Robert Amsterdam

CONTACT: bob AT robertamsterdam DOT com

My name is Robert Amsterdam, and I am a lawyer and an advocate for rule of law. This blog was created to express views which may stimulate debate and discussion on topics of international interest. I believe that we live in a world of unchallenged impunity, and this blog is merely a small attempt to shine a light on issues I view as important in countries with which I am engaged. I make no apologies or pretense of objectivity - these are my opinions and I stand behind them.

Today the Wall Street Journal issued another report on the developing fiasco of the Sakhalin Energy consortium. The Russian authorities appear to be using the Ministry of Environment to threaten a total shutdown of production to pressure Royal Dutch Shell on a dodgy asset swap with Gazprom.

But do we really honestly believe that Shell will speak out against this crass hustling that has become modus operandi of Russian state corporatism? Likely not, as Shell seems to have abandoned any hope of fair treatment in Russia, and, like ABN AMRO, has turned into an apologist to its new master.

The truth is that wherever the Russian state has less than 50% control of an energy resource, the majority owner can expect to pressured, intimidated, and, in extreme cases, jailed or worse. At the same time this is going on, Western leverage in Russian energy is getting weaker by a process I have come to call disaggregation and asymmetry.

Consider the situation in the following framework: A global economic challenge has been presented by Russia, driven by energy markets and threatening to distort the foundations of international trade. This challenge to the world follows grand-scale state theft and the subjugation of the rule of law in Russia. It is based on the theory that from politicians to the comprador class of Western intermediaries, massive and distorting economic incentives can be used to disaggregate the economic and political system in Europe and beyond.

Russia’s attack is based on a fundamental meta-narrative, that of Russia as victim. The West victimized Russia in the 1990s through shock therapy and Market Bolshevism, resulting in domination by oligarchs and enfeeblement on the geopolitical stage. Therefore, whatever path Russia takes today it is somehow acceptable as an antidote or corrective to the penuries of the 1990s. The pervasive ideological cloud created by this narrative obscures the judgment of Gerhard Schroeder and other Kremlin apologists.

Beyond this ideological screen the Kremlin campaign represents the most brazen attack on the free market in a generation. It includes the development of state enterprises in the energy sphere which are acting as Trojan horses to freeze out Western players in Russia while at the same time distorting foreign energy markets by demanding access on the basis of free market principles. The Kremlin has stolen one of the key oil producers in the world and then resold it to Western investors who have now bought the same assets twice, with the complicity of Western banks who have accepted an entirely new and corrupt Kremlin-imposed concept of risk and reward. It has steered its foreign relations so as to divide the West by breaking off Germany from the rest of Europe while teaching Norway that it values access to energy over human rights. No sooner does the Kremlin have Romano Prodi accept market access for Gazprom than it seals a deal with Algeria to tie up over two thirds of Italy’s energy supply, leaving Italy to seek assistance from Brussels and forsake any go-it-alone energy strategy.

In addition to disaggregation there is asymmetry. Yet unequal deals that favor Russia make sense as reparations for the 1990s. The failure to soften the Gazprom monopoly, which grossly violates fundamental norms of competition in the EU, WTO and Energy Charter Treaty, is somehow acceptable because Western financiers and investors can participate in the resulting windfalls.

The true adaptive brilliance of the Kremlin’s strategy is the concept of cooptation. Whether turning Germany against Poland or political leaders against their own people or ABN AMRO against a proud Dutch history of sensitivity to human rights, not only does everyone have a price, but everyone avoids shame while being loud and remonstrative declaring the beauty of the emperor’s clothes.

In the case of the Western banks and the Rosneft oil company, the moral repugnancy of Russia’s state-sanctioned theft is only matched by that of the banks scurrying to profit from a level of illegality unique in the annals of underwriting. This summer’s Rosneft floatation was a testament to the willingness of Western banks to accept Kremlin rules of the game which are both market distorting and corrupt. The risk calculus for Rosneft’s bookrunners – ABN AMRO, Dresdner Kleinwort, Morgan Stanley and JPMorgan, is driven by political factors above capital markets logic – just witness their willingness to exercise their greenshoe option to buy 31 million shares in Rosneft at the original offer price, above current market values.

Another feature of the Russian offensive is speed. Not since the negotiations over the Helsinki Accords have so many Russians been negotiating with so many countries over sensitive issues. From Algeria to Iran to Venezuela, a new gas cartel is being formed. From Norway to Canada to Brazil, new opportunistic energy market players are being co-opted. From Slovakia to Lithuania to Poland and Ukraine, old-style energy hardball is being played involving everything from phony pipeline repairs to outright blockade.

