As long as President al-Assad's regime causes instability, oil prices stay high; the Russian budget is balanced and Chinese gain the competitive advantage. This situation is the result of a series of decisions that stretch as far as 2005...
In a recent interview with the Business Insider, I said that "problems in Iran and Syria are 'wonderful for the Russian economy.'" I meant it. Mark Taylor's article "For all the bluster, these three reasons show Russia's position on Iran may be surprisingly sane" explores well why Russia is interested in the ambiguity around Iranian nuclear program. In brief, two things to keep in mind: the unstable region means higher oil prices (good for Russia), and Iran as a neighboring Islamic nuclear power means an imminent threat to Russia beyond any American's imagination (bad for Russia). However, after all, world economics and politics are a fine art of balancing, and that's what Russia is doing; playing a dangerous game, that's paying off well so far with Putin's balanced federal budget.
The new unstable player of the region is Syria, and many Americans, including Secretary of State Hillary Clinton, cannot wrap their mind around Russian and Chinese stance of non-involvement. The situation is similar to the one with Iran and Libya, but if one takes a closer look, it is different and only "better" for Russia and China. Suffering and dying of innocent people are bad things; however, they are bad only for the people experiencing them. The Russian Orthodox Church, led by former Putin's colleague, would condemn the violence, but would also remind you that there is a lot of suffering in the world, and the best immediate thing we can do is just pray for the victims. Gadhafi was a stabilizing force in his country, and NATO's help to the Libyan rebellion meant instability (higher oil prices, better budget in Russia). Gadhafi was a Russian ally, and Russia faced the loss of a $4 billion weapons contract. However, that monetary loss was offset by the significant increase in oil prices, and Gadhafi's old age helped Russia shape its decision to control the timing of his imminent "departure."
Syrian President Bashar Hafez al-Assad (coincidentally born on September 11) is a different animal. His leadership means instability in the region, for which American farmers are paying at the gas pumps, and with which Russian members of parliament are balancing the books. So, if the case of Syrian nation's slaughter is monetarily good for Russia, why would the Chinese go along? After all, they import oil as well. That's where many reporters (and Secretary Clinton) forget a small detail of a very large transaction that took place seven years ago.
Do you remember that Putin-blessed BP deal with Russia's government Rosneft? Well, the deal did not happen, however... Vladimir Putin said today that Shell may become a Rosneft's partner on the same conditions as BP was expected to. Netherland British Shell will most likely become Rosneft's partner in the Arctic, which will put Russia even further ahead of Canada and other nations claiming the vast Northern oil reserves.
Vladimir Putin commented that "Shell is a comfortable partner for us. It doesn't matter who the foreign partner is, as long as the conditions of the cooperation are in line with Russia's national interests." Shell is already involved in the famous projects Sakhalin-2 and Sakhalin-3. If the Shell-Rosneft deal takes place, the new venture will be split with 67% Russian ownership and 33% Shell ownership. The newly formed company will explore oil in the Arctic. A consortium of Russia's high-level politicians lead by Putin blessed the strategy explaining it by hundreds of fancy words. However, the reality is that while Russia has the money and the military might to claim the Arctic, it does not have the technology. Everybody else does, that's why it doesn't matter to Putin whether it will be Shell or BP. May be American-based oil companies should take a note of the situation.
Russia - World's Largest, Most Stable Energy Exporter. Moscow - Home to Most Billionaires
A janitor cleaning the street next to an exotic race car in Moscow, Russia
With average salaries of the working class virtually unchanged over the past year, and still no paved road between the west side and the east coast of the country, Russian citizens are not sure if they should be proud by the fact that their nation's capital is home to 79 billionaires, most in the world. On the other hand, Russia's vast spaces and extreme temperatures would make the maintenance of a continental highway nearly impossible, and an average Russian has seen his income surge over the past decade. So, after all, countless Bentleys, Mercedes's, and Rolls Royce's in the streets of Moscow are nowhere near to cause a Soviet-October-style or Egypt-type revolution. People, on average, are happy.
With unrest in Africa and the Middle East, The New York Times (usually unfriendly to Moscow) calls Russia "the most stable energy exporter in the world." European and American investors lined up to strengthen Russia's financial well-being and billionaires' pockets: "BP cited Russia's relative stability compared with OPEC regions, when announced in January a $7.8 billion deal to invest in the state-owned Russian oil company Rosneft and jointly search for oil in the Arctic. Later that month, Exxon Mobil, the biggest American oil company, signed a deal with Rosneft to explore offshore in the Black Sea," reported the NYT. French energy giant Total cited Russia's stability two weeks ago when agreeing to buy $4 billion worth (about 12 percent) of a Russian independent natural gas producer Novatek, and join a liquefied natural gas project in the Russian Arctic.
Combined with Russia's status as a number-one world's energy exporter, facts are facts: Russia is home to a stable economy, balanced budget, satisfied population, fastest strengthening currency, and 101 billionaires. After all, Russia's snow and ice are friendlier than Arab sand and sunshine (and safer than the Wall Street's gambling).
Russian Scientists Warn of 'Iranian Chernobyl' Possibility
Iran's nuclear power plant
Russian nuclear scientists are helping Iran in its attempts to activate the nation's first nuclear power plant at the Gulf port. However, according to Western intelligence reports, they have raised serious concerns about the extensive damage caused to the plant's computer systems by the mysterious Stuxnet virus, which was discovered last year and is speculated to have been the result of a sophisticated joint US-Israeli cyber attack, reports RIA Novosti.
Reports say that Russian scientists warned the Kremlin that they could be facing "another Chernobyl" if they were forced to comply with Iran's tight deadline to activate the complex this summer. While the story sounds like an urban legend, and it is hard to believe that a computer virus might have caused such an extensive damage (which also assumes that the files were not backed up, and that Iranian government cannot buy new computers),The Telegraph has the story.
The recent signing of the Nabucco pipeline project is definitely a political rather than economic deal. Its feasibility, the probability of its actual construction and its profitability aside, the deal shows clearly that, at least for the present, those who want to see a weaker Russia prevail over those who would rather see it strong and an integral part of the West. It is also obvious that without heavy Washington lobbying the Nabucco pipeline would never take off. Since there is practically no economic interest for the U.S. in it, Washington politics make the direction of the much advertised "reset" quite uncertain.
In the last 20 years since the collapse of communism every U.S. president has kept repeating that it is in American interests to see Russia as a strong, democratic, and prosperous nation. But actions rarely suit the words. Washington needs, and often gets, Moscow's cooperation on major security issues, but then it turns around and does its damnedest not only to prevent "non-democratic" and "authoritarian" Moscow from becoming an energy superpower, but to make sure that it gets as little cash as possible -- by diverting this cash to former Soviet republics where democracy is so rudimentary as to be barely discernible, while Oriental despotism, sometimes hereditary, is very much in evidence. So much for the hugely advertised U.S. democracy promotion mission.
In U.S.-Russia Energy Rivalry China is the Big Winner
In spite of the recent decline in crude oil prices, Russians are still paying $3 at the pump, nearly twice as much as the average in America. Why?
It's no secret that Russia's oil and gas industry, which accounts for more than half of Russian export revenues and more than a third of Russian GDP, has fallen on hard times lately. In the final quarter of 2008, at the same time that oil prices plunged worldwide, Rosneft, Lukoil and Gazpromneft also lost access to easy credit from Western capital markets. After briefly surpassing Saudi Arabia as the world's no. 1 oil producer in 2006, Russia's oil output has stagnated and declined somewhat in the last two and a half years.
The Russian federal budget, which had previously anticipated prices at $95 a barrel for 2009, now faces a huge shortfall, with current prices hovering around $45 a barrel. The Kremlin had announced plans to cut oil export taxes to spur new exploration and production in an industry that for decades has provided one of its primary sources of revenue, but these badly needed reforms may end up being postponed. Adding insult to injury for ordinary Russians, drivers across Russia are still paying over $3 a gallon at the gas pump, in spite of the collapse in crude oil prices.
The latest Russo-Ukrainian gas spat may have finally taught the elites in those two countries a vital lesson. Namely, that they stand to gain far more from acting in concert, than either one of them gains from acting against the interest of the other.
The latest statement by European Commission President Jose Manuel Barroso that "Europeans" will not forget how Ukrainian and Russian leaders acted during this crisis, reveals more than just impotence. It serves as a reminder that many Western Europeans are still not ready to accept either Ukraine or Russia as part of Europe. It would be wise for both Russian and Ukrainians not to lose sight of this fact, for it both shapes and constrains the policies of European Union towards them.
At the outset of this latest spat, both Ukrainian and Russia political elites made the mistake of assuming that EU leaders cared about the issues. They therefore put all their efforts into making their case in the media, instead of undertaking direct negotiations. Ukrainian leaders hoped to mobilise western sympathy by portraying their country as a victim of Russian imperialism, while Russian leaders sought to portray the Ukrainians as thieves. Each then tried to involve their Western European partners more directly, urging the European Commission to send monitors to the pumping stations, inviting the parties to a gas summit, and floating schemes by which European intermediaries might step in to guarantee payments in the event of further payment arrears.
