March 2007 Archives

New Kids on the Block

By Tom Nicholls

Africa is becoming a strategic battleground for energy resources, with Asian state-owned companies challenging the traditionally dominant Western majors

IT’S OFFICIAL: Asian investment in Africa has reached record levels. It set a 12-month high of $90 billion last year, according to a United Nations report. Not surprisingly, that investment was concentrated in the energy sector, with Chinese and Indian companies fighting it out to secure oil supplies for their high-demand, energy-deficient home markets. And UN officials have predicted continued strong growth in the flow of capital from Asia to Africa.

China's President Hu Jintao and outgoing Nigerian President Olusegun Obasanjo last year in Abuja. They seem to get on

Spearheading the investment wave is China. Equity ownership of foreign energy resources has become Beijing’s preferred method for securing supplies for its booming domestic market. Steady oil and gas supplies mean continued economic growth, the creation of jobs of wealth and – in turn – social stability. The political value of all that to Beijing means that Chinese companies are generally prepared to pay more for oil and gas assets than Western companies, which are focused on financial, not strategic, returns.

Nigerian licensing round

A forthcoming licensing in Nigeria is likely to reflect the gradual transfer of influence from West to East. Asian companies are expected to bid hard for oil and gas assets. The timing and contents of this licensing round keep changing. However, the latest indications are that around 30 onshore and offshore oil and gas blocks – significantly down on the originally planned 65 – will be up for grabs. Winners will probably be announced after April’s general election.

Chinese and Indian companies, in particular, are expected to emerge triumphant – certainly if recent experience is anything to go by. In May 2006, 15 blocks were awarded in a so-called mini bid round – a scaled-down version of the full-scale round planned for this year. In that round, the government linked the right to develop upstream projects with commitments to invest in domestic infrastructure. Indian and Chinese energy companies were the most successful participants, with China National Petroleum Corporation (CNPC) picking up four licences, for instance. The quid pro quo involves spending $4 billion on local infrastructure – revamping a refinery, building a hydropower plant and installing a fast-rail system from Abuja to Lagos.

It's not just about Nigeria

Asian influence is not, of course, restricted to Nigeria. Earlier this year, EnCana sold its Chad exploration assets to CNPC for around $200 million. As in deals that Chinese companies have secured elsewhere in Africa, the path of that transaction looks to have been smoothed by diplomatic manoeuvring. It was sealed shortly after a visit by Chinese foreign minister Li Zhaoxing to Chad. Until now, Chad’s oil developments have been run largely by ExxonMobil and Chevron. With expectations of significant Chinese investment in the country, that looks set to change.

Angola has also benefited from Asian investment. It is China’s largest single source of crude, shipping some 500,000 barrels a day to the country – roughly a quarter of its output. China’s state-owned energy companies are also benefiting from the political and diplomatic connections that have eased their way into oil and gas projects in other countries.

China is also big in Sudan, buying half of the country’s oil exports last year. Chinese companies are drilling in Niger. CNPC has investments in Mauritania and Algeria. India too is prepared to pay a strategic premium for assets. In last year’s mini licensing round in Nigeria, a grouping of India’s Oil and Natural Gas Corporation and Mittal Steel won licences for two blocks, paying signature bonuses of $50m and $75m; in exchange, they will spend $6 billion on a refinery, a power station and a railway.

Malaysia is in the picture too, through its highly influential state-owned oil company, Petronas. And South Korean companies are catching up. In November, South Korea signed a $10bn railway construction deal with the Nigerian government under an infrastructure-for-oil deal.
Western governments, which, just like Bejiing and New Delhi are concerned about energy-supply security, are watching with concern as Asian firms buy up African energy assets. And, in many cases, there is little that Western-based companies are able to do to defend what has traditionally been their patch because NOCs are not generally subject to the same investment rules. Yes, the Western majors still have a significant edge in terms of technology and expertise in managing big projects. And this makes them valuable partners, especially in complex offshore projects. But that advantage will be gradually eroded.

Joel Brenner

Joel Brenner, the head of the Office of the National Counterintelligence Executive, told the AP that he is concerned about Russia's dramatically increased espionage activity:

"The Russians are back at Cold War levels in their efforts against the United States," he said at an event held by the American Bar Association. "They are sending over an increasing and troubling number of intelligence agents."

Google Video is hosting an interesting 23-minute documentary film about Russia's media crackdown made by Journeyman Pictures, featuring compelling interviews with free speech leaders in Russia, as well as some terrific archival footage of Soviet-era propaganda films.

Unfortunately I can't embed the video on the blog, so just click here to view it.

Although the film dates to 2005, it displays a chilling prescience for what was to come in subsequent years. Fast forward the film to 14:56 to see an interview with Anna Politkovskaya, who says "I’ve written my will. I’m getting my children used to the idea that at any moment they might be left without me."

Today Politkovskaya was also awarded the World Press Freedom Award from UNESCO.

We pleased to offer this translation of a column written by Jens Hartmann in yesterday's edition of the German daily Die Welt.

By the Grace of Putin

By Jens Hartmann

Rosneft is one of the most powerful energy companies in the world. Its know-how comes from former competitor Yukos, which was broken up by the Kremlin and whose assets were plundered by Rosneft.

The Arctic Circle lies somewhere in the south. A herd of wild reindeer, frightened by the noise of the rotors on our Mi8 helicopter, toils through waist-deep snow. There isn’t a human settlement to be seen within a radius of 100 km – only whiteness adorned by stunted conifers. The Siberian river Yenisei, flows slowly through the terrain, pushing masses of water into the Arctic.

Oil in the Land of the Gulags

Banished by the tsar, Stalin served time in a camp here in eastern Siberia. He must have hated the area. So much so that he later had his victims construct a railroad here. It is called the “death line” or “Stalinka” and was built over corpses. With the dictator’s death in 1953, construction work was halted. Should the snow reveal the landscape for the short summer, one can find rails, watch towers and skeleton.

In all, 1,300 oil workers have started down the road to conquering this former empire of the Gulag. They are developing the Vankor oil field for the oil group Rosneft. Vankor is virgin territory. The 2.5 billion barrels in reserves discovered there so far (a barrel being 159 litres) are worth US$150 billion on the world market at today’s prices.

Yukos Reloaded

Russia’s oil company of the moment is Rosneft. While the industry showed a growth in production of only 2.2 percent last year, the state controlled company increased its output by 8.5 percent to 80.6 million tons of oil. This year, 90 million tons are to be pumped. Rosneft has greater oil reserves than ExxonMobil, BP, ChevronTexaco or Royal Dutch/Shell.

Rosneft is Yukos reloaded. The once modest state enterprise could but only distinguish itself after taking over the Yukos group, which was forced into ruin by state pressure.

The transition from private to state sector is – at least from the point of view of the Kremlin – a success story. Not least because Rosneft is sticking to the strategy begun by Yukos of buying western technology for the exploration and development of oil fields. For the industry as a whole, however, state intervention – which ranges from an extremely high taxation to encroachment on private property – is harmful.

The Supervision Principle

Mikhail Ivashatkin, 27, is one of the front-men involved in the Siberian project. The engineer from Rosneft subsidiary Vankorneft monitors subcontractors such as the U.S. companies Schlumberger and Halliburton, which are tapping these fields for Rosneft. “They don’t like to have people looking at their cards. I can understand. It’s about trade secrets," he says. He is “about 80 percent” satisfied with their performance.

Ivashatkin stands on one of the decrepit oil rig and watches the drill bit rotate. The Americans have driven the well down to 3,100 metres. 200 metres still remain. Theirs is an art which few in Russia master: They carry out horizontal drilling. First, they go deep, then the well takes a turn quasi. In this way, it is possible to exploit every nook and cranny of reservoirs containing oil. Vankor is a showcase project for the Russian oil industry. Thus, a large part of the 200 plus wells in Vankor are to be drilled horizontally. Some 60 percent of the wells are “smart wells”, which means: computer-aided sensors monitor the flow of oil.

East-West

Ivashatkin flies to Vankor from his hometown Kranoyarsk, which lies 1,300 km to the south. He works there for 30 days, sleeping in a tin container, before going home again for another 30 days. Those who are employed at Vankor belong to Russia’s better-paid workers. A well worker receives 80,000 roubles per month (€2,320). Last year, Ivashatkin experienced temperatures of minus 60 degrees Celsius. The minus 10 degrees and icy north wind which mark our visit are “like summer vacation camp”. Only at minus 44 degrees Celsius is work suspended.

Rosneft will invest US$6 billion in Vankor. Every screw must be flown in or, in winter, brought to Vankor over a steamrolled road. The first oil is due to flow in September 2008. From 2012 to 2016, Vankor, with an annual output of 22 million tons (which corresponds to about 4.5 percent of present Russian production), will have reached its peak. TNK-BP, Surgutneftegaz and Gazprom could also produce oil nearby. An enormous oil-producing area could come into existence around Vankor.

