Archive for March, 2009

What’s Peaving Putin

March 26, 2009

 

Why was Putin so peaved over the the European Commission’s and Ukraine’s joint agreement Monday to “modernize” Ukraine’s gas pipelines, and thereby increase the pipelines’ capacity to 180 billion cubic meters a year, up from their current annual carrying capacity of 120 billion? Because he likes the pipelines just the way they are.  

 

Putin called the Monday agreement “ill-considered and unprofessional,” ostensibly because the two parties didn’t include Russian leaders in the conversation.

 

“Discussing this kind of question without the main supplier is simply not serious,”  Putin said.

 

So the poor guy was feeling left out. His self-esteem was hurt. That’s all there is to it? Not quite. Putin said a very key thing right after: “The volume of gas to be pumped is a key factor. This gas can only come from the Russian territory, but no one has discussed the issue with us.” 

 

To make sense of this otherwise bizarre episode, the regurgitation of a few facts are in due order:

 1) Currently, much of the natural gas that Russia sells to Europe transits through Ukraine, who also buys it while charging Russia some modest transit fees for use of the route. 

2) For the past few years, Russia has been pushing to get European investors’ support for the construction of Nordstream, a new gas pipeline that would ferry 27 billion cubic meters of natural gas a year to Europe by cutting through the Baltic Sea. This seabound route would completely bypass any of Russia’s neighbors, thus sparing Russia any transit fees – and sparing its neighbors any revenue they could otherwise be reaping. Poland, Lithuania, and Estonia don’t like this at all, and have been making the approval process exasperatingly slow for Putin in hopes of scuttling the deal and getting it replaced with an overland route.

3)  Meanwhile, the Belarussian government and Russia’s Gazprom have been cooking up a sweetheart deal of their own, and it’s a new gas line called called Yamal-Europe-2. This line, if built, would pump an additional 24 billion cubic meters of Russian natural gas to Europe through Belarus. Gazprom spokesman Sergei Kupriyanov said that Yamal-Europe-2 will likely happen, but only – and these words are key – “after the building of Nord Stream” and if there will still be enough “demand…from consumers along the route.”

4) The fiasco with Ukraine back in January created a lot of momentum for Gazprom and Yamal-Europe-2 both. Want proof? Then know this: Russia boosted its shipments of gas through Belarus 30% during the feud. 

 

I see the makings of a Russian master plan here:

1)   Build Nordstream, which will bypass transit republics and thus spare Russia transit fees while increasing the available gas to Europe; then

2)      If Nordstream gets enough consumers, build a Yamal-Europe-2 line that will enrich Belarus (appeasing any lost opportunities that Yukashenko-land suffered over Nortstream) while also enriching Russia. Once that’s done…

3) Continue to pump the same stagnant amount of gas through Ukraine’s systems. Because it is stagnant, and demand isn’t, Russia will be able to raise or lower the price as it sees fit. At the end of all this… 

4)  Enjoy the higher revenues it is getting from Europe, the increased fees that Belarus is paying for gas it can’t get anywhere else, and an ever-steady revenue source from the limited gas trickle running through Ukraine, which it will be able to squeeze, constrict, and then relax as it pleases, a la OPEC, for maximum profit yield.  

Grrrr...Me want power! And rubles!

Grrrr...Me want power! And rubles!

 But Ukraine is in a position to foil this whole plan by offering Europe an additional 60 billion cubic meters of Russian gas through a renovated Ukrainian gas system. In the short term, this is not good for Russia, for it would mean that Ukraine could ship more Russian gas to the consumers in Europe. And per the rules of economics, whenever there is more of something, people pay less for it. If there are more liters of gas, then Russia will get fewer rubles per litre. Not to mention, Russia will have to pay the obligatory transit fees on those extra 60 billion cubic meters a year. And as for Yamal-Europe-2 and Nordstream? Forget about it. Both, put together, would total a comparatively punier 49 billion cubic meters a year. Would European investors even bother? Why would they?  

