Wednesday, December 27, 2006

Russia's energy power

Russia strong-arms energy-hungry West
Energy riches make Kremlin impervious

Steven Lee Myers

International Herald Tribune 26 December 2006

MOSCOW: Inside the Kremlin last week, the executives of three major international companies — Royal Dutch Shell, Mitsubishi and Mitsui — heaped praise on the man whose government had effectively forced them to cede control of the world's largest combined oil and natural gas development.
"Thank you very much for your support," Jeroen van der Veer, Shell's chief executive, told President Vladimir Putin during a meeting that ended a six-month regulatory assault on the project, Sakhalin-2, at the cost of granting control to the state energy giant, Gazprom. "This was a historic occasion," he said.
It was also a telling one, with lessons that extend beyond energy policy to include such disparate matters as the murders of Alexander Litvinenko, a former KGB agent in London, and Anna Politkovskaya, a prominent journalist.
Putin's Russia, buoyed by its oil and gas riches, has become so confident — so arrogant, its critics say — that it has become impervious to the criticism that once might have modified its behavior. And those who might have once criticized, from investors to foreign governments, have largely acquiesced to the new reality confronting them.
The Kremlin is now dictating its terms with greater assertiveness than it has at any time since the collapse of the Soviet Union, which took place 15 years ago this coming Monday. Many had hoped that the Russian presidency of the Group of 8 industrial nations this year would temper Putin's diplomacy, but it has not.
Russia began 2006 by making good on a threat to cut off natural gas supplies to Ukraine to get a higher price for Gazprom. The shut-off, though brief, provoked a storm of concern and fear in Europe about dependency on Russian energy, and Russia is ending 2006 by warning Belarus of the same fate.
The criticism that has been directed against the Kremlin has had little effect. Vice President Dick Cheney of the U.S. leveled the harshest criticism to date when he accused the Kremlin of using oil and gas as "tools of intimidation or blackmail."
That was in May, and U.S. policy toward Russia has changed imperceptibly, with one significant exception: The Bush administration struck a deal to allow Russia's long-coveted membership in the World Trade Organization.
"Russia since last year has been enjoying some feeling of euphoria, that feeling that we have so much money, so many resources that we can do what we want," said Fyodor Lukyanov, editor of the journal Russia in Global Affairs.
The reality is that the United States and Europe have little leverage beyond persuasion. And persuasion no longer works, as the Kremlin campaign against Sakhalin-2, the largest foreign investment project in Russia, showed.
The campaign was so transparent that it seemed comical, beginning with the surprise inspections by a colorful and hitherto little-known environmental inspector, Oleg Mitvol, who threatened to fine Sakhalin-2's developers for every tree they cut down.
As the campaign unfolded, analysts issued warnings. Governments protested. But in the end, the Kremlin got what was clearly the goal from the start: state control of a lucrative project that opens the gas market in Asia.
And the three companies with the most to lose said nothing critical as they sold 50 percent plus one share of Sakhalin-2 for what some analysts called a discounted price, $7.45 billion. Putin declared instantaneously that the project's environmental problems could "be considered resolved."
"Experience has disappointed many foreign investors in Russia," said Valery Nesterov, an energy analyst at Troika Dialog, an investment firm in Moscow.
And yet, when it comes to energy or other investments, it does little to deter them. "The attraction is so large," Nesterov said, adding that companies like Shell still held out hope of winning access to other Russian fields.
The Sakhalin affair has revived memories of the government's assault on Yukos Oil and its founder, Mikhail Khodorkovsky, in 2003 and 2004, a case that was also seen as selective at best. So has the result.
The company is now a rump of its former self, under bankruptcy receivership and with its major assets belonging to the state oil company, Rosneft. Khodorkovsky, once the richest man in Russia, remains in a Siberian prison, reportedly facing a new round of criminal charges that could keep him there.
The effect on investors was most revealing. Russia's stock market plunged 21 percent in the month following his arrest, with the Russian Trading System Index dipping below 500. It is now above 1,800; Yukos is a painful memory only for those who paid dearest.

The connection to the murders of two prominent Kremlin critics — Litvinenko in self-exile in London and Politkovskaya here in Moscow — might seem tangential, but the response to them also underscores the new reality of a newly confident Russia.
There is as yet no evidence directly linking anyone in Russia to the killings, even if critics have been quick to do so, reviving some of the worst fears about the country Russia has become.
After Litvinenko's murder, The Daily Telegraph in Britain declared flatly, "Russia is rotten to its heart." A recent cover of The Economist showed Putin dressed like a gangster, holding a gasoline nozzle as a machine gun. The British government, by contrast, has said nothing even remotely so critical.
Critics warn that Russia is ignoring the consequences of its behavior, and that the monopolistic policies of Gazprom, the erosion of political competition and the easy dismissal of critics as Russia-haters all blind the Kremlin to the dangers of the overly centralized system Putin has created.
Mikhail Kasyanov, Putin's prime minister from 2000 until 2004 and now one of his biggest critics, said that the foreigners rushing to join Russia's boom were equally complicit. "Investors are very shortsighted," he said in an interview.
Even in the long term, though, history may be on Russia's side.
"It pains a lot of people here to admit that Russia is not 'like us,'" Katinka Barysch, chief economist of the Center for European Reform, a research group in London, wrote in an electronic message, saying that Europe's energy interests would trump other concerns about Russia. "But unless the country slides into full-scale dictatorship or chaos, we will put our interests first."