Since the end of the Soviet era, only a few new reserves have been developed in Russia. An Energy Information Administration analysis states that, by 2020, Russia must derive at least half of its oil from new oil fields in order to compensate for the phasing out of old fields.

The Cash Cow

Rosneft can afford this virgin territory project, because the state has granted tax exemptions for eastern Siberia, and because the group has a cash cow. Rosneft subsidiary Yuganskneftegaz produces oil in western Siberia, where the Ob river meanders towards the north, and where it is only marginally warmer than in Vankor.

In December 2004, a letterbox company purchased by auction a majority of shares in Yuganskneftegaz for around €7 billion. The letterbox company probably belonged to Rosneft. No oil company has been sold so cheaply since the wild 1990s. Yuganskneftegaz lay at the heart of the Yukos empire.

Today, under state trusteeship, it accounts for more than two-thirds of Rosneft’s output. That’s not all though: Yuganskneftegaz also brought the new owner a borrower's note against Yukos in the amount of 263 billion roubles (€7.6 billion). That comes in handy in the Yukos bankruptcy.

Old Colours, New Owner

In Nefteyugansk, the capital of Yuganskneftegaz, little has changed since the changing of the guards from the private to state sector. Even the Yukos colours of yellow and green are still to be found on some walls and on one oil worker’s overalls. Those who once received their wages from Khodorkovsky now receive them from Rosneft’s main office, which is located just across from the Kremlin. Sergei Kudryashov, previously general director at Yuganskneftegaz, has made his way into Rosneft headquarters, a stately property from the 19th century. Kudryashov, vice president for production, is the highest-ranking former Yukos man there.

The Rosneft research centre is led by Mars Khasanov, who held the same job for Yukos. Not far from Moscow’s Gorky Park, Khasanov and his 90 co-workers – most of them used worked for Yukos – puzzle over how oil can be pumped from the ground more cheaply. If engineer Ivashatkin out in Vankor has problems with the angle of a well, he can call Khasanov four time zones to the west.

Sell Out

That Khodorkovsky built up an ingenuous petroleum group is demonstrated by the fact that oil companies from around the world are interested in those Yukos holdings which yet to be auctioned off. Five refineries, the two production companies Tomskneft and Samaraneftegaz, 193 companies in all, are up for sell. Assets worth US$26 billion are at stake, according to the bankruptcy trustee. Rosneft has by way of precaution borrowed US$22 billion, in order to have a financial cushion thick enough for acquisitions. One competitor for these assets should be Gazprom, the world’s largest natural gas monopoly.

Today, Rosneft has a Kremlin lobby comparable to that of Gazprom. In any event, the head of Rosneft’s board of directors, Igor Sechin, who also serves as deputy chief of staff in the Kremlin, has been able to keep Gazprom from incorporating Rosneft. “With great probability, Rosneft will emerge as the initiator for a further consolidation of the industry. Rosneft is becoming the basis of a new state mega-group,” the Moscow business magazine Profil speculates. “Why Rosneft? That is the only chance it has to remain independent of Gazprom.” Rosneft must grow extremely quickly: “So quick that a monster such as Gazprom cannot swallow and digest the group.”

By means of a gigantic investment programme, Rosneft is to be made fit for the future. That is how the investment plan for 2007 foresees an increase in expenditures of 45 percent vis-à-vis the previous year to 174 Billion roubles (€5 billion). Rosneft has already accumulated commitments of around US$12 billion. With the aforementioned US$22 billion, the mountain of debt is becoming menacing.

Soviet Bureaucracy

Decision making in a state company takes incomparably longer than in a private economy. Rosneft managers confirm this. “The bureaucracy is more strongly pronounced. You are frequently busy with collecting signatures and papers,” says one person at the highest level Rosneft who was previously with Yukos. Intervention from the Kremlin regarding Rosneft’s strategic direction – for example, which partners it has to work with – interferes as well.

Thus, the private oil company Lukoil, comparable with Rosneft in terms of size, is clearly more profitable. The stock market is indifferent to this, however. For it, the “Kremlin factor" is decisive. Rosneft can get an okay from the Kremlin for acquisitions and licences more easily. Lukoil shows a market capitalisation of only US$71 billion, Rosneft US$89 billion.

After a phase of extensive growth, Rosneft must try to prove that a state giant can also manage efficiently. The example of Yuganskneftegaz has stirred hope. In any event, Vladimir Milov, president of the Institute for Energy Policy in Moscow and one of the leading opponents of Putin’s policy of nationalisation, sees in Yuganskneftegaz the “successful continuation of the former owner’s work”. He adds: “While the intervention of the state usually chokes any kind of growth, this is a pleasant exception.”

A glance at the stock market prospectus from last year makes clear that even the group’s top managers have their doubts about the economic rationale of their Kremlin masters. There, it is said: “The interests of the Russian government do not have to correspond with those of the other shareholders..., which can lead to Rosneft choosing practices which do not serve to maximize shareholder value.”

Garry Kasparov pens an article in today's WSJ titled "Putin's Gangster State.":

Putin's Gangster State

By GARRY KASPAROV

This month's flurry of auctions for pieces of the state-controlled Russian energy company Rosneft has attracted an impressive number of A-list banks and Western energy companies. Many reputable corporations seem happy to loot the corpse of Yukos, the dismembered parts of which are being sold and handed off, over and over until the last drops of blood are cleaned away.
[Kasparov]

That's a disappointment, but not a surprise. The surprise will come when the investors find out their Russian partners are cashing out as quickly as possible, ready to head for the hills -- or their mansions abroad -- in the face of rising political and economic uncertainty.

Anyone trying to make a fast buck investing in Russian President Vladimir Putin's police state should first practice our traditional triple kiss. That's one for kissing off moral principles, another for Mr. Putin's backside, and the last to kiss their money goodbye when a fresh government comes in and starts looking into all these dirty deals.

While the Kremlin's favorite oligarchs pack their suitcases (doubtless full of cash), the former head of Yukos, Mikhail Khodorkovsky, sits in prison for not bowing low enough in front of the Kremlin throne. Yukos was only the biggest and best-known example of what has become standard practice under the Putin regime. There is no dividing line between bureaucrats, gangsters and the police. Allegiance to the Kremlin is the only thing that matters.

The loyalty screws are being turned tighter, illustrating the administration's increasing instability and paranoia. In recent weeks, the Kremlin's political cleansing continued with the liquidation of the Republican Party led by Duma member and Kremlin critic Vladimir Ryzkhov. In a batch of recent political appointments, old cronies from St. Petersburg were called up in force -- for example Alexander Veshnyakov, one of the architects of our stage-managed election process, has been replaced. Vladimir Churov, who in his four years in the Duma never proposed a single piece of legislation and never once spoke in parliament, is now in charge of next year's presidential election. Mr. Churov was elected to the post on a competitive basis -- with one name on the ballot.

It would be easy to believe that Mr. Putin picked up the concept of "stay the course" when President Bush discarded it last year. Mr. Putin's course, in brief: Loot as much public and private money as possible and get it into the companies and personal accounts of those loyal to the Kremlin. Clean the looted assets abroad with IPO's, auctions and eagerly complicit Western investors. Crack down on any sign of public or political opposition, no matter how small, using overwhelming force. Invalidate or ban parties and groups opposing the Kremlin. Harass, beat and even jail their activists. Shape the election laws to strip away democratic rights and civil liberties. Create menacing new laws that allow the executive and its courts to define anything they like as "extremism." Maintain tight control of the media, especially television, and use it to promote the regime and its leaders while blaming "foreign-sponsored extremists" for all problems.

Western political leaders, pundits and investors are willing, even content, to accept this in the name of the cherished legend, "stability." But when 20,000 police are amassed in Nizhy Novgorod to smash an opposition rally, does that speak of stability? What about when the local government blocks access to a Russian pro-democracy opposition Web site?

The outdated Russian infrastructure is collapsing and it's taking the Kremlin's façade of stability down with it. The standard of living for a huge majority of Russians is declining steadily. The 20 million or so Russians lucky enough to live in Mr. Putin's dream world of energy riches and its ripples are all the West sees, or wants to see. The remaining 120 million are becoming poorer and more agitated by the day.

The uncertain battle over what will happen when Mr. Putin is supposed to step down from power in 2008 is the primary cause of the increasing shakiness of the administration. But it is not the only cause. The nationwide pyramid scheme that sucks the money out of the regions and funnels it to Moscow and St. Petersburg is running dry from the bottom up. There are countless bureaucrats who are now being squeezed, so they must squeeze harder themselves. The top is taking from the middle now, and before this year ends the elite will turn on each other. We can only hope that there is still some cash left for the next government to stabilize and rebuild. Any administration wanting to bring about genuine change will have to move a lot of debris first. In many cases the existing bureaucratic structures will have to be demolished and built again from scratch.

