Putin's Wealth

The FT's Catherine Belton and Neil Buckley weigh in with an impressive story that attempts to penetrate the question of Vladimir Putin's personal fortune. This enterprise -- the documentation of what Putin is worth -- will require a long, ongoing and determined effort. But Belton and Buckley try to peal away a layer.

The piece involves Gunvor, the Swiss-based oil trading company that has miraculously (Hey, we're just really good businessmen) grabbed control of a third of Russia's oil exports. One public owner of Gunvor is Gennady Timchenko, a reclusive and long-time buddy of Putin's. The FT links Timchenko to Surgutneftegas, which Russian polical analyst Stanislav Belkovsky has asserted to many of us for over a year partly belongs to Putin. As the FT reports, when Bill Browder -- until a couple years ago Russia's biggest foreign cheerleader as the head of Hermitage Capital Management -- sought to find out who really owned Surgutneftegas, he suddenly could no longer get a visa.

Putin swats away suggestions regarding his personal share of Russia's economic boom. But those who have hung around the former Soviet Union for awhile know that his dismissals are not exceedingly convincing. Personal wealth is a prerequisite to rule in this rough neighborhood; one simply is not taken seriously among former Soviet power brokers unless one has one's own, enormous cash stash. But the hard evidence is almost impossible to obtain; I think the only case of such proof has involved Kazakhstan's Nursultan Nazarbayev, and that emerged only after a perfect storm of bungling.

The trouble at BP: For some time, it has appeared that BP could lose control of its main asset in Russia, its share of TNK-BP. The thinking has been that Gazprom is intent on grabbing control of TNK-BP, by either forcing out BP or its Russian partners. The arrival of tax inspectors at TNK-BP's offices in recent months seemed to buttress this view, given that that's precisely what signaled trouble for Shell before it was forced to hand over control of the gigantic Sakhalin-II natural gas field to Gazprom.

But my former colleagues Guy Chazan and Greg White at The Wall Street Journal have a piece that embraces a contrarian view: that Gazprom isn't the villain; the partners themselves are in a catfight. Igor Yurgens, the adviser to President Dmitri Medvedev, told me the same thing in a phone chat a couple of weeks ago.

Robert Amsterdam does a good job of explaining the probable bigger picture -- perhaps there is infighting; but Gazprom is likely still pulling the strings behind the scenes. This Reuters piece about a phantom company suddenly suing TNK-BP is more evidence of this.

Gazprom's goal -- as expressed by Putin himself -- is to obtain energy assets overseas. In order to land a traditional oil deal in Russia today -- one that involves ownership of actual oil or natural gas reserves -- one has to give up similar assets abroad. BP is trying to work such a deal with Gazprom, and the trouble at TNK-BP seems a piece of that negotiation.

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Meet the New Boss

Much ink has been spilled in recent months parsing the statements of Russia's new president, Dmitri Medvedev, with the aim of deciphering whether he will be more democratic than Vladimir Putin.

The result has been in the eye of the beholder -- those wishing for greater political participation from below have seen a suppressed democrat; others have said that, regardless of Medvedev's own preferences, he will be strait-jacketed by the presence of his predecessor in the prime minister's suite. No one, as far as I can tell, has predicted a traditional, strong Russian leader in the making.

History is replete with examples of seemingly meek gentlemen morphing into full-throated autocrats (among them Pakistan's Zia ul-Haq, Egypt's Hosni Mubarak, and further back, Kaiser Wilhelm II). So such a future cannot be ruled out in Medvedev's case.

But, at risk of reading someone else's mind, I think that Putin did not select his protege with that history bothering him; rather it was precisely because of that precedence that he passed over Medvedev's chief rival, Sergei Ivanov, who as a former spy himself has many friends in Russia's powerful security services. Putin selected Medvedev, a former law professor, for his loyalty, and his belief that Medvedev would be the least troubled by Putin's continued strong role in political affairs.

For fans of Robert Caro's magisterial The Power Broker, Putin wants to be Russia's Robert Moses. He wants to have long service, calling the shots regardless of who sits in the Kremlin.

Do not look for Russia to democratize in any western sense, not for some time in any case. Rather, Medvedev's role will be largely economic -- attempting to broaden the boom away from energy.

On foreign policy, to the degree he has any latitude, he seems likely to speak more softly. But the Gazprom-led economic march into Europe will continue. More worryingly at the moment, do not expect any precipitate withdrawal of the chin-out Russian activities in Georgia.

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Georgia: An Exercise in Image-Building

Six days before Dmitri Medvedev takes over the helm of Russia, Vladimir Putin has put the country on a war-footing with its favorite punching bag, the neighboring nation of Georgia. Putin has shifted troops to the seaside Georgian region of Abkhazia -- just in case, Moscow says, Georgia mounts a military attack against the separatist region.

