11/01/2006
Ukraine gas dispute -- Has Putin gone nuts?
By William Engdahl
It’s more useful to assume
that the answer is ‘no.’ Then we must ask what is Russia doing with its gas
price policy demands and supply cut-off to Ukraine? The move is one part of a
complex series of Russian moves in the ongoing Grand Chess Game. That game is
between Washington as sole global superpower and Russia as a reconstructing
nuclear power, and one with a vast resource wealth needed by its Eurasian neighbours
from China to Germany and beyond. Russia, which holds far the world’s largest
known reserves of natural gas, is playing its own energy card with Ukraine as
the momentary field of that battle.
The Ukraine drama is
clearer if we look at it in the context of a series of very quiet but dramatic
moves recently by the Putin government in the realm of energy and national
military preparedness.
Part I: The Ukraine issue
Just one year after the
Washington-backed Ukrainian President Viktor Yushencko came into office in
Kiev, promising to bring Ukraine into NATO and into the EU, Putin and the
Russian state-controlled Gazprom natural gas monopoly of Russia, cut gas
supplies to Ukraine on January 1. The ostensible reason was that Ukraine
refused to pay a 450% price increase for Russian gas demanded by Gazprom for
its delivered gas.
By January 4 both countries announced that they had reached a compromise settlement. The terms appear to be a face-save for both sides: Ukraine’s state Naftogas, and Russia’s Gazprom. Under the Byzantine fine print Ukraine agreed to pay Gazprom’s demand of $230 per 1000 cu m for gas. The gas flows to Western Europe were reported back to normal after falling by up to 30% on January 1-2.
There are two aspects to
this peculiar situation which bear further examination. The first is commercial
and the second is geopolitical.
Fallacy of ‘world market price’
For more than a quarter
century the major Western oil companies led by ExxonMobil, ChevronTexaco, BP
and Shell have tried to establish the artificial construct of a ‘world market
price’ for natural gas, similar to the Brent or Dubai or WTI daily price
benchmarks. A global market in gas is far more awkward than for oil simply
because of the transport problems. Gas needs pipelines or costly LNG terminals
and tankers and is thus less mobile. Oil by contrast is controlled by four
giant Anglo-American oil majors—ExxonMobil, ChevronTexaco, British Petroleum
(BP) and Shell. Those four determine world oil prices. Because it has not been
possible to create a controlled global market for natural gas, the gas tends to
be pre-sold in contracts typically of 20-25 year term.
What has resulted is a
patchwork of different prices, usually in some opaque, undisclosed manner, tied
to a formula linking it to crude oil such that, when oil in dollars drops by
say, $1, gas would drop along with, but by how much is a proprietary secret of
the gas companies and for obvious business reasons—lack of price transparency
can hide a multitude of sins. That non-transparent price formula allows
companies like Germany’s E.ON-Ruhrgas to charge significantly more for its gas
to end-users when oil prices climb above $60, even though most of its gas
deliveries from Gazprom are in typically 20 to 25 year fixed price contracts
with small variances possible.
The Gazprom Ukraine dispute
opened the Pandora’s box of confidential gas pricing to the world as Russia
revealed Western customers paid some $450 tcm compared with the then $50 tcm
Ukraine enjoyed.
Gazprom argued that raising
that to $230 or about half the western price, was a fair price. Gazprom is in
the process of becoming a global energy giant on a par with PB or ExxonMobil.
Putin also signed a decree
on December 28 lifting the limits on foreign ownership of Gazprom, an
ostensibly market-oriented move. It made good a promise Putin made two years
ago on the controversial arrest of Yukos Oilchairman and political rival,
Mikhail Khodorkovsky, namely that he would liberalize the shares of Gazprom, in
a matter of ‘months not years.’
Gazprom share ownership by
foreign interests was previously capped at 20% of total shares, and the Russian
government held the remaining and controlling share. Foreign investors were
limited to Gazprom London-listed American Depository Receipt shares.
Gazprom shares will now be
listed on the Russian stock market
later this month. Gazprom has a current market capitalization of $160 billion
dwarfing the next largest Russian stock company, LUKoil with $50 billion capitalization,
and Surgotneftegaz with $40 billion.
