Streetwise Professor

May 1, 2010

Gazputin on the March

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:45 am

Russia’s economic anschluss in Ukraine is well underway.  First, Putin announced a proposal to merge the nuclear generating assets of the two countries.  Second, yesterday he proposed something even bolder: the merger of Gazprom and Ukrainian gas monopoly Naftogaz Ukrainy.

Gazprom’s Alexi Miller stated the proposal met with an “enthusiastic” response from Ukrainian government officialsHowever, Ukrainian President Yakunovich’s spokesman denied that the deal had been discussed.

This would obviously be a major coup for Russia on the political and economic levels.  It would transform Ukraine into a Russian satrapy.  It would reduce the potential for holdups and conflicts like those that culminated in gas shutoffs to Europe in 2006 and 2009.  It would also reduce the need for South Stream in particular, thereby relieving Gazprom of the financial burden of paying for a system that makes sense only as a way of circumventing Ukraine and undermining Ukrainian bargaining power.

One wonders how the Europeans, distracted by Greece and the Greeces to come, will react to this.  One possible reaction is to conclude that this would be a good thing.  It would relieve them of any care about quarrels between far away people of whom they know little.  It would reduce the transactions costs and associated prospect for gas cutoffs inherent in a situation where ownership of highly complementary assets is divided.

But the Europeans should realize that Russian success in Ukraine will not sate its ambitions.  It will only move the scene of tension and potential conflict that much further west.  Insofar as gas is concerned, deal or no, the Europeans should get their act together and encourage development of alternative supplies, whether via new pipelines (a stretch), LNG, or domestic exploitation of shale gas.  (As an aside, isn’t the Russian concern for the impact of shale gas production on the European environment touching?  If only it were matched by a similar concern for Russia’s own environment.)

And yeah, I know saying “Europeans” and “getting their act together” in the same sentence is something of a joke.

In the early days of the blog I wrote a lot about how Putin is a man in a hurry.  In the present instance, he is clearly in a hurry on Ukraine.  It’s not hard to understand why.  He probably recognizes that there is only a short window of opportunity to achieve his ambitions.  Yanukovich’s power is at its apex, and the opposition is demoralized and divided.  But the near riot that accompanied the approval of the Kharkov agreement over the Sevastapol base is a reminder that a large swathe of the Ukrainian public opposes ceding its autonomy to Russia.  Putin no doubt reasonably concludes that it is necessary to move now while the opposition is still disorganized and inchoate.

But this move is so provocative that it could catalyze the revitalization of a more-or-less unified opposition.  If Yakunovich goes along with it, it could revivify Putin’s bogeyman–the Orangist opposition movement.  It clearly puts Yanukovich in a delicate spot, and gives Tymoshenko a powerful issue and a new lease on political life.  A merger would also have a profound effect on the shadowy interests that make obscene money in the dirty gas trade in Ukraine.  Given the influence of these forces (and their money) on Ukrainian politics, they could play a decisive role in the ultimate resolution.

One thing is certain.  The process will not be open, transparent, or clean.  A murky mix of power politics, nationalism, Ukrainian political dysfunction, and money will determine what happens next, and after that.  In these circumstances, it would be foolhardy to predict an outcome.  I do sense (and perhaps it is only wishful thinking) that there is an appreciable probability that this could blow up in Putin’s face as occurred during one of his previous attempts to meddle in Ukrainian politics–the 2004 presidential election.

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  1. I’m not sure how you can object to an economic anschluss between Russia and Ukraine when that’s what the EU has been all about from the very get go, and you have told other commenters here that former Soviet states always (unless their arms are being twisted by the Big Bad Bear) choose ‘Europe’ and ‘the West’. Well Germany is the heart of the EU if not its master and you are well aware of the tight connections between German and Russian elites.

    Well who knows, maybe you are a closeted euroskeptic.

    Comment by Mr. X — May 1, 2010 @ 11:55 am

  2. 1. Not closeted. What’s going on now over Greece was inevitable. The Europroject was utopian and based on a collective suspension of disbelief. That can only last so long. Economic integration made sense. Political integration was non-sensical given the heterogeneity of the countries invovled. And economic integration in the form of a common currency without political integration was insane. Read the papers if you doubt the last statement.
    2. What I said re other states in FSU is that the fact that they did uniformly choose the EU/NATO/close relations with the US (with the Baltics and Poland as the best examples of the latter, pre-Obama) is because Europe, for all its flaws, is much more attractive than Russia. For reasons too numerous to mention. It’s the old honey-gall contrast.
    3. If you don’t see the difference between the Russian MO in Ukraine and other parts of the FSU, and the European MO, you’re beyond help.
    4. Relatedly, the geopolitical implications are quite different. On the one hand, a revanchist, revisionist power attempting to restore the simulacrum of a lost empire. On the other hand, a post-modern, effectively pacifist collection of states.