As readers recall, Georgia and Abkhazia fought a brutal war during the early 1990s that left the two divided.

Igor Yurgens, a brainy and urbane Medvedev adviser who is making the rounds in Washington, London and Paris, told me in a phone chat yesterday that Moscow "will not use military force" in order to absorb Abkhazia, whose citizens already have been given Russian citizenship.

Yet Putin is still in a lather over the West's decision to recognize Kosovo's independence from Serbia, and this most recent flareup of tensions with Georgia seems to me of a different order from the countless previous flareups between the two over the last seventeen years. Putin is sticking his chin out.

NATO ambassadors said yesterday that the move "risks undermining stability." But Yurgens doesn't seem swayed. "We are not going to be pushed and bullied on this question after Kosovo, that's for sure," he told me.

What is Russia's move really all about? Surely it's not concern over Abkhaz security -- a Georgian military attack in order to bring the region back into the Georgian fold verges on ludicrous, mainly since Georgian President Mikheil Saakashvili knows he would lose, either to the Abkhaz themselves or a predictable Russian counter-offensive.

Is Putin simply demonstrating yet again that Russia won't be pushed around? Is he bestowing an image-building conflict on his successor, in the way that Chechnya built up Putin's own nationalist credentials when he took power in 1999 with a popularity rating of 2%? Perhaps Putin simply couldn't resist lest anyone forget what he has done for Russia's feeling of well-being? According to Itar-Tass, he is leaving office with an almost 85% approval rating.

When pressed on its general foreign policy, Russia says the West is mired in Cold War thinking, and that its strategy is straightforward and not political. If that's true, one wonders why Putin been unable to strike win-win deals with Georgia, Ukraine and the Baltics.

The prevailing wisdom is that nothing will change under Medvedev, whom experts think will keep the wheel straight and hope that things turn out as well for him as they did for Putin. Nothing Medvedev has said seems to argue otherwise.

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Book Note

The cover is out of the design shop for the new book, due out this fall.

Presidential Candidates on Russia

With Iraq sucking much of the air out of the room, the former Soviet Union and Russia in particular have gotten little attention from the U.S. presidential candidates. The notable exception has been GOP nominee John McCain, who threatened with Bush-like chest-thumping to expel Russia from the G-8, and sophomorically described Vladimir Putin's eyes as containing a "K a G and a B."

Matt Siegel at The Moscow Times weighs in today with a piece in which he interviews McCain's Russia expert, Stephen Biegun, a vice president at Ford Motor and a veteran of the current President Bush's foreign policy team; and Michael McFaul, who is Barack Obama's Russia specialist and acting director of the Institute for International Studies at Stanford University. It's worth reading, in addition to this discussion by a panel of specialists gathered together by Johnson's List a couple of weeks ago.

Both of the Democratic candidates make the point that it's unnecessary to rile Russia at the moment by insisting on a missile-defense shield in Poland and the Czech Republic, when there is no evidence that the technology works. McCain supports installation of the shield regardless.

Much also is made of Putin's crackdown on rival voices.

None of the candidates has said a word as far as I can tell about a serious, omnibus approach to Eurasian energy security stretching from Central Asia into western Europe. As readers of this blog know, Putin -- and by extension Dmitri Medvedev -- have treated this as a paramount issue, while Washington has been looking the other way to Iraq.

One amusing aspect of the foreign policy debate that has taken place is hoopla among some in the expert community over Obama's reliance on Zbigniew Brzezinski, the Carter-era national security adviser, as a chief foreign policy expert. These experts see Brzezinski as a relic of the Cold War. Perhaps such younger specialists see themselves as more authoritative. But a reading of his writing over the last decade and a half shows Brzezinski proving himself again and again as one of the most realistic and wise hands on the former Soviet Union. He does so again here in the current issue of The Washington Quarterly.

At core is a subjective issue that will not be settled to anyone's satisfaction -- is Russia a normal country, meaning should it be treated the way one would approach, say, France? Brzezinski would be on the reasonable side of those who reply 'no,' at least at the moment. Those for whom the answer seems to be yes seem to include Stephen Kotkin of Princeton and Anatol Lieven of King's College in London.

C. Boyden Gray: Ho-hum on the Caspian

The Bush administration has finally named a senior diplomat to challenge Russia in the pipeline war in Europe. He is C. Boyden Gray, the Bush family friend and GOP partisan lawyer.

As O and G readers have read over the previous months, Russia and the West, particularly the U.S., have been in fierce competition to control the natural gas supply to Europe, and ultimately to influence the continent's politics. Under Vladimir Putin's determined, hands-on leadership, Russia has been far in the lead and, unless something changes fast, will win the contest.

