November 2006 Archives

It was their first face-to-face meeting in more than six months, following several extremely bitter exchanges over spies, deportations, energy prices, and even wine. Initial press reports following the Nov. 28 meeting of Georgian President Mikheil Saakashvili and Russian President Vladimir Putin have described the talks as "useful" and "productive," but so far there no details on progress regarding the critical issues.

As Eurasianet reports, Georgia is determined to maintain independence and sovereignty:

The Georgian president, however, was quick to dispel any notions of Georgia as a Soviet-era petitioner for good will from the Kremlin. While a dialogue with Russia is "important" for Georgia, the country’s future welfare depends on Georgia’s own "script for the future," Saakashvili stressed. "[I]t is time for us Georgians to realize that we should not think day and night about what Russia thinks about us, what Russia says about us, even what actions Russia takes or what plans it has in relation to us, and that that is not of decisive importance."

It remains to be seen how this posturing will play out as Georgia is one of the few countries left to approve Russia's accession to the World Trade Organization (WTO).

This entry is the second installment in a series of posts addressing the realities of the formation of a potential natural gas cartel. The first installment can be viewed here.

Since the Financial Times broke the big story about the NATO report warning Europe to be wary of a possible gas cartel led by Russia, numerous media have rushed forward with reports and editorials arguing the absurdity of such a notion.

But to what extent are these arguments valid? What are the real possibilities of a Russia-led gas OPEC, and how will coordination among exporters impact prices and geopolitics in the short, medium, and long term?

Here are the arguments of the debate in broad stroke:

A natural gas cartel is unlikely because...

1) the different agendas of exporters will make production quotas impossible to agree upon.
2) too many long-term contracts for a cartel to control prices
3) producers know that consumer countries could react negatively with sanctions
4) gas exporters have an overwhelming need for foreign investment and technology to extract

In my opinion, a natural case cartel is indeed a future possibility that we must prepare for because...

1) there is a very high degree of market concentration.
2) some gas exporters like Russia have a history of breaking contracts, and there are significant investments to move into LNG in a big way, which may dramatically increase the amount of gas sold on the spot market.
3) consumers have already demonstrated a high tolerance for anti-competitive policies in the energy sector, and exporters have already learned how to break their collective bargaining position.
4) finance and technology can be obtained through minority joint ventures in which the foreign partner has no control over the executive. Also, sources of finance act do not always act in concert with sources of technology.

Now let's address the arguments of the cartel critics point by point.

To begin with, we have had numerous statements from the horse's mouth that Russia is not only planning to coordinate prices with other natural gas exporters, but they are already well advanced in this strategy. For example, a big part of the gas cartel story has been the aggressive rhetoric of Valery Yazev, head of the Duma's energy committee. On Oct. 30, made the following comments during an address to the Russian Gas Union industry group:

"It is necessary to form a gas alliance, which could be joined by Turkmenistan, Kazakhstan, Uzbekistan, Russia, Ukraine and Belarus. Tomorrow, with the removal of the problem of Iran's nuclear programme, I would also see Iran in this alliance. ... In the EU we have a very clearly formed cartel of customers of Russian gas, which is imposing on us the ratification of the Energy Charter, which does not meet Russian interests."

Back in June, President Vladimir Putin himself expressed a similar sentiment at the Shanghai Cooperation Organization (SCO) summit:

"I believe that creating an SCO energy club is a pressing issue, as is more intensive cooperation in transport and communications. Russia will consider financing some projects in the economic area."

This was followed by comments from Iranian President Mahmoud Ahmadinejad that SCO nations could help "prevent the threats of domineering powers and their aggressive interference in global affairs," and said that Russian-Iranian energy cooperation "could be even more productive if we cooperated in pricing gas and forming the main gas routes."

The cartel deniers also say that the differing political agendas of gas exporters would prevent successful price coordination. However, it is clear that even countries with so-called "ethical" foreign policies such as Norway have already demonstrated that they would sacrifice a great deal of their principles for exploration deals in Russia, and furthermore, the cartel really only needs a few members to put the squeeze on Europe. Enno Harks, an expert at the Science and Policy Foundation in Germany, pointed out that the coordination between suppliers is already at an advanced stage in a Nov. 15 interview with Vremya Novostei:

"If such plans were destined to be realized, a Russian-Algerian cartel would have grave consequences for the European Union. On that point, I'll just cite two figures. There's an official indicator that says 24% of gas consumed in the EU comes from Russia. But that figure can easily be misleading. If we consider 30 West European countries, including a major producer like Norway, then it turns out that this region gets 70% of its gas imports from Russia and 20% from Algeria. Any form of cartel agreement between Russia and Algeria has the potential to be a disaster for European consumers of natural gas. The West must prevent that from happening."

We also frequently hear the argument that a gas cartel is not possible because of the exporter's needs for foreign investment and technology. There is no doubt that significant investments are needed in this area in the short term, but it is wrong to assume that the formation of a cartel - or any abusive conduct in regards to pricing on behalf of the Russians - is sufficient to dissuade investors and foreign oil and gas multinationals from pouring the money and technology in. Following the theft of Yukos, the Ukraine fiasco, the North European Gas Pipeline deal, the IPO of Rosneft, and, most recently, the attacks on foreign firms working in Sakhalin - we have not seen even a slight diminishment in energy investment.

According to RIA, FDI during the first six months of 2006 shot up 41.9% to $23.4 billion, and public-private partnerships - which in the energy sector must be majority state-owned - are booming. By controlling 51% of a natural gas development project, the Kremlin retains as much opacity as they desire while at the same time enjoying a steady flow of capital and technology to develop and mobilize their gas assets. Even the most discouraging aspect to foreign investors - the burdensome Gas Law of 1999 and other regulatory hurdles that limit Gazprom's ability to sell gas at market value domestically - may be lifting soon.

There is also the argument that cooperation among natural gas exporters wouldn't be able to influence prices because too much natural gas is locked up in long-term pipeline contracts. First of all, Russia has showed a habit of breaking contracts that no longer suit them to renegotiate at higher prices, and two, there is a real possibility that their LNG export capacity could jump up dramatically in the future. By the looking Gazprom's recent midstream asset spending spree, the Russians are showing a clear desire to diversify their customer base. The recent announcement regarding the assignment of the Shtokman gas to Europe instead of LNG development was nothing more than a political ruse blindly gobbled up a gullible media - anyone who thinks otherwise should start asking Petro-Canada some tougher questions.

While a global spot market is not likely to develop for many years, the very fact that natural gas prices are set on a regional rather than global market basis gives Russia considerable clout as a cartel leader. It is already a monopoly supplier to many countries, and is able and willing to raise prices when it wants (this week Russia is close to gaining control over a Belarussian pipeline to solve a price dispute). Even if the gas cartel only consisted of Russia and Algeria (together controlling 34% of Europe's gas), in a few short years they would already control more supply to Europe than OPEC.

The West should also be very concerned about Gazprom's impressive ability to cooperate and coordinate with other suppliers. In addition the Algeria relationship, Russia has had important contact with Egypt, which although smaller, is an important supplier to Europe through its two LNG terminals, and could play a pivotal role in building new trains to bring the Arab gas pipeline up to Europe.

Exporter's influence on price can also increase with the growth in the trade of liquefied natural gas. According to a thorough Simmons & Company report, LNG consumption is set to skyrocket at 12% annually through 2010 - and you can bet that the Russians will not miss out on the lucrative markets of the Atlantic basin, nor fail to maximize LNG exports out of Sakhalin.

Make no mistake that Russia has a LONG way to go before becoming a real influential LNG player (the Oil Drum has an excellent survey on the future of LNG), And while they are still relative newcomers, they have increasingly become fast friends with Algeria. Sonatrach is an LNG monster, making Algeria the second largest LNG exporter in the world, and a competent partner to help Russia develop this technology.

The biggest LNG supplier in the world is of course Qatar - which has the potential to become the ultimate swing supplier - the Saudis of the gas market. The common wisdom among the analysts is that neither Qatar nor Norway is likely to immediately participate in an aggressive cartel, and while I'm not inclined to disagree, it is important to note that Qatar is already experimenting with the market forces by shutting down production at the North Field, and driving LNG prices through the roof. At the same time we have seen an increase in ownership of upstream LNG projects by national oil companies, and the producers are undoubtedly thrilled to see these new infrastructure projects proceed slowly while prices rise.

While the spot market for gas remains very small, the continuing supply tightness and declining production in other areas like Indonesia mean that prices may become increasingly correlated with crude indexes as well as commodity futures - which means that a small group of exporters such as Russia, Algeria, Iran, and Qatar could enjoy significant influence over global prices with production quotas even if countries like Norway and Trinidad refused to play. The Gas Exporting Countries Forum may only be a debate club - but it is certainly poised to facilitate some mutual back scratching, if not something much more formal in the future.

