly as Gazprom’s Nord Stream pipeline under the Baltic Sea threatens to divert a considerable amount of Russian natural gas to Germany. Until Poland develops alternatives to piped natural gas — such as its liquid natural gas terminal set for completion in 2014 or development of potential domestic shale deposits — it has no where to turn to but Russia. It therefore begrudgingly decided to sign a long-term deal through 2037 expanding its consumption of Russian natural gas from 7 to 11 billion cubic meters (bcm) annually.The story at this point would be over were it not for an apparent difference of opinions inside the Polish government between the Foreign and Economic Ministries. The Foreign Ministry — led by Radoslaw Sikorski, not known as a friend of Russia — forwarded the deal negotiated by the Economic Ministry to the European Commission for review, unsatisfied by the terms to which Poland was agreeing, according to STRATFOR sources in Poland. The commission then sent the deal back to Poland, telling Warsaw that the transportation infrastructure — in this case the massive 33 bcm capacity Yamal-Europe pipeline — had to be placed under the supervision of an independent regulator as demanded by the unbundling rules. This highly irked Gazprom and Polish state-owned energy giant PGNiG, which jointly own the Yamal-Europe pipeline, as well as Polish Economic Minister Waldemar Pawlak, who was hoping to use the successfully negotiated deal to resurrect his slumping political fortunes.The domestic dynamics of the story end here, with Warsaw’s staunchly pro-EU forces vying with far more ambivalent actors for political points. But there is a geopolitical angle as well.Both Russia and Poland have maintained that the European Commission is unfairly applying the unbundling regulation to their deal. There may be truth in that claim. The commission, which first proposed unbundling legislation in 2007, has since been forced to water it down due to lobbying from Europe’s own powerful utility companies and to allow producers to keep the proposed independent regulator on their books as an asset. That way utility companies would not feel that they were simply donating their pipelines to regulators without compensation.However, Russian and Polish negotiators have expressed angst that the European Commission is forcing on them the “strictest” interpretation of the unbundling rules, with hints that they are not being offered the compromise solution. This frustrates both Poland and Russia. For Poland, it means that the EU is apparently applying double standards, letting German and French utilities keep ownership of assets while Poland is forced to turn over the pipeline completely to the independent regulator. Gazprom feels that by giving up control of the pipeline — regardless of whether it gets to keep it on the books as an asset — it is losing control over who gets to use it, which means that non-Gazprom producers in Russia or eventual Polish shale gas producers could have access to its pipeline. What annoys Gazprom even more, and Medvedev alluded to this in his critique, is that Yamal-Europe was originally a $15.6 billion Russian investment. To now have it offered to other producers seems tantamount to — ironically — Soviet-era private property appropriation.The battle lines being drawn between Russia and Europe go even further, beyond just this deal. If Europe demands that energy infrastructure be made available to all producers via an independent regulator, then Gazprom’s planned pipelines such as Nord Stream or South Stream may need to

be opened to competition, including potential competition from fellow Russian producers one day. This is exactly the EU’s intention, since it would break Gazprom’s monopoly over Europe’s natural gas imports from Russia. But as Gazprom and the EU draw their lines in the sand over the issue, Poland is dealing with far less grandiose concerns, namely its natural gas supply. If the natural gas deal with Gazprom is not concluded by Oct. 20, Poland will begin to experience natural gas shortages. Simply put, Warsaw wishes Gazprom and the EU would take their fight elsewhere.

Poland Tests U.S. Security RelationshipOctober 1, 2010 | 1948 GMT

Summary

Poland is pressuring the United States to deploy troops in the country and reaffirm its commitment to collective self-defense under NATO. Warsaw sees Washington in an uncomfortable position in its dealings with Russia and entanglements in the Middle East. Poland is applying pressure both because it sees an opportunity to extract concessions from the United States and because it wants to test just how much it can rely on the United States to fulfill its security commitments.

Analysis

Polish Defense Minister Bogdan Klich told Polish media Oct. 1 that his Sept. 30 talks with U.S. Defense Secretary Robert Gates involved discussions on the expansion of U.S.-Polish military cooperation, including a potential U.S. troop deployment in Poland. Klich also said he stressed to Gates the need for the upcoming NATO Strategic Concept — to be unveiled at the November NATO summit in Lisbon — to reaffirm and emphasize NATO’s Article V of collective self-defense.