Gas War Over - Ukraine Agrees to European Prices for Russian Gas
Although Gazprom made Ukrainian customers agree to pay European prices for Russian natural gas beginning in 2010, the state-owned gas export monopoly lost hundreds of millions and many Europeans are angry that Russia and Ukraine failed to resolve their price dispute before millions in Slovakia, Romania, Bulgaria and other countries suffered gas shortages during a very cold winter (Video by: Russia Today TV)
Click on the energy section of Russia Blog to read more about the dispute.
Gazprom CEO Alexei Miller and Russian Prime Minister Vladimir V. Putin
Russia Blog contributor Professor Andrei P. Tsygankov sends along his latest article, published in the Asia Times newspaper. Prof. Tsygankov writes that although Russia is justified in seeking higher prices from countries like Ukraine that have based much of their recent economic growth on cheap subsidized Russian gas, the Kremlin has pinned far too much of its hopes for future development on the oil and gas industry.
While this type of criticism is quite commonplace in the West, Tsygankov, like his fellow Asia Times contributor "Spengler", realizes that the time is short. If Russia (and for that matter, Ukraine and Georgia, which are in even worse demographic shape) want to turn things around and avoid their societies being cut in half, they have to do it within a generation.
Click on the extended post to read this excellent Asia Times article.
why a dispute over gas payments between Russia and Ukraine only begins to be called a "gas war" when Gazprom cuts off the gas, but not when Ukraine refuses to pay for it.
If there is indeed a tendency among the Western press (and blogs) to paint these sorts of conflicts as exclusively precipitated by Russia, then that might owe as much to an unwillingness to delve into the underlying economic issues as it does an inherent anti-Russian bias.
So I've been turning to the financial press lately to get some alternative views. And, perhaps unsurprisingly, I found more sympathy for the Russian position there.
Gazprom claims that Ukraine owes it $1.5 billion in debt, and is asking Ukrainians to begin paying $419 per thousand cubic meters -- a price still below what Gazprom's end customers in Germany, Italy and France pay for the same Russian gas that transits Ukrainian territory. Gazprom has also accused Ukraine of not allowing independent European auditors to survey the pipes, to insure that gas is not being siphoned off from export pipelines to Europe by Ukrainian oligarchs. Ukraine's government denies all these charges and insists that it made a sufficient down payment (about $500 million) on its debt by midnight to keep the gas flowing, and has declared that the Gazprom supply shutoffs are unfair and politically motivated.
U.S. companies can't drill there - but foreign firms may be drilling in the Straits of Florida very soon
During the 2008 presidential campaign, Republicans urged the Democrat majority in the U.S. Congress to allow American oil companies to "drill here, drill now, pay less" amidst record gasoline prices. One of the claims Republicans made was that the federal ban on offshore oil drilling, particularly off the coast of Florida, was ridiculous because Cuba had already leased drilling rights to Chinese companies. Thus, Chinese firms would be drilling nearly 90 miles off the coast of the U.S., while American laws would prevent American oil majors from doing the same.
At that time, Democrats dismissed these GOP claims about Chinese drilling as apocryphal, and said that China hadn't drilled for any oil in or around Cuba and that more domestic drilling wouldn't reduce gasoline prices for consumers at the pump. Later on during the campaign, as gasoline prices peaked in July 2008 and U.S. public opinion polls shifted decisively in favor of drilling, the Democrat majority in Congress allowed the long-time drilling ban to slip. Nonetheless, Florida and other states retained their bans on offshore oil and gas development.
One wonders if the news Sunday that Russian oil majors are also considering development in the Gulf of Mexico will affect the debate over drilling in the Florida legislature and on Capitol Hill. The announcement by a Russian diplomat came ahead of President Dimitry Medvedev's state visit to Havana, part of a presidential tour planned through Latin America.
President-elect Barack Obama's spokesman John Podesta has already announced that Obama will review several Bush-era executive orders, including the President's recent decision to abrogate the previous President Bush's 1990 executive order that banned offshore oil drilling. Lower gasoline prices due to the global economic slowdown (and some analysts claim, the bursting of a speculative bubble in commodities) has reduced the pressure on Democrats to allow drilling -- for now. But one wonders whether China, Russia, India and other rising economic powers will have much interest in joining a U.S. and Western European-led carbon "cap and trade" scheme, the favorite policy of House Speaker Nancy Pelosi and other leading Democrats, to reduce worldwide CO2 emissions that may contribute to global warming.
Click on the extended post to read excerpts from the Associated Press story.
The war in South Ossetia and Georgia, though appalling, resulted in fewer deaths and damage than originally reported. It is still not "over" and probably won't be for some time. Meanwhile, it definitely did serious damage to Russia's relationship with the West. In some ways, relations are worse than at any time since well before the collapse of the USSR--in other words, in roughly a quarter century.
We are going to say a lot more on this, and we are not inclined to be particularly laudatory to any of the players. The war has not made any country look good.
Meanwhile, before the war we wrote a report on Ten Reasons Americans Should Care About Russia. It follows, and, as you will see, it remains valid. Perhaps as tempers cool, people of good will can consider what is at stake; what there is to gain, and what there is to lose.
To Reduce Russia Stand-off, Reduce Western Oil Dependence
By Mike Wussow and Bruce Chapman
A Russian gas rig in Siberia. Russia currently produces over 9 million barrels of oil per day and has the world's largest proven reserves of natural gas, giving Moscow significant geopolitical clout
(Note: Some of the issues described in this post - particularly U.S. oil dependency and energy security - will be the focus of a major conference hosted jointly by Discovery Institute's Cascadia Center and Microsoft on September 4-5, 2008. Participants will include Anne Korin and James Woolsey, both of whom are also referenced in this post. Details are available here.)
The Russia-Georgia conflict brings uncomfortably to the surface the question of energy security. Like much of the rest of the world, America is addicted to oil, most of it now imported. We rely on petroleum to fuel just shy of 100 percent of our transportation. America imports from its neighbors, Canada and Mexico mainly, but almost as much from Saudi Arabia, Venezuela and Nigeria. Russia supplies 762,000 barrels each day to the U.S. according to numbers released by the U.S. government in June.
Reuters Reports: Gazprom Offers to Buy All of Libya's Gas
Editors - Even if this deal does not happen, the Russian company has two things for sure - global ambitions and cash. Please, read the Reuters story about this new business development:
The Russian gas export monopoly Gazprom wants to buy any available natural gas produced by Libya and some of the country's oil, the top Libyan oil official said on Wednesday. "Gazprom has expressed its willingness to buy Libyan oil and any available quantities of gas," the official, Shokri Ghanem, told Reuters, adding that it did not mean Gazprom would buy all of Libya's oil.
Gazprom's chief, Alexei B. Miller, met with Col. Muammar el-Qaddafi of Libya, after which the company said in a statement that it hoped to buy, at market prices, "all future volumes" of gas, oil and liquefied natural gas available for export. A cooperation agreement signed in 2006 between Gazprom, which supplies about a quarter of Europe's gas, and Algeria led to fears that Europe's biggest two suppliers could work together like the OPEC group of oil exporters.
While many energy analysts were quick to dismiss these comments from a CEO representing an energy company with larger oil reserves than many OPEC countries, Mr. Miller's statement, combined with a comment from the Vice President of OAO Lukoil in April 2008 that Russian oil production might have peaked last year, could send world energy prices higher in the coming months. In the first quarter of 2008, Russia surpassed Saudi Arabia as the world's largest oil producer.
Click on the extended post to read excerpts from the articles by Bloomberg and Reuters.
UPDATE: This post has been republished over at the World Politics Review Blog.
Russia may become a player in North American energy markets sooner than anyone expected. According to the June 7, 2008 edition of the International Herald Tribune:
Gazprom has made a proposal to BP PLC and ConocoPhillips, which in April submitted a bid to build a multibillion-dollar pipeline that would carry natural gas from Alaska's North Slope to the lower 48 U.S. states, Gazprom director Alexei Miller said.
"Gazprom has unique experience, knowledge and modern technology and is the most advanced company in the world in the realm of gas transport in trunk pipelines," Miller told an international business forum in St. Petersburg, Russia. "So participation in such a large-scale project as the construction of a pipeline from Alaska is interesting for us."
Click here to read the rest of the article at the IHT. Click on the extended post to read Russia Blog's analysis.
In the last seven years, Russia and China have agreed to settle their long simmering border disputes, and bilateral trade has increased from $10 billion to $48 billion a year. To put this number in perspective, in 2007 Russia's total trade with Germany amounted to $52 billion.
To fuel its surging demand for electricity, in recent years China has become the world's largest consumer of coal, and air pollution has become a major problem in Chinese cities. Developing nuclear energy would help China to reduce emissions while continuing to grow its economy.
Most of the Western media coverage of Russian President Dimitry Medvedev's meeting last week with Chinese President Hu Jintao have focused on their joint statement, which criticized U.S. plans to build a missile defense system in Europe. But as usual, the real action last week was not diplomatic, but commercial.
