Russian History and the Passing of the Utility of Pipeline Politics

The Harvard historian Richard Pipes has triggered an interesting debate on the Internet with a long piece that leads the Weekend section of The Wall Street Journal. The piece lays out familiar Russian history -- how and why Moscow is so vexed by independent-minded neighbors; why its people go along with political repression; and its dogged pursuit of a status as "a force to be reckoned with, a country to be respected and feared." Pipes goes on to suggest policy prescriptions, including a recognition that Russians are likely to react badly to a feeling of encirclement, and a renewed attempt to persuade Moscow to adopt western political and economic values.

The piece is important not because it's perfectly presented -- I'm puzzled for example by the continued notion that somehow Russians are going to become like the West -- but because we get someone of Pipes' stature laying out once again the historical record. I myself hear dismay from Russia watchers get up in arms over the suggestion that some recent events there -- the impunity of murderers, and the public acquiescence to it all -- follow an arc going back several centuries. To them, I suggest a fresh read of Pipes. Below, I'm posting a video from a speech I just delivered at the World Affairs Council in San Francisco, arguing that time has perhaps passed by the utility of current U.S. oil policy on Russia, specifically that of pipeline politics.



At the American Conservative, Daniel Larison argues inaccurately that Pipes is merely advocating a continuation of two-decade-long U.S. policy. For instance, Larison takes Pipes to task for failing to insist on a break in NATO expansion, when the piece in fact suggests the opposite.

At the Squirrel's Nest, we get an attempt at the long view from Terry McGarty, a Massachusetts startup investor and one of Pipes' former Cambridge colleagues. McGarty quotes a well-known criticism of NATO expansion by George Kennan, one of the best diplomats the U.S. ever turned out. Kennan asserted that, among other things, NATO expansion would restore the atmosphere of the Cold War, and impale Duma ratification of Start II. Today, no one can project backward with certainty how events would have unfolded absent NATO expansion, but, in the context of Russian history, as Pipes well lays out in his piece, even in the most optimistic of circumstances there would have been at minimum the danger of Moscow creeping back into the vacuum of its former Eastern European satellites. And in a more pessimistic turn of events, eastern and central Europe could have been in similar circumstances to Ukraine and Georgia today, confronting an angry, assertive Russia at their border. Finally, Kennan wholly misjudges the Russian position on nuclear arms. Russian politics could change down the road, but since Mikhail Gorbachev the country has favored almost any nuclear arms control deal; none of the serious nuclear arms accords discussed in the post-Soviet era was ever imperiled as far as Moscow's signature was concerned. Kennan had that backwards -- they were upended in the U.S., by the Bush administration.

Russia's Achilles Heel

Over the last couple of days, the post-mortems have begun to roll in from big-thinkers on Russia. The prescriptions advised in order to bring about status-quo ante in Georgia -- ejecting Russia from G-8, distancing Moscow further from global trade treaties -- add up to a consensus of "Oh Dear, Oh My." Non-membership in G-8 and WTO no doubt is provoking snickers in the Kremlin.

Contrary to these views, however, the West and the U.S. in particular do have one very real lever, one that Karl Rove might recognize -- Russia's very strength.

Russia's Achilles Heel is its petro-power. It's a message that both senators Barack Obama (and his running mate Joe Biden) and John McCain should keep in mind as they prepare to deal with Russia.

For more than a year, O and G has been describing progressive U.S. setbacks in what I've called the Pipeline War, the struggle with Russia for energy-driven political influence in Europe. We've also been writing here during that period about the growing tensions between Russia and Georgia.

In a nutshell, Russia understands that power in a large swath of the world -- Europe, the former Soviet Union and parts of the Middle East -- can be exerted from control of oil and natural gas pipelines. That's how the U.S. has inserted its power into Russia's backyard -- through the Baku-Ceyhan oil pipeline that crosses the country of today's conflict, Georgia. Now, Vladimir Putin intends to build on Russia's restored power by erecting two gigantic new natural gas pipelines into Europe, which already relies on Russia for almost a third of its gas.

Here's where the Achilles Heel comes in. One of these pipelines -- South Stream -- would pass through nations like Bulgaria, Hungary, Serbia and Austria. These are countries in which the U.S. has influence.

If the U.S. wants Russia's attention, persuade these countries and others -- for instance Germany, the main European partner on the second pipeline, called Nord Stream -- to freeze their support for the lines until it's satisfied that Georgia's sovereignty is no longer compromised.

