Vladimir Putin’s Energystan and the Caspian
A bit more than 10 years ago, in June 1997, a stone-faced former KGB lieutenant colonel, fluent in English and German, a master in the Japanese martial art of judo (sixth-dan black belt) and co-author of the book “Judo: History, Theory, Practice,” received his Ph.D. from the St. Petersburg State Mining Institute for his 218-page thesis “Mineral Raw Materials in the Strategy for Development of the Russian Economy.”
To him judo is not simply a sport; it is also his “political philosophy.” It is the basis of how to envisage the world, and of how to build relations with the opposition in politics. This view is indeed not any different from the teaching of Kano Jigoro (1860-1938), founder of judo and the Kodokan — “Employ your own strength wisely and pursue prosperity for both yourself and others.”
Yes, the name of that former KGB agent is Vladimir Vladimirovich Putin, president of the Russian Federation.
Putin set for policy U-turn
After coming to power in December 1999 Putin’s aims were to get Russia in order, put Russia back on the modified Soviet track (1) and regain its former power and influence (2), protect national interest in strategic sectors, not to be too dependent on raw materials exports, strengthen the Russian state, remove the entire Yeltsin team in key positions (3), keep away from oligarchs who seized assets and power during the Yeltsin era, bring “privatized” companies back under government control, cooperate with the West if it advances Russia’s strategic interests, have large corporations (4) backed by the government that are able to compete with the West’s transnational corporations and remain open to foreign investment but under his own terms.
Yeltsin had done almost everything the West suggested so that Russia nearly became a playing field of Western companies. When Russia was suffering from currency devaluation, loan defaults and bank failures the new rubber barons financed Yeltsin’s 1996 presidential election campaign and bailed him out (5) under the “loans for shares” scheme (6). In Putin’s words, the Russian economy had become “criminalized,” and strategic natural resources were given away under “colonialist” deals.
Energy is Putin’s geo-strategic commodity
Putin knows very well how important a geostrategic commodity energy is. In a recent speech, for instance, he once again underlined that “Energy supply issues have become a primordial part of international economic policy today.” Not surprisingly, he selected Russia’s extensive oil and gas resources and pipelines, as well as national champion companies, as the key policy instruments to play a chess game in world energy geopolitics.
As far as natural resources are concerned Russia’s hand is very strong: It holds 6.6 percent of the world’s proven oil reserves and 26 percent of the world’s gas reserves. In addition, it currently accounts for 12 percent of world oil and 21 of recent world gas production. In May 2007, Russia was the world’s largest oil and gas producer.
As for national champions, Putin has strengthened and prepared Gazprom (the state-controlled gas company), Transneft (oil pipeline monopoly) and Rosneft (the state-owned oil giant). That is why in 2006 Gazprom retained full ownership in the giant Shtokman gas field (7) and took a controlling stake in the Sakhalin-2 natural gas project. In June 2007, it took back BP’s Kovytka gas field and now is behind Total’s Kharyaga oil and gas field. But that is not all.
Putin has seen Russia’s market position weakened in a context of liberalization of downstream markets in importing countries. If producers should care about consumers’ security of supply (meaning reliable and available energy at reasonable and affordable prices), consumers must care about producers’ security of the market (meaning access to markets in consuming countries to justify and protect their investments and long-term contracts). Thus, Putin pushed Gazprom to enter the European Union’s gas transmission and distribution system, which are regulated activities with guaranteed profit.
How about Russia’s energy customers? They are becoming more dependent on imports. For example, in the EU, Russia’s largest customer, domestic production of oil and gas is declining while consumption is increasing. Even worse, many factors ranging from logistical difficulties and geological realities to financial burdens restrict the options to diversify its supply sources and routes to avoid an over-reliance on a small number of suppliers, in particular Russia, and vulnerability related to import dependency. These challenges led security of supply to be the EU’s top priority.
Putin knows well that the EU needs Russia as much as Russia needs the EU. He also knows that the EU lacks a coherent common energy strategy and policy and is unable to speak with one voice. That is why he prefers bilateral relations (8) to multilateral negotiations with the European (dis)Union. By developing individual strategies he is indeed further weakening the position of the EU and is reducing the solidarity between its members, which deteriorates the position of small countries. It is an irony that most of the companies Gazprom partners with are the EU’s state-controlled national champions.
Moreover, cooperation with OPEC countries as well as spreading the idea and follow up of a possible gas OPEC show that Putin sees oil and gas as a possible geostrategic weapon, not only in energy and economic fields but also in international relations. In addition, a major disruption in the flow of oil from the Persian Gulf would give Russia not only more power for playing a swing producer role but also the ability to provide more Caspian oil into markets.