Hence a push within some circles, including Senator Richard Lugar specifically and the Senate Foreign Relations Committee in general, for Washington to get serious by naming a prominent senior statesman to spearhead the U.S. effort. The first nominee was Thomas Pickering, but his personal finances turned out to be a conflict of interest. Then, someone suggested Bush family friend Donald Evans, the former Commerce secretary, but that also went nowhere.

Now the administration has settled on Gray, who was counsel to George H.W. Bush, and named as a recess appointment by President Bush as envoy to the European Union when the Senate refused to confirm him.

Gray comes from similar aristocratic stock as the Bushes -- with inherited wealth, his father was secretary of the Army under Harry S. Truman, and his grandfather was chairman of R.J. Reynolds Tobacco. He graduated from Harvard, and clerked under Supreme Court Chief Justice Earl Warren.

I'm perplexed. Is this the man to general the West's battle against one of the world's consummate players of brutal market economics, namely Vladimir Putin?

To find out whether I'm simply out of the loop, I took a sampling of some of the best-connected readers of O and G. As usual, this sampling will be anonymously sourced:

1. "Doesn't sound like the person we need to bring some coherency to our policy in that part of the world."

2. "(The Senate Foreign Relations Committee) pressed Condi hard to DO SOMETHING, so, [this is] more or less her saying ‘Get this off my plate!’ This was the political compromise. Politics, not grand strategy.”

3. "[Gray's] pluses -- close to the White House, maybe gravitas (but he is a pompous ass), smart guy. Minuses -- intensely partisan, loves to hector the EU, does not know energy, [does not speak] Russian. Bottom line -- not great but could be worse."

4. "Really lousy appointment. Can hardly think of anyone worse."

What's obvious is that no one of significance would accept the appointment. Which is why you have Rice simply adding new duties onto an existing envoy's portfolio. Which is also why the announcement was made in a one-paragraph statement issued with no fanfare.

In other words, this is a dull spearhead.

Showdown in Bucharest

After the spectacle and fireworks of recent years, we're about to see the latest picture of the balance of power in Russia-West relations. The venue will be the NATO summit that begins tomorrow in Bucharest. The issue is whether to advance Georgia and Ukraine's applications to join the military alliance.

The two former Soviet countries want to push forward their status to what’s called MAP – a Membership Action Plan. True membership would come down the road, once they meet the various necessary qualifications. France and Germany oppose moving to a MAP for the two. "France will not give its green light to the entry of Ukraine and Georgia," French Prime Minister Francois Fillon told France-Inter radio. "We are opposed to Georgia and Ukraine's entry because we think that it is not the correct response to the balance of power in Europe, and between Europe and Russia."

Stephen Fidler and Stefan Wagstyl of the Financial Times rang up Georgia's Mikheil Saakashvili, who has a reputation as a hothead, but sounds eminently sensible on this issue. "No matter what some Europeans might be thinking, it's basically giving [Russia] direct veto rights, because that's how they'll perceive it," Saakashvili told the FT.

Saakashvili has that right. Russia’s foreign minister, Sergei Lavrov, suggests that Georgia will use NATO membership to force the breakaway regions of Abkhazia and South Ossetia back into the Georgian fold. This is a red herring – it’s absurd to suggest that NATO would commit troops to crushing Abkhazian or South Ossetian politics. It can't even raise sufficient troops for Afghanistan.

Instead, the issue is simple -- Vladimir Putin wishing to demonstrate Russia’s influence now, and to retain its pressure points on its former colonies in the future.

Saakashvili has done smart political spadework. He has offered power-sharing to Abkhazia, and 500 Georgian troops to Afghanistan. The latter move at minimum could quiet France’s objections.

The ultimate decision will indicate whether Putin has at last succeeded in shifting the balance of power more toward Russia's direction.

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Rights: Creative Commons

The Why's of Pipeline Politics

One thing highly unlikely to change under Dmitri Medvedev is Moscow's hard-line energy policy. Indeed, one sometimes gets the impression that Russia wants the West to build pipelines that go around it.

As evidence, take a look at two disputes: Chevron's long-frustrated efforts to ship more oil through a pipeline that technically was built exclusively for its use; and Gazprom's cutoff of natural gas today to Ukraine.

The California company is nothing if not patient and persistent. It's hard to believe that its travails with Moscow have gone on for almost two decades, but it was 1989 when the California-based company first laid eyes on the Tengiz oilfield. The western Kazakhstan field, right next to the Caspian, contains 10 billion barrels of recoverable oil reserves or more, a considerable volume in an industry that regards a 1-billion-barrel field as a supergiant. The final contract awarding Chevron 50% of the field was signed in 1993.