U.S. Nuclear Power Plants to Get More Russian Uranium
By Tom Doggett; editing by Doina Chiacu
Sequoyah nuclear power plant in Tennessee
U.S. nuclear power reactors will be able to obtain more supplies of Russian enriched uranium for fuel, under a trade deal signed by the two countries late on Friday, February 1, 2008. The agreement will provide U.S. utilities with a reliable supply of nuclear fuel by allowing Russia to boost exports to the United States while minimizing any disruption to the U.S. domestic enrichment industry.
"The agreement will encourage bilateral trade in Russian uranium products for peaceful purposes," said U.S. Commerce Secretary Carlos Gutierrez. "It will also help to ensure that U.S. utilities have an adequate source of enriched uranium for U.S. utility consumers. Gutierrez and Russian Federal Atomic Energy Agency Director Sergey Kiriyenko signed the deal allowing for sales of Russian enriched uranium directly to U.S. utilities. Before the agreement, such direct transactions were not permitted.
Which indicators are proving the increasing stability and predictability of the Russian economy? First, there's the unprecedented rate of growth of foreign investment, which surged by a factor of 2.5 in 2007. None of the world's 15 leading national economies can compete with this achievement. Some $100 billion was invested in Russia from abroad over the last 12 months, an all-time record for any emerging market country and a milestone of great historical and psychological significance for Russian business.
Please, visit the extended post to read the full Forbes report.
Video of David Zaikin, CEO of New York City-based Siberian Energy Group, commenting about the Russian energy industry on CNBC's Squawk Box last year. You can listen to a more recent interview Mr. Zaikin recorded with the BBC during the G-8 summit in June 2007 here
Will China have rights to the North Pole? Most likely, yes. But first, let's take a look at who has rights to the North Pole today.
"Power, not international law, will settle the issue. Indeed, international law recognizes this fact by making title dependent on a nation's ability to exert control over an area," said Eric Posner, a law professor at the University of Chicago in the Wall Street Journal article "The New Race for the Arctic."
"This isn't the 15th century. You can't go around the world and plant flags and say 'we're claiming this territory'," said Canada's Foreign Minister Peter MacKay. U.S. State Department spokeswoman Leslie Phillips said "We wish the Russian scientists a safe expedition..."
Russian scientists, joined by the veteran Australian polar explorer Michael McDowell and Frederik Paulsen, a Swedish pharmaceuticals millionaire and co-sponsor of the effort, indeed had a safe and successful trip to the Pole and to the sea bed nearly two miles beneath it. The expedition amused the entire world, and only days after the historic dive, countries and legal specialists started wondering "What does all this mean and who really owns the Pole?"
The Soviet-built Druzhba pipeline, Russia's main natural gas link to Europe, runs across the territory of Belarus
Once again Russia's state-owned natural gas monopoly Gazprom is making news, this time threatening to cut off 45% of gas supplies to Belarus, unless the two sides can reach an agreement by the end of today. Belarus' natural gas transport service, Beltransgaz, reportedly owes Gazprom $500 million. Minsk has fallen further behind on paying its debt to Moscow since Gazprom effectively doubled its prices on January 1, 2007, raising the rate from $45 per thousand cubic meters (tcm) to $100 (in comparison, Gazprom's main customers in Germany and the E.U. pay more than $200 per tcm). When it agreed to the new price hike, Beltransgaz also sold shares of its stock to Gazprom as collateral on its previous debt.
UPDATE: Beltransgaz made a down payment on its debt today to avoid any shut off, according to this press release from Gazprom.
Last week France's Total S.A. agreed to a 25% stake in a major Russian oil and gas project, while the state-owned firm OAO Rosneft forged a new partnership with Royal Dutch Shell.
Over at his blog, Thomas P.M. Barnett has a few comments on these moves, contrasting Russia's openness to foreign investment in energy to the off-limits approach taken until very recently by Mexico (although the new government led by Felipe Calderon is trying to modify the Mexican Constitution to permit foreign investment in this sector). While Mexican oil and gas production continues to decline, Russian oil production has increased since reaching a post-Soviet low in the mid-Nineties. In spite of government-mandated limits on what Gazprom can charge domestic industries, Russia's gas industry has also managed to keep up with increasing demand both Europe and from a booming economy at home.
Yesterday Forbes magazine reported that Russia's leading "national champion", the state-owned natural gas monopoly Gazprom, nearly doubled its profits from the previous year.
"Russian gas giant OAO Gazprom reported a doubling of full year net profit as sales surged on higher oil and gas prices and the impact of its acquisition of Sibneft in 2005."
Gazprom acquired Sibneft, one of the leading private oil companies in Russia, for $13.1 billion in late 2005. The deal made Sibneft's then-CEO Roman Abramovich the richest man in Russia.
According to Forbes, "The company said full year net profit jumped to 636 bln rubles [$24.7 billion] from 316 bln rubles [$12.7 billion] last time, on sales of 2,152 bln [$83.6 billion], from 1,384 bln [$53.7 billion] last time."
Technicians for Mostransgaz check on a pipeline station
RussiaIC.com reports this piece of good news, both for the environment and for the Russian natural gas industry:
Russian Ministry of Natural Resources has held a meeting on the problem of casing head gas utilizing. Participants discussed that burning of this gas damaged environment both in Russia and the world...
Russian state authorities decided to put the issue of gas utilizing under special control and to stimulate oil producing companies to utilize oil production by-products more carefully.
You can read more about the global problem of flaring natural gas in this Boston Globe article.
Igor Ivanovich Shuvalov, a senior aide to Russian President Vladimir Putin, told reporters last week that there is no way Russia would ever support creating an OPEC-style cartel for natural gas.
"The responsibility of gas providers must be greater than that of oil providers, because there are far fewer such countries, and no market of liquefied gas....we would never come out in favor of an initiative for creating an organization that would be setting prices. We are for the predictability of all supplies, without any fluctuations," Shuvalov said.
Click here to read the full ITAR-TASS article. You can also read a Forbes magazine interview with Igor Shuvalov here. Click on the extended post to read more about Russia's growing role in the global market for liquefied natural gas.
...Russia still looks better than some of the alternatives, says Clifford Kupchan, an analyst at New York City political risk consultancy Eurasia Group. 'The place is still Florida compared to Africa or the Middle East,' he says.
The Islamic Republic of Iran is apparently running short on cash. According to the International Herald Tribune, the Iranian regime has twice failed to pay $25 million in monthly payments to Rosatom, Russia's atomic energy agency, for work already completed on the Bushehr nuclear reactor.
Rosatom executives have confirmed that the Iranians failed to make their payment in full for the month of January and have not paid at all for this month. As a result, Rosatom has cancelled plans to deliver civilian-grade nuclear fuel to the reactor next month and is threatening to delay work at Bushehr. Russia is not willing to subsidize Iranian energy projects anymore than it was willing to keep subsidizing the former Soviet republics with cheap natural gas.
Robert Amsterdam, an attorney for jailed Yukos executive Mikhail Khodorkovsky, has republished excerpts from Prof. Economides' article in The Energy Tribuneon his blog. Mr. Amsterdam cites the report as further evidence that Russia cannot be trusted as a reliable supplier of energy to the world. Prof. Economides apparently shares this view. In a September 2006 Energy Tribune article, he condemned Russian foreign policy in recent years as "energy imperialism" and declared that "What Nikita Khrushchev tried to do with nuclear weapons during the Cold War almost half a century ago, Vladimir Putin is doing with oil and gas today."
Meanwhile, Russia is continuing to take steps to head off a potential crunch between supply and demand. The first, and most controversial part of Gazprom's strategy was raising prices on natural gas deliveries to Russia's neighbors. While conservation is usually described in the West as a good thing, Gazprom's price increases on Georgia, Ukraine and Belarus were mostly condemned by Western pundits as cases of politically motivated blackmail. The second part of Gazprom's strategy is, admittedly, the most politically tricky task - the state-owned monopoly plans to increase domestic natural gas prices paid by Russian industries and power plants. The third step necessary to head off Prof. Economides gloomy scenario is promoting alternative sources of energy for a Russian power grid still overwhelmingly dependent on cheap natural gas.
Money, Not Geopolitics, Drives Russian Energy Policy
Gazprom sign near Red Square in Moscow (Photo: Yuri Mamchur)
Ever since Russia briefly interrupted natural gas deliveries to Ukraine on New Year's Day 2006, Moscow has been harshly criticized in the West for allegedly using energy as a tool to blackmail its neighbors. The recent spat between Russia and Belarus over Moscow's price hike on oil and gas deliveries to Minsk once again prompted charges from Western politicians and pundits that Russia is not a reliable source of energy. But where many Westerners perceive Russia as a regional bully, the Kremlin argues that former Soviet republics are not entitled to cheap Russian energy simply because Russia's major export pipelines cross their territory.
