From: MSN NicknameEagle_wng (Original Message) Sent: 1/10/2006 12:32 AM
Gas pressure: why Putin is risking the West’s ire
By Neil Buckley
Published: January 3 2006 20:21 | Last updated: January 3 2006 20:21
Russia gasJust before Christmas, Russian president Vladimir Putin set out more explicitly than ever before his vision of how his country would regain the international clout it enjoyed as part of the Soviet Union.
Noting proudly that Russia was the world’s biggest exporter of natural gas and second-biggest exporter of crude oil, he told a gathering of his most trusted ministers and advisers that the country should aim to be the global leader in energy. This, rather than the military-industrial complex that dominated the Soviet era, would be the engine of Russia’s renaissance.
“Our welfare at present and, to a great degree, in the future directly depends on the place we will take in the global energy context,” Mr Putin told the televised meeting. He also issued an assurance – likely to be much repeated during Russia’s current presidency of the Group of Eight industrialised nations – that “energy security” would be a key theme.
“Russia treasures its much-deserved reputation of a reliable and responsible partner in the market for energy resources,” he said.
Moscow sees its spell at the helm of the G8 as a chance decisively to shift its relationship from supplicant – its status when it was invited to join in 1998 as a reward for pursuing liberal reforms and accepting Nato’s eastward expansion – to equal player. But on New Year’s Day, as its presidency began, the Kremlin’s first action called any such “reliable and responsible” image into question. Russia cut off natural gas exports to Ukraine after Kiev refused to agree to a more than quadrupling of the price it pays.
The decision to turn off supplies was almost certainly made by Mr Putin himself. It was he who had issued the final offer to Ukraine, just hours before the year-end deadline, and Ukraine’s president Viktor Yushchenko gave Kiev’s negative response. The move prompted a sharp fall in midwinter supplies to Europe through a transit pipeline that runs across Ukraine.
Ignominiously, Russia in effect turned the gas back on little over a day later, after a barrage of international criticism. Even if Mr Putin secures a deal with Ukraine – and the two sides were returning to the negotiating table on Tuesday – he may have inflicted broader damage on his energy ambitions. Russia has shown it is prepared to use drastic measures to force a customer to pay higher prices. It has simultaneously drawn uncomfortable attention to the full extent of Europe’s reliance on its energy – Germany, for instance, depends on Russia for about one-third of its natural gas supplies.
That in turn may provoke hard questions from Russia’s G8 partners about its plans to make political use of its energy wealth – perhaps amplifying existing concerns over its commitment to democracy and human rights. Michael Glos, economy minister of Germany, said his country would like to boost the amount of gas it took from Russia but added: “It can only be increased if we know that deliveries from the east are dependable.” Mr Glos went on: “Russia has the G8 presidency and . . . should naturally act responsibly.”
European Union energy ministers will hold an emergency meeting in Brussels today to discuss the crisis, which could trigger a broader debate about Europe’s energy security and its reliance on Russia. Nor are concerns limited to Europe. The US State department has also expressed concern about Russia using energy as a political tool. It is scarcely the backdrop Mr Putin wanted as he rolls out a strategy – several years in the gestation – to build Russia’s future around energy.
It is a vision he has cherished since long before acceding to the presidency. As a city official in St Petersburg in the 1990s, he studied part-time at the city’s State Mining Institute and wrote a dissertation entitled “Mineral Raw Materials in the Strategy for Development of the Russian Economy”. In it he argued Russia’s rich natural resource base would secure not only its economic future but also its international position. He laid out a scenario of state-controlled, but in part privately financed, “large financial-industrial corporations” in Russia that were able to compete with western multinationals.
In the past two years, he has set about creating those groups. Using occasionally questionable methods, he has restored to state control energy assets that were privatised cheaply a decade ago. Rosneft, the state-owned oil company, in late 2004 bought the main production arm of Yukos, the oil company built up by Mikhail Khodorkovsky – now serving a nine-year sentence in a Siberian prison for fraud and widely seen as the victim of a politically motivated campaign.