Since then, it's been one stumbling block after another from Russia, which has seen it in its interest to keep Tengiz bottled up. It took eight years before a long-planned dedicated pipeline from the field -- known as CPC -- finally was running. But, while CPC has been producing 320,000 barrels of oil a day, Chevron has always seen Tengiz as at minimum a 700,000-barrel-a-day field, and more reasonably capable of 1 million barrels a day of exports. As of later this year, Chevron is ready for a mid-range production increase to 540,000 barrels a day.

Only, that would require an expansion of CPC, and Russia has blocked it. As the years have gone by, Transneft, which does the negotiating for the Kremlin, has seemed always to have a new demand. When that's met, there's been another. This time, it seems to want Chevron and its partners to finance another pipeline -- a line connecting the Black and Mediterranean seas overland from Bulgaria to Greece.

This isn't public, but Transneft is currently circulating a compromise. People who have received the Transneft memo tell me that Russia is willing to allow Chevron and its partners to raise exports through a process called "de-bottlenecking," which basically means getting the kinks out. The companies could modernize existing pumping stations, but add no new ones. Exports would rise from the current 28 million tons a year to around 38 million tons; that's far less than the 67 million tons a year that the companies seek.

There's no word on whether Chevron and its partners will accept -- they have 30 days to answer -- but it seems unlikely they'll reject it. But what is the ultimate impact of Russia's intransigence? Well, what happens when water is blocked from one drain? It seeks an outlet elsewhere. So look for a greater push for a trans-Caspian oil pipeline from Central Asia to Baku.

Meanwhile, Russia's Gazprom today cut off some 35% of its natural gas supplies for Ukraine. It says its neighbor owes some $600 million for exports this year. Ukraine Prime Minister Yulia Timoshenko disputes the figures. Given that the accounting books are closed to the public, and are disputed by those to whom they are open, there's no way of knowing for sure.

But, while they talk, both Gazprom and Ukraine say their dispute won't again disrupt supplies to Europe (Europe receives more than 30% of its natural gas from Russia, and most of that flows through Ukraine), as they did in 2006. I wouldn't bet on that. Jitteriness in Europe is Ukraine's best leverage over Gazprom.

That's the point of a current natural gas pipeline competition between Russia and the West. Because of its repeated conflicts with Ukraine and others, Russia wants to build a completely new set of natural gas pipelines to supply Europe. But such deepened reliance on Russia makes Europe and the U.S. nervous. So they have mounted a plan to diversify the European supply by going completely around Russia.

Gazprom's latest cutoff will only redouble the European-U.S. effort.

Thanks to O and G Readers

The Oil and the Glory is No. 15 on Foreign Affairs magazine's Best-Seller List of books on American foreign policy and international affairs. The ranking is based on sales at Barnes & Noble. Thanks for your support.

The Western Side of the Pipeline War: On the Brink of Failure?

Readers: apologies for the week-long absence. I am back from vacation. Now, on to the latest in the pipeline war.

Another domino has fallen in Russia's relentless advance in the European natural gas pipeline war. After Monday's visit to Budapest by Russia's probable new president, Dmitri Medvedev, Hungary's prime minister is expected to sign the deal in Moscow tomorrow.

That's after an astutely run offensive in which Medvedev and his mentor, Vladimir Putin, have already recently signed on Bulgaria, Austria and Serbia, not to mention the prize in the contest -- Turkmenistan. These countries are now Russia's partners in the construction of a huge new natural gas pipeline system, Moscow's aim being to project power into Europe through dominance of the continent's gas market. Mathematically, Moscow's aim would be represented as: Economic power = Political power.

After all this, is there any reasonable case favoring a rival pipeline plan championed by Washington and the European Union? Generally, my own rule of thumb in pipeline politics is that no deal is a deal until Sumitomo's lengths of steel cylinders actually arrive on the spot, and welding begins. And they haven't.

Consider the first battle of this East-West pipeline war -- over the Baku-Ceyhan oil pipeline, connecting the Caspian and Mediterranean seas.

On Oct. 11, 1998, The New York Times committed a stupendous blunder. As readers of The Oil and the Glory know, the newspaper's lead story that Sunday, written by my former colleague Steve Kinzer, declared White House-backed Baku-Ceyhan to be "on the brink of failure." Less than a year later, a deal for the line was a reality.

Kinzer's mistake was in focusing on the big picture and armchair analysts in Washington and London, all of which indeed did make the strategic pipeline look to be dead. What he and these pundits missed were the facts on the ground -- from Central Asia and the Caucasus, it was clear that the pipeline was going to happen. Principally, Azerbaijan President Heydar Aliyev -- who had his hands on 5.4 billion barrels of oil that floundering Big Oil was desperate to develop and sell -- wanted that pipeline. It helped that essential NATO member Turkey wanted the line, too, as did the 800-pound gorilla, the White House. But the main thing was the insistence of Aliyev -- the essential man on the Caspian. Big Oil had to build it, and today, it's mightily glad it did so, since it's delivering about 1 million barrels a day of oil onto the tight world market, entirely free of interference by Moscow.