The new law will also bring
Gazprom into the widely followed Morgan Stanley Capital International emerging
market index, dramatically shifting weightings there for index tracking
investors. That has major implications
for international financial portfolio investment.
Gazprom argues it was
‘commercially’ justified in breaking an August 2004 Gazprom-Naftogaz supplement
contract which specified a fixed $50 price until 2009, a price it said then was
‘not changeable.’ All that being said, the Gazprom-Kremlin move was clearly a
hardball Russian geopolitical warning, with an eye to both NATO and upcoming
Ukrainian Parliament elections in two months.
Ukraine’s political shift
What changed in the ‘not
changeable’ Gazprom-Ukraine contract between August 2004 and January 2006, of
course, was not Gazprom but rather the political complexion of Ukraine. The
victory of the Washington-financed Yushchenko candidacy for President in
December 2004, and his inauguration in early 2005 on a pledge to bring Ukraine
into NATO, did not go down well in Moscow, which considers Ukraine historically
and strategically a part of ancient Russia—Kiev Rus.
It was also clear to the
Kremlin that Yushchenko’s call to bring Ukraine into NATO was no mere election
gimmick to distance his party from his pro-Moscow electoral opponent.
Yushchenko’s wife, Kateryna
Chumachenko Yushchenko, a Chicago-born Ukrainian-American, had previously
served in the Reagan White House and State and Treasury departments, and did
liaison work with Afghani and other anti-Soviet US-sponsored opposition groups,
such as Bush neo-conservative Zalmay Khalilzad’s Friends of Afghanistan. She
also sat on the board of a pro-NATO neo-conservative US think-tank, New
Atlantic Initiative, along with Radek Sikorski, Poland’s effusively
pro-Washington Defense Minister. Sikorski is a close friend and former American
Enterprise Institute colleague of Richard Perle and the other neo-con hawks.
The New Atlantic Initiative
was created in June 1996 following the Congress of Prague, where more than 300
conservative politicians, scholars, and investors discussed a ‘new agenda for
transatlantic relations.’ The ‘new agenda’ they promoted was quite simply to
encircle Russia by bringing the former Soviet satellite states into NATO and
into a US-defined ‘free market.’
The New Atlantic Initiative
has headquarters in the offices of the neo-conservative base of operations, the
American Enterprise Institute (AEI) in Washington, DC, where Richard Perle, his
co-author David Frum, Michael Ledeen, Lynne (wife of Dick) Cheney and Irving
Kristol are based. A more hard-core nest of neo-conservative hawks would be
hard to find on that side of the Atlantic.
The New Atlantic Initiative
openly states it was set up to bring the countries of the former Soviet bloc
into NATO and the European Union. Its original ‘patrons’ were Václav Havel,
Margaret Thatcher, Helmut Schmidt, Leszek Balcerowicz, Henry Kissinger, and
Bechtel’s George Schultz, Secretary of State under Ronald Reagan. Its executive
director was current Polish Defense Minister, Radek Sikorski.
Kissinger chaired the NAI
International Advisory Board, which was filled with neo-conservatives,
including the authors of the Project on the New American Century people (the
original group calling for ‘regime change’ in Iraq already back in September
2000).
The NAI board included PNAC
former LockheedMartin executive, Bruce Jackson, now of the Project for
Transitional Democracies. Also former Pentagon adviser Richard Perle; Michael
Ledeen, one of the close neo-con advisers to Karl Rove; neo-con publisher
William Kristol; now UN Ambassador and neo-conservative, John Bolton; Don
Rumsfeld; Deputy State Department Secretary Robert Zoellick.
The fact Yushchenko
immediately opened oil pipeline talks in May 2005 with Chevron, as a
Polish-oriented counter to the Russian pipeline Brody route, was also not lost
on Moscow. Poland, a new NATO as well as EU member, is firmly in the
pro-Washington camp, with its Defense Minister, Radek Sikorski, a
Washington-trained neo-conservative hawk.
