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3. Blog: Russia, Ukraine, oil, US diplomacy

By Jérôme Guillet (jerome.guillet@m4x.org)

Moon of Alabama

Jérôme Guillet is a banker familiar with Russia, he wrote his Ph.D. dissertation in 1995 on "The Independence of Ukraine" (in French). Moon of Alabama is a collective weblog on current international issues which he contributes to.

What is the current US administration's position on Russia?

And what is the Democrats position on Russia?

Suddenly, Putin's Russia seems to have turned from Bush's best friend (in the War on Terra and in the oil games) back into its traditional role as the arch-enemy (stifling democracy, fighting for influence with the US in various countries).

Maybe more interestingly, the Democrats and other liberals seem confused: Russia, when it was a Bush ally, could be blamed for its horrible war in Chechnya, for its nasty oil plots together with US oil companies, and for its worsening domestic democracy situation.

Now that it has turned again into a target of the administration, you can read stories about how US oil interests are fighting in Ukraine against Russia or how US and Russian interests are clashing in Venezuela, about Syria, ...

So what should we think of what's going on in Russia and in Ukraine? And what should be be a proper US policy viz. Russia?

1. The new conservative "frame" about Russia

As you may have seen in the news, there has been an unusual sight in Russian streets in the past few days: demonstrations strongly critical of the Kremlin. The cause of these demonstrations is the decision to replace the free provision of many basic services (transportation, heating, medicines) to some categories of the population by supposedly more targeted subsidies.

This is the kind of reform that the Wall Street Journal and The Financial Times editorial page guys usually love, but they are also happy to see Putin stumble, which makes for strange contortion in their writing, and which allows to identify the new themes of Republican policy viz. Russia. Let's start with the Financial Times: In cash, not kind

...for the first time in his five years in power, Mr Putin has had to face widespread street protests by ordinary pensioners and veterans over the botched introduction of reforms to monetise in-kind benefits on public transport.

They start by describing the situation, but put an important word there "botched". This allows to put the blame on the execution of the reform, not on its content.

(...) The system of in-kind benefits is wasteful. By no means every veteran or pensioner is poor enough to deserve free bus rides, drugs and medical care. The move to replace in-kind benefits with cash benefits is therefore as important a feature of Mr Putin's second presidential term as tax reform was in his first term.

A frank description of the position of the editor, which is clearly in the traditional laissez-faire (and not totally unreasonable) line: subsidies are less distorting and more effective when they are transparent and do not lead to inefficient behavior (free medicine, let's say, can lead to self-medication or over-consumption; medicine purchased at market prices with a reasonable cash subsidy to well-targeted categories of people lets them afford it if they need it put not over-consumer because they really pay for it each time). Of course, all depends, as always, on the intent behind this: is making the subsidies transparent the first step towards eliminating them? Will an average cash amount to each person be appropriate when the real needs of each are not known and can vary widely - especially for things like medicine?

However, implementation of such a change requires care. Many elderly Russians consider the obligation to pay as a psychological affront, regardless of whether the state gives them the means to do to so. In fact, many failed to get full cash compensation for withdrawal of their in-kind benefits this month, especially in poorer regions outside Moscow and oil-producing Siberia.

Two hits in one paragraph: "Russians are stupid and don't understand the civilized world where money rules" and "Russian authorities are incompetent and could not execute the reform properly - especially Russian authorities in areas without money, - uncivilized, again"

But Mr Putin could learn a political lesson from the abysmal lack of preparation in Russia's vast regions for welfare changes. This is that authoritarianism tends to suppress the expression of criticism inside as well as outside the establishment, and to shut down some of the channels of communication available to a democratic government. Had Mr Putin listened more to Russia's regional governors, he might have picked up earlier on the signals that all was not well with this reform.

The last phase is to link this episode to the now fashionable criticism of Putin's authoritarianism and Russian lack of democracy, which is a bit strange when you precisely have the most vigorous contesting of the government and there have been serious rumbles for many months.

(See the text from last June which I use below)

In today's Wall Street Journal (sorry, the link is subscription-only), we have a similar pattern:

The protests spreading across Russia in the past week are a response to an unpopular welfare overhaul. But in retrospect the seeds were planted by the Russian president's moves to centralize authority in the Kremlin. Absolute power, as Vladimir Putin ought to realize by now, brings absolute responsibility.

The WSJ cuts to the chase in the first sentence. "welfare overhaul" in the op-ed pages of the WSJ does not even require a qualifying adjective such as "needed" or "useful", that is understood by the reader; so the point is immediately Putin's power, worse, his "absolute power".

...He promised a 15% or so rise in pensions and other cash benefits that are intended to offset the end of freebies like bus rides or medicine for retirees. As in the past, when bad news hit, Mr. Putin also blamed others, in this case regional leaders, for botching the shake-up of the entitlement scheme. In fact, the Russian leader may have been partly justified in pointing the finger at local authorities who, over the Orthodox Christmas and New Year holiday, failed to make sure the new benefits were properly paid out to retirees. Strictly speaking, Mr. Putin could be commended as well for tackling an overdue reform of Russia 's inefficient social welfare schemes.

Suddenly, we do get the qualifications, staccato-style... "overdue", "inefficient", "social welfare" (what other kind of welfare do you know?), along with the finger-pointing at the poor implementation of the reform...

Many things help account for the drop in support and the rise in discontent in spite of flush economic times. But the most basic explanation is that by taking hold of all the reins of power, Mr. Putin says in effect, "Russia , c'est moi." As a result, everything that goes wrong becomes Mr. Putin's fault. Lacking any past experience in politics, the former KGB colonel probably didn't anticipate that his authoritarianism would so quickly undermine his popular support. It could turn out to be his gravest miscalculation. The new, puffed-up Russian president looks both omnipotent -- always a mirage -- and cruelly aloof. The future promises more strife. High oil prices temporarily disguise the fact that Russia remains a poor country that badly needs reforms. Mr. Putin hasn't made the best choices of where to start.