Yet today Heydar Aliyev is dead, and the Caspian is surrounded by presidents with, to put it kindly, shorter geopolitical stature. Big Oil seems to be absent the big corporate personalities who in the 1990s got in the sauna with one or more of the Caspian presidents, downed some vodka shots, and emerged with rights to huge reservoirs. And the White House lacks the vision to assign a political heavyweight -- in the 1990s, it was Clinton and Al Gore themselves, in addition to National Security Adviser Sandy Berger -- to spearhead a deal.

As for the future, there's no sign of the Bush administration suddenly changing course. The word is that Condi Rice will appoint Bush family friend Donald Evans to general the western battle. But Evans lacks the star power for instant success, and the longevity -- he will be out once the next administration takes power next year -- to manage through sheer effort.

Big Oil has been slow to snag a natural gas deal in Turkmenistan that would jump-start the western-backed Nabucco pipeline. And, short of a trip to Camp David, Turkmen President Gurbanguly Berdymukhamedov isn't suddenly going to grow a spine.

Meanwhile, Putin and his protege Medevedev are running Moscow's battle plan personally.

So, at the risk of repeating the Kinzer Blunder, Nabucco does appear to be on the brink of failure.

Of course, lightning could always strike.

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Try That in Russia, Exxon

One lesson of recent years in Big Oil is that while most of the industry zigs, Exxon zags.

So it was last week, as the company won attention for court victories that froze some $12 billion in Venezuelan state assets abroad. This involves its dispute with Hugo Chavez over his demand for control over oilfields in the country. Exxon also got a judge to seize hundreds of millions of dollars due to Venezuela in a bond deal.

Is such confrontation wise corporate strategy? The rest of the industry – sitting conspicuously on the sidelines as spectators in this rumble – wants to know, too.

Some analysts have read the news as a warning to all the petro-nationalists out there that Exxon at least won’t be pushed around. And if Exxon is successful, the others might follow suit.

One sign that Exxon’s muscle-flexing is a limited tactic, and not a strategy, however, is its experience with its giant natural gas project in Russia, called Sakhalin-I.

Over the last year, the other big companies working in Russia – Shell, Total, BP – have all caved in to Russia’s demand for a controlling share of their projects. (In Venezuela, too, the other companies involved – Chevron, BP, France’s Total and Norway's Statoil – went along with the state demands and are still operating there)

So far Exxon alone hasn’t been forced to compromise. Specifically, the company is insisting on allegiance to an entirely reasonable contractual clause allowing it to sell Sakhalin’s gas to whomever it wants. It has seemed to want that customer to be China.

Russia’s behemoth Gazprom, however, has other ideas – it wants the gas. And according to a report by Reuters’ Denis Dyomkin, Gazprom at least believes it will get its way. The article quotes Gazprom's deputy head, Alexander Ananenkov, as reporting to Russia’s next president – Gazprom Chairman Dmitri Medvedev – that he expects to sign the deal with Exxon in April or May. In case there was any doubt previously, that means Exxon would be going head-to-head with the Kremlin.

Exxon knows the history of companies going to court to get their way in the former Soviet Union – despite “victories,” they mainly end up empty handed. The FSU states simply don’t honor the courts’ rulings, and leave it to the companies to figure out what to do next.

The distinction is that Russia is not Venezuela, and Vladimir Putin (and probably Medvedev) is not Hugo Chavez. Indeed, Putin and Exxon are fairly similar – both have been disagreeable about being pushed around.

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Guest Column: How the Pipeline War Will Turn Out

Hi, my name is Paul Sampson, a London-based journalist for the newsletter Nefte-Compass who shares Steve's fascination with energy-related intrigue in Russia and Central Asia. When Steve asked me to contribute to his blog, I agreed partly because I really enjoyed his book, which ranks alongside those two oil greats, The Prize and The Seven Sisters, and partly because I’ve never blogged before. This is my first effort, so readers please go easy and save your ammo (or polonium) for later. A quick disclaimer: These views are strictly my own and no-one else's.

As hard as it tries, the European Union and the United States are no match for the 800-pound Russian gorilla when it comes to pipeline politics. Russia’s natural gas colossus Gazprom and its masters in the Kremlin have so far successfully countered the EU- and U.S.-backed Nabucco natural gas pipeline. But can they actually stop Nabucco? My hunch is no. In the end, both Nabucco and the Russian-backed Nord Stream and South Stream pipelines will be built. And the EU and Russia will find a modus vivendi that keeps Gazprom powerful, but lets new suppliers such as Azerbaijan join the fray.

