Archive for May, 2009

Hungering for Economic Freedom

May 24, 2009

Russia’s oil and gas industries may be booming, but that doesn’t mean much to the 22,000 residents of the Saint Petersburg suburb Pikalevo. Endemic joblessness, hunger, and a recent lapse of hot water supplies drove 200 of them to storm their own town hall last Wednesday.

We have a catastrophe! People have no money even for food,” said Svetlana Antropov, head of the cement-manufacturer’s union, to Moscow daily newspaper Moskovsky Komsomolets.

Pikalevo has been in survival mode since last winter, when the three mainstays of employment—the Metakhim chemical factory, Basel Cement cement plant, and alumina-maker Pikalevsky Glinozem—all shut down for good. The three sites had employed half the working population of the city.

How bad did things subsequently get? Ask Moskovsky Komsomolets correspondent Igor Karmazin, who saw hunger turn so severe that people were eating  field grass.

Courses prepared with cabbage soup nettle, salad of dandelions, and grass multiplied,” he wrote. And that was before last week, when the region’s electric companies shut off heating and hot water to Pikalevo over Basel Cement’s unpaid debts.

Pikalevo’s economic troubles actually date back to 2000, when Apatit, the three factories’ supplier of nephelin concentrate, raised the price of its concentrate to 873 rubles a ton – more than 2.8 times its previous rate. Pikalevsky Glinozem sued, citing Russia’s “anti-monopoly” statutes (for what they are worth). The court sided with Apatit. The two companies compromised on 686.4 rubles a ton, per a contract that was to remain in force until June 30, 2005. When June 30, 2005, rolled around and the contract expired, Apatit announced it would hike the price to a new height of 1372.79 rubles a ton. Pikalevsky Glinozem refused to pay, and Apatit simply stopped shipping concentrate.

Production in Pikalevo immediately started declining. The three plants just proceeded to burn through their reserves of concentrate, which would only last them so long. At that date, Valery Serdyukov, governor of the Leningrad Region, called on the Federal Antimonopoly Service to step in to save the situation. It denied him.

Every wise business leader wants to get his or her money’s worth. That is natural and good. But when an enterprise is able to raise its prices so high that a slew of vital industries cannot afford it and are driven into bankruptcy, taking down thousands of jobs with them, then clearly one is seeing a system work against itself. That system, which we are seeing now in Russia, is hurting from a lack of competition—why else could Apatit get away with such obsene price hikes? And where, pray tell, is antitrust law when Russia’s people so clearly need it?

Flashing forward four years to the present, there is an additional problem: Russian leadership’s fixation on oil and natural gas. Pikalevo is not the only town in Russia that has lost exorbitant numbers of manufacturing jobs. The Russian manufacturing sector’s output fell 14.9% in the first quarter of 2009. And its output was 8.1% lower in March 2009 from where it had stood in March 2008. All of this, even while Russia’s oil output has edged up since last March, much to OPEC’s displeasure.

Oil lines and gas lines are great sources of revenue, by all means. But no country in the world can live on them exclusively. Pipeline networks don’t claim hubs into every city. They may create jobs in some places, i.e., where the oil field and gas sites are. But other locales are going to have to have other means. So far, too many of Russia’s locales don’t.

Serdyukov, still governor, seems to have become painfully aware by now of the futility of the whole situation. This time around, he opted to wash his hands of Pikalevo’s plight, telling reporters Thursday that “the situation should be dealt with by the local authorities.”

He also delivered a public downplay of the troubles, one that would be shocking in its audacity—except that this, after all, is Russia: “There is no hot water there in Pikalevo… Well, it happens. And not just there. It happens even in Moscow and Saint Petersburg, that the water is turned off for a couple months. There is no tragedy here. As for heat, well, I don’t think it’s needed so much during the summer.

He did changed his mind the next day, and forwarded the Pikalevo government 20 million rubles in emergency “compensation for falling revenues.” Not that a quick cash infusion is any substitute for permanent industry. But it is better than nothing.

Unfortunately, Serdyukov’s comments about hot-water shutoffs expressed an indisputable truth. In Russia, these things do happen. That the residents of a town near Saint Petersburg—a major commercial hub by Russian standards—would be reduced to foraging for grass for food speaks volumes. What of the townspeople in communities around lesser cities like Samarov, Vladivostok, or in any of the vast expanses of underdeveloped tundra and taiga stretching across Siberia? How much worse off are they? How many more of their own people are going hungry?

More importantly, how long will they have to stay hungry before Russia’s officials warm up to genuine economic reform and a functional free market?

No Hurrying Nabucco

May 12, 2009

 

Conduct some trade with Europe or conduct much more trade with Russia and China—seems like an easy choice, does it not?

 

Then it’s a no-brainer why natural-gas-rich Kazakhstan, Turkmenistan, and Uzbekistan would feel no compulsion to sign up for the Nabucco pipeline deal. Much to the chagrin of European Union leaders, who want them to step in as substitutes to Gazprom.