As viewed from the eyes of
a Kremlin President, Russia was being encircled by pro-NATO former satellite
states. Not only that, but with neo-conservative assets in the Presidency of
Ukraine and the Defense Ministry of Poland, the encirclement was becoming
potentially quite threatening to vital Russian national security interests as
seen from the Kremlin. After all, Poland is now in NATO.
The NATO encirclement of
the Russian Federation, as we have earlier detailed, involved a series of
so-called ‘Color Revolutions.’ In Georgia the US-educated and backed lawyer
Mikhail Saakashvili replaced the old KGB survivor, Edouard Shevardnadze.
Georgia was a key strategic piece for the route of the Baku-Tbilisi-Ceyhan oil
pipeline from the Caspian, a project backed by Washington to get Caspian oil
out to the West, independent of Russia. That pipeline was completed in
September and is slowly being loaded.
The next major strategic
blow to Moscow came with the mentioned Ukrainian ‘Orange Revolution’
inauguration of Yushchenko in January 2005. Then in July 2005 came another
US-backed ‘color revolution,’ the ‘Tulip’ Revolution in Kyrgystan.
Indeed, as recently as
January 9, 2006, NATO Secretary General Jaap de Hoop Scheffer told reporters in
Brussels that he expected to see Ukraine inside NATO by 2008.
Putin reacts
Putin is many things but he
can’t be accused of being passive in the face of strategic threat to Russian
national interests. Moscow moved swiftly last summer to exploit a growing rift
between Uzbekistan and Washington, and the result was a ban by Uzbekistan of US
military overflights and use of its airbase, a right that had been granted by
President Karimov after September 2001 to get Uzbekistan into the ‘good’ side of
the US War on Terror. Relations between Uzbekistan and Moscow today are very
close, including in military mutual defense agreements. That rapprochement
dealt a major blow to the Washington encirclement on the Eurasian space of both
Russia and China.
The next move in this
complex geopolitical power chess game will be in Ukraine where Yushchenko faces
parliamentary elections in March. Discontent with his lack of progress on the
economy had given him very low poll ratings. Some Russian experts believe Putin
is playing hardball with Yushchenko to remind Ukraine voters where their energy
security lies, i.e. not with Yushchenko and his Western friends, but with
Moscow. Russia regards a NATO Ukraine inside the EU as a ‘strategic threat’ to
put it mildly.
The Gazprom Ukraine ‘compromise’
By ending the dispute so
swiftly, with a doctored compromise, Putin made his point, and he immediately
reassured edgy West European gas importers that Gazprom never intended to cut their gas, only the uppity Ukraine’s.
Under the terms of the new
deal, Gazprom will sell the gas which Ukraine receives, but in a devious way.
It will be sold for $230 thousand cubic meters (tcm) to an Austrian trading
company, Rosukrenergo. Rosukrenergo is in turn owned by Gazprom and the Austrian
Raifeissen Investment AG. Then Rosukrenergo simultaneously buys gas from
Turkmenistan for $50 a tcm. The two are ‘mixed’ and Ukraine’s Naftogas buys the
final gas for a price of $95 tcm. Both sides can claim ‘victory.’
Gazprom also agreed to pay
a 50% higher Transit Fee to Ukraine for its pipeline route through Ukraine to
Europe, a fee of $1.60 instead of $1.06 per tcm per 100 kilometer. As well,
both parties will settle in dollars not in the form of gas.
The West was caught in a
dilemma in opposing the Gazprom price demand of $230. First, as it was only
half the ‘market’ price, showing some restraint on Gazprom’s account. Second,
because Western organizations from the WTO to the IMF to the Washington Bush
Administration have been demanding Gazprom begin selling its gas in Eastern
Europe at ‘market’ prices and not at a ‘subsidized’ price. Ukraine is far the
largest Eastern Europe gas customer of Gazprom.
Significantly enough, on
January 5 US Energy Secretary Sam Bodman told US companies they should not be
discouraged from investing into the Russian energy sector merely because of the
Ukraine dispute, adding that the dispute had not undermined his confidence that
Russia was a good place to invest. ‘We continue to encourage our companies to
explore opportunities with Russia,’ he added. Washington clearly has a larger
agenda in the region. So too does Putin, and the two agendas are manifestly
divergent.