Energy, and specifically Nord Stream and South Stream, are a Russian strength, and a genuine vulnerability.

Georgia, Russia and Rethinking China

Years after his humiliating knockout by Muhammad Ali, the boxer George Foreman returned to the ring to a string of triumphs and the world championship despite being in his 40s. It was more marketing than sport. When asked about his choice of opponents, Foreman famously remarked that he didn't fight anyone his mama couldn't whup.

That's one way of looking at Russia's effective annexation of South Ossetia and Abkhazia over the last 24 hours. With apologies to my Georgian friends, Georgia simply isn't a serious military actor; with the exception of the Chechens and Armenians, none of the Caucasus peoples is (which is why the Abkhazians and Ossetians are relying on Russia to fight their battles).

Where Foreman was smart is that he never got back in the ring with Ali. Fifteen years after its near dismemberment by Russian-backed forces, however, Georgia wasn't so wise. It doesn't mean a return to 1993, which ushered in a literally dark decade, when Georgia often lacked even electricity to light itself. But Russia's military demonstration does show that Georgia isn't an independent actor at the moment.

Vladimir Putin (for it's clear now who is truly in charge in Moscow) has also shown that Russia doesn't intend for Georgia to join NATO. And NATO has shown that it doesn't have the gumption or inclination to stand up to Russia.

The question for the U.S. and the West as a whole is fundamental, and goes back to the original objective of the Western energy corridor: As O and G readers know, Washington's rationale was not sending a million barrels of oil a day to the West, but turning the Russian-dominated Caucasus and Central Asia into a financially independent, pro-Western region.

Georgia is a key component of the strategy, as a crossover point for the Baku-Ceyhan oil pipeline, its companion natural gas line, and the smaller Baku-Supsa Early Oil line.

Georgian absorption into NATO is effectively off the table. But does that mean an end to the West's challenge to Russia's regional energy power?

The short answer is no -- all these lines will continue to operate. Russia won't interfere with them. Why? Because its larger economic-political strategy in Europe depends on not spooking the Europeans, who could then be encouraged to back the construction of more non-Russian energy pipelines to Europe, and thus dilute Russian power there.

(I just received reliable confirmation that, contrary to a statement by Georgia, Russia did not bomb near the Baku-Ceyhan line. Bombs were dropped near the smaller Baku-Supsa line, which leads to Georgia's Black Sea, but caused no damage. The Supsa line passes near South Ossetia so it's possible that this was a fog of war situation.)

So Russia will let the Baku lines be. But it seems to me that an expansion -- the proposed trans-Caspian oil and natural gas lines, and the proposed Nabucco line to Europe -- are now effectively dead. No Caspian president would gamble his survival by embracing such a project, and that's precisely how they would calibrate such a decision.

The West simply has too few levers with Russia.

But there is one, and it's China. Since the goal of U.S. policy is energy independence for the Caucasus and Central Asian states, why does the oil and natural gas have to go West?

China is building oil and natural gas lines from Turkmenistan and Kazakhstan to Xinjiang and beyond. Washington has already quietly gotten behind these efforts, but it might be the wisest course to turn up the volume by offering actually to help to build such lines.

The next U.S. president would have make such a shift part of a larger, well-considered China strategy. Russia would hate such a U.S.-China energy tandem, but that is what leverage in this region is all about.

Thanks to O and G Readers

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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.

Photo: Axel Rouvin
Rights: Creative Commons

Diplo-Capitalism: Bush's Clintonian Iran Strategy

One needn't be a gene physicist to see that President Bush looks a lot like -- gulp -- former President Clinton these days. He's hosting Israeli-Palestinian talks, speaking with Syria, and now we hear that he's opened a pen-pal exchange with the mother of all totalitarians, North Korea's Kim Jong Il.

As my former Wall Street Journal colleague Jay Solomon notes today, neo-con John Bolton hates this shift. "Our foreign policy is in free-fall at the moment," the former U.S. ambassador to the U.N. and advocate of uni-polar diplomacy tells Solomon. Engaging dictators, Bolton says, will only "diminish our prestige and influence."

Bah humbug.

So what's next in Bush's embrace of the foreign policy he's spent seven years deriding? Adoption of Clinton's diplomatic two-step with corporate America?

