Monday, June 29, 2009

Putin’s Mentor Elected to Gazprom’s BOD

by Roman Kupchinsky

The June 26, 2009 shareholders meeting of OAO Gazprom, the Russian state-owned gas monopoly, did not produce many surprises. Management received large bonuses while shareholders complained that they were being victimized by the company as their dividends shrank.

One of the most interesting developments was the election of Valery Musin to the company’s board of directors as an independent director. Musin, head of the Civil Procedure Department at St Petersburg University Law Faculty, is the former research supervisor of Russian President Dmitry Medvedev and teacher of Prime Minister Vladimir Putin.

Musin received the second most votes from shareholders at the meeting after Alexei Miller, the company CEO.

Musin’s relationship with Putin solidified during their days together in the St. Petersburg Mayor’s office where Putin headed the department of foreign economic relations. Musin worked in this department as a legal expert. Other employees in the section were Alexei Miller, the present CEO of Gazprom, Valery Golubev, a former KGB officer who is now a deputy CEO of Gazprom, and Igor Sechin, the Deputy Prime Minister responsible for energy policy in Putin’s cabinet who is also chairman of the board of directors of the state-owned oil company Rosneft.

At the time of this posting, the Gazprom website had not yet posted a full biography of Musin indicating only that he was head of the Civil Procedure Department.

While Musin might not have much clout on the Gazprom board, his election appears to be the result of Putin’s and Medvedev’s efforts on his behalf. According to an article in Kommersant Daily, "The Prime Minister cut the list (of candidates for the board) apart," our source in the Government said. However, another well-informed source claims that the amendments were made by President Dmitry Medvedev.”

Whatever role Musin is expected to play as an independent director, there is no doubt that his election to the board will only strengthen Putin’s hold over Gazprom. As a legal expert Musin will no doubt provide invaluable advice to Russia’s champion company, its managers and behind-the-scenes power brokers.

Russia Threatens to Cut Gas to Belarus

by Roman Kupchinsky

Russia’s Gazprom threatened to cut off gas deliveries to Belarus unless a debt of $244 million is repaid in July. The warning was issued by Gazprom CEO Alexei Miller who stated that “we have sent a letter demanding that the debt be paid, if not we shall act according to the terms of the contract. We can turn to the courts or we can reduce the volume of gas supplied.”

Gazprom officials told Kommersant Daily that Belarus owed $243 million for gas consumed from January-April and $10 million for late payment fines. Furthermore, Gazprom claims that Belarus received a total of $875 million for its sale of 12.5 percent of Beltransgaz, the owner of the Belarus gas pipeline, and for gas transit fees.

Belarus vice-premier Vladimir Semashko responded by saying that his country will only begin repaying the debt in July and will be able to pay the full amount by November. Semashko also noted that Belarus disputes the penalty charges of $10 million and will not pay them.

A large part of the misunderstanding stems from what was said and promised during a meeting between Belarus President Alexander Lukashenko and Russian President Dmitry Medvedev on April 10, 2009. Officials in Minsk claim that during the meeting, Medvedev promised that Belarus would be charged $150 per 1,000 cubic meters – that figure being the average yearly price for gas in 2009. This verbal agreement was then sent to Gazprom in the form of an addendum to the existing gas contract, however Gazprom never responded to the letter.

When asked about the conversation between the two presidents, Miller replied that there was in fact such a conversation but the agreed upon terms were not included in the addendum to the contract.

Gazprom has stated that it plans to charge Belarus “European prices” for gas beginning in 2011. What that might be is difficult to say and will depend upon the price of oil.

Friday, June 26, 2009

Eurasian Energy Briefs

by Roman Kupchinsky

China continued to forge closer energy ties with Turkmenistan. On June 25, 2009 the China Development Bank signed an agreement with Turkmengaz, the state-owned gas company, promising $4 billion in preferential loans for energy projects. Turkmengaz agreed to boost future gas deliveries to China by 33 percent, from 30 billion cubic meters (bcm) to 40 bcm annually. China National Petroleum is building the 7,000 kilometer (4,300 mile) Central Asia Gas gas pipeline from the Bagtyarlyk region of Turkmenistan that is scheduled to open this year.

Russian energy giant Gazprom
began its annual stockholders meeting today in Moscow. On the agenda was the election of a new board of directors. The board is headed by first Deputy Prime Minister Viktor Zubkov and contains four Gazprom managers, including CEO Alexei Miller. Valery Musin , the former teacher of Prime Minister Vladimir Putin and President Dmitry Medvedev at St. Petersburg State University was elected to the board. Professor Musin is one of Russia's leading international business law experts. He served as chief legal expert to the St. Petersburg Mayor's Office Foreign Affairs Department headed at the time by Putin. His election strengthens Putin's grip on Gazprom.

Ukraine’s Naftohaz refuted charges made by Gazprom’s Deputy CEO Alexander Medvedev on June 24, 2009 that storing Russian gas in Ukrainian underground facilities is risky and that Ukraine “stole” 8 billion cubic meters of Russian gas. After the press conference, Gazprom’s press center explained that Medvedev was referring to a dispute which took place in 2004-2005. In response to these charges, the Naftohaz press center stated that it is impossible for Ukraine to steal any Russian gas from its storage facilities because for the past 4 years no Russian gas has ever been stored in them. Furthermore, Naftohaz explained that according to the current contract there is no linkage between storage and the transit of Russian gas to Europe. Naftohaz did indeed offer to store Russian gas this year, but Gazprom refused the offer.

Thursday, June 25, 2009

Gazprom’s Investment Program to Decrease by 30 Percent

by Roman Kupchinsky

Faced with lowered demand for gas in Europe and Ukraine along with collapsing profits, Russian energy giant Gazprom will decrease its 2009 investment program by 30 percent according to the newspaper Vedomosti.

In dollar terms this means that investments will decline from the 920.44 billion rubles,($29.35 billion) approved by the company’s board of directors in December 2008, to approximately 640-740 billion ($20.4 billion). The largest cut of 137 billion rubles ($4.37 billion) will come from the postponement of bringing on line the giant Bovanenkovo field in the Yamal Peninsula . Which projects will be postponed or cut to make up the rest of the decrease Gazprom officials refused to say.

This is not the first time Gazprom has adjusted its controversial investment program over the years. In 2004 the investment budget for 2006 was 286.5 billion rubles ($11 billion). As the gas monopoly went on an acquisition spree in 2007 by buying the Moscow power generating company Mosenergo, 19 percent of the independent gas company Novatek and the Sakhalin-II LNG project, the investment budget jumped to 779.4 billion rubles ($30 billion).

But the greatest criticism hurled at Gazprom has been its lack of developing new gas fields while traditional fields are being depleted and for placing too much emphasis on buying once cheap Central Asian gas to cover production cuts.

The state-owned monopoly tried to rebut criticism when Deputy CEO Alexander Medvedev told a press conference in Moscow on June 24, 2009 that the reason Gazprom's market share in Europe and Turkey plunged to 16 percent in the first quarter of this year, compared with 30 percent last summer was because European customers were temporarily buying less gas because they built up large reserves last summer in anticipation of higher prices at the start of this year. However, Medvedev failed to mention that European customers preferred buying cheaper LNG in spot trading from Gazprom's competitors.

According to the Moscow Times Medvedev stated that Gazprom is planning to export 142.1 billion cubic meters of gas to Europe and Turkey this year, a 10.5 percent decrease from last year's 158.8 bcm. The gas will come from its own production, independent producers and Central Asian imports.

Wednesday, June 24, 2009

Russian Spies and European Energy Security

by Roman Kupchinsky

The head of Germany’s counterintelligence organization, the BfV, Burkhard Even told the newspaper Die Welt am Sonntag on June 21, 2009 that the Russian Foreign Intelligence Service, the SVR, has been actively conducting espionage operations against the German energy sector. "The Russian intelligence services, keeping up with their government's changing information needs, have intensified efforts in recent years to investigate German firms illegally," Even said.

