A Murder in Russia

Today's murder of Stanislav Markelov is not proof in isolation of anything apart from that Russia continues to be a perilous place for those who challenge officialdom. But given who the lawyer was representing, and the string of high-profile murders in the country, the killing demonstrates yet again the atmosphere of impunity for assassins created by Prime Minister Vladimir Putin.

Markelov was representing the family of an 18-year-old Chechen girl, Elza Kungayeva, who was brutally raped and murdered by an Army colonel named Yuri Budanov. Budanov's crimes were unforgettably described by writer Anna Politkovskaya, who herself was murdered a little over two years ago in Moscow. In large part because of Politkovskaya's crusading journalism, Budanov finally was imprisoned for 10 years.

In Russia, it's common for prisoners to be released after serving half their term on good behavior, and last Thursday a court let Budanov go.

The 34-year-old Markelov had vigorously opposed Budanov's early release. Today, he did so again in a news conference near the Kremlin in Moscow. Moments later, a man wearing a ski mask shot him dead in broad daylight, using a pistol fitted with a silencer. The killer also murdered Anastasia Baburova, a free-lance journalist for Novaya Gazeta who was accompanying Markelov. The killer then vanished into a subway station.

What sets Russia apart from fellow members of the so-called Group of Eight nations is just such murders, organized and carried out without consequence. If you cross an invisible line in Russia, you are subject to the ultimate sacrifice -- death -- and the chances are whoever ordered it will go unpunished. Politkovskaya is one example. Another whom I researched for Putin's Labyrinth is Paul Klebnikov, the editor of Forbes Russia, who while being a fervent Putin admirer, clearly crossed someone else's line of tolerance, and was murdered in 2004.

Murders occur in all countries, but not with the frequency that they do in Russia, and not with impunity for the organizers.

Clowns to the Left of Me, Jokers to the Right

Why has Russia's natural gas dispute with Ukraine stretched out so long?

A key reason is the subtext from Russia's side: an effort once and for all to tar and discredit much-detested neighbors who have become darlings of the West, and end the West's intrusion into Moscow's claimed sphere of influence.

Despite some self-inflicted damage, the gambit so far has been relatively successful.

In the fall, Russian Prime Minister Vladimir Putin and his junior partner, President Dmitry Medvedev, managed through skillful public relations to turn their full-scale invasion of Georgia into a reflection on the sanity of Georgian President Mikhail Saakashvili. It was one of those kernel-of-truth cases -- Saakashvili in fact is a rash, immature leader (and may indeed have initiated the original fighting in South Ossetia that preceded Russia's invasion of Georgia proper).
Saakashvili's personality flaws hardly justified Russia's seizure of the Georgian port of Poti and the bombing of the Baku-Ceyhan pipeline route, and Putin and Medvedev suffered black eyes. Yet Saakashvili's image in the West and at home was severely -- and perhaps permanently -- damaged. (And, not incidentally, the U.S. was revealed to be largely impotent in what it had hubristically claimed as a pro-Western new region.)

Now, Putin and Medvedev have in their sights another primary local irritant -- Ukraine and its independent-minded president, Viktor Yushchenko. In the latest part of this effort, the Russian leaders are trying to recruit Europe into a strategy of reducing their new dispute with Ukraine to this: Ukraine is a country-size thief.

On its face, what we have is a simple pricing dispute. Ukraine wants to pay close to today's price for its 2009 natural gas supplies, or about $180-$235 per 1,000 cubic meters of gas. But Russia wants Ukraine to agree to what its other European customers are paying based on long-ago negotiated contracts, or about $400 per 1,000 cubic meters.

We've previously discussed the role of personal gain in confounding a settlement to what elsewhere is usually a utility dispute. The two sides seem no nearer to resolving the central pricing disagreement, but increasingly cold Europe has stepped in to at least restore the flow of gas.

Here's where the charges of thievery enter. Russia says it won't restart the general flow of gas because Ukraine is siphoning off volumes for itself; Ukraine denies the accusation, and says it's simply isolating a bit of the gas -- so-called technical gas -- in order to get pressure into the line. Today, Putin and Medvedev met with Europeans in Moscow in an ostensible attempt to break the logjam, but failed.

Here's what Russia proposes: a consortium of European countries will "buy" the technical gas, and thereby "share the risk" with Russia. Italy, Russia's usual partner in its energy-based geopolitical strategies, is the sole foreign recruit thus far.

What would be the outcome of such a consortium if it does fully materialize? It would give de facto international validation to Russia's claim that Ukraine is so untrustworthy that a European consortium is required to mitigate the risk of doing business with it.

It would come again with some damage -- the dispute will go on until the two sides agree on a price, and meanwhile Putin, Medvedev Gazprom and Russia itself would look unreliable.

Yet, strategically Russia would also bring disrepute on a neighbor that until now has enjoyed an irritatingly good image outside the region.

If any of Europe's most important nations were still seriously considering either Ukraine or Georgia as potential members of NATO, these last few months will have made them less open to the idea.

Not Everyone is Losing Money

Pure traders are the only ones left standing in the crude oil speculation business now that oil prices have collapsed, sending hedge funds, college endowments and pension funds scampering. And these traders have found a new way to make solid double-digit profits. It's called betting on the contango.

What's contango? It's when the market as a whole bets that oil prices are going to steadily rise well into the future, and traders react by buying two contracts on the New York Mercantile Exchange -- say, one for the purchase of oil next month at $41.24 a barrel, and a second contract to sell it in February 2010 for the going rate of $60.22 a barrel. For those lacking a calculator, that's a cool 46% profit.

