As market conditions tightened in the early twenty-first century, the idea of Russian national champions became particularly attractive. The advent of China and then India as voracious consumers of energy and metals put Russia, with its abundant resource deposits, in a strong bargaining position. Taking advantage of these changes in market conditions, Putin skillfully utilized Russia’s gas and oil potential to advance its economic and political agenda. At times his efforts seemed little different from what the Soviets used to call “economic imperialism.” The difference in this case, if there is any difference, is that in the pre–World War I era, most of the “capitalist” corporations controlling such resources were privately owned. But private or state owned, after they established a foothold in a foreign country, they pressured their home country to help them maintain their interests. In Putin’s Russia, most national champions are either wholly or predominantly state owned, although some, such as Surgutneftegaz, have no or limited state ownership. Whether public or private, these national champions, actively encouraged by the state, seek to dominate foreign markets, just as companies did in the pre–World War I era. Usually the corporation takes the first step to establish a foreign presence, but on occasion the state has acted first and only afterward was the national champion brought in to carry out a state-to-state agreement (see Tables 6.1 and 7.1).
This economic imperialism—as Lenin would have labeled it—is not necessarily limited to the outside world. A reverse form of economic imperialism has essentially taken place within Russia itself. As we have seen, after both the 1917 Revolution and the 1991 breakup of the USSR, the government found it necessary to offer concessions to foreign energy companies because Russian companies were unable to exploit the country’s oil deposits on their own. Unable to master the drilling challenges in extreme circumstances, particularly offshore, the Soviets in 1917 and the Russians in 1992 found it necessary to bring in foreign technicians. In the 1990s, the government even agreed to accept production sharing agreements (PSAs) with significant tax concessions for foreign companies—the sort of policy followed by much poorer and smaller third world nations. But once Russia and its industries recovered enough economically to do without such help, the state authorities either disregarded contractual agreements or found environmental loopholes or instances of tax evasion that they used to claim contractual violations, as they did with Shell at Sakhalin and BP at Kovykta.2
The bankruptcy and renationalization of Yukos, as we have seen, was an extreme example of how the state will resort to extreme measures to regain control of a private enterprise. To the victims, of course, it felt like a form of domestic economic imperialism. But this renationalization sent a clear message. Rare is the corporate chief executive officer, Russian or foreign, in Russia who today dares to defy state edicts or wishes; they all realize that if the state prosecutor wants to, he can find something they have done that was illegal. As explained by Boris Berezovsky, the exiled former oligarch behind Sibneft, Aeroflot, and several other previously privatized entities, everyone in business in Russia must necessarily have violated the law at one time or another. Given the helter-skelter, often contradictory, nature of the privatization process and the absence of any well-established interpretation of Russian legal codes, it was impossible to adhere to the letter of the law and operate profitably. A survey among businessmen and women conducted in 2001 found that only 15 percent of those interviewed claimed they could operate legally. The remaining 85 percent said that of necessity they have had to cut corners.3 As a result, almost everyone operates with the knowledge that if they step out of line or cross the wrong person, they can face crippling charges from the prosecutor general’s office. Once the prosecutor general makes such charges, he can then freeze a company’s bank account, after which it cannot pay its bills and almost inevitably cannot survive.
TABLE 7.1 Russian Petroleum Company Expansion Abroad
POLITICIANS FOR SALE
Just as the state and its national champions can force out whomever they choose, they can also use their resources to buy up priority projects or personnel. The most glaring instance of this was the way Gerhard Schroeder prostituted himself for the Nord Stream gas pipeline designed to link Russia and Germany under the Baltic Sea.
