Archive for June, 2009

Treading Lightly in Belarus

June 29, 2009

Gazprom’s harsh words for Belarus over unpaid gas bills two weeks ago turned out to be just that – harsh words.

The gas firm had given Minsk a due date of last Wednesday to pay $231 million in “debts” that Belarus had accrued by paying $150 per thousand cubic meters of natural gas January-April of this year instead of the $210 per thousand cubic meters that Gazprom had been expecting. And if no payment, then no more gas.

By Friday, debts were still unpaid and gas was still running. And Belarussian vice-premier Vladimir Semashenko told the Belarussian parliament that Belarus will pay off the $231 million amount, but not until some time between August and November.

What did Russia have to say in response? Actually, nothing. Putin told his parliament that Belarus will be business as usual; Russia will continue to sell it gas at heavily subsidized rates ($150 per thousand cubic meters ).

This is only logical, given that Gazprom stands to lose 40% of its revenue this year. In such circumstances, its leadership board have to take the conciliatory approach.

The alternative would be a repeat of last winter’s Ukraine fiasco. Whatever benefits Russia derived from shutting off the pipes to Kiev, it paid for them heavily in the form of 4.5 billion cubic meters of natural gas that never reached customers. It was a problematic strategy then, and it would be a foolhardy one now – a company that is losing 40% of its business doesn’t make pains to lose any more.

Especially when those customers are clearly making plans to seek new business elsewhere. In this case, with Western Europe. President Alexander Lukashenko is setting out to establish a Belarus-EU free-trade zone within the next three-four years, and he has made some tepid overtures to human rights – freeing a few political prisoners – to soften European disapproval of his undemocratic governance style. These actions sufficed to move Europe to lift its travel ban on him and to grant Minsk 10 million euros to improve food produce for export.

“We honestly want to forge good ties, even if this may not be to somebody’s liking,” said Lukashenko (Any guess as to whom that “somebody” might be?).

He added that Russian trade spats with Belarus over milk, natural gas, and other commodities had prompted Belarus to look more to trade with the West.

And he said something key: Cooperation with Europe is “part of a strategic plan.”

Belarus is a small market for Russia’s exports, natural gas and otherwise, but it is a market nonetheless. The two nations share multiple lucrative trade deals that Moscow would prefer not to lose – among others, a $9 billion nuclear plant that Belarus contracted Russia to finance; and Defense Systems, an intergovernmental Belarus-Russia defense firm that will be marketing its Pechora 2M surface-to-air missile system to five countries in the near future.

Belarus, positioned squarely between Russia and Europe, is in a position to draw needed business from both. And, it is in a position to use one as a counterweight to the other when it needs to. If Russia starts applying adverse economic terms, Lukashenko can start making overtures to Europe. Likewise, if Europe wrings its hands too much over the lack of democracy in Belarus, Lukashenko can call on Russia for backup.

Russia has little to fear of Belarus abandoning Russia altogether. The Belarussian economy, with its reliance on Russia for more than half of its import commodities and its natural gas, would not survive without Russian business. Belarus is far from independent. But it is close enough to independence that it can, and will, keep Russian hubris in check.

Gazprom Squirms

June 29, 2009

Gazprom is supposed to be a natural gas monopoly. But a 40% plunge in sales this year suggests that it is starting to feel the pinch from competition.

While Europe’s demand for natural gas will have dropped a mere 5% this year, according to an RIA Novosti analysis by Oleg Mityayev, Gazprom’s export earnings are on track to drop a whopping 38.5%—$40 billion, down from last year’s $65 billion.

“It transpires that, along with the shortfall in earnings, the key Russian gas exporter lost part of its control of the European gas market to competitors,” he wrote.

Those competitors include Norway, Algeria and the Gulf States, who have all been shipping Europeans comparatively much cheaper supplies of liquefied natural gas.

Norway alone will export 100 billion cubic meters this year, according to Jarle Hetland in European Voice, up from 85.7 billion cubic meters in 2007.

An official with the Norwegian Petroleum Directorate said that it could increase exports by 10 billion-15 billion cubic meters more in the year following.

And that was before last week, when Shell discovered an enormous new gas field in the waters off the Norwegian coastal town of Gro. This field contains no less than 100 billion cubic meters—enough that, if pumped, would elevate Norway from being the world’s fifth-largest producer of natural gas to being its third-largest (Russia would still be number one).

Norway benefits from a “spot” pricing model, based on prices that can raise or lower at a moment’s notice. Russia’s prices are bound by long-term contracts, which dictate a price based on where the world’s oil price stood at the time of writing—in effect, tying the price of gas now to the price of oil six or eight months ago.