As readers of this blog know, I see one of America's most triumphant foreign policies of the last decade as the successful linking of the Caspian and Mediterranean seas through the Baku-Ceyhan oil pipeline. When this million-barrel-a-day came on line last year, it cemented a decade-long challenge to Russian suzerainty in Central Asia and the Caucasus.

And it was all a joint diplomatic-commercial effort of Clinton administration officials and Big Oil, specifically BP, Pennzoil and a few other companies. It was cutting-edge stuff -- geopolitics at the intersection of diplomacy and commerce.

Now it seems Bush is following the same tack. Today my friend Dean Rose was kind enough to pass along a transcript of Bush's news conference this week on the fresh intelligence that in fact Iran stopped seeking development of a nuclear weapon four years ago.

Bush said he's working to get companies both in the U.S. and abroad to help persuade Iran to stop enriching uranium. One presumes Bush was talking about oil companies -- what other type of company would he be describing?

Here's Bush's direct language when asked what's next in U.S. policy on Iran:

"And I believe now is the time for the world to do the hard work necessary to convince the Iranians there is a better way forward. And I say, hard work -- here's why it's hard. One, many companies are fearful of losing market share in Iran to another company. It's one thing to get governments to speak out; it's another thing to convince private sector concerns that it's in our collective interests to pressure the Iranian regime economically.

"So I spend a fair amount of time trying to convince our counterparts that they need to convince the private sector folks that it is in their interests and for the sake of peace that there be a common effort to convince the Iranians to change their ways, and that there's a better way forward."

This is not to mock Bush but simply to note the dovetailing of long-standing foreign policy practices.

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Rights: Creative Commons

News: Bush Creating New Position Of Senior Envoy For Russia, Caspian

The Bush Administration is about to appoint a retired senior diplomat to a newly created position to try to advance ambitious U.S. aims in Russia and on the Caspian Sea. Like the 11th-hour push on Israel and Palestine, it's an example of Bush's determination to stay relevant by attacking the thorny global problems he largely sidestepped until now.

Thomas Pickering, a former U.S. ambassador to Russia and among the country's most respected statesmen, has been asked to return to the State Department as a special envoy with a broad portfolio in the Eurasian region, according to people with whom I've been talking.

I met Pickering in 1993, when he was ambassador to Russia, and he's an extremely smooth, well-connected, mannerly fellow. He's suited for his leading tasks -- to help smooth over some of the friction with Russia's Vladimir Putin, and work on getting Caspian natural gas to the West via a trans-Caspian pipeline from Turkmenistan.

Pickering's deputy would be Steven Mann, a Central Asia specialist with among the longest titles in the State Department -- principal deputy assistant secretary of state for South and Central Asian affairs. I've met Mann numerous times, and find him extremely knowledgeable and realistic without being cynical.

The twin appointments amount to a resurrection -- and elevation -- of the old job of Caspian Sea czar, a post that Mann previously held. It's a Clinton-era position that Colin Powell abolished as unnecessary when he became secretary of state.

One seasoned Washington hand with whom I exchanged messages said the Bush administration is re-inventing the job because it doesn't know what else to do in Moscow and on the Caspian. "They have run out of options and need someone with more gravitas to show they are serious and not irrelevant," he said. " The question is why Pickering would come back for this."

I'd say Condoleeza Rice must have seriously flattered Pickering that only he could salvage the situation. But we will wait for Pickering himself to speak after his appointment becomes official.

Big Russian Deals; Motley Fool on Turkmenistan Gas

Cashing out in Russia? One sure signal of Vladimir Putin's actual political plans will be activity in big Russian dealmaking. One of the most active betting lines around the world is how Putin will manage to stay in the driver's seat after he's forced to step down as Russian president in March. If there's a rash of huge buyouts, mergers and share sales, it would be a sign of uncertainty of what comes after the presidential elections. It could mean that some of those who have gotten rich under Putin are cashing out. Dmitry Zhdannikov of Reuters has an interesting piece today suggesting that Gazprom may finally go after half of BP's venture with the Russian-held TNK, and that favored oligarch Oleg Deripaska may want to buy into Norilsk Nickel, the world's biggest producer of nickel and palladium.