My entire point here is that too many analysts are over-reacting to the James-Bond-like conspiracy theory of "Gasfinger" and failing to address the fundamental issues at stake - which is that Gazprom is already actively engaged in anti-competitive policies to pre-empt, disaggregate, and coordinate the energy market. You can call it a cartel if you want, or an industry association, or even just a multinational memorandum of understanding, but the truth is that this is nothing more than a debate over semantics, and Europe, the United States, and Asia should be doing everything possible to prepare for the possible future of a natural gas cartel - despite the evident challenges to its formation.

Here is a recording of Bob's speech this week at the University College London's School of Slavonic and East European Studies. We will update this post with a transcript when available.

Last week during the Russia-EU summit in Helsinki, the president of the European Commission, Jose Manuel Barroso raised the issues of Mikhail Khodorkovsky and Anna Politkovskaya with President Vladimir Putin.

Here is the report from European Parliament News:

On human rights, the EU had expressed concern about the situation in Chechnya and stressed the importance of thoroughly investigating all human rights offences and bringing the perpetrators to justice. The EU had also raised the issues of the rule of law and media independence in Russia, including the investigations of journalist Anna Politkovskaya's murder. ...

The issue of human rights in Russia had also been raised, she said, notably including the killing of Anna Politkovskaya. Mr Barroso had said that the perception of a lack of due process was a problem, and he raised the case of Mikhail Khodorkovsky in this regard. Mr Putin had defended Russia's approach to such matters.

Dr. Leon Aron of the American Enterprise Institute has published an extensive article surveying the troubling developments in Russian economic policy. I extract here some interesting passages:

On the return of the strong state:

Key postulates of Russian national political culture--so magnificently and, many of us thought, permanently banished by Mikhail Gorbachev and Boris Yeltsin--have now returned in force. It is once again respectable to say that the glory of Russia is the state, that what is good for the state is necessarily good for the country, and that the strengthening of the state is society’s primary objective. Hence, the state functionary (naturally conceived as a model of enlightenment, probity, and public spirit) is today considered a far more effective agent of progress than a free press (so sensationalist and profit-seeking), the voter (so uneducated and fickle), the judge (a bribe-taker), or, heaven forbid, the private entrepreneur.

In a 2005 book, Will Democracy Take in Russia?, Yevgeny Yasin--one of the earliest and most influential theorists of the Russian economic revolution, the mentor of those who led it, and minister of the economy between 1994 and 1997--has described the difference between the 1990’s and today as a clash between two starkly alternative visions of progress. The strategy followed by Yeltsin, he observes, was “modernization from below.” Its engine was private initiative, with big business in the lead, and minimal limitations on civil liberties and political rights. Putin, by contrast, is dedicated to “modernization from above,” with the state as the most powerful actor, the agenda-setter in economic matters as well as in politics.

This has many precedents in Russian history, of course. Epitomized most clearly by Peter the Great and Stalin, “modernization from above” has been pursued, mutatis mutandis, by virtually all Russian leaders, the two most notable exceptions being Czar Alexander II (1855-1881) and Boris Yeltsin. Today, as during previous eras, the implementation of this policy has been accompanied by the loosening of restraints on the state so that it can better mold society to its ends. The executive once again dominates the legislature and the judiciary. Moscow’s control has been re-asserted over formerly self-governing provinces. The national mass media, especially television, also largely bow to the Kremlin. The police, the security services, and servile courts have become policy tools.

On private energy management and Yukos:

Few economic quips have been vindicated faster or more vividly. Despite “expert” warnings, parroted ad nauseam by American newspaper columnists, to the effect that the new owners would quickly strip their assets and flee abroad with the loot, between 1999 and 2004 the young tycoons (all of whom, to be sure, became fabulously rich) invested an estimated 88 percent of their profits, some $26 billion, in modern technology and new exploration. Gradually, the top oil firms also became more transparent, disclosing their asset and management structures and adopting Western accounting practices. Trillions of rubles were paid in taxes to the state and, for the first time in post-Soviet history, to shareholders. More important, during those six years, private oil production increased by 47 percent, as compared with 14 percent in the state-owned sector.

Then came the re-nationalization of the oil industry. It started with an assault on Yukos, Russia’s largest private company, through a series of blatantly manipulated trials that began in 2004. In one instance, a judge ruled for the prosecution after spending only three days “examining” several hundred volumes of tax materials. In another, Yukos was assessed for tax liabilities that exceeded its income for the period in question. In 2005, Mikhail Khodorkovsky--the company’s founder and, at the time, Russia’s richest man--ended two years of incarceration to begin a nine-year sentence in a prison camp in eastern Siberia, on the Chinese border, three thousand miles from Moscow.

Yukos was bankrupted. Its largest production unit was quickly sold to a front company that, in a matter of days, resold it to Rosneft, a stagnant, poorly managed state-owned firm controlled by Igor Sechin, a Putin confidant and deputy chief of staff, who had taken over as chairman of the board in 2004, the same year Yukos was put on trial. Today Rosneft is the second-largest oil company in Russia; yet even after robbing Yukos, it is weighed down by debts of over $11 billion.

On foreign policy and Iran:

Nevertheless, although Russian foreign policy today is supremely pragmatic, it is conducted in a way that points to looming trouble. Putin has tried to win the greatest possible freedom of action for Russia by positioning the country above the international fray. To achieve this maneuverability, he has refused to bind himself to formerly important tenets like “democracy,” “human rights,” and “Western civilization,” rejecting alliances based on these precepts in favor of “working directly,” one on one, with a range of countries, many of them very unsavory. Without regard to the substantive merits of individual cases, Moscow is seeking to arrogate to itself a crucial role in today’s international process, collecting the attendant dividends as it goes along.

A chief element in this realpolitik has been the Kremlin’s readiness to leverage key Russian assets in the form of conventional arms, nuclear technology, and energy resources. Thus, Moscow saw its delivery of tactical air-defense missiles to Syria in 2005 as a means of restoring its influence in the Middle East. Similarly, earlier this year the Kremlin played host to the leaders of Hamas in an attempt at diplomatic arbitrage, hoping to obtain concessions (like the recognition of Israel’s right to exist) and to emerge thereby as an indispensable mediator between East and West.

The locus classicus of Putin’s new foreign strategy has been, of course, Moscow’s relations with Tehran. Russia has almost finished the Islamic Republic’s $1-billion nuclear power plant at Bushehr, and continues to oppose any effective sanctions aimed at forcing the regime to halt its march toward nuclear enrichment (a march that Moscow staunchly defends as the “peaceful development of nuclear energy”). Despite insistent requests by Washington, Russia has also resumed arms sales to Tehran, suspended by Yeltsin in 1995. The most recent deal, signed in December 2005, will provide mobile air-defense missile systems, MIG fighter jets, Su-24 bombers, T-72 tanks, and patrol boats.

With the country’s gold and currency reserves approaching $300 billion, Moscow’s motive in cultivating Iran is not primarily financial; the controversial agreements are worth just a few billion dollars. Nor is Putin driven by ideological opposition to American “imperialism” or to the American alliance with Israel. Indeed, last April a Russian rocket, launched from a cosmodrome in the Far East, carried into orbit an Israeli spy satellite that undoubtedly will be used to monitor Iran’s “peaceful” nuclear program.

An important op/ed from Yulia Latynina in the Moscow Times regarding the Litvinenko case.

Wednesday, November 29, 2006. Issue 3550. Page 8. The Lessons of Litvinenko's Death By Yulia Latynina

Alexander Litvinenko died last week in a London hospital from polonium-210 poisoning. I won't waste time on the rumors that Litvinenko was poisoned by enemies of President Vladimir Putin. Or that Litvinenko, like the noncommissioned officer's wife in Gogol's play "The Inspector General," "flogged" himself.

On a number of occasions in the last few years, we went to bed in one country and woke up in another. The first was the arrest of Mikhail Khodorkovsky in 2003. Then came the Beslan school siege in 2004 and the subsequent elimination of direct gubernatorial elections.

After Ukraine's Orange Revolution in late 2004 and early 2005, we went to sleep in a country that was not terribly intelligent, and whose president personally bullied its neighbors and worked as a tub-thumper for Viktor Yanukovych. We awoke in a country surrounded by malicious imperialist enemies.

But in the last two months, we have awoken in a different country three times: following the government's anti-Georgian campaign, the murder of investigative journalist Anna Politkovskaya and the death of Litvinenko.

These events are just signs along the road to a place filled with prison camps. By a strange coincidence, they followed major economic changes. As recently as last summer, the Kremlin seriously thought that Europe would let Russia buy into its gas distribution networks and that it would invest in developing gas and oil fields in this country. But there was no rush to invest, and there was no question of letting Russia buy into distribution networks.

The great political illusion exploded. And as happens any time an illusion explodes here, the leadership responded with personal annoyance and finger-pointing at external enemies. With the illusion gone, only the road and its ominous signs remained.

Litvinenko's death could have three consequences. First, an apostate has been silenced, potentially sending a warning to anyone who might betray the security services. At shooting ranges where intelligence agents hone their skills, pictures of Litvinenko used to hang on the targets. Perhaps when the great illusion fell apart the pictures were swapped for the original.

