As we saw in the Introduction, the Russians, along with the Italian company, Eni, are doing everything they can to ensure that a bypass and diversionary pipeline is not built. Putin is doing this by trying to dissuade not only potential suppliers but customers from using such a pipeline. Toward that end, Russia and Putin have reached at least a tentative agreement with Turkmenistan to tie up much of its natural gas exports for twenty-five years so little would be available for an alternative routing.27 Unless the U.S. government and other promoters of such a pipeline can assure themselves and prospective users and investors that the volume of gas carried by the pipeline will be large enough, they will not put up the money needed to build it.
As for Georgia, given its crucial role as the connecting link between Baku and Ceyhan, Russia has done its best to destabilize the region and keep Georgia from operating the pipeline in an orderly and reliable way. If Georgia collapses in turmoil, investors will not put up the money for a bypass pipeline and Russia will be able to maintain its pipeline monopoly. That, at least in part, explains why the Russian government has provided rather open support for South Ossetia and Abkhazia, two regions that seek to separate from Georgia and align themselves instead with Russia.
That is not all Russia has done. In 2006, after Georgia arrested and then expelled some Russian embassy officials on charges of espionage, Russia declared an embargo on imports of Georgian wine and mineral water as well as its fruits and vegetables—its most important export earners. At almost the same time, Russia shut down transport and postal service to Georgia, thereby severing its most important link to the outside world.28 To underline its hostility, Russia also expelled Georgians living and trading in Russia, not only those without legal documentation but also those who had proper permission. In addition, there were disruptions in the flow of electricity from Russia. At about the same time in January 2006, the gas pipeline passing through North Ossetia from Russia to Georgia mysteriously exploded.29 This coincided with the campaign against Ukraine and the application of similar pressure on Moldova. As with Ukraine, the Russians demanded that Georgia and Moldova agree to pay the much higher Western European market price for gas.
It has not been an easy time for either Georgia or Moldova. In the fall of 2007, for example, opposition groups in Georgia began to call for the resignation of Mikhail Saakashvili’s pro-Western government. Saakashvili called out the troops and put down the demonstration in a rather heavy-handed way, insisting that these protests were provocations organized by Moscow in an effort to regain control of the area, an accusation Moscow disputes.
Upping the ante, Gazprom began to demand that it be given ownership of Georgia’s and Moldova’s domestic pipelines. In 2007, the two agreed to pay more for gas—in Georgia’s case, a price of $235 per 1,000 cubic meters, about the same as Europe—but Georgia refused to yield to Gazprom demands that it sell off its domestic pipelines. But Moldova, along with Armenia, both succumbed and agreed to sell Gazprom a controlling share in their gas distribution networks.30
Undoubtedly such pressure on relatively small countries hurts. But despite the harassment, the Georgian economy, in particular, has enjoyed an unprecedented economic boom. It may have been an effort to make Russia and Putin look foolish, but President Mikhail Saakashvili attributed the country’s astounding 10 percent annual growth to the embargo itself. As he explained, the embargo unexpectedly led to an increase in foreign direct investment from Kazakhstan and the United Arab Emirates.31 (By investing this way Kazakhstan seemed to be doing what it could to undermine Russia’s policy. However in May 2007, after a series of visits by Putin, Kazakhstan appeared to become more supportive of Russia.)32 It also helped that President Saakashvili’s government began to implement a vigorous program of economic reform that included the adoption of a 12 percent flat tax (1 percent lower than a similar flat tax in Russia), the slashing of red tape, and the introduction of a new customs code. Moreover, the cutoff of gas from Russia caused only temporary hardship. Almost immediately the Georgians were able to arrange for substitute deliveries, primarily from Azerbaijan. By 2007, Georgia had managed to shift more than 80 percent of its natural gas imports to non-Russian sources.33
While Russian intimidation of Georgia may have backfired, the Russians continued to harass Ukraine, and in 2007, even their heretofore cooperative ally, Belarus. Much to the disbelief of Alexander Lukashenko, president of Belarus, in January 2007 Russia began to apply the same type of pressure on Belarus that it had on Ukraine a year earlier. This was quite a surprise. Lukashenko, a one-time collective farm manager and what some have called the last dictator in Europe, has used his powers to tie Belarus almost blindly to Russia. It was a shock therefore when Belarus was told it too would have to pay more for its gas. At first the Russians demanded $200 per 1,000 cubic meters. Ultimately, they consented to a price of $100 per 1,000 cubic meters. But even $100 meant a doubling of prices from 2006. Belarus was also asked to pay $180 for each ton of petroleum sold to Belarus as a form of export duty.34 Reluctantly, Lukashenko agreed to the $100 per 1,000 cubic meter price for gas. But to Lukashenko, this was much more than an unfriendly gesture from what he had frequently boasted was a supportive partner. Belarus depended on these highly subsidized and therefore cheap petroleum imports from Russia and their subsequent re-export to Western Europe at considerably higher world prices. The difference between what it paid and what it charged provided Belarus with a substiantial profit, which is used to underpin its otherwise shaky economy.
