Books on Russia
Update No: 334 (27/10/08)
Much is happening in Russia and its part of the world right now, justifying
There is the August war and its aftermath in Georgia. There is trouble brewing
on the Western border with Poland and its neighbour, the Czech Republic.
There are massive implications for the global energy industry in these events.
Gazprom's hand has been greatly strengthened.
Moreover, Russia, Iran and Qatar have announced their intention to set up a gas
OPEC, a rump version of what we, New Nations have been predicting for years as a
core objective of Vladimir Putin - OGEC, an Organisation of Gas-Exporting
Countries. Since these three are responsible for 60% of global gas reserves,
such a move is a mighty step towards it.
Last, but not least, there has been a meltdown of the Russian Stock Exchange of
over 60%, a less welcome figure than the above. Does the financial crash portend
a depression of the real economy, such as happened exactly ten years ago in
Turmoil and tumult
When President Mikhail Saakashvili of Georgia ordered his troops into South
Ossetia on August 7, he started something much bigger than he realised. A strong
reaction by the Kremlin was inevitable. Did he act on prompting from certain
people in the upper echelons of some Western security organisation, or some
gung-ho military advisor? Certainly he acted as though he expected the US
cavalry to appear over the horizon when his invasion went wrong? The best he got
out of it was that public opinion in the US but probably nowhere else, due to a
concerted whitewash by both politicians and much of the US media, will always
refer to it as “Russia’s invasion of Georgia.”
'A new cold war' is an exaggeration to describe the situation; but a distinctly
cooler climate now prevails in Russia's relations with the West, especially the
NATO denies responsibility for war in Georgia
Was he put up to it by the Americans, or rather some unidentified figure in the
Western alliance, promising support? It would have been a major miscalculation
if he did believe it. The Caucasus is not the remit of the West, but
NATO has denied provoking August's five-day conflict between Russia and Georgia,
a spokesman for the alliance said on September 18, after Russian President
Dmitry Medvedev accused it of sparking the conflict. Medvedev had said NATO
"provoked the conflict" between Russia and Georgia, adding that Russia
was "being pushed... behind an Iron Curtain. I would like to underline
again that this is not our path. There is no sense for us in returning to the
NATO Secretary General Jaap de Hoop Scheffer meanwhile pledged "full
solidarity" with the ex-Soviet republic of Georgia, following an informal
meeting with the 26-nation bloc's defence ministers in London. De Hoop Scheffer
told reporters at a press conference in London that "NATO is in full
solidarity ... with the Georgian people and with the Georgian government. We
have an intensive partnership, an intensive dialogue, an intensive high-level
political engagement with Georgia," he added.
Asked for his response to Medvedev's accusations earlier, NATO spokesman James
Appathurai told AFP: "There is nothing provocative about supporting
Georgia's democratic development, nor anything provocative in helping them meet
their aspirations to come closer to the Euro-Atlantic community."
Georgian efforts to become part of NATO have infuriated Russia, which objects to
the prospect of its old Cold War foe extending to its borders.
OSCE banned by Russia
Attempts to have military monitors of the Organisation for Secureity and
Cooperation in Europe (OSCE) placed inside South Ossetia failed on September 18,
when Moscow flatly said 'No'.
The EU under the leadership of President Nicolas Sarkozy of France has
negotiated the dispatch of 200 EU monitors. They will be stationed in the
Russian defined 'buffer zone' outside the two breakaway regions, Abkhazia and
South Ossetia, which 8,000 Russian troops are garrisoning.
The Kremlin infinitely prefers dealing with continental Western Europeans to the
US or the UK. When Condoleezza Rice says Russia is facing pariah status, she is
wrong as regards the EU. She is speaking for the US State Department, but not
for much longer. Any US president with an ounce of sense is going to forge a new
relationship with Russia next year.
The Czech and Polish missile defence shield
In a separate development likely to anger Moscow, US Defence Secretary Robert
Gates and his Czech counterpart signed an agreement clearing the way for
stationing US forces to operate missile defence radar in the Czech Republic.