The missing link is that, due to the Kremlin's complete control of the media, few Russians make the connection between their problems and the current administration. The reforms of the 1990s, mainly associated with Yegor Gaidar and Anatoly Chubais, created in most Russians' minds a link between free markets, democracy, corruption and poverty. The Putin regime consistently exploits those fears. They say, "it's dirty and unfair, but this is democracy, this is capitalism. Look, here is your president welcomed as a peer by President Bush and the rest." The Kremlin wins on both ends. They profit from each transaction and then go on the news to blame these shady and rapacious dealings on the corrupt and imperialistic West.

The Kremlin's policy has its supporters outside of Russia as well. A recent editorial by Henry Kissinger called for "maximizing incentives" and "removing frictions to active cooperation" between the U.S. and Russia. If Ronald Reagan had had that mindset I would still be playing chess for the Soviet Union! Was President Reagan "removing frictions" when he told Gorbachev to "tear down this wall"? The lack of Western political will to stand up and acknowledge the true state of affairs in Russia only encourages Mr. Putin and his gang to push further.

The politicians are passive while the foreign business elite actively supplies the Kremlin with the confidence and ammunition -- literal and figurative -- to crush the democracy movement. Those who do business with this oppressive regime are putting themselves in the compromising position of supporting repression to protect their investments.

Opposition rallies will take place on April 14 in Moscow and the following day in St. Petersburg. The police state will again be out in a show of force, this much is certain. But will anyone be watching? Mr. Kissinger also referred to Russia's authoritarian government as "inherently transitory," and here I must agree. It is a transition to a dictatorship -- one that is forming right under the pinched noses, blind eyes and closed mouths of the West's political leadership.

Mr. Kasparov, former world chess champion, is a contributing editor at The Wall Street Journal and chairman of the United Civil Front of Russia.

A Theatrical Performance of Russian Justice

By the Polittechnologist

Many people were shocked by the Basmanny Court’s recent just ruling that investigative actions with Mikhail Khodorkovsky and Platon Lebedev should have been carried out anywhere but Chita, and continue to lose sleep over what it might portend. As well they should, because in my opinion, this ruling is the most frightening move yet in the whole saga of YUKOS and its managers and shareholders.

Why? Because this is the first signal of the joining together into a single whole of all the many criminal cases that have been fabricated with varying degrees of meticulousness.

Moscow is where we find Pichugin, and Alexanian, Pereverzin, and others. Bakhmina is sitting out her sentence in Mordovia. Dragging all of them all the way out to Chita is bad. And so it is that they’ve decided to make a gesture of sorts in the Basmanny Court. It seems the procuracy was wrong, so the place for conducing the investigation must be changed. And the small fact that the actual investigation has already been completed (in Chita) seems to be beside the point.

As a result, the court has actually played right into the procuracy’s hands – and not once, but twice. First, it tactically waited until the investigative actions ended, and second, it provided a lawful opportunity to continue the investigation, only now in aggregate with the other cases.

Just wait and see – a new strand, and a new case, are sure to appear in the very near future. And the seemingly lawful ruling by the Basmanny Court has in actuality paved the way for further lawlessness. Which could take place somewhere in Saransk or Tambov or wherever. But don’t delude yourself for one moment about that court ruling – because there is no justice in Russia. None. Period. What there is, is a political decision to destroy Khodorkovsky, and you are seeing it being carried out.

You well might ask why the procuracy has even bothered to protest the Basmanny ruling if this is so? No mystery here –they just happen to be huge fans of a peculiar genre of theatrical performance known as “playing at justice”.

Freedom's Zone has publised an interesting translation of an interview with Dr. Elaheh Kulai, who was formerly one of just 11 female MPs in Iran, on the state of relations between Iran and Russia. The interview was first published in the Iranian exile Persian newspaper Rooz.

Busheher Nuclear Power Plant project. Photo: AFP

Q: In other words you do not regard Russia as a friend of Iran?

A: I do not believe that any nation is our permanent friend, nor do I believe that any nation is our permanent enemy. The rule in international relations is that whatever is permanent for our country is whatever is really in their interest.

Therefore no nation, not Russia, not America, not Europe, not China nor any other nation can be our permanent friend, nor can they be our permanent enemy. Our permanent friend is our interests, which we must properly identify.

Likewise, we have no permanent enemies and in our relations with other nations our interests can juxtapose and interpenetrate.

Q: In your view, in evaluating relations between Russia and Iran over the last 100 years, were these relations mostly damaging or mostly beneficial to Iran?

A: In my view this issue should be seen from the Russian point of view. Whenever leaders in Iran acted correctly, relations with Russia benefited us. We must ask how to order our relations with Russia. Russia is a large neighbor at our northern borders by the Caspian Sea. We can have various ties with the Russian society, policy, culture and economy that are beneficial to us. One must not look at the issues as black and white or as all or nothing, but we must not lean on Russia or think that Russia will defend our interest.

Russia is a country like no other country in the world. It is essential and constructive for us to develop relations with Russia, and the usefulness of these relations is undeniable. However in my view it would be unrealistic for us to count on Russia in conditions of intensifying conflict with the West.

Complete interview here.

In other news, it seems that 48% of Germans think that America is more dangerous than Iran.

The new issue of the Washington Quarterly has numerous, long articles dedicated to Russia - there is high quality information in abundance here, worthy of examination and discussion. See below for some excerpts, I'll post a critique later on when time permits.

Dmitri Trenin: Russia Redefines Itself and Its Relations with the West

Power and property are inextricably linked in Russia itself, and Russian leaders, though primarily business oriented, are not oblivious to the political influence that comes with ownership or market dominance. They reason that economic dependencies lead to political dependencies, which result in privileges. The oil and gas business, they believe, is essentially political. For decades, Western oil companies were major political players in the Third World countries in which they operated. Since the 1973 oil boycott, decisions by the Organization of the Petroleum Exporting Countries have been essentially political. The Baku-Tbilisi-Ceyhan pipeline was a U.S.-driven political project, with the aim of bypassing Russia. Transit countries, such as Ukraine and Belarus, have used their critical geopolitics to win concessions from their Russian suppliers. The Russians thus make no apologies for being the principal purveyor of oil and gas to the Western markets. They see it as a strength that stands out among so many Russian weaknesses. They enjoy being an energy power. ...

With the U.S.-Russian economic anchor being essentially absent, political relations can and probably will become substantially worse. A crisis could arise over some provocation or miscalculation in Georgia or Ukraine, should the main Ukrainian factions resume their bitter internecine fight. A resumption of hostilities in Abkhazia or South Ossetia would draw Russia in, resulting in a Russian-Georgian military confrontation, with Tbilisi appealing to the United States and Europe for protection and support. A major political split within Ukraine could also put the territorial unity of the country in question, encouraging Russian irredentists to propose holding a referendum in overwhelmingly Russian-speaking Crimea. Russia is turning nationalist, with clear anti-U.S. overtones, while the U.S. public sees Russia in an increasingly negative light. The rhetoric of both countries’ 2008 presidential elections is likely to strain relations even further. During the U.S. campaign, Russia’s membership in the Group of Eight may become an issue; and in Russia, the United States can be cast as the one country that seeks to prevent the recovery and rise of Russia. If the legitimacy of the new Russian president is questioned, the damage could be truly severe.

Celeste A. Wallander: Russian Transimperialism and Its Implications

Moscow has used its importance in global energy markets to fracture the EU’s common trade policies; to limit its neighbors’ willingness to pursue political and security relations that Russia opposes (influencing Ukraine’s new reticence on NATO membership, for example); to lay the groundwork for multifaceted cooperation with a rising China; and to create leverage for Russia’s entry into the global economy as an investor and owner. Sometimes this has been quite obvious. In November 2006, Belarus and Russia faced off in a confrontation over the state-owned gas company Gazprom’s demand that it be allowed to buy 50 percent of Beltransgas or it would triple or even quadruple the price Belarus pays for Russian natural gas.In other cases, it has been subtler. Gazprom is joint owner with a company called Centragas Holding (the ownership of which remains a mystery) of RosUkrEnergo, a Swiss-registered company that serves as an intermediary for selling Russian and Central Asian gas to Europe. Instead of buying natural gas directly from Gazprom, Ukraine’s state energy company Naftogaz buys it at a negotiated price from RosUkrEnergo, leading corruption experts to believe that the company’s sole purpose is to generate and siphon rents in interstate energy deals.

The subtlety increases the further one gets from Russia’s post-Soviet borders. In western Europe, Gazprom created a subsidiary company with minority German ownership chaired by former German chancellor Gerhard Schroeder, conveniently not long after Schroeder as chancellor had approved the agreement to build the new Northern European Gas Pipeline. Gazprom is seeking to build a new pipeline to Germany that bypasses transit countries such as Ukraine and Belarus, an objective that many in Europe viewed with concern insofar as it would increase European dependence on Russian energy exports. By creating a subsidiary in which German political and business interests have a direct stake, Gazprom succeeded in persuading key players to go ahead with the deal.