Russians keep up pressure over energy

Andrew E. Kramer

International Herald Tribune December 26, 2006

Gazprom, the Russian energy monopoly, threatened Tuesday to halt natural gas supplies to Belarus if that country did not agree to a large price rise by Monday.
The strong Russian position suggests that Moscow is turning aggressive in energy pricing even with countries that have been close allies.
Belarus now has the cheapest gas in the former Soviet Union, other than Russia itself. Gazprom, which has more energy reserves than any other company in the world, is insisting that Belarus more than double the price it pays, though that would still remain below world levels.
Gazprom warned that Belarus was behaving "irresponsibly" in the talks over both pricing and a Russian demand to surrender control of a key export pipeline, saying this resistance was putting Belarus's energy supply at risk.
The threat came almost exactly a year after Gazprom cut off fuel supplies to Ukraine, another key country, causing intense supply jitters in Western Europe. After a din of criticism, Gazprom turned the gas back on after three days.
But in the energy markets now, the Kremlin is dictating terms with greater assertiveness than it has at any time since the collapse of the Soviet Union. Even those who might have once criticized the government, from investors to foreign governments, have largely acquiesced to the new reality confronting them. (News analysis, Page 3)
Gazprom already owns one of the two major export pipelines that run through Belarus and is negotiating for a share in the second, a move that would tighten the company's bear hug on European supplies.
Gazprom said exports to Poland and Germany through two pipelines that pass through Belarus were not at risk.
The company spokesman, Sergei Kupriyanov, said Gazprom had been stockpiling gas in underground reservoirs in Western Europe to ensure uninterrupted supplies further down the pipeline, even if Belarus were to be switched off.
"Time is flying," Gazprom's chief executive, Aleksei Miller said in remarks carried on Russia's NTV television.
"Responsibility for what has taken shape today lies with the Belarussian side," he said, addressing a Belarussian delegation led by a first deputy prime minister, Vladimir Semashko.
"Gazprom and the Russian Federation met you halfway on all issues," Miller said. "We offered the most preferential regime. We think these conditions are more than good."
Gazprom's tough negotiating suggested an unraveling of the special relations between Russia and Belarus, which are joined in a loose if dysfunctional union state. Russia is one of the last allies in Europe of the Belarussian dictator, Aleksandr Lukashenko.
"The demand shows Putin is abandoning any myth of the union state," Lilia Shevtsova, an associate at the Carnegie Center in Moscow, said in an interview by telephone. "Lukashenko is desperate and backed into a corner."
Still, Gazprom's final asking price for Belarus is among the lowest offered to Russia's neighbors: $105 to $110 per 1,000 cubic meters, in a combination of cash and shares in the national pipeline operator, Beltransgaz. But that would more than double Belarus's current price of $46.68 per 1,000 cubic meters.
Gazprom said Belarus wanted to pay rates in line with those paid in the neighboring Russian province of Smolensk, or about $40 for residential consumers and $54 for industrial customers, citing a treaty related to the union state.
Gazprom says it is intent on filling out its bottom line by raising prices throughout the former Soviet Union, putting an end to a decade of subsidies.
Belarus uses about 21 billion cubic meters a year, about a third of the demand in neighboring Ukraine. It exports another about 30 billion cubic meters of Russian gas to Poland and Germany, compared with the 100 billion cubic meters of gas exported via Ukraine.
The chief negotiator for Belarus, Deputy Prime Minister Vladimir Semashko, left talks in Moscow without a deal Tuesday. "We still have time until the 31st of December," he said.
Gazprom has slowly raised prices in neighboring countries while trading special deals for footholds in the local gas distribution business or access to the skein of export pipelines that is essential to its hugely profitable business.
Ukraine, for example, will pay $135 per 1,000 cubic meters in 2007 while Gazprom won a concession to distribute gas through a joint venture, RosUkrEnergo.
By comparison, Georgia last week agreed to short-term supplies at a price of $235 until it secures an alternative. Georgia refused to sell its pipelines to Gazprom.
Armenia, a traditional Russian ally in the south Caucasus, secured a deal to pay $110 until 2009 but surrendered a strategic segment of pipeline linking that country with Iran, another big gas supplier.
Moldova agreed Tuesday to pay $170 and allow Gazprom a larger role in its domestic companies that distribute natural gas.
In the bargaining, Gazprom said that if Belarus insisted on keeping the pipeline, it would have to pay $200 per 1,000 cubic meters, an offer that Belarus refused.
In a combined deal, Gazprom demanded $75 and $80 in cash and $30 worth of shares in Beltransgaz, for 1,000 cubic meters.

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