Second, his death could turn Russia into a rogue state. In the final analysis regimes are not divided into parliamentary and presidential. They are divided into regimes that are capable of poisoning the opposition with polonium-210 and those that are not. I doubt that President Vladimir Putin will find it easy to explain to his buddy, U.S. President George W. Bush, that Politkovskaya was whacked by renegade thugs. Were the people who slipped Litvinenko the polonium-210 no more than thugs, too?

If Russian agents carried out the operation to eliminate Litvinenko, they did so with no more elegance than we saw in the case of Chechen rebel leader Zelimkhan Yandarbiyev, who was killed in 2004 in a car blast in Qatar.

There was no need for elegance in the Litvinenko case, however. The polonium seems to have been left like a spy's calling card -- not to prove to the world that Russia is run by the security services, but to prove this to Putin.

Putin has surrounded himself with friends who were not trained to run businesses or to run the country. They were trained to carry out special operations. They were trained to eliminate enemies of the regime. And when there aren't any real enemies, they have to be created.

For some reason, as more enemies of the regime are eliminated, their number continues to grow. And Putin is left alone, surrounded by enemies from whom only his friends can save him.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.

He is not a sympathetic character. He may be hard to read. My conviction that he is leading Russia down the wrong path is shared by millions of people. However, the public excoriation we are witnessing in London about the leader of the Russian Federation is not something which should be joined in by anyone, much less a lawyer, who believes in the foundations of modern law.

For three years now I have been confronted with the blatant illegalities of the Kremlin’s campaign against Mikhail Khodorkovsky and Yukos. I have been advocating respect for fundamental principles of due process, fair trials, and the presumption of innocence. The universality of these principles means that there can be no shortcut to achieving the rule of law. Justice must be done, and justice must be seen to have been done.

In the past week comments have been widely circulating in the European press accusing the Russian president of involvement in the poisoning of former KGB officer Alexander Litvinenko. These comments are extraordinarily inflammatory and wrongheaded. In accusing Vladimir Putin personally, we do not advance the rule of law in Russia by one iota. Such accusations are giving in to hysteria and lowering ourselves below the standards of our own legal systems that we so cherish and promote worldwide.

Russia has been faced with mounting European criticism over its widespread human rights abuses and disrespect for fundamental principles of the rule of law and democratic processes. Yet pointing the finger at Vladimir Putin personally will rightly be seen in Russia as deeply hypocritical. Vladimir Putin has full rights to the presumption of innocence, just like anyone else.

All those suspected for responsibility behind this attack in London will face the full onslaught of a Scotland Yard investigation. Hasty assertions about Vladimir Putin’s guilt are not only inappropriate, but may well backfire. These statements give great play to the arguments of Kremlin hardliners who have been telling Vladimir Putin that he cannot trust his European neighbors; that Europeans are deeply Russophobic; that he must stand apart as an independent center of power in the world. Mr. Putin may well be convinced that he has nothing left to lose in terms of his reputation in the West – and then matters will certainly take a turn for the worse.

In contrast to my views about the person of the Russian presidency, I do believe that there is a reverse onus on the Russian state to cooperate fully in disgorging information relevant to this case. In the court of public opinion there is a pervasive presumption of guilt weighing upon the Russian authorities. This is an unavoidable consequence of the brazen impunity with which the Russian authorities have flaunted law and due process in recent years. When state actions amount to grand-scale theft, when corruption is endemic, when opponents are locked away and when political legitimacy is maintained through near-total control over the press, the Kremlin should not be surprised to find that it has a tremendous credibility problem.

In respect however to the President of Russia, there is no such reverse onus. Vladimir Putin deserves the full shield of a wholehearted presumption of innocence. Taking that away from him is lowering ourselves to the same kind of demagoguery that we have been so vociferously opposing. In the meantime, speculation and oversimplified accusations will not help Scotland Yard to do its work.

The Financial Times has published an editorial on Russia today.

I post here some extracts:

The European Union's relationship with its most powerful neighbour is dysfunctional. Last week's summit with Russia was a dismal affair, overshadowed by internal EU squabbling, the mysterious death of a former Russian spy and sundry rows over pipelines and food safety. Before the next summit in May, the EU needs a robust and unified policy that allows co-operation without offering Russia the chance to dictate terms. ...

The UK must make clear that if there is any sign of Kremlin involvement in the death of Alexander Litvinenko, the former spy and British citizen, the consequences will be grave for relations between London and Moscow. And, since Russia has refused to heed the EU's calls to open up its own gas industry, it may also mean limiting access to EU energy assets for Gazprom, which is increasingly a tool of the Kremlin.

The irony is that Europe's main demand - a more open Russian energy market - is in Moscow's own interest, since the country's decaying infrastructure badly needs more investment. But for a resurgent Russia, giving foreigners greater control over the country's chief natural resource is a difficult step to take of its own accord.

Thanks to Tom G. Palmer for the link to this video of Alexander Litvinenko at the Frontline Club.

Peter Gumbel of Time Magazine has done a long feature on the new Russian dissidents that is worth reading. Here is one interesting abstract:

Has anyone noticed? Some dissidents complain that, now that the cold war is over, Russia can get away with anything. "At least in the Soviet Union times there was a steady drumbeat of people in the West talking about the problem. Today, lots of Russian activists feel isolated," says Gill. That's not to say there's no support; the European Union and the Council of Europe hold regular discussions about human-rights issues with Russian authorities, and Angela Merkel, the German Chancellor, recently raised the matter of Khodorkovsky's imprisonment directly with Putin, saying the conditions of the oil boss's detention were "unacceptable."

But at a time when Russia is emerging as an energy superpower and a key ally on handling Iran and North Korea, human rights and freedom of speech are no longer at the top of the West's agenda. Some, including Merkel's predecessor, Gerhard Schröder, are quick to defend Putin; in his recent memoirs, Schröder described the Russian President as "a flawless democrat." "It's frustrating that some European leaders hold this view," says Grigory Pasko, a former navy captain, journalist and environmental campaigner who in 2001 was sentenced to four years in jail on treason charges, and released in 2003. "You would hear less of this sort of thing if Europe were not so dependent on Russian energy."

From the Financial Times:

Text of statement dictated by Alexander Litvinenko from his hospital bed

I would like to thank many people. My doctors, nurses and hospital staff who are doing all they can for me; the British Police who are pursuing my case with vigour and professionalism and are watching over me and my family. I would like to thank the British Government for taking me under their care. I am honoured to be a British citizen.

I would like to thank the British public for their messages of support and for the interest they have shown in my plight.

I thank my wife, Marina, who has stood by me. My love for her and our son knows no bounds.

But as I lie here I can distinctly hear the beating of wings of the angel of death. I may be able to give him the slip but I have to say my legs do not run as fast as I would like. I think, therefore, that this may be the time to say one or two things to the person responsible for my present condition.

You may succeed in silencing me but that silence comes at a price. You have shown yourself to be as barbaric and ruthless as your most hostile critics have claimed.

You have shown yourself to have no respect for life, liberty or any civilised value.

You have shown yourself to be unworthy of your office, to be unworthy of the trust of civilised men and women.

You may succeed in silencing one man but the howl of protest from around the world will reverberate, Mr Putin, in your ears for the rest of your life. May God forgive you for what you have done, not only to me but to beloved Russia and its people.

From the Moscow Times:

Gazprom Snaps Up Best-Selling Tabloid

Gazprom will expand its extensive media clout by buying the country's most widely read newspaper, Komsomolskaya Pravda, the head of Gazprom's media unit said Tuesday.
...
KP has a total readership of 8.4 million people, according to TNS Gallup Media. It is ranked No. 63 in the world by the World Association of Newspapers and prints 700,000 to 830,000 copies daily and 3.1 million on weekends.

Kremlin critics say President Vladimir Putin has squeezed media freedoms by bringing major newspapers and television channels under the control of state-run companies like Gazprom.

Analysts say the Kremlin is especially keen to bring major media outlets under its control ahead of presidential elections in 2008, when Putin must step down after two terms in office.

Following the event with Andrei Illarionov yesterday, Bob did an additional interview with the Cato Institute, which is available for download from their website here.

Today MOSNEWS has picked up on Bob Amsterdam's comments in regards to Schroeder from yesterday's event at Cato.

Today the Washington Post is running an editorial about the Litvinenko poisoning. Here's an extract:

Former colleagues of Mr. Putin in the KGB don't doubt who is responsible. One, Oleg Kalugin, pointed out that the president pushed the Russian parliament to authorize the secret service to take action against "terrorists" outside the country. Another, Oleg Gordievsky, the former KGB chief in Britain, told the Times of London that he believed the attack was "state-sponsored" and was carried out by another former Russian agent. We trust that the British authorities will vigorously investigate the attack on Mr. Litvinenko -- who is now a British citizen -- and that Prime Minister Tony Blair will take seriously the possibility that a colleague in the Group of Eight sanctioned a political murder attempt in London.

While Mr. Litvinenko's story was emerging over the weekend, President Bush was pictured exchanging jollities with his "friend Vladimir" at a summit in Vietnam. Does Mr. Bush regret having given so much support to a leader who has dismantled his country's nascent democracy and whose opponents keep turning up in hospitals and morgues? If so, he's keeping his own secret.