Jeffrey Mankoff: Russia and the West: Taking the Longer View

If the twenty-first-century world is destined for multipolarity, the Russian elite is largely unanimous in believing Russia must be one of the poles. For all of the talk of cooperation with the West in the aftermath of the 2001 terrorist attacks, no one in Russia really believed that it would give up its identity as an autonomous actor in world affairs. The ongoing discussion of the concept of “sovereign democracy” to describe the Russian political system focuses to a great degree on this issue. A truly sovereign state, as defined in contemporary Russian political discourse, is one whose goals and methods, at home and abroad, are made solely on the basis of calculations of national interest rather than because of external pressure to conform to behavioral norms. Foreign Minister Sergei Lavrov underlined the importance of foreign policy autonomy in a September 2006 address: “I think that the rapid revival of Russia’s foreign policy autonomy is one of the issues [that] is complicating relations between us, since far from everyone in the [United States] has gotten used to this. But they must get used to it.”

Alexander Rahr: Germany and Russia: A Special Relationship

The Russia factor will continue to split the EU. The countries of the old West, such as Germany and France, will continue to pursue a constructive partnership toward Russia and will be reluctant to enlarge NATO and the EU further into the post-Soviet space. New EU and NATO members in central Europe, on the other hand, will likely continue to lobby for a new policy of containment against Russia. They will be supported by U.S. conservatives who have lost any hope of Russia’s democratization. Meanwhile, Germany will have to balance all these competing pressures during the forthcoming EU presidency. In all likelihood, Berlin will refrain from proclaiming a new EU ostpolitik but will strike a compromise between the Merkel and Steinmeier camps on the issue of Russia and the post-Soviet space.

Merkel will concentrate on building consensus on a common EU foreign and security policy within the EU member states and will cautiously avoid any indication of a German special relationship with Russia. She does not want to be accused of conducting a Russia policy over the heads of the central and eastern European countries. Meanwhile, Steinmeier will probably make several trips to countries of the post-Soviet space during the German EU presidency to initiate a broad dialogue with Russia, Ukraine, and other post-Soviet states on a pan-European energy foreign and security policy.

Committee for Support of Khodorkovsky Operating in Chita

By Grigory Pasko, journalist

Marina Savvateyeva is the chairperson of the Center for Support of Civic Initiatives of the city of Chita. She is also deputy chairperson of the Committee for Support of Mikhail Khodorkovsky. This committee was founded in 2005. The newspaper “Znay”, the news bulletin of the Trans-Baikal Civic Union, published an announcement on the founding of the committee in November 2005. It says, it part: “Mikhail Khodorkovsky became a prisoner of the Trans-Baikal colony IK-10 because he openly criticized today’s political regime… The power has always considered the Trans-Baikal region a land of imprisonment at hard labor and of deportation… The destinies of many of Russia’s best people, who became victims of political repressions, are closely connected with the history of the Trans-Baikal region – from the Decembrists to the victims of Stalinism… We are creating our public committee to express our support for the civic position of Mikhail Khodorkovsky, who became a victim of direct political pressure and the absence in our country of an independent judicial system…”

Photo of Marina Savvateyeva (L) and Tatiana Maltseva (R), members of the committee for support of M. Khodorkovsky, by Grigory Pasko

I met with Marina in Chita right after yet another court session at which the question of the supposedly unlawful participation by Marina and her committee colleagues in a picket in support of Khodorkovsky (right after the new charges had been filed against him on February 5 of this year) was being considered.

Marina Savvateyeva had lodged a complaint with the court, asking it to rule that the prohibition on conducting the picket had been illegal, and requesting the court to oblige the city administration to approve the conducting of a picket the following Saturday. The court has yet to adopt a final decision, apparently because it’s not that easy to rule that blatant lawlessness is legal: the city administration had no grounds whatsoever to prohibit the picket and arrest its participants.

Here is the latest answer to come from the city administration of Chita [in all its untarnished bureaucratic glory—Trans.]: “…To the point of your application on picketing I inform about the impossibility of conducting the given undertaking in the place and time announced by you in connection with information addressed to us that has been received about special measures being conducted on 5 March of the year 2007 by law enforcement organs with respect to persons suspected of and charged with the commission of crimes on the territory adjacent to the square named after V.I. Lenin”, signed, Deputy Mayor of Chita A.I. Glushchenko.

Photo of square named after Lenin in the center of Chita by Grigory Pasko

I can understand the desire of a bureaucrat to justify the unlawful actions of the law enforcement organs. But why does he need to violate the law himself in the process? Pursuant to Article 12 of the Law “On Operative-and-Detection Activities”, information about the organization and tactics of conducting operative-and-detection activities [roughly “police work” in Russian—Rough Trans.] is classified as a state secret. But Glushchenko’s letter indicates the kind of operative activity (“special”), its character (“with respect to [certain] persons”), its time (“5 March 2007”), and its place (“the square named after V.I. Lenin”).

Maybe this is why the court, having considered the arguments of the prosecution and of the defense of the picket participants, came to the conclusion that the trial needs to be postponed until better times.

Also postponed was consideration of the question about the participation in the picket of the former priest Father Sergiy, who was defrocked for his “calumnious” ties with Khodorkovsky: Sergey Mikhailovich Taratukhin had spoken with Mikhail Borisovich in the Krasnokamensk penal colony, which served to give rise to conflicts with the diocese.

Marina Savvateyeva told about the forms of the committee’s work. The work has gotten stronger in the past year. Oleg Kuznetsov, a scholar-anthropologist, who heads the committee for support of Khodorkovsky, conducted many meetings with journalists. The committee members have participated in pickets, met with inhabitants of the city and the Kray and clarified to them what Khodorkovsky was locked up for in actuality.

It is noteworthy that the makeup of the committee includes not only lawyers – Yevgeny Anisimov, Irina Zaborovskaya, Igor Linnik, Vitaly Cherkasov – but also entrepreneurs – Andrey Zhidkov, Alexander Luchankin.

Of course, the local power does everything to hinder the activities of the committee. But it seems the enthusiasts aren’t giving up.

From the Economist:

Lord Browne, BP’s chief executive, visited Russia’s president, Vladimir Putin, last week. Speculation has it that TNK-BP’s participation in the auction was meant to confer legitimacy on the event (Russian law requires there to be at least two bidders), and thus to curry favour with the Kremlin—and perhaps also with Rosneft, who might be a more palatable partner than Gazprom. Though TNK-BP insisted that its interest in the auction was real, it seemed to wane pretty quickly. Meanwhile, more charges are being brought against Mikhail Khodorkovsky, Yukos’s former boss, who was arrested in 2003, and PricewaterhouseCoopers, Yukos’s auditor, has also been targeted by prosecutors. Those cases also seem designed to help justify the sell-offs. But larceny, even with a (relatively) respectable face, is still larceny.

[Thanks to outreach by Grigory Pasko to bring more Russian voices onto RA.com, we're pleased to offer this guest column by Ivan Pavlov, Director of the Institute for Information Freedom Development - Bob Amsterdam.]

Access to Information is Obstructed in Russia

By Ivan Pavlov, Director of the Institute for Information Freedom Development*

In 2005, before the adoption of Federal Law No. 149-FZ «On information, information technologies and the protection of information» of 27 July 2006, a group of jurists working together with our Institute for Information Freedom Development (www.svobodainfo.org), initiated a series of court cases to contest the inaction of a number of organs of state who were not providing access to information on their activities in full measure. The reason for going to court became the absence of official websites of some state organs, as well as the absence of certain socially significant information on the websites of other state organs.

Ivan Pavlov

Among the categories of socially significant information encountered in normative legal acts, we can name the following: information on the state of the natural environment (ecological information), legal information, information on accidents and other emergencies that threaten people’s safety, information on citizens (personal data), information on the activities of organs of state and organs of local self-administration. The last category, which is sometimes called government information, occupies a special place in this list.

Its specificity lies in the fact that the state is the proprietor of the largest volume of socially significant information. Second, state information resources are the most in demand in society. Third, the right to access to information on the activities of organs of state is relatively new for the Russian Federation.

The first law in the world on freedom of access to government information was adopted by the Parliament of Sweden in the year 1766. In Russia, the right to access to information was first set forth legally in the Declaration of Rights and Freedoms of the Person and the Citizen, adopted by the Supreme Soviet of the RSFSR in November 1991. That same year saw the adoption of the Law of the RF «On mass information media», which among other things was called upon to regulate legal relations in the sphere of access by journalists to information on the activities of the organs of power. That said, the first law regulating the general part of the information-law sphere appeared only in 1995.

An important role in ensuring the right of citizens to access to information on the activities of the organs of state power is played by the federal targeted program «Electronic Russia (the years 2002-2010)», confirmed by Decree No. 65 of the Government of the RF of 28 January 2002, as well as Decree No. 98 of the Government of the RF «On providing for access to information on the activities of the Government of the Russian Federation and federal organs of executive power» of 12 February 2003. The latter normative legal act confirmed the List of Information on the Activities of the Government of the Russian Federation and Federal Organs of State Power required to be placed in public domain information systems.