 

 

 

The level of enthusiasm among Europeans for a Baltic gas route is inversely proportional to the level of gas Europeans are already getting through the already-existing Ukraine route. A more abundant stream coming out of Ukraine would put a damper in investors’ interest in the Baltic route and all the risks that may go with it. Putin and his cohorts are hoping to keep the enthusiasm for the new, cheaper (for Russia) lines up; that means keeping European confidence in Ukraine down.

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Have Gas, Will Blackmail

March 26, 2009

 

You’re the president of a Third World country that is barely making it through this worldwide recession. You’ve got $500 million at hand. Do you

A) invest it in your country’s economy and spur some growth? –OR-

B) Give it away to the government of another Third World country a thousand miles away?

 

On Monday, Belarussian president Alexander Lukashenko took option B, giving half a billion dollars cash to breakaway Georgian province Abkhazia.

 

For added good measure, he flew to Moscow the next day to meet with Abkhaz leader Sergey Bagapsh and assure Bagapsh that the Abkhaz have a friend in Lukashenko.

 

“Much work emerges after gaining independence,” he said. “We would be happy if Belarus’ involvement could help to solve problems in this region.”

 

Why this burst of magnanimity from Lukashenko? The answer consists of one word: Russia.

 

Russia has been pressuring Belarus to recognize the independence of breakaway Georgia republics South Ossetia and Abkhazia for months. And to do so over EU counter-pressure, no less, which included a veiled threat last month from Czech foreign minister Karel Schwrzenburg that “if they recognize South Ossetia and Abkhazia it would create a very, very difficult situation for Belarus because Belarus would be out of the European consensus.”

 

Russia pressing on one side, NATO pressing on the other. Not an easy position for little Belarus to be in. Russia’s Medvedev has been doing his part to make Lukashenko’s decision easier. His government gave Lukashenko’s $1.5 billion in aid earlier this year and has promised an additional $500 million later this year. Needless to say, Medvedev’s “charity” isn’t for free. Belarus is going to have to earn its keep.

 

The Russian president has every reason for presumptiousness in this. Belarus is currently in no position to be defiant. Not when, according to the CIA World Factbook, Russia is the market for 59% of its exports.

 

Nor when Russia is the staple of Belarus’ energy supplies. As this table from the CIA World Factbook will show, item by item, Belarus’ native energy supplies are barely a drop in the bucket of its energy needs. Russia’s oil and gas lines fill a very large gap:

 

Oil – production:


33,700 bbl/day (2007 est.)

Oil – consumption:


179,700 bbl/day (2006 est.)

Oil – exports:


256,400 bbl/day (2005 est.)

Oil – imports:


394,100 bbl/day (2005 est.)

Oil – proved reserves:


198 million bbl (1 January 2008 est.)

Natural gas – production:


164 million cu m (2007 est.)

Natural gas – consumption:


21.76 billion cu m (2007 est.)

 

 

And as far as energy goes, Belarus has proven relatively pliable in the past. Russia raised the price Belarus must pay for Russian natural gas from $47 per thousand cubic meters in 2006 to $100 in 2007 and again to $128 in 2008. Belarus squabbled a bit over both hikes, which led each time to Russia threatening to shut off the gas. The latter threat sufficed both times to make Belarus relent and do Russia’s bidding.  

 

There is talk of Russia raising the price again to $200 per thousand cubic meters this year, and ultimately charging Belarus the same rate it charges the rest of the world in 2011. These are the same terms that sparked last January’s ugly showdown with Ukraine, with all the gas-deprived Europeans that that entailed. Any showdown with Belarus will probably end much more quickly, though. We got a hint of that around the time of the January Ukraine fiasco, with a less-publicized meeting between Belarussian and Russian authorities. Prior to the meeting, the Belarussian government told the Belarussian public that it is raising their price that they will have to pay for gas by 9.8%: $174.18, up from $158.67. In short, to appease Gazprom, Belarus may sacrifice even its own Belarussians.

  

Now we see Lukashenko forking over a huge sum of money to finance Abkhazia’s growth at a time when his own country might not be able to afford electricity in the next year. This all speaks to a great desperation on his part to please Russia. And a ruthless drive on Russia’s part to squeeze its weaker CIS neighbors for every last ruble it can get.