Indeed, political realists should applaud the Kremlin: behind the smokescreen of relations with Brussels, the Russians are preparing to dominate the EU’s energy markets and are already driving wedges into the European economic space. Meanwhile, the Kremlin meets with Hamas, sells rockets to Syria and negotiates a major gas deal with Israel. Russia is in a frantic competition with both China and the EU to pre-empt alternative supply sources, and yet on the surface relations with both appear strong.

Russia’s fuel diplomacy, and the abuses of state authority that have engendered it, present a challenge of historic proportions for Western leaders, since in many ways the new instruments of Russian power are far more potent than the weapons that could not be used during the Cold War.

Western leaders must challenge their own assumptions about the real nature of the current Russian regime. A parallel may be drawn to 1946, when George Kennan dispatched his “long telegram” from the United States Embassy in Moscow. The 8,000-word telegram, perhaps the most famous diplomatic dispatch of history, provided an elaborate explanation of the undercurrents of the emerging post-war Soviet foreign policy. For over a generation thereafter, Washington’s Cold War strategy of containment was grounded in the analysis and recommendations found in the telegram.

Today the world stands at a similar geopolitical turning point. Russia is mutating rapidly, and the post-Cold War window of opportunity to engage Russia, as an ally and partner with shared values, is closing. It is time that someone writes the “long telegram” of 2006 – not to reignite a Cold War, but rather to avert one by awakening to the realities and implications of an insidious kleptocracy that steamrolls over human rights and poses real threats to global economic and political security.

If anyone had any doubts about whether the Yukos case was a one-off in Russia, they ought to read this new report by the World Bank.

The September 2006 report, entitled, “Governance Matters” ranked Russia 151st among 208 countries in terms of political stability, democratic voice and accountability, effectiveness of government, quality of regulatory bodies, rule of law and control over corruption. Overall that placed Russia in the league of Swaziland and Zambia, and just ahead of East Timor. Russia’s political stability – defined as the perceived likelihood that the government will be destabilized or overthrown by unconstitutional or violent means – was comparable to that of the Philippines and Kyrgyzstan. On the credibility of the state's commitment to policy formation and implementation, Russia was in a group with Pakistan and Tanzania. For regulatory quality, Russia was ranked alongside Madagascar and Senegal. Rule of law in Russia was as effective as in Ecuador, Indonesia and Bangladesh.

With company like that, one would hope that greater caution would be exercised as the EU and Russia continue their negotiations for a partnership treaty – yet the message still doesn’t get through. This World Bank report, as well as the latest news from the Sakhalin project, underscore what I have been arguing for some time: that corrupt elements in the Russian leadership have not only abused the law and seized private property as it suits them, but have also parlayed the resulting oil and gas wealth into political and economic influence on the world stage, bullying their neighbors and enriching themselves in the process.

Make no mistake, Russia has imperial ambitions, and in order to curb them and turn Russia into an equal partner, the West has got to stop showing such weak-kneed deference to the energy weapon.

Today Yulia Latynina of Ekho Moskvy published a great op/ed in the Moscow Times on the tragic murder of Central Bank Chairman Andrei Kozlov, and the possible connection to Alexander Slesarev of Sodbiznesbank.

A Place Where They'll Kill a Central Banker By Yulia Latynina

Would it be possible for someone in the United States to kill Alan Greenspan to prevent a review of mortgage rates on his or her private home? Of course not. This would be incompatible with the structure of the state.

In Russia, however, it was possible for someone to kill Central Bank First Deputy Chairman Andrei Kozlov, quite likely in revenge for the closure of problematic banks (read: minor clearing-houses for money laundering). The question is why those involved ultimately chose murder as the best way to solve their problems.

I have a pretty good idea why.

Recall, if you will, the case of Sodbiznesbank. The bank came unglued not only as a result of money laundering, but also because it was the institution used by the Tagiryanovskaya criminal group to transfer money for the kidnapping and murder of Kamaz director Viktor Faber. What did the prosecutors do to the bankers? They ultimately let them out on bail, on the condition that they not flee the country. After all, it's not like they were Yukos shareholders.

Following this, the bank -- which had managed to retain its license -- started to lure private depositors with the offer of high interests rates, in much the same way that terrorists often use hostages as human shields. It was Kozlov who stripped the bank of its license. After this, demonstrations by investors the bank had deceived nearly led to a banking crisis that threatened to destabilize the very stable economy.

Despite his proximity not only to money laundering but also to criminals with blood on their hands, investigators had no particular questions to ask the bank's owner, Alexander Slesarev.