 

Whether they care to admit it or not, some EU officials recognize that whatever they can offer the three Caspian nations, it might be bested by what Beijing and Moscow can offer.

 

If we in Europe do not get these supplies of gas, then they will end up in Russia or China,” said a European Union diplomat anonymously to the Moscow Times today. 

 

EU leaders had hoped they could get the three to make concrete commitments to Nabucco at last Friday’s “New Silk Road” summit in Prague. A summit declaration, which leaders of Turkey and a number of interested European nations signed, pledged its signers to identify “non-committed natural gas and oil volumes … that can be dedicated specifically to the EU.” 

 

The hope is that said gas volumes might get shipped via Nabucco, which is supposed to pump 20-30 billion cubic meters a year from the Caspian Sea region to Europe starting 2013 or 2014.

  

Kazakhstan, Turkmenistan, and Uzbekistan all refrained from signing. In so doing, they towed Russia’s line, which is staunch opposition to the project, as it is to any project that might undercut Gazprom’s monopoly.

 Turn down the prospect of exporting 20-30 billion cubic meters of gas? That’s a lot of gas, isn’t it? Not really. The three nations have conduits of gas, some in operation now and some to be in operation soon, which match or even dwarf this amount. For starters, there is the Turkmenistan-China gas pipeline, which started pumping gas last January. Bagtyarlyk, a territory on the line, has enough natural gas to pump 30 billion cubic meters a year to China for the next 30 years. There is also the Central Asia Center gas pipeline, which will have a capacity of 80 billion cubic meters a year upon completion in 2012.

 

In addition, each nation has some very active natural-gas business of its own with Russia and China.

Kazakhstan: Russia has a virtual monopoly on Kazakh natural gas, more than 90% of which goes to or through Russian territory. If the percentages alone sound intimidating, consider the bulk amounts: Kazakhstan’s North Kumjol field, on which Kazakh company Petrokazakhstan and Russian company Lukoil are partnering, produces  18.3 million million cubic feet a day (189.14 million cubic meters a year). That’s on top of the the 4.5 million cubic feet a day (46.51 million cubic meters a year) coming from the North Buzachi field, courtesy of the Lukoil and China National Petroleum Corporation. Even more gas shipping is in store once Russia develops the Khvalinskoye field, which it is expected to do by 2014. There are a total 369 billion cubic meters of natural gas buried within.

Uzbekistan: Lukoil already beat the West to the punch here, too. Last January, the company confirmed plans to invest $5 billion this year in exploring and developing Uzbek gas deposits, with the aim of selling the extractions to Gazprom.  These plans follow two previous gas deals, worth $1.5 billion total, that Moscow and Tashkent reached in 2006.

Uzbek president Islam Karimov had such deals in mind when, last November, he rebuffed the very idea of Nabucco with the bold assertion that “Uzbekistan exports gas only to Russia, and then it exports gas wherever it wants.

And to China, apparently. The Uzbekistan-China pipeline, under construction as of last July, will ship 30 billion cubic meters a year–half of Uzbekistan’s gas supply–to Chinese buyers once most of its stations reach completion in 2012.

 

Turkmenistan: Turkmenistan and Russia exchange 50 billion cubic meters of natural gas annually. Turkmenistan could get by just fine without adding Western oil contracts to the mix. Though it may pretend to seek them just to win better terms from Russia. Policy-analysis firm STRATFOR concluded that Turkmen president Gurbanguly Berdimukhammedov took this very tack last month, when Russia sharply reduced its gas conumption without telling Turkmen officials, and the pipeline consequently overloaded and burst. The Turkmen government began publicly pursuing gas deals with Europe, including one with Germany’s RWE. It would be a stretch to say that this course of action endeared Moscow to the Turkmen government. As STRATFOR records further, Moscow responded to the RWE deal by threatening to pull back its weapons sales and the troops stationed within Turkmen borders. This was frightening to the Turkmen leadership, which fears military incursions from Uzbekistan and other rivals on its western flank.

“At the end of the day,” reads the STRATFOR report, “Turkmenistan is still stuck in balancing its desire to reach out to non-Russian foreign players and its fear that only Russia can protect the state from the West and other regional rivals.”  

Russia, and to a lesser extent China, clearly are the dominating presence in the Kazakh, Turkmen, and Uzbek economies: Russia because of its vast material and infrastructure support (which it can give and take away), and China because of its gargantuan hunger for natural resources to fuel its rapidly growing economy (which is an astronomically profitable market for fossil fuels). The economic power that Russia and China wield is tremendous, and will not be broken by a mere 30-billion-cubic-meter pipeline to Europe. Western nations, leaders, and private corporations will have to undertake far more investing in the Caspian region if challenging Russian and Chinese dominion there is their goal. They might achieve it, but over decades, not in months or years.

Turkish president Abdullah Gul held out some hope last week that the nations who didn’t sign the Silk Road accord might yet come around sooner: “It’s in their interest to find new markets, they are looking for new markets in order to have a better bargaining, in order to have a better price.