The SVR effort is targeting the acquisition of information on alternative and renewable energy and efforts to increase efficiency. European energy interests, diversification plans and Germany's economic situation are also on the SVR’s shopping list.

The chief of the BfV considers that the Russian secret services have also supported attempts by Russian enterprises to obtain a foothold in the German power sector. Since 1990, natural gas’ share of the German electricity market has more than doubled, from 7 percent to 16 percent and much of this gas is from Russia.

Two years ago, German Interior Minister Wolfgang Schaeuble presented his ministries 2007 security report in which it states that Russia and China were stepping up espionage efforts and Internet attacks on German companies.

"Intelligence and security services are under orders to actively support Russian industry," said the report, adding that Prime Minister Vladimir Putin had renewed that as a goal when he was president.

"The greed of foreign intelligence services ... is directed not only at big companies but also at a number of innovative small and mid-sized firms," the report claimed.

The BfV assertions that the Russian SVR, under the command of former prime minister Mikhail Fradkov is engaged in gathering confidential information about energy diversification plans in Europe should disturb not only the German counterintelligence community, but the EU Commission as well as policy makers in European capitals.

Particularly vulnerable to Russian spying are the new EU member states such as Poland, Hungary, the Czech Republic, Bulgaria and Romania.

The Polish newspaper Fakt reported on October 19, 2004 that:
"They (Russian intelligence services) are implementing the strategy adopted after the collapse of the Soviet Union aimed at making Poland and other countries dependent on Russian energy resources. Their activity has intensified since Putin became Russian president," says Marek Biernacki. The former Interior Minister points out to another threat: "Polish companies employ former secret service officers as experts. There are no guarantees that these experts are loyal to Poland."

“Gas, oil, and -- most recently -- electric energy are the number one target of Russian agents. Russia is seeking to make Poland dependent on its supplies. This would enable it to blackmail any Polish government. The meeting between Vladimir Alganov (accused by Polish authorities of spying for Russia) and [the wealthiest Polish businessman] Jan Kulczyk clearly shows this: the two men discussed not only oil, but also mysterious electricity deals. The Russians earlier did everything they could to control a fiber optic cable that was to connect Russia with the West via Poland.”

Tuesday, June 23, 2009

Gazprom in Negotiations to Change Turkmen Gas Contract

by Roman Kupchinsky

Russia’s Gazprom and Turkmenistan’s state-owned gas company, Turkmengaz, were reported to have begun negotiations today on changing the terms of the gas purchase contract signed last December. Russia is proposing that the contract be a “take or pay” contract, linked to the price of oil and not the annual fixed price as was agreed upon in December.

Gas sales from Turkmenistan to Russia were suspended in April when a conflict broke out between the two countries over a pipeline blast caused by a change of pressure in the pipe. Turkmenistan blamed Gazprom Export for not notifying Turkmen authorities that it had stopped receiving gas. The Russian side rejected the charges and gas stopped flowing to Russia.

The conflict grew when the Turkmen side decided not to automatically award Gazprom a contract for the construction of the East-West pipeline and clinched a deal with China to develop the on-shore part of the giant Yolotan gas field.

At the heart of the dispute is the pricing mechanism agreed upon in the December 31, 2008 contract. Gazprom, according to Russian Prime Minister Vladimir Putin, agreed to pay Turkmenistan a fixed rate of $340 (which includes transit fees) for 1,000 cubic meters throughout 2009.

However, a few days later Putin and Gazprom insisted that Ukraine pay Gazprom on the basis of a take or pay contract linked to the price of oil. Why Turkmenistan was given a fixed price is difficult to say. Furthermore the terms of the December 2008 contract with Turkmenistan were never made public.

In the first quarter of 2009 Gazprom paid Ashgabat $300 per 1,000 cubic meters of gas. If a take or pay pricing method is agreed upon, Gazprom will pay Turkmengaz $220 in the third quarter and $160 in the fourth quarter of 2009.

A number of factors might have played a role in bringing Gazprom and Turkmenistan back to the negotiating table. When Turkmen gas ceased going to Russia in April, Turkmenistan, which has no other significant customers for its gas or export routes, was forced to cap some bore holes or flare off the gas, losing millions of dollars.

Russia, on the other hand, is faced with lower demand in Europe and Ukraine; however, the different opaque gas middlemen schemes Gazprom Export has created in Europe, like Gazprom Germania, rely on Central Asian gas supplies to sell to their customers. These schemes cannot continue siphoning off Russian gas without that gas being replaced by gas from Central Asia.

The Gazprom Germania website states: “The main focus of our business activities is on marketing natural gas of Russian and Central Asian origin in Western and Central Europe.”

The other question which needs to be resolved during the new negotiations is the volume of gas that Russia will buy from Turkmenistan in 2009. The earlier number of some 40 billion cubic meters, is now unrealistic and Gazprom will most likely insist on a far lower amount.

Sunday, June 21, 2009

Russia, the Archangel Michael and the Iranian Election

by Roman Kupchinsky

While many Western leaders have condemned the Iranian regime for rigging the vote in the June 2009 presidential elections in favor of incumbent President Mahmoud Ahmadinejad and for using brutal force to suppress pro-democracy protesters, Russia and China, as could have been predicted, congratulated the Iranian leader on his “victory” and lambasted the United States and its allies for having doubts about the final results of the vote.

“The issue of elections in Iran is an internal affair of the Iranian people,” Russian Deputy Foreign Minister Sergei Ryabkov told reporters in Yekaterinburg where Russia hosted a summit of the Shanghai Cooperation Organization (SCO), which was attended by Iranian President Mahmoud Ahmadinejad…“We welcome the holding of elections in Iran, and we welcome the newly re-elected president of Iran on Russian soil… it is highly significant that the first foreign visit after Ahmadinejad’s re-election is to Russia." It was indeed significant given that the two countries share so many things in common.

This message was further elaborated upon by Alexander Dugin, the head of the Russian right-wing International EurAsian Movement, among whose members are many influential Russian businessman. Dugin stated. "The SCO is evolving into a kind of organization for countries that feel themselves excluded from the global system, who feel victimized by the US-dominated unipolar order…"Now this unipolar world is being shaken to its foundations by economic crisis and imperial retreat, and it's time to define a new project of a multi-polar world."

The International EurAsia Movment board is listed on the organizations website and includes numerous members of the Russian defense and security services.

In a programmatic speech by Dugin at the 2004 conference of the organization, he presented a broad outline of the group’s goals in a rambling manifesto.
“Almost all religions and traditions claim – globalization, “new world order” , “unipolar world”, “world cabinet” – are symbols of Lucifer , strategic constructions of “God enemies” – Archangel Michael`s direct enemies. Christians identify this “new world order” as “antichrist”, muslims as “dadjallah”, judes – “great melting” (“erev rav”), hinduists – as forces of Kali Juga, Buddhists – Mara, demon of illusion. On the other side of all differences between doctrines, rituals and dogmata exists special tradition – tradition of Archangel Michael, “michaelic” veiled light. It is affiliation of human to “hierohistory”, right (and obligation) to be a soldier of one of the two opposing armies.”

Russian President Dmitry Medvedev and Chinese President Hu Jintao both met Ahmadinejad, although the meeting with Medvedev was brief because Ahmadinejad had arrived in Yekaterinburg a day late because of the crisis in Tehran. Ahmadinejad and Medvedev joked and smiled for television cameras, but as Kremlin spokeswoman Natalya Timakova said “their meeting had been very short: "They did not even sit down."

A brief report from China's official Xinhua news agency said Hu and Ahmadinejad "exchanged views on bilateral relations and issues of common concern" on the sidelines of the summit.

By embracing, however low-key, the official Iranian election results, the Russian and the Chinese leaderships have gambled that the current regime will be able to suppress the opposition and remain in power. If they are proven wrong they are likely to be seen by the Iranian opposition as allies of the hated regime and the Archangel Michael and his contemporary supporters might be in for a shock.