Just a reminder to tune in today at 12:00 PM for a live webcast from the Cato Institute of Robert Amsterdam and Andrei Illarionov, the former economic advisor to President Vladimir Putin. Mr. Amsterdam and Mr. Illarionov will be discussing Russian energy policy and the new Russian state.

The link to view the live webcast can be found here.

There have been reports that the European Commission is currently circulating a white paper among member states, urging the EU to take action against Russia’s rapidly increasing military and energy links to Latin America.

Although some have commented on Russia’s involvement in the region, I am greatly relieved to see that this important issue is finally getting attention at the governmental level.

The Kremlin has clearly demonstrated its interest in rebuilding relations with Latin American nations to a Cold War level. On the energy side, we are seeing Moscow engaged in talks to help build the “Hugoducto” – a gas pipeline that would connect Venezuela, Brazil, Bolivia, Argentina, and Uruguay. LUKoil and Gazprom have gone on a spending spree to grab up licenses in the Orinoco Basin, while at the same time energy nationalizations in Bolivia and Ecuador are creating more resource autocrats. On the military side, Russia recently completed a major $3 billion arms deal with Venezuela, delivering fighter jets and helicopters to the stridently anti-American Hugo Chavez, and is in conversations for several other big business transactions.

Russia's close relationships with Venezuela, and Hugo Chavez in particular, have changed dramatically in recent years while at the same time U.S. influence in the region is waning. In an article titled "The Putin-Chavez Partnership", Mark N. Katz of George Mason University explains how the dynamic between the two presidents changed:

The atmospherics of the third Chavez visit to Moscow were very different from those of his second visit in October 2001 or Kasyanov’s to Caracas in December 2001. Putin had been emphasizing partnership with the United States in the twelve months following the 9/11 attacks, and so Moscow was not very receptive to Chavez’s anti-American rhetoric. However, by the time of Chavez’s November 2004 visit, several events had soured Russian-American relations, including the U.S.-led intervention in Iraq, the Rose Revolution in Georgia, and the Orange Revolution in Ukraine (both of which Moscow considered to have been orchestrated by Washington). With the Orange Revolution actually in progress during Chavez’s third visit, his anti-American rhetoric was very much in accord with the viewpoint of the Putin administration. (Chavez himself had only recently, in August 2004, won a majority of votes in a recall election. While many of his opponents claimed that Chavez had rigged the election the Russian Foreign Ministry issued a statement declaring it legitimate.)

By July of 2006, both leaders made their intentions very clear during an official Moscow visit. Hugo Chavez said the following:

"I consider our cooperation in the energy sector to be of primary importance. We examined issues linked to developing cooperation between major Russian and Venezuelan companies. We were very glad to acknowledge that firms such as Lukoil and Gazprom are already working in Venezuela and will soon start to develop deposits located both in the sea and on land. I think that this is one of today’s best results and a very important step forward in developing our bilateral relations. Mr President, you know, and all of Russia must know, that oil reserves in Venezuela continue to grow. And as we continue prospecting and drilling our oil stocks are doubling. We can take the stocks around the Orinoco River as an example; there, our oil reserves are estimated at approximately 270 billion barrels. This will make Venezuela the OPEC country with the world’s largest oil reserves, since our reserves will even be greater than Saudi Arabia’s. And we are glad to reveal that Lukoil and all of its experience, technology and determination, will work in the region surrounding the Orinoco River."

At the same press conference, Vladimir Putin issued these comments:

"Certainly, the oil and gas sectors are the most promising and interesting branches in which we cooperate. And I am very pleased to note that our leading companies are making their first steps onto the Venezuelan market.

At the same time our interaction is not limited to the energy sector. The financial and investment sectors, engineering, the mining industry, the metallurgical industry, the chemical industry, transport and, of course, military and technological cooperation are all promising spheres."

According to Peter DeShazo of the Centre for Strategic and International Studies, “Chávez is looking for support and business deals from countries that he sees as rivals or adversaries of the US. Clearly he sees things in Cold War terms.”

Russia’s relations with Latin America must be watched very closely for several reasons. At the very best, Russia’s interest in the region simply reflects their newfound willingness to flex their energy muscle, and engage in an activist foreign policy as part of a bid to consolidate their role in a new multi-polar international system. At the very worst, we could be witnessing the first stages of a plan to manipulate Venezuela’s oil and gas exports to the United States by diverting supplies, taking over their market share with LNG, and further tighten their grip on global energy markets.

The report notes that Russia’s presence is still relatively small, so the time to act is now. It is also to be noted that this relationship is opportunistic for both leaders, and subject to change without notice. What is fundamental is the relative impotence of the United States to influence this relationship over an area geographically central to what has always been presumed up until now to be the primary sphere of US influence of world affairs. It is this loss of the ability of Washington to project meaningful leverage that should be of the most concern.

Today the European Voice is running an interview they did with me. The story was also picked up in MOSNEWS.

Khodorkovsky lawyer says EU firms must back human rights

By Simon Taylor

The lawyer representing jailed former Yukos chief executive Mikhail Khodorkovsky has called on European businesses to join the fight for human rights and the rule of law in Russia to protect their own interests.

Robert Amsterdam, the lawyer for Khodorkovsky, who has been held in jail in Siberia on charges of tax evasion and fraud and embezzlement, said: “European business has to understand the fight for human rights is their fight.” In an interview with European Voice he said that the recent murder of Russian journalist Anna Politkovskaya, whose investigations into the conflict in Chechyna upset the Kremlin, was a threat to “every businessman” working in Russia.

Amsterdam strongly criticised the approach of EU leaders including former German chancellor Gerhard Schröder and French President Jacques Chirac of separating human rights concerns from energy issues, saying it had allowed corruption to take hold in Russia, which is now ranked 151st in the World Bank list of countries by transparency. Schröder had “let his wallet” deprive him of any authority, Amsterdam said.

The former German chancellor, who was appointed head of the supervisory board of a consortium which will build a controversial pipeline to bring Russian gas across the Baltic to Germany, had done a “dirty deal” and given up democracy for stability in Russia, said Amsterdam. Khodorkovsky’s lawyer singled out recent comments by Schröder saying that Russian President Vladimir Putin was a “dyed-in-the-wool democrat”, saying they were contributing to the “very serious” situation in Georgia where Russia has imposed an air and postal embargo.

Khodorkovsky’s lawyer said, however, that Europe had “not completely ceded its voice”, saying that German Chancellor Merkel was trying to take a new approach towards Russia. But he added that Merkel was being “obstructed” by Foreign Minister Frank-Walter Steinmeier, who was chief adviser to Schröder when he was chancellor.

“The willingness to stay silent [on human rights and failure to respect the rule of law] empowers Gazprom and harms the European energy [sector] because of the bribery and corruption,” he said.

The lawyer criticised the EU’s focus on energy security concerns because it treated the issue as a “zero sum game” where Europeans tried to impose rules on Russia to protect European interests.

Instead, he argued, it was in Russia’s own interests to have more transparency and effective rule of law in the business sector because Russian companies needed “massive investment” in modernising extraction and distribution capacity to ensure that they could continue to exploit their assets in the future.

Russia was guilty of a “lack of strategic thinking”, he said, pointing to the decision not to allow international companies to exploit the Shtokman gas field in the Barents Sea, after a long bidding process, as an example of “arbitrary decision-making”. This would harm Russia in the long run as it urgently needed foreign investment but investors would be put off by a lack of transparency and the failure to ensure the rule of law was applied. There was still a chance to put pressure on Russia to change its ways, said Amsterdam, but the EU needed to act now before Russia had other options of whom to sell energy to. “In five years time they can start selling to Asia,” said Amsterdam.

Failure to act would play into the hands of Gazprom which was pursuing a strategy of “pre-emption”, said Amsterdam, by buying into downstream assets in the European distribution market. When decisions were being made in the future about where to buy energy from, those decisions would be made by companies owned by Gazprom, he said.

© Copyright 2006 The Economist Newspaper Limited. All rights reserved.

It is with profound sadness that we read that President George W. Bush is spending valuable political chips to curry favor with President Putin on Iran. In the eyes of an average, well informed Russian, the credibility of the United States is taking a big hit.

For on the street in Moscow, it is well understood that Russia is the party that is benefiting from the isolation of Iran, because it is to Russia that Iran poses the real threat. Russia is not nearly as concerned about ideology or democracy in Iran, it is chiefly concerned with its potential to become a true alternative to European gas security if relations were normalized.

Going to Mr. Putin and demonstrating this lack of understanding over what issues truly matter to Russia harms America in the long term, and buttresses the power of the siloviki in the eyes of critical Russian elites.

The fact that the United States has squandered one of its most important leverage points by backing Russia's WTO bid without achieving anything in return represents a further further confirmation that it will take more than James Baker to assist this White House in crafting an effective foreign policy in the near term.