In accordance with the latter Decree, federal organs of executive power are obligated:

- to ensure access for citizens and organizations to information on the activities of federal organs of executive power, with the exception of information classified as restricted access information, by way of the creation of information resources in accordance with the List confirmed by this Decree;

- to place the indicated information resources in a timely and regular manner in public domain information systems, including on the Internet network.

As of today, the organs of power in Russia furnish the public with only 23.6% of the information from that volume that must be found in the public domain. The experts of our institute came to such a conclusion on the basis of the results of a research study on the openness of federal organs of executive power conducted in 2006.

Subjected to study were the official websites of these structures, because, in the opinion of the specialists of the institute, it is precisely these websites that are an important source of information on the activities of the state. These websites allow us to make judgments about the transparency of management procedures. By analyzing a website, we can draw conclusions about the predisposition of one or another agency to corruption.

We came to the conclusion that today’s power does not even satisfy one quarter of the requirements of citizens for socially significant information – the information the agencies are required to place on websites according to existing legislation.

A situation whereby information is found in the public domain is simply not to the advantage of certain structures of state. For example, the Federal Agency for Technical Regulation and Measurement (Rostekhregulirovaniye) did not desire that information on state industrial sector standards be available on the Internet. No wonder – until recently the complete database of standards was being sold for 250 thousand rubles (around a thousand US dollars–Ed.). Such activity most likely brought a good profit. This is a situation where taxpayers were being sold information that had been created with their own money.

If in November 2004, 54 federal organs of executive power (out of the 85 in existence today) did not have their own websites, then now there are only two such agencies. These are the Main Administration for Special Programs of the President of the RF and the Federal Agency for High-Technology Medical Assistance.

The “troika” of leaders in openness of information consists of the websites of the Ministry of Emergency Situations of Russia (43.8% of the required information is available), Rosnedvizhimost [the Federal Real Estate Cadastre Agency] (39.7%), and the Federal Customs Service of Russia (34.6%). The laggers in the race for the title of “Best federal organ of executive power website” became the Foreign Intelligence Service (approximately 12% of the required information) and the Federal Migration Service (only 11%).

It goes without saying that the mass media can not really be considered free if they do not have free access to information. They are not in a position to be able to analyze or competently criticize the activities of an agency if they do not have the complete picture at their disposal.

Russia today presents a vivid example of a closed society in the informational sense. The right of access to information has atrophied so much in our country that even judges often do not know that it is prescribed in the Constitution. The fact is that for now, we lack – at a genetic level – an understanding of the importance of transparency of power. We still have a long way to go before we recognize the benefit of this.

(*The Institute for Information Freedom Development is a non-profit, non-governmental organization founded in St. Petersburg in 2004 that conducts research on the legal theoretical and practical aspects ensuring the rights of citizens and organizations to access socially significant information, in particular to information on the activities of organs of state.)

Yesterday in the Moscow Times, the political analyst Yevgeny Kiselyov published an article examining the recent actions of Russia's courts in regards to the Mikhail Khodorkovsky case. I have posted the complete article as I've been informed that our resident Polittechnologist is preparing a rebuttal of sorts.

Worried Over Strasbourg, Scared of The Hague

By Yevgeny Kiselyov

For over a week now I have been perplexed by the fact that those monitoring human rights in Russia have not come up with an answer for the following question: Why after four years of relentlessly prosecuting the Yukos case did Moscow's Basmanny District Court decide in favor of former CEO Mikhail Khodorkovsky on March 20?

Why has the court -- the very name of which has become synonymous with selective application of the law, or simply lawlessness -- suddenly granted the defense's motion against hearing the latest charges against Khodorkovsky and his former business partner Platon Lebedev in a court in the remote Chita region?

There was another decision from the court, on Monday, that muddied the waters a bit but likely didn't represent a change in the outcome. I will return to that later.

The fact remains that over the last four years the court has handed down dozens of rulings regarding Khodorkovsky, Lebedev and Yukos. The defense lawyers have, as a rule, challenged the actions by the Prosecutor General's Office. The court, as a rule, has decided in favor of the prosecution. That's why the latest decision was so surprising.

Those who prepared the proceedings moved the hearing to Chita, almost 6,000 kilometers away. This would have made it more difficult for the press, defense witnesses and defense lawyers to attend. It looked like a move to reduce publicity after the initial Moscow proceedings were accompanied by daily demonstrations and the presence of high-profile supporters.

Shifting the venue to Chita was against the law, which states that defendants should be tried either in their city of residence or where prosecutors claim a crime was committed. Nobody expected the court to allow an end run around this requirement.

Even less expected was its subsequent change of mind.

Some starry-eyed optimists might suggest the court has just decided that strict adherence to the law is paramount. But the shift is more likely linked to a comment by Yury Shmidt, Khodorkovsky's lawyer. He said that when the court openly and repeatedly sides with the prosecution it helps the defense. The more Khodorkovsky's rights are violated, the greater the chance he will win when he seeks redress from the European Court of Human Rights in Strasbourg.

The Strasbourg court will examine if the defendants had access to objective and impartial proceedings; whether the adversarial principal of justice was properly applied; if the defendants' procedural rights were ignored; if the proceedings were open to the public and media; and how state-controlled media covered the proceedings.

There were clearly violations. Neither Khodorkovsky nor his lawyers was given sufficient time to become acquainted with the prosecution's materials in the case. The defense was refused the right to introduce documents, reports by independent experts and other materials into the record of the court's proceedings. And, as defense lawyers have often pointed out, the verdicts have been nearly verbatim repetitions -- including grammatical errors -- of the indictment.

It is not hard to imagine Khodorkovsky and Lebedev winning their case in Strasbourg.

Until recently, Russian authorities have maintained a very condescending attitude toward the Strasbourg court. It might have been unpleasant losing different cases in the court, but the decisions obtained on human rights violations there don't have the power to overturn rulings from Russian courts. Telling the public that the problem is in the court's anti-Russian bias, fanned by enemies who cannot bear to watch the country's return to power and greatness, is also an integral part of the strategy.

But the authorities now seem to realize that decisions from Strasbourg have legal as well as political consequences. The legal consequences could roll over into financial penalties in the billions of dollars.

As a case in point, this year the European Court of Human Rights is expected to hear complaints connected with the Yukos case. A parallel process has been taking place quietly and unobtrusively. Yukos shareholders have filed a lawsuit against the Russian government demanding compensation for what was essentially the nationalization of the oil company. The amount they are suing for, $50 billion, is the largest in the history of legal arbitration.

Although the authorities are publicly silent about the case, they are taking it very seriously. They have spared no expense in hiring a major U.S. law firm, Cleary, Gottlieb, Steen & Hamilton, and bringing in top-notch Russian lawyers.

The first hearings at the International Court of Arbitration at The Hague will come at the end of the spring. The court could rule that the case is outside of its jurisdiction, which would end Russia's problems. If it takes the case, the proceeding could stretch out for years. Imagine the difficulties for Moscow if the Strasbourg court ruled in Khodorkovsky's favor while The Hague was still considering the unlawful nationalization complaint.

The Kremlin now has to deal with the possibility that future verdicts from Strasbourg will be used in arbitration lawsuits or criminal proceedings against the state or senior Russian officials.

This helps explain why President Vladimir Putin replaced Pavel Laptev, who ended his term in Strasbourg in disgrace, with Veronika Milinchuk, a close associate of Justice Minister Vladimir Ustinov, as representative to the human rights court. Her appointment came with the announcement that, henceforth, the country's representative to Strasbourg will hold the post of deputy justice minister.

Ustinov has his own reasons for being concerned about the result of the proceedings in Strasbourg. After all, it was he who ran the Prosecutor General's Office that brought criminal charges against Yukos executives, applied for warrants to conduct searches and arrests, and managed to obtain the strict verdicts it was seeking against the accused.

Taken together, all of this suggests that the looming hearings in Strasbourg might be behind the decision to transfer the trial back to Moscow.

If this is the case, we might even expect the new proceedings to be conducted in accordance with all proper procedures. Even if it adds a year to the duration of the hearings, it will be worth it. A facade of irreproachable punctiliousness will have to be maintained during the process of reaching the predetermined guilty verdict. Only then will the state have any hope of defending its actions in Strasbourg.

Monday's decision on the legality of moving Khodorkovsky and Lebedev to Chita might introduce some confusion here. But, as a member of Khodorkovsky's legal team explained to me, the ruling was of no real importance.

For the defense, what is important is that it has in hand a decision with greater legal bearing. This is the Basmanny District Court ruling that the investigation into the charges against Khodorkovsky and Lebedev can't be carried out in Chita, and this ruling can only be overturned by a higher court. If the Moscow City Court upholds the decision, this supports my theory that there is a political consideration in relation to the Strasbourg Court in play. If the Moscow City Court does overturn the decision, I'm wrong, and the Basmanny District Court ruling was just a blip.