Friday, June 19, 2009

BPS-2 -A New Russian Oil Pipeline Which Might Not be Needed

by Roman Kupchinsky
On June 10, 2009 the construction of the Baltic Pipeline System (BPS-2) got underway. The 1,170 km long pipeline will run from Unecha in the Bryansk Region to the Ust-Luga oil terminal south of St. Petersburg. The first stage with an annual capacity of 30 million tons is scheduled to be completed in September 2012. The second stage will increase capacity to 50 million tons and is due to be ready by the end of 2013.

In February 2007, Semyon Vainshtok, the-then head of Transneft, the operator of the BPS-2 pipeline, issued a statement saying that it was necessary to “protect the country” from the risks involved in transporting oil through the territories of neighboring countries. Earlier that year, a dispute occurred between Russia and Belarus over tariffs for oil transported via the Druzhba pipeline. “We discussed with colleagues that if we had had no risks with neighboring countries, we did not have to spend so much money,” Vainshtok said.

By ending Moscow’s dependence on Belarus as a transit country for Russian oil as well as relying on Ukraine’s oil terminal in Pivdenny on the Black Sea, Russia will deprive the badly starved Belarus treasury of some $1 billion annually in transit fees. At the same time, the Ukrainian Pivdenny oil terminal will most likely stand empty and the Odessa-Brody pipeline, originally built to ship oil from the Caspian to the Plock refinery in Poland will rust in the picturesque Ukrainian countryside if it cannot find a supply of oil.

Other factors also contributed heavily to the hurried pace of preparations of BPS-2, not least of which is the self-interest of some members of the Russian political and commercial elite who lobbied extensively for the project. Gunvor, a company which has often been linked in the media to Russian Prime Minister Vladimir Putin who is reputed to have a close relationship with Gennadiy Timchenko, a co-owner of Gunvor, obtained a majority interest in the oil terminal being built in Ust-Luga in March 2009.

Ust-Luga will become the biggest outlet for refined products in the region, with a spur line connecting the port and crude pipeline to the Kirishi refinery, owned by Surgutneftegaz. Kirishi is more than 100 kilometers to the east of Ust-Luga.

A report released by Moscow investment bank Troika Dialog in December 2008 criticized the Gunvor scheme for Ust-Luga as “politically-driven…It is unclear where Transneft intends to find oil for the new pipeline, given declining oil production and exports and already ample spare capacity in the pipeline system. Moreover, some 450,000 bpd of West Siberian crude will be re-routed to fill the first phase of the Eastern Siberia – Pacific Ocean (ESPO) pipeline. Transneft therefore faces the prospect of paying up to $5 billion for a project that would bring no additional revenues.”

In April 2008 Russia's Ministry of Industry and Energy submitted to the government its negative conclusions regarding the pipeline; however their reservations took second place to the geopolitical motives and the personal interests of the Russian elite.

Thursday, June 18, 2009

Russian Energy Briefs

By Roman Kupchinsky

Chaos and uncertainly seem to have gained the upper hand in the Russian gas business. On Tuesday, June 16, 2009, Gazprom, the Russian state owned gas concern, announced that it would postpone investments into the giant Bovanenkovo gas field in the Yamal Peninsula until the third quarter of 2012, Gazprom’s deputy chief Alexander Ananenkov said Tuesday.
The announcement came despite a pickup in European sales that began in April following a decline in Gazprom's prices."Why would we invest money into something that won't have demand?" Ananenkov said. "It wouldn't make sense."

Sitting north of the Arctic Circle, the frozen Yamal Peninsula fields will be Gazprom's most valuable gas reserves for the next few decades, and Bovanenkovo is the largest of them. It is still scheduled to be the first in the area to come on line.

First Deputy Prime Minister Viktor Zubkov, a member of the Gazprom Board of Directors, described the beginning of the Bovanenkovo field as the start of a "megaproject to develop the gigantic hydrocarbon treasure troves of the Yamal Peninsula" and called the effort "the largest energy project" in Russia's post-Soviet history.

Soon after this announcement, Gazprom's market share in Europe and Turkey plunged from 30 percent last summer to 16 percent in the first quarter of 2009.

Will this decision to postpone investments save the Russian gas giant from further losses? Russia’s conflict in Central Asia over the price of gas agreed upon between Gazprom and Turkmenistan in December 2008 is sure to continue escalating. Will it end soon is anyone’s guess. The Turkmen government is already making deals with Chinese companies to build pipelines to China and the Kremlin is highly upset by this development.

Ukrainian Prime Minister Yulia Tymoshenko, in the meantime, is seeking a $4 billion loan from the EU to pay for Russian gas in order to meet the terms of the contract she signed in January 2009 with Gazprom. According to Mykhaylo Honchar, the former deputy head of the Ukrainian pipeline system, the situation is critical. “Naftohaz has cut off gas deliveries to Kyiv (City) due to non payments and is considering cutting off supplies to other Ukrainian industrial regions.” Does this mean that Naftohaz Ukraine is on the verge of bankruptcy as has been predicted for months?

The European Union is scheduled to discuss energy security at a summit meeting today in Brussels. Earlier, a high-level European Commission fact-finding team met with Naftohaz chief Oleh Dubyna and Gazprom Export director Alexander Medvedev in order to access the current state of affairs between the two companies and seek a solution to Naftohaz’s debt problems.

The Commission team suggested that private EU gas companies could possibly buy excess Russian gas and stockpile it in Ukrainian underground storage facilities. This would provide badly needed cash for Naftohaz and the companies could resell this gas on the spot market during the winter heating season.

Tuesday, June 16, 2009

Viktor Chernomyrdin Removed as Russian Ambassador to Ukraine

by Roman Kupchinsky

Russia’s controversial envoy to Ukraine, the once head of Gazprom and former Russian Prime Minister, Viktor Chernomyrdin was, at long last, recalled to Moscow by Russian President Dmitry Medvedev and offered a position as a consultant to the president. His successor has not yet been named.

Chernomyrdin’s career spans a few decades working in the Russian gas industry. His was a highly controversial career. The 71-year old Chernomyrdin began working in the Orenburg gas fields as a driller in the rough and tumble Soviet gas industry. He worked his way up within the industry and in 1989 became the head of Gazprom. Earlier he had been appointed by Mikhail Gorbachev to be the U.S.S.R. Minister of Gas at which time it was renamed OAO Gazprom. In 2005 the Russian state became the owner of 51 % of the company. In 2001 newly elected Russian President Vladimir Putin appointed Chernomyrdin to become the Russian ambassador to Ukraine. This appointment revealed Putin’s strategy towards Ukraine – gas was the key in Russian-Ukrainian relations and the only person who could represent Russian policy had to be a senior official familiar with the intricacies of Russian gas politics.

Chernomyrdin, however, did not arrive in Ukraine with a clean slate. Earlier, as a member of the Gore-Chernomyrdin Commission, he was suspected of corruption by the U.S. C.I.A. In a report reputedly sent by the C.I.A. to then-U.S. Vice President Al Gore in 1995, the agency cautioned the Vice-President that Chernomyrdin was linked to a number of criminal schemes. Chernomyrdin's private assets accumulated in his official position, according to the alleged C.I.A. report, ran into the billions of dollars. When the secret report reached Vice President Gore, he refused to accept it. Instead, according to several C.I.A. sources, he sent it back to the agency with the word "bull***t" scrawled across it."

As Russia’s Ambassador to Ukraine, Chernomyrdin played a highly controversial role and there were a number of attempts by Ukrainian politicians to have him declared persona non grata for his comments on Ukrainian domestic affairs. Russian political scientist Stanislav Belkovsky told the Ukrainska Pravda website on June 12, that Chernomyrdin had initially been sent as envoy to influence then-Ukrainian President Leonid Kuchma. Once Kuchma left office and after the Kremlin’s unsuccessful attempt to support Viktor Yanukovych’s presidential bid in 2004, Chernomyrdin’s role changed. He became more involved in gas negotiations between Russia and Ukraine and on March 24, 2009, Chernomyrdin was awarded the highest Russian state decoration - the medal “For Services to the Fatherland” from Medvedev.