Russian commentators have complained in the last several weeks about how Belarusian President Alexander Lukashenko has sought to transform his country's image in the West from an authoritarian pariah state into yet another victim of Russia's "energy imperialism". Russians ask: why does the West criticize Russia for subsidizing Lukashenko, and then criticize us again for stopping these subsidies? And how exactly does the West expect us to get countries like Belarus or Ukraine off the dole without threatening to shut off gas supplies? Russians scoff at the idea that Lukashenko would ever agree to price increases that could threaten his grip on power because the European Union presented him with a polite request.
Gazprom has announced plans to quadruple the price it charges Belarus for gas this winter, raising rates from $46 per thousand cubic meter (tcm) to $200/tcm. The move comes as a surprise to some Western analysts who view Gazprom's actions solely through the prism of politics, since Belarusian President Alexander Lukashenko is still viewed as a loyal ally of the Kremlin. But the move does not surprise energy analysts who have been closely following Gazprom's frequent statements about the need to modernize its pricing structure.
As Russia Blog reported this time last year, the very brief interruption of natural gas deliveries to Ukraine on New Year's 2006 was exacerbated by politics, but the decision was fundamentally driven by economics. Gazprom wanted to end the siphoning of natural gas from the pipelines it uses to export gas to Western Europe that cross Ukrainian territory. The fallout from the Orange Revolution gave Gazprom the political cover it needed from the Kremlin to act in a way that it knew would be unpopular in the West. But after all the hype about Russia flexing its muscles as an energy superpower, the end result was a compromise that pushed prices in Ukraine closer to European levels. And while Europeans were reminded of their growing dependency on Russian natural gas, the alternative sources for the Continent - the Greater Middle East and West Africa - aren't likely to be more stable suppliers than Russia anytime soon.
Gazprom billboard near the Russian Parliament building in Moscow
In recent months the Western media has taken notice of Russia's tightening domestic market for natural gas and electricity. First the International Herald Tribune, then the UK Independent and Financial Times newspapers published articles questioning whether Russia can continue to expand energy exports while providing enough energy at home. Last week Gazprom executive Alexander Medvedev responded to these claims by reassuring Western investors that his company will invest more than enough to meet rising demand at home and abroad. Gazprom plans on investing $40 billion in the next few years to develop huge Arctic gas fields in the Barents Sea and Yamal region of northwest Siberia.
Even so, some analysts doubt that Gazprom can overcome the political constraints imposed by Russia's upcoming 2008 elections, and begin encouraging conservation by raising gas rates. The need for more energy conservation is highlighted by the fact that Russia consumes more than 2/3rds as much gas as the U.S. - in spite of only having half the population.
Russia does have immense coal reserves and stockpiles of nuclear fuel leftover from the Cold War to substitute for gas in electric power generation. However, neither conservation nor substitution is likely to take off until natural gas prices rise. Many powerful Russian industries have profited from Gazprom's legal obligation to sell them gas for less than half of the European market price ($250 per million cubic meter), and are not likely to allow rate increases without a fight.
Gazprom does not have to raise rates to Western European prices overnight to meet its export obligations. But it will probably need to accelerate the liberalization of the Russian gas and power market to meet its ambitious goals.
Click on the extended post to read Energy Biz Insider Editor in Chief Ken Silverstein's article on this topic.
Gazprom Deputy Chairman Alexander Medvedev wants everyone to relax about the state-owned natural gas giant's growing clout in world energy markets. While visiting the U.S. last week for a public relations tour, he told Business Week, "I can assure you that we have enough reserves to meet both local demand and export obligations, including potential sales in new markets: in China, Korea, and the U.S. and Canada for (liquefied natural gas) sales. This is fully supported by investment programs." Medvedev's remarks came in response to recent media reports claiming that Russia could run short on gas and be forced to cut exports in the near future.
Can Gazprom continue to provide subsidized gas at home while meeting its ambitious export commitments abroad? That was the question posed this week by two major news articles about Russia's tightening gas and electricity markets. In their reports, both the UK Independent and UK Financial Times questioned whether Gazprom can provide Russian power plants with enough subsidized natural gas to keep the lights on in Russia while boosting gas exports to Europe and China. The normally restrained Financial Times presented an alarmist headline, "Russia Faces the Chilling Prospect of a Winter Short of Gas" while the Independent's headline read, "Russian Electricity Market: Sell-Off in a Cold Climate".
Much like China, after decades of failed central planning, Russia is happy to be coping with the problems created by rapid growth rather than stagnation. Economists have noticed for years an almost direct correlation between growing demand for energy and increasing GDP. Russia's recent economic success and abundant natural resources, however, do not exempt the country from making difficult choices about its energy future. The energy path that Brazil, Russia, India, and China (what Goldman Sachs analysts have dubbed the BRIC group) choose in the next few years will have major implications for the U.S. economy.
American politicians and energy analysts often refer to the United States as "the Saudi Arabia of coal" since the U.S. has 245 billion metric tons of coal reserves. At the current rate of consumption (1 billion metric tons per year), this means that the U.S. has over 200 years supply.
With 157 billion metric tons, Russia has the second largest coal reserves in the world (China has the third largest with 114 billion metric tons). According to the UK-based World Coal Institute, in 2005 Russia produced 222 million metric tons of coal, or nearly one quarter of the U.S. level.
Russia's Ministry of Industry and Energy reported that Russian mines surpassed last year's total in September 2006. Coal consumption for Russian power generation was up by 4.3% between 2005 and 2006, but coal still lags far behind gas as the preferred fuel for new generating plants.
Russian coal mining is concentrated in regions served by the Trans-Siberian Railway, with the Kemerovo, Krasnoyarsk, and Novosibirsk regions accounting for the bulk of the nation's production.
For more detailed information on this topic, check out the reports issued by:
President Bush and Georgian President Saakashvili in Tblisi in 2005
On Saturday, November 4, the Doha, Qatar-based Gulf Times newspaper reported that Georgian officials are considering importing natural gas from Iran via Azerbaijan in the event Russia cuts them off this winter. While Georgia might have no other choice but to freeze or accept the prices Gazprom will dictate, maybe it's time for Americans to ask what U.S. vital interest will be served by Georgia sending more money to Teheran instead of Moscow.
Click on the extended post to read the full article.
"Russia is second only to the United States in total natural gas consumption, and it is the only country in the world where natural gas accounts for more than one-half of total primary energy consumption. In 2003, Russia consumed 15.3 trillion cubic feet of natural gas." (Source: U.S. Energy Information Agency)
Sitting on 27.5% of the world's natural gas, it isn't surprising that so much of the Russian power grid and heating depends on this formerly cheap fossil fuel. For decades the Soviet Union sought to maximize oil exports to acquire precious hard currency; natural gas was cheap and abundant, and there was no way to export it without building costly pipelines.
Today Russian energy companies want to fetch world market prices for their gas, starting with the former Soviet republics and working their way back home; natural gas is no longer cheap, and there are ways to export it through LNG (liquefied natural gas) tankers to the entire world.
Besides gradually introducing market prices to encourage conservation, what else can major NG producers and distributors do to use less gas at home and make more of the stuff available for export?
As we have reported here at Russia Blog, the short answer is: switch to coal and nuclear power, and exploit new energy efficiency technologies. This trend presents a huge opportunity for Western environmental and energy technology companies to demonstrate how much money their products and construction techniques can save Russian energy producers and consumers. And it just so happens that the Pacific Northwest is home to some of the leading energy technology entrepreneurs and research labs in America.
Keeping the lights and servers on in Moscow board rooms
The Colorado-based Energy Biz Insider magazine has an excellent article this week on the challenges of setting market prices in Russian electric power and gas utilities.
Much of the controversy surrounding Russia's increasing clout in world energy markets revolves around the fact that state-owned conglomerates like Gazprom and Rosneft have the temerity to demand world prices for gas, starting with former Soviet republics like Ukraine and Belarus, but will only gradually introduce these rates in Mother Russia. However, as we have documented here at Russia Blog, Russians do not receive massively subsidized gasoline (unlike citizens of OPEC countries) and are paying about the same prices at the pump as Americans do for lower-quality petrol.
There are many legitimate reasons why sudden inflation from 1990s-style "shock therapy" in Russian domestic energy markets is to be avoided. Not only does Russia need capital to fund the replacement of dozens of Soviet-designed nuclear reactors, but old oil and gas fired plants must be replaced with new coal-fired facilities to free up more gas for export while Russia's power grid is upgraded to modern standards. All of this new infrastructure will require tens of billions in new investment, which is why RAO Unified Energy Systems and other Russian utilities are going public in the next eighteen months, listing shares on the London Stock Exchange.
Click on the extended post to read Energy Biz Insider Editor in Chief Ken Silverstein's article.
U.S. Secretary of Energy Samuel Bodman and RosAtom Director Sergei Kiriyenko
With North Korean nuclear tests and the murder of Anna Politovskaya dominating international headlines last week, probably even many Washington Post readers overlooked Hudson Institute fellow Richard Weitz's excellent article on the great potential for U.S.-Russia nuclear energy cooperation. This is unfortunate, as the nuclear industry is an area where both the U.S. and Russia enjoy some of the largest growth potential in the world. Russia and the U.S. also account for a large number of the reactor designs currently operational around the world and therefore are the logical countries to lead a global consortium to insure that nuclear material is used for peaceful purposes. Furthermore, if Iran continues to reject participation in an internationally monitored program, it would only prove to the world that the Ahmadenijad regime wants nuclear bombs and not peaceful electricity.