Aaaah,"Russia, c'est moi" - a day without an anti-French dig (if not, more usually, a full article) in the WSJ is a rare day indeed... France is Soviet, and Russia is, well, French... Pity us. Anyway, more variations on the theme, it's a fucked up country, uncivilized, and Putin "the rookie" is out of his depth and choosing the easy option for KGB colonels and other third world despots - absolute power.

So what can we conclude form that? Since Khodorkovski's arrest and the subsequent dismemberment of Yukos, the strategic oil partnership with Russia has cooled off in the public eye (I am talking about perceptions, not about the actual reality of cooperation on the ground) and we are back to the theme of a strategic confrontation, to which I will get into more below as regards oil. Together with this cooling off, the theme that Russia is not really democratic has come back to the fore. Now that it's a convenient topic to bring up, it's suddenly okay again to criticize the autocratic tendencies of Putin. (They were there from the start, but widely ignored previously).

(If you want to go into the details on Russia policy discussions, go see Johnson's Russia List, the main site for Russia hands, which is pretty much exhaustive on the topic.)

More generally, the conservative line seems to be one of disappointment in Putin, and therefore of renewed confrontation. What has brought the turnaround? Oil maneuvers? The Ukrainian elections? The recent focus on "authoritarianism" is purely opportunistic as this has been going on for a while and the Chechnya war -- and its tens of thousands of deaths -- has been going on throughout the Putin presidency with very limited reactions from the West. It nevertheless seems to embarrass the Democrats who cannot really complain about the administration paying more attention to the human rights abuses but seem intent in linking this new found awareness to oil conspiracies with the exact opposite intent to those they were complaining about before (Bush and Putin were chums because they were going to have a grand deal in the energy sector, with Russia providing a reliable plentiful source of oil -- and action for the oil majors, and the US providing much needed investment). So what is the oil situation like?

2. Russia and oil (and gas)

Russia is fighting with Saudi Arabia for the title of first oil producer worldwide, so they are a significant force in the oil business. But the fact is, they are a more significant natural gas player (with 40% of world reserves) and, while the two sectors are somewhat related, they are different enough to have really different policy implications.

Go read this (courtesy of the US Dept. of Energy) for a good backgrounder.

Oil is the big bogeyman, usually. The fact is, Russia exports about half of its production of oil (say 4-4.5 mb/d - that million barrels per day). The other half is refined in Russia, and another chunk of that a big third, so probably 1.5-2 mb/d, is exported again, as diesel or fuel. About half of the exported oil is trnasported by pipe to Europe and the other half is sent by sea (via Novorossisk and St-Petersburg in Russia, and Ventspils, Odessa, or Butingue in former Soviet republics in the Baltics or Ukraine) - and most of that goes to Europe (Mediterranean refineries or Rotterdam). A chunk of the oil is exported by rail to China. Diesel and fuel are exported either by pipeline or by rail. That means that a lot of Russia's oil trade is constrained by export infrastructure (pipelines and ports), a lot of which it does not control directly, and which to a lot of noisy "games" over such assets.

The fact is, a pipeline makes all parties dependent on one another. They all get revenues from it, and all can block the flow of oil (the producer can stop to produce, the transporter can stop to transport, and the buyer can stop to buy - or to pay) - they are stuck together for a long time and neither can take an advantage over the others. It gets a little bit more interesting when alternative routes are available, but a lot of it is play-acting, so do not listen to all the press releases and announcements you see in the press about pipelines, most of it is fluff.

The interesting oil-related issues to understand about Russia are the following:

- Russian authorities already physically control most of Russia's exports through Transneft and Transnefteprodukt, the public monopolies in charge of oil pipelines and oil products pipelines. They also control revenues through various taxes, including those that apply specifically to export volumes. I think that Khodorkovski was sent to jail because he was trying to build his own independent infrastructure to export oil, which would have freed him from the Kremlin's oversight.

- Russia is always producing as much as it can AND exporting as much as it can, so it cannot take over the role that Saudi Arabia plays on the oil market, that of "Central Banker", able to regulate oil production and prices by either increasing or reducing its production according to needs. Russia cannot increase, and does not desire to decrease, its production, and thus has a limited influence on the market.

- Pipelines not run under long-term, transparent rules are permanent headaches, whose terms of use are subject to systematic re-negotiation, and thus prone to making a lot of noise and grabbing headlines for what are essentially inconsequential things (mostly - whether that thug or this oligarch gets the skim). Russian oil is mostly pipeline-based, and pipelines are very rigid affairs in practice.

- Remember the scale of things: When you read an article which mentions Russian oil and any amount under a billion dollars - just ignore it, it is inconsequential. oil is big business, and the headline amounts are always huge. Russian oil exports currently amount to about $200 million per day, i.e. 70 billion $ per year, plus the same side either sold locally or exported as diesel or fuel - that's more than 500 billion dollars of oil in the past 5 years alone.

- Regarding US oil companies' interests in Russia, it is not really a question of profit. What Big Oil sees in Russia is one of the few places with large reserves of oil and private ownership of the assets. They would like a piece of the pie to replenish the reserves on their books, which show signs of weakness and which stock market investors track closely. A big investment in Russia means a few years of respite on that front. Any transaction in Russia would otherwise not be especially profitable. Exports are constrained by pipeline capacity, which means that you can only sell a fraction of your production on the world market and must sell the rest within Russia, with all the complications that entails; exports -- and production generally -- is heavily taxed by the Russian government, and the bureaucracy is horrendous. So it's necessary in a long term perspective, but it's not a miracle. Additionally, private ownership has meant until now domestic ownership, i.e. oligarchs, and they do not want to let go of their share of the pie, which they can exploit more ruthlessly than foreign investors could ever do (worse treatment of employees, of environment, "deals" on taxes, etc.).