In response to the imposition of the $180 Russian export duty, Belarus then imposed a $45 a ton transit fee on the petroleum the Russians were sending on to Western Europe. Since about half of all Russian petroleum sold to Western Europe is shipped through Belarus, this was a significant countermeasure.35 After almost a week and a half of nasty words and an occasional halt in the flow of gas and oil to Belarus, the two sides reached a compromise. Russia agreed to lower its export duty on petroleum from $180 a ton to $53, and, in turn, Belarus agreed to abolish its transit fee.36 But even though Lukashenko agreed to the higher prices, Belarus fell behind in its payments so that by mid-2007, it was $456 million in arrears. Once again Russia threatened to cut off deliveries. After apparently turning for help to Hugo Chavez, president of Venezuela, Belarus paid its bill and the flow of gas was no longer interrupted.37
THE PIPELINE POKER GAME
While most of the outside world’s attention was on whether Belarus, like Ukraine the year before, would agree to pay a higher price, at the same time there was an even more significant effort by Russia to expand its control of the pipeline network linking Russia to its European consumers. After the collapse of the USSR, almost all of Gazprom’s customers in the CIS, the Commonwealth of Independent States (the former Soviet republics), found themselves with significant bills they could not pay for the gas they had already imported. In what became a standardized routine, Gazprom would then offer to cancel the debt or charge a lower price if the Ukrainians, Armenians, Moldavans, or Georgians would give Gazprom an equity stake in their domestic pipeline network (see Table 6.1). In Belarus, Gazprom offered $2.5 billion for a 50 percent stake in Beltransgaz, which owned the gas export pipeline.38 While Belarus agreed, some of the others have held back. The Financial Times for example, reported that in Ukraine, President Viktor Yushchenko had publicly criticized Naftogaz for offering Russia a measure of control over its gas transit system. Yushchenko and his allies feared that if Gazprom gained an equity interest in their pipelines, Russia would demand an ever larger say in their economic and political affairs.39
There was particular concern that if Russia or Gazprom were allowed to buy up local gas distribution systems used by its customers to maintain their monopoly control and economic rent, the Russian operators would do all they could to exclude other potential suppliers. In fact, gaining control over pipeline access to other producers of gas as well as to Gazprom customers has been a major goal of Gazprom and Russia. It is not only the foreign consumers o
f Russian natural gas who worry that Russia will some day control gas pipelines within their territory; non-Russian producers of natural gas operating in what used to be the USSR are also very much concerned. They are indeed vulnerable. As long as there is no other way for the Central Asian countries—or for that matter Russian petroleum companies—to transport their gas to Europe except through Gazprom-controlled pipe-lines, the only alternative for the Central Asians is to find customers in Asia or accept a Gazprom-dictated price for their gas. That explains why until 2006 Turkmenistan was forced to sell its gas to Russia for as little as $46 per 1,000 cubic meters. Ironically, at that price, when the Russians were the sellers and Ukraine, Belarus, Georgia, and Moldova were the buyers, Russia complained that the price was too low. It also explains why landlocked Turkmenistan, as well as its neighbors Kazakhstan and Uzbekistan, express interest now and then in a proposal to build a pipeline under the Caspian Sea from Kazakhstan to Azerbaijan and from there overland through Georgia and Turkey and on to Europe. This was the proposal promoted by U.S. Vice President Dick Cheney when he went to Kazakhstan in the summer of 2006.40
TABLE 6.1 Gazprom Expansion Abroad