From Stratfor:

Moscow's strategic interest is to act against the aims of U.S. policy on Iran and other issues, attracting Washington's attention away from Russia. Thus, it becomes involved in the Middle East, instigating or perpetuating conflicts that take up the already-limited U.S. bandwidth. Russia likes to present itself as having influence over the Islamic republic, but in reality, Tehran is hardly driven by its relations with Moscow and has no reason to rely on the Russians in its policy decisions.

Kommersant is running a column today by Andrey Kolesnikov, which speculates on the details of yesterday's Bush-Putin lunch at the Vnukovo-2 airport in Moscow.

Yet, Putin obviously needed that meeting before Hanoi. Russian president was sympathetic about Republican failure in midterm elections to US Congress. It is rumored he took that misfortune as his own, but it seems to me, however, Putin can hardly imagine anything like that in his own country.

Yet, Putin certainly understands the results of the midterms might bring trouble to him as well. Every now and then, Democrats introduced resolutions to the Congress which were blocked by Republicans. Democrats wanted to tie up Russia’s G8 membership with human rights issues in Russia, for instance. Other resolutions concerned Mikhail Khodorkovsky case, or denouncing Russian law on NGOs.

Democrats will probably try to triumphally accomplish what they’ve begun, and US president only can stop them, if he vetoes their draft resolutions. Thus, Putin wanted to persuade Bush that the latter should definitely act so, and that’s what Putin did during the dinner.

Today in Washington I met with Zeyno Baran, Senior Fellow and Director at the Center for Eurasian Policy at the Hudson Institute. Zeyno is an expert on energy and Central Asia, among other topics, and here I post a few excerpts from a briefing she delivered to the House Committee on International Relations on July 25, 2006. It was a pleasure to meet Zeyno, I look forward to following her work and that of Hudson Institute closely.

On securing U.S. energy interests in Central Asia:

More recently, the trans-Caspian gas pipeline idea was revived by the US Administration, but this time starting with Kazakhstan. According to the new strategy, Turkmen gas will be added only later, if at all. The logic is that there is already plenty of flared gas (gas released as a byproduct of industrial operations, and which would otherwise be wasted) in Kazakhstan that could instead be transported to Western markets. Given Kazakhstan’s pragmatic energy development policy and demonstrated interest in the East-West corridor, this option seems to be the best way forward.

Yet this too may not materialize unless the US is seriously committed to changing the energy dynamics in Eurasia, which ultimately means confrontation with Russia’s regional energy strategy. To come up with a coherent and pragmatic strategy, it is necessary to look at the broader Eurasian energy picture - specifically at the activities and plans of Gazprom. While many have wanted to turn a blind eye to the possibility that the US and Russia may not have a “win-win” option in Central Asian energy, it is clear that Russia is playing to win it all, regardless of US interests. This makes sense from Russian perspective: Gazprom’s basic strategy is to maintain its monopoly in the region, with which it can purchase Central Asian gas at below world-market prices, channel it to lower-paying Russian customers, and sell its own domestic reserves to Western Europe at high prices. It can further protect its lucrative European markets by freezing out independent Central Asian suppliers. By maintaining and strengthening its monopoly power, Gazprom will strengthen its leverage (and that of the Russian government) over European gas consumers. To do this, Gazprom desperately needs continued supplies of Central Asian gas (primarily from Turkmenistan and to a lesser degree Kazakhstan) in order to meet its supply commitments.

On converging interests with Kazakhstan:

Kazakhstan not only has the largest recoverable oil supplies in the region; it also has the largest gas production. It has approximately 2,000 bcm of explored natural gas reserves, with unexplored reserves (including Caspian offshore potential) estimated at 8,300 bcm. In recent years, domestic gas production has averaged 12 bcm annually; by 2020, Kazakhstan hopes to produce 40 bcm per year.

Given Gazprom’s Central Asian gas strategy, and following Cheney’s visit to Kazakhstan, Russia refocused its attention on the country - specifically on its gas sector. Russia has sought to lock in Kazakh supplies for the long run, thus preventing their independent transport to Europe - by way of, for example, a trans-Caspian gas pipeline. President Putin invited Nazarbayev to the G8 summit; subsequently, on July 17, they created a joint venture to process natural gas from Kazakhstan’s Karachaganak gas field (which is one of the world’s largest gas condensate fields, located on the Russian-Kazakh border). Moves such as this one make clear that the US should no longer take Kazakhstan and its pro-Western orientation for granted.

Recommendations:

To devise an effective energy strategy for Central Asia, dynamics in the Caucasus, Black Sea region and EU markets must be considered. We know that Russia will increase the gas price to Ukraine—it delayed such a move in order to avoid a headache at the G8, and to wait await the formation of a new Ukrainian government. If the pro-Russian Yanukovych becomes the Prime Minister, then the price increase may be more gradual, if a pro-Western leader takes power, then the price may be tripled. We also know from last year’s gas cutoff to Ukraine that there is a direct link between Central Asian gas and Europe’s own energy security. The markets are indirectly connected, but it would be benefited by a direct connection.

To accomplish this, the US (together with the EU) needs to be more effectively involved in the success of post-revolutionary Ukraine and Georgia—first by recognizing that the Kremlin does not want them to succeed (and in fact is actively trying to undermine both states’ reform process) and also by helping them with their own energy-diversification and institution building efforts.

BBC: Bush Backs Russia's WTO Entry Bid During Moscow Visit
RIA: Alexander Ryazanov of Gazprom is Sacked, Replaced by Ex-KGB Golubev
Bloomberg: TNK-BP and Gazprom Form Joint Venture
EDM: Moscow Appears to Back South Ossetia Vote
Guardian: Queen Announces Introduction of Climate Bill During Next Session of Parliament
Telegraph: Deutsche Börse Drops Bid for Euronext
Forbes: Russian Carrier Vimpelcom Celebrates 10 Years on NYSE
Reuters: Dutch Are Confident that Sakhalin Woes Will Come to Close
Moscow Times: MSCI Barra Declines to Include Rosneft on Emerging Index, Shares Fall
MOSNEWS: Russia Accuses Poland of Harboring Smugglers
Radio Free Europe: Ukraine's EU Ambitions Must Not Hurt Ties With Russia, Says Yushchenko
MarketWatch: EU Clears Gaz de France-Suez Merger

On Monday, Nov. 20, at 12:00 PM, I will be participating in a Policy Forum event at the Cato Institute in Washington DC, along with the esteemed Mr. Andrei Illarionov, a former economic advisor to Vladimir Putin.

It will be possible to watch and/or listen to the event live online via a webcast. I attach the announcement here:

Russian Energy Policy and the New Russian State

POLICY FORUM
Monday, November 20, 2006
12:00 PM (Luncheon to Follow)

Featuring Robert Amsterdam, Attorney for Mikhail Khodorkovsky; and Andrei Illarionov, Former Economic Adviser to President Putin and Senior Fellow, Center for Global Liberty and Prosperity, Cato Institute.

The Cato Institute
1000 Massachusetts Avenue, NW
Washington, DC 20001

tv Watch the Event Live in RealVideo
Listen to the Event in RealAudio (Audio Only)

Russian energy policy is reflecting a change in the conduct of the Kremlin's domestic and foreign affairs. Robert Amsterdam, a partner at Amsterdam and Peroff, will explain how the treatment of private energy companies in Russia is part of a broader pattern of political centralization and will describe what he believes are the global goals of Russia's more aggressive, energy-driven foreign policy. Andrei Illarionov, the newest senior fellow at the Cato Institute, will describe the accelerated pace of change in Russia and new ways in which political, economic and civil liberties are being eliminated.

Cato events, unless otherwise noted, are free of charge. To register for this event, please fill out the form below and click submit or email events@cato.org, fax (202) 371-0841, or call (202) 789-5229 by 12:00 noon, Friday, November 17, 2006. Please arrive early. Seating is limited and not guaranteed. News media inquiries only (no registrations), please call (202) 789-5200.

If you can't make it to the Cato Institute, watch this forum live online.

Some assorted photos from President George W. Bush's visit with President Vladimir Putin today.

From the New York Times:

When Bush and his wife, Laura, landed, they were greeted on a red carpet on the tarmac by Putin and his wife, Lyudmila. The Russian president presented Mrs. Bush with a bouquet of yellow, orange and red flowers and the foursome exchanged kisses.

Inside the marble-floored Vnukovo Airport terminal, the two couples took seats in ornate armchairs for photographers, a table nearby laid with lunch. The Bushes presented their hosts with a gift of a jumbo photograph of the four of them in one of the golf-cart sized electric cars that the Russians made available to leaders attending the Group of Eight summit Putin hosted in St. Petersburg in June.

The brief gathering was billed by White House advisers as not much more than a greeting between friends while Bush accepted the Russian generosity of allowing Air Force One to refuel in Moscow halfway through the 19-hour flight to Singapore. But the rarity of a president flying east to Asia, rather than west, no doubt reflected that the Washington-Moscow relationship needs a little extra care lately.

On Monday night, the FT broke a big story citing a report from NATO economists warning against the threat of a possible Russia-led "OPEC for gas" which would further leverage Kremlin influence in Europe.