    The ProfessorComment by The Professor — May 1, 2010 @ 12:32 pm

  3. A Russian expansion, however, is going to make the world a far more interesting place. The Europeans are moribund and boring. The End of History isn’t even on the horizon – so, what would you have expected?

    Comment by Kacha — May 1, 2010 @ 12:57 pm

  4. I certainly never thought history ended. I thought that whole meme was utter bullshit.

    The ProfessorComment by The Professor — May 1, 2010 @ 1:28 pm

  5. Agreed – Fukuyama just served some stale, warmed-up Hegel with plenty of liberal imperialist cheese on top. Despite best efforts, utterly unpalatable – but academia gobbled it up as if it were something fresh and original.

    Comment by Kacha — May 1, 2010 @ 2:25 pm

  6. That’s what academia do:)

    The whole EOH thing was also self-falsifying. If you act as if it is true, you empower those old reprobates intent on acting in the old historical ways.

    I wish the Euros were only moribund and boring.

    The ProfessorComment by The Professor — May 1, 2010 @ 3:00 pm

  7. That’s actually a clever quip I wish I had come up with.

    In addition to being moribund and boring, the inevitable collapse of the European project will also be extraordinarily unpleasant. How unpleasant depends on how long the ossification process can be maintained before the whole mess collapses under its own weight. Actually – no, it also depends on what people will have learned from the experience. I fear they will have ‘learned’ that there just wasn’t enough State to make things work just right and what’s really needed is more State.
    Glad not to live there.

    Comment by Kacha — May 1, 2010 @ 3:19 pm

  8. Kacha. (1) Thanks re quip. (2) Agreed re Europe, and glad not to live there. (It is a lovely museum in spots, though.) Unfortunately, we in the US aren’t learning from them, and seeing them as the Ghost of Christmas Future. Instead, we seem hell-bent on becoming more European, more statist.

    The ProfessorComment by The Professor — May 1, 2010 @ 4:21 pm

  9. And it was merely weeks ago that shale gas was writing GAZPROM’s epitaph.

    Now we have a frustrated Procrustes!

    Comment by rkka — May 1, 2010 @ 6:00 pm

  10. You are too harsh on Fukuyama. His argument wasn’t that authoritarian reversals and wars are not impossible, just that liberal democracy has been accepted as an ideal by all modern societies with the exception of socialist relics like North Korea and a few backwards Islamists. As such, in his view the global victory of liberal democracy is assured in the long term.

    Second, he didn’t spell it out, but he did actually make the point that EOF is self-falsifying implicitly. I think this is by far the most important quote from his book:

    In Germany, above all, the war was seen by many as a revolt against the materialism of the commercial world created by France and that archetype of bourgeois societies, Britain…But in reading German justifications for the war, one is struck by a consistent emphasis on the need for a kind of objectless struggle, a struggle that would have purifying moral effects quite independently of whether Germany gained colonies or won freedom of the seas…

    Modern thought raises no barriers to a future nihilistic war against liberal democracy on the part of those brought up in its bosom. Relativism – the doctrine that maintains all values are merely relative and which attacks all “priveleged perspectives” – must ultimately end up undermining democratic and tolerant values as well. Relativism is not a weapon that can be fired selectively at the enemies one chooses. It fires indiscriminately, shooting out the legs of not only the “absolutisms”, dogmas and certainties of the Western tradition, but that traditions emphasis on tolerance, diversity and freedom of thought as well.

    He never really offered a satisfying reply to this very contradiction. All the better, since I for one am dissatisfied with my rootless cosmopolitanism and would welcome the return of history – which is in any case inevitable with the coming age of Limits to Growth.

    Comment by Sublime Oblivion — May 1, 2010 @ 7:18 pm

  11. “In these circumstances, it would be foolhardy to predict an outcome. I do sense (and perhaps it is only wishful thinking) that there is an appreciable probability that this could blow up in Putin’s face as occurred during one of his previous attempts to meddle in Ukrainian politics–the 2004 presidential election.”

    I think you’re making the 2004 “Orange Revolution” out to be far more of a purely Ukrainian phenomenon than it actually was. The West (and particular the US) played an absolutely enormous role in bankrolling and supporting Yushenko and the protest movements which eventually swept him into power. Maybe this all was worthwhile and maybe it wasn’t. But the attempt to rig the 2004 election didn’t passively “blow up in Putin’s face” the West very actively sought to MAKE it blow up and succeeded in doing so.