So, would US companies want a piece of the action? Sure. Does it influence US-Russian relations? I'd say marginally only. Of course, there will be diplomatic discussion regarding specific topics, and lobbying commensurate to the scale of the projects, but nothing out of the ordinary. Exxon or Chevron are just as happy (or even more) to buy Russian assets from Putin than from Khodorkovski, if that's what it takes.

- Where the game gets slightly more interesting is with regard to infrastructure project involving third parties, especially in the Caspian. Western companies are building the BTC pipeline (that's the official site) which avoids Russia, but they have also built the CPC pipeline which crosses Southern Russia from Kazakhstan (and is actually the only pipeline in Russia not controlled by Transneft to this day). So it's a high-stakes game, with no clear winner, and no easy separation between sides -- as often in the oil business, sometimes you ally yourself with the company/country you are fighting/competing with bitterly elsewhere.


For a good summary of the Caspian projects, go see here (official US site)

On the gas side, Russia has the largest reserves in the world (40% of the world total), is the largest producer (alongside the US, with about 20% of world production each), is the largest exporter by far (130 bcm - billion cubic meters to Europe, and another 50 bcm to former Soviet republics, especially Ukraine), and it has the most extensive pipeline system in the world. The sheer scale of its existing gas infrastructure is hard to underestimate. Most of its gas business is run by Gazprom, the state-owned monopoly, whose gas production is 5 times bigger than the second largest gas producer in the world, Shell.

Gas is purely an infrastructure business- the most important thing is to transport the gas, and you can do that only by pipeline or, after having liquefied it, on LNG tankers. Either way, the infrastructure costs a lot and imposes where the gas goes. All of Russia's exports go to Europe, and most of that go through Ukraine, but this is really not a problem, as I have explained here. (yes, in the Wall Street Journal). Pipelines create a co-dependency, which means what it says - no side can impose its will on the other(s). Europe needs Russian gas, Russia needs gas export revenues, Ukraine needs transit revenues, Russia and Europe need an uninterrupted flow of gas through Ukraine.

LNG is slowly turning gas from a local (continental) business into a worldwide market, by allowing gas to be transported between continents, but the still-high cost of the LNG chain limits its overall impact. So Russian gas, even if LNG projects like Sakhalin (very likely) or Murmansk (still speculative) happen, will mostly go to Europe, and the US have a very limited say on the trans-European gas business.

The only place where the US could have played a role was in the Caspian, and there, Russia has kicked the US's ass unambiguously. Russia fully controls Central Asian gas because all the existing pipelines from Central Asia go to Russia and it makes no sense to build new pipelines while those are not full (which they are not). The only market at stake was Turkey, which could have been supplied by Russian gas or by Western-produced gas in Azerbaijan or Kazakhstan. Russia pre-empted that by building the "Blue Stream" pipeline linking directly Russia to Turkey underneath the Black Sea. In a classic winner-takes-all situation, they have most of the Turkish market and it will be very difficult to develop new gas projects in the region before Turkish demands increases a lot more (although BP has managed to squeeze in its - smaller - Shah-Deniz project)

3. Ukraine and Russia

I'd like to come back specifically to Ukraine, as it has been in the news recently for its "orange revolution", which has been accompanied by strange mutterings from the left that this was just another US anti-Russia, pro-Big Oil plot. A fairly typical article is this one, from the Asia Times, which I will comment as follows:

Ukraine: Oil politics and a mockery of democracy

By William Engdahl

The results of the third round of elections in Ukraine in which Viktor Yushchenko was proclaimed the final winner, far from being grounds for jubilation in Ukraine and beyond, ought to give concern for the future of Ukraine to many.

That sets the ground fairly quickly -- it's not really democracy, and it's all about oil -- and it's BAD! Let's see.

The recent battle over the election for president to succeed the pro-Moscow Leonid Kuchma in Ukraine was more complex than the general Western media accounts suggest. Both Russian President Vladimir Putin and George W Bush are engaged in high stakes geopolitical power plays. Both sides in Ukraine have evidently engaged in widespread vote fraud. The Western media chose to report only one side, however. Case in point: a non-governmental organization, the British Helsinki Human Rights Group, reported it found more vote irregularities on the side of the opposition Yushchenko in the contested November vote, than from the pro-Moscow Viktor Yanukovych. Yet the media reported as if fraud only took place on the side of the pro-Moscow candidate.

So -- it's all about the US and Russia, and the Western media is hopelessly biased. Not like that nice-sounding group, the "British Helsinki Human Rights Group", which happens, despite its lofty name, to be a Buchanan-type right-wing isolationist group with strange friendships but has been quoted extensively about the supposed anti-Russian conspiracy Strange bedfellows in Bush-hatred.

The Ukraine elections were not about Western-sanctioned democratic voting, as some magic formula to open the door to free market reform and prosperity for Ukrainians. They were mainly about who influences the largest neighbor of Russia, Washington or Moscow. A dangerous power play by Washington is involved, to put it mildly.

"Ukrainians are uncivilized savages who know nothing about democracy -- their demonstrations (tens of thousands of people 24/7 in freezing weather) are just a US plot!"

Yuschenko favors European Union and NATO membership for Ukraine. Not surprising, he is backed, and strongly, by Washington. Former US national security adviser Zbigniew Brzezinski has been directly involved on behalf of the Bush administration in grooming Yushchenko for his new role. As far back as November 2001, Yushchenko was reportedly wined and dined in Washington by the Bush administration

He was Prime Minister of his country, a fairly large European country, at that time, for chrissake! What's so spooky about being "wined and dined"??

As regards "favoring European Union and NATO membership", what does that mean? He favors better relations with the West -- he has borders with the European Union and NATO members, so he has to deal with them. He explicitly mentions hopes of joining the European Union but NATO barely deserves a mention on his official website.