This is the way it has to be. After all, neither side wants a new cold war over gas supplies, do they? If Brussels and Moscow agree to work more closely on energy, then I see no reason why Washington wouldn’t go along.

It’s been an excellent 2008 so far for Gazprom and its chairman, Russia’s president-in-waiting, Dmitry Medvedev. Medvedev and his mentor Vladimir Putin signed a deal in Bulgaria giving Gazprom a 50% stake in the crucial European hub for South Stream, which Gazprom and Italy’s Eni plan to build under the Black Sea. Then Serbia's Boris Tadic gave Gazprom majority ownership of a trunk line into South Stream, plus a 51% interest in Serbia’s state oil company, NIS. Finally, the Russians won joint ownership of Central Europe's largest gas marketing hub at Baumgarten, the terminus for the West’s proposed Nabucco pipeline. According to Nefte Compass, Gazprom now has its sights set on a gas deal in Hungary.

These deals reveal the extent to which energy and politics are intertwined in Russia. Take the Serbian deal, which was signed ten days or so before today's second round of presidential elections in the country pitting pro-European incumbent Boris Tadic against the nationalist Tomislav Nikolic. That Tadic was in Moscow to sign the pact with Gazprom suggests that it was all designed to improve his chances of re-election. Crude tactics indeed.

In general, the deals help to polish Medvedev’s image as he campaigns to inherit Putin’s mantle next month. Having kept a low profile over the past years, Medvedev is now taking some of the limelight and portraying himself as a strong and credible leader. How much freedom he will have when he ascends to the throne and to what extent Putin and the siloviki will control him is a subject for another blog.

Horelma: Here is a quick addition to Steve’s blogs on the mysterious Kazakh buyer of the $100 million London property. My interest isn't who the real owner is – let’s face it, $100 million isn’t that much for your average Kazakh billionaire – but why anyone would pay so much for such a bizarre place on a busy street in north London. I drive down Bishops' Avenue perhaps once a month, and it never fails to astound me how over-the-top the houses on it are. Having lived for several years in Dubai, I've seen my fair share of post-modern eye-sores. But Bishops Avenue has to take the biscuit.

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$100 Oil and The Centuries-Old Art of the Deal in Russia

One side story about hundred-dollar oil is how the Big Oil companies are being forced to scramble, grovel and just plain grit their teeth in sorry deals.

Take Russia. Russians are among the most amazing negotiators in the world. Century after century, decade after decade, they somehow get westerners to fall over themselves to trade the store for access to the Russian market.

In the 19th century, Immanuel Nobel, the ingenious father of dynamite inventor Alfred Nobel, moved his entire family to Russia to try to sell his know-how in the laboratory to successive czars. He went home poor. Five decades later, one of his grandsons – the oilman Emanuel Nobel – got rich, but then had to flee the Bolshevik revolution disguised as a peasant.

In the 1920 and 1930s, American industrialists literally built the spine of the Soviet economy – car factories, steel plants, dams – and as part of the deal gave the Soviets the technology needed to do so. Suffice it to say that Stalin then asked the foreigners to leave, and the Soviets started doing the work themselves.

So it is in Russian energy today. During the 1990s, western companies got access to some of Russia’s most technologically difficult-to-develop oil and natural gas fields. Now that they have delivered the know-how, majority ownership in most of those deals has reverted back to state-controlled companies (it didn't help that the companies appear to have gotten sweetheart terms), and no new such access being granted.

And from there, a clear Russian energy policy has emerged: foreign oil companies can have access to Russian energy – but only if it’s part of a swap of assets elsewhere in the world. That is, you can buy a quarter of my house if I can own part of yours.

On its face, that sounds fair, especially to the Russian side, which as usual is negotiating shrewdly. But what about the western side -- what are they giving and what are they receiving for that access?

Which leads me to two German deals for access to a supergiant natural gas field called Yuzhno Russkoye, or South Russian. This northwest Siberian field contains the equivalent of 5.1 billion barrels of oil.

Last month, Germany’s BASF won 25% minus one share of the field. In exchange, Gazprom increased its share in Wingas, a hugely lucrative German utility, from 35% to 50% minus one share.

BASF's access to a quarter of Yuzhno Russkoye arguably wouldn’t be a bad deal if the company could “book” the reserves; that’s how Wall Street values oil companies – how many barrels of oil equivalent they actually own. If BASF gets 1.25 billion barrels of oil equivalent, one might be able to make a case for trading hard assets such as a 2,000-kilometer-long European natural gas pipeline network and an extensive natural gas and fiber optic marketing business.