Norilsk Nickel Doubles Profits, Lukoil to Invest $100 Billion
The Wall Street Journal reported on October 9, 2006 on page A12 today that Russian mining company Norilsk Nickel more than doubled its profits in the first half of 2006. The company's stock closed at $128.50 per share on Thursday, and Norilsk Nickel plans to buy back a billion dollars worth of its own stock at $131 per share. Shareholders will also be rewarded with a dividend of 56 rubles ($2.07) per share for the first nine months of 2006. The International Herald Tribune has the full story here. Norilsk Nickel is one of a basket of Russian companies traded on the New York Stock Exchange (NYSE), AMEX, the London Stock Exchange, and the technology-weighted Nasdaq index (NN's holdings include key metals for semiconductors).
In other Russian business news from the weekend, LukOil President Vagit Alekperov announced that his company would invest $100 billion dollars to develop new oil and gas production. The ten year development plan will be presented to investors in New York on October 19. Alekperov vowed to acquire refining capacity in the U.S. and other key markets, adding that the company could boost earnings by $3.5 billion by making gasoline instead of just selling crude. Lukoil is also turning many of its drilling and shipping units over to contractors to emphasize its core business of pumping and transporting oil. The IHT again has the story.
400 Northeastern U.S. gas stations now have the LukOil brand
Today Reuters has a story on the rapid growth of Russian oil giant LukOil's North American retail business. Fifteen years after the end of the Cold War, Americans in New Jersey and Pennsylvania are filling up their tanks with gasoline refined from Russian crude, and Russia's largest private oil company is sponsoring the NFL's Philadelphia Eagles. That's definitely progress, but LukOil has even more ambitious plans.
At 216,000 barrels per day, Russia is currently right behind Ecuador as the 10th largest oil exporter to the U.S. However, once pipelines are completed from Siberian fields to the ice-free Arctic port of Murmansk and Russia's Far East coast, Russia's share of American oil imports will significantly increase. LukOil is already looking ahead to major deals with North American refiners to expand its revenues downstream. This is a win win for Russia and the U.S where Russians profit from a secure but still growing gasoline retail marketplace and Americans become slightly less dependent on Mideast oil.
Click on the extended post to read the full Reuters article.
The Houston Chronicle has two stories this week about oil and gas development on Sakhalin Island in Russia's Far East. Control of Sakhalin Island historically has been disputed between Russia and Japan, with the first Russian explorers and traders arriving in the 17th century. Japan occupied southern Sakhalin Island after the 1905 Russo-Japanese War, but Russia took the island back in 1945. Japan and Russia still have not reached an agreement to officially end World War II; hostilities today are limited to patrol boats occasionally firing on Japanese fishermen intruding into Russian waters.
Japan is currently the third biggest economy and oil consumer (5.5 million barrels a day) in the world, and the second largest petroleum importer behind the U.S. The Japanese home islands have no oil, therefore Japan imports almost 100% of its fuel, most of which comes from the Middle East. Tankers from the Middle East bound for East Asia have to pass through two bottlenecks: the Straits of Hormuz facing Iran, and the Malacca Straits between Singapore and Indonesia. For this reason, the Koizumi government has sought to diversify Japan's sources of oil by investing in energy from Russia and forrmer Soviet Central Asia.
Japan's diversification strategy suffered a setback earlier this year, when President Putin opted not to extend a major pipeline from Manchuria to the port of Nahodka. This week the Japanese received some good news when Exxon Mobil, the world's largest private energy company, announced that it was ready to start exporting oil and gas from the Sakhalin 1 project.
The Russian business newspaper Kommersant has an article up on their website today, candidly titled Thanks to the War Machine. The article provides some historic perspective on how the USSR profited from the oil shocks after the 1973 Arab-Israeli War and the 1979 Islamic revolution in Iran. The article also notes that Russia has been the single largest beneficiary of higher global oil prices fueled by Mideast turmoil. However, Kommersant contributor Sergey Minaev's argument intersects with a view we have presented here at Russia Blog for some time: the West (not just the U.S.) has a strategic interest in developing Russian oil and gas, with the goal to expand global energy supplies from outside the Middle East.
Today's news is that Venezuelan President Hugo Chavez is visiting Moscow, slapping the backs of Putin and LUKOil's Vagit Alekperov, signing oil contracts, and pledging to purchase $3 billion worth of Russian weapons. Chavez also used his Kremlin stage to taunt America, calling the U.S. a "stupid giant". Chavez basked in the welcome from the Kremlin, the friendliness of many ordinary Russians on the streets, and favorable coverage from the Russian media. Russia Blog will try to explain why Chavez' visit was such a success for the Venezuelan strongman.
First of all, Hugo Chavez is drunk on oil money, and he usually pays on time and with cash. For example, the last time Russia Blog wrote about relations between Russia and Venezuela, we noted that Chavez ordered 100,000 barrels from Lukoil to meet his obligations to Petroleos de Venezuela's subsidized customers in South America.
As we have written many times before, Russians will never turn away anyone who has cash, (even Saddam Hussein), but they could care less about the causes of nationalities that have no money (i.e. Palestinians). Until very recently, Russia had nothing to sell besides oil and gas and some very good weapons. Second, many Russians, just like many Americans inside the Beltway, are still stuck in a Cold War mentality, and Chavez' anti-American remarks sounded great to them. But the biggest non-monetary reason Chavez scored was that Russians have a soft spot for loud pugnacious guys with a mafia attitude, and Chavez delivered. Chavez acted like a middle-aged millionaire gangster from a Siberian town, swilling vodka in public, listening to loud Russian national music, dropping cash and bear hugging President Putin.
An anonymous Moscow-based blogger writing for Ruminations on Russia is making some interesting claims about a report issued last week by UBS, an international investment bank. According to RoR's Thursday July 13 blog post, foreign investors are seriously underestimating how quickly the Russian economy is growing, and therefore how much gas Russia will soon burn at home instead of having available for export. For those of us hoping that Russia can provide the U.S. and Europe with a major alternative to importing more oil and gas form the Middle East, at first glance this sounds like very bad news.
Contrary to the dire predictions of Peak Oil doomsayers, the main obstacle to Russia meeting the world's need for more energy is not geology, but waste and corruption.
Rosneft CEO Sergei Bogdanichikov with his picture of Putin
As the war in the Middle East continues to dominate the headlines and drive up oil prices, the biggest news in global energy markets this week continues to be OAO Rosneft's initial public offering.
As Austin, TX based Strategic Forecasting notes, until two years ago, Rosneft was an afterthought in the Russian oil market, a state-owned pigmy next to the privately-owned giants Lukoil, Yukos (Mikhail Khodorkovsky) and Sibneft (Roman Abramovich). Then Mikhail Khodorkovsky tried to sell his company to several multinational oil companies while buying influence in the West, portraying himself as the champion of opposition to Putin. The Kremlin responded to Khodorkovsky's hubris by dismembering Yukos and banishing the oligarch to a Siberian prison, far away from the friends he thought he could buy on Capitol Hill. Now the same oil majors Khodorkovsky thought would protect him from the Kremlin are buying shares in the empire he built, based on assets the oligarch stole from the Soviet Union.
Articles about Russia have been coming fast and furious this week with St. Petersburg hosting the G-8 summit for the richest countries in the world. For the Kremlin, the most important story is that the nation is finally being allowed to join the World Trade Organization, five years after the U.S. agreed to Chinese WTO membership - this in spite of China having a far worse record on pirating intellectual property and denying human rights than Russia.
For U.S. foreign policy, the most important announcement this week is the Bush Administration's agreement with the Kremlin to liberalize trade in peaceful nuclear technology. The deal would be similar to the nuclear pact the Bush Administration negotiated with India, the world's largest democracy, and an emerging Asian superpower capable of competing with China.
In return for U.S. technology and investment, Russia agrees that the reactor it is building in Iran will be incapable of enriching uranium, and all spent fuel rods will be returned to Russia. Of course, preventing individual Russian nuclear scientists from working at Iran's enrichment plants is the real issue, but one that can be solved if those Russian physicists are given plenty of peaceful work to do elsewhere. Moreover, critics can hardly call this initiative radical - it is consistent with the 1990s bipartisan Nunn-Lugar legislation, which allocated $10 billion U.S. taxpayer dollars in the last decade to secure Russia's nuclear arsenal and brainpower from falling into the wrong hands. Indeed, Pennsylvania Republican Congressman Curt Weldon thinks that this deal could have happened three years ago, if it were not for tensions arising from the U.S. invasion of Iraq.
The Houston Chronicle reported last week that Gazprom Deputy Chairman Alexander Medvedev has accused the Paris-based International Energy Agency of organizing European governments against buying Russian gas. This is the second time in recent months that Gazprom has warned the European Union and EU regulators not to hinder its ambition to purchase assets "downstream" in the energy supply chain.