For the time being, Nursultan Nazarbayev, the Kazakhstani president, has indicated he would keep his options open.41 Most of the petroleum from Kazakhstan continues to move west overland to Russia through the pipeline of the Caspian Pipeline Consortium (of which the Russian pipeline monopoly Transneft owns 24 percent) to Novorossiysk on the Black Sea. But Kazakh petroleum is also flowing through the Baku-Tbilisi-Ceyhan route, thereby bypassing Russian territory and also the dangerous and overcrowded Bosporus Straits (see Figure 2, page 8).42
PREVENT A SOUTHERN ROUTE
To Putin, all of this is like a giant chess match. Every move by a rival must be met by Putin with an even more attractive offer. He was confronted with such a challenge in December 2006 when a consortium led by BP began construction of a South Caucasus pipeline designed to transport natural gas from the Shah Deniz field in the Caspian Sea, as well as gas from Turkmenistan, Uzbekistan, and Kazakhstan, through Azerbaijan and Georgia to Ceyhan, the Turkish port on the Mediterranean Sea. From there, the gas would be shipped to the Balkans and ultimately to the European Union.43 The route would parallel the already built Baku-Tbilisi-Ceyhan petroleum pipeline. Because it passes through Georgia, this gas pipeline would also make gas available for Georgia. But the pipeline’s main purpose would be to free countries in Europe from being so dependent on Gazprom. From Turkey, the gas would be shipped through the NABUCCO pipeline, which is scheduled to be finished by 2011. NABUCCO would carry gas through Bulgaria, Romania, Hungary, and Austria, and from there to the West.44 The main transit and storage hub would be built in Austria by OMV, the lead promoter of the project.
Turkey has also proposed to work with Iran to ship its gas overland by pipeline through Turkey and on to Europe. If it is eventually built, such a pipeline might also be used to transit gas from Turkmenistan. Some gas from Turkmenistan is already shipped to northern Iran, for now the only outlet for Turkmen gas that does not flow through Russia.45
The big challenge for BP, the NABUCCO partners, and Turkey is to see whether they can sign up enough customers to make the effort profitable. Eager to see that they did not, Gazprom moved simultaneously to increase deliveries of gas to Turkey via its Blue Stream pipeline under the Black Sea. Blue Stream was officially inaugurated in November 2005. From Turkey the Russian gas will be piped on to Western Europe via Gazprom’s South European Gas Pipeline (SEGP). A Gazprom delegation, headed as usual by Putin, went to Budapest in 2006 in an effort to convince the Hungarians that using Gazprom gas, not BP’s from the Caspian, was a better deal for Hungary. Since the market would probably not be large enough to support both pipelines, Gazprom and Putin hoped in this way to preempt the NABUCCO effort.
To make the offer more appealing than the NABUCCO route, Gazprom proposed to offer its gas sooner and cheaper. It also sought to persuade Hungary, an essential NABUCCO partner, that it should support Gazprom’s South European Gas Pipeline for Russian gas (SEGP) instead. To make it worth their while, Gazprom offered to provide Hungary with an attractive long-term supply contract, and to make the offer even harder to resist, Gazprom promised that under its proposal, Hungary rather than Austria would become the European hub.
Political grandmaster that he is, Putin’s tactics appeared, at least initially, to have worked. On March 12, 2007, the Hungarian prime minister Ferenc Gyurcsany announced that Hungary would support Gazprom’s Blue Stream pipeline rather than NABUCCO.46 As he put it, NABUCCO is “a long dream and old plan. But we don’t need dreams, we need gas.” No doubt the fact that Hungary, not Austria, would be the hub for the Blue Stream project was also a factor. The Hungarian prime minister explained that because the European Union had yet to agree on a common energy policy, it was dangerous for Hungary to wait when it had the option of making a favorable bilateral deal with Gazprom and in so doing solve its immediate energy problems.47 Gazprom already had available the gas that Hungary needed. The NABUCCO pipeline, however, had yet to be proven. At best it would not be available until some time in the future. Eager to support the NABUCCO alternative, the European Union argued otherwise. Azerbaijan already had enough gas available and Kazakhstan was in the process of adding more.