This is planned to be in tandem with a defence system in Poland.
The Kremlin threatens to station nuclear weapons against the two states, its
former allies in the Warsaw Pact.
It would be obviously highly appropriate for the next US president to address
the issue urgently. Obama can hardly see this particular legacy of the
ultra-aggressive Bush Administration as a wise one. The whole project is as
demented as can be imagined and should be dropped forthwith after January 20.
Gazprom to the fore
One of the main winners in the Russian- Georgian war in South Ossetia was
Gazprom - and not only in economic terms, but also in geopolitical terms. That
does not mean that Russia's biggest state company was involved in unleashing the
war or, indeed, took part in it in any way. They had nothing to do with it. But
the fact is that the war was a severe blow against Gazprom's competitors, or
more specifically, the rival infrastructure projects for delivering gas to
It is through Georgia that the so- called "fourth corridor" runs, by
which hydrocarbons and especially natural gas reach the EU countries. The first
is from Russia, the second is from Norway, and the third is from Algeria.
The biggest gas pipeline runs through Georgia: Baku-Tbilisi- Erzurum
(Turkey), from where the gas continues towards southern Europe. With the growth
in the volume of extraction in Azerbaijan, the pipeline's capacity could rise
from today's 6 billion cubic meters a year to 20 billion by 2014. Even if it did
not stop deliveries, the war, first of all, pushed gas prices up, and second, it
was bound to influence plans for the expansion of the "fourth
corridor." Clearly there is a problem there that needs to be addressed.
True, the conclusions from the war could be twofold. The BBC claims that the
Russian-Georgian war could be interpreted by the gas and oil extracting
countries as a show of strong pressure by Moscow, pressure that could also be
turned against them, which might make them abandon plans to support non-Russian
- essentially, anti- Russian - projects for the delivery of hydrocarbons to
But exactly the opposite conclusion is also possible. For the EU, the main value
of the Baku-Tbilisi-Erzurum pipeline is that it has nothing to do with Russia,
and therefore Gazprom. There could be a boom in non-Russian projects with the
support of the Europeans. Germany, for instance, has already sounded out the
subject of pipelines as one of the priorities in postwar talks. Berlin is
threatening Moscow that "without the help of the EU it will be difficult
for Russia to modernize the gas infrastructure." The same arguments also
apply to the Georgian transit oil pipelines, such as Baku-Tbilisi-Ceyhan, for
The big one – a gas OPEC as a step towards OGEC
There has been an anomaly in the world energy industry for decades. The
oil-producing countries forged an Organisation of Petroleum-Exporting Countries
(OPEC) in the early 1970s as the first oil price hike was being prepared. Form a
monopoly, curb production in tandem at a time of acute shortage and hoist the
price range. This is a classic formula – justifying Adam Smith's statement:
“Whenever businessmen foregather to debate their common interests, it
invariably involves a conspiracy against the public.”
It might have seemed logical for the gas-exporting countries to have followed
suit. But oil supplies are far more flexible than gas supplies. The former can
be transported to market in different ways, by pipeline, by carrier or ship, by
barrel or truck; the latter only by pipeline.
Actually this is not quite true – there is after all liquefied natural gas
(LNG), as transportable in various ways as oil. But it is more expensive than
natural gas. There is an overwhelming economic advantage in most cases for the
crude product – it is economical!
This is doubtless why the world gas industry has been characterised by long-term
gas export contracts on a two-way track via pipelines. The consumer is not
exactly king, but has a decided advantage in bargaining – he can divide and
rule, playing off the actual provider against potential ones. Its technical name
There is, however, a rival ploy which could predominate over monopsony – let
us call it, meta-monopoly!
The actual and potential suppliers get together and forge a monopoly
threatening, not actual, but potential, supplies - combine and rule thereafter.