In February 2009 Chernomyrdin made a number of highly disparaging remarks about Ukrainian President Viktor Yushchenko in an interview for the media. He was summoned to the Ukrainian Foreign Ministry and warned that this type of behavior was incompatible with his status and if he persisted in doing so he would be expelled. According to various sources in Ukraine, the two most likely candidates to replace Chernomyrdin are Gregory Karasin, the Russian Deputy Minister for Foreign Affairs who is responsible for Russian relations with C.I.S. states and Dmitry Rogozin, the Russian representative to N.A.T.O. Whoever is appointed, the overall consensus is that the candidate will be someone with high level access to Medvedev and Putin and be willing to do whatever it takes to help bring Ukraine into the Russian orbit.

Thursday, June 11, 2009

New Obstacles for the Nord Stream Pipeline

by Roman Kupchinsky

The German Ministry of Defense has once again voiced its opposition to the proposed route of Gazprom’s major gas pipeline project- the Nord Stream pipeline. The Bundeswehr reservations were recently presented to the German parliament’s committee on national defense, in which the Defense Ministry stated that the route was too close to the island of Rugen where large scale German naval maneuvers are held.

The news of this renewed opposition to Nord Stream came on the same day that German Foreign Minister Frank-Walter Steinmeyer arrived in Moscow for talks with Russian President Dmitry Medvedev and Prime Minister Vladimir Putin.

In the past Steinmeyer had been a firm supporter of Nord Stream. According to Jamestown senior fellow Vlad Socor, “The Russo-German pipeline is not a European project in any sense. Interested parties ranging from the Kremlin and Gazprom to German business groups and elements in the German government portray this project as a European one. German Minister of Foreign Affairs Frank-Walter Steinmeyer used this argument when visiting Estonia.”

However this month, Steinmeyer is challenging German Chancellor Angela Merkel in the upcoming election and is reluctant to whitewash Nord Stream which has become a controversial issue for many German voters. As the candidate from the SPD, once headed by former chancellor Gerhard Schroeder, a key executive in the Nord Stream consortium, Steinmeyer is now caught in a vicious political battle. The Bundeswehr report tempered his support of Nord Stream to the great displeasure of the Russian leadership. Steinmeyer’s position is also weakened by the fact that the head of the Nord Stream Consortium office in Switzerland is Mathias Warnig, a former intelligence officer for the East German security service, the hated Stasi.

Responding to the German military report, the deputy CEO of Gazprom, Alexander Medvedev stated: “Europe must decide how to resolve this situation. If Europe does not want our gas, we will find the means to sell it elsewhere.”

Medvedev, in what might be seen as a threat to the EU, once again raised the specter of Gazprom diverting gas from European markets and selling it as LNG to the U.S. and Canadian markets. Bloomberg quoted the Gazprom official on June 10, 2009: “Gazprom is seeking as much as 10 percent of the U.S. gas market by 2020, after two Arctic liquefied natural gas projects start producing, deputy CEO Alexander Medvedev told reporters Tuesday.”

"The volume which we have right now is just 0.5 percent of natural gas consumption of the United States, but with gas out of Shtokman and maybe Yamal LNG our share in the U.S. and Canadian markets would go up between 5 and 10 percent," Medvedev said.

Many U.S. energy analysts view this as an empty threat. LNG is still a tiny source of gas supplies to the U.S. and will remain such for years to come. Besides, Russian LNG will face fierce competition from Qatar and Nigeria, not to mention Trinidad and Tabago, the main supplier of LNG to the U.S.

Is the Nord Stream pipeline doomed? Much will depend on the upcoming German elections and on the continuing opposition to Nord Stream from Poland and the Baltic states. But the end game will take place in the near future and a showdown between Gazprom and Germany is in the works.

Wednesday, June 10, 2009

Russia's Economic Pressure on Belarus Escalates to Trade War

by Alexander Melikishvili

On Friday, June 5, in a three-hour interview given to the chief editors of the mainstream Russian news publications - the newspapers Izvestia and Zavtra and journals Rossiiskaya Federatsiya Segodnya (Russian Federation Today) and Soyuznoe Gosudarstvo (Union State) - the President of Belarus Alexander Lukashenko presented the list of grievances and focused on the sources of tensions in the bilateral relations with Russia. In a bold move, President Lukashenko spoke openly about the fact that Russia linked the postponement of the $500 million loan to Belarus with Minsk's continued refusal to recognize the independence of Georgia's breakaway regions of South Ossetia and Abkhazia. In particular, when asked when Belarus plans to recognize the independence of Georgia's separatist territories and whether this was a painful topic in the relationship between Belarus and Russia, President Lukashenko responded:
"You say that this is a painful topic and question. But to me all Russian leaders tell me: 'This does not really matter. Well, if you recognize - that's good, but if you don't - that's fine too.' First of all, of course, for Russia this is not even an issue. Whether we recognize them or not, say, now, tomorrow or the day after tomorrow. Compared to what is happening around Belarus - that's not that important. But, yes, we do understand that this recognition would not be redundant for Russia. However, I often say that we have our own history of relationships with those republics, and in particular with Abkhazia. With Ossetia, of course, we almost had no such relations, even though we met with people and so on. This is my position...By the way, when we met within the framework of the C.I.S. [Commonwealth of Independent States] everyone told Medvedev: 'No, we have our own problems.' And I was the last one to speak and I said: 'If you do not want to recognize, do not look for motivation under the table. You simply do not want to do it, you are afraid and so forth. And why should not we express support? This is our only ally, we want a lot from it and so forth.' Ask Medvedev, ask him this question about my position. And I told the Russian leadership how we intend to resolve this problem. They had no more questions. But nonetheless...We reached the point that they arrive and say: if [you deliver on] Ossetia and Abkhazia - this means that there will be $500 million. You know, we do not want to 'sell' any issues and positions. We never had that in our history and we never will. We will resolve this issue by ourselves. More so because we met with the leader of Abkhazia Bagapsh, and after that we met with Kokoity. They do not have any questions for us. They understand our position."
At times equally cryptic and combative, President Lukashenko spoke with palpable frustration and provided a number of responses that will surely fuel speculations about the continuing rift in relations between Minsk and Moscow. On the possibility of Belarus becoming another subject of the Russian Federation Lukashenko's remarks actually contained a warning and a veiled threat:
"We, as leaders, must calculate the consequences of such a move. Even I, let's imagine that I make such a decision, and what about tomorrow? Do we have shortage of conflicts in the Caucasus? Today Russia is being 'bombed' for the fact that it 'imperially,' with armed force squashed and subdued...And what about here? From this point of view the President of Russia says: 'Yes, you are absolutely right...This will be absolutely harmful for Russia.' On the other hand - we have our own 'morons,' there are a few of them, even if they constitute two, or, say, three percent, but they are the most active, the most ambitious, the most 'moronic' in any society. They are ready to unleash 'national-liberation war.' They need a pretext. At present everyone makes fun of this. And you think that they will not have anything to fight with? Tomorrow they can receive from Ukraine, the Baltics, mainly from there, from Poland, where they maintain channels. The weapons will surface instantly, explosions, the situation will be destabilized and many in the society will think: listen, they fight for independence, for what is sacred. Here, in Belarus, our people are not dumb, they think exactly the same as the Russians: 'our land, we will never give up, they will tear their shirts and go.' They are similar to Russians in that. Do you want to create one more Chechnya here? I don't."
Meanwhile the ever inventive head of the Russian Federal Consumer Protection Service, Gennadiy Onishchenko (one of the chief architects of the economic embargo imposed on Georgia) announced a comprehensive ban on imports of Belarusian milk products to Russia, which will surely hit Minsk hard economically considering that Belarus exports 40 percent of the milk it produces and 95 percent of it (worth $1 billion) goes to Russia annually. Even though the Russian government went to a considerable extent to deny any political pretext and the Foreign Minister Sergei Lavrov rejected the notion of tacit economic sanctions against Belarus and insisted that the ban stemmed from the concern for the health of Russian consumers, the closer examination of imposed measures clearly indicates otherwise. According to The Moscow Times, the ban on Belarusian milk products is formally predicated on the technicality - the failure by the Belarusian manufacturers to comply with the new regulations for the dairy industry products that went into effect in December, which include requirements to provide additional information on packages. However, the dairy industries of other neighboring countries, including Lithuania, Latvia and Ukraine, also, by and large, do not meet the new regulations and yet their products have not been affected by the ban thus far.