George Soros has some controversial history with Russia
Billionaire investor George Soros is continuing his very public campaign to keep major Western investors from putting money into Rosneft's initial public offering (IPO). Like its sister firm Gazprom, Rosneft is owned by the Russian state, and therefore owns assets seized by the Kremlin from Yukos.
Since acquiring Yukos' assets, Rosneft has made several bold moves. Last year, Rosneft and the Kremlin were criticized by the Wall Street Journal's editorial board for extending a job offer to Don Evans, President George W. Bush's first Secretary of Commerce, and a close friend from Bush's hometown of Midland, Texas.
Rosneft is hoping to raise $11 billion dollars with this initial public offering and bring in Western investors as minority stakeholders. Rosneft needs this capital to upgrade its aging network of pipelines and bring the latest extraction technologies into Siberian oil fields. Without this investment, it will be more difficult for Russia to expand production and help stabilize world oil prices.
Russia Energy Revenues $550 Million Per Day; Kremlin Builds $76 Billion Stabilization Fund
Gazprom CEO Alexei Miller next to President Putin
The Canadian Broadcasting Corporation (CBC) is reporting some big numbers in their story about Russia's oil and gas boom today. According to the CBC article, Russian oil and gas companies are raking in "$550,000,000 every day, or $380,000 every minute, around the clock. The state gets 65 per cent of that. Oil and gas exports account for about 60 per cent of federal budget revenues and 60 per cent of its exports."
What is more interesting than these raw numbers though is what the Kremlin is doing with the windfall.
Several U.S. politicians this week are calling for a windfall profits tax to punish oil companies for making too much profit and allegedly price gouging at the pump. Likewise, on the international stage, several European and American leaders have accused Russia of using gas prices to bully its neighbors and manipulate world energy markets. U.S. Senator John McCain, a leading contender for the Republican Presidential nomination in 2008, observed last week in Brussels that the Soviet Union never cut off natural gas to its neighbors, but Gazprom did last year.
Piling on with more Russia-is-an-energy-manipulator commentary yesterday was one Max Boot, a fellow at the Council on Foreign Relations in New York. To read the LA Times article registration is required, but Tennessee Law School Professor Glenn Reynolds, who runs the very popular Instapundit blog, posted this excerpt:
Of the top 14 oil exporters, only one is a well-established liberal democracy -- Norway. Two others have recently made a transition to democracy -- Mexico and Nigeria. Iraq is trying to follow in their footsteps. That's it. Every other major oil exporter is a dictatorship -- and the run-up in oil prices has been a tremendous boon to them.
My associate at the Council on Foreign Relations, Ian Cornwall, calculates that if oil averages $71 a barrel this year, 10 autocracies stand to make about $500 billion more than in 2003, when oil was at $27. This windfall helps to squelch liberal forces and entrench noxious dictators in such oil producers as Russia (which stands to make $115 billion more this year than in 2003) and Venezuela ($36 billion). Vladimir Putin and Hugo Chavez can buy off their publics with generous subsidies and ignore Western pressure while sabotaging democratic developments from Central America to Central Asia.
While we won't comment on Boot's implied comparison between Putin and the anti-American loudmouth Chavez, Russia Blog's editors decided to do our own quick comparison of subsidies paid to Venezuelans and Russians.
Gazprom CEO Alexei Miller - backed by President Putin
The BBC reported this week that Gazprom CEO Alexei Miller flexed his corporate muscles, warning British regulators not to rule out Gazprom's potential acquisition of Centrica, the largest natural gas supplier in the UK.
Attempts to limit Gazprom's activities in the European market and to politicise questions of gas supplies, which are in fact entirely within the economic sphere, will not produce good results," Mr Miller said. "It should not be forgotten that we are actively seeking new markets such as North America and China," he added. "It's no coincidence that competition for energy resources is growing."
Gazprom is the largest state-owned natural gas monopoly in the world, and after acquiring Sibneft in 2005, it also has oil reserves greater than those held by Irving, Texas-based Exxon, the world's largest private energy company.
Mr. Miller's remarks were intended to remind EU regulators who sits in the driver's seat of global energy markets, both from the point of view of suppliers and customers. North America and Asian demand for gas continues to grow rapidly, while European demand for gas grows at a much slower rate, resulting in less leverage for EU customers and regulators in the future. Gazprom was severely criticized by the EU and in the Western media last January, when the state-owned giant temporarily suspended gas shipments to Europe through Ukraine during a dispute over prices with Kiev. Gazprom restarted deliveries after reaching an agreement with the Ukrainian government, and also announced that it would start charging Belarus higher rates for natural gas starting in 2007.
Yesterday the New York Times had a story on the lack of pipelines preventing several oil fields in Siberia from capping the natural gas that comes out of their wells. Instead of pumping the gas to markets in Europe and Asia, Soviet era fields like the ones near Usinsk, 1,000 miles northeast of Moscow, are flaring gas. The amount of gas annually wasted by one company, Rosneft, would be enough to power a city the size of Denver (600,000 people) for a year. These gas flares can be seen at night by satellites orbiting in outer space.
On the positive side, Rosneft is trying to raise cash for new pipelines with an initial public offering open (at least theoretically) to some foreign investors.
Tales of waste and inefficiency in the oil and gas sector in Russia are nothing new. However, the article reveals a fact that most westerners outside the oil industry probably didn't know - why Russia dilutes its expensive low sulfur crude with cheaper, higher sulfur oil from the Caucuses to create the mediocre "Urals blend" it sells to Europe.
The Washington Times has a story today on how Gazprom is buying gas from Central Asian suppliers - principally, Turkmenistan - then selling the gas to Europe for a five-fold profit, with most of the money being siphoned off by mysterious middlemen. "Gazprom, the Russian natural gas monopoly, buys gas from Central Asia for less than $50 per 1,000 cubic meters and then sells it to European countries at prices as high as $260."
The larger geopolitical argument being made in Washington now is that the Kremlin is exploiting an empire of pipelines as leverage to control former Soviet republics.
The Russian government plans to purchase another natural resources giant Norilsk Nickel through a state-owned company that specializes in diamonds ALROSA. Vladimir Potanin, one of the richest Russian oligarchs, has decided that it's time to bail out. Norilsk Nickel is worth 16.5 billion dollars.
As Russia Blog has mentioned before, Mikhail Khodorkovsky made the mistake of not cooperating with the government, and he tried to sell his hard assets to foreigners. The oligarchs are welcome to milk the cow, and put the milk in offshore accounts, but they cannot sell the cow.
A new presidential election is coming up, and no one knows yet who is going to replace Putin. The corrupt "system" might become unstable, and Russian oligarchs can either 1) lose their companies, or 2) lose their freedom. Abramovich set an example for his fellow oligarchs by bailing out and leaving Russia behind with pockets full of cash. He could have sold Sibneft for a more if it had gone public, but he does not want to join Khodorkovsky in Siberia next to the Chinese border. Furthermore, in a single day the assets Abramovich appropriated from the Soviet Union over several years became cash in British and Swiss banks.
Alexander Hloponin, governor of Krasnoyarsky Kray, a region rich in metals, issued a statement supporting the negotiations between Potanin and the Russian government. The governor used a very interesting phrase: "The government and the President are controlling the situation very strongly. Russian companies should be controlled by Russian stock-holders, and there will be no attempts to sell them to the Western corporations. Our companies will be working and benefiting our country and our citizens".
"Rosneft's chairman is Putin's powerful deputy chief of staff, Igor Sechin. From the Kremlin, he is reported to have masterminded the attack on Yukos's leadership--from which Rosneft benefited handsomely. Sechin leads the siloviki faction in the Kremlin composed of former military and secret police officers. According to the Financial Times, Rosneft is viewed in Russia as "the oil company of the Siloviki," of which Putin and the other leading candidate to replace him as president, second deputy prime minister Sergei Ivanov, are themselves members.
"Medvedev and Sechin, both senior government officials at the head of Russian energy giants, are among Russia's "new oligarchs." In a systematic, Kremlin-directed reversal of the rushed privatizations of the 1990s that coincided with Putin's rise to power, the Russian state has coopted or destroyed the independent tycoons of the 1990s who controlled Russia's vast natural resource base--and who represented centers of financial and political power beyond Kremlin control--and replaced them with its own loyal servants. According to the Russian newspaper Nezavisimaya Gazeta and the Christian Science Monitor, seven people from President Putin's inner circle now control nine state companies with total assets equal to 40 percent of Russia's GDP."
The Ukrainian-Russian gas dispute has been a big deal in the media lately, and there was plenty of coverage from all the media outlets, even in the Seattle papers. Today, with the fight seemingly over for now, Russia Blog will take a closer look at what has happened.
First of all, I'll address the concern voiced by major media outlets regarding the "unfair deal" where Belarus and Kazakhstan get the same gas for 25% of the price Moscow is demanding that Kiev pay. Kazakhstan and Belarus are strategically the closest Russian allies; either Russian troops are stationed in these countries, or Russia performs nuclear tests in these countries, launches space craft from the Baikonur Cosmodrome in Kazakhstan, etc. These former Soviet republics are not going to join the EU or NATO anytime soon, and they don't really claim to have free markets.