Other people, though, did have questions. Apparently feeling invincible, Slesarev had refused to return money to the bank's most serious clients, and he was subsequently gunned down, along with his wife and daughter.

The Sodbiznesbank story is not just a story about criminal business. It is a story about the complete disintegration of law enforcement bodies, and it is this background that leads financial conflicts to be resolved using weapons. But unlike Hollywood films, those who take up weapons first are not the heroic avengers come to slay the bad guys, but the bad guys themselves come to solve their personal problems.

The murders of Kozlov and Slesarev may be connected -- it is not often that so much blood is spilled among money-launderers. But whatever the case, we can say with some certainty that Kozlov's killers were not oligarchs and not financiers, but people among the latest candidates to have their license revoked. The order for the hit was probably issued in a bar where whoever ordered it, complete with a third-class education and 10 years in prison behind him (or 10 years in the armed forces), sat drowning his sorrows in a bottle of vodka.

Unfortunately, Kozlov's killers' animal instincts -- because they probably have no others -- told them one thing. There is no real state in Russia. There is only the "power vertical" -- a toothless State Duma, cowed television and helpless government. In other words, all we have is a set of instruments fully subordinated to the Kremlin to control reality.

But the Kremlin cannot actually control reality: It is saying nothing about Kondopoga, Chechnya or murdered officials. To solve crimes, you have to have law enforcement agencies. But
Russia's agencies have a lot more in common with petty gangs, when they are not doing the state's bidding in dismembering Yukos, stealing wholesale and retail cellular phones, providing freelance protection services to businesses and even high-profile murders, or being used as instruments for business redistribution. They can put anyone behind bars, but they can't actually solve crimes.

In a country where the Kremlin can do anything, anyone who has a pistol with a silencer can do anything. Kozlov's killers seem to have understood this.

Yulia Latynina is the host of a political talk show on Ekho Moskvy radio.

Guy Chazen weighs in on the Kozlov murder here.

Joshua Kurlantzick has a powerful piece coming out in the next issue of the New Republic that ties together Russia, Iran, China, and the rise of an increasingly cozy alliance of dictatorships and petro-states. The War on Terror has consumed an enormous amount of foreign policy resources for the United States, and in this vacuum, many of the autocracies of the world have had the opportunity "to feel each other out," creating a coherent axis of resource nationalist states. The policy response from the West: far from sufficient.

Of particular interest is Kurlantzick's observation that these relationships between Iran, Venezuela, and Russia are not bound to ideology, which gives them a frightening advantage of flexibility and adaptability.

He writes:

Unlike the Soviet Union, however, this axis does not offer a comprehensive ideological alternative to the United States comparable to communism; indeed, many of its member countries have embraced elements of capitalism, while using very different political models. Instead, the world has returned to an earlier system, one reminiscent of the early twentieth century, when ideology was not paramount but new powers like Germany and Japan developed flexible alliances to win resources and to weaken Great Britain, the world's strongest country at the time. Welcome to a new era of resource nationalism.

Kurlantzick also seems to understand the link between the theft of Yukos and the latest thuggish bullying of Shell in the Sakhalins:

Putin's plans to develop oil as a state weapon have long been clear. As director of the Federal Security Service (successor to the KGB) in St. Petersburg in the '90s, he authored an article arguing that the state should use natural resources to wield power. Since then, Putin has surrounded himself with former colleagues from St. Petersburg who share his views. In 2004, Putin and friends dismantled oil giant Yukos, a private company, and sold many of its assets to Rosneft, a state company. They boosted the power of state gas firm Gazprom; as Putin bluntly announced, "Gazprom is a powerful political and economic lever of influence over the rest of the world." This week--in a move widely interpreted as an attempt to assert more control over its resources--Russia revoked an environmental permit for a Royal Dutch Shell oil and gas project off the country's Pacific coast. Russians likely approved: A recent poll revealed strong Russian popular support for energy nationalization.

On the SCO:

Moving beyond initial trade and diplomatic ties, the autocrats have built military relationships, too. Russia and China held their largest joint military exercises last year, showing how two armed forces that once detested each other have put aside past mistrust. Russia has become China's biggest arms supplier, and Moscow also has made winning back its military influence in Central Asia a priority, regaining basing rights in countries like Tajikistan. For his part, Chávez has reportedly offered to sell Tehran F-16 fighters, while Russia has provided the mullahs with civilian nuclear technology. In addition, China, Russia, and other Central Asian nations are considering turning the SCO into a full-fledged alliance, which would make it one of Asia's premier security groups. SCO is the "most dangerous organization that Americans have never heard of," argues Christopher Brown, a Central Asia expert. Or, as David Wall of Cambridge's East Asia Institute told The Washington Times, if the Shanghai group added Iran, "it would essentially be an opec with bombs."