Yuschenko was pro-"foreign investment" when Prime Minister, which is usually understood to mean Western investment. As it were, in the case of Ukraine, most foreign investment has come from Russia, and Yuschenko was seen as a reliable friend of Moscow and of Russian business. Prior to the recent election fracas, he was seen as the candidate most likely to renew that policy which had been interrupted by Yanukovich (the Prime Minister and loser in the election) to favor Ukrainian oligarchs in the control of the country's resources. Western investment in Ukraine has been minimal so far and neither candidate would have changed much there.

The Asian Times then quotes Z. Brzezinski at length. Brzezinski has long been an anti-Russian hawk, and he has always said the prying Ukraine and Russia apart was the best way to permanently weaken Russia, which for him is a worthy strategic goal. The fact that he was an influential player and that he is still part of the establishment does not mean that his advice has been followed.

There is a distinct pattern of US covert actions in changing regimes in Eastern Europe, in the context of this Eurasian strategy of the US, in which Ukraine fits the pattern. The Belgrade vote in 2000 to topple Serbian Slobodan Milosevic was organized and run by US ambassador Richard Miles. This has been well documented by Balkan sources and others. Significantly, the same Miles was then sent to Georgia, where he engineered the toppling of Eduard Shevardnadze in favor of the US-groomed Mikhail Saakashvili last year, another pro-NATO man on Moscow's fringe. James Baker III played a key role as well, as some noted at the time. Now Miles was reportedly involved in Kyiv, with the US ambassador there, John Herbst, former ambassador in Uzbekistan. Curious coincidence? The Ukraine "democratic youth" organization, Pora ("High Time") is a slick, US-created entity. It is modeled on the Belgrade youth group, Otpor, which Miles also set up with help of NED and George Soros' Open Society, USAID and similar friends. Pora was given a brand image, for selling to the Western media, a slick logo of a black-white clenched fist. It even got a nifty name, the "chestnut revolution", as in "chestnuts roasting on an open fire". Before he came to power, Saakashvili was brought by Miles to Belgrade to study the model there. In Ukraine, according to British media and other accounts, Soros' Open Society, the US government's NED and the Carnegie Endowment, along with the State Department's USAID, were all involved in fostering Ukraine regime change. Little wonder Moscow is a bit concerned with Washington's actions in Ukraine.

Now we get to the core of the misunderstanding about Ukraine.

It is true that Yuschenko has been inspired by the Georgian revolution last year, and it is true that both organizations have received help, especially from the Soros Open Foundation, which has been in the region for 15 years now and has been a genuine force for democratization and grass-roots movements. It is the fact that Yuschenko was helped by these organizations that led Putin or some around him to label him the "American candidate" and start supporting Yanukovich. Many people in Moscow still do not understand that decision by the Kremlin, in view of Yuschenko's greater openness to Russian business and his decent track record of working with Moscow back in 2001.

Once this "meme" became supported by the Kremlin, the whole "candidate of the West vs. candidate of the Kremlin", while patently false, gained "common wisdom" status in a self-reinforcing cycle. Once Western politicians, not knowing better (or genuinely concerned by the blatant Yanukovitch electoral abuse), started to speak about it, this triggered further Russian reactions.

An interesting point to note here is that the Poles took the lead in expressing the Western point of view, and from the first time, they benefited from a quasi-explicit role of European Union spokesman and thus spoke for a much bigger constituency than just the "local neighbors". The fact that Poland is still very anti-Russian certainly fed the cycle described above. (The whole episode has also made Poland a lot more pro-European: they experienced at first hand the leverage that the EU can bring to one country's voice, they felt on an issue of importance to them the full solidarity of other members and the trust put in them to drive a EU joint position -- welcome back to "old Europe")

So the Russia vs West fight has been invented by the Russian out of slightly paranoid overreaction to genuine democratic impulses. Let's please not misunderestimate the democratic commitment of dozens of thousands of Ukrainians -- that kind of intense mobilization could never have happened without genuine support for Yuschenko and a real desire to fight for a free election. Never forget that Ukraine already had a peaceful democratic transition in 1994 -- the pro-Western Kravtchuk was beaten fairly by Kuchma (then seen as the candidate of Russia, before turning more ambiguous), he left power peacefully and nobody protested -- and Ukraine remained independent, even if really badly governed.

Washington policy is aimed at direct control over the oil and gas flows from the Caspian, including Turkmenistan, and to counter Russian regional influence from Georgia to Ukraine to Azerbaijan and Iran. The background issue is Washington's unspoken recognition of the looming exhaustion of the world's major sources of cheap high-quality oil, the problem of global oil depletion, or as the late American geologist M King Hubbard termed it, of peak oil.

Then we get to the oil conspiracies. Let's see how they unfold.

Oil pipeline politics are also directly involved in the fight for control of Ukraine. In July 2004, the Ukraine parliament voted to open an unused oil pipeline to transport oil from Russian Urals fields to the port of Odessa. The Bush administration vehemently protested this would make Ukraine more dependent on Moscow. The 674 kilometer oil pipeline, completed by the Ukraine government in 2001, between Odessa on the Black Sea and Brody in western Ukraine, can carry up to 240,000 barrels a day of oil. In April 2004, the Ukraine government agreed to extend Brody to the Polish Port of Gdansk, a move hailed in Washington and Brussels. It would carry Caspian oil to the EU, independent of Russia. That is, were Ukraine to become dominated by a pro-EU pro-NATO regime in the November vote. Last July, the Kuchma government suddenly reversed itself and voted to reverse the oil flows in Brody-Odessa, in order to allow it to transport Russian crude to the Black Sea.

The Odessa-Brody pipeline is real, and the decision to use South-North (from Russian pipes to the Black Sea) instead of North South (from the Black Sea towards Western Europe) is also a fact, but let's not make it into a bigger thing than it is.