As most consumers are well aware, oil prices around the world fell significantly during the last eight months. So gas prices based on eight-month-old oil prices will inevitably be somewhat over priced.

“Our consumers, being rational in their approach, have opted for the less expensive choice,” said Medvedev.

In addition to buying cheaper gas from Norway, European consumers have been using up more of the previously accumulated stores of gas they already bought from Gazprom over the years. Use of already-accumulated fuel increased by 65% in the first quarter of 2009. In the meantime, Gazprom’s world-leading supplies have to wait for willing buyers.

Gazprom has more gas than it can sell,” wrote columnist Paul Taylor in the Moscow Times on Monday.

He quotes a Brussels official, who told him (anonymously, of course) “We are enjoying watching the Russians squirm.”

It is doubtful they will be squirming for long, though. The United States’ Energy Information Administration forecasts European demand for natural gas going up another 13.8% (or 3.8 trillion cubic feet) between 2010 and 2020. Norway will not be in any position to fill this need.

Nor, of course, are stores of already-bought gas any long-term strategy. Sooner or later, stores run out. Then they will need to be replenished with yet more gas from Gazprom. The gas giant will be in an ideal position to provide, given what else is expected to take place between 2010 and 2020: the completion of the Nord Stream and South Stream pipelines.

Talking Tough on Natural Gas

June 21, 2009

Russia turned off the natural gas lines to Ukraine last winter in a dispute over gas prices. It may now shut off the spigots, in like fashion, on Belarus.

Last Wednesday, Russia gave Belarus one week to pay $231 million for underpayment on natural gas delivered January-April of this year. Belarus had been paying $100 per cubic meters of gas during those four months, though the contract price was for $250 per cubic meter.

This episode is by no means the first time that Belarus and Russia have crossed words over natural gas. Gazprom threatened Belarus with a gas shutoff back in December 2006,  though some last-minute negotiating stopped the firm from carrying this out.

Whether negotiations would be as successful this time around has far-ranging repercussions, not only for communities in Belarus, but in many communities outside it as well: Most of the 10 billion cubic meters of natural gas that Russia ships into Belarus flows onward to consumers throughout Europe. Not unlike Ukraine’s gas, which thousands of Western Europeans sorely missed during last January’s Russia-Ukraine gas spat.

Belarus will probably propose to meet Russia halfway, according to Belarussian daily Belaruskaya Delovaya Gazeta, which cites Belarussian officials who expect that Belarus will offer to pay $150 per cubic meter.

They are taking a gamble, though, because economically speaking, their country is not in much of any position to bargain. According to the CIA World Factbook, Russia is the source of 59.5% of Belarus’ imports and the destination for 36.5% of its exports. By comparison, only 4.4% of Russia’s imports come from Belarus, and only 5% of its exports go to Belarus. Belarus needs Russia a great deal more than Russia needs Belarus.

Moreover, Russia graciously ended a months-long standoff with Belarus on Belarussian milk imports last week, as reported by RIA Novosti (Russian authorities had banned all Belarussian milk from Russia on June 6 because they deemed Belarus to be noncompliant with new Russian regulations on the export and import of dairy products. Belarus fired back by first dropping out of a new interstate security accord with Russia two weeks ago, and then imposing new customs controls on its border with Russia last Wednesday. Within hours of the border controls taking effect, Russia dropped the ban on milk). As such, Russian officials may feel that they are owed.

On the other hand, Russia is in the middle of a bid to jointly enter the World Trade Organization with Belarus and Kazakhstan. It might be inclined to hold off on any gas wars for the time being, lest it weaken its case for WTO membership by angering European WTO members who won’t like having their gas shut off yet again, not to mention appearing like an overall economic liability prone to volatile trade flows.

In all probability, this one-week ultimatum might really be a means to an entirely different end: upping the ante on construction of the Yamal-2 pipeline, which is expected to bypass all transit countries and thus render gas cutoffs of this kind unnecessary. If Dutch and German investors bankrolling Yamal-2 so much as hear that the status quo of existing pipe lines might mean future shutoffs of needed gas, they’ll probably get much more generous, and much more excited to see Yamal-2 completed very soon.

So Many Invasions, So Little Time

June 21, 2009

Russia’s next war won’t be with Georgia. It’ll be with Georgia’s unruly northern neighbors—Russia’s supposed vassals—the Chechens, Dagestanis, and Ingush.

That’s one plausible explanation for why, as Eurasia Daily Monitor reported, Russia’s defense ministry is simultaneously drawing down the number of troops in South Ossetia and Abkhazia while organizing a massive new army training exercise in the North Caucasus.