 

It is no wonder that Medvedev and company make a scene whenever more of its neighbors consider joining NATO, or at least doing more business with the West. The West is an alternative to Russian exploitation. Medvedev and company find it preferable that their neighbors have no alternative and keep being exploited.

An Inconvenient Nuke

March 15, 2009

  

The Russian government has a reputation for friendliness toward Iran, just as it has a reputation for rough suppression of Russians who disagree with their government. So this pronouncement Thursday from Maj. Gen. Vladimir Dvorkin, head of the Moscow-based PIR—Center for Strategic Nuclear Forces, is a bit of a shocker:

 

Iran is actively working on a missile-development program. I won’t say the Iranians will be able to develop intercontinental ballistic missiles in the near future, but they will most likely be able to threaten the whole of Europe,” he said.

 

He didn’t say Iran is working to build nuclear weapons. But he made it clear that Iran could one day get them, and it would become much more bellicose once it did.

 

Iran, which is already ignoring all resolutions and sanctions issued by the UN Security Council, will be practically ‘untouchable’ after acquiring nuclear-power status, and will be able to expand its support of terrorist organizations, including Hamas and Hezbollah,” he said.

 

Dvorkin played lead roles in drafting the SALT II, START I, and START II treaties. He is also a former employee of the State Central Naval Testing Site, where he took part in Soviet nuclear-powered ballistic-missile submarines’ underwater test launches. In sum, he is someone whom people listen to when the subject is development of deadly weapons.

 

So his words came at an inconvenient time for Medvedev, given the upstart nuclear facility in Bushehr, Iran, that is supposed to be fully operational by March 2010 thanks to the Russian money funding it and the Russian nuclear fuel that will power it.

 

All while Medvedev is also trying to get the US on board for a new nuclear pact that would replace START-1 following the latter’s expiration in 2009. That pact is supposed to limit US and Russian deployment of nuclear weapons. What does it gain the United States to see Russia reduce its nuclear stockpiles if Russia is aiding and abetting the construction and deployment of new nukes by its anti-U.S. ally Iran?

 

And make no mistake about it, Iran and Russia are allies. Just ask Heidar Al-Balouji,

research fellow at the Institute for Political and International Studies (IPIS), Tehran:

 

It is no accident that the Russian foreign policy concept views Iran as one of its main 

partners in the Moslem world,” he wrote.

 

Why? Because Iran is a very helpful partner for placating Islamic extremist movements,

who are a greater threat to Russia than is the Iranian Revolutionary Guard. Tehran

proved to be a key negotiator already in imbroglios in Tajikistan, Karabakh, and 

Chechnya.

 

Partnership with Iran is an economic boon, also, according to fellow PIR—Center

scholar Vladimir Orlov. He noted that Bushehr is only one of seven plants

that Russia has contracted to help build and supply, for $1 billion each$7 billion

altogether.

 

Russia would like to see Iran as an important strategic and economic partner-technologically, financially, in cooperation in the energy sphere” he wrote.

 

As for me, I have no doubt that economic interests are at play here. The Russian defense industry is certainly hawking for more business with Iran: Iran was the third-largest buyer of Russian military hardware in 2003.

 

But the security interests are very real, too. Why? Afghanistan. Iran’s state agencies have been heavily engaged the last few years with reconstruction projects in Afghanistan, expanding Afghan-Iran border security, and broadcasting anti-American, pro-Iranian propaganda from Iranian radio stations onto the Afghan airwaves. The fruit of their labor is that Iran is becoming a considerable influence in Afghan politics, as it already is in Iraqi and Lebanese politics.

 

This may make Iran very important, considering that the Taliban has made no secret over the years of its leaders’ aspirations to seize control of not only Afghanistan, but the Central Asian CIS as well, and maybe even parts of Russia. The 2001 US invasion obviously derailed them for a while, but they’ve been showing a lot of resilience in the last few years. Could they make a complete comeback? Not likely, but that possibility has surely crossed Russian officials’ minds, or at least it should have. If–or when?–the US/NATO quest to democratize Afghanistan totally implodes, Russia may count on a well-armed and well-connected Iran to help regain control and curb resurgent Taliban ambitions of world domination.