The swift settlement of the
Ukraine gas dispute, as well as the details of the compromise, in which Ukraine
de facto pays what it offered before the cut-off, suggests what Yushchenko
claimed. It was not an issue of commercial policy. It was and is an issue of
power politics, Russian power geopolitics.
Its real focus is how Putin
perceives the danger posed by an ever-more-ambitious USA foreign policy in
Eurasia and what he can do to contain that threat. It’s clear the cut-off was
intended to send a sharp signal to Kiev: don’t get any cute ideas of joining
NATO and becoming a part of a hostile alignment to Russia. Here the US build-up
of potential war threat against Iran also figures into the Kremlin
calculus.
Part II: Russia’s strategic response to Washington
Moscow’s military muscle shows
On December 26, as most of
the West was distracted in Holiday cheer, the Russian military activated a new
fleet of Topol-M missiles. The new generation weapon is capable of fitting a
nuclear warhead, as well as changing trajectory to foil an enemy interception
device such as the current generation of US anti-missile defense weapon.
This was no small act of
macho bravado. General Nikolai Solovtsov, commander of Russian Missile Forces
simultaneously announced the mobilization of a new battalion for the Topol-M
missiles. The missiles have a 1 megaton impact, some 75 times the Hiroshima
A-bomb of 1945. Solovtsov is an outspoken critic of the US decision to forge
ahead with its anti-missile defense, which is a Rumsfeld priority. The Russian
general announced that the Topol-M was, ‘capable of piercing any missile defense
system,’ and was immune to electromagnetic blasts used by current US missile
defenses. For military experts that is
impressive.
Russia announced it has
also formed 20 new nuclear missile units, its largest increase of nuclear
spending since the 1962 Cuba Missile Crisis.
London’s respected Jane’s Defense Review says the new
Topol-M missiles could ‘evade the ballistic missile defenses currently being
fielded in Alaska and California.’ That’s perhaps an unexpected surprise for
Mr. Rumsfeld, the champion of the US defense shield.
The fanfare in Russia
around the Topol rollout is the greatest since the Soviet-NATO confrontation
around the Soviet SS-18 missiles and the NATO Pershing II’s in the 1980’s. The
recent flood of petrodollars into Moscow Treasury accounts has allowed the
military to significantly upgrade defense technology for the first time since
the collapse of the Soviet Union in 1990. In November 2005 the Kremlin
announced a $ 1.8 billion spending increase for the nuclear missile program. The
move was greeted with applause from the Russian population according to
reports.
Not irrelevant, Ukraine has
now asked to rejoin the Russian nuclear umbrella and be protected by Topol-M
missiles along the Volga River. In September 2005, Russia also successfully
tested a submarine-launched version of Topol-M, called Bulava, from the White
Sea. That missile successfully hit its target 30 minutes later on Kamchatka on
the Far East side of Russia, an extremely impressive feat not lost on Pentagon
strategists.
Putin, under strong US
protest, has also pushed ahead with his decision to sell anti-aircraft missiles
to Iran. Russian technicians are building the Iranian nuclear power complex.
The current leaks in the German press as well as Turkish media, whether true or
not, of advanced Pentagon preparations for a possible nuclear strike on Iran’s
nuclear installations, has to be seen in the context of these Russian military
advances. This is becoming a very high-stakes game of chess in Eurasia.
Zbigniew Brzezinski’s map of Eurasia,
recall, includes the oil-rich Middle East.
This renewed Russian
military assertion on the advanced nuclear missile front is also accompanied by
major other moves to extend Russian energy policy abroad in a clear
politically-drawn map, or more accurately said, geopolitical map, as the
Russian map is about political geography-where the energy resources are and who
controls them.
There are three notable new
elements of the Putin energy strategy now being undertaken: the start of construction
of the Eastern Siberia oil pipeline going to Vladivostock on the Russian Far
East coast, the signing with Germany for construction of a new Baltic
underwater gas pipeline from Russian territory to Germany, bypassing Ukraine or
Poland. Finally, on January 9, Moscow announced Gazprom had concluded an
agreement with the Moscow-aligned government of Alexander Lukashenko to explore
ways of expanding Russian gas delivery to the European Union via Belarus, again
bypassing Ukraine.