There were originally supposed to be 3,700 troops stationed in Abkhazia and South Ossetia. But on Wednesday, May 17, Russia’s top military commander, First Deputy Defense Minister Army-General Nikolai Makarov, announced that this number would be cut. He didn’t give any specifics, only that the stationed force  “will be reduced, since the initially announced number is perhaps too large.”

This is happening in conjunction with Kavkaz-2009, a training operation that is the successor of Kavkaz-2008, which took place last summer. The Kavkaz-2008 operation amassed and equipped 8,000 Russian troops on the Georgian border; they subsequently marched into Abkhazia and South Ossetia, to the dismay of the Georgian military forces who had been hoping to bring the two republics back under Georgian control.

This year’s Kavkaz exercise involves an even larger fighting force of 8,500. Eurasia Daily Monitors’ Pavel Felgenhauer speculates convincingly that Russia is planning on a new round of combat, this time bringing the fighting straight into Georgia proper. Most likely, it will take place in July or August.

Their objectives will be decisive,” he wrote. “Regime change and the forceful demilitarization of Georgia… establishing a secure land corridor linking Russia to its strategically important military base in Armenia… (and) transforming Georgia into a loose confederation of its many semi-independent regions with their regional king-pins, with a weak central government and without any national military-security forces.”

He notes that recently Makarov claimed to be worried that Georgia would be an instigator of new trouble. In the general’s own words, “Georgia is saber-rattling and preparing weapons to resolve its territorial problems by any means.”

Felgenhauer suspects that Makarov is just laying out a justification for an invasion of Georgia that the Russian military is already set on undertaking. Stationing this major military operation in the north Caucasus is the invasion’s planning phase:

If Moscow were indeed anticipating a possible new Georgian attack, it would have been logical to place forces in forward positions to prevent a sudden assault. But if Russia itself is preparing major military action, using the accusations of Georgian aggression as a pretext, it makes practical sense not to spend resources creating large permanent military bases in Abkhazia and South Ossetia. It is much more expedient when the time for action arrives to move combat troops from permanent bases within Russia.

Felgenhauer may be right. But the only problem is that this summer might be an inopportune time. There are too many other invasions that Russia will likely have to initiate. Specifically, into Chechnya, and neighboring Dagestan and Ingushetia.

Never mind that Russian president Medvedev and Chechen governor Ramzan Kadyrov officially celebrated the end of the Chechen war over a month ago. Things are, as the head of a local NGO told Caucasian Knot, “not so mild and beautiful.”

Militia groups keep up the fight. Among their latest sorties, as told by Eurasia Daily Monitor: a shootout that killed a police officer in Shali on May 28; and an explosive device that wounded two police officers on May 30 in Grozny.

Caucasian Knot concurs with the NGO head: “Kadyrov has serious reason to be dissatisfied with the actions of law enforcement agencies.

That’s why Kadyrov gathered his security chiefs together on Wednesday, May 17, and told them “I am giving you two weeks to change the situation. The rebels must be destroyed.

Will the Chechen forces be able to do in two weeks what the far more powerful Russian military was not able to do in 10 years? Probably not. Russian leaders have every reason to be worried. They may reason that Kadyrov will need some extra help. Enter another 8,500 Russian troops.

They might see it as a sound investment, given that havoc in Chechnya seems to have a tendency to spill over into neighboring republics:

  • On June 1, a man was severely wounded by an improvised explosive device in Dagestan’s capital city of Makhachkala. Three law officers were wounded in a shootout in Makachkala the day before.
  • The same day as the shootout, another bomb blew up a car parked at a gas station in Karabulak, Ingushetia, killing the three passengers inside.

It’s natural that what starts in Chechnya might continue in Ingushetia. The Chechens and Ingush share many historical ties: Both are mostly Sunni Muslim, 20.4% of Ingushetians are ethnically Chechen, the two languages are almost mutually intelligible, and both peoples share an antipathy toward their overlord Moscow.

Dagestan is Sufi Muslim, not Sunni. But that hasn’t stopped Chechen rebels from trying to inspire the Dagestanis to rise up against Russia many times since the fall of the Soviet Union. And even before–Shamil, a warlord of Dagestan in the nineteenth century, drew most of his followers from Chechnya.

Russian officials might be open to taking on Georgia some time in the future. But for the time being, any plans to gain new territory might have to be put on hold while they must fight for the territory they already have. Apparently they feel Chechnya is worth expending a decade and hundreds of thousands of lives over. Or maybe they fear that the loss of it would be enough to turn the Russian people against Medvedev-Putin’s United Russia party, which is already losing popular support due to the tanking economy. It doesn’t need an unsuccessful war to sour the public mood even more.