 

Nevertheless, the world would be safer if Iran’s arms didn’t include nuclear weaponry. I think so. And Orlov thinks so:

 

We have quite a potentially big agenda. But this agenda is clearly conditional – and the condition is: Iran develops its nuclear program only in peaceful ways and means.”

Russia and OPEC join forces to raise your gasoline bill

March 14, 2009

Russia is welcome to become a member of OPEC, according to Iranian oil minister Gholamhossein Nozari.

“The ground is ready in OPEC to accept Russia as a new member, but, of course, countries request membership by evaluating and considering their own interests,” he told Fars News Agency, Iran’s semi-official media outlet, on Thursday, just a few days ahead of the Sunday, March 15, meeting of leaders from the cartel and current non-member Russia.

 

OPEC has every reason to want to bring Russia on board, considering that Russia is the world’s second-largest oil producer and OPEC’s raison d’etre is “to stabilize the world oil market.” And adding Russia’s supply to the OPEC cartel would be a definitive stabilizer. OPEC presently commands two-thirds of the world’s oil reserves. That remaining one-third of non-OPEC oil is a lingering competition. The less of it there is, the happier will the OPEC nations be. Adding Russia would be a big increase in OPEC oil and a big simultaneous decrease in non-OPEC oil. Hence an opportunity to make serious cutbacks in worlwide oil production–triggering serious jumps in price.

 

The strategy paid off literally ovenight: Oil prices shot up 11% Thursday in the wake of Nozari’s announcement hit the wires. Couldn’t have come at a better time, seeing as oil prices had fallen to a historic low of $100 a barrel. 

 

So it’s obvious what OPEC gets out of it. But what does Russia get out of it? Is OPEC membership worth the $2 million annual membership fee?

Probably not. In addition to said fee, being an OPEC nation entails two things: output quotas and mandatory higher prices. Russia actually already has those bases covered. It’s already planning some cuts in oil production to match the declining demand. It’s also making the following two proposals at this weekend’s OPEC conference:

1) In conjunction with OPEC-member Venezuela, a plan to automatically cut supplies if prices fall below a certain level.

-AND-

2) At the end of this year, a meeting in Moscow of the world’s oil-producing nations to discuss “a new pricing mechanism.”

 

I’ll make a point to savor the low gas prices now. It sounds like they’ll be just a warm memory later.

 

 

Phantom Menaces

March 1, 2009

 

Guns don’t kill people, was a maxim one used to hear a lot in the United States during 1990s debates on gun legislation. It’s true. Guns don’t kill people. Idiotic governmental policies that give guns precedence over flesh-and-blood people kill people.

Last Friday, Putin assured a worried nation that he fully intends to fund much-needed programs for health, housing, unemployment assistance, and other societal needs. He pointed out that his 2009 fiscal budget includes a $1.5 billion economic stimulus package for job creation.

 

“Lowering social standards or social dumping must not become an anti-crisis tool,” he said.

 

A nice thought. It would have been more believable if, that same day, a government commission hadn’t loaned the national defense industry $56 billion in bailout money.

Arms matter a great deal to Putin. The question is, do unemployed Russians matter?
Arms matter a great deal to Putin. The question is, do unemployed Russians matter?

(photo credit: sondrak.com)

 

 

 

Now it’s true that arms makers have fallen on some particularly hard times in Russia in the last year. One-third face bankruptcy, according to Russian Technologies head Sergei Chemezov, who also that one-half of those who make ammunitions or explosives are going on broke. Of all arms manufacturers throughout the military-industrial complex, only 36% are stable.

 

The St. Peterburg Times says that demand for Russian military goods dropped off 50%-70% in 2008. Some of this might be just your run-of-the-mill recession cutbacks. Some of it is also dissatisfaction with the products: Indian buyers complained of late deliveries, and Algeria returned 15 MiGs because of defective parts. So yes, arms manufacturers could have used some help. But $56 billion of help when the whole sum of their fellow citizens got a mere $1.5 billion bonus?

 

Well, then the Russian arms industry must be very huge and account for enormous sums of Russian workers and Russian capital. That would explain why it got such an obscenely large chunk of bailout cash.

