The European Commission of the European Union on September 19, 2007, adopted a resolution insisting that no company from outside the EU be allowed to acquire energy infrastructure (i.e., gas distribution companies) “in Europe unless there is ‘reciprocity with that country.’ “60 It was assumed this was also intended specifically to prevent further acquisitions within the EU by Gazprom; certainly some members of the Russian Duma interpreted it that way and were not happy about it.
Others take an opposite approach and may actually welcome Russian efforts to buy up local natural gas distribution service companies and properties, much as it has done in Belarus, Lithuania, and Germany. As they see it, if the Russians own these distribution facilities, they will be less likely to shut off the flow of gas to their own facilities.61 On the negative side, control of such assets will allow Russian interests to exclude non-Russian-originated gas from their pipeline. They may even be able to extract monopoly rents. At the same time, foreign assets owned by Russians outside of Russia risk ending up as hostages. Presumably the rule of law that prevails in the United States and other Western countries will prevent retaliation and the arbitrary seizing of property owned by Russians. As we saw earlier, however, Noga, the Swiss company, managed to win permission from a European judge to seize the Luxembourg bank owned by the Russian government, suggesting that the more property owned by Russian entities outside Russia, especially where the state is the dominant owner, the more vulnerable Russia becomes to the type of pressure and blackmail that on occasion Western companies in Russia have faced.
This implies that U.S. policy should encourage Russian companies to invest in the United States, especially when they provide goods and services that supplement those sold by others. In the same way, the more assets owned by Russian entities outside of Russia, the more Russian firms are likely to feel pressure to conform to international standards. Thus, if Gazprom should for some reason decide to withhold delivery of LNG to its U.S. customers, as a countermeasure those customers might well decide to seize Russian-owned assets as a hostage. In the same way, companies like LUKoil should be encouraged to compete in U.S. markets by exporting Russian petroleum to the gasoline service stations that it owns here. (This is also a way to diversify oil imports.) When Russia is able to act as a monopolist, however, such investments are more problematic—building a natural gas pipeline that gives them monopoly power over consumers in the territory served by that pipeline would be an example.
THE NEW ASSERTIVE RUSSIA
In the aftermath of the financial collapse of August 1998, it looked as if Russia’s day as a superpower had come and gone. That it should recover and reassert itself again after less than a decade is nothing short of an economic and political miracle.
Yet its recovery is heavily dependent on high energy prices, making that recovery precarious. Countries with a monoculture based on energy more often than not have complicated social, political, and economic problems caused in part by their overreliance on energy resources. Nevertheless, most Russians would agree that the benefits that stem from that monoculture have more than offset the disadvantages. Russian petroleum export revenue has provided Russia with extraordinary liquidity as a creditor nation—a rather unusual, if not historic, status for Russia. Moreover, its natural gas wealth and its ownership of natural gas pipelines, at a time when energy markets are likely to be severely constrained for years to come, give Russia unprecedented political and economic power. Whether Russia joins in a strong GECF (Gas Exporting Countries Forum) consortium is irrelevant; because of its pipeline operations, countries served by this pipeline, be they in Europe or Asia (including China), will have a hard time resisting Russian demands. This is very different from the MAD (mutually assured destruction) days of the Cold War when each side was afraid of the other. For the foreseeable future, there seems to be no way to restrain Russian behavior. Yet as they pile up more and more dollars and euros, the Russians are almost certain to use more and more of their money to expand and buy up assets overseas. Once they are exposed this way, they in turn may find themselves held hostage.
For now, however, Russia, with or without Vladimir Putin as president, finds itself in a newly assertive, even dominant, international position. Its emergence as a new super energy power overlaps with the weakening of the United States as we have squandered our manpower and resources in Iraq. Russia under Putin, on the other hand, has developed a new hubris that is not based on mere bluster.