First of all, 240,000 b/d is to be compared to Russian exports of 4,500,000 b/d -- it's 5% of their oil exports, thus nothing to change any global balance.

Secondly, Russia has no monopoly on Caspian oil. It has some say over the CPC which, as we wrote before, is the only pipeline which is regulated by contracts under international law and not under the control of Transneft (and which exports most of the US-produced oil in Kazakhstan). It has no control over the current pipeline used for Azerbaijan exports, which goes through Georgia and not Russia, and it will have no control over the BTC pipeline currently built across Georgia and Turkey to accommodate the increasing Azeri (Western-controlled) production. So Russia is a smallish player in the Caspian oil game and the absence of the Odessa-Brody pipe is not going to cause any problems for Caspian exports.

On the other hand, using it going the other way helps the Russians increase their exports immediately by providing a new outlet, and it provides immediate revenues to the Ukrainians (as opposed to potential future ones from Black Sea sourced oil which does not really exist yet). The only ones to be really pissed are the Turks, because more oil in the Black Sea means more tanker traffic through Istanbul in the Bosporus, and the Poles who lose some transit revenue.

The pipeline can be reversed in the future if there are needs to do so, but it is not a big deal that it s going in that direction -- in fact, it increases the volume of Russian oil on the international market, which should have a positive effect on prices.

Now, on the gas side, the situation is interesting as well because Ukraine physically controls close to 90% of Russian exports to Europe (as well, and this is less well known, most of the deliveries to southern Russia as the pipeline going there happens to cross into Ukraine for a short distance). What is also less said is that Ukraine depends on Russia for a good chunk of its own gas, thus creating a situation of strong co-dependency. Russian gas exports are too strategic for Russia to compromise, and the solution has basically been to pay off the Ukrainians by giving them a good chunk of their gas for free in exchange for the transit of export gas to Europe. This has been done without a hiccup for the past 10 years and there is very little incentive for anyone to change anything in that arrangement. Sure, the local oligarchs fight for the inevitable skim in the gas distribution business (as the Ukrainian populations pays for its gas, but the distributor does not pay for the gas from Russia, someone can make money there.)

I wrote about this in the Wall Street Journal a couple of years ago -- you can find that article here

4. What Russia policy?

The US have a strong interest in the region (oil, war on terra, nuclear proliferation and disarmament) and will continue to have a strong diplomatic and military presence. Bush and Putin have a very similar "we're the big boys and we like our power games -- it's-business-nothing-personal" approach to diplomacy.

They are able to cooperate punctually - as they did in the war on terra, and as can happen punctually on oil projects of common interest, in a relationship best characterized by intense rivalry. That rivalry is more obvious now that the more visible joint projects are less active (on the oil side, awaiting the Kremlin shake up of the Russian domestic industry, on the war on terra, Russia is getting pissed by the US's permanent encroachment on its former satellites and making more of a fuss about it).

Is there an alternate policy for the Democrats?

The oil projects will remain, and are not "evil" per se. Democracy promotion is a real issue that needs to be addressed in a more consistent fashion -- which is never easy when discussing in parallel multi-billion dollar investments that require the goodwill of the Kremlin.

Relations with Russia will never be straightforward; it is not a natural ally; on both sides linger the memory (and the nostalgia) of the cold war when the bilateral relationship was the most important in the world. Today, it is not anymore, but Russia still has great power pretensions and only a few arguments (i) its nukes, (ii) the UN Security council veto and its still extensive diplomatic presence around the world, and (iii) its nuisance capacity in supporting nasty regimes around the world and selling them weapons and nuclear technology (iv) its significant presence on the energy and commodity markets and its potential role as anti-OPEC (or alternatively pro-OPEC) -- and its capacity to interfere in the affairs of its oil- and gas-producing neighbors. Russia wants most of all to be respected, listened to and taken seriously.

The US has Russia in mind when it thinks about (i) nuclear proliferation, (ii) access to Central Asia in the War on Terra, (iii) investments in the Russian or Caspian energy sectors, (iv) diplomatic games in a few sensitive places like North Korea, Iran, Syria, and, if we are to believe Bush and Dr Rice (v) democracy promotion (what with Russia turning authoritarian and Belarus being an "outpost of tyranny"). I am not sure that there is a global policy on these different items, as while some can lead to confrontation (Iran, US presence in Russia's neighbors, "democracy"), most can be grounds for sensible compromise and joint work, and from the outside, it looks like each is treated independently of the other. So a smart Russian policy would be one that sets a common position taking into account all of these aspects together in a coherent fashion.

5. so, cash or subsidies?

To conclude what is becoming a pretty long text, I'll come back to the initial cash vs subsidy and provide a Russian point of view on it: Perverse Preferences for Subsidies by an astute observer of Russian politics and business, Yulia Latynina.

The system of subsidies works something like this.

Act One. A doctor writes his elderly patient a prescription for a subsidized medicine.

Act Two. The elderly woman goes to the pharmacy. The prescribed medicine is in stock, but the pharmacist knows that the woman will only pay half-price. He won't collect the other half until the state medical insurance fund processes his request, and that could take anywhere from a month to a year. The pharmacy is privately owned and can't afford to go into the red. The pharmacist therefore tells the woman that the Russian-made medicine prescribed by her doctor is out of stock and suggests an imported equivalent, which costs $100 and is not on the list of subsidized medicines.

Act Three. There is another pharmacy around the corner. It belongs to the governor's son. This pharmacy doesn't dispense subsidized medicines, either, but it does have an excellent working relationship with the local medical insurance fund, headed by the deputy governor's daughter. The two have worked out a nifty deal: He sells medicines at full price, then files for compensation as though he had sold them at the subsidized price. She approves his request and they're both in the money. Benefits and subsidies are nothing more than a clever way to embezzle from the state budget on the pretext of providing assistance to the needy.