Klich brought to the United States a long wish list that Washington will find very difficult to fulfill. The United States is currently attempting to extricate itself from a complex situation in the Middle East, where it is not only trying to end two wars but also dealing with post-war arrangements, specifically what to do with Iran’s growing influence in the region. The last thing the United States needs is to upset Russia, which has shown a willingness to back Washington against Iran for a price, by positioning troops on the borders of the Russian sphere of influence.

This is exactly why Poland is applying pressure: It wants to see where the United States stands when it is most uncomfortable for Washington to meet the demands of its allies. Warsaw has reasons to be doubtful of the U.S. commitment. Polish history is replete with geopolitical failures prompted by allies breaking their promises to Warsaw. The fundamental Polish problem is that it is nestled between two European heavyweights, Germany and Russia, and as such, any alliance commitment places a great burden on its purported allies: facing off against Moscow and Berlin essentially in their own territory for the sake of Poland.

Moreover, and more contemporarily, Poland has faced U.S. dithering on its commitments to place ballistic missile defense (BMD) and Patriot missile batteries in Poland. Warsaw was stunned in September 2009 by the U.S. decision to replace the planned deployment of 10 Ground-based Midcourse Defense interceptors (the so called Bush-era BMD plan) with a more “phased” approach of deploying Standard Missile-3 (SM-3) interceptors on U.S. BMD-capable Aegis-equipped cruisers and destroyers. Washington tried to allay Polish fears of abandonment immediately after the change of BMD plans by offering to deploy a Patriot missile battery to Poland, but this quickly became a fissure in U.S.-Russian relations as well. The deal was only finalized in May 2010 and only in a non-permanent training deployment capacity. Ultimately, the United States has redrawn its BMD plans to include deployments of ground-based SM-3 interceptors in Poland by 2018. However, from Warsaw’s perspective, the U.S. decisions to alter BMD plans and only temporarily commit Patriot missile deployments clearly were more of a message to Russia than they were a gesture to Poland, aiming both to secure alternative shipping routes to Afghanistan via Moscow’s sphere of influence in Central Asia and to pressure Russia not to deliver the S-300 air defense system to Iran.

Thus, Poland is testing the U.S. commitment to the continuation of this close bilateral security relationship. Klich said he talked with Gates about the potential stationing of U.S. troops and aircraft in Poland, including F-16s and Hercules transport squadrons. These moves would be significant enhancements of the Polish-American security relationship; in fact, the deployments of U.S. troops and aircraft in Poland would be a significant geopolitical step by the United States to encroach on the former Soviet sphere of influence — and Moscow would definitely see it as crossing a line.

However, Klich also hinted at two other suggestions that may be far easier for the United States to meet. First is to readdress NATO’s Article V on collective security in the upcoming NATO summit, an issue Poland worries about along with the rest of the Central and Eastern European countries fearful of the ongoing Russian resurgence. Second is to enhance Polish-U.S. cooperation on special operations forces. Poland, according to STRATFOR sources in Warsaw, wants to see the United States give it a major command in the NATO Special Operations Headquarters (NSHQ). The United States is currently the NSHQ’s “Framework Nation” — the nation that provides the strategic impetus and logistics for a particular command — and Warsaw wants to see the Polish military in that role.

In the short term, Poland may be aiming high (troop deployment) to get something lower (NSHQ leadership) out of the United States. However, in the long term, Warsaw wants a clear commitment from the Washington — as it has throughout its history wanted from its allies — which certainly would be demonstrated by long-term troop deployments. Poland is specifically choosing a very uncomfortable time for the United States to prove its commitment in order to gauge just how much it can rely on Washington for security cooperation in the future.

