Middle East Economic Survey
VOL. LII
No 13
Russian Resolve Prevails In Competition For Caspian Gas
By Andrew Reed
Mr Reed is an oil market analyst at Energy Security Analysis, Inc (ESAI). The following article was excerpted from a new white paper by ESAI – ‘Pursuing Global Influence: Oil, Gas & Russia’s New Foreign Policy of Confrontation.’ To request a copy, contact Andrew Reed at areed@esai.com.
Russia’s Pursuit Of Global Influence
In a Kremlin effort to expand Russian global influence by economic means, the Putin regime is deploying state companies, such as Gazprom and Rosneft, and is increasingly allying with large private companies, whom Putin calls upon to act in the national interest. This strategy implicitly encouraged Russian shareholders to seek a greater role in the management of TNK-BP, which one can expect will act more like a national oil champion in the future. The traditionally close cooperation between privately owned Lukoil and the Kremlin, including in critical regions like the Caspian, is a model in this regard. Under the grand alliance that has emerged, those oligarchs who adapted to the rules laid down by then President Vladimir Putin earlier this decade now receive increased government support in exchange for acting in Russian national interests. This represents a new chapter in the Putin regime’s relations with the oligarchs. Having brought the oligarchs to heel and expanded state control of the oil industry, the Putin team nowadays seeks to harness the business resources of what can be called “patriotic oligarchs” to enhance Russian influence by economic means.
This does not mean Russian influence will grow unchecked. The global credit crisis, low oil prices and a worsening investment climate have greatly weakened Russia’s economic system and strategic enterprises. The enterprises the Kremlin is counting on to expand Russian global influence are highly leveraged with foreign debt and have seen market capitalization plummet (Gazprom’s market capitalization fell 75% in 2008). The government is using its foreign reserves to refinance the debt of strategic enterprises (including Gazprom and oil companies) and cushion the fall of the ruble. With the average price of Urals crude oil expected to be less than $50/B in 2009, Russia will run a budget deficit that will be an additional drain on its reserves.
While the limits to Russia’s potential to project power are becoming obvious, do not expect Russia to become less ambitious or more cooperative with the West when it comes to energy matters. In a new white paper titled Pursuing Global Influence: Oil, Gas & Russia’s New Foreign Policy of Confrontation, ESAI explains how Russian foreign policy recently underwent a subtle but significant change. The change explains Russia’s conduct in the recent gas dispute with Ukraine. It also says much about how Russia will behave in the future.
New Resolve In Traditional Sphere Of Influence
Following the August 2008 war in South Ossetia, Russia shifted the emphasis of its foreign policy to defending its interests in its traditional sphere of influence. This became clear in the immediate aftermath of the war when Russia recognized the independence of Georgia’s two separatist republics, Abkhazia and South Ossetia. This and subsequent moves demonstrated that post-Soviet Russia is more willing than ever to pursue policies that are detrimental to its relations with the West. In its view, there is little potential for improved relations with the West to benefit Russia. The subtle but significant change to Russia’s worldview is already evident in the energy sector: it is one of the primary reasons the January gas dispute with Ukraine escalated to an unprecedented level. Russia was willing to shut off the flow of gas to Europe because it was acting with less regard for the West and with greater resolve in its confrontation with Ukraine, a commercial dispute polarized by a variety of political and economic tensions, some with far-reaching ramifications for energy security and geopolitics.
Preempting Nabucco In Central Asia
As part of this foreign policy shift Russia is intensifying efforts to shape the future southern transport corridor that will deliver gas from the Caspian to Europe, by maximizing control of supply. Because the commitment of Turkmenistan is widely considered critical to procuring sufficient supply for implementation of the Western-backed Nabucco pipeline, the project’s ultimate success hinges on Turkmenistan’s participation. Under Turkmenistan’s new president a breakthrough has been achieved in relations between Azerbaijan and Turkmenistan. These were icy under their previous leaders due to competing claims over the division of the Caspian Sea, rights to Kapaz (Serdar) oil field, and Azerbaijan’s old gas debt to Turkmenistan. But while warmer relations improve prospects for the Trans-Caspian pipeline that would link Turkmenistan to Nabucco, Russia has maneuvered to prevent Turkmenistan’s participation in the project.