Russians like in-kind services better than subsidies because they know that in Russia, in-kind goods are much more likely to actually benefit them (free transport / heated buildings) than subsidies which will be diverted by bureaucrats before they reach them. Subsidies are indeed more transparent in theory when the State works and is transparent. When it does not and is not, real goods are worth a lot more.

Russians were supportive of Putin because for the average Ivan, authoritarianism is a lot better than chaos. They are getting less supportive than before not because he is suddenly turning to be too dictatorial, but because they see that he is behaving as usual, i.e. taking the wealth of the country from the old crowd of oligarchs -- and giving it to a new gang of crooks loyal to him.

I'll conclude this by quoting another insightful article about Russia : A Normal country? by a guy called Matthew Maly (go vist his website for more articles):

Our insistence on exorbitant taxes destroyed most Russian enterprises, drove all private entrepreneurs to seek protection from mafia, and fed an enormous expansion of Russia's envy-driven bloodsucking "bureaucrats" who do nothing for people yet serve as a shining example of thrift, driving to work in cars costing 60 years worth of their salary. A Russian bureaucrat may earn $2K per year, but his car could be worth $120K.

Thus, by the time vouchers kicked in, most Russian enterprises were already idle, totally destroyed, without a market, and suffering under a mountain of debt, their trained staff gone and their machine tools sold for scrap metal. An average Russian citizen got only $30 for his privatization voucher, whereas Chubais promised that it would cost at least as much as a new car. Since all property was administratively distributed, real banks did not appear, as there were no real businesses to finance. The banks that did appear were all vying for state funds and thus were corrupt, uncontrollable, and speculative institutions. This "banking system" contributed to collapse of August 1998, wiping out, yet again, savings of ordinary Russians. Why was it so? Because value of a currency is ultimately determined by goods and services that people produce. Since in Russia people either did not produce or produced "in hiding", Russian currency had arbitrary value that depended only on the amount of IMF loans Russia could get (and then distribute among a small group of cronies). That collapse destroyed what was left of people's trust in capitalism and democracy.

Also, by that time Russians were mostly underemployed, impoverished, dismayed, and confused. That sealed the fate of democratic movement. Without grassroots support, Russia's "democratic" parties turned into Moscow discussion clubs, and could not nurture and attract new leaders. No wonder that Putin is seen as a Messiah, which he is not. In fact, Putin is fundamentally incapable to solve Russia's problem: because he is the purest manifestation of that very problem.

The problem I am talking about is actually as old as Russia's history. Here is what it is. Russian citizens (all Russian citizens, and that includes Khodorkovsky) have no private property. All that the Russians have is conditional property, a permission from a bureaucrat, which says, "Live as you like, until discovered". Since Russians do not have private property, they do not have the rights, and since they do not have the rights, they are not real humans. And this is the key to entire Russian history.

Now, Russians look like humans, act like humans, and, on occasion, write mighty good poetry. And so the question that is being asked in Russia, time and again is: "If they look so much like humans why don't we turn them into humans?" "And how to do that?" "Easy: just give them the rights. They get the rights - then they acquire private property - it would protect and expand the rights - and they would then be human."

But the Russian rulers never did take this advice.

That's simple enough - do not give the Russians advice, they do not listen, are miffed, and blame you when things go wrong. Respect them, they are not "savages" or "uncivilized", and respect yourself by not compromising your values for elusive contracts or deals. 

Posted by Jérôme à Paris on January 20, 2005 at 09:15 AM | Permalink


Gazprom's dream pipeline to Europe

By Judy Dempsey
International Herald Tribune

BERLIN - In northern Russia, where vast deposits of natural gas lie waiting to be tapped, Gazprom, the state-owned Russian energy giant, is hatching a multibillion-dollar strategy that would lock a swath of Europe from Germany to Britain into long-term delivery contracts, in a move that would bypass Ukraine and Belarus and anchor Russia to Europe more closely over time.

Gazprom has been seeking European partners to pay for a new underwater pipeline - originating near St. Petersburg and going to Germany, and then potentially continuing on to Britain - whose price tag is estimated at between $8 billion and $10 billion.

Despite the enormous cost, analysts say the proposed supply line will not be big enough to meet Europe's demand for gas in the next decade. Furthermore, there is a cheaper alternative for the short term: Existing pipelines could be upgraded to allow greater capacity.

Gazprom says the new pipeline is necessary because it will ensure direct, transit-free and safe deliveries of Russian natural gas into Europe.

"The pipeline will connect directly the Russian gas network with the consumer countries in the European Union," a Gazprom spokeswoman, Olga Moreva, said, in response to written questions submitted to the company.

"The pipeline should allow diversifying gas export flows," she added. "It will open a new transit corridor for Russian gas, thus avoiding transit through the countries with unstable economies. This in turn should decrease political risks that currently affect reliability of gas deliveries to Western Europe."

Analysts say there is an underlying political reason for the pipeline. Russia wants to reduce its dependence on Belarus and Ukraine, the two most important transit countries for sending Russian gas to Europe's markets. Eighty percent of Gazprom's current energy exports to Europe use Ukraine as the main transit route.

"The North European Gas Pipeline is a political statement by Russia - and a very expensive one," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "Existing pipelines are operating at undercapacity," he said, and new pipelines will only be needed starting in 2013 or 2015.

Arkadiusz Sarna, an energy specialist at the government-funded Center for Eastern Studies in Warsaw, called the pipeline "a project with no economic base."

"The Europeans know this," he said. "There is more a political reason to it. Russia's relations with Belarus and Ukraine are not very good."

Gazprom's earlier experiences with diversifying its transmission routes have not been entirely successful.

They have resulted in higher gas prices for consumers, who often bear the costs of building pipelines.