We probably won't have to wait long to find out what the real case was.

From the Financial Times:

Moscow rules The Financial Times March 29 2007

There is something unsettling about BP, Britain's largest company, publicly co-operating with the Kremlin by allowing TNK-BP, its Russian joint venture, to join state-run Rosneft in this week's auction of assets from the bankrupt Yukos group.

To nobody's surprise, there were no other participants and Rosneft won, paying just $7.59bn for a chunk of its own equity with a stock market value of $8.4bn. TNK-BP abandoned its bid after less than 10 minutes. But it insisted it had participated in good faith - and pulled out only because it could not match Rosneft on price. The company failed to convince analysts, who said that from the start the auction was designed to favour Rosneft.

Under Russian law, an auction must have at least two bidders to be legal. So TNK-BP's participation was helpful to the sale process.

To be fair, oil and gas companies often have to operate in countries with the most difficult political conditions. Russia is no exception. Under President Vladimir Putin, the state has openly re-established control of natural resources and squeezed down private companies. Russian officials argue that they are merely correcting the wrongs of the 1990s, when domestic oligarchs and foreign speculators took advantage of a country in turmoil.

The biggest victim has been Yukos, which has been broken up following tax and fraud probes and the jailing of Mikhail Khodorkovsky, its founder. Foreign companies have also been hit, notably Royal Dutch Shell, which was forced to sell control of the $22bn Sakhalin-2 gas venture to state-run Gazprom. In this environment, it would not be surprising if TNK-BP was keen to curry favour with Mr Putin, not least because the Kremlin is considering revoking the licence for the huge Kovykta gas field.

In itself, participating in a quick-fire auction is a small price to pay for edging up an inch or two in Mr Putin's estimation. Companies around the world try to ingratiate themselves with governments.

But it is not a pretty sight, even in developed democracies, where the authorities claim to tolerate a measure of criticism. In emerging economies, particularly big rich authoritarian countries such as Russia, the spectacle can be demeaning.

A measure of play-acting is perhaps essential for success in this imperfect world, not least in business. Grovelling has its place, as do fawning and flattery. But executives must remember that there are costs as well as benefits. A company that lowers its standards may find it more difficult to observe high standards in future.

It could become harder to resist political and bureaucratic pressures and for a company to disentangle its interests from those of the regimes under which it operates. The public image of the company suffers - and so does the image of business in general.

CFR.org is hosting a podcast discussion with Andrew Kuchins, director of the Center for Strategic and International Studies’ Russia and Eurasia Program, on the recent spate of apparent contract killings in Russia.

Among other comments, Kuchins remarks that 1) to be an investigative journalist in Russia is an extremely dangerous occupation, and 2) if a murder of a journalist occurs, it is highly unlikely that the crime will be solved. He also says that the West can't really do much to improve the situation for journalists, because it no longer has the leverage it had in the 1990s. Kuchins: "As this rash of contract killings demonstrates, I think it really demonstrates more the weakness of Mr. Putin's system, rather than the strength and the control that the Kremlin has."

[We're pleased to welcome back our guest blogger and expert Russian ecologist, Albert Kalashnikov, who has written for us in the past.]

Construction of the VSTO as a secret operation of the special services

[VSTO – Eastern Siberia – Pacific Ocean oil pipeline]

By Albert Kalashnikov, ecologist

From 1985 to 1999, not a single kilometre of trunk pipeline was built in Russia. The state did not consider this a priority problem, inasmuch as a decline in oil production was being observed in the country and existing transport capacity was quite sufficient. In 1999, OAO «AK «Transneft» (the state trunk oil pipeline transport monopolist) begins realization of the first large pipeline project – «BPS» (the Baltic Pipeline System) from the fields of Western Siberia and Timano-Pechora to the port of Primorsk – export to the countries of the European Union (60 million metric tons of crude per year). Concurrently with this, the private company «YUKOS» resolves to throw down the gauntlet to «Transneft» and announces its intention to build the first private trunk oil pipeline in Russia. «YUKOS» head Mikhail Khodorkovsky had decided that it was necessary to orient oneself not towards Europe, but towards China, which is increasing purchases of oil for its economy year in and year out. As a result, an inter-governmental agreement is signed between Russia and the PRC for the development of a design for the oil pipeline. From 1999, «YUKOS» begins to actively lobby at all levels the project for the construction of the pipeline from Angarsk (Irkutsk Oblast) to Daqing (Heilongjiang Province). The overall span of the «Angarsk-Daqing» Russo-Chinese oil pipeline (RCP) route was supposed to comprise 2214 km, of which 1453 km along the territory of Russia (30 million metric tons of crude per year). The announced cost of construction was $2 billion.

In response to the «YUKOS» initiative, «Transneft» in alliance with «Rosneft» in that same year, 1999, propose an alternative variant for the construction of an oil pipeline to the East. Their «Oil pipeline for deliveries of Russian oil to the countries of the APR» [Asia-Pacific Region] (Angarsk-Primoriye) project was not only more expensive (with an announced initial cost of more than 5 billion dollars), but also more complex and long 3765 km. In order to pay for the project, it was calculated with a capacity of 70 million metric tons of crude per year. And here there arose a problem – where to get so much crude? Probably the only advantage of the given variant was its soundness from the point of view of opportunities for diversification, and, correspondingly, it gave the state levers for managing export directions (not only the PRC, but also S.Korea, Japan, the USA, and other countries of the APR). In execution of instruction No. Pr-1315 of the President of the Russian Federation of 17 July 2001, «AK «Transneft» in August of 2001 set about drawing up Declaration of Intent and Justifications of Investments into the construction of its project. The project got approval in the Ministry of Economic Development and Trade of the Russian Federation, where in January of 2002, there took place the presentation of the Declaration of Intent of the project with the participation of the Ministry of Energy and oil companies. In April 2002, «Transneft» coordinated the Declaration of Intent in the administrations of the regions on the territories of which it was planned to build the oil pipeline facilities.

Photos: Albert Kalashnikov, the pipeline under construction.

At the same time, the «YUKOS» routing was moving along in parallel at the government level. On 8 September 2001, the signing of a general agreement for the development of a feasibility study for the Angarsk-Daqing oil pipeline took place in St. Petersburg. The document was signed based on the results of negotiations between the head of the government of the RF, Mikhail Kasyanov, and the premier of the State Council of the PRC, Zhu Rongji. Construction of this oil pipeline was slated to begin in 2003 and finish in 2005. In the meantime, the parties could not come to a consensus on the main question: on pump-through tariffs and purchase guarantees, which in the end put the brakes on the realization of the given project. And the reason for this was the demand of the Chinese that they be allowed to participate in the development of a series of oil-and-gas fields on the territory of Eastern Siberia, including Irkutsk Oblast and Yakutia, among others the Yurubcheno-Takhomskaya oil-and-gas, Verkhnechonsky oil-and-gas-condensate, and Talakanskaya oil fields. That they took such a tough stance was explained by the emergence of the PRC in the Aktöbe field in Kazakhstan and the construction of an alternative oil pipeline along the route Tengiz-Kenkiyak-Atasau with access to Urumqi (Xinjiang-Uyghur Autonomous Region).

To the holding back by Russian officials the «YUKOS» head reacted thus: “While we were first from the point of view of the construction of a pipeline, we could attain somewhat better positions from the Chinese partners. If we become second after the Kazakh colleagues, then we will have to orient ourselves to those conditions which will develop by that time. And from this point of view, our bureaucratic delays will lead to certain losses.” It is interesting that Khodorkovsky’s prediction came true in 2004 – China signed agreements on the construction of oil pipelines with Kazakhstan and Uzbekistan. And on 23 August 2005, the Management Board of the partners in the company «Kazakhstanneft» accepted an offer from CNPC on the acquisition of its company for 4.18 billion US dollars (CNPC thereby secured production and deliveries to China of approximately 7 million metric tons of crude annually). The only geopolitical plus for Russia here became the fact that as a result, China “diverted” a part of Central Asian crude from the «Baku-Ceyhan» oil pipeline. And in the long term, the trans-national company «BP» is going to have real problems with being able to fill it (the Azerbaijani fields are on the decline).

In the meantime, the outcome of the battle of the routings still had not been decided at the initial stage; opinions in the government were split. Prime Minister Mikhail Kasyanov was pushing for Japan, defending the interests of «Rosneft»., while Minister of Energy Igor Yusufov lobbied «YUKOS» defending the Angarsk-Daqing route leading to China. The Ministry of Nature reacted “negatively” to both variants, because they envisioned laying the pipeline in immediate proximity to Baikal, found under UNESCO protection.

Now let us recall the whole legal chaos of the Russian bureaucratic apparat relative to the environmental component of both projects. Here we have everything from anti-constitutional prohibitions on holding referendums, to direct pressuring of ecologists-volunteer community workers, to gross violations of the procedures for holding public hearings on environmental impact studies, and much more about which many materials have already been written. And so, against this background, don’t the periodically repeated bursts of nature-protecting activeness on the part of official ecologists look strange?