Noticing Turkmenistan: I receive lots of emails and calls these days on whether the talk of deals and reform in Turkmenistan is realistic. David Lee Smith over at Motley Fool has a piece talking about the investment side. In a posting yesterday, Smith notes the international contest going on over the republic’s natural gas now that President Saparmurat Niyazov is dead. He’s only putting Turkmenistan on a watch list, which is about right. He does get it wrong when he says that Russia is the republic's only export route – Turkmenistan has a small natural gas pipeline into Iran. But essentially he's on the right track -- yesterday my friend Marat Gurt of Reuters reported a Russian announcement that it’s closer to sealing a pipeline construction deal that would virtually monopolize Turkmen gas. Look for another U.S. or European Union shuttle mission to Ashkabad.

For investment community readers of this blog, take a look at Smith’s prior posts on oil services companies (here and here). Given the coming demise of Big Oil, I’ve been suggesting that shareholders sell the majors and shift to the technology-laden companies that will be in huge demand by the new version of the Seven Sisters – state-owned oil companies in Venezuela, Russia, China, Saudi Arabia, Kazakhstan and so on.

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Georgia's Saakashvili resigns; Turkmenistan vs. Gazprom

What dictators don't do: Can you imagine Vladimir Putin resigning? Or allowing Russian elections to go forward absent his heavy hand? How about Kazakhstan's Nazarbayev or Azerbaijan's Aliyev? Uzbekistan's Karimov? The notion is preposterous. These leaders would no more risk such a rash throw of the dice than they would live off their official salary.

Yet that's precisely what Georgia's Mikheil Saakashvili has done. Yesterday, he resigned as president in order to take part in the January 8th snap elections he's called to challenge his opponents to electoral battle. Whatever his critics say, Saakashvili's act distinguishes him from the run-of-the-mill former Soviet autocrats.

Making Russia pay: Even if the West loses the pipeline battle for influence in Europe, it might find solace in helping to get Turkmenistan a working wage for its chief export. Russia has been buying Turkmenistan's natural gas for $100-$130 a thousand cubic meters, much less than the world price exceeding $260 a thousand cubic meters. And it's a pittance compared with the $350 a thousand cubic meters that Russia's Gazprom intends to charge its European customers starting next year.

Now, Turkmenistan is demanding more. It's asked Gazprom for a 30% increase, to around $170 a thousand cubic meters, according to a report by the Financial Times' Catherine Belton.

The report quotes Gazprom CEO Alexei Miller as blaming Turkmenistan's sudden request on the U.S. and Europe, which have been urging the republic to defy Russia and export a large portion of its natural gas directly to Europe. The West is championing the construction of the so-called trans-Caspian natural gas pipeline as a rival to a trio of Russian-planned pipelines to Europe. It's through that trans-Caspian line that the European supply would pass.

This courtship of rivals puts Turkmenistan at the center of the East-West battle for market -- and by extension political -- influence in Europe.

Whatever Turkmenistan decides, at the very least it will receive more of the pie.

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Rights: Creative Commons

How to Aggravate the Petro-States

If you want to know why the Kazakhs and Russians are irritated with the major oil companies -- and why Big Oil is in trouble all over the world -- look at this quote from a former oil executive in Venezuela.

In the latest New York Times Magazine, Tina Rosenberg asks this fellow why his company didn't do much for the average Venezuelan while at work in the country. The man replies, "It shouldn't have. It was an oil company."

The perverse part of this breathtaking remark is that it wasn't from a western oil executive, but Ramon Espinasa, former chief economist for the country's state oil company, known by its acronym Pdvsa (pronounced ped-uh-VAY'-suh).

Why has Hugo Chavez gone after Pdvsa as remorselessly as Big Oil? Because Pdvsa was behaving as haughtily as the foreigners -- it had learned to be Exxon.

The jury is still out on Chavez's Oil Socialism. But Espinasa reminds me of why Chevron, for instance, is in hot water in Kazakhstan (which though not fully apparent now, will become so in the coming months).

One reason is that at key, needy moments over the years -- needy on the Kazakh side, that is -- the California company declined to accelerate the payment of huge bonuses it owed to the government, to help the Kazakhs obtain cheap loans, or to lend them money itself.

In other words, before Kazakhstan's bonanza struck, when it needed cash, the biggest game in town -- Chevron, Exxon and the Tengiz oilfield -- declined to help. Why? "We're not a bank," one Chevron man once told me. In other words, like Espinasa, Chevron and Exxon are oil companies, businesses, and not a welfare society.