"The estimates for building the North European Pipeline are between $8 billion to $10 billion," said Emmanuel Bergasse of the International Energy Agency in Paris, an independent division of the Organization for Economic Cooperation and Development. "That would ultimately be paid by the consumers. This has turned out to be the case for a similar project: the Blue Stream pipeline built in 2003 between Russia and Turkey below the Black Sea for a cost of $3.2 billion. It is only used at around 10 percent of its capacity."

At a length of 917 kilometers, or 570 miles, the North European Pipeline is designed to have an annual capacity of 30 billion cubic meters, or just over 1 trillion cubic feet. According to Gazprom, European energy consumption will rise considerably over the next five years. But if those estimates prove accurate, analysts say, the pipeline would have a hard time meeting the increase.

Moreva said Gazprom delivered more than 140.5 billion cubic meters to the European market last year. "Under already operating contracts, our exports should grow to 180 billion cubic meters by 2010," she said.

Bergasse says Gazprom's strategy is to diversify its export routes. "The North European Pipeline would afford Gazprom control of the pipeline from upstream to downstream. It will also be able to control the price of gas."

Furthermore, entering the European market directly could put Gazprom in a position to lock Europe into long-term contracts, a long-term goal for the company, even as energy markets open to competition across the European Union, analysts said.

"Russia wants to diversify its routes and lock into the European markets before the gas markets are completely open," said Ivan Poltavets of the Institute for Economic Research and Policy Consulting in Kyiv. "The fear by Gazprom is that the Europeans might try to get cheaper gas from Algeria."

Germany's biggest energy companies - all of which have close ties with Russia and increasingly depend on Gazprom for natural gas - recently joined a special working group with Gazprom to look at the economic feasibility of the pipeline.

All the German energy companies interviewed were cautious about commenting on the viability of the pipeline. But Aleksei Miller, the Gazprom chairman, who was in Germany last month, personally lobbied Chancellor Gerhard Schröder and the energy companies to financially support the project.

Schröder, who has been cultivating a close friendship with President Vladimir Putin, is convinced Germany will benefit over the coming decades if it can win privileged access to Russia's vast natural resources, senior officials at the German Chancellery said on the condition of anonymity. They said the move would also bring political benefits because it could anchor Russia to Europe.

German political and financial support is crucial for Gazprom and its majority stakeholder, the Russian state, because Gazprom has run up high debts after a spate of recent acquisitions. But in return for such support, European companies are hoping to gain a foothold in the Russian energy market despite Putin's recent drive to regain state control over the country's main assets.

"Gazprom will need partners for this new pipeline," said Bill McAndrews, spokesman for German energy group RWE, a member of the working group. He said the group would not be finished with its work for several more months. But he stressed RWE's long contacts with Gazprom, saying, "Over 28 percent of RWE's energy is bought from Gazprom, and about 28 percent of Germany's total gas requirements are met by Russia."

Some analysts suggest it would make more economic sense to expand and upgrade the two existing pipelines that cross Belarus and Ukraine.

"The capacity of the Belarus line is 20 billion cubic meters," Poltavets said. "But when Russia built it, it built only one pipeline. There is room for a parallel one. That would cost between $1.5 billion to $2 billion."

Poltavets also points out that with some investment, Ukraine's pipeline could be repaired and upgraded to take on more capacity.

"The potential of the pipeline is 175 billion cubic meters, yet in 2003 it was operating at undercapacity," he said. "It was dealing with 130 billion cubic meters a year."

Gazprom has shown little interest in pursuing either option.

In December, Viktor Yushchenko, a pro-European, was elected president of Ukraine, much to the chagrin of Moscow, which had openly campaigned for Viktor Yanukovich.

A month after Yushchenko's inauguration, Miller's high-level Gazprom delegation was in Germany to discuss how the new pipeline could be financed.

Transporting energy carried few risks in the former Soviet Union, when the Kremlin used the Soviet republics of Belarus and Ukraine as the principal transit routes for transporting its natural gas to what was then Communist Eastern Europe and on to Western Europe.

Once the Soviet Union disintegrated in 1991, Russian authorities were forced to negotiate each year with the newly independent Belarus and Ukraine the cost of using these transit pipelines.

Ukraine and Belarus tried to reap some of the benefits by charging high transit fees. Yet both countries also are dependent on Gazprom for energy needs. Indeed, when Belarus in 2002 challenged Gazprom's business practices, Russia shut off supplies for several days as a warning.

The incident also pushed Gazprom to consider alternative transmission routes.

These are strategic and political considerations that are reminiscent of the power games played in the 1990s over gas pipeline routes in the southern Caucasus. Russia, the former Soviet republics of Turkmenistan and Azerbaijan, Turkey, Iran and the United States have all tried to influence that region's natural gas flows to the West.

Poltavets said Ukraine's new government was determined to improve its image as a reliable partner for transporting Russian natural gas to Europe.

"Ultimately the new government's aim is to show the international community that Ukraine is reliable and provides a secure and safe transit route," Poltavets said. "In the past, it had a bad reputation. It was accused of stealing gas. It's now about the integrity of the state and its commitment at making those pipelines secure."

Indeed, when Yushchenko addressed the Bundestag, or German Parliament, this month in Berlin, he went out of his way to convince his audience that Ukraine would guarantee secure energy supplies to Germany and Europe and that Ukraine wanted good relations with Russia.


South Stream: Gazprom's new mega project

Eurasia Daily Monitor
Monday, June 25, 2007 -- Volume 4, Issue 123

by Vladimir Socor

On June 23 in Rome, ENI Chief Executive Paolo Scaroni and Gazprom Vice-Chairman Alexander Medvedev signed a memorandum of understanding to build a gas pipeline from Russia to Italy -- South Stream. Energy Ministers Pierluigi Bersani of Italy and Viktor Khristenko of Russia joined the two executives in providing some commercial and technical specifications of the project.