This has manifested itself in several ways. For instance, with its newfound cash, Russia once again is increasing the funding of its military. In 2005, military expenditures rose 27 percent over 2004 and in 2006, they were increased by another 22 percent. And in an episode reminiscent of the nineteenth century, Russia sent an expedition in two mini-submarines 15,000 feet under the Arctic ice cap. The submarines planted a titanium capsule with a Russian flag under the North Pole and then claimed ownership of 460,000 square miles of Arctic Ocean floor. Asserting that the 1,240-mile underwater Lomonosov Mountain Range extends from the Russian mainland into the polar region, Russian geologists took core samples of the ground at the Pole which they insisted matched similar samples from the underwater area part of Russia. Their reasoning is that this makes the North Pole part of Russia. This not only has military implications but the region is thought to contain as much as 10 billion tons of oil and gas deposits, equal to perhaps 25 percent of the world’s as yet undiscovered oil and gas; and with earth warming, these energy deposits are now much more readily accessible.62
A land claim of this sort by the Russian government is not all that novel. Czarist governments claimed parts of China as well as Alaska in the nineteenth century and the Soviet government regularly presented claims over territories of other countries including Finland, Rumania, Poland, and Japan. What is unprecedented now is that with its new financial holdings, Russia has also begun to demand a say in world monetary and financial decision making. In a June 2007 speech to a group of Western and Russian businessmen, Putin went so far as to challenge the way the World Trade Organization and the International Monetary Fund (IMF) operate. He called them “archaic, undemocratic and awkward,” complaining that the United States, the EU, and Japan run the organization as if it were a privileged private club. Putin wanted more say for Russia and other non-Western countries. With that in mind, a few months later Russia proposed that Josef Tosovsky, a well-regarded Czech central banker and former prime minister, be made the head of the IMF instead of the EU’s nominee, Dominique Strauss-Kahn, the former French finance minister. What made this so newsworthy is that by tradition, Europeans and now the EU select the head of the IMF while the United States nominates the head of the World Bank. Moreover, in the Soviet era, the USSR more or less ignored the World Bank and the IMF. Now that modern-day Russia is a financial powerhouse, Putin has decided to challenge such cozy arrangements. In the same St. Petersburg speech, Putin questioned why only the dollar and the euro serve as world currencies. Given the new strength of the ruble, Putin argued that the ruble should serve the same function.
These are clearly good times for Russia. In many ways it is like awakening from a decade-long nightmare. Perhaps we in the West did not fully appreciate how upset most Russians were after the loss of their country’s superpower status. It was a national disgrace and humiliation. How deeply this was felt can be gauged by revealing comments from two Russian political figures. Reacting to the British government’s demand that the Russian government turn over Andrei Lugovoi, a former KGB agent, to them so they can question him about the polonium 210 poisoning of Alexander Litvinenko, Konstantin Kosachëv, chairman of the Russian Duma’s Foreign Affairs Committee, exploded. Normally a reasonable fellow, Kosachëv protested, “You can act this way toward a banana republic, but Russia is not a banana republic.” In an even more revealing statement, one better suited for a psychiatrist’s couch than the weekly newspaper, Argumenty i fakty, in which it appeared, Valentina Matviyenko, the governor of St. Petersburg, proud
ly insisted that “Russia has now regained a sense of self-respect. We spent so many years feeling there was something wrong with us— others lecturing us on how we should live and where we should go. But we have overcome our inferiority complex.”
Putin clearly shares this new assertiveness. This was dramatically demonstrated in Munich, Germany, on February 10, 2007, at the Annual Munich Conference on Security Policy. In a speech to the group of mostly NATO member countries, Putin criticized not only NATO for opening bases on what used to be Warsaw Pact territory— something NATO promised it would not do—but also President George W. Bush and the United States for pursuing unilateral policies in Iraq and even Eastern Europe. The tone and the content of his speech to representatives of countries that were once enemies of the Soviet Union would have been unthinkable nine years earlier. It was a tough speech that unnerved many Western representatives who had seldom, if ever, heard such candor in a public attack on the United States at a meeting of America’s closest allies.