This attitude is blind. It misunderstands the history and enormity of Big Oil in the countries where it works. Oil executives saunter into these poorer nations like heads of state, and the contracts they sign are often seen within the countries themselves as the equivalent of a treaty with a superpower -- as a means of protection and prosperity.

Oil executives and negotiators of course know this, and use it to their advantage to get the deal. Then they conveniently forget, even when a favor sought by the host country isn't welfare, but reasonable need that would be no big deal fulfilling.

And the attitude is currently tripping up both Chevron and Exxon. At $95 oil, they would sorely love to triple production at Kazakhstan's 300,000-barrel-a-day Tengiz oilfield, in which they have a collective 75% stake. But Russia is blocking expansion of the 1,000-mile pipeline that would take that larger production to market.

Russia's condition for going along with the companies? That they effectively finance the construction of another pipeline that would serve Russia's interest -- one that would link the Black and Mediterranean seas through Bulgaria and Greece.

So far the companies have refused. Why? Because they are oil companies, not arms of the Russian strategic policy group.

The companies eventually will have to bend. But meanwhile they are also irritating the Kazakhs. Expect demands for contract renegotiation soon after the Kazakhs are finished with the dispute at the sister Kashagan field.

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America's Unnoticed New War

As I've traveled this week for the launch of The Oil and the Glory, I've been asked if we're at the start of a new Cold War with Russia. Even my wife says that I at times seem to regard Russia as the devil.

The answer is no.

Yet, the West and Russia are undeniably in a new battle for influence and power.

But there is a difference in how their armies are arrayed: Russia, in the person of Vladimir Putin, has fought brilliantly so far. But the U.S. seems barely to have noticed that it has a new war front in addition to terror.

The war is over the flow of oil and natural gas from the former Soviet Union to Europe. It's similar to the 19th and 20th century struggle for mastery of sea lanes in that the conflict is over who will control arteries vital to everyone.

The stakes are high -- influence in Europe, on whom the U.S. relies for support on political and economic issues around the world. And, so far, Russia has the pronounced advantage.

The odd thing is that the U.S. actually won the first battle of this war, but it's Russia that's learned the lessons and applied them.

The U.S. victory was the construction of the Baku-Ceyhan oil pipeline, linking the Caspian and Mediterranean seas. Its launch last year spelled the first break in Russia's nation-breaking economic stranglehold over Central Asia and the Caucasus, sending about 1 million barrels a day of oil to the West.

Yet, while the U.S. has now turned its focus to missiles, Russia is fighting the new war by building its own ingeniously plotted energy pipelines to Europe. They have names like Nord Stream and South Stream, and there are more.

This is Russia pursuing its national interests -- the market dominance of Europe for Gazprom, its natural gas giant, and its oil companies.

That's not evil. It's devilishly shrewd. And it's been all but unanswered by the U.S.

Steve on NPR's Fresh Air

Listen to the Terry Gross interview with Steve

A Caspian Deal: Tea Anyone?

There has been fanfare leading into Tuesday's meeting of the leaders of the Caspian nations, and their discussion again of the vexing question of whether they are neighbors of a sea or a lake. Let's hope the tea and meals are tasty in Tehran, because there will be no breakthrough.

The main reason: None of the main antagonists are going to capitulate.

Lots of people rightly find humor in the sea-or-lake issue, which ostensibly determines how a body of water is treated in terms of the littoral nations' rights. Apart from its amusement value, however, it's pointless to debate on the merits of the various sides, because each produces its chosen group of long-ago treaties, laws and precedents to make points that are instantly dismissed by the other interested parties.

Instead, it's easiest to look at interests:

Iran and Russia generally fall into the same camp, but for different reasons (Iran wants title to more sea than it would deserve by a purely quantitative count of its coastline; Russia would like to control all activities on the sea, but will settle for halting any cross-sea pipeline that would further weaken its stranglehold on oil and natural gas exports from the region).

It's principally the idea of that trans-Caspian pipeline that will scuttle any deal. Azerbaijan in my opinion will never agree to a prohibition on a pipeline in the sea, and Kazakhstan and Turkmenistan won't either if they are smart. Yet Russia won't agree to any pact that doesn't preclude a pipeline.

So the meeting is hopeless in terms of a certain settlement -- Azerbaijan, Kazakhstan, Turkmenistan and Russia will continue to develop their oilfields at will. Washington will persist in trying to get Turkmenistan and Kazakhstan to build a cross-sea pipeline. And Russia will push the states not to build one.