Russia’s new Gas and Oil Pipeline
strategy
These three projects
combined with the clear Russian signals it is not about to abandon its support
of the Iran nuclear plant construction and Russia’s unveiling of new missile
technologies, clearly indicate Russia is emerging as a serious counterweight to
what had been a one-sided move by the United States to divide and control the
giant Eurasian landmass in its now clear strategy of re-empting any rival
nation or group of nations in Eurasia from challenging American hegemony and global
‘total spectrum dominance’ as the Pentagon likes to call it.
It is useful to recall that
it was the ever-bolder sequence of US-led moves to surround Russia with an iron
cordon of US and NATO military bases which has prompted this Russian reaction.
Moscow is not naïve when it
comes to analyzing power relations and geopolitical advantage. In March 2005,
Leonid Shebarshin, ex-head of the Soviet Foreign Intelligence Service, KGB, who
now heads a Russian economic and security consulting company, told the Russian
paper, Vremya Novostei, ‘On the
pretext of fighting international terrorism, the US is trying to establish
control over the world’s richest oil reserves.’ He added, ‘The US has usurped
the right to attack any part of the globe on the pretext of fighting the
international terrorist threat. The fight against that all-mighty ubiquitous
myth [Al-Qaeda], deliberately linked to Islam, is of great advantage for the
Americans as it targets the oil-rich Muslim regions.’
On December 9, Gazprom
began construction of a 744 mile pipeline--the Northern Pipeline or more
properly the North European Gas Pipeline (NEGP)--that will deliver Russian gas
to Germany. The undersea Baltic route will bring Russian gas from Vyborg
between Finland and St Petersburg, through international waters, to the
northeast German port of Greifswald. That allows Gazprom to bypass an existing
pipeline from Russia through Poland. Future spurs from the main line could
deliver gas to Swede, Finland and the UK. British gas output peaked in 2000 and
is rapidly declining such that the UK in 2005 was a net gas importer the first
time since the 1970’s.
It is a major $5 billion
deal negotiated by then German Chancellor Gerhard Schroeder and Putin just
before Schroeder left office. The deal is with Germany’s largest gas company,
E.ON and BASF’s Wintershall AG, Germany’s largest oil and gas producer. We now
know Schroeder was also offered a lucrative seat on the board. That project
immediately sent alarm bells ringing in Washington and by proxy, in Washington-dominated
Poland and Ukraine. Poland has called the pipeline a ‘conspiracy’ against
Polish interests, and has appealed to the International Energy Agency to block
the deal claiming it robs Poland of gas transit fees (sic!). The IEA chief
economist has sided with Poland whatever that is worth.
It seems likely, despite
soothing words by Chancellor Merkel to the contrary, that Berlin will continue
to back the project. The Latvian press stated on December 12, ‘Merkel understands perfectly the importance
of the pipeline for her country: for some time Germany will become an exclusive
supplier of Russian gas to Europe in a situation where the amount of gas
extracted by European companies is steadily decreasing. Under the
circumstances, Germany has nothing to gain from involving Poland in the
project, because the laying of the pipeline may make Berlin dependent on Warsaw
to some extent.’
The second new Russian gas
export project is the Belarus enlargement. Belarus is today a de facto, and
soon to be de jure, part of a regrouped Russia. The US-led efforts to affect
regime change there with a ‘color revolution’ a la Ukraine, to date have fallen
flat. Hours after Russia and Ukraine settled their gas dispute, Gazprom
announced it was in talks to build new underground gas storage facilities in
Belarus. The two countries already have a common economic zone. The gas would come from Russia’s huge Yamal
peninsula gas field.
The third pillar of a
global independent energy export strategy, one that is clearly intended to
outflank the now-obvious Washington encirclement of Russian energy routes, is
the Russian oil pipeline from Eastern Siberia to Nakhodka on Russia’s Pacific
coast, at the Sea of Japan near Vladivistock.
Construction on this
pipeline was inaugurated also at the beginning of January.