Last autumn, the Russian state increased its stake in Gazprom, the gas giant that controls about 20 per cent of the world’s natural gas reserves, from 38 per cent to 51 per cent, moving from de facto to de jure control. Gazprom then bought Sibneft, the oil group controlled by Roman Abramovich, the Chelsea Football Club owner, for $13.1bn in Russia’s biggest merger.
Finally, Mr Putin has just signed into law measures to lift long-standing restrictions on foreigners owning Gazprom’s remaining 49 per cent free float. Some analysts believe the influx of international investors could double Gazprom’s market capitalisation to as much as $300bn (£172bn, €250bn), putting it among the world’s top companies. Rosneft, meanwhile, is being prepared for an initial public offering on the London Stock Exchange this year that Russian officials have suggested could value it as high as $72bn.
Instituting a new phase, Russia last month started wooing high-profile foreigners to take important positions in its energy industry, in an apparent effort to boost its international credibility and clout. Gerhard Schröder, the former German chancellor, agreed to head a project controlled by Gazprom to build a $5bn export pipeline under the Baltic Sea to western Europe. Donald Evans, former US commerce secretary and a close friend of President George W. Bush, politely declined a personal offer from Mr Putin to chair Rosneft, but the Russian president has hinted Russia will continue to search for high-profile foreign executives to join the Rosneft board.
All this leaves Russia with two state-owned energy giants with substantial foreign investment – plus several privately owned groups that in the past decade have been brought up to international standards. On top of the world’s biggest hydrocarbon reserves, a location spanning the Eurasian land mass, and a state-owned pipeline network enabling it to supply both east and west, it makes a powerful package.
The G8 presidency is Russia’s chance to sell that package to the club of the world’s most powerful industrialised nations. Igor Shuvalov, Russia’s G8 “sherpa” and a close adviser to Mr Putin, has made clear Russia sees its energy clout as its G8 admission ticket – one which, since it is not technically among the world’s eighth largest economies, is not automatic.
“We can guarantee the global economy will not lack energy resources,” Mr Shuvalov said last year. “We will create a mechanism whereby Russia . . . will supply [energy] to the global market on such terms as will allow the global economy to develop positively and predictably.” His remarks implied Russia could provide a stable alternative to the conflict-ridden Middle East as energy supplier.
After cutting off supplies to Ukraine – with whom Russia has the biggest natural gas trading relationship in the world after that between Canada and the US – the claim looks harder to support. “Russia has stained its previously unblemished reputation,” says Graham Weale, director of the European energy service for Global Insight, a consultancy. “If it doesn’t do it again, it may get away with it. But if it does so even one more time, it’s going to be hard for it to increase its sales.”
An energy consultant who asked not to be identified because he has Russian clients went further yesterday. “They’ve basically shot themselves in the foot,” he said. “They think they can cut off Ukraine but they can’t – not without cutting off their other customers. And of course it’s damaging Russia’s reputation as a reliable supplier.”
Cliff Kupchan, an analyst at the Eurasia Group consultancy and former state department official in the Clinton administration, says Russia succumbed to the temptation to use its energy power as a stick rather than a carrot. “Petro-power is about diplomacy,” he says. “Petro-coercion, using energy as a weapon of foreign policy, is something totally different again.”
He warns that the row with Ukraine could also mar Russia’s efforts to attract investors to Gazprom, by demonstrating once again that it is an arm of the Russian state.
Moscow, however, can hardly have been surprised at the international reaction. It briefly cut gas to Belarus two years ago, when Russia’s usually loyal neighbour balked at a demand to double the price it paid. That brought protests from Europe and an intervention from Germany’s Mr Schröder.
So why is Russia endangering its broader energy ambitions through a messy spat with its neighbour? Analysts suggest Russia wants to use the demand that Ukraine shifts to market prices for gas as a lever to gain another prize – joint control with Ukraine of the export pipeline across that country.