Germany and Russia Move CloserJune 22, 2010 | 0856 GMTBy George Friedman

German Foreign Minister Guido Westerwelle will brief French and Polish officials on a joint proposal for Russian-European “cooperation on security,” according to a statement from Westerwelle’s spokesman on Monday. The proposal emerged out of talks between German Chancellor Angela Merkel and Russian President Dmitri Medvedev earlier in June and is based on a draft Russia drew up in 2008. Russian Foreign Minister Sergei Lavrov will be present at the meeting. Andreas Peschke said, “We want to further elaborate and discuss it within the triangle [i.e., France, Germany and Poland] in the presence of the Russian foreign minister.”On the surface, the proposal developed by Merkel and Medvedev appears primarily structural. It raises security discussions about specific trouble spots to the ministerial level rather than the ambassadorial level, with a committee being formed consisting of EU foreign policy chief Catherine Ashton and Russia’s foreign minister. All of this seems rather mild until we consider three things. First, proposals for deepening the relationship between Russia and the European Union have been on the table for several years without much progress. Second, the Germans have taken this initiative at a time when German foreign policy is in a state of flux. And third, the decision to take this deal to France and Poland indicates that the Germans are extremely sensitive to the geopolitical issues involved, which are significant and complex.Reconsidering Basic StrategyThe economic crisis in Europe has caused the Germans, among others, to reconsider their basic strategy. Ever since World War II, the Germans have pursued two national imperatives. The first was to maintain close relations with the French — along with the rest of Europe — to eliminate the threat of war. Germany had fought three wars with France since 1870, and its primary goal was not fighting another one. Its second goal was prosperity. Germany’s memory of the Great Depression plus its desire to avoid militarism made it obsessed with economic development and creating a society focused on prosperity. It saw the creation of an integrated economic structure in Europe as achieving both ends, tying Germany into an unbreakable relationship with France and at the same time creating a trading bloc that would ensure prosperity.Events since the financial crisis of 2008 have shaken German confidence in the European Union as an instrument of prosperity, however. Until 2008, Europe had undergone an extraordinary period of prosperity, in which West Germany could simultaneously integrate with East Germany and maintain its long-term economic growth. The European Union appeared to be a miraculous machine that automatically generated prosperity and political stability alongside it. After 2008, this perception changed, and the sense of insecurity accelerated with the current crisis in Greece and among the Mediterranean members of the European Union. The Germans found themselves underwriting what they regarded as Greek profligacy to protect the euro and the European economy. This not only generated significant opposition among the German public, it raised questions in the German government. The purpose of the European Union was to ensure German prosperity. If the future of Europe was Germany shoring up Europe — in other words, transferring wealth from Germany to Europe — then the rationale for European integration became problematic. The Germans were certainly not prepared to abandon European integration, which had given Germany 65 years of peace. At the same time, the Germans were prepared to consider adjustments to the framework in which Europe was operating, particular from an economic standpoint. A Europe in which German prosperity is at risk from the budgeting practices of Greece needed adjustment.The Pull of Russia

In looking at their real economic interests, the Germans were inevitably drawn to their relationship with Russia. Russia supplies Germany with nearly 40 percent of the natural gas Germany uses. Without Russian energy, Germany’s economy is in trouble. At the same time, Russia needs technology and expertise to develop its economy away from being simply an exporter of primary commodities. Moreover, the Germans already have thousands of enterprises that have invested in Russia. Finally, in the long run, Germany’s population is declining below the level needed to maintain its economy. It does not want to increase immigration into Germany because of fears of social instability. Russia’s population is also falling, but it still has surplus population relative to its economic needs and will continue to have one for quite a while. German investment in Russia allows Germany to get the labor it needs without resorting to immigration by moving production facilities east to Russia.The Germans have been developing economic relations with Russia since before the Soviet collapse, but the Greek crisis forced them to reconsider their relationship with Russia. If the European Union was becoming a trap in which Germany was going to consistently subsidize the rest of Europe, and a self-contained economy is impossible, then another strategy would be needed. This consisted of two parts. The first was insisting on a restructuring of the European Union to protect Germany from the domestic policies of other countries. Second, if Europe was heading toward a long period of stagnation, then Germany, heavily dependent on exports and needing labor, needed to find an additional partner — if not a new one.At the same time, a German-Russian alignment is a security issue as well as an economic issue. Between 1871 and 1941 there was a three-player game in continental Europe — France, Germany and Russia. The three shifted alliances with each other, with each shift increasing the chance of war. In 1871, Prussia was allied with Russia when it attacked France. In 1914, The French and Russians were allied against Germany. In 1940, Germany was allied with Russia when it attacked France. The three-player game played itself out in various ways with a constant outcome: war.The last thing Berlin wants is to return to that dynamic. Instead, its hope is to integrate Russia into the European security system, or at least give it a sufficient stake in the European economic system that Russia does not seek to challenge the European security system. This immediately affects French relations with Russia. For Paris, partnership with Germany is the foundation of France’s security policy and economy. If Germany moves into a close security and economic relationship with Russia, France must calculate the effect this will have on France. There has never been a time when a tripartite alliance of France, Germany and Russia has worked because it has always left France as the junior partner. Therefore, it is vital for the Germans to present this not as a three-way relationship but as the inclusion of Russia into Europe, and to focus on security measures rather than economic measures. Nevertheless, the Germans have to be enormously careful in managing their relationship with France. Even more delicate is the question of Poland. Poland is caught between Russia and Germany. Its history has been that of division between these two countries or conquest by one. This is a burning issue in the Polish psyche. A closer relationship between Germany and Russia inevitably will generate primordial fears of disaster in Poland.Therefore, Wednesday’s meeting with the so-called triangular group is essential. Both the French and the Poles, and the Poles with great intensity, must understand what is happening. The issue is partly the extent to which this affects German commitments to the European Union, and the other part — crucial to Poland —is what this does to Germany’s NATO commitments.The NATO Angle