Quite apart from those specifications, the project at this stage seems politically motivated to intensify competition among European countries for limited amounts of Russian gas. South Stream can significantly increase Russia's options to play consumer and transit countries and various national energy champions in Europe against each other.

South Stream would start from Russia's Black Sea coast at Beregovaya, the same starting point as that of the Blue Stream pipeline to Turkey. South Stream would run some 900 kilometers on the seabed of the Black Sea, reaching a maximum water depth of more than 2,000 meters, to Bulgaria. Two options are under consideration for the Bulgaria-Italy route. The southwestern option would continue through Greece and the Adriatic seabed in the Otranto Strait to southern Italy. The northwestern would run from Bulgaria through Romania, Hungary, and Slovenia to northern Italy. If the second route is chosen, a lateral spur from Hungarian territory into Austria is a "possibility." Gazprom is holding out all options to all potential takers.

The new pipeline is planned to carry 30 billion cubic meters of gas annually. ENI's unit Saipem -- which had previously built the Blue Stream pipeline on the seabed for Gazprom -- expects to deliver the feasibility study for South Stream within several months. Gazprom and ENI would jointly finance, own, and operate the project on a parity basis. Countries along the overland route(s) would be offered minority stakes in the South Stream project. Transit deals are explicitly ruled out. Moscow speaks of "tasking" those countries: "The governments of those countries have the task to build an efficient system of agreements supporting this initiative," Khristenko stated (Interfax, June 23).

Gazprom and ENI are working out the cost estimates. According to ENI, the costs would be in line with those of creating an LNG supply chain (gas liquefaction plants, tanker ships, re-gasification plants) along the South Stream route. This is an oblique admission that the costs would be very high. Construction work on the pipeline could start "within months" from Russian territory and is expected to be completed in less than three years. However, the start of construction must await approval from European Union competition and regulatory authorities.

The upstream sources for South Stream could be Siberian gas and Central Asian gas in proportions that are yet to be determined. Medvedev spoke interchangeably of Russian gas and Gazprom-owned Central Asian gas at the June 23 presentation of South Stream. For its part, ENI bought the Siberian gas-producing companies ArcticGaz and Urengoil in April 2007, when the Russian government auctioned off the last remaining assets of the destroyed Yukos company. Reciprocally, ENI has opened direct access for Gazprom to distribution systems and end consumers in Italy.

Attending an "energy summit" on June 24 in Zagreb, Russian President Vladimir Putin held a bilateral meeting with Bulgarian President Georgi Parvanov to draw Bulgaria into the South Stream project. According to Russia's account of the meeting, Parvanov accepted eagerly. Putin also claimed that the European Commission's reaction to Russia's announcement of South Stream was encouraging (Itar-Tass, June 24). However, Romanian President Traian Basescu in his speech at the same Zagreb summit underscored that the Western-backed "Nabucco project would decisively contribute to Europe's energy security and supply diversification" (Rompres, June 24).

Launching South Stream at least as an intention reflects Russia's policy to reduce overland transit through neighboring countries, relying increasingly on maritime transportation for its energy exports to Europe.

Even more ambitiously, Russia seeks to maximize the range of its export routes under full or partial Russian control. Adding to the existing pipelines -- Beltransgaz and Yamal through Belarus and Poland and the Ukrainian transit pipelines westward and southward -- Russia is building the Baltic seabed pipeline to Germany; planning to extend its Blue Stream pipeline from Turkey farther afield; and now targeting southern and central Europe through the South Stream pipeline.

By putting a multiplicity of options on the table, Russia can pressure countries it regards as "recalcitrant" into transportation deals favorable to Moscow. For example, Ukraine seeks Russian consent to maintain (rather than reduce) annual gas transit volumes and to build the Uzhhorod-Bohorodchany extension of Ukraine's pipeline system. For its part, Turkey considers the possibility of participating in the proposed extension of the Blue Stream pipeline on Turkish territory. However, the Russia-Bulgaria pipeline on the seabed of the Black Sea is intended to circumvent both Ukraine and Turkey. This option considerably strengthens Russia's leverage in negotiations with those transit countries; and, in Ukraine's case, it may increase Moscow's leverage to demand partial control of Ukraine's transit pipelines in return for not reducing transit volumes through that country.

South Stream can partly change the original destination of Blue Stream's extension. According to Gazprom, the throughput volume for the extended Blue Stream may be either reduced or rerouted southward across Anatolia for shipment to Israel (the latter option seems far-fetched on many counts, however).

If carried out, South Stream would partly replace the planned extension of Blue Stream from Turkey through Bulgaria, Romania, Hungary, and Austria. Either project is rival to the EU- and U.S.-backed Nabucco transport project for Caspian gas along that same route. South Stream would also rival the proposed extension of the Baku-Tbilisi-Erzurum gas pipeline through Turkey, which is planned to either be integrated with Nabucco or continue from Turkey to Greece and Italy. Apart from running ahead in both the transit and downstream races, Russia is running way ahead in the upstream race for Central Asian gas to feed these projects.

Moreover, Moscow seems to be planning greater transport capacities than its own gas resources may be able to fill from stagnant Russian production in the years ahead, even taking Gazprom's purchases of Turkmen gas into account. Instead of duly investing in extraction in Russia itself, Gazprom is increasingly investing in the construction or capture of assets in Europe.

Apparently, Gazprom follows Transneft's example of planning to build surplus pipeline capacities as an instrument of export strategy. Euphemistically referred to as "flexibility," surplus pipeline capacities (if built as intended) will enable Russia to switch export directions for large hydrocarbon volumes -- favoring one or another direction, country, or national champion -- according to a system centrally managed from Moscow. The Kremlin seeks to become the political manager of an energy supply system for Europe under conditions of tight or even deficit supplies in the medium term.

(ENI presentation, Rome, June 23; Interfax, Bloomberg, June 23-24)
--Vladimir Socor





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