In any case, they’re not going to simply leave the situation to Kadyrov, who is already showing that he can’t quell uprisings alone. They’re going to try to do what they haven’t done in over a decade, i.e., restore order themselves.

Being Powerful Isn’t Enough

June 7, 2009

A penny for your thoughts—actually, make that $500 million.

Frustrated with the scarcity of international support for its war in the Caucasus, the Russian government apparently has sought to buy some. It approached Belarusian president Alexander Lukashenko last month and offered him a $500 million (15.47 billion rubles) loan, to be paid on the condition that he recognize Abkhazia’s and South Ossetia’s independence, according to Belarusian daily Beloruskaya Delovaya Gazeta last week.

But Lukashenko turned out to be less desperate for cash than his Russian counterparts had expected. He stated in no uncertain terms that his stance on the two republics is not for sale.

We do not wish to be sold. We will solve the issue ourselves,” he said.

In the same breath, he reminded the Russian leadership that they’re not the only game in town: He’s a proud member of the European Union’s “Eastern Partnership” program and has no intention of leaving it (a partnership of Ukraine, Azerbaijan, Georgia, Moldova, Armenia, and Belarus with the EU; the six nations get consideration for free-trade pacts, financial aid, help with energy security and visa-free travel to the EU).

And he told Beloruskaya Delovaya Gazeta that if it’s money Belarus is after, he is actually more likely to get it from Europe than from Russia. Russia’s trade laws are too much geared toward enriching Russia and against equitable trade: “There are organized and identified barriers in Russia. And we have to overcome them, to sell a textile, chemical fiber, potassium and other fertilizers. They build, and they protect what build with duties. Yet, we overcome these duties, lowering, of course, the price, but we sell it.

RIA Novosti sees an additional factor at work: natural gas prices.

Relations between Moscow and Minsk have repeatedly been strained in recent years, in part due to Russia charging Belarus more for its gas,” it states.

Whatever the factors, and they are probably many, Lukashenko is now committed to forming new partnerships to supplement his staid one with Moscow. He said this clearly to his Cabinet ministers in a separate meeting:

If things go wrong with Russia, do not bow down to it, do not whine and weep. Seek fortune in a different part of the globe” Lukashenko told them.

Let’s spare the moral outrage over Russia using economic incentives to get backing for its military policies. Such things are far from unheard of in the give-and-take of international relations. The United States knows this well. In the weeks leading up to its war in Iraq, it offered Turkey $6 billion to “cover the costs of damage” if it would participate.

And in December 2002, it arranged a sweetheart deal between Lockheed Martin and the Polish government in which the latter bought 48 F-16 aircraft for $3.5 billion and got a range of offsets totaling $9.7 billion—for a $6 billion profit, i.e., 2.6 times the value of the aircraft themselves. Of course, this deal doesn’t necessarily translate to a bribe for support in the Iraq War. But the deal’s timing, less than three months before Poland’s March 2003 pledge of 200 troops to Iraq, does raise the question. So does this statement by Gregory Filipowicz, a defense industry consultant who helped arrange at least two of Lockheed’s “offset” investment deals: “Lockheed didn’t win the contract, the U.S. government did, with pressure and support coming from the very highest levels.”

France, for its part, tried to use its economic clout to be a counterweight on Iraq. It warned several Eastern European nations that their support for the war placed their candidacies for EU membership in jeopardy.

Note that in all four of these cases, only one ended in the greater economic power getting the support that it wanted. In the other three, said economic power was forced to reckon with other, greater powers in the neighborhood. France was forced to realize that nothing it could offer Eastern Europeans could beat what they might get through close ties with the United States. And the United States had to realize that its money alone could not compensate for the visceral pushback the Turkish leaders could expect from the minority of their constituents who were militant Muslim and anti-American.

Russia, in turn, must take the hint that—in Belarus’ eyes, at least—it’s not as important as it would like to think. Since the 1990s, Russia’s comparatively larger economy and vital energy resources have made it a key player to its lesser neighboring republics, who have accepted its (often very restrictive) economic demands for their survival’s sake. But those who want to more than survive may find that they have demands of their own that don’t jive with Russia’s. And in this case, they’re choosing to exercise them. It’s easier when, to their West, there are alternative wealthy countries with comparatively friendlier, global-trade oriented policies.

Then, Russia has to accept—like France and the United States—that being a powerhouse doesn’t guarantee you’ll get what you want. Other nations have interests of their own, and can be expected to pursue them.