It is noteworthy the Russians emphasized that what is happening poses no threat to NATO. Russia is trying to calm not only Poland, but also the United States. The problem, however, is this: If Germany and Europe have a security relationship that requires prior consultation and cooperation, then Russia inevitably has a hand in NATO. If the Russians oppose a NATO action, Germany and other European states will be faced with a choice between Russia and NATO.To put it more bluntly, if Germany enters into a cooperative security arrangement with Russia (forgetting the rest of Europe for the moment), then how does it handle its relationship with the United States when the Russians and Americans are at loggerheads in countries like Georgia? The Germans and Russians both view the United States as constantly and inconveniently pressuring them both to take risks in areas where they feel they have no interest. NATO may not be functional in any real sense, but U.S. pressure is ever-present. The Germans and Russians acting together would be in a better position to deflect this pressure than standing alone.Intriguingly, part of the German-Russian talks relate to a specific security matter — the issue of Moldova and Transdniestria. Moldova is a region between Romania and Ukraine (which adjoins Russia and has re-entered the Russian sphere of influence) that at various times has been part of both. It became independent after the collapse of communism, but Moldova’s eastern region, Transdniestria, broke away from Moldova under Russian sponsorship. Following a change in government in 2009, Moldova sees itself as pro-Western while Transdniestria is pro-Russian. The Russians have supported Transdniestria’s status as a breakaway area (and have troops stationed there), while Moldova has insisted on its return.The memorandum between Merkel and Medvedev specifically pointed to the impact a joint security relationship might have on this dispute. The kind of solution that may be considered is unclear, but if the issue goes forward, the outcome will give the first indication of what a German-Russian security relationship will look like. The Poles will be particularly interested, as any effort in Moldova will automatically impact both Romania and Ukraine — two states key to determining Russian strength in the region. Whatever way the solution tilts will define the power relationship among the three.It should be remembered that the Germans are proposing a Russian security relationship with Europe, not a Russian security relationship with Germany alone. At the same time, it should be remembered that it is the Germans taking the initiative to open the talks by unilaterally negotiating with the Russians and taking their agreements to other European countries. It is also important to note that they have not taken this to all the European countries but to France and Poland first — with French President Nicolas Sarkozy voicing his initial approval on June 19 — and equally important, that they have not publicly brought it to the United States. Nor is it clear what the Germans might do if the French and Poles reject the relationship, which is not inconceivable. The Germans do not want to lose the European concept. At the same time, they are trying to redefine it more to their advantage. From the German point of view, bringing Russia into the relationship would help achieve this. But the Germans still have to explain what their relationship is with the rest of Europe, particularly their financial obligation to troubled economies in the eurozone. They also have to define their relationship to NATO, and more important, to the United States. Like any country, Germany can have many things, but it can’t have everything. The idea that it will meld the European Union, NATO and Russia into one system of relationships without alienating at least some of their partners — some intensely — is naive. The Germans are not naive. They know that the Poles will be terrified and the French uneasy. The southern Europeans