The report, which was delivered to NATO's 26 member states, was vigorously denied by Russia. According to the FT:

On Monday night, Dmitry Peskov, deputy Kremlin spokesman, insisted there was “no substance at all” to the suggestion that Russia was seeking a gas cartel. “I think the authors of such an idea simply fail to understand our thesis about energy security,” he said.

“Our main thesis is interdependence of producers and consumers. Only a madman could think that Russia would start to blackmail Europe using gas, because we depend to the same extent on European customers.”

Frankly, this incredulous posturing by Peskov should come as no surprise. This is, after all, the man who brushed aside the shock and outrage following Putin's astonishingly crass rape jokes, attributing it all to some nuance of humor lost in translation.

The fact is that Russia's claim to subscribe to a thesis of "interdependence of producers and consumers" is simply not backed by their actions.

Take, for example, the swap agreement reached this past summer between Gazprom and Algeria's Sonatrach, which consolidates 69% of Italy's natural gas supply under the control of one distributor. In a pleading letter to the European Energy Commissioner, Italian Industry Minister Pierluigi Bersani diplomatically pointed out that this agreement could “eventually lead to economic pressures on European gas prices;” which was another way of warning that Italy is about to submit itself to the whims of a foreign oligopoly.

Paolo Scaroni, CEO of the Italian energy group ENI, echoed these concerns in an address to the European Parliament last April, when he said that an alliance of the top three or four gas exporters would be more effective than Opec. Despite these words, Scaroni just today signed an energy deal with Gazprom, which will make ENI Gazprom's No.1 client in the world.

The fact that Gazprom signed a swap agreement with Sonatrach is in itself not surprising or shocking, but it is rather the non-transparent manner in which they structured the deal that raises so many concerns among NATO members. Also, this deal was closed just five months after an opaque $7.5 billion arms deal between Russia and Algeria, despite the fact that Algeria still owes Russia $4.7 billion from past arms deals. How can Algeria pay for these arms?

Defense Industry Daily speculates that Russia extracted major concessions in the energy realm:

Enter Russia's energy sector, in the persons of LUKoil CEO Vagit Alekperov, Gazprom chief Alexei Miller, and Igor Makarov of independent gas producer Itera. UPI believes the final arrangement is that Algeria will give gives Russian companies access to oil- and gas-rich regions, with the proceeds split between the producer and the Algerian government. The Algerian government is then bound to immediately transfer the revenues to Russian arms manufacturers, until such time as the debt is paid off.

Meanwhile, OPEC member Algeria develops more of her energy reserves, and the projects create local employment in the bargain. Indeed, the St. Petersburg Times reports that an $80 billion, 5-year program is underway aimed at boosting growth and drawing more investments to Algeria as it recovers from an extremely bloody civil war. That war against the Wahhabist/Salafist al-Qaeda affiliate GSPC and other Islamist terrorist groups has lasted over a decade and is still ongoing, but government successes over the last few years have sharply reduced the size of the threat.

The Morocco Times notes that Algeria has the world's seventh-largest natural gas reserves with 4.55 trillion cubic meters, and is the world's fourth-biggest gas exporter after Russia, Canada and Norway at 60 billion cubic meters per year. Russia, meanwhile, is the number one gas exporter to Europe, with about 26% of the market. By coordinating its export policies with number three exporter Algeria (about 10% of the European market), Russia may be able to increase its leverage within Europe, complicate the EU's efforts to diversify its sources of supply, and leverage that improved position into greater participation in and influence over Europe's pipeline projects.

For many months, commentators have been warning about the coming reality of the gas cartel, and urging a stronger government response to ensure healthy market competition in the sector. Nevertheless, many in the media still don't seem to get the urgency of what's at stake, and are prone to take Peskov's arguments at face value (the FT itself did a rush article to accompany the NATO story explaining the obstacles to the gas cartel).

However there are many other theatres in which the possibilities of this "OPEC for gas" is playing out, including Iran, Eastern Europe, the former satellites, the Shtokman Field, and China, which I will address in the next installments in this series.

Asia Times: A thorough survey of Russia's LNG opportunities
AP: TNK-BP Denies Government Pressure
TREND: Russia's Stake in Iran Pipeline to be Evaluated
RIA Novostia: Mikhail Saakashvili Won't Accept New Russian Gas Prices
Deutsche Welle: Warsaw Makes Its Voice Heard in EU-Russia Talks
Reuters: Arkady Dvorkovich Complains that Sakhalin Hasn't Boosted Russian Economy
Reuters: Environmental Watchdog Oleg Mitvol Says Sakhalin Is Just a Start, and Consults International Lawyers in Regards to Suing Shell in International Courts
People's Daily Online: China National Petroleum Sets Up Joint Venture with Rosneft
Independent: Human Rights Watch Report on Chechnya Goes to UN Committee on Torture
MOSNEWS: Vladimir Putin Boasts About WTO Concessions

Today the Wall Street Journal is reporting that a proposed pipeline between Bulgaria and Greece has taken a big step forward, which is designed to overcome the transportation bottlenecks at the Turkish-controlled Bosporus Strait - the main connection between the Black Sea and the Aegean Sea. The proposed pipeline, which would mainly benefit Russian and Kazakh oil exporters, would connect Burgas, Bulgaria with the port of Alexandroupolis in Greece.

The Journal reports:

In the past several years, there have been other attempts to circumvent the Bosporus -- most notably the $3.6 billion, 1,000-mile Baku-Tbilisi-Ceyhan pipeline that delivers oil from Azerbaijan directly to the Mediterranean. Likewise, there is no shortage of alternative proposals for pipelines that cross the Balkans or link the north coast of Turkey with the south.

Some analysts doubt that the Burgas-Alexandroupolis pipeline makes economic sense for the companies involved, leading to suggestions that Russia is pursuing the project to avoid sending the oil through Turkey. Though trade and commercial relations between Russia and Turkey have improved, historically the two countries have had an antagonistic relationship.

"Russia's real goal for the Burgas-Alexandroupolis pipeline is to find a route past Turkey," said Konstantinos Filis, head of the Center for Russia and Eurasia at the Institute of International Relations in Athens. Adds Julian Lee, senior energy analyst at the Center for Global Energy Studies in London, "The commercial arguments for building the pipeline are much more tenuous than the political arguments."

Roughly one-quarter of Russia's five million barrels a day of oil exports pass through the Turkish-controlled strait. Semyon Vaynshtok, chief executive of Russian state pipeline company OAO Transneft, a member of a consortium of Russian companies involved in the pipeline, said yesterday that it has sent to Greece and Bulgaria on behalf of the Russian government a draft agreement governing the pipeline. Russian officials privately acknowledge a desire to break Turkey's power over negotiating transit through the strait.

As a follow up to my previous post, I just came across Kim Zigfeld's (La Russophobe) entry on Publius Pundit from a couple of days ago in regards to the midterm elections and U.S.-Russia relations. Kim makes three very important points: 1) while the new Democratic majority may prove to be less than revolutionary, the change in House balance does "free up" some Republicans who may have previously been unable to pursue foreign policy positions on Russia; 2) the U.S.-Russia relation during the Bush administration was characterized by the Kremlin's ability to convince Washington that anti-terror cooperation could be only had in exchange for American tolerance of Russian autocracy; and 3) that many Americans fail to recognize that the siloviki (ex-KGB and security officials) currently in control of the Kremlin are still very much immersed in an institutional paranoia of the United States as enemy, that there are not likely to adopt pro-American policies on their own.

Following the Democrats’ sweep to victory in the midterm elections, various blogs and columnists have offered their two cents on how the new Democratic majority in the House and Senate would impact U.S.-Russian relations. Unfortunately, like many strictly partisan discussions of foreign policy, some of these commentators are missing the point entirely.

For example, some on the right have taken the rather reactionary viewpoint that Democratic control of Congress will result in a “tougher” orientation toward Russia, and that these hardliners shouldn’t make an unnecessary enemy out of Russia.

These apologists mimic the talking points of the Kremlin, such as those of Boris Gryzlov, speaker of Russia's lower house of parliament, who told the Washington Post that “there are fears that the Democrats are more prone to apply double standards in human rights." In a similar vein, Aleksandr Golts of Yezhednevny zhurnal, told Radio Free Europe the following:

The key posts in Congress are now occupied by people who all these years have retained a consistent anti-Putin stance. Congressman Lantos has consistently said that Russia in its current conditions has no place in the G8 [Group of Eight leading industrialized countries], and has again and again denounced human rights violations in Russia. Being the head of the International Relations Committee will enable him not only to gain a larger audience for such declarations, but also to take concrete action. And considering that Russian leaders interpret any critique as some kind of global conspiracy to humiliate Russia and prevent it from getting back on its feet, I think that relations between our countries will continue to deteriorate.

It is interesting that the apologists don’t make any mention of the strong statements made by Sen. John McCain in regards to Russia, or recall the blunt terms used by Dick Cheney in Latvia, or Dr. Condoleezza Rice’s distinguished career in regards to Russia policy. Taking a critical stance toward Russia is not a red/blue issue – it’s common sense. The principal problem with the arguments of Gryzlov, Golts, and the apologists is that they believe that criticism of Putin’s policies is somehow incompatible with the building of a constructive partnership.