As embarrassing as Schroeder’s complicity was to most Germans, he is not the only one to be wooed or seduced by Russia’s energy money. About the same time, Donald Evans, a close friend of President George W. Bush, was offered a somewhat similar opportunity. Evans, like Bush, also has a background in the Texas oil business. (Reportedly, he was more successful at it than the future president.) Later, Evans served as chairman of the Bush-Cheney 2000 presidential campaign, after which Bush brought him to Washington in January 2001, as his first Secretary of Commerce. Attempting to take advantage of that close relationship with President Bush, in December 2005, a year after Rosneft seized Yuganskneftegaz from Yukos, President Putin offered Evans what Putin referred to as “a top job” at Rosneft.
In a May 2006 meeting with President Bush, the president told a small group of us that he had heard about the offer to Evans directly from Putin, who told Bush that he was doing this “as a favor” to President Bush. The president said he was puzzled as to why Putin thought this should be regarded as “a favor.” From the outside it was anything but. Accepting this offer from Rosneft would have served to legitimize Rosneft’s takeover of Yuganskneftegaz, which had been Yukos’s most valuable asset. If he had any doubt as to how compromising his acceptance would have been, a December 19, 2005, editorial in the Wall Street Journal warned Evans that the public would perceive his taking the job as a sellout and urged him to reject the offer. After thinking about it for two weeks (suggesting that he must have been tempted), Evans eventually turned it down, thereby sparing himself the embarrassment that followed Schroeder’s appointment.
Not everyone in the United States was so principled or so forewarned. Shortly after his daughter Karen was hired for $500,000 by ITERA, the Turkmenistan-Ukraine trading company headquartered in Jacksonville, Florida, Curt Weldon, a Republican congressman from Pennsylvania, became ITERA’s public advocate. Those connections in part explain how ITERA, a rich Russian energy company, managed to apply for and receive an $868,000 grant in February 2002 from the U.S. Trade and Development Agency. Of all things, this money was to be used to underwrite ITERA’s effort to explore a Siberian gas field.4 That a U.S. agency should agree to finance what in fact is a well-endowed Russian company, underwriting its efforts to explore for gas in Russia, does seem odd. The grant to ITERA bears a striking resemblance to the loan guarantees the German government gave to Nord Stream before Gerhard Schroeder lost his post as chancellor and became that company’s chairman.
Although Weldon denies he did anything wrong, the circumstantial evidence that he was unduly supportive of ITERA is hard to ignore. Among other efforts on ITERA’s behalf, Weldon sponsored a dinner in September 2002 to honor Igor Makarov, chairman of ITERA, at the Library of Congress in Washington; gave a speech in the House of Representatives in 2002 about ITERA; and participated in the opening of ITERA’s headquarters in Jacksonville in 2003, a city a bit outside his Philadelphia congressional district.5 The Russian paper Kommersant claims that between 2002 and 2004, Weldon also worked on behalf of two other Russian companies.6 Nor did it help that all of this became public knowledge shortly after the lobbyist Jack Abramoff and disgraced Congressman Tom DeLay had also been accused of taking money from Naftasib, a Russian oil company, and then lobbying on its behalf.7 For this, Abramoff was alleged to have been paid $2.1 million. With Russia’s energy wealth, it was hard to avoid the perception that like many U.S. interest groups, a few Russian companies had also discovered how receptive the Republican-controlled Congress had become to financial incentives in 2006.
In October 2006, U.S. government attorneys obtained search warrants and then raided four houses and offices in the Philadelphia area and the ITERA office in Jacksonville. Weldon’s efforts on behalf of I
TERA then became a major issue in the election that November. Among the gaffes that became public was Weldon’s praise for ITERA when he spoke at the opening of the company’s headquarters in January 2003: “I can think of no other company that represents what Russia is today and offers in the future.”8 Given the accusations at home that ITERA was a classic case of Russian officials stripping assets from state companies for their own personal benefit, Weldon was probably more accurate than he intended to be.9
The Schroeder, Weldon, DeLay, and Evans seductions highlight not only how money can seduce some of the West’s highest ranking officials but also how the Russians are learning to use their oil wealth outside Russia (they long ago learned how to use it within Russia). This wealth has catapulted Russia into new power relationships with its customers and Russia’s main rival, the United States. Unlike the Cold War era, however, when the Soviet Union was effectively checked militarily by the United States and vice versa, it is hard today to find any similar restraint. Then, each feared to use nuclear weapons. We understood that if we used such weapons against the USSR, it would use its armed missiles against us. This was called MAD: mutually assured destruction.