At the same time, the new Ukrainian government decided that everything Russian is bad, and the free market future of Ukraine lies within EU and NATO. The most popular slogan these days in Russia was, "If you paid for the revolution, pay for the gas!"
Don Evans, the former Secretary of Commerce and close friend of President George W. Bush, this past week reportedly turned down an offer from President Putin of Russia to become Chairman of the Russian state oil company OAO Rosneft. The company is currently headed up by Igor Sechin, deputy chief of staff to Mr. Putin and is expected to go public next year. Evans is an experienced oilman who headed energy companies in Texas and Colorado before joining the Bush Administration as Secretary of Commerce in the first G.W. Bush term.
In a previous post Russia Blog discussed Gazprom's deal with several German banks and the Schroeder government to build a natural gas pipeline under the Baltic to Germany that would bypass Poland and Ukraine. As one of our readers pointed out in a comment, with Ukraine not paying its gas bill, who could blame Russia for wanting to have an alternate route to ship oil and gas to Europe, just as the Clinton Administration wanted to see multiple pipeline routes for Caspian Sea oil in the 1990s?
Today's piece by Washington Post reporter Anne Applebaum, who is married to the Polish Defense Minister Radek Sikorski (formerly with the American Enterprise Institute), will surely annoy Russophiles in the U.S. I suspect they will particularly take offense at her comparison of Russia's lobbying in D.C. with Saudi Arabia's -- especially since Russia is fighting Chechen jihadists who have been bankrolled in part by Saudi money.
For the past several days Russia has been in intense negotiations with Ukraine over their trade in natural gas. The Russian state-owned giant Gazprom sells gas to Ukraine for prices much lower than international market rates. Putin said that the Russian Federation budget is losing 4.6 billion U.S. dollars a year by undercharging Ukraine. After stating this financial fact, Putin appeared angry when he said that "Ukraine is absolutely capable of paying the market rates for Russian natural gas."
Ukraine spent one night thinking over Putin's remarks and came up with some surprising announcements during their regular Friday presidential press-conference. Anatoly Matvienko, assistant to the chief of staff of the Ukrainian president, started out by saying abstractly "if we are heading towards market prices, we should think about charging the international market rates for hosting foreign troops".
After some more remarks, Ukrainian officials got to the point and said that Russia is also underpaying, for leasing the Russian Navy base in Sevastopol. Russia pays an annual fee of $93 million, plus other expenses for maintaining the city's infrastructure. The Ukrainian government now insists that Russia's actual payments should be at least $120 million dollars a year. In comparison, Russia is paying Kazakhstan $200 million a year for the Baikonur Cosmodrome (Russian space launch facility based in Kazakhstan).
Radek Sikorski (who I met at the American Enterprise Institute briefly after he moderated a a 2003 debate between Niall Ferguson and Robert Kagan) is in the news again. Sikorski, who is married to the Washington Post reporter Anne Applebaum, is back in government as Defense Minister for the newly elected Law and Justice conservative coalition. Mr. Sikorski's "neocon" credentials from AEI have drawn considerable comment in European political journals, and contributed to speculation that he is Warsaw's go-to-guy for dealing with Washington.
Today's International Herald Tribune covered a press conference at which Mr. Sikorski described declassified Warsaw Pact archives from 1979 - a time when Poland was growing restless under Soviet domination and a Polish Pope was being elected in the Vatican. The IHT implies that the conservative government is sincere about wanting to tell the whole truth about the Communist past, but that the timing might be a slap at Russia for freezing Poland and the the rest of the European Union out of recent negotiations between Moscow and Berlin over a new gas pipeline under the Baltic.
More Raids on YUKOS Friendly Think Tanks, Law Firms
The Russian General Prosecutor's office has ordered searches and seizures of any documents related to YUKOS held by other companies. For the past three days the searches have been executed in the private business park Zhukovka-88. The targets of the federal tax police raids included Investment Bank Trust, National Bank Trust, Law Firm ALM-Feldmans, YUKOS-FBC, LLC, and the Open Russia Fund. Searches were conducted even at the Belgium-based YUKOS Finance B.V. Now the Russian government is going after Mikhail Khodorkovsky's former legal team.
The most ruthless search sacked the offices of the Open Russia Fund, which was surrounded by a SWAT team armed with machine guns. Open Russia is a non-profit organization that supports many social causes around the nation, and works as one of Russia's few pro-free market, pro-rule of law think-tanks. Open Russia's recent projects include articles on Russian corruption, the construction of a museum for the blind in Samara, financing a homeless children's shelter in Barnaul, etc.
In the past few months several regional representatives and program officers of the Fund were compelled to testify as witnesses on the YUKOS case. On the last day of the search, Russian prosecutors hauled out of Open Russia's offices every single paper document and all of their computer servers.
Russia Blog Reported in July - Gazprom Buying Sibneft
Russia Blog reported in July about the purchase of Sibneft by Gazprom. It happened on September 28th, 2005. Russian Oligarch Roman Abramovich sold his assets, that he had appropriated in early 1990-s, for $13,1 billion. Now Roman can enjoy running his personal British Soccer Club and residing in London, UK. Russian taxpayers will cover the Kremlin decision to retire the young billionaire with the pension that he never earned.
While Mr. Abramovich is enjoying the happy side of Russian corruption and "democracy" Putin-style, Mr. Khodorkovsky was condemned to spend an additional 8 years in prison for building the most successful Russian business ever known and speaking out against his government.
YUKOS stock jumped 40% today, based on rumors that the company will be acquired by Rosneft. There has been general uptick for stocks in the Russian market in the past few days. However, this isn't the reason for YUKOS big "success".
Speculators believe that the stock will be purchased by the state-owned Rosneft, that acquiredYuganskneftegas earlier this year. The corporate meeting between Yuganskneftegas and YUKOS is scheduled for April 18, 2006, and many Russian analysts say that it's too early and too risky to speculate on some future deal that might not happen at all. However, this kind of acquisition makes perfect sense.
Russian politicians and media are preoccupied with the same problem as their counterparts in the U.S. - "skyrocketing gasoline prices". As in the U.S., the problem is not simply of demand temporarily outstripping supply, but one of politics and geography.
Thanks to Hurricanes Katrina and Rita, most news watchers now know that the bulk of U.S. oil and gas production occurs in the Gulf of Mexico, as does a dispraportionate share of American refining (since refineries are easier to expand in the business friendly southern Gulf states than on the Atlantic or Pacific coasts). Less reported has been the problem of fields in Oklahoma and the Gulf that once were prolific now yielding less gas, driving exploration into deeper waters and geologic formations. And that's before we discuss the environmental rules that keep many rich fields on the Atlantic coast, the Rocky Mountains and Alaska offline.
Russia's geographic/political problem in contrast, is not complacency and the NIMBY syndrome but a corrupt culture that was not transparent enough to use the massive foreign investment necessary to get oil and gas from Siberia, the Caspian and Arctic seas to markets.
On the positive side, Russia's difficulties are actually a sign of real economic gains at home and greater connectivity with the world. High domestic demand for gasoline and electricity is solid proof that Russia's rising GDP is real, and cannot simply be chalked up to greater energy exports. Money that in the Nineties would come in for raw materials and go abroad for imported luxury goods may actually be coming back to Russia.
Conoco Phillips' full page ad in the Wall Street Journal today boasted about its push to open up gas fields in Russia. In case anyone needed further proof that the Cold War is dead, liquified natural gas (LNG) tankers will soon be plying their trade along sealanes once reserved for the Red Banner Northern Fleet of Tom Clancy fame. American oil men are already working with their Russian counterparts in a region that the U.S. Navy once only beheld through periscopes and satellite photographs. How fitting that both Murmansk and Vladivostok might become bustling ports again thanks to global capitalism.
But as noted previously here, Russia's track record of giving foreign investors real returns on their investment and attracting more capital in the 1990s was poor, worse even than the politically unstable kleptocracies of West Africa.
While readers will be happy to know that California's farm raised caviar may bring some relief to the overfished sturgeon populations of the Caspian Sea, the most important contribution came from J. Robinson West's analysis "The Future of Russian Energy". West, a top executive for PFC Energy, first delivers the good news: Russian crude oil production has hit a post-Soviet high of 9 million barrels a day, 50% more than just six years ago. Russian oil production now ranks second only to Saudi Arabia's, at 11% of the world market. Then West presents the bad news - Russian oil production has only grown by 3% this year, and Russia may be hitting the upper limit of what its aging derricks and Soviet-era pipelines can handle.
Massive direct foreign investment is the only solution, and would enable Russia to obtain new equipment and explore untapped remote Arctic and Siberian regions. But Putin's destruction of Yukos, in an effort to stifle political opposition and create "national champions" in the energy sector, has scared off many foreign investors. And Russia did not have a good record of attracting investment before the Yukos power grab.