    I’m pretty sure given all of the other pressing problems on Europe’s and America’s plates, sovereign debt crises, Afghanistan, etc. etc., that they aren’t going to have much interest in getting involved in the Ukraine again. Even if they did want to get involved, whom would they support? The (increasingly unstable) Timoshenko, who’s as unreliable and egomaniacal as any politician in the world? Or perhaps Yushenko, even though he couldn’t crack double digits in the presidential election?

    Of course there is going to be a fair bit of opposition to Yanukovich given the deeply divided nature of Ukrainian society. But absent an effective leader or substantial outside support, it’s not going to amount to much.

    Comment by Mark Adomanis — May 2, 2010 @ 7:09 am

  12. @rkka-You miss the point. Again. In your obsession to play “GOTCHA” you habitually fail to read what I’ve actually written.

    In the present instance, there is no contradiction whatsoever between the threat of alternative gas supplies, notably shale, on Gazprom’s profitability and power, and the issues posed by Putin’s proposal to merge it with Ukrainy Naftogaz. The latter is primarily a geopolitical issue, relating to Russia’s attempt to create a simulacrum of the Russian Empire, and using energy as its major leverage. Moreover, how is there possibly a contradiction between the statements that (a) shale gas is detrimental to Gazprom, and (b) integration of Gazprom and UN is politically beneficial to Russia and is part of a geopolitical strategy to bring Ukraine more firmly under Moscow’s control? Both can be true. Both are true.

    You should note that merger is actually quite common in declining industries. That’s not the point here, but it just goes to show that merger between declining businesses is not uncommon. Indeed, it’s quite common.

    The economic aspects of this particular proposal are ambiguous. On the one hand, integration of complementary pipeline systems (and complementary production and transportation assets) should be economically beneficial. It reduces transactions costs, and reduces the probability of holdups and conflicts that result in shutoffs that have been extremely damaging to Gazprom. (I make this point in the post.) It would also reduce Gazprom’s need to invest in pipelines to circumvent Ukraine in order to reduce its vulnerability to holdup. (Also mentioned in the post.) On the other hand, Gazprom is already incredibly unwieldy and inefficient, and bolting that company together with a basket case like UN will only exacerbate those inefficiencies.

    The market’s verdict was not favorable: Gazprom’s stock price declined 2 percent, indicating that the other hand appears to be the dominant one.

    The ProfessorComment by The Professor — May 2, 2010 @ 9:12 am

  13. Just tell me, what better option did either party have, going forward. Was the previous Ukrainian government going to clean up Naftogaz? Ever? Is there going to be a more pro-Western Ukrainian goverent determined to do so any time soon? And how do you know things would work any better if Russia and Ukraine took a “rest” on that ideological bed of yours? Face facts, Procrustes, Western influence was very little help to Russia or Ukraine while it existed, to put it charitably.

    What reason is there to believe that another dose of Western influence would turn out any better?

    Comment by rkka — May 2, 2010 @ 10:21 am

  14. Sublime Oblivion,

    Fukuyama’s argument was wrong all the way back when Hegel first made it. And I’m sure that Hegel simply copied from some other, older determinist who was wrong about it much earlier.

    Limits to Growth? What’s that even supposed to mean?

    Comment by kacha — May 2, 2010 @ 10:46 am

  15. The Limits to Growth on the planet – things like peak oil, declining EROEI of energy sources, global warming, etc.

    I suspect these are the things that have the best chance of disproving Fukuyama’s thesis.

    Comment by Sublime Oblivion — May 2, 2010 @ 11:15 am

  16. “a) shale gas is detrimental to Gazprom,” What is the Professor going to do when Gazprom buys a big chunk of the Marcellus or Haynesville Shale? Blow a gasket? Feel like the Evil Empire is creeping closer to Houston? Or have drinks with John Hattenberger (Gazprom USA’s chief in H-town)? Seriously, the notion that they’ll just sit back and not buy in to the ‘competition’ is funny.

    Comment by Mr. X — May 2, 2010 @ 1:04 pm

  17. Sublime Oblivion, the Limits to Growth Malthusian nonsense doesn’t become more true with repetition. Until Earth looks like Trantor, there’s still room to grow on Earth itself. It’s a rather big planet with lots of empty space. Enough space for humans in any case, not so sure about other big mammals… Declining fish catches in the open sea will force increased investment in fish farming in all shapes or forms. Too bad for fisherman and the blue-fin, but – c’est la vie, that’s the way the cookie crumbles and the way things work: some die, some live. The only thing we should worry about is Keynesian and Socialist schmucks trying to manage the economy, because when that happens we are going to hit into some real limits of growth faster than you can say allocation of resources through the price system and we will enjoy the pleasures of real existing shrinking a la USSR. Other than that, I can’t be bothered to worry much.

