Monday, April 24, 2006

Imperialistic Gas

How many lies and distortionы can an editor of Washington Post pack into one editorial? Let us count them in this piece called “Imperialist Gas. Russia doesn't want to "politicize" energy sales. It just wants to use them to bully its neighbors.” Published April, 23.

Last week the chairman of the state-controlled gas exporter, Gazprom, which provides a quarter of the European Union's supply, crudely threatened E.U. governments that his company will sell its product in other markets unless they give way to its "international ambitions."

What is meant here by “crudely threatening”. EU governments stated plain and clear, that they see Gazprom only as a wholesale gas supplier.

EU governments stated plain and clear that they want to “diversify” gas supply and started looking for alternative suppliers. Gazprom is highly dependent on European consumers. When it started asking evident questions – would “diversification” mean buying less gas from Gazprom or would it mean that Gazprom’s strategic plans to increase gas supply to Europe are useless, EU governments hinted that, “Yes. When we find alternative suppliers we will buy less gas from Russia”.

Gazprom made a conclusion - in this situation EU markets become too risky and the company might think about alternative consumers in Asia. This statement was regarded as blackmail and crude threats. Where is a threat? Who is threatening whom? What alternatives does Europe give to Gazprom? Why does a natural desire of a company to increase its profits makes EU so hysterical? 49% of GP shares are publicly traded and major Europeans mutual funds have them in their portfolios.

The chairman, Alexei Miller, was reacting to reports of British unease at the possibility that Gazprom might seek to purchase Britain's largest gas company.

“Unease” here means that British government thinks about a special bill with the sole purpose – to ban Gazprom from privatization tender of Centrica. If someone doesn’t know – Gazprom doesn’t sell gas to the UK. The country has its own resources.

Lacking Soviet military might or a large economy, Mr. Putin now describes Russia as an "energy superpower."

It’s a lie. Putin never described Russia as an “energy superpower”.

He offered a taste of what this might mean in January, when he personally ordered a cutoff of gas to Ukraine -- which had the temerity to reject his candidate in a presidential election -- even though this also meant a shortage of gas in Vienna, Rome and Berlin.

“Even though” this meant that Ukraine started stealing Italian, Austrian and German gas. In this conflict Putin acted as a pathetic weakling. He immediately agreed to go on subsidizing Ukraine with cheap $95 per 1000 m3 gas. He immediately agreed with Ukraine’s demand to pay twice for gas transportation. The only “good” thing – before the conflict Ukraine was stealing gas with impunity. Now it informs post factum how much it siphoned for its own needs and promises to pay for it later - $800 million so far in just 4 months.

As for the politicization of economic markets, Europeans wondering about Russia's intentions need look no farther than Georgia and Moldova, two former Soviet republics that, like Ukraine, have attempted to consolidate democracies and establish independence from Moscow.

Anyway, Moscow is eagerly helping them to establish independence – no more subsidized gas and no more imports of poisonous ersatz-wine. Total independence and freedom!

Late last month Russia abruptly banned the import of their wines, even though these supply more than 40 percent of the Russian market and account for a large part of the two countries' foreign exports. The health reasons cited by Russian officials were unserious.

If health reasons are not serious why then American and European authorities ban wine exports from Georgia and Moldova? American FDA was the first to do it. The reason is simple – health dangers. In this perverse world civilized countries don’t want to endanger health of their citizens but “uncivilized” Russia must import wine with DDT. There is one very easy way for civilized countries to help Ukraine – pay for Ukrainian gas. Refusal. Another very civilized way to help Moldova and Georgia – import their wine. Europe refuses yet again – this wine is a far cry from civilized standards. But somehow “uncivilized” Russia (with uncivilized health standards, I persume) must do what American and European friends of young democracies refuse to.

If St. Petersburg can become the forum at which Western leaders make clear they will not accept Russia's use of economic blackmail or military force to dominate its neighbors, or its backing of a dictatorship in Belarus, then the summit might be worth having after all.

Western leaders for so long played with Russia typical “win – loose” games that they are horrified at the possibility that a scenario could be “win – win”. What should Western leaders do for that?