Moscow's bullying appears to have produced a rare moment of opportunity for Minsk's rapprochement with the West. At the meeting on Monday with the Deputy Chairman of the House of Representatives of the Belarusian National Assembly, Valery Ivanow, the special rapporteur on Belarus for the Parliamentary Assembly of the Council of Europe (P.A.C.E.), Andrea Rigoni stated that Belarus was invited to participate in the P.A.C.E. session on June 23, which will include the discussion of the question of restoring special guest status for Belarus. In addition, the International Monetary Fund (I.M.F.) announced today that the loan to Belarus has been increased by $1 billion to $3.5 billion, which must still be approved by the executive board of the I.M.F. It remains to be seen whether increased Western attention and efforts to engage Minsk will indeed result in the multi-vector foreign policy by President Lukashenko. It is clear though that the ultimate litmus test of whether Minsk will bow to Moscow's pressure will be the issue of the recognition of Georgia's breakaway provinces.

Monday, June 8, 2009

Ukraine Pays for May Gas but Future Payments are Unsure

by Roman Kupchinsky

On June 5, 2009, the Ukrainian stated-owned oil and gas concern, Naftohaz Ukrayina, paid Gazprom, the Russian gas monopoly $475 million for gas delivered in May 2009. By beating the June 7th deadline by two days, Naftohaz once again threw a monkey wrench into the propaganda blitz which had been carefully choreographed by Russian Prime Minister Vladimir Putin and Gazprom leadership in order to discredit Ukraine as a reliable transit country in the eyes of the European Union.

Speaking at a meeting of the Ukrainian National Defense and Security Council, Ukrainian President Viktor Yushchenko was uncommonly blunt about the state of affairs at Naftohaz and revealed how the payment was made. “The situation in Naftohaz is critical” Yushchenko stated, “frankly speaking it has never been so severe.” The Ukrainian President stated that Naftohaz owed $157 million for gas which was consumed and almost $500 million for gas placed in underground storage. “I had no choice but to order an emission (of the Ukrainian currency, the hryvnia) and in time the full sum owed Gazprom of 3.8 billion hryvnia will be paid.”

After news of the payment was released, Yushchenko’s advisor for energy matters, Bohdan Sokolovsky demanded that the Russian leadership apologize for their “incorrect and libelous statements about Ukraine’s ability to pay for gas.”

Gazprom officials told Kommersant that at the time the paper went to print they could not confirm receiving a payment, but added that the sum owed Gazprom by Naftohaz was about $640 million.

While the May payment was met before the deadline, Ukrainian officials are worried that this was due to a stopgap measure – a new emission. The average monthly debt to Gazprom is approximately $200 million for consumed gas and $500 million for gas placed into storage.

Come the end of June there remains a real possibility that Ukraine will be unable to pay $700 million for June gas deliveries and this will most likely give Putin the chance to again insist that the E.U. pick up part of the Ukrainian gas tab or else the gas spigot to the E.U. might once again be shut.

How will the E.U. Commission react? This remains anyone’s guess, but as oil prices keep rising, the Russian leadership is placing its bets that by mid 2010, when gas prices will once again begin to climb, the E.U. will finally throw its full support behind the South Stream and thus doom Ukraine’s most valuable geopolitical asset, it gas pipeline network, to the dustbin. This could also spell the beginning of the end for Ukraine as a fully independent state.

Friday, June 5, 2009

Friday Shorts

Russia Pushes for WTO Membership at the St Petersburg International Economic Forum

Russia renewed its efforts to join the World Trade Organization on the margins of the St Petersburg International Economic Forum, which concludes today. The E.U. Trade Commissioner Catherine Ashton, the United States Trade Representative Ron Kirk and the Russian Economy Minister Elvira Nabiullina met to discuss Russia's W.T.O. accession prospects. Russia, the largest economy outside the W.T.O., has been waiting to join the 153-member organization for close to 16 years. The Russian Deputy Foreign Minister Alexander Yakovenko stated that Russia would like to complete the process by the end of the year, which appears to be highly unlikely. Separately, the Russian officials told the Organization for Economic Cooperation and Development (O.E.C.D.) on Thursday that Russia will be submitting its formal membership application package on June 24-25, according to the O.E.C.D. Director of Legal Affairs, Nicola Bonucci.

Putin Reprimands the Aluminum Magnate Deripaska during his Visit to an Economically Depressed Town in Russia's Heartland

In an obvious populist stunt aimed at shoring up the waning public support, the Russian Prime Minister Vladimir Putin demonstrated his incredible micromanagement abilities during the visit to the economically depressed town of Pikalyovo with the population of 22,000 in the Leningradskaya Oblast. Protesting the wage arrears resulting from the closure of the alumina production plant the Pikalyovo residents blocked the federal highway Novaya Ladoga-Vologda for almost entire day on June 2. Fearing the spread of similar outbursts of dissent nationwide Prime Minister Putin rushed to Pikalyovo, where at a hastily arranged and highly choreographed meeting with the factory owners, local officials and union leaders, he resolved all matters and publicly humiliated once favorite aluminum magnate Oleg Deripaska by forcing him to sign a contract that would allow the alumina plant to resume production.

Russia's Chief of General Staff Reconfirms the Linkage between Progress on START Renewal and U.S. Plans for Missile Defense in Europe

Today the Chief of General Staff, Army General Nikolai Makarov told the media that Russia will not cut its nuclear deterrent as long as Washington's position on the missile defense system in Europe remains unclear. General Makarov stated, "So long as the situation in the world is not clear, including on the missile defence system, we will not touch our nuclear potential...The question of strategic nuclear forces for us is sacred. We will provide as many resources as are needed to maintain stability in the world...We will leave our strategic missile forces practically unchanged." General Makarov's words will surely pour some cold water on American negotiators, who concluded the second round of talks on the renewal of the Strategic Arms Reduction Treaty in Geneva this week. According to the chief U.S. negotiator, Assistant Secretary of State Rose Gottemoeller the talks held on June 1-3 were "very productive".

Russian Plane Makes an Observation Flight over Estonia under the Open Skies Treaty

On Wednesday, May 27, 2009, a Russian military aircraft carried out a surveillance flight over Estonia in accordance with the relevant provisions of the Treaty on Open Skies. According to the Estonian General Staff, an Antonov An-30B aircraft equipped with a vertical optical panoramic photo camera conducted an aerial surveillance flight with seven Estonian defense officials on board to make sure that the flight pattern corresponded with a pre-approved 795 km route. It should be noted that Russia performed similar observation flights over Estonia in 2005, 2006, 2007, and 2008. The Treaty on Open Skies is a confidence-building mechanism between the member-states of the Organization for Security and Cooperation in Europe that was signed in Helsinki in 1992 and entered into force 2002. The overflights are used to generate and disseminate information on defense capabilities between the signatory states. Estonia acceded to the treaty in 2005 and it is supposed to allow up to four such overflights a year.