After Gyurcsany announced that Hungary had opted for the Russian Blue Stream variant, which ran through the Black Sea from Russia to Turkey, he and his government evidently had some second thoughts. Perhaps, he suggested, they should keep their options open at least a little longer. Showing that the Hungarians are good chess players as well, a spokesman for the Hungarian government told a press conference the next day that Hungary was still willing to work with the NABUCCO consortium. After all, NABUCCO was strongly supported by the European Union and, as a new member, Hungary could not disregard its wishes, at least in the early planning stages and especially since there were still uncertainties in both projects.48 As Prime Minister Gyurcsany explained after meeting with President Putin, “Why shouldn’t we receive half from one source and [half] from the other?”49 The prospects for NABUCCO also improved when Germany’s second-largest gas company, RWE, decided to join in as a sponsor.
Putin clearly seemed determined to prevent the construction of the NABUCCO pipeline. To add to the competition from the Blue Stream and SEGP gas pipelines, in the summer of 2007 Putin along with the Italian company Eni proposed the construction of what they called the South Stream pipeline. This would be yet another gas pipeline from Russia running under the Black Sea to Bulgaria and then on to Italy.50 As if all these proposals and negotiations were not complicated enough, in July 2007 OMV, the partly state-owned Austrian energy company, tried to take over MOL, the recently privatized Hungarian national energy company. While OMV earlier had initiated the NABUCCO project, as NABUCCO appeared to flounder, OMV reversed course and agreed instead to a deal with Gazprom that would make Vienna a gas hub. In effect this would mean that Gazprom would be dropping MOL as its main partner and eliminating Hungary as the hub. The Hungarians were opposed to OMV for other reasons as well. In 2006 they had gone to the trouble of fully privatizing MOL. If the partially state-owned OMV were allowed to buy it up, the Hungarian MOL would again become a state company, only this time the state would be Austria. There was also concern that if Gazprom should some day acquire OMV then Gazprom would own gas distribution facilities not only in Austria but also in Hungary.51
BUILDING A BALTIC SEA BYPASS
The Caspian Sea pipelines via Turkey and the pipelines in the south of Eastern Europe are not the only instances of rivalry between Gazprom and Western companies and governments or where Putin has taken it upon himself to represent Gazprom. Even though Ukraine, Belarus, and Poland have complained that they were victimized by Gazprom, one of Gazprom’s biggest concerns has been to find a way to protect itself from Ukraine and Belarus. As Gazprom sees it, both countries have at times blackmailed Russia, either cutting off or threatening to cu
t off the flow of oil or gas to Western Europe. That is the primary reason that Gazprom and Putin have worked with Germany and particularly Chancellor Gerhard Schroeder to support the construction of a gas pipeline under the Baltic Sea directly from Russia to Germany. Now called the “Nord Stream” pipeline, Gazprom has a 51 percent share in the consortium that is building and operating the pipeline. Two German companies, E.ON and Wintershall, a wholly owned subsidy of BASF, each initially had 24.5 percent of the remainder.52
This pipeline has been surrounded by controversy, both within Germany and in Eastern Europe. For the Germans, it was embarrassing to discover that Gerhard Schroeder, after having been so outspoken in support of building this bypass Nord Stream pipeline while chancellor, became the chairman of its board immediately upon being voted out of office. (At the time it was called the North European Gas Pipeline Company [NEGP].)53 The embarrassing part was that for this relatively cushy, figurehead job, Schroeder was to be paid an annual salary of $300,000.54 Moreover, not only had he been the main sponsor of such a pipeline within Germany but days before he left office, the German government offered to act as a guarantor for a 1 billion euro loan which a consortium of German banks was prepared to offer to finance the project.55 This would make such a loan more attractive to the banks and thus result in a lower interest rate.
Petrostate:Putin, Power, and the New Russia Page 20