will feel increasingly abandoned as Germany focuses on the North European Plain. And the United States, watching Germany and Russia draw closer, will be seeing an alliance of enormous weight developing that might threaten its global interests.With this proposal, the Germans are looking to change the game significantly. They are moving slowly and with plenty of room for retreat, but they are moving. It will be interesting to hear what the Poles and French say on Wednesday. Their public support should not be taken for anything more than not wanting to alienate the Germans or Russians until they have talked to the Americans. It will also be interesting to see what the Obama administration has to say about this.

Poland: Fracing on the Rise?June 16, 2010 | 0957 GMTSummary

Lane Energy of Canada is the latest energy company to announce it will begin using a technique known as fracing to drill for natural gas in Poland. While the interest in Poland’s natural gas reserves (estimated at 1.5 trillion cubic meters) may help alleviate Poland’s reliance on Russian natural gas imports, there are still a number of unknowns that will have to be cleared up before the technique becomes a viable source of natural gas for the country.AnalysisAccording to Polish daily Rzeczpospolita, on June 15 Lane Energy of Canada is set to begin drilling for unconventional shale gas deposits using a technique called hydraulic fracturing — also known as fracing — in northern Poland in the geological formation referred to as the Baltic Depression. A Lane Energy spokesman said the company is optimistic and results should be available in three months. Lane Energy’s is the latest in a string of recent announcements by major energy companies beginning to develop Poland’s unconventional gas deposits, which energy group Wood Mackenzie estimates to be around 1.5 trillion cubic meters.

Fracing is a technique by which unconventional natural gas deposits are extracted from rocks. Such “source rocks” may over time produce conventional deposits — gas released over time and then trapped by an impermeable substance such as limestone or a layer of salt — but those rocks often hold much larger concentrations of gases, trapped in small pores and narrow cracks that restrict the original gas migration. Such unconventional formations can exist in tight sands, coal beds and shale. Fracing essentially involves drilling down to source rock and then pumping “slick water” (water mixed with sand or another granular material) at high pressure to prop up the cracks and fractures that are formed by drilling so the gas can seep into those cracks and then into the well.Technological advances in drilling techniques in the United States, combined with the rising price of natural gas in the mid 2000s, made the adoption of fracing possible. The combination of fracing and horizontal drilling, which extends the point of contact across the field, allowed U.S. fields such as the Barnett Shale producing region in north Texas — long thought exhausted — to be revitalized for production. Adoption of these techniques has boosted the U.S. proven natural gas reserves by about a trillion cubic meters to around 7 trillion cubic meters. The idea of applying these fracing techniques to Europe is appealing, especially in Eastern and Central