I wholeheartedly disagree, and I believe that a healthy defense of human rights, international law, democracy, and justice is the cornerstone of a positive relationship with Russia, and that anyone who suggests that the U.S. needs to show more tolerance of Russian authoritarianism is no friend of the Russian people.

Living in Europe over the last number of years, I have come to understand that it is the nature of apologists, whatever their stripe, to attempt to place economics over principals, and what they perceive to be expedience over the reality of national interests. Frankly, one thing these apologists have in common is ignorance of the state of affairs in Russia.

Beyond Democrat vs. Republican, and much more important that who will chair the House Foreign Relations Committee, the U.S.-Russia relationship is not something that fits neatly into partisan categories, but rather is in many ways definitive of the bi-partisan national interest in a sound foreign policy, especially in regards to the current situations in Iran and North Korea.

I need it explained to me how the United States needs Russian help on Iran, when it is the Russians who benefit by the present stalemate and uncertainty over the nuclear situation. The Russians are in fact the key beneficiaries, both as technological suppliers to Iran in the nuclear area, and as the #1 competitor in respect to the development of Iranian natural gas, which represents the one possible answer to Europe’s increasing energy dependence on Russia.

It can be fairly argued that the United States has the most to gain from opening up a dialogue with Iran, rather than cozying up to a Moscow which is doing its best to isolate Iran to preserve energy hegemony over Europe at the expense of a possible nuclear crisis in the Mideast.

Furthermore, the Kremlin and its apologists have done an amazing job of convincing Washington that their participation and cooperation in solving problems with Iran and North Korea is something that must be bargained for. When the apologists argue that Washington should overlook abuses of human rights, shrinking democratic freedoms, and the hubris of energy imperialism because it “needs” Russia’s cooperation, they need to remember that Moscow has its own interests in working with the West. As they share a border with Iran, and are well within range of North Korean arms, they are the ones who would absorb tremendous risk with a region-wide Shia revival or a nuclear conflagration in the East. This pandering by apologists makes little geopolitical sense, and comes at the cost of intelligent analysis and definition of both European and American national interest.

This realpolitik, however, misses the boat entirely in failing to address the substantial US interest in enforcing rule of law and compliance with international treaties with respect to the Russians. If American and other foreign businesses are to survive in Russia in the medium term, a strong US position on the escalating danger of the classic cocktail of corruption, lack of transparency, and departure from the rule of law, is what needs to be addressed.

These issues, and the difficulty that Europe has had in facing them, is exactly what both Democrats and Republicans need to agree on for the national interest. Contrary to what the scaremongers may say, Democratic control of the House is not going to “prevent” Russian ascension to the WTO (as already demonstrated), but will rather provide the most important forum in which the two countries can address these concerns.

We need to immediately stop buying into this paranoid myth which seeks to equate reform with failure. When we ask Russia to change, we do so because we want her to succeed.

Today the FT is reporting on the continuing persecution of TNK-BP by the Kremlin. The reporter notes that "The attack on TNK-BP - a 50:50 joint-venture - is indicative of growing intolerance of foreign companies playing an equal or majority role in developing Russian energy resources."

It is interesting that this development comes on the same day that TNK-BP announces the settlement of a $1.4 billion back-tax bill.

EUROPE: Russia moves against Rospan oil executive
By Arkady Ostrovsky in Moscow
Russian prosecutors have opened a criminal case against a senior executive of Rospan, a subsidiary of TNK-BP, the Anglo-Russian oil venture, in the latest move against foreign oil companies.

The case comes two days after the prosecutors asked the government to revoke Rospan's main licence to large gas fields in western Siberia. The prosecutors did not name the executive, but claimed the company violated environmental and licensing agreements.

Yuri Trutnev, Russia's minister for natural resources has recently threatened to revoke the company's licence in Kovykta, one of the largest gas fields in eastern Siberia.

BP is not the only foreign company to have come under pressure from Russian authorities in recent months. Royal Dutch Shell which leads the $20bn Sakhalin 2 oil and gas project and Exxon Mobil, the main operator in the Sakhalin 1 project, have come under fire from Russian environmental agencies in what is seen as a politicised attack.

Analysts say the pressure on TNK-BP is designed to force its Russian shareholders to sell their shares cheaply to Gazprom, the state-controlled gas giant, and to ensure that BP agrees to scrap a clause that prevents Russian shareholders from selling out before 2007.

The attack on TNK-BP - a 50:50 joint-venture - is indicative of growing intolerance of foreign companies playing an equal or majority role in developing Russian energy resources. Rospan, once controlled by Yukos, is TNK-BP's second biggest gas project, after Kovykta.

Gas production by independent companies is crucial to Russia's ability to satisfy growing domestic demand and to bolster Gazprom's stagnant production.

IHT: Georgian premier accuses Russia of 'political blackmail' by hiking gas price
Zaman: Armenia Surrenders to Russia
RIA: Energy Dialogue as Seen by Cartels
Times: Gazprom Pipeline Deal Points to Alliance with Iran
Kyiv Post: Armenia says its price of $110 for Russian gas will remain fixed until end of 2008
EurasiaNet: Russia Tightens Control over Armenian Energy Sector
Oneworld: Armenian Energy Dependence on Russia
ISN: Armenia Balancing Between Russia and Georgia
Asia Times: Russia Plays a Double Game over Iran
EDM: Russia Cements Control of Armenia's Energy System

EDM: GAZPROM’S "PURE COMMERCE" IN GEORGIA

Georgian President Mikheil Saakashvili told an international conference in France on November 3 that Moscow’s extortionate price hike to Georgia and overall political use of energy is a “bad precedent for everyone. Energy should not become a political tool” (AP, November 3). On the same day, however, U.S. State Department spokesman Sean McCormack told the media, “We believe that market forces should determine the price levels. So Georgia and Gazprom are going to work out a price. Our general take on this is that Russia should be a good partner for its clients [sic] and a reliable supplier of energy.” The statement inadvertently implied that Russia and Georgia are negotiating as equivalent actors in normal market circumstances -- an implication all the more disconcerting as the spokesman had sought official guidance before giving this answer to a press query from the previous day (state.gov, November 3).

There is an interesting article posted today at Eurasian Home, making the argument that the EU has not done enough to foster healthy competition between Russia and Iran in the gas sector. The recent news from Armenia has generated a lot of discussion on the Moscow-Tehran relation, and I hope to put in some thoughts later today on the issue.

Iran should resist an energy alliance with Russia, the EU should argue, because Russia will always be in the driving seat. Gazprom only ever takes a controlling stake in projects, and it will involve itself in Iranian projects precisely with the object of protecting itself from Iranian competition and stymieing the development of Iran’s gas resources. If Iran wants to develop its resources quickly, it should look to a more efficient and technologically developed partner, such as Total, OMV or Statoil. Western banks can bring far more capital to support Iranian energy projects than Russian banks ever could.

But we are not seeing this energy alliance with Iran happen. Instead, we are seeing the EU once again outmanoeuvred by Gazprom, because Gazprom thinks two moves ahead, and the EU merely reacts, usually with panic and indignation.

This weekend, Gazprom bought a controlling stake in its joint venture with Armenia, ArmRosGas, which controls Armenia’s domestic gas distribution network and a soon-to-be-completed gas pipeline with Iran. That pipeline could have helped free both Armenia and Georgia from dependence on Russian gas, and also have been a conduit for Iranian gas into western Europe. But the Armenians, unwooed by the EU, sold the controlling stake to their Russian masters for $119 million.

The same week that this deal was being signed in Moscow with Armenia’s president, the petroleum minister of India, Murli Deorla, was also in town. He announced yesterday that India had agreed to let Gazprom join a planned pipeline from Iran to India and Pakistan. He said: “Russia will join the Iran pipeline. I spoke to Pakistan minister for petroleum and natural resources Amanullah Khan Jadoon (on Russian participation) on Tuesday and will be speaking to the Iranian minister later”.

So on the two most important new projects bringing Iranian gas to the outside world, Gazprom is involved, and possibly even in control. A good weekend’s work, fellows.

These appear to be the first decisive steps in a Kremlin initiative to forge an energy alliance with Iran. Also last week, Valery Yazev, head of the Duma energy committee and Gazprom’s top lobbyist in the Duma, called for the creation of a gas cartel involving CIS countries, and including Iran, to counter the ‘cartel’ of European consumers. The plan was prompted, he said, by the refusal of France and Germany to be played off against the rest of Europe by president Putin, who offered Germany the chance to be a hub for Russian supplies to the rest of Europe when he visited Germany in September. Merkel refused, sensible lady.

Alexander Medvedev, deputy chairman of Gazprom, yesterday told me that he viewed participation with Iran as “very profitable. We hope to use the joint venture to become involved in extraction and development [of Iranian gas], and possibly help supply gas through the joint venture to Western Europe, as well as Pakistan and India”.