There can be one explanation for this: already then, the decision had been adopted in the Kremlin to stretch out the question of the start of construction of the eastern oil pipeline a maximally long time. Two objectives take shape here:

1. To use the oil factor for as long as possible to strengthen the foreign policy positions of Russia in the Orient, playing on the economic confrontation between the PRC and Japan. This line persists to this very day thanks to the dividing of the project into two stages of construction and the continuing uncertainty with the routing of the second stage. Thus it is still not clear where exactly the terminus of the oil pipeline will be – in Khabarovsk or Primorsky Kray, or if everything will simply be confined to just the first stage (with a cost of 185 billion rubles) and will end in Amur Oblast;

2. To have the time to prepare for and carry out the “nationalization” of the «YUKOS» fields, which under any scenario were the principal source of crude for filling the eastern pipeline. After all, it was clear right from the very start that there could not be two routes; there were only enough reserves for one pipeline, since «Transneft» does not have its own fields and does not engage in oil production, while its “ally”, the production company «Rosneft», does not have a sufficient effective reserve. The subsequent sad outcome for «YUKOS» is known to all… The low-efficiency «Rosneft» gobbled up its more successful competitor and as a result became practically the monopolist of the oil industry in Russia, having the opportunity to personally manage the trunk oil pipelines through the agency of «Transneft».

Hence, what appeared to be a many-years-long confusion with the eastern oil pipeline, the growth of environmental alarmism, the multitude of discrepancies, the intensifying protest attitudes – all of this in the end now looks like a top secret operation by the special services. A behind-the-scenes game, in which the moves were predetermined in advance. We should give its author and moderators their due and admit that the game succeeded. It is especially interesting to recall the so-called public hearings, which are conducted en masse in all the regions of the territory through which the route passes. Here it is necessary to clarify the fact that such undertakings are of course required by law, but they are often simply ignored, both by the customers and the supervisory organs, and by the public. But here, everything is by the book: a public reception office remains open its legally mandated two months during the course of the hearings, and personal invitations are sent out to all the local environmentalists-seditionists. And the predictable result is right there in front of us: a broad burst of protest locally, appeals to courts, and all of this with stable informational support from the news media. Then the supervisory nature-protection organs are brought in and as a result «Transneft» is forced to put the brakes on once again. Time passes and everything is repeated yet again, then again and again. It should be said, to the credit of the employees of the company «Transneft», that they carry this burden of the judges that has been laid upon them without complaint. The hearings continue…

Photos: Albert Kalashnikov, the pipeline under construction.

The environmental component of the VSTO [Eastern Siberia – Pacific Ocean oil pipeline]. I will not weary you with discussions about how low Russia fell to the role of a raw-materials appendage of technologically developing countries, whether the VSTO is needed or not, and if it is needed, then by whom concretely, and so forth. What we are talking about here is that the VSTO has always been a “cat in a bag”, and today the situation has changed little. It seemed to the public that their protest actions do have an effect on the choice of the direction of the route: recall the campaigns in defense of Tunkinsky Park, Lake Baikal, the Cedar Valley Preserve, the Barsovy and Imangra Wildlife Sanctuaries, Perevoznaya Bight… The route “ping-ponged” from the borders of Mongolia to the Yakutian tundra. In the end, all the parties came together on the northernmost variant, which is the one now being realized. But was it not clear from the very beginning that this route is the most effective one in the sense of ensuring that the oil pipeline would be filled? Its proximity in passing by the new fields being developed is exactly what provided such an opportunity.

There is no doubt that the VSTO is a project that is highly potentially dangerous for the environment. And there is no doubt that the builders of the pipeline will deviate from the confirmed technical documentation that is being discussed at the public hearings.

European Union Energy Commissioner Andris Piebalgs has said the "C" word again in regards to Russia's efforts to coordinate with other natural gas exporters. It is good to see that someone is awake in Europe.

From the WSJ:

Mr. Piebalgs said Russian and Algerian officials had told him they agreed to cooperate only on "issues of technological challenges, research activities, perhaps some swaps," but he added, "I can't exclude at this stage that there won't be moves to establish a gas cartel."

Mr. Piebalgs said a cartel would jeopardize the development of gas markets and damage EU relations with cartel members. He also said "consumers would definitely lose confidence in the gas supplies."

"To be fair, gas could be replaced," he said. "It's not a good choice for the European Union, because natural gas is very clean as a fossil fuel, but it could be replaced by other means such as coal or lignite or by nuclear."

Mr. Piebalgs said the U.S. encouraged the EU to continue its plan to diversify its supplies. Russia accounts for 25% of the EU's natural-gas imports and Algeria 10%.

Analysts said one reason the U.S. wants to encourage the EU to diversify its energy mix is to erode the political power Russia holds through its gas and oil exports.

From Bloomberg:

Calpers Asked to Mull Risks Yukos Bid Could Pose to Chevron

By William Selway

March 26 (Bloomberg) -- The California Public Employees' Retirement System should examine whether the value of its Chevron Corp. shares would be hurt should the oil company buy assets of bankrupt OAO Yukos Oil Co., a board member said.

California Controller John Chiang sent a letter last week to Russell Read, the fund's chief investment officer, asking it to study the risk of a Chevron bid for the Russian company's assets. Calpers owns 9.03 million Chevron shares worth about $670 million, according to a U.S. regulatory filing.

Russia's government took control of Yukos, once the country's largest oil exporter, because of unpaid taxes. Former Yukos owner Mikhail Khodorkovsky, who is serving eight years in a Siberian penal colony for tax evasion and fraud, says he is being punished for opposing President Vladimir Putin, and the U.S. has raised concerns about the takeover.

``Considering the legal, financial and geopolitical controversy that has been associated with Yukos' recent history, I am concerned that, should Chevron participate in the auction and succeed in acquiring assets, the transaction may pose risks to Calpers' investment portfolio,'' Chiang wrote.

``To protect our investment in Chevron, and the overall health of our portfolio for state retirees, we should engage in immediate due diligence to assess the risks and, if warranted, take appropriate mitigation steps,'' the controller wrote.
...
Chiang is one of 13 members of Calpers' board of directors, which oversees the fund. Garin Casaleggio, a spokesman for Chiang, said any decision on whether Calpers should sell shares of Chevron would be made after the fund's staff has studied the matter and made their own recommendation.

The fund has a history of using its $230 billion of assets to press for changes in corporate behavior. Every year it targets as many as a dozen public companies among its holdings to seek policy changes and better financial results.

And the New York Times:

Last Thursday, John Chiang, the California state comptroller, sent a letter to Calpers, the retirement fund, asking it to review investments in Chevron in light of that company’s reported intention to bid in the Yukos auctions. Calpers, with billions invested in equities, has in the past swayed boards with its criticisms of corporate behavior.

Mr. Chiang cited the risk of lawsuits and divestment campaigns against Western companies for “complicity in illegal and unethical activities by the Russian government.” Russian authorities say they are obeying their own laws.

Chevron, of San Ramon, Calif., has not announced a bid for Yukos assets but has not contradicted statements by the bankruptcy receiver in Moscow that it sent a letter of intent late last year. Chevron is among the top 20 companies in the Calpers portfolio.

Mr. Chiang has not commented on BP’s role, but his spokeswoman, Hallye Jordan, said in a telephone interview that “he will soon.”

From Yulia Latynina in the Moscow Times:

The Geopolitics of Accounts Receivable

By Yulia Latynina

On Sunday, the 15 members of the United Nations Security Council, including Russia, unanimously passed Resolution 1747, which provides for the imposition of sanctions against Iran in response to its nuclear development program. On Monday -- the very next working day -- Russia announced that Iran had finally made overdue payments for Russian construction work on the Bushehr atomic energy plant in Iran.

Looking at this from a commercial rather than a diplomatic standpoint, Moscow appears to have pried the money from Tehran using the Security Council in much the same way it uses the Prosecutor General's Office for the same purpose at home.

When trying to explain why Russia is assisting Iran in its atomic energy program, analysts usually opt for complex geopolitical explanations, like portraying it as Moscow's answer to a U.S. White House trying to create a unipolar world.

A simpler explanation is that Russia has become a very active economic actor and pragmatically minded people in President Vladimir Putin's circle are prepared, in the best tradition of Adam Smith, to sell just about anything to anyone.

Complete article here.

From the Bangkok Post:

The presidents were drawn in particular to a stand devoted to Chinese tea culture, Interfax reported. Hu presented the Russian leader with a tea set inscribed with tea-boiling tips in Russian.

Observing women in traditional Chinese costume, the Russian leader remarked, "I don't know what's more beautiful - the clothes or the girls," the news agency reported. He then added: "It's the girls."

Stratfor posted this analysis yesterday, which makes the recent actions of BP even more odious than they may first have appeared. If this "managed competition" of state-owned energy companies really does give the illusion of stability - it would seem to be a short-lived phenomenon.