Europe, where the former Soviet bloc countries still largely depend on imported natural gas from Russia for domestic consumption. Poland consumed 13.7 billion cubic meters (bcm) of natural gas in 2009, of which 4.1 bcm was produced domestically and around 9.6 bcm was imported via pipes, with Russia specifically accounting for 7.1 bcm and Uzbekistan 1.5 bcm, although the latter also came via Russian-controlled routes. These import numbers are set to rise sharply, with Russia and Poland signing a new natural gas contract in February 2010 that will see long-term Russian gas imports rise to 11 bcm annually. While reliance on Russian natural gas imports is considerable, Poland actually relies on domestically produced coal for nearly all of its electricity needs. However, in order to meet European Union greenhouse gas emission standards, Poland is planning to switch a substantial part of its electricity production from coal to natural gas. The planned Polish liquefied natural gas regasification facility at Swinoujscie, with an import capacity of 2.5 bcm per year, will help alleviate dependency on Russia, but the contract signed with Russia illustrates Warsaw’s expected rise in natural gas usage, with natural gas-fired power plants already in the works. In fact, deals like it could be the standard, unless something like fracing can shift the equation.However, several uncertainties remain. First, geologically speaking, not all countries will benefit from the application of these potentially revolutionary techniques. For example, Italy and the Netherlands, which have had considerable domestic natural gas production over the years, have the majority of their production offshore, but fracing can only be conducted from an onshore site because it requires immense amounts of freshwater to be pumped down the well. However, Romania, Poland and Germany all have existing — and depleted — wells that are onshore and near water sources that would potentially be suitable for development. That said, it is impossible to predict how much of the unconventional deposits will be recoverable until well after the drilling starts, which is why it is crucial that foreign energy companies with the technology begin exploratory work. Poland has currently seen the most activity of foreign companies with ConocoPhillips, ExxonMobil, Marathon, Chevron, Talisman, Lane Energy, BNK Petroleum, Emfesz, EurEnergy Resources, RAG, San Leon Energy and Sorgenia E&P all involved at some level in exploratory work. Quotes on potential Polish reserves range from 1.5 to 5 trillion cubic meters, indicating that it is still unclear what the numbers really are. The second problem is that energy majors looking for fracing action in Europe are not necessarily the companies with the greatest expertise or incentive. Fracing was largely innovated in the United States by smaller energy companies willing to take risks to get to deposits in fields considered to be depleted. These smaller firms hung on to plots, sometimes for decades, trying successions of innovative techniques to squeeze out every last drop of hydrocarbons and in the process becoming extremely familiar with the geology of their fields. On the other hand, energy majors — especially those working in a foreign environment — do not want to invest as much time and effort into their fields since they have other investments around the world. This means that while there will undoubtedly be some successes from the exploration, it is not likely to see the kind of runaway output that the United States has experienced, at least not any time soon.

Poland, Russia: Resetting RelationsApril 7, 2010 | 2222 GMT – NOTE, this was written before the Smolensk Air crash.

A woman visits the memorial museum for the Katyn massacre near Smolensk, Russia

Russian Prime Minister Vladimir Putin hosted Polish Prime Minister Donald Tusk at a ceremony to commemorate the World War II massacre of Polish officers in the Katyn Forest near Smolensk, Russia. At a later news conference, the two leaders called for improved bilateral relations. Tusk’s presence shows that Poland and Russia are indeed working at “resetting” relations. Putin first reached out by accepting Tusk’s invitation to attend ceremonies Sept. 1, 2009, commemorating the 70-year anniversary of the German attack on Gdansk that began World War II. Notably, Putin called the Molotov-Ribbentrop Pact, which paved the way for the German-Soviet invasion of Poland, “immoral” in a much publicized column in Polish Gazeta Wyborcza published a day before that visit. The Katyn massacre is at the center of Polish-Russian tensions. During Soviet times, the Kremlin denied Moscow’s involvement, accepting responsibility for the mass killings only in 1990. Many in Warsaw believe Russia should go much further, however, and open the official archives into the crime — especially the so-called “Belarusian list” of 3,800 Polish officers thought to have perished in prisons in Belarus. How far Warsaw should push Moscow on the issue is becoming a proxy for a debate between two political visions in Poland, one that opposes Russia and one that seeks collaboration. With presidential elections approaching in Poland, the hard nationalist line of incumbent President Lech Kaczynski will face Tusk’s more accommodating line toward Russia, represented in this election by Civic Platform candidate Bronislaw Komorowski (Tusk will not be running, as he needs to maintain control over the Civic Platform from the more hands-on position of prime minister).Already, Tusk has faced domestic criticism for concluding a natural gas deal with Russia that will see Moscow increase the amount of natural gas it sells Poland and gain greater control over the transit infrastructure that pipes Russian gas to Germany via Poland. Tusk does not see an aggressive policy toward Russia as positive for Polish national security or business, nor does he think it helps Warsaw’s standing within the European Union. He also is sensitive to Russian and German concerns, understanding that an overly aggressive policy toward Russia will not make him friends with Berlin, which is enjoying very close relations with Moscow. This will open him up for further criticism from the Polish right, however — which is exactly what Russia wants. Russia needs Poland wholly consumed domestically, especially on issues of little geopolitical import such as Katyn, so Warsaw cannot assume a leadership role in the European Union’s Eastern Partnership policy, which ostensibly intends to draw Belarus and Ukraine further within the EU sphere. With Moscow acting cordially, it is difficult for Tusk to stand firmly behind an aggressive Polish foreign policy that would push back Moscow’s influence in Central Europe — especially when this will not make Tusk any friends in Germany or France.

