Don't Let Russia Turn Gas Into a New Weapon
From the May 27, 2007 Sunday Times
May 29, 2007
by Irwin Stelzer
WHAT do Mikhaïl Khodorkovsky, Mikhaïl Gutseriev, and John Browne have in common? They all thought their desire for profits from Russia’s vast oil and gas reserves trumped Vladimir Putin’s lust for power. Khodorkovsky now languishes in a Siberian jail, and when released will be rearrested and charged with crimes that will get him another 28 years in prison. Gutseriev, head of the mid-sized oil company Russneft, was recently charged with “large-scale tax evasion” and conducting illegal activities as part of an “organised group” – the same charges laid against Khodorkovsky. It seems that the Kremlin deputy chief of staff, Igor Sechin, the former KGB agent who heads state-owned Rosneft, which took over Khodorkovsky’s Yukos oil company, “is extremely ambitious in regard to these [Russneft’s] assets”, according to press reports.
Which brings us to Lord Browne, who also thought there was money to be made in Russian oil. He set up TNK-BP, a joint venture with a group of Russian billionaires that accounts for about 25% of BP’s glo-bal production, and is developing the huge Kovykta gas field in eastern Siberia – or not.
It seems that TNK-BP is in violation of its licence to develop the Kovykta field, according to Oleg Mitvol, deputy head of Russia’s Federal Resource Management Agency. This ratchets up the pressure on the three billionaire partners of BP to sell out to state-controlled Gazprom – several former KGB agents grace its board. “This is just going to be another phone call,” one banker familiar with the matter told the Financial Times. “If they are told to sell, they will sell.”
As did Royal Dutch Shell, which ceded control of its $22 billion Sakhalin-2 natural-gas project to Gazprom, and threw in a $1 billion annual payment to the Russian treasury after environmental authorities threatened to close the project.
Control of 50% of oil and, in effect, all gas production now resides with the state.
Worse still, Russia has successfully gained control of the pipeline networks that deliver fuel to the West. Putin recently persuaded the presidents of Turkmenistan and Kazakhstan to join Russia in building a pipeline to ship their natural gas to western markets through Russia. It seems like only yesterday that I was briefed at the State Department on American plans to encourage the construction of a new pipeline that would hook up with existing lines through the Caucasus and Turkey, bringing Central Asian gas to Europe without passing through a Russian bottleneck. Those plans are now dead, or at least on life support.
Putin also recently approved plans to build an oil pipeline to the Baltic port of Primorsk, bypassing independent-minded Belarus.
All of which gives him huge influence in western Europe. “If power is measured by the fear instilled in others – as many Russians believe – [Putin] is certainly winning,” says The Economist.
None of this would matter if we were dealing with ordinary commercial transactions, aimed at maximising the economic value of Russia’s natural endowments. But that is not the case. First, the takeovers of Shell, BP and other assets hardly represent transactions at market prices. Putin takes his inspiration from Mario Puzo’s The Godfather rather than Adam Smith’s The Wealth of Nations, and makes potential sellers offers they just can’t refuse.
Second, Putin’s goal is not the mere profit maximisation that guides decision-making in market economies. It is to gain influence over the foreign policies of European countries and, to a lesser extent, America. He has already shown that he is willing to cut off gas to Europe, and cooperates with Opec to damage the American economy by keeping oil prices high. A nuclear umbrella prevented the Soviet army from rolling across Europe, but it is no match for supply cut-offs that can throw western economies into recession.
Russia achieved this dominant position for two reasons. The first is that the world’s capitalists behave as Lenin knew they would: “They will furnish credits . . . supply us materials and technical equipment which we lack . . . restore our military industry for our future attacks against our suppliers.” The West has supplied Russia with the technical skills and capital needed to exploit oil and gas resources and sold important bits of western energy infrastructure to Gazprom, chaired by Dmitry Medveded, who is first deputy prime minister of the Russian federation. Never mind that Russia will not allow such foreign investment in its infrastructure, or that it is using its oil and gas wealth to beef up its military. “Our military is the second most powerful force in the world after America’s,” a Russian official trumpeted this month.
The second reason Russia has gained such a dominant hand in its negotiations with energy-dependent countries is the inability of the West to forge a common strategy, the necessary ingredients of which are clear: increase storage facilities as insurance against gas-supply interruptions; finance pipelines that avoid Russian-controlled territories; refuse to sell infrastructure to Gazprom; construct terminals that can receive liquefied natural gas (LNG) from Africa and the Middle East; unite to create countervailing buyer power.
Russia, Tony Blair pointed out last week, is “prepared to use [its] energy resources as an instrument of policy”. But the West is unprepared to use its financial and technical resources in the same way. That failure, warns Blair as he heads off into the sunset, “could be as crucial to our country’s [and, I would add, the West’s] future as defence”.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.