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Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 433,491 346,520 310,000 16
         
GNI per capita
 US $ 2,610 2,140 1,750 97
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 334  (27/10/08)

Preview
Much is happening in Russia and its part of the world right now, justifying extensive coverage. 

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 1998?

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 US.

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 traditionally Russia's.

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 past."
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 Europe. 

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 Europe. 

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 instance. 

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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 is monopsony.

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 adventure. 

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 be disinterested. 
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. 

 

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