Putin’s speech reflected Russia’s progress in the short time since Russia had become a major energy producer. It was not the tough part of the talk, however, but the softer part that best demonstrated Russia’s new assertiveness and self-confidence. After having taken President Bush to task in such an open way, during the question period Putin suddenly softened his mood. “In spite of all our disagreements, I consider the president of the United States my friend. . . . He is a decent person, and it is possible to talk and reach an agreement with him”; or as the New York Times translated Putin’s Russian, Bush “is a decent man and one can do business with him.”63
For those with long memories, this condescending sentiment all but echoed what then Prime Minister Margaret Thatcher said in December 1984 after she first met that “unwashed” Politburo yokel from Moscow, Mikhail Gorbachev. This was but three months before he would become the leader of the USSR. Now twenty years later as the head of this new energy powerhouse, it was Putin’s turn to show a similar condescending manner. Whether he meant it or not—and he probably meant it—Putin now wanted to show that the tables have turned. It was Russia’s turn to be condescending to that “unwashed” Texas yokel, George W. Bush. There was not much the targets of his attack could do but smile and seek to import more of Russia’s gas and oil.
Notes
Introduction
1. SKEIN News, November 30, 2005.
2. Financial Times, April 24, 2006, 2.
3. David Johnson’s Russia List, no. 26 (March 3, 2007).
4. Eurasia Daily Monitor, Jamestown Foundation, September 21, 2006; Moscow Times, March 23, 2007.
5. John D. Grace, Russian Oil Supply: Performance and Prospects (Oxford: Oxford University Press, 2005), 16.
6. Marshall I. Goldman, “The Russian Disease,” International Economy (Summer 2005), 27.
Chapter 1
1. Robert W. Tolf, The Russian Rockefellers (Stanford: Hoover Institution Press, 1976), 40.
2. G. Segal, “The Oil and Petrochemical Industry in the Soviet Union” (London: mimeo., undated), 1.
3. Tolf, 41–42.
4. Iain F. Elliot, The Soviet Energy Balance (New York: Praeger, 1974), 70.
5. Elliot, 70.
6. Daniel Yergin, The Prize (New York: Simon & Schuster, 1991), 57.
7. Segal, 2; V. I. Pokrovskii, Sbornik Svedenii Po Istorii I Statistike Vneshnei Torgovli Rossii (St. Petersburg: Department tamozhennykh sbor’, 1902), Vol. I, 217.
8. Pokrovskii, 217.
9. Elliot, 70; Tolf, 44.
10. Tolf, 40. This is an excellent study of Nobel’s life and work. Much of the description of Nobel’s activities in the remainder of this chapter is taken from this book and the study by Pokrovskii. See also Steve Le Vine, The Oil and the Glory (New York: Random House, 2007), chapters 1–3.
11. Pokrovskii, 218.
12. Tolf, 55.
13. Pokrovskii, 219.
14. Segal, 3.
15. Pokrovskii, 220.
16. Tolf, 97.
17. Tolf, 95.
18. Pokrovskii, 221.
19. Tolf, 48, 71–72, 99.
20. Pokrovskii, 221.
21. U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, bicentennial ed., Pt. I (Washington, D.C., 1975), 597.
22. Pokrovskii, 215.
23. Pokrovskii, 142.
24. Pokrovskii, 215; Peter Lyashchenko, History of the National Economy of Russia to the 1917 Revolution (New York: Macmillan, 1949), 689.
25. Zbynek Zeman and Jan Zoubek, Comecon Oil and Gas (London: Financial Times, 1977), 9; Tolf, 188–92.
26. Tolf, 192–93.
27. Pokrovskii, 217; Segal, 2.
28. Yergin, 131.
29. Yergin, 133.
30. Lyashchenko, 632.
31. Exports in 1913, however, did slightly exceed those in 1905 by 3,000 tons.
32. Trudy statisticheskogo otdeleniie, Departament tamozhenny sbor’, Obzor’ Vneshnei torgovli Rossii za 1901 (St. Petersburg: Department tamozhenny sbor’, 1903), 9 (hereafter Vneshnei torgovli Rossii and the appropriate year); Vneshnei torgovli Rossii 1915, 8.