Russian Law Enforcement Authorities Uncover Missile Parts Smuggling Ring

On May 29, Russia's Federal Customs Service announced that it had uncovered an international ring of active and retired military officers, who had been involved in smuggling parts of S-75, S-125, S-200 and S-300 air defense missile systems to Belarus, Kazakhstan, Ukraine and Bulgaria for at least two years. The Russian customs authorities detained a dozen suspects and expropriated 22 tons of missile spare parts and components intended for smuggling. The statement issued by the Federal Customs Service also referred to the two recent interceptions of illegal shipments of missile system components, including a radar, on the borders with Ukraine and Belarus.

Only Eight Russian Nuclear-Powered Ballistic Missile Submarines are Ready for Combat

On Monday, June 1, the Russian military analyst Mikhail Barabanov, who is the editor-in-chief of the Moscow Defense Brief, an influential defense publication produced by the Center for Analysis of Strategies and Technologies (C.A.S.T.), stated that out of the total of 12 nuclear-powered ballistic missile submarines currently in service in Russian submarine fleet, only 8 were actually combat-ready.

Russia Scraps MiG-31 Sale to Syria in Exchange for Israeli UAVs

by Alexander Melikishvili

Recent news reports in the Russian and Israeli press and media may shed light on the quid pro quo arrangement that was apparently concluded by Moscow and Tel Aviv in the area of military-technical cooperation. Tel Aviv's conditionality with regard to Russia's unprecedented deal with Israel to acquire the second-tier unmanned aerial vehicles (U.A.Vs), which was discussed on this blog back in April, has finally been revealed in detail. It turns out that in exchange for UAVs from the Israel Aerospace Industries (I.A.I.), Moscow may have indefinitely halted the sale of eight MiG-31 interceptor-fighter jets to Syria.

It is worth recalling that as early as in December of last year the Russian business daily Kommersant, citing the Israeli newspaper Maariv, reported that the UAV deal with Russia was causing major tensions between the Israeli Ministry of Defense (M.O.D.) and Ministry of Foreign Affairs (M.F.A.). At the center of the dispute were the irreconcilable views held by the respective ministries. While the M.F.A. saw it as crucial to improvement of bilateral relations and possibly a halt to the transfer of S-300 air defense systems to Iran, the M.O.D. was afraid that the sensitive UAV know-how would eventually leak to Iran. An unnamed M.O.D. official told Kommersant newspaper, "There is [a] fear in Israel that any [of] our military technologies can be transferred from Russia to Iran, for instance, via Syria." Meanwhile the I.A.I. has been exceedingly guarded and reserved with regard to the U.A.V. deal with Russia. In December the I.A.I. Director of International Marketing for Russia and the C.I.S. countries Robert Fisher provided no comments about the progress on the U.A.V. contract with Russia.

According to The Jerusalem Post, the groundwork for the aforementioned quid pro quo arrangement was laid in the aftermath of the August war between Russia and Georgia last year, when Major General Amos Gilad, the Head of the Diplomatic-Security Bureau of the Ministry of Defense of Israel traveled to Moscow, where he received assurances that "Russia would not sell the S300 defense missile system to Iran, and would consider halting the sale of MiG-31s to Syria." It appears that the Kremlin still keeps the options open for the first deal but may have halted the second transaction. It must be noted that in accordance with the Russia-Syria deal signed in early 2007, Moscow was to sell eight MiG-31 interceptor-fighter jets to Damascus for the estimated price of $400-500 million.

In late April Kommersant newspaper reported that the sale of MiG-31 interceptor-fighter jets to Syria was suspended. Quoting the annual report of the Open Joint Stock Company Sokol Aviation Plant (based in Nizhny Novgorod), which was approved by its Board of Directors, the preparation of planes for export was halted "due to the absence of a contract." The role of the Sokol Aviation Plant in the botched deal becomes clear considering that the production of MiG-31s stopped in 1994 and Syria was to receive these aircraft from the reserves of the Russian Air Force. For that purpose they had to be retrofitted for export by the Sokol Aviation Plant. An anonymous source with ties to the Russian state-controlled arms trading monopoly Rosoboronexport admitted to Kommersant that the abrupt annulment of the Syrian contract occurred as a result of Israeli pressure. As always in Russia, the speculations proliferate, but according to another source in the industry-relevant ministry, the deal fell through because Syria lacked sufficient funds to pay for the costly acquisitions. Russia's bargaining position vis-a-vis Syria is strong in any case. In 2005 Moscow generously wrote off close to 70 percent of Syria's debt to Russia, which at the time amounted to whopping $13.4 billion. After that Syria still owed Russia some $3.6 billion.

On May 20, the Russian Aircraft Corporation MiG broke its silence regarding the MiG deal with Syria. The MiG representative's comments carried by the Kommersant newspaper unequivocally denied existence of such a contract. An unnamed MiG representative stated, "There is no such contract in nature. This contract was concluded in 2007 only by the mass media and they were the ones, who annulled it in 2009." At the same time another unnamed source in the Russian defense industry pointed out that "several years ago Syria expressed serious interest towards the acquisition of Russian interceptors MiG 31-E." The same source continued, "In early 2007 the contract to transfer eight planes to that country was even initialed, but it never entered into force because it was not possible to settle all financial questions." "In 2007 the Sokol Aviation Plant began preparations for the fulfillment of the future contract. However soon after the work halted because Syria did not confirm the entry of the contract worth more than $400 million into force," the source concluded.

Israeli officials told The Jerusalem Post that the delivery of U.A.Vs to Russia will commence by the end of the year. In the meantime the Israeli government expects the visit by the Russian Deputy Defense Minister (in charge of procurements) Vladimir Popovkin, who will familiarize himself with the production of U.A.Vs for Russia. More alarmingly, however, it turns out that the Russia-Israel U.A.V. deal could at a later stage entail the sale of the advanced long-range Heron U.A.V. to Russia.

Notwithstanding the above claims and counterclaims, the Syrian government entered the fray on Sunday, May 24, when it issued a statement dismissing reports in the Russian media denying rumors that the deal was off. The statement issued by Damascus and timed to coincide with the official visit by the Russian Foreign Minister Sergei Lavrov read: "This is part of attempts to undermine the friendly relations and cooperation between Syria and Russia." It seems that Damascus chose a denial from the dearth of face-saving options available in the aftermath of the collapsed deal.

Thursday, June 4, 2009

Russian Gas Update

by Roman Kupchinsky

The European Commission will send a delegation of officials to Moscow and Kyiv in order to ascertain the facts surrounding the latest gas-related tensions between the two neighboring countries the website Ukrayinska Pravda reported on June 4, 2009. The delegation comes on the heels of a statement by Russian Prime Minister Vladimir Putin who warned that if Ukraine is unable to pay its gas bills, the transit of Russian gas to Europe could be stopped by the end of June. The delegation’s report will be crucial for the upcoming EU summit to be held in Brussels on June 17-18.

At issue is Ukraine’s May 2009 gas bill which is due on June 7th and Naftohaz’s ability to pay for gas to be placed in underground storage which is shipped to Europe during the fall-winter heating season. These topics were discussed in Moscow on June 2, 2009 during a meeting between Alexei Miller, the CEO of Gazprom and Oleh Dubyna, the head of Naftohaz Ukrayina, but no results of the talks were reported in the media.

The mysterious case of the sale of the Hungarian gas company Emfesz KFT to an unknown company named RosGas based in Zug, Switzerland resurfaced today. The Russian daily Vedomosti reported that Emfesz was sold to RosGas for $1 by its manager, Istvan Goczi who apparently had a power of attorney to do so. Emfesz is owned by Mabofi Holdings which in turn is controlled by Dmytro Firtash, a Ukrainian businessman who owns 45 percent of RosUkrEnergo (RUE). Russia’s Gazprom owns 50 percent of RUE and 5 percent is owned by Firtash’s partner Ivan Fursin. Emfesz supplied about 20 percent of the Hungarian gas market with gas it purchased from RUE. However, in January 2009 RUE was eliminated from the gas supply chain and could no longer supply Emfesz.