NO MUTUALLY ASSURED RESTRAINT
Today, if the Russians or Gazprom threaten to halt the flow of their natural gas, there is little anyone can do about it. After twenty years or so, Russia’s natural gas has become an integral part of the economies in the countries it serves. The European pipeline network does distribute gas from other countries but by far the greatest flow is from Russia. If the gas flowing from Russia—or the gas transiting from Central Asia in the Russian pipeline—were to be curtailed, consumers in Germany and other Central European countries near the Russian border would have a difficult time finding a substitute. While there are other producers of natural gas such as Algeria and Norway supplying product to the pipeline, they are at the other end of the pipeline network in the southwest or northeast, and it would be difficult to reverse the flow in a pipeline that has been designed to ship Russian gas coming from the east. Coal could be a replacement, but several months would be required to make the needed adjustments and the affected countries could experience several cold winters in the meantime. That is why we have likened the pipeline to an umbilical cord. Because Russia controls delivery of so much gas through its pipeline, in effect it has monopoly control in the markets it serves.
As we saw in Chapter 6, some have suggested that the Gas Exporting Country Forum (GECF) should turn itself into an OPEC counterpart. The group consists of fifteen countries, including the largest gas exporters, Russia, Iran, Algeria, and Qatar. As of 2007, GECF had met seven times, but despite some occasional tough talk, it has been unable to do much more than exchange information on such matters as technology, research, and perhaps some product swaps—for example, Algeria has sent its LNG (liquefied natural gas) to the United States in exchange for Russian natural gas delivered by pipeline to an Algerian customer in Western Europe.10
Some time in the future, the market for LNG may become large enough so that if gas delivered by pipeline should be cut off, LNG can be substituted in its place. But because producing LNG is so expensive and requires such a large capital investment, in 2005, 87 percent of it was sold only on the basis of long-term contracts. Unlike oil purchases that are made on the spot, LNG transactions often require as much as a two-year contract commitment. That in large part explains why as of 2005, 19 percent of the world’s gas was delivered by international pipeline, compared to only about 6.9 percent as LNG.11 LNG production is expected to double by 2010, but the likelihood is that relatively long-term contracts will still be required, making an actual spot market unlikely.
Even if some way can be found to produce LNG at a much cheaper price, remember that GECF members export only 14 percent of the gas consumed in the world. This compares to OPEC, whose members account for more than 35 percent of the world’s oil exports. The United States, for example, produces 84 percent of the gas it consumes and Canada provides another 15 percent.12 If Gazprom were to enter into a joint venture with BP in Trinidad to produce LNG, there might be local consequences for U.S. consumers accustomed to using imported LNG, but LNG constitutes such a small fraction of the total natural gas consumed in the United States that the Russian venture would have little impact on this country. The real threat of an effective GECF would be felt in Europe where Russia and Algeria account for 44 percent of Europe’s natural gas consumption.
But there is reason to doubt that Russia would be willing to subordinate its actions to such an umbrella group. Russia has resisted membership in OPEC for that very reason. It prefers to let others coordinate production cutbacks. This allows Russia to increase its own production so it can benefit from the higher prices that OPEC cutbacks have created. It did just that in 1973. It is hard to see, therefore, why Russia would be willing to subordinate itself to a more powerful GECF. After all, it already has enormous clout.
This is why with Gazprom’s newly acquired ability to determine economic, political, and personal success or failure, Russia is in a stronger position relative to Western Europe than it has ever been in its history. The threat of mutually assured destruction may have ensured no one would use missiles during the Cold War, but today there is no mutually assured restraint (MAR) to temper what might be called a one-nation OGEC, Organization of Gas Exporting Country, which is Russia today.