33. A. V. Venediktov, Organizatsiia gosudarstvennoi promyshlennosti v SSS R (Leningrad: Izdatel’stvo Leningradskogo Universiteta, 1957), 185.
34. Tolf, 215.
35. Tolf, 217.
36. Segal, 5.
37. Anthony C. Sutton, Western Technology and Soviet Economic Development, Vol. I, 1917 to 1930 (Stanford: Hoover Institution Press, 1968), 41; Tolf, 222.
38. Sutton, Vol. I, 18.
39. Sutton, Vol. I, 19, 30, 122; the Japanese did not come in until 1925.
40. Sutton, Vol. I, 37.
41. Sutton, Vol. I, 10, 23.
42. Sutton, Vol. I, 82.
43. Venediktov, Vol. I, 185.
44. Segal, Vol. I, 16.
45. Foreign Trade, September 1967, 18.
46. Sutton, Vol. I, 41.
47. Foreign Trade, September 1967, 17.
48. Some of that might not have gone to the United States directly but to Standard Oil for reshipment to the Middle and Far East.
49. Ministersvo vneshnei torgovli SSSR (hereafter MVT SSSR), Vneshniaia torgovlia SSSR za 1918–1940 (Moscow: Vneshtorgizdat, 1960), 657 (hereafter VT SSSR with the appropriate year).
50. VT SSSR, 1918–1940, 528.
51. Sutton, Vol. I, 16, 40. Later on Sutton refers specifically to 1928 when he says petroleum amounted to 19.1 percent of all earnings. His assertions are then repeated by Tolf and Segal.
52. VT SSSR, 1914–1940, 94.
53. Segal, 12.
54. Elliot, 72; Grace, 14.
55. Elliot, 74–75, 89; Robert Campbell, The Economics of Soviet Oil and Gas (Baltimore: Johns Hopkins University Press, 1968), 124–25.
Chapter 2
1. Pravda, December 10, 1963, 1; VT SSSR, 1913–1940, 58, 144.
2. See Table 1.2; Elliot, 74; Anthony C. Sutton, Western Technology and Soviet Development, Vol. II, 1930 to 1945 (Stanford: Hoover Institution Press, 1971), 90.
3. Sutton, Vol. II, 89; Anthony C. Sutton, Western Technology and Soviet Development, Vol. III, 1945 to 1965 (Stanford: Hoover Institution Press, 1973), 38–39, 135–36.
4. Campbell, Economics, 126.
5. Campbell, Economics,127–28.
6. Campbell, Economics,125; Robert W. Campbell, Trends in the Soviet Oil and Gas Industry (Baltimore: Johns Hopkins University Press, 1976), 27.
7. Elliot, 96; “Europe-Sibir,” Ekonomika i organizatsiia promyshlennogo proizvodstva (hereafter EKO), no. 4, 1976, 160–67.
8. Total Information, no. 68, 1976, Geneva, Switzerland, 2.
9. Total Information, 4; Elliot, 97; The Review of Sino-Soviet Oil, April 1979, 50.
10. Sutton, Vol. I, 24; Tolf, 65, 182.
11. Campbell, Economics, 102–20, 126–28; Joseph S. Berliner, The Innovation Decision in Soviet Industry (Cambridge: MIT Press, 1976).
12. Campbell, Economics, 93.
1
3. Campbell, Economics, 109.
14. Campbell, Economics, 93.
15. Pravda, February 28, 1978, 2.
16. Review of Sino-Soviet Oil, November 1977, 10.
17. Current Digest of the Soviet Press, February 14, 1973, 6.
18. Pravda, November 20, 1962, 4.
19. Izvestia, October 15, 1984, 47.
20. Pravda, January 27, 1978, 2; Daniel Park, Oil and Gas in COMECON Countries (London: Kogan Page, 1979), 67.
Petrostate:Putin, Power, and the New Russia Page 27