On the other hand, the weather will be lovely (84 degrees fahrenheit; 29 celsius).

Gazprom Humor in Ukraine

Gazprom's latest turn as the heavy in Russian geopolitics may be high comedy or low tragedy, depending on who is talking. Perhaps it's simply chutzpah? Because who apart from Gazprom would try to persuade the world that debts it effectively owes to itself justify severing natural gas to Europe?

The issue has attracted attention because Russia supplies more than a third of Europe's gas (some European nations rely on Russia for 90% of their supply), and 80% of that supply transits Ukraine. Russia has been accused--with some merit-- of using the leverage of that supply to get its way on European political and economic matters.

Today the Financial Times reports that Ukraine seems for now to have defused a row in which -- just as a pro-Moscow slate of parliamentary candidates coincidentally seemed headed for possible defeat in Ukraine elections -- Gazprom threatened to cut natural gas to its neighbor.

But the issue of the $1.3 billion debt persists. While Gazprom seems to have much of Europe running in circles to discover the root of this suddenly vital debt, there is really no mystery.

It's a simple matter of an opaque deal involving Gazprom, its insiders and friends.

The key player to look at is a middleman company called Rosukrenergo, which is half owned by Gazprom and a Ukrainian businessman named Dmitry Firtash (for background, google the work of Glenn Simpson, my former colleague at The Wall Street Journal).

Rosukrenergo is the middleman for Turkmen gas exports to Ukraine. In other words, Gazprom -- the biggest natural gas company in the world -- itself has been incapable of shipping this natural gas, so has contracted out the work to a non-transparent middleman. As of now there is not a public list of who is getting rich from this deal apart from Firtash.

However, we now know that a $1.3 billion debt for this gas has appparently accumulated since June. Rosukrenergo perhaps has failed to collect it from Ukrainian users. But since the entire matter is cloaked in darkness, we have only Gazprom's word for it.

The bottom line, however, is that the debt is the middleman's -- Rosukrenergo owes this money to Gazprom proper.

Gazprom is such a card.

Is There Political Will on the Caspian?

The presidents of Kazakhstan and Turkmenistan are in New York this week for the United Nations General Assembly. While together in a neutral environment, they could take the first step to resolving the pipeline morass that has bedeviled their half of the Caspian Sea for fifteen years. That would mean getting out of their luxury hotel suites, dispensing with the hallowed meetings with oilmen lining up to kiss the presidential ring, and announcing that they intend to build a joint oil and natural gas pipeline system across the Caspian to Baku.

Why should they take a rest from such accouterments and risk the predictable firestorm with Russia? Because it’s the only way they will finally obtain a measure of true political independence. Once they make that commitment, oil companies and western governments can help realize it.

Since the Soviet breakup, Russia has wielded what a former National Security Council officer named Sheila Heslin called its “iron umbilical cord” to hold the Caspian republics in check. Heslin’s term referred to the former Soviet energy pipeline system, which channels almost all the region’s oil and natural gas exports through Russia. When it is so moved, Russia just switches off the spigot.

In just one recent example of what it means to be reliant on the Russian system, Chevron and Exxon Mobil last week were effectively forced to agree to a large tariff increase for an oil pipeline that runs from Kazakhstan through Russia, even though it’s private and not ostensibly under Russian state control. The tariff increase is part of a Russian squeeze before it agrees to the companies’ plan to double the pipeline’s capacity and export more oil from Kazakhstan’s supergiant Tengiz oilfield.

In Turkmenistan’s case, it has its hopes pinned on a Chinese pledge to link the countries through a $26 billion natural gas pipeline. If it's actually built, the pipeline will be crucial to Central Asia’s economic and thus political independence. But this is the same China that has vowed for a decade to build a much cheaper oil pipeline to Kazakhstan, a pipeline that has yet to be finished. If it takes comparatively long in Turkmenistan, the line should be finished by mid-century.

In the mid-1990s, Azerbaijan and Georgia decided to reject Russia’s energy stranglehold, and spearhead the construction of an oil pipeline to Turkey, avoiding Russia entirely. With then-Azerbaijan leader Heydar Aliyev taking the lead locally, the Clinton administration backed the line on the world stage, and pushed the oil companies to build and finance it. A year ago, the first oil began moving through the Baku-Ceyhan pipeline, and natural gas will come, too.