    Comment by Kacha — May 2, 2010 @ 2:08 pm

  18. @Mr. X. No. I won’t give a rat’s ass, actually. Buying something in a competitive market is fine with me. If they can compete, more power to them. But if they can compete, why do they need a government enforced-monopoly in Russia, and the active engagement of the Prime Minister and President of a country that fancies itself a world power on a nearly daily basis to advance its interests?

    Houston is a big town, and can deal with competition. Indeed it thrives on it. Can Moscow say the same?

    Did I ever say they’ll just sit back?

    The point is that what happens with respect to shale is out of Gazprom’s control, if they join the parade or not. But their profitability and potential future market dominance is clearly dependent on what happens in shale and LNG.

    The ProfessorComment by The Professor — May 2, 2010 @ 3:00 pm

  19. The Putin mafia can buy Statoil ?

    Statoil in Marcellus Shale
    In March 2010, Statoil announced that it will increase their share of Marcellus Shale which cost $253 million USD in a deal with Chesapeake Energy Corporation. The Marcellus Shale formation is through New York, Ohio, Pennsylvania and West Virginia. This development will make Statoil’s ownership of the asset almost 280 square kilometres.

    Comment by Boris — May 2, 2010 @ 5:18 pm

  20. Professor,

    Shale Gas will likely destroy LNG in North America for quite a while. Who is going to invest into LNG to NA when they have shale? Without LNG there can never be an international gas market, and with shale, there will be less need for LNG, so with shale there will be an even lower chance for an international gas market.

    From a Gazprom perspective, shale is not necessarily a bad thing since it keeps the American markets nicely separate from those markets most important to Gazprom: Western Europe and China.

    However, there’s another factor most people are not talking about because most people don’t know about it – and that’s going to be a massive game changer for the entire fossil fuel business: GTL.

    Comment by Kacha — May 2, 2010 @ 7:05 pm

  21. @Kacha-But that’s just what works against Gazprom. Shale gas in the US displaces LNG that would have flowed here. It will instead flow more to Europe, depressing prices in Gazprom’s major market.

    Yes, GTL bears watching.

    The ProfessorComment by The Professor — May 2, 2010 @ 7:27 pm

  22. There’s not that much LNG to go around, though. Qatari LNG is not economical for export to Europe (Spain only gets it because the government subsidizes it). While Korea will always need LNG, and pipelines are not really an option for Japan, the only other market is China – but at current comparative costs, Russian gas beats LNG hands-down. That may change, of course – things always change. T&T LNG will still be needed in the US – besides, without terminal capacity in Europe, where would the T&T LNG go? So, the European market is still assured, at least for the medium-term future.

    But, you are right in so far that shale put the kibbosh on Russian LNG dreams. But there’s somebody who’s going to be a lot more screwed than Gazprom because of shale: Alberta. Unless the enviros have it their way in Marcellus, the gig’s up for the Calgary boys.

    Comment by Kacha — May 2, 2010 @ 8:03 pm

  23. Glad to know you actually know about GTL. Nice to talk to somebody who has his eyes on the ball. There’s some really interesting research into FT Process alternatives going on that could make a huge difference. BUT – and that’s something most people also seem to miss, GTL is not going to change the gas market only, it has real potential to screw up the oil market, particularly when the politicos start to get their grubby little energy-independence fingers into it.

    Comment by Kacha — May 2, 2010 @ 8:13 pm

  24. Gas-to-liquid, (GTL) is a developing technology that converts stranded natural gas into synthetic gasoline, diesel or jet fuel through the Fischer-Tropsch process developed in World War II Germany.

    Proponents claim GTL fuels burn cleaner than comparable petroleum fuels. Most major international oil companies are in advanced development stages of GTL production, with a world-scale (140,000 bbl/day) GTL plant in Qatar

    Comment by Boris — May 3, 2010 @ 6:35 pm

  25. Some say that North and South streams have never been about circumventing Ukraine in the first place – their capacity is far too small to reach that goal. It is just that these projects are a way of putting about 60% of construction costs directly into the pockets of certain select individuals – far above the Gazprom average of 10%, if you trust Browder’s calculations.

    Comment by Ivan — May 4, 2010 @ 4:11 am

  26. Fischer Tropsch was developed prior to WWII, and some of the synthetic fuel tech came from the U.S. to Nazi Germany via Standard Oil (Rockefellers again).

    Comment by Mr. X — May 4, 2010 @ 12:55 pm

  27. […] business deal, Moscow has set forth an example of its expansion of empire.  Craig Pirrong described it as part of Russia’s economic “anchluss” of Ukraine, arguing that this could […]

    Pingback by Official Russia | No Panacea for Ukraine Gas Trade — May 5, 2010 @ 2:02 am

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