When news of the sale was made public, the British-based organization Global Witness conducted an investigation into RosGas in order to determine who stood behind it. According to their report:
We have been unable to find the company’s office, but have learned that its correspondence address is that of a mobile phone company in the Swiss tax haven of Zug. There is no evidence to suggest that RosGas AG is currently anything more than a shell company. Curiously, the Hungarian Energy Office (HEO) does not seem to know who owns RosGas AG either, despite having rapidly approved its takeover of Emfesz. The HEO said in an emailed response to questions from Global Witness that: “in the resolution we asked for further information in [the] Hungarian language on the new owner’s owner as the full ownership structure was not transparent enough.” A spokesman added that the HEO was seeking information on the “structure of ‘owners’ tree’”, presumably the chain of ownership of the company. RosGas AG is supposed to provide this information within 45 days of the deal being approved. But even if it does not, there is no suggestion from the HEO that its takeover of Emfesz will be cancelled. Instead, the company will merely face a fine.

Wednesday, June 3, 2009

Turkmen-Russian Gas Relations Continue to Sour

by Roman Kupchinsky

Compounding Russia’s ongoing problems with its European and C.I.S. gas clients is the geopolitically sensitive case of Turkmenistan. On June 2, 2009 The Moscow Times reported that Gazprom demanded that this prime Central Asian gas producing country either slash the price of gas it sells or reduce the volume it ships to Gazprom. The reason for the request was that Gazprom had no immediate need for expensive Turkmen gas at a time when its own exports had dramatically decreased due to depressed Ukrainian and E.U. demand for gas.

The Turkmenistan conundrum has placed the Russian government in a dire squeeze. It exposes the total failure of Russian Prime Minister Vladimir Putin’s strategy to maintain total control over Turkmen gas production which was meant to: A.) Supplement declining gas production in Russia; B.) Prevent Turkmenistan from supplying gas to the Nabucco pipeline.

The announcement was made by Valery Golubev, a former KGB agent who is now a deputy director of Gazprom responsible for sales to C.I.S. countries. Golubev stated: "Since Europe is not taking the gas anymore, we said, 'Dear colleagues, there is no market for your gas at such a price.” But it was Putin who in late December 2008 announced that he had made a deal with Turkmen President Gurbanguly Berdymukhammedov to buy Turkmen gas at “world prices.” Did Putin grossly miscalculate the demand for Turkmen gas or was he guided by other, more personal motives? It is well known that Turkmen gas was sold on the European market not only by the discredited company RosUkrEnergo, but also by various subsidiary companies of Gazprom Germania, Centrex and other Gazprom-affiliated intermediaries.

Golubev, speaking in the Urals city of Chelyabinsk, reminded Turkmenistan that they have no choice but to ship their most valuable export through Russia since no other pipeline routes exist, at least not for the next five years.
"There are no alternatives. Gas to Europe can be supplied from Turkmenistan mainly through the Central Asia-Center gas pipeline system," he said, the news agency reported.

A Turkmen official said last week that if talks failed, it could take Russia to the International Court of Arbitration. Presumably the Turkmen government would attempt to prove that Gazprom was not meeting its obligations under a “take or pay” contract signed with Turkmenistan. However, the contract between Turkmenistan and Russia has not been made public and it is not clear what the payment terms were.

At the same time Gazprom kept insisting that Ukraine meet the terms of its “take or pay contract” and while Putin was forced in mid-May 2009 to forego penalizing Ukraine for not meeting its contractual commitments it remains unclear if this a tactical move to give his pro-Russian friends in Kyiv room to maneuver and win the upcoming presidential elections or was it a slight of hand to cover-up his inept handling of the gas purchase agreement with Turkmenistan in December 2008?

Tuesday, June 2, 2009

Troubles in the Russian Gas Sector

by Roman Kupchinsky

With demand for natural gas in Europe at new lows, the Russian gas industry is going through a period of decreased profits and dropping production. Russia’s gas giant, Gazprom, the majority of which is owned by the Russian state, has been hit particularly hard.

The International Energy Agency reported on May 15, 2009 that gas consumption in the European Union decreased by 2-3 percent in the first quarter of 2009. Gas imports dropped by 12 percent compared to the first quarter of 2008. During this period, Gazprom’s supplies to Europe fell by 39 percent (and by 50 percent to Germany and Italy) and its share of gas imports to the E.U. decreased from around 30 percent to 18 percent. Despite this, Gazprom remains the largest exporter of gas to the E.U.

According to the Polish Center for Eastern Studies, Gazprom sells gas at the current price of $390-400 per 1,000 cubic meters making it the most expensive gas in Europe. NorskHydro sells gas at $360-370 and Shell at $333. The cheapest gas in Europe is supplied by BP at US$196. BP mainly operates spot supplies, where the price is more flexible than in long-term contracts.

In what might be considered a response to the crisis it faces, Gazprom has begun expanding its LNG sector. The Moscow Times reported on June 1, 2009 that Gazprom was “speeding up its plans to sell more gas by tankers to a wider range of customers as it faces a sharp drop in demand from its traditional consumers in Europe.” "Trends on the global gas markets create conditions for Gazprom to increase the pace of producing and supplying liquefied natural gas," the company said in a statement late Thursday.

According to the Moscow Times:
“Gazprom's management board ordered the company's engineering divisions to work faster in studying options for building an LNG plant in the Far East, the statement said. The board also ordered the engineers to report on the possibility of building a long-discussed LNG plant that would use prospective gas from the Yamal Peninsula, saying for the first time that the plant would take gas from independent producers.“
Gazprom’s main competition in the LNG market would come from Qatar which produces cheaper LNG and has a substantial LNG tanker fleet as compared to Russia’s fledgling few tankers. However, Russia has used gas swaps in the past to export LNG and will presumably do more such deals in the near future.

Gazprom’s aim is to control 25% of the global LNG market by 2030 following the development of a number of key, but highly challenging fields in Eastern Siberia, the Yamal Peninsula and the Barents and Caspian Seas. However, unless the company provides greater strategic focus on developing domestic reserves, while also allowing for greater foreign investment and technical expertise, such a target is likely to remain elusive.

According to the Energy Business Review:
“Gazprom clearly believes that international aspirations can successfully coexist with domestic production in order to achieve such goals. However, the scale of investments and technical expertise required to launch major LNG capabilities, both inside and outside Russia, could be beyond Gazprom's reach without the help of greater foreign investment and a strategic focus on upstream assets. Even then, Russia will face growing competition from other LNG players in the Middle East, North and West Africa and Asia Pacific in its bid to claim a 25% mantle.”
“According to recent calculations, investment of up to $200 billion in the Russian gas sector will be required by 2020 if it is to meet international demand. The growth of Gazprom's production rate dropped to a mere 0.5% in 2005 and to almost zero in 2006, underlining the IEA's forecasts that, without the major development of reserves, Gazprom could be unable to fulfill contracts” the Energy Business Review states.