But Turkmenistan and Kazakhstan cut themselves off from the East-West link by refusing to concretely back a trans-Caspian spoke to the Baku hub.

The Kazakh and Turkmen presidents may think that such a pipeline will simply be built, and that then they will use it. But the countries have it reversed – they themselves must take charge of their future.

Moscow's Red Lines: Kosovo, Missiles and Berezovsky

Russian Foreign Minister Sergei Lavrov has used the occasion of a university speech to lay down an implacable position on some of the most divisive issues between Moscow and the West. It was another indication that Moscow is engaged as much in policy as in image-building as someone no longer to be trifled with.

Here is the first paragraph of the Agence France Press story: Russia will not back down on "red line" issues including the future of Kosovo and opposition to US plans for an anti-missile defence system in central Europe, Foreign Minister Sergei Lavrov said Monday. Read story

And an important quote from the piece: Lavrov said that some were worried by "the rapid rebirth of our country as one of the leading countries of the world. However, this does not mean that it's necessary to think up yet another myth about the Russian threat."

Steve's comment: Lavrov made the remarks today at Moscow State Institute of International Affairs. For those accustomed to negotiating with Moscow, whether during the Soviet or post-Soviet period, it is nothing new for it to "stick to our position until the end," as Lavrov put it.

Its immovable positions, he said, include a refusal to hand over Andrei Lugovoi to Britain in the case of the Alexander Litvinenko murder, rejecting Kosovo independence unless Belgrade itself agrees, and opposing Washington's plans to install an anti-missile shield in Poland and the Czech Republic (on the last item, one wonders about the hulabaloo on either side over an as-yet unproven system).

Lavrov also resurrected Moscow's chagrin over Britain's sheltering of oligarch Boris Berezovsky, whom he called one of several "odious characters" from Russia living there.

As a whole, these do not differ fundamentally from postures Russia has taken previously during the post-Soviet period. What is different is that it appears unlikely this time to shift position. And that appears to be as much show as principle.

Fencing Out Russia

The Financial Times has an interesting piece today on a developing European Union strategy that's explicitly designed to prevent outside countries from buying up energy properties for political purposes. The story is based on a leak of internal EU working papers. The upshot: the disclosure takes the vagueness out of Western Europe's attitude toward Russian acquisition of its pipelines and refineries -- the writers of the papers are clearly worried that Europe will be treated like some former Soviet states.

Here are the two key sentences from the FT piece: An internal Commission document about the implications of unbundling, seen by FT Deutschland, the Financial Times' sister paper, says the EU could be "vulnerable to a strategy of third countries to dominate the EU markets not only in terms of supply but also by acquiring the networks". The document explicitly warns about situations "where investment is driven by other motives than economic ones". Read story

Steve's comment: Of the EU states, Poland has most openly discussed the issue of state- owned and private Russian companies buying parts of Europe's energy infrastructure. It has said in so many words that it is not going to risk its independence after the decades it took to take it back from Moscow.

The likelihood is that broader support has formed within Europe to prevent its energy assets from being swallowed up by wallet-thick petro-states like Russia and also Saudi Arabia.

Russia bristles at such attitudes, calling them hypocritical. And it is true that some of the criticism from Europe and the U.S. has been self-serving and at times hysterical.

Yet Moscow is short-sighted if it believes that no one has taken account of its behavior in Central Asia and the Caucasus.

Since the 1991 Soviet breakup, oil and natural gas export pipelines that pass through Russia have been routinely blocked or bottled up to use by Kazakhstan and Turkmenistan. A needed expansion of the export pipeline from Kazakhstan's supergiant Tengiz oilfield has been blocked at least partly for Russian geopolitical reasons (in order to counterbalance the U.S.-backed Baku-Ceyhan pipeline by forcing Chevron to help build a rival pipeline through Bulgaria and Greece to the Mediterranean). And Georgia has regularly suffered oddly timed cutoffs of its natural gas supply.

In part there are financial reasons for these acts; but the over-arching explanation is that Russia has a history of bullying whom it can, and attempting to keep its former colonies under its thumb.

The working papers no doubt will go through revisions. But there is no doubt that Europe will adopt some sort of legal mechanism to make it harder for outside countries to buy its energy assets.

How stringent that mechanism is will depend on how convincing Russia is that its treatment of its former Soviet colonies has been an aberration.