Actually, it wouldn’t. Russian arms exports totalled $8.35 billion in 2008. That equals about 2% of all Russian imports that year, the sum of which was $476 billion, according to the CIA World Factbook.

 

Russia’s military seems to have been busy of late drumming up new business and making up for lost revenue. RIA Novosti reports that the Air Force has a joint air-defense system with Armenia in the making while the Russian Navy has been conducting joint exercises with Venezuela, India, and Turkey. The news agency states that Russia’s navy intends to build up “a constant presence in different regions of the world’s oceans.” This coincides with an increased presence in space, also, beginning with a military satellite that the Russian Space Agency, according to ChinaView.net, launched last week.  

 

An industry representing 2% of Russia’s exports gets $56 billion in loans while the whole economy gets $1.5 billion. Putin must have some astonishing information indicating a major economic revival is around the corner, and so he expects that the 8.1% unemployment rate  now besetting Russia is going to just magically disappear.

 

He must also have reason to think that Russians don’t have more pressing problems. Funny, the rest of the world sure seems to think otherwise. For starters, there are the HIV infections that could spread to more than one in 10 Russian adults by 2010. There is also the abysmal state of children’s health: fewer than one in three Russian children are born healthy. Let’s not forget the astronomically high rates of substance abuse among Russia’s teenage population: drug-related deaths of minors are 42 times higher than they were in the 1980s. And then there are your various problems of poverty, homelessness, violent crime, etc. The list goes on and is too long for this mere blog entry.

 

Russian officials aren’t wrong to want to bolster their national defense. There are plenty of hypothetical threats they could encounter down the road: Islamic-extremist elements to the south, China to the east, even the United States to the west (that would be very far down the road, I trust). But surely the very real, non-hypothetical, threats that are killing and maiming Russians right now should merit more attention. When it’s people’s lives, what is has to take priority over what might be.       

 

And now for some good news about the Russian economy…

March 1, 2009

 

A few entries ago, I noted that Radio Europe correspondent Chloe Arnold predicted the Russian economy would actually weather the economic storm better than Western Europe and the United States. Turns out, he was right.  

 

Compare the U.S. economy’s recent GDP growth during and that of the Russian economy, and Russia’s comes out ahead. The Russian economy grew 2.2% during the fourth quarter of 2008, according to its official state figures, while the E.U. and U.S. economies made respective contractions of 1.1% and -6.2%.

 

Moreover, while all three economies are likely to have it rough in the year ahead, Russia’s economy should have it the least rough. That’s according to the International Monetary Fund, whose World Economic Outlook projects Russia’s economy contracting -0.7% in 2009 before rebounding 1.3% in 2010. By comparison, the agency sees the U.S. economy contracting another -1.6% in 2009 before rebounding by an only marginally higher 1.6% in 2010; it sees the E.U. economy slipping a full -2% this year and making a meager comeback of .2% next year.  

 

That Russia would have better GDP numbers shouldn’t be too surprising. It’s been leading the pack on this indicator for a few years now. These GDP growth percentage numbers, also from the World Economic Outlook, say as much: 

 

             2007           2008
European Union 2.6 1
Russia 8.1 6.2
United States 2 1.1

 

There’s clearly a benefit to being a petroleum-based economy in an era of high -and growing- energy demand. It helps also that, as the World Economic Outlook further notes, lower spending in most economies is going to decrease worldwide economic inflation 5.25% this year and 5% next year. Out-of-control inflation was a tremendous drag on Russia’s fledgling economy during the 1990s, when the ruble reduced to 1,200th of its original exchange value within the 12 months of calendar year 1998. Russian banks had a momentary inflation scare again last month, with the ruble dipping to an emergency-level exchange value of 41 against the dollar and creditors subsequently going into panic. Not having to worry about this problem, at least, can only be a change for the better.  

 

That’s not to say that there are a lot of more specific indicators that would give any sane Russian cause for alarm: the ruble is still only about 28 to the dollar, Russia’s uneployment rate is higher, its stock market’s 70% drop last month far exceeds any ups and downs of the Dow Jones, investment in fixed capital is lower, and exports and productivity are not even close to those of the U.S. economy.

But the overall picture is not as bleak as some might have you think.