The tactics have worked elsewhere. Russia kept gas prices low to Belarus in return for an agreement to take joint control of the export pipeline across its territory to Europe. Gazprom also raised prices to Georgia but is freezing them for 10 years in return for forming a joint venture to develop the country’s domestic gas distribution network.
A bigger goal may be to try to bully the west-leaning Mr Yushchenko, who swept to power in Ukraine’s Orange revolution, into rebuilding ties with Moscow – and to influence Ukrainian parliamentary elections in March in the hope they will return a more pro-Russian legislature. One political consultant who knows Mr Putin suggests he “hates” Mr Yushchenko and is happy to try to undermine him.
The Russian president may also have an eye on the domestic audience, seeking to demonstrate that Russia can still wield influence over its former Soviet neighbours after the setback of Ukraine’s 2004 presidential election, in which Mr Putin backed the losing candidate. Whatever the real motive, Chris Weafer, chief strategist at the Russian-owned Alfa Bank, says Russia’s action will force the EU to consider alternative gas suppliers, such as Egypt. And if Russia’s biggest foreign customers do that, smaller customers or potential ones such as the US and Asian countries would also be cautious.
“People in Europe woke up on Monday and were surprised just how vulnerable their energy supplies are,” says Mr Weafer. “Russia may have brought forward by 10 years a big debate in the EU about its own energy security.”
ELEMENTS OF MOSCOW’S GROUP OF EIGHT AGENDA
■ Energy security: Russia intends to increase oil and gas exports following investment in its pipeline infrastructure, which is limited and obsolete. In particular, upgrades are needed in transporting liquefied natural gas and completing oil pipelines to terminals where large tankers can be accommodated. No clear timetable has been given for the increase
■ Migration: Policies are being sought to stem Russia’s demographic slide. Its population has been declining steadily since the break-up of the Soviet Union in 1991, with increased poverty, alcoholism, emigration and a degradation of the healthcare system blamed variously for reducing birth rates and life expectancy
■ Fighting disease: Russia and the Commonwealth of Independent States have one of the biggest problems with the spread of HIV/Aids. Efforts to combat serious infectious diseases provide a link to one of the priorities of the previous British presidency – Africa
■ Aid: After the UK attempt to highlight the problem of poverty in Africa, Russia intends to focus attention on the former Soviet republics of central Asia, some of which are severely impoverished
POTENTIAL FLASHPOINTS FOR THE RUSSIAN G8 PRESIDENCY
■ Democracy: Russia has abolished direct elections of regional governors and changed electoral rules in a way that will make life much more difficult for opposition parties and independent candidates
■ Freedom of speech: President Vladimir Putin has re-established state control over all national TV channels and many newspapers, though websites and some radio stations still provide lively debate
■ Civil society: A bill that would clamp down sharply on non-governmental organisations – though slightly softened from an original draft – has been rushed through Russia’s parliament and is awaiting Mr Putin’s signature
■ Chechnya and the north Caucasus: In spite of Moscow’s claims that the situation in the breakaway republic of Chechnya is stabilising, bombings and attacks in neighbouring internal republics over the past year suggest the conflict is spreading
■ Relations with neighbours: Georgia has accused Russia of fanning separatist conflicts. Russia cut off gas to Ukraine, a year on from the Orange Revolution there, after demanding a huge price rise
■ Choice of allies: Russia is helping Iran build the Bushehr nuclear reactor and has just sold it $1bn of weapons. Russia also retains close ties both with Uzbekistan, whose massacre of protesters in the city of Andijan in May provoked international condemnation, and Belarus, where president Alexander Lukashenko is described by the US as ‘Europe’s last dictator’
Germans shrink from an old enemy’s embrace
Less than a week ago a German government official was asked what Berlin would do if Gazprom, the state-controlled Russian energy giant, acted on its threat to cut gas supplies to Ukraine, writes Bertrand Benoit. The question elicited a shrug: even at the height of the cold war, she said, Russia had never turned off the tap.