Counting the Geopolitical Winnings on the Caspian

John C.K. Daly has an interesting article on the latest geopolitical fallout in pipeline politics on the Caspian.

ANNAPOLIS, Md. (UPI) -- The death of Turkmen leader Saparmurat Niyazov last Dec. 21 set off an unseemly but discreet scramble among a number of nations eager for access to the world's fourth-largest reserves of natural gas. Seven months later, the clear winner for the race to control Turkmenistan's energy is Russia, with China as also-ran, while the United States and other Western nations essentially lost. What happened? The answer might be the Realtors' creed, "location, location, location." Read rest of article

Steve's comment: From the mid-1990s, Washington played a brilliant game on the west side of the Caspian, and a massively inept one on the east. The difference was that in Azerbaijan and Georgia, it had strong, far-sighted partners in Heydar Aliyev and Eduard Shevardnadze. In the east, however, Kazakhstan's Nazarbayev and Turkmenistan's Niyazov never joined the geopolitical combat posed by their Azeri and Georgian neighbors, and maneuvered Washington into an embarrassingly absurd diplomatic exercise.

U.S. officials paraded into Astana and Ashkabad to persuade the Kazakhs and Turkmen to do what was manifestly to their advantage -- build an energy pipeline link independent of Russia, and the Kazakhs and Turkmen delivered platitudes on how, yes, they would cooperate before promptly forgetting they had done so.

The recent Kazakh and Turkmen decision to sign a long-term contract for most of their natural gas to Gazprom -- and to build yet another pipeline north to Russia -- appears to be a nail in the coffin for the eastern half of the grand U.S.-backed East-West Energy Corridor to Turkey.

The biggest question is why have Nazarbayev and Turkmenistan's Berdimukhamedov signed such a deal. One answer is that it is the easiest short-term option -- avoid the sparks of geopolitical conflict, and simply sell to one's traditional northern trading partner. They may believe that they retain the opportunity in the future to balance out the increased leverage they have granted to Russia. It is difficult to see how, given the agreement, such a trans-Caspian pipeline could be built any time in the foreseeable future.

Here is an interesting piece on how, contrary to the prevailing wisdom, Italy may not have entirely bet the store on continued good will from Gazprom. Instead, Italy appears to be hedging its bets.

Europe's struggle for energy independence from Russia

An excellent new piece in the Economist describes Europe's yet-again-divided and weak approach toward energy supplies. The first two graphs:

WESTERN failures in recent energy tussles with Russia have been persistent and spectacular. Key allies have drifted off into private deals. The big picture has been ignored. The gloomy drift accelerated this year with the signing of a three-cornered deal between Russia, Kazakhstan and Turkmenistan to pump the Caspian’s huge gas reserves north through Russia. Now Uzbekistan, according to Russia’s Vladimir Putin, is going to join too.

Europe’s only chance of getting gas along pipelines that Russia doesn’t control is a project called Nabucco. Its aim is to connect the gas riches of the Caspian and the Middle East to Europe via the Caucasus and Turkey. Read rest of article

From Steve: In addition to a hilarious account of State Department energy authority Matt Bryza in action, the piece points up how Russia yet again has triumphed by relying on Europe's propensity for going multiple ways at once. It also highlights the persistently short-sighted attitude of Kazakhstan and Turkmenistan, which so far have refused to concretely back an independent export pipeline for their lucrative natural gas reserves and so are subject to Russia's whims on price. The Economist piece is by Edward Lucas

4 Leaders Try to Offset Russia's Clout

BAKU, Azerbaijan (AP) – Leaders of four former Soviet republics discussed ways to counterbalance Russia's wide influence in the Caspian and Black Sea basins at a summit of their regional grouping.

The summit is the first for the organization, called GUAM, the Organization for Democracy and Economic Development, since its four member countries – Georgia, Ukraine, Azerbaijan and Moldova – agreed last year to deepen ties and cooperation.
Read the rest of story

From Steve: On the other side of the Caspian, Kazakhstan and Turkmenistan still have no concrete link into the Baku-based oil-and-natural gas pipelines to the Mediterranean.

Instead they recently agreed to build another natural gas pipeline through Russia. To the degree that they are seeking leverage against Russian influence of their energy markets, they are doing so by building up transportation with China, and organizing barge traffic to Baku.

But one wonders if this will be sufficient for their long-term economic independence.