Here's the catch -- you've got to have some place to store the crude, and such places are so filled up that traders are now renting 2-million-barrel supertankers to store their contango bets.

I write about this as part of a story just posted on-line at Business Week.

Ukraine and Russia: The Role of a Middleman

Russia has prickly relations with several of its neighbors, but all pale in comparison with its friction with Georgia and Ukraine. Last August, the former resulted in a full-fledged war, and pessimism about the security of the U.S.-backed oil and natural gas corridor connecting the Caspian Sea with the West. Now, the latter -- Russia's long antagonism with Ukraine -- is provoking a similar recalibration of energy security, this time about natural gas supplies to Europe.

I have pointed out the pricing dispute that's raised the temperature between Russia and Ukraine. But Ed Chow, whose activities in Russia on behalf of Chevron in the 1990s I recounted in The Oil and the Glory, thinks something more is afoot. Namely, Chow thinks the issue separating the sides is at least partly who personally stands to gain from a new deal.

Chow and Jon Elkind, another veteran of the 1990s diplomatic conflict with Russia over the Caspian as a member of Bill Clinton's National Security Council, detail the underside of the Russia-Ukraine natural gas game in the latest issue of the Washington Quarterly.

The article notes the role of an opaque middleman company called RosUkrEnergo in the deal. We have discussed RosUkrEnergo at O&G; The Wall Street Journal's Glenn Simpson has done the best ground-breaking work on the company. Half-owned by Gazprom and two Ukrainian businessmen, RosUkrEnergo is the equivalent of a maitre d' who performs no principal role but controls access to the best tables. RosUkrEnergo owns no gas, or pipelines, yet earns a flat 20% take off the top of all the gas sold by Russia to Ukraine.

RosUkrEnergo takes that gas, and sells it. That amounted to a staggering $4.3 billion in proceeds to RosUkrEnergo in 2007, according to Chow and Elkind. How that money is divided has never been explained.

In a phone conversation, Chow notes that Gazprom and Ukraine at one point were just $15 apart in their negotiations -- Russia was demanding $250 per 1,000 cubic meters of natural gas this year, while Ukraine was offering $235. "If that was the only difference, why couldn't they make a deal?" Chow asks. "I suspect the difference was the role that RosUkrEnergo would play."

Chow and Elkind call RosUkrEnergo "shady." "The company’s role is a political bone of contention in that an entity with no assets, no track record, and no transparency was placed at the very center of the Ukrainian gas economy," they write.

Russia-Ukraine: A Market Dispute

Are the Russians and Ukrainians simply fated to go to the mat every year about this time, causing grief to their neighbors? Or is something else at work in their antagonism?

The philosophical answer is that, while it's hard to imagine these two former Soviet states living as friendly neighbors any time soon, the current dispute is a separate matter.

It can be reduced to a difference of outlook: Do you expect oil prices to rise to $60 a barrel this year, or to drop back down to between $30 and $40 a barrel? (Oil has surged in the last two trading days to about $46 a barrel because of the fighting in Gaza.)

In Europe, natural gas prices follow oil, and Russia is clearly of the consensus view that oil will average somewhere in the neighborhood of $60 a barrel this year. That corresponds to a natural gas price of about $350 per 1,000 cubic meters. (Here's the loose formula to get the natural gas price: divide the oil price by six, then multiply the result by 35.3).

Hence the claim by Russian Prime Minister Vladimir Putin that the demand by Gazprom, Russia's natural gas behemoth, for $250 per 1,000 cubic meters from Ukraine this year amounts to a "humanitarian gesture."

Ukraine, however, has embraced oil's most recent price band. It's arguing that oil will average $40 a barrel this year, or $235 per 1,000 cubic meters of natural gas. That's precisely what Ukraine has counter-offered to Gazprom.

(As a separate matter, if Europe truly is paying $500 per 1,000 cubic meters, as Gazprom has claimed, it is seriously overpaying. That corresponds to $84-a-barrel oil.)

(Another baffling issue is Russia's claim that it's owed a $600 million late fee on top of the $1.5 billion natural gas bill that Ukraine already has paid. That's a 40% penalty, and Ukraine is only a month late.)

The subtext is the nature of the two countries' contract, which is based not on the spot price of natural gas, or a forecast, but a formula that lags current prices by eight months. In other words, when Gazprom is retorting that it in fact could charge Ukraine $418 per 1,000 cubic meters if it so wishes, that's Russia's estimate of the price of natural gas last May.

In the end, look for the two countries to settle some place in the middle, say at $50 a barrel oil, which would entitle Gazprom to charge $294 per 1,000 cubic meters. But don't be surprised if Ukraine bends a bit more toward Russia's demand than a down-the-middle compromise; indeed, I wouldn't be surprised if Ukraine agrees to Gazprom's offer of $250 per 1,000 cubic meters.

The dispute has more bite than previous rows because of the economic times. Ukraine is in an economic fix, as is Gazprom.

Regarding the latter, Gazprom's troubles go far. It doesn't produce much of the gas it ships to Europe, but markets gas it buys mostly from the Central Asian state of Turkmenistan. In order to obtain long-term rights to that gas, and not have it siphoned off by a covetous West, Gazprom has agreed to pay the Turkmen about $340 per 1,000 cubic meters.

Given market prices, that means that Gazprom might be forced to sell to Europe this year at a loss, unless it unilaterally cuts the price it pays to the Turkmen, who in that case could respond by withholding supplies.

"Gazprom is in a tough spot," says Kenneth Medlock, a natural gas expert at Rice University's James A Baker Institute for Public Policy, who helped me with the calculations for this article. If Gazprom loses the Turkmen supplies, Medlock said, "they are going to have trouble meeting their contractual commitments" to Europe.