1. Stop economic blackmail – let Gazprom to European retail natural gas markets.
2. Accept Kosovo scenarios for Transniest, Abkhasia and South Osetia.
3. Stop protecting opium production in Afghanistan and stop heroine traffic from Afghanistan to Russia. Destroy opium plantations. US troops can do it a one week.
4. Agree to buy natural gas at the border of Russia and not at the border of Ukraine. Negotiate directly with Ukraine transportation prices and “mystical gas disappearance” problems.

11 comments:

Nick Wilsdon said...

Great post Konstantin - very accurate summary of the politics behind this.

jin said...

'2. Accept Kosovo scenarios for Transniest, Abkhasia and South Osetia.'


That will never happen. You know, because this are totaly different conflicts :)

Good post!

Thomas Wicker said...

Privet, Konstantin,

As always, a very interesting post, and a good explanation of your viewpoint.

A couple of points:
1) Gazprom has, in fact, sold gas to the UK (LNG, in fact). In today's Moscow Times:
'Gazprom Is Good for the World'
By Aiste Skarzinskaite and Andrew McChesney
Staff Writers
http://www.themoscowtimes.com/stories/2006/04/26/001.html

Money quote:
In his speech, he [Gazprom deputy CEO Alexander Medvedev] also directed criticism at the media. He said Russia delivered its first LNG shipment to Britain last April, but instead of welcoming it, "the British media went into hysteria -- I cannot find a better word."

2) Maybe the translations are bad, but, according to the Google search I did, Putin described Russia as an "energy superpower" in a speech on 31 Jan 2006. As I said: maybe they were bad translations.

3) About the "West's" problems with Gazprom ...

It's less to do with the fact that there's a Russian company that's making this statement, than that the company is controlled by the Kremlin.

A key paragraph from your post is where you talk about how, in the Gazprom-Ukraine conflict, "Putin acted as a pathetic weakling."

Now, substitute "ExxonMobil" for "Gazprom," and "Bush" for "Putin," and see if the sentence would make any sense (even if many of the facts would be the same -- ExxonMobil tries to force the Ukraine to pay more, etc.). Or, try "BP" for "Gazprom" and "Blair" for "Putin." Either way, people would be scratching their heads -- because it would make no sense to say that the leader of the country would be negotiating for the price of the energy. Sure -- it's grammatically correct. It just wouldn't bear any resemblance to reality.

And that's where the West has a problem with Gazprom. As you yourself indicate, Gazprom's actions aren't defined by a corporate interest, a desire for profit, a simple wish to have good working relations for the purpose of conducting business. Instead, Gazprom's interests are blurred by being also part of the government, and governments have far more interests than companies do.

And that's where Gazprom's latest dealings cause alarm, and why Great Britain is making a stink about a Gazprom takeover of a British gas firm. It's not one company taking over another; it's a subsidiary of the Russian government taking over a British gas firm. Instead of Gazprom acting in its own interests, the part of the Ukrainian deal that really scares the West is that Gazprom might act simply in the national interest of Russia -- even when it would be contrary to good business practices. We can't (and don't) assume that ExxonMobil or BP or other companies will act in concert with US or UK foreign policy objectives (for example, if we hadn't made it illegal, they would've happily bought oil from Saddam Hussein). Gazprom, however, takes its marching orders not from its shareholders, nor from its customers, but from Putin (again, as you point out in your post). Gazprom *will* act in the foreign policy interests of Russia -- even if it would hurt Gazprom as a company (for example, it didn't raise gas rates for Belarus at the same time it did for Ukraine).

In the West, we're used to having things compartmentalized. On one side, there are companies, and we can quickly and easily predict how they will react -- thus, there's little risk in dealing with the company. On the other side, there's a government, which may or may not make laws that affect the company (e.g., "You can't buy/sell to this country," or "We'll give $X in foreign aid to Ukraine," or whatnot). Since it's not a company, it's relatively easy to predict how it'll react -- and governments usually take awhile to react, so you have some lead time before things happen (at least in democracies, since everyone has to squabble and fight and complain and bluster first). Thus, with compartmentalization, there's a great deal that's predictable in how the actors will react, meaning there's less risk, meaning there's more trust and faith.

And that's the problem with Gazprom: it's not compartmentalized, and, since we've seen some evidence that it *might* be being used for political purposes, there's more risk, and less faith. Just the same as there's less faith from foreign investors in US ports these days, because the Congress has shown that it wants to interfere in the process -- meaning there's more risk for potential investors in US infrastructure, and, thus, less trust. It really doesn't matter what country makes the process riskier; it just matters that the country makes it riskier.