Warsaw's Reality on the North European Plain August 14, 2009 | 2142 GMTGERMAN CHANCELLOR ANGELA MERKEL will travel to Sochi, Russia, on Friday to meet with Russian President Dmitri Medvedev, one day after her personal intervention seems to have pushed a deal on German auto maker Opel to a Russian-backed bid. General Motors Corp. reportedly agreed in principle on Thursday with Canadian auto parts manufacturer Magna

International to sell its stake in the troubled Opel unit. The Magna bid is backed by state-owned Sberbank, Russia’s largest bank, and would include close cooperation between Opel and GAZ, the second-largest Russian car manufacturer. While GM was worried that the deal would transfer U.S. technology incorporated into Opel to the Russians, Merkel personally lobbied for the deal, spurning GM’s delay and pressuring the U.S. company to accept the Canadian-Russian bid over a rival Belgian offer. The agreement is only one of a number of recent business deals that illustrate the burgeoning economic relations between Russia and Germany. For Germany, the business deals with Russia are a way to increase demand for German exports, particularly for automobiles and heavy machinery that account for the majority of German manufacturing. Since exports account for 47 percent of Germany’s gross domestic product, the Russian market is an important part of Berlin’s strategy to get out of the current recession. For Russia, the deals are meant both as a means of modernizing the Russian economy and as a way to increase Moscow’s political influence with Berlin. As the trade links crystallize, Berlin and Moscow will not be tied together solely by natural gas exports. This is undoubtedly going to make Poland uncomfortable. If a newly assertive Germany, which for 60 years has not been allowed to have an opinion in matters of foreign policy, chooses not to be hostile to a resurgent Russia, then the situation for Poland becomes difficult. Warsaw is located on the North European Plain — Europe’s superhighway of conquest — directly between Berlin and Moscow. As such, the Poles are categorically fearful of a Russian-German alliance. Given its geography, Poland historically has had only two foreign policy strategies. The first, employed when Warsaw is in a powerful position, is to use the lowlands of the North European Plain to its own advantage and expand as much as possible, particularly into Ukraine, the Baltic States and Belarus. This is the aggressive Poland of the Polish-Lithuanian Commonwealth, which in the 16th century was one of the most powerful and largest countries in Europe. As an example of its power, it was only through the intervention of Polish King Jan III Sobieski that Vienna, and thus Europe by extension, was saved from the Ottomans in 1683. The second strategy, favored when Warsaw feels threatened, is to find an ally outside of the region determined to guarantee Polish independence. This was the case with Napoleonic France in the early 19th century and with the United Kingdom between the two world wars. This is also the situation today, with Poland hoping that the United States will commit to it with the ballistic missile defense (BMD) installation. BMD, from Poland’s perspective, would mean having U.S. troops on its soil, which would extend the alliance between the two countries past what Warsaw sees as nebulous guarantees of NATO. However, the United States currently is not looking to challenge Russia overtly. Washington is concentrating on Iran, and the last thing the United States wants is for Russia to counter American moves in Poland by supporting Iran through transfer of military technology, nuclear or conventional.This makes Warsaw nervous: If Poland cannot employ one of its two favored strategies, it tends to cease to exist as a country. The various partitions of Poland, all in the late 18th century, are still fresh in Warsaw’s collective memory. At that time, a rising Prussia and a surging Russian Empire (along with Austria) broke Poland bit by bit until it no longer existed on the European map. The same situation, also well remembered, was the consequence of the Molotov-Ribbentrop agreement, which led to the combined Nazi-Soviet invasion of Poland on Sept. 1, 1939.

That historical event will bring the current leaders of Poland, Russia and Germany together on Sept. 1 in Gdansk, Poland. Polish Prime Minister Donald Tusk has invited Merkel and Russian Prime Minister Vladimir Putin to ceremonies mark the 70-year anniversary of the World War II invasion.The meeting is indicative of the balancing act that Warsaw is forced to play, lacking a clear signal from the United States on its commitment to Poland. It is also a signal to Washington that, although the invasion occurred 70 years ago, Poland is still stuck in the middle — between of Moscow and Berlin — on the North European Plain.