This is not to argue that Russia can do whatever it wants with its natural gas reserves. There are several concerns: one set has to do with the demand for Russian energy, one set has to do with its energy supplies, and one set is an offshoot of Russia’s political and economic environment.
What would happen, for example, if there were a world recession and/or demand for Russia’s gas and oil should suddenly slacken? After all, it is not as if Russia had no petroleum or gas reserves prior to 2000. Russia has been the world’s leading producer of natural gas for some time, as well as a major, if not the largest, petroleum producer for many years. So why is it only now that Russia and Gazprom have become such concerns to the Europeans? The answer, in large part, is that as China and India have come of age financially, they have gobbled up most of the slack in the energy market. Despite the increasing emphasis on energy conservation, overall world demand continues to grow. At the same time, some of the existing reserves in Western Europe are being depleted. A far-reaching recession would undoubtedly precipitate a drop in commodity prices just as it did in 1997 and 1998, but at best that would be a temporary phase.
THE QUEST IN THE WEST FOR ALTERNATIVES
Compounding the problem, there are fewer and fewer prospects of finding new giant petroleum or gas fields. As in the past, the high energy prices of the early twenty-first century have stimulated the search not only for reserves that previously would have been unprofitable to exploit but also for new types of energy. Sources of supply such as the oil sands of Canada that until recently would have been too expensive to work now are worth developing. They provide Canada with reserves that some claim to be second only to Saudi Arabia’s. Then there is also ethanol made from both sugarcane in Brazil and corn in the United States as well as solar and wind power. Detroit automakers have been campaigning to design cars that can run on either regular gasoline or E85, a combination of 85 percent ethanol and 15 percent petroleum.13 They have already manufactured several million such flex-fuel vehicles as well as hybrids that utilize both electricity and gasoline. Similarly in the aftermath of the $90–$100 a barrel oil price, many in Europe as well as the United States and Asia are taking a second look at nuclear energy. Nuclear energy already generates almost 80 percent of France’s electricity. However, it is unlikely that enough new nuclear facilities can or will be built in the near future or enough new forms of energy or enough new deposits of crude oil and natural gas in Russia or elsewhere can be found to replace the reserves depleted by existing consumption, much less to provide for an increase.
Additionally, Russia’s influence could be wea
kened if the Europeans can find some way to gain access to natural gas from Central Asia without having to pipe it through Russia. At times, Kazakhstan has offered its support for various arrangements that would bypass Russia. (Almost as often it has disavowed any such routing out of loyalty to, and probably intimidation from, Russia).14 This alternate route has at times been supported by the United States and the European Union. It should be a major priority for both Europeans and Americans.
Conceivably, LNG from non-Russian sources might also become a viable alternative, but at the moment, few places can supply enough of it at reasonable prices. Unless new technology offers a cheaper way of processing LNG, the prospects for creating a widely used spot market for LNG where consumers can purchase LNG at the last minute are not very good. For the time being, creating processing and handling facilities for producing, shipping, and distributing LNG is very expensive. As a result, almost everyone involved insists on a long-term contract commitment before they will agree to the necessary investments.
Of course, with time, there is the danger that other countries and other suppliers might try to encroach on “Russian markets.” Alert to such a possibility, Gazprom, especially when Putin was president, could be counted on to attempt to gain control of possible producing fields outside Russia before potential competitors had a chance to intervene. For example, just as the Chinese have looked to Africa for sources of supply, so in 2008 Gazprom also sought to tie up what were thought to be very large gas deposits in Nigeria. This was seen as a strategy to gain control before private Western companies could step in, convert the gas to LNG, and use it to undermine Russian sales to Europe and the United States.15 As part of the arrangement, Gazprom also promised to help Nigeria reduce the amount of associated gas released during oil production that the Nigerians flare, that is, burn off into the atmosphere.
Petrostate:Putin, Power, and the New Russia Page 23