But Gazprom, despite its vast difficulties does not seem to be in the least bit deterred from achieving its strategic plan to strengthen its monopolistic role in southern Europe. According to the Romanian on-line news portal, on June 1, 2009,
“Romanian gas producer Romgaz and Russian company Gazprom signed a collaboration memorandum as a consequence of the Moscow visit the Economy minister Adriean Videanu and his delegation made two weeks ago. Videanu says that this is the first agreement signed by the two companies since 1989, but he would not reveal its content, as it is confidential…Videanu told the press the access to the agreement was denied, as the memorandum was classified. The minister said that, according to the agreement, this September will see the creation of a Romanian-Russian project between Gazprom and Romgaz, meant to store and use gas. The future depots could store up to 5-6 billion cube metres of gas.”
Videanu also stated that Romgaz will be able to import gas directly from Gazprom, hinting that intermediary companies might be excluded from the deal. However, reported on May 25, 2009, that Gazprom would not exclude the present intermediary companies:
“Gazprom (Export) head Alexander Medvedev said he was pleased with the intermediary companies, in an interview for Radio Romania Actualitati. Romanian authorities believe that if the intermediary companies are eliminated, the prices for imported gas, considered to be some of the highest in Europe, could drop. Medvedev agrees only with the fact that the prices are competitive. The medium price for the second quarter was set to $370 for one thousand cube meters. Markets expect the gas price to drop to $220 by the end of 2009.”
On April 2, 2007, Gazpromexport, Gazprom’s foreign trading subsidiary headed by Medvedev, signed a contract with Conef, a Romanian company owned by the Russian/Israeli businessman Vitaliy Machitsky, to sell Conef up to 2 billion cubic meters of gas annually from 2010 to 2030. Under the contract the aggregate supply volume would reach 42 billion cubic meters. The Romanians were concerned that Machitsky, not only acquired ownership in the country’s aluminum industry but also controlled a substantial percentage of Romania’s gas imports from Russia. At this time Gazprom Export agreed to increase gas deliveries to the Alro Slatina aluminum plant owned by Machitski’s Marco Group. The price Gazprom Export charged Conef for this gas was classified a “commercial secret.”

In April 2007 Gazprom Export signed long term gas supply contracts with three Romanian gas companies - Romgaz, Transgaz and Conef. The contracts provide Gazprom with long-term access to gas shipping facilities in Romania but do not provide any transparency. The blanket use of the term “commercial secret,” currently used by Gazprom to cover up its shady dealings in the countries of the former Warsaw Pact who are now members of the E.U. and N.A.T.O. is very disturbing and the E.U. Commission should conduct an investigation into what is really taking place in Romania. For insuring E.U. energy security it is the right thing to do.

Monday, June 1, 2009

Amid Growing Tensions Russia Postpones $500 Million Loan to Belarus

On Thursday, May 28, the Russian government delegation led by the Prime Minister Vladimir Putin traveled to Belarus to participate in another session of the Council of Ministers of the Belarusian-Russian Union State, a chimera of bilateral state integration that has been dragging on with mixed results for close to a decade. The visit laid bare the growing differences between Russia and Belarus on a number of important issues. At the press conference before the meeting of the Council of Ministers of the Belarusian-Russian Union State, the Russian Finance Minister Alexei Kudrin harshly criticized the Belarusian government's inept economic policies.

In particular, Kudrin stated that because Belarus refused to accept the $500 million loan in Russian rubles, Moscow decided to postpone it. It should be noted that the aforementioned loan was supposed to be the final installment of the $2 billion loan, which Moscow and Minsk agreed upon last year as part of the bilateral anti-crisis economic recovery program. Russia gave Belarus $1 billion last year and another $500 million earlier this year. Kudrin ridiculed the Belarus' planned economy and described the Belarusian government's control of its currency as a "meaningless policy." He went on to accuse Belarus of having a "parasitic" attitude toward Russia. Kudrin warned that the deepening hard currency deficit in Belarus may lead to the country's insolvency. In this regard Kudrin noted, "We may see insolvency of the Belarusian government and the Belarusian economy as a whole due to the hard currency shortage at the end of this year or next year."

Emerging after a frosty meeting with President Lukashenko, Putin tried to alleviate tensions caused by Kudrin's remarks by calling them "extreme assessments" which were "inappropriate." He provided the assurance that "whatever happens in the world economy, Russia will always give its shoulder to Belarus when necessary." On Friday, May 29, in another attempt at belated damage control, the visiting First Deputy Prime Minister Igor Shuvalov interpreted the recurrent Russian-Belarusian "complications" as the byproduct of "intensive work," which in his view "must be settled calmly."

However, the damage appears to have been done. On Friday, at a meeting of the Belarusian government devoted to the discussions of socio-economic developments, President Lukashenko bluntly rebuffed Kudrin's criticism and strongly urged cabinet members to diversify sources of external economic assistance to Belarus. In an impassioned soliloquy he implored Belarusian Prime Minister Sergei Sidorsky and the Chairman of the Board of the National Bank of Belarus Piotr Prokopovich to stop relying on Russian assistance. President Lukashenko pointedly remarked:
“If things don’t work out in Russia, bowing, nagging and weeping is useless. We should seek our happiness in another part of the planet...We are an independent sovereign country and we will do everything in our interest...Therefore, you must remember: no praying or begging. If they don’t have the $500 million that they promised a long time ago and that we included in our budget, don’t go and beg...Let’s build our economy and policy as a sovereign independent state. We have many levers to influence the situation, those challenges that we face, including in Russia. Let’s use them. When will we start thinking as civil servants of an independent sovereign state?”
Referring specifically to Kudrin's remarks, Lukashenko stated:
"Yesterday we witnessed an interesting situation. The President of Belarus and Vladimir Putin were discussing things from private to state ones in an absolutely friendly manner. The discussion went well. Meanwhile Aleksei Kudrin held a press conference before the session of the Union Council of Ministers in order to sow panic in Belarus...If their economy is that good, where did the 10% GDP decline come from? Our economy is different, but our GDP growth stands at 1.5%."
At times noticeably irritated President Lukashenko continued to press his cabinet members and even implied that Kudrin's remarks were approved by Prime Minister Putin:
“What is your problem? Why do you go to Russia where you are kicked? Don’t you understand that it is not the first time when they want to get us for free? Yesterday Vladimir Putin said that he had discussed the situation with Kudrin while flying to Minsk. And after that Kudrin broke out his rant. Wasn’t it arranged? It was, totally."
The global economic downturn caused severe hard currency shortage in Belarus and forced President Lukashenko to pass the law simplifying procedures for foreign companies to deposit funds in Belarusian banks. As the independent Belarusian political analyst Leonid Zaiko suggests, Belarus' impending default may provide Moscow with an opportunity to pull Minsk back into its orbit. In this regard two matters are of particular importance to the Kremlin. First, Belarus' recent overtures to the West have been an irritant for the Kremlin in part because improved relations will increase Minsk's bargaining leverage with Moscow. Minsk's goodwill gesture of release of political prisoners, Brussels' decision to lift the travel ban on top Belarusian officials, followed by President Lukashenko's unprecedented visit to Vatican and Minsk's accession to the Eastern Partnership greatly concern the Kremlin. Moscow is fully aware of the hard currency shortage in Minsk and the sudden change of the monetary format of the last installment (from U.S. dollars to Russian rubles) of the loan may have been intended to remind Belarus of its obligations. Second, Moscow expects Minsk to recognize the independence of Georgia's breakaway regions of Abkhazia and South Ossetia. During his visit to Minsk, Kudrin was quick to deny the existence of any linkage between Minsk's continued refusal to recognize the independence of Georgia's secessionist provinces and the postponement of the loan. He told the press: "I have never raised this issue with any Belarusian official." Nonetheless, judging by the fact that President Lukashenko raised this issue in his speech at the government meeting on Friday, there is little doubt that it was indeed discussed during his meeting with Prime Minister Putin. On this matter Lukashenko stated:
“The bottom line is the recognition of South Ossetia and Abkhazia is the question between us and these countries, with which we have excellent contacts and they know our tactics...nobody will pressure us about it from the East and the West”.
Proverbially resilient President Lukashenko proved many a times in the past that he is capable of resisting Russia's pressure effectively. It will remain to be seen whether he will succeed this time under the impact of the global economic crisis. In conclusion of his Friday speech at the government meeting President Lukashenko made a veiled reference to the peculiar geopolitical setting in which Belarus is caught due to the struggle for influence between the E.U. and Russia:
"This is a big game. Keep it in mind. If we make it, the state will survive. If we don’t, we will be crushed and pocketed. Our sorrow is nothing. But we lead 10 million talented and hard-working people, who we mustn’t expose or deceive.”