Gazprom has abandoned its practice of exploiting its position as the only effective outlet for Central Asian gas exports to force suppliers to sell gas cheaply. In the past, Gazprom forced Turkmenistan to sell its gas cheaply to FSU consumers that often accumulated arrears. Now Gazprom offers to pay “market price” to Central Asian suppliers and purchase their gas at the border. Gazprom’s offer on the surface seems to guarantee a fair price and reduce transit risk for Central Asian suppliers. This sews up future delivery commitments and Gazprom gains control over resale of the gas, enhancing its control of supply to Europe. This policy is a logical response to growing competition for Caspian Basin gas, most notably from China. It is also an effective tool to lure Central Asian suppliers away from the Western-backed Nabucco project.
In what was a clear demonstration of Gazprom’s resolve to preempt Nabucco, in mid-2008 Gazprom offered to purchase gas from Azerbaijan, the Caspian Basin supplier that is most staunchly pro-Western, committed to Nabucco and already having access to the European market bypassing Russia (via the Baku-Erzerum pipeline). Azerbaijan’s President Ilham Aliyev has repeatedly acknowledged the attractive terms offered.
Azerbaijan is unlikely even to seriously consider what would be a rapprochement with Russia unless the latter can deliver concessions from Armenia in their unresolved territorial dispute over Nagorno-Karabakh. And there is no indication Russia can and will offer such an initiative. At the same time, in the aftermath of the interruption of oil exports from Azerbaijan in August 2008, caused by an explosion on the BTC pipeline and the war in South Ossetia, Azerbaijan cannot ignore the value of the Russian offer in terms of the reduction in transit risk. Azerbaijan has not accepted or rejected the offer yet. In the end, it is doubtful Azerbaijan would take any action, such as committing a portion of future gas supply to Russia, that would undermine the prospects for Nabucco. President Aliyev’s public acknowledgment of the attractive terms offered by Russia is probably meant to spur greater political support for Nabucco in the West.
Russian policy has the best chance of succeeding in Central Asia. Russia no longer uses its leverage to force Turkmenistan to sell gas at knock-down prices to consumers from whom it could not reliably collect payment. Various reports indicate Gazprom will pay Kazakhstan, Turkmenistan and Uzbekistan at least $300/1,000 cu ms in early 2009. That is more than Gazprom reportedly receives for the sale of gas to some countries. Now that Russia offers more fair terms and China is closer to gaining access to Central Asian gas resources, Turkmenistan is less economically isolated than it was in the past. As a result, it is not urgent for Turkmenistan to pursue participation in Nabucco.
Meanwhile, old and new obstacles and risks make Nabucco less attractive for Turkmenistan and other potential Central Asian suppliers. One obstacle is Russia’s longstanding opposition to any pipeline across the Caspian on “environmental grounds.” Additional obstacles and risks stem from Russia’s August 2008 military intervention in Georgia. Russia significantly weakened Georgia when it recognized the independence of its breakaway republics and formalized its military presence on their territories, thus making both the dismemberment of Georgia and Russia’s military presence in the region more permanent. This impairs the ability of the West to ensure pipeline security. Also, an explicit warning followed Russia’s intervention: Russia demands that its so-called “privileged interests” in the region be respected. The cost of miscalculating the Russian response to territorial provocations was high for Georgia. This will only inspire greater caution by leaders of neighboring states.
Nabucco supporters recently scrambled to reinforce support for the supply of gas from the Caspian to Europe bypassing Russia by holding a conference in Budapest in late January. But it appears greater resolve by Russia will beat them to the punch.