They may well be looking for new markets. But those markets need not be Western markets.

Blood, Politics, and NATO Meet in Georgia

May 2, 2009

 

Go with Russia or go with NATO? The upcoming Cooperative Longbow 09–Cooperative Lancer 09 military-training exercises in Georgia, organized by NATO’s Partnership for Peace Programme, are a loyalty call for Russia’s 14 fellow republics within the CIS. All are Programme members and have the option of participating. One by one, they’ve had to decide whether to take that option, or to heed the demands by Russia—a Programme member itself—that they bow out.

 

By now, only three—Armenia, Azerbaijan, and Ukraine—are still signed on to defy Moscow and participate. Moldova pulled out last Wednesday. Kazakhstan called it quits the week before. Latvia and Estonia each individually said “thanks, but no thanks.” 

 

It’s interesting that Armenia and Azerbaijan, who continuously quarrel over ownership of the Nagorno-Karabakh region, can find an area of common cooperation in Georgia. They should, given that:

1) Georgia is the next-door neighbor of both (see the map below) and

2) Georgia’s population is 5.7% Armenian and 6.5% Azeri.

 

Those are two good reasons to believe that any serious trouble in Georgia will sooner or later spill over into Armenia and Azerbaijan.

To Armenians and Azerbaijanis, the turmoil in Georgia is too close for comfort.

To Armenians and Azerbaijanis, the turmoil in Georgia is too close for comfort.

 

Georgia has been the scene of much serious trouble in the last year, i.e., violence in Abkhazia and South Ossetia on top of growing civil dissent throughout Georgia proper against the Saakashvili regime. How messy is the whole country going to get? Armenia and Azerbaijan both have vested interests in not finding out. They would be better off not watching passively as Georgian civil order implodes. They also have an interest in not affording Russia a pretext to occupy Georgia proper, which Russia might see fit to do if the instability in Georgia continues. Either scenario would, if nothing else, mean streams of refugees pouring into Armenia’s and Georgia’s territories. Worse, it might mean war-related destruction of railways, pipelines, and other infrastructure that the two Caucasian republics’ fledgling economies cannot afford.

 

Things such as these came to pass in the bad old days of the early 1990s, when early armed uprisings by Abkhazian separatists against their then-occupier Georgia led to violent campaigns by Georgians to drive Abkhazia’s ethnic Armenians out. The fighting also led to collateral damage to Georgia’s Black Sea railroad (a lifeline from Russia to Armenia) and the repeated blowing-up of a natural-gas pipeline running through Georgia to Armenia.

 

Last year’s conflict in Georgia caused additional damage to rail transit into Armenia. Quote the CIA World Factbook: “The disruption of rail transit into Armenia during the Georgia-Russia conflict in August 2008 highlighted how Armenia’s supply chains for key goods – such as gasoline – were vulnerable to instances of regional instability.

 

Armenian leaders today have the foresight not to rely on Georgian or Russian troops to keep the peace and prevent things from getting blown up. They’re opting instead to take matters into their own hands by committing their own Armenian troops into Georgian territory and proactively keeping the (short-term, at least) peace.

 

Azerbaijan’s leadership is looking ahead, too, to the Kars-Akhalkalaki-Tbilisi-Baku rail project, a rail line that will transit people and goods from Azerbaijan to Turkey and back via a route through Georgia. The project has had a hard time getting off the ground due to not enough funding for the line’s Georgia segments. Baku has every good reason to expedite things, and that means helping to keep Georgia stable.

 

Belarus, Kazakhstan, Moldova, and the other republics that bailed from the NATO exercise all have the luxury of not having to worry about these things. All are far enough away from Georgia to not be fearful of hordes of refugees, exploding railways, or the like.

 

They also have the added element of closer ethnic ties to Russia. Belarus is 11.4% Russian; Kazakhstan is a whopping 30% Russian; 12.5% of the Kyrgyz Republic’s population is Russian; a smaller, but still considerable, 5.8% of the people of Moldova are ethnically Russian. So what concerns the Russian Federation will concern many of their own voting citizens. And so when Russian officials evince great worry that Saakashvilli might interpret NATO’s operation as validation and launch new attacks on Russia (and they have), or that nations who participate in the training exercises will, in so doing, weaken their own ties with Russia (and they likewise have) large numbers of voting citizens in these other CIS republics will listen and take heart. Their own leaders will inevitably listen and take heart, in turn.

 

Ethnic ties are a non-factor in Armenia and Azerbaijan. Their populations are, respectively, only 0.5% and 1.8% Russian. There are no ties that bind among their voters.

 

What about Ukraine? Where would Ukraine’s people stand? They, actually, are a bit more complicated. A substantial 17.3% of Ukrainians are Russian. But given annual Russia-Ukraine face-offs over gas exports—and last winter’s momentary freeze—there is probably little sense of fraternity with Russia in Ukrainian officialdom. Blood runs thicker than water, for sure, but so does the fuel needed to heat one’s home in northern Eurasia’s frigid winter season.