Surely Russia is not immune to weaknesses. The uncertainty about the future economic situation, especially domestic energy needs, declining production (9) in major oil and gas fields, and not enough investment in developing upstream sector questions the potential of Russia’s future oil and gas export capacity. The latter is one of the reasons why Putin pays so much attention to the “stans” in and around the Caspian, especially Kazakhstan and Turkmenistan.
Caspian Sea region at crossroads of energy politics
In the 19th and early 20th century the great powers, the British and Russian empires, struggled for supremacy in and around the Caspian, which came to be known as the Great Game. With the collapse of the USSR in 1991, oil and gas-rich newly independent states of the region again became a geopolitical battle area, coined as a revival of the Great Game.
However, this new game has become far more complex than the 19th century one due to the mixture of actors, ranging from national/international oil and gas companies to Russia, China, a US/EU coalition, and possibly Iran. Even Japan, which used to be rather hesitant or too careful to play power games as such, has jumped in.
This undisguised political battle contains prizes — control and influence and development of the hydrocarbon resources and their transport routes to the markets.
The US/EU coalition (backed by NATO) mainly concentrates on transport routes. Note that in international pipelines business, politics often comes before economics. And politics mostly determines which route to follow and which countries to transit. The moves of the US/EU coalition in the region follow a strategy that prevents the construction of pipelines through Russia or Iranian territory. The coalition pushes for a corridor to Western markets from the fields on the eastern shores of the Caspian through allies Azerbaijan, Georgia and Turkey and to eastern markets through Afghanistan and Pakistan, as opposed to an Iran-Pakistan-India gas pipeline project.
The most recent efforts of the US/EU coalition are the followings:
April 3, 2007: Construction of a pan-European oil pipeline (Romania-Serbia-Croatia-Slovenia-Italy) was signed for. Scheduled to be completed by 2012.
April, 24, 2007: Construction of the trans-Anatolian oil pipeline (Bosporus bypass, Samsun-Ceyhan in Turkey), which will connect Samsun to Ceyhan in Turkey, has started. Scheduled to be operational by 2009.
May 11, 2007: Odessa-Brody-Gdansk (from Ukraine to Poland) and AMBO (Bulgaria-Macedonia-Albania) oil pipeline projects were discussed. Follow-up is in October 2007 in Vilnius, Lithuania.
The main characteristic of those pipelines is the source of oil, which is supposed to come from the Caspian. Since Azeri oil may only be enough to feed the Baku-Tbilisi-Ceyhan oil pipeline for another decade, the above-mentioned lines must rely on Kazakh oil.
A competing project promoted by Russia, however, the Burgas-Alexandropoulis oil pipeline (10) (Bosporus bypass, Bulgaria-Greece), will soon involve Kazakhstan. Thus, the line’s main source of oil may also be Kazakh oil.
Currently, Kazakh oil is exported in three directions: northward (via the Russian pipeline system and rail) westward to the Black Sea (via CPC and rail, and shipped by barge to Azerbaijan) and southward (via swaps with Iran), eastward through China (via pipeline and rail). The question is the following: Can Kazakhstan produce that much oil to feed all its customers? Most probably, no. Therefore, it is unlikely that all those projects will be realized.
***
1- Putin has restored many Soviet symbols: the red star as the military emblem, the red banner as its military flag and declaration of the birthday of Felix Edmunovich Dzerzhinsky, founder of Soviet secret service Cheka, the forerunner of the KGB, as Security Organization Day.
2- Putin’s thoughts and enthusiasm for reasserting the role of a strong Russia was shaped in his Ph.D. thesis around the idea of natural resources and national champion companies. Whether he was the actual author is another issue.
3- According to a news analysis in The Washington Post, up to 78 percent of 1,016 leading political and business leaders in Russia have served previously in organizations affiliated with KGB or FSB.
4- Martha Brill Olcott, The Energy Dimension in Russian Global Strategy, The James Baker III Institute for Public Policy, Rice University, October 2004.
5- Allowing the government to pay back salaries and pensions.
6- When the government could not pay back loans, it auctioned off the right to manage shares.
7- However, in mid-July Gazprom announced it would develop the field with France’s Total.
8- For example, Gazprom signed long-term contracts and asset swaps with Germany’s Ruhrgas, France’s Gaz de France, Italy’s Eni and Enel, and Austria’s OMV. Note that Germany’s Ruhrgas has a stake of more than 10 percent in Gazprom today and has a representative on the board of directors.
9- Most of the recent increase in production most probably comes from already long-worked fields with old wells, from new wells in those deposits, the rehabilitation of existing oil fields and the reopening of closed wells.
10- Signed in March 2007 by Greece, Bulgaria and Russia, scheduled to be completed in 2011.
Dr. Sohbet Karbuz, a former official of the International Energy Agency and a former academic, currently works for an energy industry association in France. The opinions expressed are the author’s alone. He can be contacted at sohbetkarbuz@yahoo.comsource: Today’s Zaman