All that said, I'm *not* advocating for an immediate privatization of Gazprom; I think the '90s showed that indiscriminate privatization falls under Really Bad Ideas. However, having the Kremlin provide Gazprom with more autonomy, and provide this transparently, would go a long way towards making everyone happy. What always amazed people about the supplies during the Soviet times was that the gas providers acted like a company; they really didn't seem to care about the foreign policy of the USSR. Thus, they earned their customers' trust, because they were seen as independent. Now, with Medvedev as Chairman of the Board of Directors, and Gref, Khristenko, and Yusufov on the board (source: http://www.gazprom.ru/eng/articles/article8823.shtml), there's a lot more suspicion since the government controls so much of the board.

Do you really want people to trust Gazprom? Then it needs to be more transparent, and should immediately take, and hold, positions that put it into conflict with Putin (e.g., set a price for its gas -- for everyone, no matter the country, or its relationship with Russia). Make its deals crystal clear. Have the government become a "non-voting shareholder," with no seats on the board (keep a requirement for majority Russian ownership, and, say, a supermajority of Russian membership on the Board of Directors). Have Gazprom, and all other companies, pay major taxes on the products, so that they're effectively receiving the same amounts, and the government can take the windfalls and still provide subsidies and support other projects.

In short, as long as Gazprom remains under the wing of the Kremlin, to the point where its defenders explicitly point out that Putin gives it marching orders, it isn't going to be trusted by the West. It's not that Gazprom is a company with headquarters in Russia, it's not the fact that it's giving incredible amounts of support to the Russian economy, it's not that most shares are in Russian hands. It's all about the governmental control, and particularly how control appears to be being used. And, frankly, whether that's fair or not is completely beside the point; it is what it is, and will continue to be that way until the Kremlin's control is released.

At least, IMHO. But -- thanks for the opportunity for discussion! :^) Poka y udachi!

Yours,
Thomas Wicker

Anonymous said...

Now, substitute "ExxonMobil" for "Gazprom," and "Bush" for "Putin," and see if the sentence would make any sense (even if many of the facts would be the same -- ExxonMobil tries to force the Ukraine to pay more, etc.). Or, try "BP" for "Gazprom" and "Blair" for "Putin." Either way, people would be scratching their heads -- because it would make no sense to say that the leader of the country would be negotiating for the price of the energy. Sure -- it's grammatically correct. It just wouldn't bear any resemblance to reality.

That's the fundamental difference between how the business is done in the Western countires and in Russia. That's exactly why so many so-called democrats are not happy with the situation in the country. Most people in Russia would never believe that the head of a country cannot influence whatever he wishes. It has been like that from back God knows when so people don't know the difference and think that it is how it should be done.

Michael Averko said...

Actually, the mentioned former Soviet territroies have a greater case for independence when compared to "Kosova" (the Albanian pronounced and spelled version of the south Serb province).

Michael Averko
Independent Foreign Policy Analyst & Media Critic

mikeaverko@msn.com

Anonymous said...

Thomas,

Fortunately, Russians do not subscribe to the ideas of Anglo-Saxon free-market fundamentalists. In case you did not notice, EU does not have problem with memeber states' energy state monopolies either.

As for irrational fears of the "West" (I assume, US and UK) you decribe, looks like some attitude adjustment is in order.

Greg said...

To: Thomas Wicker

Re: number 3

You sure wrote a lot to illustrate your point. Though it seems that there is something missing to balance your conclusion. This maybe it:

There is a definite relationship between the Western oil and gas companies and their respective governments. These relationships are just as clear (the difference is in the regulating mechanisms, but these are merely technicalities) as in the case of Gazprom and the Russian government, and are as strong; and when it comes to foreign policy those relationships are defended *militarily* as well as diplomatically, as we have seen many times through history.

So, using your logic, it would be much more dangerous to let the (for example) US companies in on your soil as you’d be risking the wrath of US military if those companies do not enjoy the host’s full cooperation.

As for Gazprom’s shareholders – it’s capitalization dynamic, especially around and after the time of the price war with the Ukraine, shows that they approve of it’s actions.

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