We have finally fixed the problems we were experiencing with comments! Please, by all means, fire away.

The Financial Times is running a column by Arkady Ostrovsky about the coming supply crunch of Russian natural gas. According to UBS, if demand for gas grows by just 0.3% over the next year, "the risk of supply crisis is real."

Some important excerpts:

The shortage has international implications, too. It means Gazprom will not be able to increase gas supplies to Europe, at least in the short term - something that European countries are increasingly aware of and concerned about.

It also means that, in spite of president Vladimir Putin's promise to build a pipeline from western Siberia to China, Russia may struggle to fill it. This may explain Gazprom's decision to abandon its long-nurtured plan to send gas from Shtokman field in the Barents sea to the US market as liquefied natural gas, diverting it to Europe instead. The decision, initially interpreted as a poke at the US, may instead have been a sign of desperation: sending Shtokman gas to Europe would free up Siberian output for domestic consumption.

Analysts say the problem is not the lack of gas - Russia has 16 per cent of the world's total reserves - but rather Gazprom's investment strategy. Over the past few years the company has spent vigorously on anything but developing its reserves. It has built a pipeline to Turkey, taken over an oil company, invested in UES and tried to gain a foothold in European distribution markets. All this was in the name of creating a national energy champion. But investment in Gazprom's core activity was inadequate.
...
Vladimir Milov, head of the Institute for Energy Policy and one of Gazprom's opponents, argues that the only way of avoiding crisis is to break Gazprom's monopoly on pipeline infrastructure and to license independent gas producers.

"Gazprom was given enormous privileges in exchange for providing the country with gas at regulated prices. If it wants to behave as a commercial company, it should not be a monopoly," Mr Milov says.

Independent producers, including oil companies, already account for 20 per cent of domestic gas sales in Russia and could rack up their output. But this would require incentives.

"If we can ensure independent regulation of the pipeline by the state, we'll have plenty of gas," says Mr Gref. Gazprom's monopoly over the pipeline infrastructure means that independent gas producers are forced to sell gas on Gazprom's terms or not at all. They are not allowed to export gas and often cannot even reach their domestic customers.

Loosening Gazprom's grip over the pipelines and introducing an independent regulator would be the first step towards splitting it into a pipeline operator and a production company - something that Mr Putin has vehemently ruled out in the past.

He now faces the choice between domestic gas shortages that threaten to slow economic growth and preserving the Kremlin's sacred cow.

This post is somewhat belated, but please check out Evgeny Morosov's new blog, Global Berlin. Evgeny attended my speech in Berlin this week and did a very kind write up and posted a podcast of the interview. He also posted a recording of the speech here and here. Thanks, Evgeny!

Sergei Blagov at EDM has posted a very interesting article on Gazprom's interests in the Far East.

One excerpt:

Gazprom and the China National Petroleum Corp, the parent company of PetroChina, signed a memorandum on gas supplies during President Vladimir Putin's March visit to China. On October 18, Gazprom CEO Alexei Miller and China National Petroleum Corporation President Chen Geng discussed the main conditions for supplies of Russian gas to China through pipelines running from western and eastern Siberia, according to a Gazprom press statement.

South Korea has generally been considered off-limits to Gazprom because a gas pipeline through North Korea remains impossible. However, on October 17 Gazprom said that it was still considering plans to start supplying South Korea with natural gas in 2012 or 2013 as part of its broader plan to build Russia's first pipeline to Asia. Gazprom said the idea had been discussed at a meeting between Miller and executives of Korea Gas, a South Korean state-controlled energy company. A Gazprom statement quoted Miller as saying that Gazprom was considering supplying South Korea with 10 bcm of gas a year. Miller also said Gazprom was considering building both an onshore and an offshore pipeline to South Korea, implying that natural gas could come not only via China but also from Sakhalin.

In the meantime, despite official claims otherwise, Gazprom may eventually join the Sakhalin-2 project. On October 16, Japan's Mitsui and Mitsubishi reportedly voiced support for Gazprom's possible participation in Sakhalin-2, according to Russian media reports. Former prime minister Sergei Stepashin, now head of the Russian Audit Chamber, said that Russian companies, notably Gazprom, could join the Sakhalin-2 project. He argued that such involvement would guarantee that the contract would be fulfilled on time (Ren TV, October 25).

There is a startling incongruity between investment attitudes within and outside of Russia.

Major Western banks such as ABN AMRO, Citigroup, JP Morgan, and Morgan Stanley are as bullish as can be in regards to Russia, and are pushing their investors heavily into equities. This Western confidence in Russia is underscored by yesterday's announcement to back a loan of $24.5 billion to Rosneft - the largest loan in history to a Russian company, and the fourth largest in Europe - to help it continue its piecemeal plundering of what was once the Yukos oil company.

This positive Western attitude is also reflected in the strong appetite for two new IPOs of Russian firms: the pipeline manufacturer OAO TMK and the electricity generator OAO OGK-5.

The bull fever is also spreading to the commercial real estate sector. David Brush, managing director and head of RREEF Real Estate Opportunity Funds and RREEF in Europe, told the Wall Street Journal the following:

In Russia, we are currently developing apartments in central St. Petersburg, in partnership with Russian residential developer RBI Holdings. We are likely to invest around $500 million over the next two to three years. Russia can offer returns that are several percentage points higher than in many Western European countries.

However, this enthusiasm to take on Russian risk is incongruous with the bearish behavior of many Russian firms, which seem to be hedging their bets on future instability in Russia and displaying their unease with the upcoming elections.

One of the most high profile of these firms is Sistema, which is seeking a large stake in Deutsche Telekom in exchange for control over MTS - Russia's largest mobile phone operator.

The Financial Times writes:

The Moscow-based conglomerate has long been associated with the city mayor, Yuri Luzhkov, a close friend of Mr Yevtushenkov. But with Mr Luzhkov's term as mayor expiring in December 2007, analysts speculated the looming retirement of his main political patron might be prompting the Sistema chairman to look for along-term investment haven.

Uralsib, a Moscow brokerage, said a DT deal "would reduce political risks, which are becoming a concern, especially with the Moscow mayoral election approaching".

This Russian eagerness to sell their own risk and move their money outside of the country is widespread, demonstrated by other major deals such as Severstal's failed move on Arcelor, the Vneshtorgbank stake in EADS, and the move of record numbers of IPOs to New York and London.

While it is not yet clear what these reverse flows mean for the future of the Russian economy, we should all pay very close attention to these kinds of incongruities. There is a long history of opacity and misinformation in Russia, in regards to both macroeconomic data and production figures from the energy industry - the main engine of growth. Combine this with the demonstrated inability of banks such as ABN AMRO and DKW to clearly communicate political risk to their shareholders, and you have a potentially dangerous situation.

I have argued that the Russian legal system is the greatest non-tariff barrier to trade ever invented. Getting it right would be worth 10 WTO successions; failing to address it allows for the growth in opacity and the inability of Westerners and Easterners to agree on what constitutes a buy or sell signal. Let's keep our eyes on this canary in the mine.

Today Vladimir Socor at EDM has a great article posted on Moscow's threats to quadruple the price of gas to Belarus in order to pressure the Lukashenka administration into selling off half of Beltransgas. While the two governments disagree over the true value of Beltransgas, a very familiar face has stepped into the fold to evaluate the firm: ABN AMRO.

Socor writes:

These Russian measures are not only economically motivated, but also designed to goad Belarus into yielding sovereignty and forming a “union state” with Russia under the threat of losing control over national assets. This is how Lukashenka and some of his closest confidants, such as Mikalay Charhinets, chairman of a parliamentary committee on foreign affairs and national security, interpret Moscow’s latest moves regarding oil and gas. According to Charhinets, these moves “amount in practice to a Russian economic war on Belarus….The Russian side is being inconsistent in its approach to forming a union state. Previously they were asking us to resolve the political issues [regarding the union state], but now we hear from the Russian president’s mouth that economic integration has priority….The Russian leadership’s position means that Belarus must consider other options to preserve its sovereignty and economic security.” Charhinets went so far as to warn that Belarus could question the continuing presence of Russian military installations in Belarus (Interfax, October 25).

In a similar vein, an irate Lukashenka told a visiting Russian regional governor that Minsk “categorically opposes the tearing up of union relations and union agreements” -- that is, the switch of Moscow’s priorities toward economic integration of Belarus with Russia. “Well, we don’t want to sell certain state assets,” he confirmed, alluding to the oil refineries. And, “Why is Russia building up a [customs] border with Belarus? In that case we can also start building up a customs border” (Interfax, October 31).

Socor's analysis comes on the same day that it is further announced that Moscow intends to double gas prices to Georgia.

The Guardian reports the following:

In an interview with the Guardian and other western media Mr Bezhuashvili said Russia would need to explain why such a large increase was needed. "They present this as a commercial deal but there is a big portion of politics inside the price," he said.

Moscow has consistently denied the increases are political, saying prices are only being brought in to line with those on the European market. However, Ukraine and Georgia appear to have been singled out for large hikes because of their leaderships' desire to join Nato and the EU.