Such certainties have since been shattered. Calls are rising within Europe’s largest economy for Berlin to rethink not only its heavy reliance on Russian energy but also its cosy political relationship with its former cold war enemy. “Russia has been using energy as a weapon against its immediate neighbourhood since the 1990s,” says Frank Umbach of the German Society for Foreign Policy. Few worried about such tactics then, he says, but with western Europe now facing collateral damage, alarm bells are belatedly ringing.
Russia provides about a third of the gas consumed in Germany and over 40 per cent of its gas imports. Experts expect this dependency, already the highest among large western European nations, to reach well over 50 per cent by the end of the decade. For months, the International Energy Agency in Paris, the European Commission and the French and British governments have been watching these figures with mounting concern. As Angela Merkel, the new chancellor, prepares to visit Russia this month, German voices are joining the chorus of warnings.
“For too long, Germany has only considered energy as an economic and an environmental issue,” says Eckart von Klaeden, an MP from Ms Merkel’s Christian Democratic Union. “We must now catch up with the rest of the EU and start thinking about it in security terms.”
A distancing from Russia would mark a foreign policy U-turn for Germany, which became the country’s closest partner in the EU under Gerhard Schröder, Ms Merkel’s predecessor. By the end of his second term, Mr Schröder had forged a genuine friendship with Mr Putin, addressing him in German – which the Russian president speaks fluently – using the familiar “Du” form reserved for friends and family.
At home, the chancellor often countered criticism of Mr Putin’s authoritarian drift, famously describing him as a “dyed-in-the-wool democrat” in a talk show. Weeks after stepping down last year, Mr Schröder accepted the chairmanship of the North European Gas Pipeline Company (NEGPC), a €5bn Gazprom-dominated pipeline venture he had supported as chancellor.
Berlin officials say such an embrace of Russia was guided by three factors: the belief that it would encourage democratic and market-oriented reforms in the country; the desire to build on Germany’s status as Russia’s largest trade partner to boost German investment opportunities in the country; and the need for a secure source of energy given the instability of the Middle East.
Roland Götz, Russia expert at the German Institute for International and Security Affairs and a fervent supporter of such engagement, says Russia’s decision to let more gas flow into the Ukrainian pipeline this week had, if anything, shown that gas did not lend itself to abuse as a foreign policy tool. “Cutting gas supplies is like dropping an atomic bomb. You cannot do it without damaging yourself. Russia needs to sell its gas as much as we need to buy it.”
Yet for Mr Umbach and the increasingly influential camp of Schröder critics, the former chancellor’s policy not only failed to curb Mr Putin’s assaults on democracy and his re-nationalisation of vital segments of the economy at home, but also put Germany’s energy supplies at the mercy of the Kremlin. “Even if you look at business projects, you see that most Russian-German joint ventures are Russian-controlled,” Mr Umbach says. “The NEGPC, for instance, was a Russian initiative and one that makes very little economic sense.”
Many in Ms Merkel’s CDU share the same concerns and are now calling for the urgent diversification of Germany’s energy supplies. “It is quite clear that the differentiated price policy Russia applies to its neighbours has little to do with economics,” says Ruprecht Polenz, head of parliament’s foreign affairs committee. “And it is clear too that Gazprom should be seen as a tool in the hands of the Kremlin.”
“Of course, we have an elementary interest in a strategic partnership with Russia, but not with a Russia that reverts to its old authoritarian structures,” he says.
Even members of Mr Schröder’s Social Democratic party, now junior partner in Ms Merkel’s “grand coalition”, say Germany should work towards a co-ordinated European approach to Russia and to energy policy in general. In the short term, critics of engagement say, Berlin should seek to diversify its supplies, for instance by accelerating plans for a deep-sea harbour in Wilhelmshafen, on the North Sea coast, allowing it to import liquefied gas from Qatar among other providers.
Ironically, Mr Polenz says, the escalation of the Ukraine-Russian gas dispute may have provided new arguments for welcoming both countries in the World Trade Organisation, as “the WTO would provide the best mechanisms for dealing with such disputes”.
Additional reporting by Thomas Catan
http://news.ft.com/cms/s/a79361c0-7c90-11da-936a-0000779e2340.html