Igor Sechin, a key silovik begins to catch up with Gazprom, for now...

Bankrupt Russian oil company Yukos began auctioning the last of its property -- approximately four big chunks and several smaller assets -- on March 27. A subsidiary of Russian oil mammoth Rosneft acquired Yukos' 9.44 percent stake in Rosneft. Rosneft's bid countered a bid from British-Russian oil firm TNK-BP, a company in which Russian natural gas giant Gazprom is working to acquire a majority stake. If TNK-BP had won the Yukos auction, the 9.44 percent stake, along with the 1.25 percent stake it already owns, would have been enough to garner TNK-BP -- and eventually Gazprom -- a seat on Rosneft's board. In retaliation, Rosneft has threatened to bid against Gazprom for majority stake in TNK-BP.

Rosneft and Gazprom began competing after they failed to merge in 2005. Until then, the two state-owned companies had always kept to their respective petroleum products -- Gazprom to natural gas and Rosneft to oil. However, after the merger collapsed, they began to cross over into each other's fields, and the wrestling match escalated. The forces behind both Rosneft and Gazprom are powerful members of Russian President Vladimir Putin's inner circle of trusted associates. Putin is planning to leave office within a year, and a fracture of this magnitude would have ominous repercussions unless Putin can get it in check.

Putin held an impromptu meeting of his personal group during the weekend of March 24-25 in order to sort out the Yukos matter. Under his proposal, Rosneft would gain most of Yukos' assets and Gazprom would get TNK-BP and a few smaller Yukos assets. Putin's offering of TNK-BP shows not only how little he values foreign investment, but also the desperation of the situation. With Putin's proposal, Gazprom would lose a degree of its freedom as the newly empowered Rosneft closes in on Gazprom's business maneuvers.

So, why would Putin want to compromise Gazprom, which has championed the government's consolidation of power? The answer is: balance. Putin has always sought to balance competing interests in Russia. He has balanced the oligarchs, military and siloviki while placing his own influential players from St. Petersburg (his hometown) into key positions. Putin has even blurred the lines among most of the groups, as he did when he named siloviki-magnet Sergei Ivanov as defense minister (Ivanov was the first civilian to head the military) and then as first deputy prime minister.

However, in the past few years, the balance has been tipped. Gazprom and its political forces have gained too much power, and if one -- Deputy Prime Minister Dmitri Medvedev, who sits on Gazprom's board -- is a likely successor to Putin, Gazprom must be checked before the transfer of power takes place. Putin must ensure that neither he nor his successor can be overwhelmed by Gazprom. To do this, the president must strengthen Rosneft.

Allowing Rosneft to gain the larger of the Yukos assets is the first step, but the second is to get the company a larger political force with which to counter Gazprom's numerous champions in the government. Gazprom has Medvedev (who, if he does not succeed Putin, is likely to at least fall into the premiership) and Deputy Chief of Staff Vladislav Surkov, Putin's top aide and one of his most trusted allies. Rosneft's sole defender is Deputy Chief of Staff Igor Sechin, Putin's longtime friend and adviser. Though Medvedev is the face of Gazprom's force, it is Surkov and Sechin who are duking it out behind the scenes. If Medvedev becomes president or prime minister, Rosneft will need a force to counterbalance his presence and be the face for Rosneft and Sechin.

The obvious -- but not ideal -- choice is Ivanov, who has stuck to defense and military issues and has no experience with energy politics. However, Ivanov is Putin's other likely successor. Putin has realized that if the Rosneft-Gazprom battle goes unchecked, the power struggle among his inner circle will collapse the state, either before or soon after he leaves office. Unless he wants to hand his successor a shattered Kremlin, Putin must overcome a cadre of powerful personalities -- and he has less than a year left to do it.

From the Moscow Times:

The State of Auction Theory

By Konstantin Sonin

Returning to theory is often one of the ways people try to explain what went wrong in major auctions that have been held here in the past. The sale of the state's 75 percent stake in Slavneft in 2002, for example, was run in such a way that it maximized the opportunity for collusion between the most likely bidders. When the auction mechanism is based on open bidding -- so-called English auctions -- it is easy for participants who have reached an agreement on the outcome beforehand to track the bidding and make sure that no one deviates from the plan. The fact some of the firms participated were just fronts for unknown interests facilitated collusion even further. If one party to the plan noted that a bidder was acting outside the original agreement, he might activate a "sleeping" bidder to protect his interests.

In the 2004 auction for Yuganskneftegaz, formerly the largest production asset at Yukos, the whole process reached the absurd. It was unclear immediately following the auction which of the major parties interested, Rosneft or Gazprom, was behind the unknown company that came out the winner.

An example of how best to prevent collusion between bidders came in the auction for a blocking stake in state-owned telecoms giant Svyazinvest in 1997. As this case demonstrated, the risk of behind-the-scenes deals is minimized if the auction is conducted using sealed bids. The ultimate winners said themselves that they overpaid for the stake significantly, which had to be a positive result for those who organized the sale.

It appears that we may face the same issues again when Yukos' remaining assets go on the block over the next few weeks. In the first of these auctions, in which the now-bankrupt company's shares in state-controlled oil major Rosneft will be up for bid Tuesday, the outcome looks like a foregone conclusion. Even ignoring the likelihood of political interference, the main contender is Rosneft itself. It will be hard for TNK-BP, the other declared contender, to walk the fine line involved in losing the auction while still giving the impression that it is trying to win. As a result, it will likely be very careful in bidding. If the auction were "closed," meaning that it was based on the submission of sealed bids, the price fetched for the assets would be higher, as the favorite would have to insure itself against the risk of coming in too low.

The organizers have clearly not taken a best-theory approach in setting up another looming auction, scheduled for April 4. This will combine a 20 percent packet of shares in Gazprom Neft (the renamed Sibneft), ArcticGaz, Urengoil, and other Yukos assets. Pure theory would suggest that these assets should have been auctioned off separately. That way, bidders who didn't have deep enough pockets to vie for the entire package might have been interested in some of the individual assets. At the risk of sounding repetitive, this should have been designed as a closed auction as well. Bundling all of these assets into one package has made the auction absolutely uncompetitive. There is only one company in Russia that is interested and able to tackle something this big, and that is Gazprom. If the plan had been to auction the assets individually, Gazprom would have faced competition for at least some of these, a factor that would likely have driven prices higher. But the organizers apparently believed that organizing the auctions separately would allow the bidders to collude and that some assets would be scooped up on the cheap.

All of this theory aside, it is possible that political decisions about what should go to each of Rosneft and Gazprom and with only token competition have played the chief role in determining the auction mechanism here. If this is the case, then everything has been organized according to auction theories.

Reading the popular tech blog Slashdot this morning, I was directed to an interesting Fortune article about the hot (pardon the pun) market for technology investment out in the frozen plains of Siberia. We think this is great news and should be followed closely - Russia has so many terrific opportunities for foreign investors with the burgeoning and innovative private sector, diversifying away from just natural resources and minerals. If only doing business with state-owned firms could be as rewarding...

Time for Novosibirsk to export software solutions, not Russian brides

Fortune:

This is Akademgorodok - Academy Town - where Russian high tech booms. This place, called the Silicon Forest, won't pass for Silicon Valley anytime soon. Private high tech has expanded from a $10 million business a decade ago to a still-tiny $150 million industry last year, with the number of firms growing 15 percent annually.

But there is enough softly priced expertise for Intel, IBM, and Schlumberger to make camp here. And in a signal of Akademgorodok's broadening reach and legitimacy, a local IT firm is producing a Web portal for Oprah Winfrey.
...
Tapping brain resources, then, becomes a priority. Every year, Russia graduates as many science and technology specialists as India - 200,000 - although Russia is 80 percent smaller by population. Russian science and technology hold a unique position in the world, with a tradition of critical thinking and developmental breakthrough, along with a professional hunger born of the proximity to actual hunger.

Russia's software exports total $1.8 billion annually; the country is the third-largest software-outsourcing destination in the world, after China and India. "Inside Intel we have an expression," says Steve Chase, president of Intel Russia. "If you have something tough, give it to the Americans. If you have something difficult, give it to the Indians. If you have something impossible, give it to the Russians."

Below is a debatable controversial editorial comment from the Wall Street Journal today. Here is a short comment Bob wrote a while back about Russia and Iran.

Little Sweaty Fist

Why is Putin now getting tough on Iran?

BY BRET STEPHENS
Tuesday, March 27, 2007 12:01 a.m. EDT

"This is very easy to understand," said Russian President Vladimir Putin last year, explaining his idea of an energy policy. "Just think back to childhood when you go into the street with a sweet in your hand and another kid says, Give it to me. And you clutch your little sweaty fist tight around it and say, What do I get then?"

So why, when it comes to the Iranian nuclear file, has Mr. Putin finally opened his little sweaty fist, signing on--with no apparent compensations--to additional U.N. sanctions on the Islamic Republic while calling a halt to Russia's construction o