The pipeline will run more
than 2,423 miles and would be able to transfer up to one million barrels a day
of oil of a quality similar to that in Abu Dhabi. The full size of the Russian
East Siberian field is not yet known and exploratory drilling will be required,
but early estimates are over 6 billion barrels. The project could take more
than a decade and costs could hit $20 billion owing t the harsh climate
conditions.
The project is expected to
cost as much as $8 billion and will be largely financed by the Japan Bank for
International Co-operation, a state agency, and the large private Japanese
banks. Interestingly, during a state visit to Japanese Prime Minister Koizumi
last November, Putin refused to give Japan a guarantee that Russia would give a
priority to routing the line from Lake Baikal to Nakhodko on the Sea of Japan,
rather than building a ‘China Route’ going instead to Daqing in northeast China
from Russia’s Skovorodino.
The pipeline, which will be
built by Russia’s Transneft, will be in two stages. Stage one, just begun, will
run from Siberia to Skovorodino, far from the coast to Japan but close to
China. That will be completed in 2008. The plans for a second stage were left
open during Putin’s Tokyo talks, leaving his Japanese hosts more than nervous.
Clearly, Putin and Russia’s Gazprom are playing their cards close to the chest.
The Koizumi government is regarded in Moscow as a Pacific proxy of
Washington.
The Institute of Analysis
and Prognostication Kazakhstan-USA, a Kazakhstan strategic institute, in a
recent roundtable discussion of ‘US Policy in Central Asia,’ noted the
resources reality defining much of US and NATO policy towards Eurasia and the
Central Asian republics since the collapse of the Soviet Union 15 years ago:
‘The proven world gas reserves as of 1 January, 2001 are 164 trillion cm. It is
believed that these reserves will be enough for 62 years. Russia and Iran have
50% of the world's natural gas reserves, while the territory of Russia, Kazakhstan,
Turkmenistan, Uzbekistan and Middle East (especially Iran-w.e.) has 70% of the
world reserves.’ And Russia itself holds fully 32% of those world gas reserves.
The Iran calculus
Little wonder Iran is such
an obsession of Washington military strategists these days. Iran has also been
regularly purchasing not only nuclear engineering expertise from Moscow. It has
also been buying Russian anti-missile defenses.
A Russian company, Antei,
which produces anti-aircraft missile systems has developed a new efficient
system called Tor M1. The US and other NATO countries have precision weapons
and a reliable shield is necessary. The new Russian anti-aircraft missile
system Tor is such a shield. According to the Federation of American
Scientists, the Tor system is the only system in the world which can detect and
identify various targets. It can detect targets at a height ranging from 10
meters to 6 kilometers. The Tor system is autonomous and has short reaction
time. The latest technologies of Russia's defense industry are used in it.
This is the system believed
to be in place in Iran against possible US airstrikes. The stakes are now far
higher than the Iraq campaign where 12 years of blockade and US air control
rendered Saddam Hussein’s military a farcical opponent for the US Shock and Awe
massive assault.
Clearly, as Washington
turns up the heat by leaking hints it is preparing a possible nuclear attack on
Iran, the potential for backfire against the United States is rapidly becoming
colossal. That is not to say that the Bush Administration isn’t mad enough to
try it. But it is becoming very problematic for the role of the US in the
world.
On
January 4, the Kazakhstan Gazeta
wrote, ‘The situation is getting more and more complicated. On the one hand, Americans
do not want Russia to strengthen its influence in Kazakhstan and Central
Asia..’ They noted that ‘the United States committed a serious error in
alienating Uzbekistan in recent months. ‘The
Americans were carrying out a double game with regard to Uzbekistan, but their
politicians and analysts got mistaken in their prediction, so the US policy on
this country ended up in a complete fiasco. The usage of double standards in
their approach is far from causing a growth of confidence of our peoples in the
United States of America,’ the paper concluded. ‘The fiasco of the
Americans with regard to Uzbekistan, when first a gradual modernisation of the
republic had been declared, then, after the Andijan events, the official
relationship with Tashkent worsened, showed to all that the American politics
and expert estimations were far from being omniscient and always successful. It
is a very important moment for the regional countries: all observers noted that
the geopolitical situation around Central Asia and Kazakhstan is directly
connected to contradictions between big powers.’
Contradictions
is putting it mildly.