Whether BASF is booking those reserves hasn’t been discussed publicly as yet. But one has to wonder after Gazprom's last couple of deals – with France’s Total and Norway’s Statoil in Russia’s supergiant Shtokman natural gas field. Gazprom has kept all the reserves to itself. But perhaps the Germans pulled succeeded where the French and the Norwegians failed.

Meanwhile, German’s largest utility, E.ON, is also negotiating for a stake of 25% minus one share in Yuzhno Ruskoye (Gazprom will own the remaining 50% plus two shares). E.ON is talking about a payment of 1.2 billion euros, plus just under a 50% stake in the German company’s Hungarian natural gas trading and storage units, and other unspecified assets. One possibility under discussion is a piece of E.ON’s gas-to-power plants in Great Britain. Again, there's no public discussion of booking reserves.

As oilmen friends tell me in email exchanges, the Germans must know what they are doing. But I still wonder -- even if one can book reserves, one is essentially exchanging an unguaranteed cash flow -- the sale of natural gas -- for hard assets. To me, both deals have the ring of selling one’s seed corn for cash.

Yet, if the past is any teacher, expect more such deals.

That's how oilmen are having to deal with the world of hundred-dollar oil.

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Rights: Creative Commons

The Putin

Does Putinism require Vladimir Putin?

Putin announced today that he’s prepared to stand beside Dmitri Medvedev as his prime minister. He also says there’s no plan to transfer presidential powers to the prime minister's office.

I personally think that Putin will exercise much more power than any Russian prime minister in the post-Soviet period after the March elections. After all, he only said that there are no plans to change the law – Medvedev needn’t formally change any rules to allow his mentor to govern, for instance, the ultra-powerful military and intelligence services.

Yet I recall a conversation on my last trip to Moscow this year with a super-smart Russian analyst who predicted that Putin would step aside – there would simply be a shifting of seats as in musical chairs.

So let’s take Putin at his word and consider whether Putin is a requirement for the current system to go on.

The prevailing wisdom is yes. Putin failed to build up Russian stable institutions of governance during his almost eight-year tenure, but instead erected power around himself, the argument goes. In an editorial Saturday, my former newspaper, The Wall Street Journal, wrote, “Putinism hangs on a single man.”

That's an enormous categorical assumption. And I think it's wrong. Putin did build up an institution, and it’s hiding in plain sight: The people all around him, in public and behind closed doors, who run the Kremlin, Gazprom, Rosneft and the rest of the economy are that institution. Heirs to the fortunes wrested in part from Russia's powerful oligarchs of the 1990s, they aren't going anywhere.

Putin has just bequeathed one of the most powerful parts of that institution to Medvedev, and that's his political brain trust. Russia's Vedomosti newspaper says Medvedev's presidential campaign will be run by Putin chief of staff Sergei Sobyanin and possibly also his main strategist, prince of darkness Vladislav Surkov.

Yes, I think my Moscow friend had a point. Though it can seem otherwise, what's been built up in Russia is bigger than one man. Still, Putin will be around a long time. From close in, he can ensure that his successor is getting along well. He can reassure the many people counting on this institution for their fortunes. He can continue to help balance these forces. And he can step in forcefully should Medvedev unexpectedly falter.

Many people call Putin’s practices “Putinism.” So what shall we denote the institutional proper noun for those who practice Putinism?

I suggest The Putin.

Photo: asphaltasphalt
Rights: Creative Commons

Russia's New Prime Minister

As we've discussed on this blog for many months, the likeliest Russian power scenario going forward is that Vladimir Putin steps from the presidency into the prime minister's chair. Today, Putin's chosen successor, Dmitri Medvedev, made that scenario official.

There's some commentary out there that this is Putin's way of assuring a platform to return as president. But I think we've got the power structure as it will probably play out: Medvedev as president and Putin as prime minister, a position whose powers will be increased by the rubber-stamp parliament.

Here's why -- as soon as a person steps into the president's chair, the clock begins ticking. He's limited to two, four-year terms, and Putin is on record as opposing any change in that rule. The prime minister has no such limits, so Putin could remain Russia's paramount leader for life if he so wishes. And he -- and the Kremlin-bound clans that control Russia underneath him -- seem to so wish.

For both Russia and the world, this means the same current course: in Russia itself, a state-led economic boom with limited political freedoms; and outside the country, a Gazprom-led attempt to assert Russian influence.

Putin Lays Out Russia's Future: The Gazprom-KGB State

For years, scholars, think tank commentators and journalists have been fond of a cute phrase to describe Russia: The KGB State. That's because of Vladimir Putin's KGB past, and the men who generally surround him.

But Putin's clever choice today of successor shows how he sees his country, and that's a hybrid -- what one might call the Gazprom-KGB State.