And lastly, Kurlantzick gives an ominous warning that without an urgent policy reorientation, the problem of energy imperialism could tilt the world toward conflict:

Sound familiar? In the 1930s and early '40s, the last age of resource nationalism, Japan had turned its back on previous liberal reforms and moved toward fascism. Its powerful economy was short on oil, gas, rubber, and other commodities. Insecure about British and U.S. alliances in Asia, Tokyo justified its invasions of the Dutch East Indies and other parts of Asia by claiming the West was preventing it from accessing supposedly free markets for resources. Japan also inked a loose alliance with Germany--which itself invaded Russia partly to gain Soviet oil--that ultimately became much more substantial. By August 1941, the United States had declared an oil embargo on Japan, heightening the tension over resources. In October 1941, Japan's leaders decided on total war if the embargo was not removed within a month. You know the rest.

Today the International Herald Tribune is carrying an op/ed I wrote.

Oil weapon: It's time for a long, hard look at Russia

Robert R. Amsterdam, International Herald Tribune

LONDON A global economic challenge has been presented by Russia, driven by energy markets and threatening to distort the foundations of international trade.

This challenge to the world follows grand-scale state theft and the subjugation of the rule of law in Russia. It is based on a flawed meta-narrative avowing that Russia is a victim: The West victimized Russia in the 1990s through shock therapy and Market Bolshevism, resulting in the domination of the country by oligarchs and its enfeeblement on the geopolitical stage.

Therefore whatever path Russia takes today is somehow deemed acceptable as an antidote or corrective to the penuries of the 1990s.

Beyond this ideological screen the Kremlin's offensive represents the most brazen attack on the free market in a generation. It includes the development of state enterprises in the energy sphere acting as Trojan horses to freeze out Western players in Russia while at the same time distorting foreign energy markets by demanding access on the basis of free market principles.

The Kremlin has stolen one of the world's key oil producers and then resold it to Western investors who have now bought the same assets twice, with the complicity of Western banks.

It has steered its foreign relations so as to divide the West. No sooner does the Kremlin have Romano Prodi accept market access for Gazprom than Gazprom seals a deal with Algeria to tie up over two thirds of Italy's energy supply.

In addition to disaggregation there is asymmetry.

The failure to soften the Gazprom monopoly, which violates fundamental norms of competition, is somehow deemed acceptable because Western financiers and investors can participate in the resulting windfalls.

The true brilliance of the Kremlin's strategy is the concept of cooptation. Whether turning Germany against Poland or political leaders against their own people or ABN AMRO against a proud Dutch history of sensitivity to human rights, not only does everyone have a price, but everyone avoids shame while loudly declaring the beauty of the emperor's clothes.

The consequences are worrisome when political considerations trump capital markets logic and respect for law. It now seems that the first dividend of the Rosneft flotation was Russia's revocation of Shell's license to complete its $20 billion development of the Sakhalin-2 oil and gas project. Who is next?

Another feature of the Russian offensive is speed. From Algeria to Iran to Venezuela, a new gas cartel is being formed. From Norway to Canada to Brazil, new opportunistic energy market players are being co- opted. From Slovakia to Lithuania to Poland and Ukraine, old-style energy hardball is being played involving everything from phony pipeline repairs to outright blockade.

Indeed, political realists should applaud the Kremlin: Behind the smokescreen of relations with Brussels, the Russians are preparing to dominate the EU's energy markets and are already driving wedges into the European economic space.

Russia's fuel diplomacy, and the abuses of state authority that have engendered it, present a challenge of historic proportions for the West.

Western leaders must challenge their own assumptions about the real nature of the current Russian regime. A parallel may be drawn to 1946, when George Kennan dispatched his celebrated "long telegram" from the U.S. Embassy in Moscow. The 8,000-word dispatch provided an elaborate explanation of the undercurrents of the emerging post-war Soviet foreign policy.

For more than a generation, Washington's Cold War strategy of containment was grounded in the analysis and recommendations in the telegram.

Today the world stands at a similar geopolitical turning point. Russia is mutating rapidly, and the post-Cold War window of opportunity to engage Russia as an ally and partner is closing.

It is time for someone to write the "long telegram" of 2006 - not to reignite a Cold War, but to avert one by awakening to the realities and implications of a kleptocracy that poses real threats to global economic and political security.

Robert R. Amsterdam, partner in the Canadian law firm Amsterdam & Peroff, is international defense counsel for Mikhail Khodorkovsky. This article expresses the author's personal views.