That is what Russia, Iran and Qatar are now up to for a venture, indeed an
It was actually by peradventure. The Georgian crisis has its own logic to it, as
does the global credit crunch. They both made the Russian authorities realise
that in critical times you need friends or at least allies, especially as the
latter has induced a halving of oil prices and a downward pressure on gas
prices. Hence the idea to forge a gas OPEC, aired by Premier Chernomyrdin a
decade ago and then by Putin, was dusted down again.
Alexey Miller, chairman of Gazprom, said that the three countries were forming a
“big gas troika” and that the epoch of cheap hydrocarbons had come to an
end. “we are united by the world's largest gas reserves, common strategic
interests and, which is of great importance, high cooperation potential in
tripartite projects. We have agreed to hold regular – three to four times a
year – meetings of the G3 to discuss the crucial issues of mutual interest.”
Miller's comments came after a meeting in Tehran with Gholamhossein Nozari,
Iran's petroleum minister, and another with Abdullah bin Hamad al-Attiyah,
Qatar's deputy prime minister and oil and energy minister. Miller said that the
cartel was establishing a technical committee of specialists and experts to
discuss the implementation of joint projects embracing the entire value chain
from geological exploration to marketing.
The Russians avoided the sensitive word, 'cartel,' but the Iranians spelled it
out. There is a demand to form this ‘gas OPEC’ and there is a consensus to
set up a ‘gas OPEC’.”
An actual OPEC meeting took place on October 24, and a meeting of Abdullah al
Badri, OPEC's secretary-general, with energy chiefs in Moscow on October 22,
when it was agreed to coordinate Russian energy policy more closely than
hitherto with the oil cartel. With this in mind, Miller said that fossil fuels
are henceforward going to cost more. We share the opinion that oil price
fluctuations don't put in question the fundamental thesis that the era of cheap
hydrocarbons has come to an end.”
It is just a first step, but one which alarms the West, particularly the EU
states so dependent on Russian energy supplies. The logic would appear to bring
in Algeria and perhaps even Norway, a non-member of the EU, eventually.
It certainly is unlikely that Turkmenistan with their new gas windfall, or Libya
who have recently improved relations with Russia, and similarly Venezuela, will
For all the Western complaints that the move towards a cartel is contravening
the need for competition, it has to be admitted that higher hydrocarbon prices
has an ecological rationale. It puts pressure on the West to accelerate
developments in wind, wave and other renewable energy alternatives. The Shetland
Islands off Scotland in the North sea given the political will and the
appropriately large investment, might alone provide 10% of all Europe's energy
requirements from wind and wave power, so stormy is their climate. Those who
assess the climate change threat as the premier challenge that the human race
faces, should welcome the G3 as a step to sanity. The market, albeit a
cartelised one, could force change that endless talks by politicians have not.
Wider effects on the economy
Russia's financial markets already forfeited foreign confidence earlier this
year over disagreements between BP executives and Russian executives on how to
invest profits from the jointly owned TNK-BP oil company. Just after the
Russia-Georgia crisis, the London Telegraph reported that the unexpected costs
of the war had an instant effect on Russian markets not least capital flight,
that Russia's economy suffers from chronic inflation, and that falling crude
prices are threatening a major trade deficit. If Russia decides to embrace
isolation in this kind of insecure global environment, its leaders must
understand that it is the general population that will face economic and social
hardship as a result.
The drop by 37% in world oil prices from a high of $147 per barrel has been the
prime reason for economic slowdown and a massive fall in the Russian markets by
57% in early October and more subsequently. The government has poured liquidity
into them to try and correct the situation. It has $500 bn in reserves to play
with. But the impact of the August war has not helped to restore investor
confidence, any more than BP's and Shell's earlier difficulties with their
Russian jvs, which George Soros (who burned his fingers investing earlier in
Russia), characterised as due to the absence of the rule of law in that country,
which judgement seems particularly apt to us and a matter that only the Russian
government can correct.
But if investors don't return and oil prices fall further in the wake of the
global financial crisis, the Russian boom of this decade may begin to look like
a short-lived miracle.