The levers of power will be distributed like this: Dmitri Medvedev keeps the money that's fueled Russia's roar back onto the world stage rolling in; and Putin keeps his hand in decision-making through his power base -- the FSB, the successor agency to the Soviet-era KGB.

Medvedev, who unless someone mightier than Putin intervenes will be Russia's next president come March, is chairman of the Russian natural gas giant. He's also of course Putin's deputy prime minister, but it's the Gazprom title that has demonstrated Putin's confidence in his 42-year-old protege.

Gazprom is the spearpoint of Russia's foreign policy. Through its control of natural gas pipelines, Gazprom is the instrument of Russian influence in its former colonies in Central Asia, the Caucasus, the Slavic states of Belarus and Ukraine, and even in the Baltics. And Gazprom is also Russia's lever of influence in Europe, where the company supplies 30% of the natural gas. That influence is likely to grow with the construction of new pipelines from Russia to Europe.

But what Medvedev doesn't have is links to the FSB, or any of the other security services. That means he's absolutely no threat to Putin's aspirations of holding on to power. If Putin had selected Medvedev's main rival, former KGB officer Sergei Ivanov, it would have sent a different message.

Last week, Putin proved that he's the country's most popular political figure in a massive sweep of parliamentary elections. Now he's moved to consolidate his position with the appointment of a milquetoast successor who seems likely to gladly stay on the economic side of power, and leave the rest to his patron.

We all assume that Putin plans not just to exert continued influence, but paramount power. Expect to hear more on that front.

A Collective Czar

Vladimir Putin's announcement today that he is running for Parliament solves the main question that's vexed the Kremlinology guessing game: How would he retain influence after leaving office in March given that any new president was bound sooner or later to be territorial and jealous of his own prerogatives?

The answer: Putin has shifted that debate over to the Duma, which now will find it to its enormous self-interest to change Russian law to a strong parliamentary system. With Putin as its leader, the United Russian party will annoint itself the collective czar. Here is the AP story on Putin's announcement.

Who will be president? Right now, Putin is trying out Viktor Zubkov, the prime minister he named last month. But it almost doesn't matter -- Putin will select whoever he thinks will be easier to get along with as prime minister. Sergei Ivanov or Dmitri Medvedev are still in the running for that spot.

Putin: Final Piece in Place

President Putin has all the pieces in place now to remain Russia's ruler in name or fact as long as he wishes. But does he want to? Given Putin's habitual caution, the rush to figure out his intentions is almost wholly in vain. We probably won't know for another four years.

Putin's selection of a retirement-age loyalist as prime minister seems to be the last in a three-prong strategy. It fits into the article of faith among both Russian and foreign analysts that Putin intends to rule over Russia in one way or another for the foreseeable future. Under an eminently reasonable scenario, Putin would return to eight more years of power in 2012, when he will be just 58. He could even do another round, his supporters say, returning for a third set of terms in 2024.

Here has been the puzzle: If Putin adheres to his pledge to honor the constitution and step down following the March elections -- which he almost certainly will do -- how can he be sure that his successor, after four years of the heady experience of governing a nuclear-armed petro-power, will surrender power?

Another bit of entirely reasonable logic heard in Moscow is that Putin isn't necessarily seeking to rule the country as long as he wishes. Instead, he simply wants to give his potential rivals the impression that he wants to in order to retain the option come 2012; following this argument further, Putin also would want to keep the sharks at bay and protect his personal and business interests over the coming years.

As recently as yesterday morning, the betting money was that fellow former spy Sergei Ivanov, one of his first deputy prime ministers, had the job of succeeding Putin in the bag. But what makes sense now is that Ivanov is prong one of Putin's strategy.

The Ivanov prong meets the prerequisite of loyalty to Putin, and the probabily of no or few changes in Russian foreign and domestic policy. So he is still in the running.

The second prong is Dmitri Medvedev, who as another first deputy prime minister is another presumed Putin heir. Medvedev has also displayed unflagging loyalty to Putin, and would be his choice if he wants a more liberal Kremlin. He also remains in the race.

The trouble with both Ivanov and Medvedev, however, is that both are relatively young. They are 54 and 42, respectively.

Loyalists so far to a fault, can they truly be trusted to step down four years from now should Putin wish them to?

Hence prong three. Russia's new prime minister, Viktor Zubkov, turns 66 on Saturday. He will be 70 in 2012, not at all a young age in Russia. Such a person would arguably be more amenable to retirement, or even if he did not wish to surrender power might simply not be healthy enough to continue.

When Putin selects his successor, if it is prong three, he will be asserting a cautious strategy.

Yet that still will not answer the ultimate question -- does he intend to return to power or not? He will not tip his hand until he needs to, meaning at this time four years hence.