Want to know how bad Russia's efforts at attracting foreign investment in the energy sector have been since the collapse of the USSR? Since 1992, Russia's energy industries have received 15 billion dollars in foreign direct investment (FDI) - while Western Africa has received 113 billion. Russia is losing energy investment dollars to Nigeria, which ranks nearly dead last every year in independent rankings of the world's most corrupt and least transparent economies.
In fairness to the Kremlin, oil in the Gulf of Guinea has lower transportation costs, since it is more convenient for shipping to markets in Western Europe and the American East Coast. West's analysis also doesn't mention many of the recent initiatives Putin has launched to lure foreign investors back. But there is no ignoring the article's indictment of Gazprom as a massive Soviet style bureaucracy, and description of Russia's pipeline operator Rosneft as similarly hamstrung by poor management and deteriorating infrastructure.
Gazprom is hoping for a new pipeline under the Baltic Sea to pump Russian gas to Western European markets, bypassing political obstacles in Ukraine. However, expanding Gazprom's exports of Russian gas to a slow-growing Europe is relatively easy, compared to the challenge of getting oil and gas from Siberia to energy hungry markets in Asia and the entire Pacific Rim, the growth market of the future. Meeting Asian demand will require not just new pipelines across Siberia and China, but massive liquified natural gas (LNG) and tanker terminals at the Pacific ports of Nakhodka and Vladivostok.
The Wall Street Journal has an article today that tells the story Russia's new oil pipelines in Siberia. Yesterday President Putin announced that Russia is going to build a new pipeline that will go to China, and only later will the pipeline reach Russia's Pacific Coast. “The Daqing pipeline will be built first, but we’ll also build to Nakhodka,” said Putin.
Chinese-Russian relations have incredibly improved in the past few years, and Russia's arms industry has been kept alive by Chinese orders. The WSJ also notices that Russian-Japanese relations seem to be gridlocked. Japan still wants to get the Kurile Islands back, and Russia constantly says “No”. Pursuing this unreal dream, Japan starts losing points in what could’ve been one its best economic opportunities in recent years. Though China is still nominally socialist and Russia is a very young democracy, business is business, and capitalism directs money to places where business is easy, profitable and safe. The Chinese have won this round big time.
The Kurile Islands belonged to the Russian Empire from the late 17th century until they were conquered by the Japanese in 1905. After the victory in World War II, Russians got the islands back, and everything seemed to be just right. However, 40 years of occupation planted a lot of nationalist dreams in Japan. Russia and Japan never signed the peace treaty, so technically speaking, Russia and Japan are still officially in a state of war. This is the last problem Japan needs when its only true friend in the world remains the U.S., while China exploits atrocities from sixty years ago to stoke anti-Japanese xenophobia in the present.
So who is right and who is wrong - and who really owns the islands? The first geographic note of the Kurile Islands appear in Russian accounts as early as 1646. Later, in the 18th and 19th centuries, the Kuriles were explored and developed by Russian settlers. Today the Kurile Islands are home to 30,000 Russian people.
Japan is trying to play the socialism card of sharing and giving away - kind of a Robin Hood idea; if you have too much land, and somebody else doesn’t, though really wants it, you must share. I’m sure there will be some people who would say that Russia is already the biggest country in the world, while Japan is struggling without enough space. Give up the islands!
However, the Kurile Islands are much more than just a piece of land in the ocean. The strategic location of the islands makes Russia into a harbored navy power. Russian bases on the Kuriles provide early warning for Russia's East Coast from potential “invaders” and tsunamis. The islands also serve as a base for lucrative commercial fishing.
Almost weekly Japanese boats are caught illegally fishing in Russian waters. Many times they are pursued by military planes and the Russian navy. Sometimes they are getting shot at, and some people have been killed. However, all this doesn’t stop the Japanese from pretending that the islands are theirs. There is enormous Japanese propaganda invasion of the islands as well. The Japanese distribute CD’s and tapes, targeting school children, delivering the cry for “help”. “The Islands are ours” say tapes over and over again.
I believe that the islands are purely Russian, not just because I’m Russian myself, but because not a single country in the world since World War II has supported the Japanese claim, while history and geography proves the Russian ownership.
People who are not aware of the situation find it almost surreal, ones they learn it. Anyway, while Japanese government is chasing the dream, Japanese businesses lose access to cheaper oil and better cooperation from neighboring countries.
It's very hard for a non-Russian to understand politics in Russia. The person that is elected to Parliament by a majority of the population in his constituency doesn't really mean anything. Usually it's an unknown person who is not going to be making any decisions. Executive disputes and litigation become parliamentary and executive politics in Russia. One of the biggest recent political moves involves the financial claims of Sibir Energy against Russian oligarch Roman Abramovich's Sibneft.
A good friend of Mikhail Luzhkov, Shalva Chigrinsky used to have half the stock of Sibneft-Yugra, co-owned with Roman's Sibneft. However in the years 2002-2003 he lost almost all of it to the oligarch, and now he barely has 1% of the company's stock. Though the loss happened 2 years ago, it was only few weeks ago, when Gazprom started seriously speaking about purchasing Sibneft, that the Kremlin and its friends started worrying. When Gazprom claims the ownership of an entity, the Russian government (Kremlin) becomes the owner, and there is nothing you can do against the Russian federal government in the courts.
The Russian legal system doesn't work, and the Russian governor Abramovich doesn't live in Russia, so Mr. Chigrinsky sued Abramovich on the Virgin Islands. The first judgement was an injunction on the sale of 49% of stock of Sibneft-Yugra. The court was trying to force Abramovich to uncover his financial statements. However, Abramovich's lawyer waived these small misunderstandings, and everything is going well for the oligarch so far.
The situation is reminiscent of the sale of Yuganskneftegas, when a Houston federal bankruptcy court prohibited auctioning off the company. Gazprom didn't receive credit from Western banks, but as everyone remembers, international laws and courts can’t stop Gazprom and the Russian Government.
In a recent press conference, Russian President Vladimir Putin officially confirmed Gazprom’s desire to purchase large part of Sibneft.
"Gazprom is negotiating the credit of $12 billion with the Western banks in order to purchase Sibneft" – says an anonymous source in the investment company Interfin Trade. This might become the largest merger and acquisition in Gazprom’s history. "Many banks want to participate, and everybody is working hard on it at the moment."
The source at PRIME-TASS said that negotiations are in their very first stage, Gazprom wants to purchase 72% of Sibneft, and the credit line might be lower than the one mentioned above.
The market price of 75% of the shares of Sibneft is $11.5 billion, and the main share holders have 72%, represented by the Millhouse Capital group. If Gazprom executes the purchase, the other 3% can be purchased off the public market, and eventually the government-owned giant will have a dominating stake in the company. Some sources are also speculating that Shell might join Gazprom in this deal, on the heels of their recent megadeals in Russia's Far East. One of the other foreign firms to benefit from the deal will be Germany'sRuhrgas, which owns 6% of Gazprom).
Abramovich is not any different from Mikhail Khodorkovsky, or Boris Berezovsky; he started his business and made his fortune under the very questionable circumstances in the chaos of the early Russian "privatization".
However Abramovich, now 38, has been much more clever than his fellow oligarchs. He moved to get elected as a governor in a remote Siberian state, which guarantees him legal immunity, and he is constantly surrounded with an army of bodyguards and riding in armored bullet-proof vehicles. Most importantly, Abramovich has maintained tight relations with the Kremlin and made a smooth transition from the "anything goes" Yeltsin era to the "law and order" Putin regime. Abramovich, unlike Khordokovsky or Berezovsky, never threatened the Putin regime with open dissent or the funding of opposition parties.
The purchase of Abramovich’s Sibneft by the Kremlin’s Gazprom should be a profitable bail-out deal for the oligarch, based on a friendly handshake with Putin. Russia's other top oligarchs are trembling at the thought of more seizures of their assets by the Putin regime (Berezovsky has won political asylum Britain, and Khodorkovsky is reading books in jail). Abramovich in contrast, will get full cash value for the property that he managed to appropriate from the Soviet Union in his early twenties, and the shares he acquired during Kremlin's destruction of YUKOS.
This is the latest major deal for Russia's gas monopoly Gazprom, and marks a new stage of the Kremlin's effort to return total state control lost during the first half of the 1990's - a loss the regime associates with democracy, "privatization" and anarchy.
State-owned Gazprom has purchased 25 percent plus one share in the world's largest liquefied natural gas (LNG) project Sakhalin-2, located off Russia's east coast.
The deal was seen by some analysts as driven by a desire to keep valuable natural resources in Russian hands.
RussiaBlog's reply is - not a “desire” but the highest priority, and not just “Russian” hands - but the Kremlin's.
It should be mentioned that one Russian executive, Mikhail Khordokovsky, did not agree to give the State his 25% chunk. There were many attempts by the Kremlin to take some part of YUKOS (siphoning off its daughter companies, its pipeline project to China etc.). YUKOS executives' refusal to “share" and to “return" (give gratuitously) property “taken" (gained) during the first half of 90's brought about the total demolition of the corporation by the Putin regime.
A CNN analyst comments, "The deal also raised the prospect that when Gazprom comes to choose partners to develop its giant Shtokman gas field in the Barents Sea, it will look for assets in return."